Federal-mogul 10Q 2009 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2009

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

For the transition period from __________ to __________

Commission File Number: 000-52986

FEDERAL-MOGUL CORPORATION

(Exact name of Registrant as specified in its charter)

Delaware	20-8350090
(State or other jurisdiction of incorporation or organization)	(IRS employer identification number)

26555 Northwestern Highway, Southfield, Michigan	48033
(Address of principal executive offices)	(Zip Code)

(248) 354-7700

(Registrant’s telephone number, including area code)

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

Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes ¨ No ¨

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

Large accelerated filer ¨ Accelerated filer x Non-accelerated filer ¨ Smaller Reporting Company ¨

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

Yes ¨ No x

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.

Yes x No ¨

As of October 29, 2009, there were 99,404,500 outstanding shares of the registrant’s $0.01 par value common stock.

FEDERAL-MOGUL CORPORATION

Form 10-Q

For the Three and Nine Months Ended September 30, 2009

INDEX

	Page No.
Part I – Financial Information
Item 1 – Financial Statements
Consolidated Statements of Operations	3
Consolidated Balance Sheets	4
Consolidated Statements of Cash Flows	5
Notes to the Consolidated Financial Statements	6
Forward-Looking Statements	31
Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations	31
Item 3 – Qualitative and Quantitative Disclosures about Market Risk	49
Item 4 – Controls and Procedures	51
Part II – Other Information
Item 1 – Legal Proceedings	52
Item 1A – Risk Factors	52
Item 6 – Exhibits	53
Signatures	54
Exhibits	55

PART I

FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

FEDERAL-MOGUL CORPORATION

Consolidated Statements of Operations (Unaudited)

	Three Months Ended September 30						Nine Months Ended September 30
	2009			2008			2009			2008
	(Millions of Dollars, Except Per Share Amounts)

Net sales	$	1,380.0		$	1,692.0		$	3,922.0		$	5,546.4
Cost of products sold		(1,168.4	)		(1,413.1	)		(3,354.9	)		(4,605.5	)

Gross margin		211.6			278.9			567.1			940.9

Selling, general and administrative expenses		(172.5	)		(191.7	)		(526.9	)		(612.8	)
Interest expense, net		(32.5	)		(46.6	)		(100.3	)		(137.2	)
Amortization expense		(12.2	)		(21.4	)		(36.6	)		(56.7	)
Chapter 11 and U.K. Administration related reorganization expenses		(0.4	)		(2.3	)		(2.8	)		(15.3	)
Equity earnings of non-consolidated affiliates		5.4			4.2			9.3			20.7
Restructuring, net		1.4			(11.3	)		(38.4	)		(14.0	)
Other income, net		8.7			15.7			38.5			13.0

Income (loss) before income taxes		9.5			25.5			(90.1	)		138.6
Income tax benefit (expense)		5.8			(18.3	)		11.4			(71.7	)

Net income (loss)		15.3			7.2			(78.7	)		66.9
Less net income attributable to noncontrolling interests		(4.9	)		(3.6	)		(8.9	)		(5.2	)

Net income (loss) attributable to Federal-Mogul	$	10.4		$	3.6		$	(87.6	)	$	61.7

Income (loss) per common share:
Basic	$	0.11		$	0.04		$	(0.89	)	$	0.62
Diluted	$	0.10		$	0.04		$	(0.89	)	$	0.62

See accompanying notes to consolidated financial statements.

FEDERAL-MOGUL CORPORATION

Consolidated Balance Sheets (Unaudited)

	September 30 2009			December 31 2008
	(Millions of Dollars)
ASSETS
Current assets:
Cash and equivalents	$	784.3		$	888.2
Accounts receivable, net		1,083.3			938.7
Inventories, net		841.3			893.7
Prepaid expenses and other current assets		238.9			267.4
Total current assets		2,947.8			2,988.0

Property, plant and equipment, net		1,890.7			1,910.6
Goodwill and other indefinite-lived intangible assets		1,398.6			1,430.4
Definite-lived intangible assets, net		527.3			563.9
Other noncurrent assets		326.0			342.7

	$	7,090.4		$	7,235.6

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Short-term debt, including current portion of long-term debt	$	102.3		$	101.7
Accounts payable		503.1			622.5
Accrued liabilities		464.0			483.1
Current portion of postemployment benefit liability		61.7			61.0
Other current liabilities		165.3			173.8
Total current liabilities		1,296.4			1,442.1

Long-term debt		2,759.9			2,768.0
Postemployment benefits		1,279.9			1,240.1
Long-term portion of deferred income taxes		537.3			553.4
Other accrued liabilities		179.8			235.9

Shareholders’ equity:
Preferred stock ($.01 par value; 90,000,000 authorized shares; none issued)		—			—
Common stock ($.01 par value; 450,100,000 authorized shares; 100,500,000 issued shares; 99,404,500 outstanding shares as of September 30, 2009 and December 31, 2008)		1.0			1.0
Additional paid-in capital, including warrants		2,122.7			2,122.7
Accumulated deficit		(555.5	)		(467.9	)
Accumulated other comprehensive loss		(577.1	)		(688.0	)
Treasury stock, at cost		(16.7	)		(16.7	)
Total Federal-Mogul shareholders’ equity		974.4			951.1
Noncontrolling interests		62.7			45.0
Total shareholders’ equity		1,037.1			996.1

	$	7,090.4		$	7,235.6

See accompanying notes to consolidated financial statements.

FEDERAL-MOGUL CORPORATION

Consolidated Statements of Cash Flows (Unaudited)

	Nine Months Ended September 30
	2009			2008
	(Millions of Dollars)

Cash Provided From (Used By) Operating Activities
Net (loss) income	$	(78.7	)	$	66.9
Adjustments to reconcile net (loss) income to net cash provided from operating activities:
Depreciation and amortization		240.5			265.8
Cash received from 524(g) Trust		—			225.0
Change in postemployment benefits, including pensions		46.2			8.5
Change in deferred taxes		(22.3	)		1.7
Gain on sale of debt investment		(7.9	)		—

Changes in operating assets and liabilities:
Accounts receivable		(117.8	)		(107.9	)
Inventories		77.2			21.9
Accounts payable		(106.3	)		(75.9	)
Other assets and liabilities		17.3			(30.7	)
Net Cash Provided From Operating Activities		48.2			375.3

Cash Provided From (Used By) Investing Activities
Expenditures for property, plant and equipment		(145.7	)		(240.2	)
Net settlement from sale of debt investment		7.9			—
Net proceeds from the sale of property, plant and equipment		0.9			10.9
Payments to acquire business		—			(4.7	)
Net Cash Used By Investing Activities		(136.9	)		(234.0	)

Cash Provided From (Used By) Financing Activities
Proceeds from borrowings on exit facilities		—			2,082.0
Repayment of Tranche A, Revolver and PIK Notes		—			(1,790.8	)
Principal payments on exit facilities		(22.2	)		(22.2	)
Decrease in other long-term debt		(2.7	)		(9.2	)
Decrease in short-term debt		(2.1	)		(0.2	)

Purchase of treasury stock		—			(16.7	)
Net payments from factoring arrangements		(5.9	)		(15.5	)
Debt amendment/issuance fees		(1.0	)		(0.6	)
Net Cash (Used By) Provided From Financing Activities		(33.9	)		226.8

Effect of foreign currency exchange rate fluctuations on cash		18.7			(12.0	)

(Decrease) increase in cash and equivalents		(103.9	)		356.1

Cash and equivalents at beginning of period		888.2			425.4

Cash and equivalents at end of period	$	784.3		$	781.5

See accompanying notes to consolidated financial statements.

FEDERAL-MOGUL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

September 30, 2009

1.	BASIS OF PRESENTATION

Interim Financial Statements: The unaudited consolidated financial statements of Federal-Mogul Corporation (the “Company”) have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) have been condensed or omitted pursuant to such rules and regulations. These statements include all adjustments (consisting of normal recurring adjustments) that management believes are necessary for a fair presentation of the results of operations, financial position and cash flows. The Company’s management believes that the disclosures are adequate to make the information presented not misleading when read in conjunction with the consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2008. Operating results for the three and nine months ended September 30, 2009 are not necessarily indicative of the results that may be expected for the year ended December 31, 2009.

Principles of Consolidation: The Company consolidates into its financial statements the accounts of the Company, all wholly-owned subsidiaries, and any partially-owned subsidiary that the Company has the ability to control. Control generally equates to ownership percentage, whereby investments that are more than 50% owned are consolidated, investments in affiliates of 50% or less but greater than 20% are generally accounted for using the equity method, and investments in affiliates of 20% or less are accounted for using the cost method. The Company does not hold a controlling interest in any entity based on exposure to economic risks and potential rewards (variable interests) for which it is the primary beneficiary. Further, the Company’s joint ventures are businesses established and maintained in connection with its operating strategy and are not special purpose entities.

Use of Estimates: The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported therein. Due to the inherent uncertainty involved in making estimates, actual results reported in future periods may be based upon amounts that differ from these estimates.

Trade Accounts Receivable: Federal-Mogul subsidiaries in Brazil, France, Germany, Italy, Japan and Spain are party to accounts receivable factoring arrangements. Gross accounts receivable factored under these facilities were $215 million and $222 million as of September 30, 2009 and December 31, 2008, respectively. Of those gross amounts, $194 million and $209 million, respectively, were factored without recourse and treated as sales. Under terms of these factoring arrangements, the Company is not obligated to draw cash immediately upon the factoring of accounts receivable. As of September 30, 2009 and December 31, 2008, the Company had outstanding factored amounts of $3 million and $8 million, respectively, for which cash had not yet been drawn. Expenses associated with receivables factored or discounted are recorded in the consolidated statements of operations within “Other income, net.”

Controlling Ownership: Mr. Carl C. Icahn indirectly controls approximately 75% of the voting power of the Company’s capital stock and, by virtue of such stock ownership, is able to control or exert substantial influence over the Company, including the election of directors, business strategy and policies, mergers or other business combinations, acquisition or disposition of assets, future issuances of common stock or other securities, incurrence of debt or obtaining other sources of financing, and the payment of dividends on the Company’s common stock. The existence of a controlling stockholder may have the effect of making it difficult for, or may discourage or delay, a third party from seeking to acquire a majority of the Company’s outstanding common stock, which may adversely affect the market price of the stock.

Mr. Icahn’s interests may not always be consistent with the Company’s interests or with the interests of the Company’s other stockholders. Mr. Carl C. Icahn and entities controlled by him may also pursue acquisitions or business opportunities that may or may not be complementary to the Company’s business. To the extent that conflicts of interest may arise between the Company and Mr. Icahn and his affiliates, those conflicts may be resolved in a manner adverse to the Company or its other shareholders.

Equity and Comprehensive Income: The following table presents a rollforward of the changes in equity for the nine months ended September 30, 2009, including changes in the components of comprehensive income (also contained in Note 15). In accordance with FASB ASC Topic 810, Consolidation, amounts attributable to the Company’s shareholders and to the noncontrolling interests are as follows:

	Total			Federal-Mogul Shareholders’ Equity			Non- Controlling Interests
	(Millions of Dollars)

Equity balance as of December 31, 2008	$	996.1		$	951.1		$	45.0
Comprehensive income:
Net (loss) income		(78.7	)		(87.6	)		8.9
Foreign currency translation adjustments and other		68.6			68.6			—
Hedge instruments, net of tax		28.4			28.4			—
Postemployment benefits, net of tax		13.9			13.9			—
		32.2			23.3			8.9
Capital investment in subsidiary		8.8			—			8.8
Equity balance as of September 30, 2009	$	1,037.1		$	974.4		$	62.7

Adoption of New Accounting Pronouncements: In July 2009, the Financial Accounting Standards Board (“FASB”) released the authoritative version of the FASB Accounting Standards Codification (“FASB ASC”) as the single source of authoritative nongovernmental US GAAP. The FASB ASC supersedes all existing accounting standard documents recognized by the FASB. Rules and interpretive releases of the SEC under authority of federal securities laws are also sources of authoritative US GAAP for SEC registrants. All other non-SEC accounting literature not included in the FASB ASC will be considered nonauthoritative. The FASB ASC is effective for fiscal years and interim periods ending after September 15, 2009. The adoption of the FASB ASC had no impact on the Company’s consolidated financial position, results of operations or cash flows.

In September 2006, the FASB issued guidance now codified within FASB ASC Topic 820, Fair Value Measurements and Disclosures, which defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. The pronouncement is effective for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. In February 2008, the FASB released additional guidance now codified under FASB ASC Topic 820, which provides for delayed application of certain guidance related to non-financial assets and non-financial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually), until fiscal years beginning after November 15, 2008, and interim periods within those years. The Company adopted certain provisions of FASB ASC Topic 820 effective December 31, 2007 in connection with its fresh-start reporting. Pursuant to the requirements of FASB ASC Topic 820, the Company adopted these provisions with respect to its non-financial assets and non-financial liabilities effective January 1, 2009. The implementation of this pronouncement did not have a material impact on the Company’s consolidated financial position, results of operations or cash flows.

In December 2007, the FASB issued guidance now codified within FASB ASC Topic 810, Consolidation, which requires that ownership interests in subsidiaries held by parties other than the parent are clearly identified. In addition, FASB ASC Topic 810 requires that the amount of consolidated net income (loss) attributable to the parent and to the noncontrolling interest be clearly identified and presented on the face of the consolidated statements of operations. These provisions of FASB ASC Topic 810 are effective for financial statements issued for fiscal years and interim periods beginning on or after December 15, 2008. The adoption of FASB ASC Topic 810 did not have a material impact on the Company’s consolidated financial position, results of operations or cash flows.

In March 2008, the FASB issued guidance now codified as FASB ASC Topic 815, Derivatives and Hedging, which requires enhanced disclosures about an entity’s derivative and hedging activities and thereby improves the transparency of financial reporting. FASB ASC Topic 815 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. The Company adopted these provisions of FASB ASC Topic 815 on a prospective basis as of January 1, 2009. The adoption of FASB ASC Topic 815 did not have a material impact on the Company’s consolidated financial position, results of operations or cash flows.

In April 2009, the FASB issued guidance now codified as FASB ASC Topic 825, Financial Instruments, which extends the existing disclosure requirements under FASB ASC Topic 825 to interim financial statements. The new guidance is effective for financial statements issued for interim periods ending after June 15, 2009. The adoption of these provisions of FASB ASC Topic 825 did not have a material impact on the Company’s consolidated financial position, results of operations or cash flows.

In May 2009, the FASB issued guidance now codified as FASB ASC Topic 855, Subsequent Events, which defines and establishes the period after the balance sheet date during which management of a reporting entity evaluates transactions and events for potential disclosure in the financial statements in addition to disclosing the date through which such events have been evaluated. The guidance is effective for financial statements issued for fiscal years and interim periods ending after June 15, 2009 and is to be applied prospectively. The adoption of FASB ASC Topic 855 did not have a material impact on the Company’s consolidated financial position, results of operations or cash flows. In accordance with FASB ASC Topic 855, the Company has evaluated subsequent events through October 29, 2009, which is the date on which these financial statements were issued.

2.	REORGANIZATION UPON EMERGENCE FROM CHAPTER 11 PROCEEDINGS

Background

On October 1, 2001 (the “Petition Date”), the predecessor to Federal-Mogul Corporation (the “Predecessor Company” or the “Predecessor”) and all of its then-existing wholly-owned United States subsidiaries (“U.S. Subsidiaries”) filed voluntary petitions for reorganization under Chapter 11 of Title 11 of the United States Code (the “Bankruptcy Code”) with the United States Bankruptcy Court for the District of Delaware (the “Bankruptcy Court”). Also on October 1, 2001, 133 affiliates of the Predecessor Company incorporated under the laws of England and Wales filed voluntary petitions for reorganization under Chapter 11 of the Bankruptcy Code in the Bankruptcy Court and commenced administration proceedings in the High Court of Justice, Chancery Division, in London, England under the United Kingdom Insolvency Act 1986. An additional affiliate of the Predecessor Company incorporated under the laws of Scotland filed a voluntary petition for reorganization under Chapter 11 of the Bankruptcy Code in the Bankruptcy Court on the Petition Date, and commenced administration proceedings before the Court of Session in Edinburgh, Scotland in April 2002.

The Predecessor Company, together with its United States and United Kingdom affiliates that commenced bankruptcy proceedings in the United States and administration proceedings in the United Kingdom, are referred to collectively as the “Debtors”. Subsidiaries of the Predecessor Company other than the aforementioned U.S. and U.K. subsidiaries were not party to any insolvency proceedings and operated in the normal course during the pendency of the Chapter 11 proceedings and the U.K. administration proceedings.

Following a Confirmation Hearing that began on June 18, 2007 and concluded on October 2, 2007, and following the consensual resolution of various legal objections to confirmation of the Fourth Amended Joint Plan of Reorganization (As Modified) for the Predecessor Company and certain of its affiliates (the “Plan”), the Bankruptcy Court entered an Order (the “Confirmation Order”) on November 8, 2007 confirming the Plan and entered detailed Findings of Fact and Conclusions of Law with respect to the Plan. On November 14, 2007, the United States District Court for the District of Delaware (the “District Court”) entered an order affirming the Confirmation Order and adopting the Findings of Fact and Conclusions of Law. The Confirmation Order became final and non-appealable thirty days after its affirmance by the District Court. The Plan became effective in accordance with its terms on

December 27, 2007 (the “Effective Date”).

On the Effective Date, the Predecessor Company merged with and into New Federal-Mogul Corporation, a Delaware Corporation, whereupon (i) the separate corporate existence of the Predecessor Company ceased, (ii) New Federal-Mogul Corporation became the surviving corporation and continues to be governed by the laws of the State of Delaware and (iii) New Federal-Mogul Corporation was renamed “Federal-Mogul Corporation” (''Federal-Mogul'', the ''Company'', the “Successor Company”, or the “Successor”).

Establishment and Operation of the U.S. Asbestos Trust and U.K. Asbestos Trust

Section 524(g) of the Bankruptcy Code provides in general terms that, if certain specified conditions are satisfied, a court may as part of a bankruptcy plan of reorganization issue a permanent injunction preventing entities from taking legal action against a debtor to collect, recover, or receive payment on asbestos-related claims where the bankruptcy plan provides that those claims are to be paid by an asbestos trust established under section 524(g) of the Bankruptcy Code.

On the Effective Date, in accordance with the Plan, an asbestos personal injury trust qualifying under section 524(g) of the Bankruptcy Code (the “U.S. Asbestos Trust”) was created. Pursuant to and on the terms specified in the Plan and the Confirmation Order, the U.S. Asbestos Trust has assumed liability for all asbestos-related personal injury claims of the Debtors. The U.S. Asbestos Trust will make payments to holders of asbestos personal injury claims in accordance with the trust distribution procedures that were filed with the Bankruptcy Court as an exhibit to the Plan, with the exception of asbestos-related personal injury claims against the U.K. Debtors that are to be evaluated and paid by the U.K. Asbestos Trust. The Plan contains an injunction issued by the Bankruptcy Court and affirmed by the District Court pursuant to section 524(g) of the Bankruptcy Code that expressly forbids any and all actions against the Debtors, their respective subsidiaries, and certain of their affiliates, for the purpose of, directly or indirectly, collecting, recovering or receiving payments or recovery with respect to all direct or indirect claims relating to asbestos-related personal injury claims.

The commencement of the administration proceedings in the United Kingdom resulted in the appointment of certain administrators (the “Administrators”) to oversee the businesses of the Debtors that were incorporated under the laws of England and Wales (the “U.K. Debtors”). In mid-2006, the Administrators proposed Company Voluntary Arrangements (“CVAs”) for 51 of the U.K. Debtors (the “CVA Debtors”). Following approval of the CVAs by the requisite majorities of creditors and shareholders, the CVAs became effective on October 11, 2006, resolving claims (other than those dealt with by the Plan) against the principal U.K. Debtors. Amongst other things, the CVAs established a U.K. Asbestos Trust which shall provide for the sole and exclusive treatment and payment of the CVA Asbestos Claims. The U.K. Asbestos Trust is separate from the U.S. Asbestos Trust, and was funded by the Predecessor Company when the CVAs became effective.

As part of the Plan, the U.S. Asbestos Trust issued on the Effective Date a note in the amount of $125 million to the Company. The issuance of that note reflected the fact that certain of the asbestos personal injury claims that had been anticipated to be paid from the U.S. Asbestos Trust prior to entry into the U.K. Global Settlement will instead be paid from the U.K. Asbestos Trust, which had been previously funded by the Predecessor Company. The $125 million note had a maturity date of January 11, 2008 and was repayable in either cash or through the Company taking ownership of 6,958,333 shares of Class B Common Stock of the Company that were pledged to secure the $125 million note. The note was repaid by the U.S. Asbestos Trust on the maturity date.

Discharge of U.K. Administration Proceedings

On December 1, 2006, the discharge of the administration proceedings for the principal U.K. Debtors became effective. That discharge ended those U.K. Debtors’ administration proceedings. On February 6, 2008, the High Court of Justice in London, England approved the discharge of the administration proceedings for all 70 of the U.K. Debtors that did not have CVAs and whose administration proceedings were in effect as of that date. The Company intends to have those remaining 70 U.K. Debtors, virtually all of which are dormant entities, either liquidated under the laws of England and Wales or struck from the English register of companies in the near term. The discharge of those U.K. Debtors’ administration proceedings will be effective immediately before the passage of a resolution to liquidate the U.K. Debtor in question or the making of an application to strike off the U.K. Debtor in question.

Chapter 11 and U.K. Administration Related Reorganization Expenses

Various matters relating to the Chapter 11 Cases continue to be litigated in the Bankruptcy Court or have been litigated therein and are awaiting rulings. The ongoing pursuit of these matters does not affect the discharges, releases and injunctions afforded to the Debtors under the Plan.

Chapter 11 and U.K. Administration related reorganization expenses in the consolidated statements of operations consist of legal, financial and advisory fees, and other directly related internal costs. The Company will continue to incur expenses in connection with completing distributions pursuant to the Plan.

	Three Months Ended September 30				Nine Months Ended September 30
	2009		2008		2009		2008
	(Millions of Dollars)

Professional fees directly related to Chapter 11 and U.K. Administration	$	0.4	$	2.3	$	2.8	$	15.3

3.	FRESH-START REPORTING

The Predecessor Company’s emergence from bankruptcy resulted in a new reporting entity for accounting purposes and the adoption of fresh-start reporting. Since the reorganization value of the assets of the Successor Company immediately before the date of confirmation of the Plan was less than the total of all post-petition liabilities and allowed claims, and the holders of the Predecessor Company’s voting shares immediately before confirmation of the Plan received less than 50 percent of the voting shares of the emerging entity, the Successor Company adopted fresh-start reporting.

In accordance with fresh-start reporting, the Company’s reorganization value has been allocated to existing assets. In addition, liabilities, other than deferred taxes, have been recorded at the present value of amounts estimated to be paid. Finally, the Predecessor Company’s accumulated deficit has been eliminated, and the Company’s new debt and equity have been recorded in accordance with the Plan. The excess of reorganization value over the value of net tangible and identifiable intangible assets and liabilities has been recorded as goodwill in the accompanying consolidated balance sheets.

Estimates of fair value represent the Company’s best estimates, which are based on industry data and trends and by reference to relevant market rates and transactions, and discounted cash flow valuation methods, among other factors. The foregoing estimates and assumptions are inherently subject to significant uncertainties and contingencies beyond the reasonable control of the Company. Accordingly, there can be no assurance that the estimates, assumptions, and amounts reflected in the valuations will be realized, and actual results could vary materially.

4.	RESTRUCTURING

The costs contained within “Restructuring, net” in the Company’s consolidated statements of operations are comprised of two types: employee costs (principally contractual termination benefits) and facility closure costs. Contractual termination benefits are accounted for in accordance with FASB ASC paragraph 712.10.25-2 and are recorded when it is probable that employees will be entitled to benefits and the amounts can be reasonably estimated. Facility closure and other costs are accounted for in accordance with FASB ASC paragraphs 420.10.25-14 and 420.10.25-15 and are recorded when the liability is incurred.

Estimates of restructuring charges are based on information available at the time such charges are recorded. In certain countries where the Company operates, statutory requirements include involuntary termination benefits that extend several years into the future. Accordingly, severance payments continue well past the date of termination at many international locations. Thus, these programs appear to be ongoing when, in fact, terminations and other activities under these programs have been substantially completed. Management expects that future savings resulting from execution of its restructuring programs will generally result in full pay back within 36 months.

Due to the inherent uncertainty involved in estimating restructuring expenses, actual amounts paid for such activities may differ from amounts initially estimated. Accordingly, previously recorded reserves of $39.1 million and $2.3 million were reversed for the nine months ended September 30, 2009 and 2008, respectively. Such reversals result from: changes in estimated amounts to accomplish previously planned activities; changes in expected (based on historical practice) outcome of negotiations with labor unions and government agencies, which reduced the level of originally committed actions; changes in ability to execute certain actions due to changes in business climate and changes in approach to accomplish restructuring activities.

Management expects to finance these restructuring programs over the next several years through cash generated from its ongoing operations or through cash available under its debt agreement, subject to the terms of applicable covenants. Management does not expect that the execution of these programs will have an adverse impact on its liquidity position.

The Company’s restructuring activities are undertaken as necessary to execute management’s strategy and streamline operations, consolidate and take advantage of available capacity and resources, and ultimately achieve net cost reductions. Restructuring activities include efforts to integrate and rationalize the Company’s businesses and to relocate manufacturing operations to best cost markets. These activities generally fall into one of the following categories:

1.	Closure of facilities and relocation of production – in connection with the Company’s strategy, certain operations have been closed and related production relocated to best cost countries or to other locations with available capacity.

Consolidation of administrative functions and standardization of manufacturing processes – as part of its productivity strategy, the Company has acted to consolidate its administrative functions to reduce selling, general and administrative costs and change its manufacturing processes to improve operating efficiencies through standardization of processes.

During the three and nine months ended September 30, 2009, the Company recorded $(1.4) million and $38.4 million, respectively, in net restructuring, of which $(2.6) million and $37.0 million, respectively, were employee costs, and $1.2 million and $1.4 million, respectively, were facility closure costs. The following tables provide a summary of the Company’s consolidated restructuring reserves and related activity as of and for the nine months ended September 30, 2009 by reporting segment and by type of cost. “PTE”, “PTSB”, “VSP”, and “GA” represent the Powertrain Energy, Powertrain Sealing and Bearings, Vehicle Safety and Protection, and Global Aftermarket reporting segments, respectively. As disclosed in Note 19, the Company consolidated its reporting segments from six to five during the first quarter of 2009, eliminating the Automotive Products segment. Prior year reporting segment amounts have been reclassified to conform to the new reporting segment structure.

	PTE			PTSB			VSP			GA			Corporate			Total
	(Millions of Dollars)

Balance at December 31, 2008	$	34.2		$	47.2		$	22.0		$	4.8		$	5.0		$	113.2
Provisions		26.2			8.8			3.6			4.2			0.4			43.2
Reversals		(4.4	)		(0.1	)		(0.3	)		—			(0.1	)		(4.9	)
Payments		(7.6	)		(4.9	)		(6.2	)		(1.4	)		(1.5	)		(21.6	)
Foreign currency		(1.3	)		(2.7	)		(0.4	)		—			0.1			(4.3	)
Balance at March 31, 2009		47.1			48.3			18.7			7.6			3.9			125.6
Provisions		5.2			10.5			6.5			1.7			1.4			25.3
Reversals		(11.2	)		(9.8	)		(2.0	)		(0.8	)		—			(23.8	)
Payments		(7.6	)		(11.2	)		(6.7	)		(2.5	)		(1.3	)		(29.3	)
Foreign currency		3.8			3.0			0.4			0.2			(0.1	)		7.3
Balance at June 30, 2009		37.3			40.8			16.9			6.2			3.9			105.1
Provisions		1.1			0.1			6.2			0.7			0.9			9.0
Reversals		—			(0.4	)		(9.8	)		(0.2	)		—			(10.4	)
Payments		(9.1	)		(11.1	)		(4.2	)		(1.7	)		(1.0	)		(27.1	)
Foreign currency		1.2			1.0			0.1			—			—			2.3

Balance at September 30, 2009	$	30.5		$	30.4		$	9.2		$	5.0		$	3.8		$	78.9

	Employee			Facility Closure			Total
	(Millions of Dollars)

Balance at December 31, 2008	$	113.2		$	—		$	113.2
Provisions		76.1			1.4			77.5
Reversals		(39.1	)		—			(39.1	)
Payments		(76.6	)		(1.4	)		(78.0	)
Foreign currency		5.3			—			5.3
Balance at September 30, 2009	$	78.9		$	—		$	78.9

Activities under Global “Restructuring 2009” Program

An unprecedented downturn in the global automotive industry and global financial markets led the Company to announce, in September 2008 and December 2008, certain restructuring actions, herein referred to as “Restructuring 2009”, designed to improve operating performance and respond to increasingly challenging conditions in the global automotive market. This plan, when combined with other workforce adjustments, is expected to reduce the Company’s global workforce by approximately 8,600 positions. During the three and nine months ended September 30, 2009, the Company recorded $(2.4) million and $37.3 million, respectively, in net restructuring associated with Restructuring 2009, of which $(3.6) million and $36.1 million, respectively, were employee costs, and $1.2 million and $1.2 million, respectively, were facility closure costs. The Company expects to incur additional restructuring charges up to $7.0 million through 2010, of which $5.1 million are expected to be facility closure costs and $1.9 million are expected to be employee costs. As the majority of the Restructuring 2009 costs are related to severance, such activities are expected to yield future annual savings at least equal to the incurred costs. The following is a summary of the Company’s Restructuring 2009 reserves and related activity as of and for the three and nine months ended September 30, 2009:

	PTE			PTSB			VSP			GA			Corporate			Total
	(Millions of Dollars)

Balance at December 31, 2008	$	33.2		$	44.1		$	21.9		$	4.8		$	2.8		$	106.8
Provisions		25.8			8.8			3.3			4.2			0.5			42.6
Reversals		(4.3	)		(0.1	)		(0.3	)		—			—			(4.7	)
Payments		(6.6	)		(4.8	)		(5.9	)		(1.3	)		(1.3	)		(19.9	)
Foreign currency		(1.3	)		(2.3	)		(0.5	)		(0.1	)		—			(4.2	)
Balance at March 31, 2009		46.8			45.7			18.5			7.6			2.0			120.6
Provisions		4.9			10.2			6.2			1.7			1.4			24.4
Reversals		(11.2	)		(8.6	)		(2.0	)		(0.8	)		—			(22.6	)
Payments		(6.5	)		(10.4	)		(6.3	)		(2.5	)		(1.2	)		(26.9	)
Foreign currency		3.0			2.6			0.4			0.2			(0.1	)		6.1
Balance at June 30, 2009		37.0			39.5			16.8			6.2			2.1			101.6
Provisions		1.1			—			5.8			0.3			0.8			8.0
Reversals		—			(0.4	)		(9.8	)		(0.2	)		—			(10.4	)
Payments		(9.0	)		(11.1	)		(3.7	)		(1.3	)		(0.8	)		(25.9	)
Foreign currency		1.2			1.2			0.1			—			—			2.5

Balance at September 30, 2009	$	30.3		$	29.2		$	9.2		$	5.0		$	2.1		$	75.8

Net charges (reversals) related to Restructuring 2009 are as follows:

	Total Expected Costs		Incurred During 2008		First Quarter 2009		Second Quarter 2009			Third Quarter 2009			Estimated Additional Charges
	(Millions of Dollars)

Powertrain Energy	$	56.2	$	38.6	$	21.5	$	(6.3	)	$	1.1		$	1.3
Powertrain Sealing and Bearings		60.5		45.9		8.7		1.6			(0.4	)		4.7
Vehicle Safety and Protection		35.4		31.2		3.0		4.2			(4.0	)		1.0
Global Aftermarket		12.3		7.1		4.2		0.9			0.1			—
Corporate		6.7		4.0		0.5		1.4			0.8			—
	$	171.1	$	126.8	$	37.9	$	1.8		$	(2.4	)	$	7.0

5.	OTHER INCOME, NET

The specific components of “Other income, net” are as follows:

	Three Months Ended September 30						Nine Months Ended September 30
	2009			2008			2009			2008
	(Millions of Dollars)

Environmental claims settlements	$	0.1		$	15.8		$	12.4		$	16.3
Gain on sale of debt investment		—			—			7.9			—
Gain on involuntary conversion		0.3			—			7.2			—
Unrealized gain (loss) on hedge instruments		3.0			(1.5	)		4.7			(2.3	)
Accounts receivable discount expense		(1.1	)		(2.3	)		(3.2	)		(7.1	)
Adjustment of assets to fair value		(0.8	)		—			(1.3	)		—
Foreign currency exchange		2.6			(5.2	)		(0.2	)		(10.3	)
Other		4.6			8.9			11.0			16.4
	$	8.7		$	15.7		$	38.5		$	13.0

The Company has commenced a lawsuit in Ohio against a number of insurers relating to insurance indemnification for costs arising from environmental releases from industrial operations of the Predecessor Company prior to 1986. Most of the insurer-defendants in this lawsuit have been dismissed because of settlements that the Company has reached with them. The case is proceeding against several non-settling insurers. The settlements with insurers reached by the Company during the nine months ended September 30, 2009 resulted in a net recovery to the Company of $12.4 million. The Company continues to engage in settlement discussions with several of the parties remaining in the case, although no assurances can be given regarding the outcome of such discussions.

During the second quarter of 2009, an affiliate purchased and sold debt investments on the Company’s behalf for approximately $22 million and $30 million, respectively. This resulted in a single cash transaction with the affiliate for a $7.9 million net gain, which the Company recognized in other income.

During 2008, a fire occurred at a plant in Europe. The Company received insurance proceeds of $7.6 million during the nine months ended September 30, 2009, $7.2 million of which were recognized as involuntary conversion gains.

6.	FINANCIAL INSTRUMENTS

Foreign Currency Risk

The Company manufactures and sells its products in North America, South America, Asia, Europe and Africa. As a result, the Company's financial results could be significantly affected by factors such as changes in foreign currency exchange rates or weak economic conditions in foreign markets in which the Company manufactures and sells its products. The Company's operating results are primarily exposed to changes in exchange rates between the U.S. dollar and European currencies.

The Company generally tries to use natural hedges within its foreign currency activities, including the matching of revenues and costs, to minimize foreign currency risk. Where natural hedges are not in place, the Company considers managing certain aspects of its foreign currency activities and larger transactions through the use of foreign currency options or forward contracts. Principal currencies hedged have historically included the euro, British pound, Japanese yen and Canadian dollar. The Company had notional values of approximately $10 million and $5 million of foreign currency hedge contracts outstanding at September 30, 2009 and December 31, 2008, respectively, of which substantially all mature in less than one year and all were designated as hedging instruments for accounting purposes. Unrealized net losses of $0.3 million and unrealized net gains of $1.0 million were recorded in “Accumulated other comprehensive loss” as of September 30, 2009 and December 31, 2008, respectively. No hedge ineffectiveness was recognized during the nine months ended September 30, 2009.

Interest Rate Risk

The Company, during 2008, entered into a series of five-year interest rate swap agreements with a total notional value of $1,190 million to hedge the variability of interest payments associated with its variable-rate term loans. Through these swap agreements, the Company has fixed its base interest and premium rate at a combined average interest rate of approximately 5.37% on the hedged principal amount of $1,190 million. As of September 30, 2009 and December 31, 2008, unrealized net losses of $56.4 million and $66.6 million, respectively, were recorded in “Accumulated other comprehensive loss” as a result of these hedges. As of September 30, 2009, losses of $34.1 million are expected to be reclassified from “Accumulated other comprehensive loss” to the consolidated statement of operations within the next 12 months. No hedge ineffectiveness was recognized during the nine months ended September 30, 2009.

These interest rate swaps reduce the Company’s overall interest rate risk. However, due to the remaining outstanding borrowings on the Company’s Exit Facilities and other borrowing facilities that continue to have variable interest rates, management believes that interest rate risk to the Company could be material if there are significant adverse changes in interest rates.

Commodity Price Risk

The Company’s production processes are dependent upon the supply of certain raw materials that are exposed to price fluctuations on the open market. The primary purpose of the Company’s commodity price forward contract activity is to manage the volatility associated with forecasted purchases. The Company monitors its commodity price risk exposures regularly to maximize the overall effectiveness of its commodity forward contracts. Principal raw materials hedged include natural gas, copper, nickel, lead, high-grade aluminum and aluminum alloy. Forward contracts are used to mitigate commodity price risk associated with raw materials, generally related to purchases forecast for up to fifteen months in the future.

The Company had 214 and 364 commodity price hedge contracts outstanding with combined notional values of $38 million and $91 million at September 30, 2009 and December 31, 2008, respectively, of which substantially all mature within one year. Of these outstanding contracts, 164 and 346 commodity price hedge contracts with combined notional values of $26 million and $83 million at September 30, 2009 and December 31, 2008, respectively, were designated as hedging instruments for accounting purposes. Unrealized net losses of $1.5 million and $33.0 million were recorded in “Accumulated other comprehensive loss” as of September 30, 2009 and December, 31, 2008, respectively. Unrealized net gains of $0.2 million and $2.1 million were recognized in “Other income, net” during the three and nine months ended September 30, 2009, respectively, associated with ineffectiveness on contracts designated as accounting hedges.

Other

The Company presents its derivative positions and any related material collateral under master netting agreements on a net basis. For derivatives designated as cash flow hedges, changes in the time value are excluded from the assessment of hedge effectiveness. Unrealized gains and losses associated with ineffective hedges, determined using the hypothetical derivative method, are recognized in “Other income, net”. Derivative gains and losses included in “Accumulated other comprehensive loss” for effective hedges are reclassified into operations upon recognition of the hedged transaction. Derivative gains and losses associated with undesignated hedges are recognized in “Other income, net” for outstanding hedges and “Cost of products sold” upon hedge maturity. The Company’s undesignated hedges are primarily commodity hedges and such hedges have become undesignated mainly due to forecasted volume declines.

Concentrations of Credit Risk

Financial instruments, which potentially subject the Company to concentrations of credit risk, consist primarily of accounts receivable and cash investments. The Company's customer base includes virtually every significant global light and commercial vehicle manufacturer and a large number of distributors, retailers and installers of automotive aftermarket parts. The Company's credit evaluation process and the geographical dispersion of sales transactions help to mitigate credit risk concentration. No individual customer accounted for more than 5% of the Company’s sales during the nine months ended September 30, 2009. The Company requires placement of cash in financial institutions evaluated as highly creditworthy.

Adoption of Additional Disclosure Requirements

In March 2008, the FASB issued additional disclosure requirements contained within FASB ASC Topic 815, Derivatives and Hedging, which requires enhanced disclosures about an entity’s derivative and hedging activities. The Company adopted these disclosures on a prospective basis as of January 1, 2009.

The following table discloses the fair values and balance sheet locations of the Company’s derivative instruments:

	Asset Derivatives					Liability Derivatives
	Balance Sheet Location	September 30 2009		December 31 2008		Balance Sheet Location	September 30 2009			December 31 2008
	(Millions of Dollars)
Derivatives designated as cash flow hedging instruments:
Interest rate swap contracts		$	—	$	—	Other current liabilities	$	(34.1	)	$	—
						Other noncurrent liabilities		(22.3	)		(66.6	)
Commodity contracts	Other current liabilities		2.5		—	Other current liabilities		(4.3	)		(36.6	)
Foreign exchange contracts	Other current liabilities		—		1.0	Other current liabilities		(0.3	)		—
		$	2.5	$	1.0		$	(61.0	)	$	(103.2	)

Derivatives not designated as hedging instruments:
Commodity contracts	Other current liabilities	$	0.5	$	—	Other current liabilities	$	(1.1	)	$	(7.4	)

The following tables disclose the effect of the Company’s derivative instruments on the consolidated statement of operations for the three months ended September 30, 2009 (in millions of dollars):

Derivatives Designated as Hedging Instruments	Amount of Gain (Loss) Recognized in OCI on Derivatives (Effective Portion)			Location of Gain (Loss) Reclassified from AOCI into Income (Effective Portion)	Amount of Gain (Loss) Reclassified from AOCI into Income (Effective Portion)			Location of Gain (Loss) Recognized in Income on Derivatives (Ineffective Portion and Amount Excluded from Effectiveness Testing)	Amount of Gain (Loss) Recognized in Income on Derivatives (Ineffective Portion and Amount Excluded from Effectiveness Testing)

Interest rate swap contracts	$	(20.4	)	Interest expense, net	$	(9.5	)		$	—
Commodity contracts		5.4		Cost of products sold		(2.6	)	Other income, net		0.2
Foreign exchange contracts		(0.3	)	Cost of products sold		0.2				—
	$	(15.3	)		$	(11.9	)		$	0.2

Derivatives Not Designated as Hedging Instruments	Location of Gain (Loss) Recognized in Income on Derivatives	Amount of Gain (Loss) Recognized in Income on Derivatives

Commodity contracts	Cost of products sold	$	(1.7	)

Commodity contracts	Other income, net		2.8
		$	1.1

The following tables disclose the effect of the Company’s derivative instruments on the consolidated statement of operations for the nine months ended September 30, 2009 (in millions of dollars):

Derivatives Designated as Hedging Instruments	Amount of Gain (Loss) Recognized in OCI on Derivatives (Effective Portion)			Location of Gain (Loss) Reclassified from AOCI into Income (Effective Portion)	Amount of Gain (Loss) Reclassified from AOCI into Income (Effective Portion)			Location of Gain (Loss) Recognized in Income on Derivatives (Ineffective Portion and Amount Excluded from Effectiveness Testing)	Amount of Gain (Loss) Recognized in Income on Derivatives (Ineffective Portion and Amount Excluded from Effectiveness Testing)

Interest rate swap contracts	$	(17.2	)	Interest expense, net	$	(27.4	)		$	—
Commodity contracts		17.6		Cost of products sold		(16.0	)	Other income, net		2.1
Foreign exchange contracts		—		Cost of products sold		1.3				—
	$	0.4			$	(42.1	)		$	2.1

Derivatives Not Designated as Hedging Instruments	Location of Gain (Loss) Recognized in Income on Derivatives	Amount of Gain (Loss) Recognized in Income on Derivatives

Commodity contracts	Cost of products sold	$	(6.2	)

Commodity contracts	Other income, net		2.6

Foreign exchange contracts	Cost of products sold		0.1
		$	(3.5	)

Fair Value Measurements

FASB ASC Topic 820, Fair Value Measurements and Disclosures, clarifies that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based upon assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, FASB ASC Topic 820 establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:

Level 1:

Observable inputs such as quoted prices in active markets;

Level 2:

Inputs, other than quoted prices in active markets, that are observable either directly or indirectly; and

Level 3:

Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.

Assets and liabilities measured at fair value are based on one or more of the following three valuation techniques noted in FASB ASC Topic 820:

Market approach: Prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities.

Cost approach: Amount that would be required to replace the service capacity of an asset (replacement cost).

Income approach: Techniques to convert future amounts to a single present amount based upon market expectations (including present value techniques, option-pricing and excess earnings models).

Assets and liabilities remeasured and disclosed at fair value at September 30, 2009 and December 31, 2008 are set forth in the table below:

		Asset /								Valuation
	Frequency	(Liability)			Level 2			Level 3		Technique
		(Millions of Dollars)
September 30, 2009:
Interest rate swap contracts	Recurring	$	(56.4	)	$	(56.4	)	$	—	C
Commodity contracts	Recurring		(2.4	)		(2.4	)		—	C
Foreign exchange contracts	Recurring		(0.3	)		(0.3	)		—	C

December 31, 2008:
Equity method investments	Non-recurring	$	220.6		$	—		$	220.6	C
Interest rate swap contracts	Recurring		(66.6	)		(66.6	)		—	C
Commodity contracts	Recurring		(44.0	)		(44.0	)		—	C
Foreign exchange contracts	Recurring		1.0			1.0			—	C

7.	INVENTORIES

Inventories are stated at the lower of cost or market. Cost was determined by the first-in, first-out (“FIFO”) method at September 30, 2009 and December 31, 2008. Inventories are reduced by an allowance for excess and obsolete inventories based on management’s review of on-hand inventories compared to historical and estimated future sales and usage.

Net inventories consisted of the following:

	September 30			December 31
	2009			2008
	(Millions of Dollars)

Raw materials	$	164.7		$	174.8
Work-in-process		129.9			131.8
Finished products		616.3			624.0
		910.9			930.6
Valuation reserves		(69.6	)		(36.9	)
	$	841.3		$	893.7

8.	GOODWILL AND OTHER INTANGIBLE ASSETS

At September 30, 2009 and December 31, 2008, goodwill and other intangible assets consist of the following:

	September 30, 2009							December 31, 2008
	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount
	(Millions of Dollars)
Definite-Lived Intangible Assets
Developed technology	$	115.0	$	(18.4	)	$	96.6	$	115.0	$	(10.5	)	$	104.5
Customer relationships		524.6		(93.9	)		430.7		524.6		(65.2	)		459.4
	$	639.6	$	(112.3	)	$	527.3	$	639.6	$	(75.7	)	$	563.9

Goodwill and Indefinite-Lived Intangible Assets
Goodwill						$	1,044.6						$	1,076.4
Trademarks and brand names							354.0							354.0
						$	1,398.6						$	1,430.4

Given the complexity of the calculation of goodwill impairment and the significance of fourth quarter economic activity, the Company had not completed its annual impairment assessment for the year ended December 31, 2008 prior to filing its annual report on Form 10-K. During the quarter ended March 31, 2009, the Company completed this assessment, and recorded a reduction to its goodwill impairment charge of $2.9 million. The goodwill impairment charges were required to adjust the carrying value of goodwill and other indefinite-lived intangible assets to estimated fair value. The estimated fair values were determined based upon consideration of various valuation methodologies, including guideline transaction multiples, multiples of current earnings, and projected future cash flows discounted at rates commensurate with the risk involved.

During 2009 and associated with the pushdown of final fresh-start values to the individual operating entities, the Company identified $34.7 million of corrections to certain balance sheet accounts (principally deferred taxes and accumulated other comprehensive loss) were necessary to properly state goodwill. The Company recorded these balance sheet corrections in 2009, which reduced its goodwill balance by $34.7 million.

The Company recorded amortization expense of $12.2 million and $21.4 million during the three months ended September 30, 2009 and 2008, respectively, and $36.6 million and $56.7 million during the nine months ended September 30, 2009 and 2008, respectively, associated with definite-lived intangible assets. The Company utilizes the straight line method of amortization, recognized over the estimated useful lives of the assets.

9.	INVESTMENTS IN NON-CONSOLIDATED AFFILIATES

The Company maintains investments in 14 non-consolidated affiliates, which are located in China, Germany, India, Italy, Korea, Turkey, the United Kingdom, and the United States. The Company’s direct ownership in such affiliates ranges from approximately 1% to 50%. The aggregate investments in these affiliates are $231.5 million and $220.6 million at September 30, 2009 and December 31, 2008, respectively, and are included in the consolidated balance sheets as “Other noncurrent assets.”

Equity earnings of non-consolidated affiliates amounted to $9.3 million and $20.7 million for the nine months ended September 30, 2009 and 2008, respectively. During the nine months ended September 30, 2009, these entities generated sales of approximately $351 million, net income of approximately $27 million and at September 30, 2009 had total net assets of approximately $494 million. Dividends received from non-consolidated affiliates by the Company for the nine months ended September 30, 2009 were $5.8 million. The Company does not hold a controlling interest in an entity based on exposure to economic risks and potential rewards (variable interests) for which it is the primary beneficiary. Further, the Company’s joint ventures are businesses established and maintained in connection with its operating strategy and are not special purpose entities.

The Company holds a 50% non-controlling interest in a joint venture located in Turkey. This joint venture was established in 1995 for the purpose of manufacturing and marketing automotive parts, including pistons, piston rings, piston pins, and cylinder liners to OE and aftermarket customers. Pursuant to the joint venture agreement, the Company’s partner holds an option to put its shares to a subsidiary of the Company at the higher of the current fair value or at a guaranteed minimum amount. The term of the contingent guarantee is indefinite, consistent with the terms of the joint venture agreement. However, the contingent guarantee would not survive termination of the joint venture agreement.

The guaranteed minimum amount represents a contingent guarantee of the initial investment of the joint venture partner and can be exercised at the discretion of the partner. As of September 30, 2009, the total amount of the contingent guarantee, were all triggering events to occur, approximated $60 million. The Company believes that this contingent guarantee is substantially less than the estimated current fair value of the guarantees’ interest in the affiliate. As such, the contingent guarantee does not give rise to a contingent liability and, as a result, no amount is recorded for this guarantee. If this put option were exercised, the consideration paid and net assets acquired would be accounted for in accordance with business combination accounting guidance.

If this put option were exercised at its estimated current fair value, such exercise could have a material effect on the Company’s liquidity. Any value in excess of the guaranteed minimum amount of the put option would be the subject of negotiation between the Company and its joint venture partner.

The Company has determined that its investments in Chinese joint venture arrangements are considered to be “limited-lived” as such entities have specified durations ranging from 30 to 50 years pursuant to regional statutory regulations. In general, these arrangements call for extension, renewal or liquidation at the discretion of the parties to the arrangement at the end of the contractual agreement. Accordingly, a reasonable assessment cannot be made as to the impact of such arrangements on the future liquidity position of the Company.

10.	ACCRUED LIABILITIES

Accrued liabilities consisted of the following:

	September 30		December 31
	2009		2008
	(Millions of Dollars)

Accrued compensation	$	192.1	$	175.7
Accrued rebates		100.4		103.7
Restructuring reserves		78.9		113.2
Non-income taxes payable		45.8		25.2
Accrued product returns		21.4		20.7
Accrued professional services		14.1		14.2
Accrued warranty		7.7		9.2
Accrued Chapter 11 and U.K. Administration expenses		2.4		4.5
Accrued income taxes		1.2		16.7
	$	464.0	$	483.1

11.

DEBT

In connection with the consummation of the Plan, on the Effective Date, the Company entered into a Tranche A Term Loan Agreement (the “Tranche A Facility Agreement”). The Tranche A Facility Agreement provided for a $1,334.6 million term loan issued on the Effective Date to satisfy in part the obligations owed under the Predecessor Company’s prepetition credit agreement and certain other prepetition surety-related obligations. On December 27, 2007, the Company notified the administrative agent under the Tranche A Facility Agreement of the Company’s intent to repay the Tranche A term loan during January 2008. On January 3, 2008, the Tranche A term loan was repaid in full.

On the Effective Date, the Company, as the issuer, entered into an Indenture (the “Indenture”) relating to the issuance of approximately $305 million in senior subordinated third priority payment-in-kind notes (the “PIK Notes”, referred to together with the Tranche A Facility Agreement as the “Repaid Instruments”). The PIK Notes were issued in order to satisfy in part the obligations under the Predecessor Company’s prepetition credit agreement and certain other prepetition surety-related obligations. On December 28, 2007, the Company gave its notice of intent to redeem the PIK Notes, in full, in January 2008 at a price equal to their redemption price. On January 3, 2008, the PIK Notes were redeemed in full.

Also on the Effective Date, the Company entered into a Term Loan and Revolving Credit Agreement (the “Exit Facilities”) with Citicorp U.S.A. Inc. as Administrative Agent, JPMorgan Chase Bank, N.A. as Syndication Agent and certain lenders. The Exit Facilities include a $540 million revolving credit facility (which is subject to a borrowing base and can be increased under certain circumstances and subject to certain conditions) and a $2,960 million term loan credit facility divided into a $1,960 million tranche B loan and a $1,000 million tranche C loan. The Company borrowed $878 million under the term loan facility on the Effective Date and the remaining $2,082 million of term loans, which were available for up to sixty days after the Effective Date, were fully drawn on January 3, 2008 as the source of funds to repay or redeem the Repaid Instruments. As of the Effective Date, existing letters of credit under the Predecessor Company’s debtor-in-possession (“DIP”) credit agreement of $34.3 million, and existing letters of credit issued under the Predecessor Company’s prepetition credit facility of $39.4 million, were rolled over as letters of credit under the Exit Facilities.

The obligations under the revolving credit facility mature December 27, 2013 and bear interest for the first six months at LIBOR plus 1.75% or at the alternate base rate (“ABR”, defined as the greater of Citibank, N.A.’s announced prime rate or 0.50% over the Federal Funds Rate) plus 0.75%, and thereafter shall be adjusted in accordance with a pricing grid based on availability under the revolving credit facility. Interest rates on the pricing grid range from LIBOR plus 1.50% to LIBOR plus 2.00% and ABR plus 0.50% to ABR plus 1.00%. The tranche B term loans mature December 27, 2014 and the tranche C term loans mature December 27, 2015; provided, however, that in each case, such maturity may be shortened to December 27, 2013 under certain circumstances. In addition, the tranche C term loans are subject to a pre-payment premium, should the Company choose to prepay the loans prior to December 27, 2011. All Exit Facilities term loans bear interest at LIBOR plus 1.9375% or at the alternate base rate (as previously defined) plus 0.9375% at the Company’s election.

The Exit Facilities were initially negotiated by the Predecessor Company and certain of the Plan Proponents, reaching agreement on the majority of significant terms of the Exit Facilities in early 2007. Between the time the terms were agreed in early 2007 and the Effective Date, interest rates charged on similar debt instruments for companies with similar debt ratings and capitalization levels rose to higher levels. As such, when applying the provisions of fresh-start reporting, the Company estimated a fair value adjustment of $163 million for the available borrowings under the Exit Facilities. This estimated fair value has been recorded within fresh-start reporting, and is being amortized as interest expense over the terms of each of the underlying components of the Exit Facilities. During both the three and nine months ended September 30, 2009 and 2008, the Company recognized $5.6 million and $16.7 million, respectively, in “Interest expense, net” associated with the amortization of this fair value adjustment.

Debt consisted of the following:

	September 30			December 31
	2009			2008
	(Millions of Dollars)
Exit Facilities:
Revolver	$	—		$	—
Tranche B term loan		1,925.7			1,940.4
Tranche C term loan		982.5			990.0
Debt discount		(124.1	)		(140.8	)
Other debt, primarily foreign instruments		78.1			80.1
		2,862.2			2,869.7
Less: short-term debt, including current maturities of long-term debt		(102.3	)		(101.7	)
Total long-term debt	$	2,759.9		$	2,768.0

The obligations of the Company under the Exit Facilities are guaranteed by substantially all of the domestic subsidiaries and certain foreign subsidiaries of the Company, and are secured by substantially all personal property and certain real property of the Company and such guarantors, subject to certain limitations. The liens granted to secure these obligations and certain cash management and hedging obligations have first priority.

The Exit Facilities contain certain affirmative and negative covenants and events of default, including, subject to certain exceptions, restrictions on incurring additional indebtedness, mandatory prepayment provisions associated with specified asset sales and dispositions, and limitations on i) investments; ii) certain acquisitions, mergers or consolidations; iii) sale and leaseback transactions; iv) certain transactions with affiliates; and v) dividends and other payments in respect of capital stock.

The total commitment and amounts outstanding on the revolving credit facility are as follows:

	September 30		December 31
	2009		2008
	(Millions of Dollars)

Current Contractual Commitment	$	540.0	$	540.0

Outstanding:
Revolving credit facility	$	—	$	—
Letters of credit		0.5		46.6
Total outstanding	$	0.5	$	46.6

Borrowing Base on Revolving Credit Facility
Current borrowings	$	—	$	—
Letters of credit		0.5		46.6
Available to borrow		518.0		475.7
Total borrowing base	$	518.5	$	522.3

Under the Exit Facilities, the Company had $50.3 million and $56.9 million of letters of credit outstanding at September 30, 2009 and December 31, 2008, respectively; $0.5 million and $46.6 million, respectively, pertaining to the revolving credit facility and $49.8 million and $10.3 million, respectively, pertaining to the term loan credit facility. To the extent letters of credit associated with the revolving credit facility are issued, there is a corresponding decrease in borrowings available under this facility.

As of September 30, 2009 and December 31, 2008, the estimated fair values of the Company’s Exit Facilities were $2,249.0 and $1,362.7 million, respectively. The estimated fair values were $535.1 million lower at September 30, 2009 and $1,426.9 million lower at December 31, 2008 than their respective carrying values. Fair market values are developed by the use of estimates obtained from brokers and other appropriate valuation techniques based on information available as of September 30, 2009 and December 31, 2008. The fair value estimates do not necessarily reflect the values the Company could realize in the current markets.

12.	PENSIONS AND OTHER POSTEMPLOYMENT BENEFITS

The Company sponsors several defined benefit pension plans (“Pension Benefits”) and health care and life insurance benefits (“Other Benefits”) for certain employees and retirees around the world. Components of net periodic benefit cost for the three months ended September 30 are as follows:

	Pension Benefits
	United States						International						Other Benefits
	2009			2008			2009			2008			2009			2008
	(Millions of Dollars)
Service cost	$	6.4		$	6.0		$	2.2		$	1.7		$	0.4		$	0.5
Interest cost		15.8			15.1			4.7			4.9			7.6			7.4
Expected return on plan assets		(10.7	)		(18.6	)		(0.6	)		(0.7	)		—			—
Amortization of actuarial loss (gain)		7.5			—			—			—			(0.2	)		—
Net periodic benefit cost	$	19.0		$	2.5		$	6.3		$	5.9		$	7.8		$	7.9

Components of net periodic benefit cost for the nine months ended September 30 are as follows:

	Pension Benefits
	United States						International						Other Benefits
	2009			2008			2009			2008			2009			2008
	(Millions of Dollars)
Service cost	$	19.3		$	17.9		$	5.7		$	5.1		$	1.2		$	1.5
Interest cost		47.2			46.2			13.4			14.9			22.8			23.1
Expected return on plan assets		(32.2	)		(55.7	)		(1.7	)		(2.1	)		—			—
Amortization of actuarial loss (gain)		22.5			—			—			—			(0.6	)		—
Net periodic benefit cost	$	56.8		$	8.4		$	17.4		$	17.9		$	23.4		$	24.6

13.	INCOME TAXES

For the nine months ended September 30, 2009, the Company recorded an income tax benefit of $11.4 million on a loss before income taxes of $90.1 million. This compares to income tax expense of $71.7 million on income before income taxes of $138.6 million in the same period of 2008.

Generally, the amount of tax expense or benefit allocated to continuing operations is determined without regard to the tax effects of the other categories of income or loss, such as other comprehensive income. However, an exception exists when, within a tax jurisdiction, there is a pre-tax loss from continuing operations, pre-tax income from other categories, and a valuation allowance has been established against deferred tax assets within that jurisdiction. In such an instance, tax benefit is allocated to continuing operations as an offset to the tax expense recorded against other categories of income. The Company recorded a tax benefit of $19.9 million to continuing operations pursuant to this rule during the nine months ended September 30, 2009. Also, during the current period, the Company recognized a net tax benefit of $10.7 million from the reversal of a valuation allowance against certain net deferred tax assets of an Indian subsidiary. Further, the income tax benefit for the nine months ended September 30, 2009 differs from the U.S. statutory tax rate due primarily to non-recognition of income tax benefits on certain operating losses and non-deductible items in various jurisdictions.

14.	COMMITMENTS AND CONTINGENCIES

Litigation and Environmental Matters

Resolution of Asbestos Liabilities

As described in Note 2, all asbestos-related personal injury claims against the Debtors will be addressed by the U.S. Asbestos Trust or the U.K. Asbestos Trust in accordance with the terms of the Plan and the CVAs, and such claims will be treated and paid in accordance with the terms of the Plan, the CVAs, and their related documents. All asbestos property damage claims against the Debtors have been compromised and resolved through the Plan and the CVAs. Accordingly, the Debtors have not recorded an asbestos liability.

Environmental Matters

The Company is a defendant in lawsuits filed, or the recipient of administrative orders issued, in various jurisdictions pursuant to the Federal Comprehensive Environmental Response Compensation and Liability Act of 1980 (“CERCLA”) or other similar national, provincial or state environmental laws. These laws require responsible parties to pay for remediating contamination resulting from hazardous substances that were discharged into the environment by them, by prior owners or occupants of their property, or by others to whom they sent such substances for treatment or other disposition. The Company has been notified by the United States Environmental Protection Agency, other national environmental agencies, and various provincial and state agencies that it may be a potentially responsible party (“PRP”) under such laws for the cost of remediating hazardous substances pursuant to CERCLA and other national and state or provincial environmental laws. PRP designation typically requires the funding of site investigations and subsequent remedial activities.

Many of the sites that are likely to be the costliest to remediate are often current or former commercial waste disposal facilities to which numerous companies sent wastes. Despite the joint and several liability which might be imposed on the Company under CERCLA and some of the other laws pertaining to these sites, the Company’s share of the total waste sent to these sites has generally been small. The other companies that sent wastes to these sites, often numbering in the hundreds or more, generally include large, solvent, publicly owned companies and in most such situations the government agencies and courts have imposed liability in some reasonable relationship to contribution of waste. Thus, the Company believes its exposure for liability at these sites is limited.

The Company also has identified certain other present and former properties at which it may be responsible for cleaning up or addressing environmental contamination, in some cases as a result of contractual commitments. The Company is actively seeking to resolve these actual and potential statutory, regulatory and contractual obligations. Although difficult to quantify based on the complexity of the issues, the Company has accrued amounts corresponding to its best estimate of the costs associated with such regulatory and contractual obligations on the basis of available information from site investigations and best professional judgment.

Total environmental reserves, determined on an undiscounted basis, were $23.3 million and $25.8 million at September 30, 2009 and December 31, 2008, respectively, and are included in the consolidated balance sheets as follows:

	September 30		December 31
	2009		2008
	(Millions of Dollars)

Other current liabilities	$	5.3	$	7.1
Other accrued liabilities (noncurrent)		18.0		18.7
	$	23.3	$	25.8

Management believes that recorded environmental liabilities will be adequate to cover the Company’s estimated liability for its exposure in respect to such matters. In the event that such liabilities were to significantly exceed the amounts recorded by the Company, the Company’s results of operations and financial condition could be materially affected. At September 30, 2009, management estimates that reasonably possible material additional losses above and beyond management’s best estimate of required remediation costs as recorded approximate $47 million.

Conditional Asset Retirement Obligations

The Company records conditional asset retirement obligations (“CARO”) when the amount can be reasonably estimated, typically upon the expectation that an operating site may be closed or sold. The Company has identified sites with contractual obligations and several sites that are closed or expected to be closed and sold. In connection with these sites, the Company has accrued $26.4 million and $27.0 million as of September 30, 2009 and December 31, 2008, respectively, for CARO, primarily related to anticipated costs of removing hazardous building materials, and has considered impairment issues that may result from capitalization of CARO.

The Company has additional CARO, also primarily related to removal costs of hazardous materials in buildings, for which it believes reasonable cost estimates cannot be made at this time because the Company does not believe it has a reasonable basis to assign probabilities to a range of potential settlement dates for these retirement obligations. Accordingly, the Company is currently unable to determine amounts to accrue for CARO at such sites.

For those sites that the Company identifies in the future for closure or sale, or for which it otherwise believes it has a reasonable basis to assign probabilities to a range of potential settlement dates, the Company will review these sites for both CARO and impairment issues.

Reserves for CARO are included in the consolidated balance sheets as follows:

	September 30		December 31
	2009		2008
	(Millions of Dollars)

Other current liabilities	$	10.5	$	8.9
Other accrued liabilities (noncurrent)		15.9		18.1
	$	26.4	$	27.0

Other Matters

The Company is involved in other legal actions and claims, directly and through its subsidiaries. Management does not believe that the outcomes of these other actions or claims are likely to have a material adverse effect on the Company’s financial position, operating results, or cash flows.

15.	COMPREHENSIVE INCOME (LOSS)

The Company’s comprehensive income (loss) consists of the following:

	Three Months Ended						Nine Months Ended
	September 30						September 30
	2009			2008			2009			2008
	(Millions of Dollars)

Net income (loss) attributable to Federal-Mogul	$	10.4		$	3.6		$	(87.6	)	$	61.7

Foreign currency translation adjustments and other		34.5			(175.0	)		68.6			(59.8	)

Hedge instruments		(3.6	)		(33.9	)		40.4			7.1
Income taxes		3.6			11.8			(12.0	)		(2.5	)
Hedge instruments, net of tax		—			(22.1	)		28.4			4.6

Postemployment benefits		7.4			—			21.8			—
Income taxes		(2.6	)		—			(7.9	)		—
Postemployment benefits, net of tax		4.8			—			13.9			—

	$	49.7		$	(193.5	)	$	23.3		$	6.5

16.

WARRANTS

In connection with the Plan, holders of the Predecessor Company’s common stock, Series C ESOP Convertible Preferred Shares and the 7% Convertible Junior Subordinate Debentures received warrants to purchase shares of Common Stock of the Successor Company at an exercise price equal to $45.815, exercisable through December 27, 2014. The Company issued 6,951,871 warrants as of the Effective Date, all of which remain outstanding as of September 30, 2009.

17.	STOCK-BASED COMPENSATION

On February 2, 2005, the Predecessor Company entered into a five-year employment agreement with José Maria Alapont, effective March 23, 2005, whereby Mr. Alapont was appointed as the Predecessor Company’s president and chief executive officer. Mr. Alapont served as chairman of the board of the directors of the Company from June 2005 to December 2007. In connection with this agreement, the Plan Proponents agreed to amend the Plan to provide that the Successor Company would grant to Mr. Alapont stock options equal to at least 4% of the value of the Successor Company at the reorganization date (the “Employment Agreement Options”). The Employment Agreement Options vest ratably over the life of the employment agreement, such that one fifth of the Employment Agreement Options vest on each anniversary of the employment agreement effective date. For purposes of estimating fair value, the Employment Agreement Options were deemed to expire on December 27, 2014.

Additionally, one-half of the Employment Agreement Options had an additional feature allowing for the exchange of one half of the options for shares of stock of the Successor Company, at the exchange equivalent of four options for one share of Common Stock. The Employment Agreement Options without the exchange feature are referred to herein as “plain vanilla options” and those Employment Agreement Options with the exchange feature are referred to as “options with exchange.”

On the Effective Date and in accordance with the Plan, the Company granted to Mr. Alapont stock options to purchase four million shares of Successor Company Common Stock at an exercise price of $19.50 (the “Granted Options”). Pursuant to the Stock Option Agreement dated as of December 27, 2007 between the Company and Mr. Alapont (the “Initial CEO Stock Option Agreement”), the Granted Options do not have an exchange feature. In lieu of options with exchange under the employment agreement, the Successor Company entered into a deferred compensation agreement with Mr. Alapont intended to be the economic equivalent of the options with exchange. Under the terms of this deferred compensation agreement, Mr. Alapont is entitled to certain distributions of Common Stock, or, at the election of Mr. Alapont, certain distributions of cash upon certain events as set forth in the Deferred Compensation Agreement dated as of December 27, 2007 between the Company and Mr. Alapont (the “Deferred Compensation Agreement”). The amount of the distributions shall be equal to the fair value of 500,000 shares of Common Stock, subject to certain adjustments and offsets, determined as of the first to occur of (1) the date on which Mr. Alapont’s employment with the Company terminates, (2) March 23, 2010, the date on which Mr. Alapont’s employment agreement with the Company expires, (3) Mr. Alapont’s death, (4) the date Mr. Alapont becomes disabled (as defined for purposes of Section 409A of the Internal Revenue Code), (5) at the election of Mr. Alapont, a change in control (as defined for purposes of Section 409A of the Internal Revenue Code), or (6) the occurrence of an unforeseeable emergency (as defined for purposes of Section 409A of the Internal Revenue Code).

On February 14, 2008, the Company entered into Amendment No. 1 to the Initial CEO Stock Option Agreement, dated as of February 14, 2008 (the “Amendment”). Pursuant to the Amendment, the exercise price for the Granted Options was increased to $29.75 per share. On February 15, 2008, the Initial CEO Stock Option Agreement as amended was cancelled by mutual written agreement of the Company and Mr. Alapont. On February 15, 2008, the Company entered into a new Stock Option Agreement with Mr. Alapont dated as of February 15, 2008 (the “New CEO Stock Option Agreement”). The New CEO Stock Option Agreement grants Mr. Alapont a non-transferable, non-qualified option (the “CEO Option”) to purchase up to 4,000,000 shares of the Company’s Common Stock subject to the terms and conditions described below. The exercise price for the CEO Option is $19.50 per share, which is at least equal to the fair market value of a share of the Company’s Common Stock on the date of grant of the CEO Option. In no event may the CEO Option be exercised, in whole or in part, after December 27, 2014. The New CEO Stock Option Agreement provides for vesting as follows: 80% of the shares of Common Stock subject to the Option are vested as of September 30, 2009, and the final 20% of the shares of Common Stock subject to the CEO Option vest on March 23, 2010.

These transactions were undertaken to comply with Internal Revenue Code Section 409A in connection with the implementation of Mr. Alapont’s employment agreement. The grant of the CEO Option was approved by the Company’s shareholders effective July 28, 2008.

The Company revalued the options granted to Mr. Alapont at September 30, 2009, resulting in a revised fair value of $17.5 million. During the three months ended September 30, 2009 and 2008, the Company recognized $5.5 million in expense and $4.2 million in income, respectively, associated with these options. During the nine months ended September 30, 2009 and 2008, the Company recognized $12.9 million in expense and $5.2 million in income, respectively, associated with these options. Since the Deferred Compensation Agreement provides for net cash settlement at the option of Mr. Alapont, the CEO Option is treated as a liability award, and the vested portion of the CEO Option, aggregating $16.0 million, has been recorded as a liability as of September 30, 2009. The remaining $1.5 million of total unrecognized compensation cost as of September 30, 2009 related to non-vested stock options is expected to be recognized ratably over the remaining term of Mr. Alapont’s employment agreement. Key assumptions and related option-pricing models used by the Company are summarized in the following table:

	September 30, 2009 Valuation
				Options Connected
	Plain Vanilla			To Deferred			Deferred
	Options			Compensation			Compensation

Valuation model	Black-Scholes			Monte Carlo			Monte Carlo
Expected volatility		67	%		67	%		67	%
Expected dividend yield		0	%		0	%		0	%
Risk-free rate over the estimated expected option life		1.32	%		1.43	%		1.43	%
Expected option life (in years)		2.68			2.87			2.87

18.	INCOME (LOSS) PER COMMON SHARE

The following table sets forth the computation of basic and diluted income (loss) per common share:

	Three Months Ended September 30				Nine Months Ended September 30
	2009		2008		2009			2008
	(Millions of Dollars, Except Share and Per Share Amounts)

Net income (loss) attributable to Federal-Mogul shareholders	$	10.4	$	3.6	$	(87.6	)	$	61.7

Weighted average shares outstanding, basic (in millions)		98.9		99.8		98.9			99.9

Incremental shares based on assumed conversion of deferred compensation stock (in millions)		0.4		0.3		0.4			0.3

Diluted shares (in millions)		99.3		100.1		99.3			100.2

Income (loss) per share:
Basic	$	0.11	$	0.04	$	(0.89	)	$	0.62
Diluted	$	0.10	$	0.04	$	(0.89	)	$	0.62

The Company recognized a loss for the nine months ended September 30, 2009. As a result, diluted loss per common share is the same as basic loss per common share for this period as any potentially dilutive securities would reduce the loss per common share.

The 500,000 common shares issued in connection with the Deferred Compensation Agreement described in Note 17 are excluded from the basic and diluted earnings per share calculation as required by FASB ASC Topic 710, Compensation.

19.	OPERATIONS BY REPORTING SEGMENT

Prior to 2009, the Company's integrated operations were organized into six reporting segments generally corresponding to major product groups; Powertrain Energy, Powertrain Sealing and Bearings, Vehicle Safety and Protection, Automotive Products, Global Aftermarket and Corporate. The Company consolidated its reporting segments from six to five reporting segments during the first quarter of 2009, eliminating the Automotive Products segment. Prior year reporting segment amounts have been reclassified to conform to the new reporting segment structure. This segment consolidation required a reallocation of goodwill and other indefinite-lived intangibles. This reallocation did not trigger any impairment.

The accounting policies of the reporting segments are the same as those of the Company. Revenues related to products sold from Powertrain Energy, Powertrain Sealing and Bearings, and Vehicle Safety and Protection to OE customers are recorded within the respective reporting segments. Revenues from such products sold to aftermarket customers are recorded within the Global Aftermarket segment. All product transferred into Global Aftermarket from other reporting segments is transferred at cost in the United States and at agreed-upon arm’s-length transfer prices internationally.

The Company evaluates reporting segment performance principally on a non-GAAP Operational EBITDA basis. Management believes that Operational EBITDA most closely approximates the cash flow associated with the operational earnings of the Company and uses Operational EBITDA to measure the performance of its operations. Operational EBITDA is defined as earnings before interest, income taxes, depreciation and amortization, and certain items such as restructuring and impairment charges, Chapter 11 and U.K. Administration related reorganization expenses, gains or losses on the sales of businesses, non-cash expense associated with U.S. based funded pension plans and the impact on gross margin of the fresh-start reporting valuation of inventory.

Net sales, cost of products sold and gross margin information by reporting segment are as follows:

	Net Sales
	Three Months Ended				Nine Months Ended
	September 30				September 30
	2009		2008		2009		2008
	(Millions of Dollars)

Powertrain Energy	$	370	$	518	$	999	$	1,722
Powertrain Sealing and Bearings		209		289		576		947
Vehicle Safety and Protection		208		240		545		811
Global Aftermarket		593		645		1,802		2,066
	$	1,380	$	1,692	$	3,922	$	5,546

	Cost of Products Sold
	Three Months Ended						Nine Months Ended
	September 30						September 30
	2009			2008			2009			2008
	(Millions of Dollars)

Powertrain Energy	$	(336	)	$	(443	)	$	(925	)	$	(1,459	)
Powertrain Sealing and Bearings		(199	)		(277	)		(574	)		(873	)
Vehicle Safety and Protection		(159	)		(191	)		(416	)		(623	)
Global Aftermarket		(474	)		(505	)		(1,439	)		(1,656	)
Corporate		—			3			(1	)		6
	$	(1,168	)	$	(1,413	)	$	(3,355	)	$	(4,605	)

	Gross Margin
	Three Months Ended				Nine Months Ended
	September 30				September 30
	2009		2008		2009			2008
	(Millions of Dollars)

Powertrain Energy	$	34	$	75	$	74		$	263
Powertrain Sealing and Bearings		10		12		2			74
Vehicle Safety and Protection		49		49		129			188
Global Aftermarket		119		140		363			410
Corporate		—		3		(1	)		6
	$	212	$	279	$	567		$	941

Operational EBITDA by reporting segment and the reconciliation of Operational EBITDA to income (loss) before income taxes are as follows:

	Three Months Ended						Nine Months Ended
	September 30						September 30
	2009			2008			2009			2008
	(Millions of Dollars)

Powertrain Energy	$	47		$	87		$	103		$	299
Powertrain Sealing and Bearings		8			7			3			57
Vehicle Safety and Protection		49			50			125			180
Global Aftermarket		82			89			244			303
Corporate		(52	)		(54	)		(142	)		(195	)
Total Operational EBITDA		134			179			333			644

Interest expense, net		(32	)		(47	)		(100	)		(137	)
Depreciation and amortization		(82	)		(95	)		(240	)		(266	)
Restructuring, net		1			(11	)		(38	)		(14	)
Gross margin impact of December 31, 2007 fresh-start reporting inventory adjustment		—			—			—			(68	)
Chapter 11 and U.K. Administration related reorganization expenses		—			(2	)		(3	)		(15	)
Non-cash expense associated with U.S. based funded pension plans		(17	)		(1	)		(50	)		(4	)
Other		6			3			8			(1	)
Income (loss) before income taxes	$	10		$	26		$	(90	)	$	139

Total assets by reporting segment are as follows:

	September 30		December 31
	2009		2008
	(Millions of Dollars)

Powertrain Energy	$	1,725	$	1,641
Powertrain Sealing and Bearings		860		851
Vehicle Safety and Protection		1,618		1,698
Global Aftermarket		2,136		2,007
Corporate		751		1,039
	$	7,090	$	7,236

FORWARD-LOOKING STATEMENTS

Certain statements contained or incorporated in this Quarterly Report on Form 10-Q which are not statements of historical fact constitute “Forward-Looking Statements” within the meaning of the Private Securities Litigation Reform Act of 1995 (the “Reform Act”). Forward-looking statements give current expectations or forecasts of future events. Words such as “anticipate”, “believe”, “estimate”, “expect”, “intend”, “may”, “plan”, “seek” and other words and terms of similar meaning in connection with discussions of future operating or financial performance signify forward-looking statements. The Company also, from time to time, may provide oral or written forward-looking statements in other materials released to the public. Such statements are made in good faith by the Company pursuant to the “Safe Harbor” provisions of the Reform Act.

Any or all forward-looking statements included in this report or in any other public statements may ultimately be incorrect. Forward-looking statements may involve known and unknown risks, uncertainties and other factors, which may cause the actual results, performance, experience or achievements of the Company to differ materially from any future results, performance, experience or achievements expressed or implied by such forward-looking statements. The Company undertakes no obligation to update any forward-looking statements, whether as a result of new information, future events, or otherwise.

All of the forward-looking statements are qualified in their entirety by reference to the factors discussed under “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2008 (the “Annual Report”) filed with the Securities and Exchange Commission on February 24, 2009, as well as the risks and uncertainties discussed elsewhere in the Annual Report and this report. Other factors besides those listed could also materially affect the Company’s business.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following Management’s Discussion and Analysis of financial condition and results of operations (“MD&A”) should be read in conjunction with the MD&A included in the Company’s Annual Report.

Overview

Federal-Mogul Corporation is a leading global supplier of technology and innovation in vehicle and industrial products for fuel economy, alternative energies, environment and safety systems. The Company serves the world’s foremost original equipment manufacturers (“OEM”) of automotive, light commercial, heavy-duty, industrial, agricultural, aerospace, marine, rail, and off-road vehicles, as well as the worldwide aftermarket. During the nine months ended September 30, 2009, the Company derived 54% of its sales from the OEM market and 46% from the aftermarket. The Company seeks to participate in both of these markets by leveraging its original equipment product engineering and development capability, manufacturing know-how, and expertise in managing a broad and deep range of replacement parts to service the aftermarket. The Company believes that it is uniquely positioned to effectively manage the life cycle of a broad range of products to a diverse customer base.

Federal-Mogul has established a global presence and conducts its operations through various manufacturing, distribution and technical centers that are wholly-owned subsidiaries or partially-owned joint ventures. During the nine months ended September 30, 2009, the Company derived 42% of its sales in the United States and 58% internationally. The Company has operations in established markets including Canada, France, Germany, Italy, Japan, Spain, the United Kingdom and the United States, and emerging markets including Argentina, Brazil, China, Czech Republic, Hungary, India, Korea, Mexico, Poland, Russia, South Africa, Thailand, Turkey and Venezuela. The attendant risks of the Company’s international operations are primarily related to currency fluctuations, changes in local economic and political conditions, and changes in laws and regulations.

Federal-Mogul offers its customers a diverse array of market-leading products for OEM and replacement parts (“aftermarket”) applications, including pistons, piston rings, piston pins, cylinder liners, valve seats and guides, ignitions, dynamic seals, bonded piston seals, combustion and exhaust gaskets, static gaskets and seals, rigid heat shields, engine bearings, industrial bearings, bushings and washers, transmission components, brake disc pads, brake linings, brake blocks, element resistant systems protection sleeving products, acoustic shielding, flexible heat shields, brake system components, chassis products, wipers, fuel pumps and lighting.

The Company operates in an extremely competitive industry, driven by global vehicle production volumes and part replacement trends. Business is typically awarded to the supplier offering the most favorable combination of cost, quality, technology and service. In addition, customers continue to require periodic price reductions that force the Company to continually assess, redefine and improve its operations, products, and manufacturing capabilities to maintain and improve profitability. Management continues to develop and execute initiatives to meet the challenges of the industry and to achieve its strategy for sustainable global profitable growth.

For a more detailed description of the Company’s business, products, industry, operating strategy and associated risks, refer to the Annual Report.

Results of Operations

Consolidated Results – Three Months Ended September 30, 2009 vs. Three Months Ended September 30, 2008

Net sales by reporting segment were:

	Three Months Ended September 30
	2009		2008
	(Millions of Dollars)

Powertrain Energy	$	370	$	518
Powertrain Sealing and Bearings		209		289
Vehicle Safety and Protection		208		240
Global Aftermarket		593		645
	$	1,380	$	1,692

The percentage of net sales by group and region for the three months ended September 30, 2009 and 2008 are listed below. “PTE”, “PTSB”, “VSP”, and “GA” represent Powertrain Energy, Powertrain Sealing and Bearings, Vehicle Safety and Protection, and Global Aftermarket, respectively.

	PTE			PTSB			VSP			GA			Total
2009
United States and Canada		20	%		34	%		26	%		64	%		42	%
Europe		61	%		53	%		53	%		22	%		42	%
Rest of World		19	%		13	%		21	%		14	%		16	%

2008
United States and Canada		19	%		29	%		26	%		62	%		38	%
Europe		66	%		60	%		55	%		23	%		47	%
Rest of World		15	%		11	%		19	%		15	%		15	%

Cost of products sold by reporting segment was:

	Three Months Ended September 30
	2009			2008
	(Millions of Dollars)

Powertrain Energy	$	(336	)	$	(443	)
Powertrain Sealing and Bearings		(199	)		(277	)
Vehicle Safety and Protection		(159	)		(191	)
Global Aftermarket		(474	)		(505	)
Corporate		—			3
	$	(1,168	)	$	(1,413	)

Gross margin by reporting segment was:

	Three Months Ended September 30
	2009		2008
	(Millions of Dollars)

Powertrain Energy	$	34	$	75
Powertrain Sealing and Bearings		10		12
Vehicle Safety and Protection		49		49
Global Aftermarket		119		140
Corporate		—		3
	$	212	$	279

Net sales decreased by $312 million, or 18%, to $1,380 million for the three months ended September 30, 2009 from $1,692 million in the same period of 2008. The impact of the U.S. dollar strengthening, primarily against the euro, decreased reported sales by $62 million.

In general, light and commercial vehicle OE production volume declined in all regions. Despite these production volume declines, the Company generally maintained its OE market share in all regions. Global aftermarket volumes decreased in all regions due to a combination of factors including the economic recession reducing consumer spending and the frailty of Eastern European financial markets. The combined impact of these factors was a net sales volume decline of $244 million. Net customer price decreases were $6 million.

Cost of products sold decreased by $245 million to $1,168 million for the third quarter of 2009 compared to $1,413 million in the same period of 2008. This was primarily due to a $123 million decrease associated with the decline in sales volume. This reduction is due to reduced material, manufacturing labor and variable overhead costs as a direct consequence of the lower production volumes, partly offset by increases in the cost base resulting from changes in the mix of products manufactured and sold in the period. Productivity in excess of labor and benefits inflation of $31 million represents improvements in the total manufacturing cost base in excess of those due to reduced production volume and mix changes. Other factors contributing to this decrease were currency movements of $58 million and material sourcing savings of $31 million.

Gross margin was $212 million, or 15.4% of sales, for the three months ended September 30, 2009 and $279 million, or 16.5% of sales, in the same period of 2008. Favorable productivity in excess of labor and benefits inflation of $31 million and material sourcing savings of $31 million were more than offset by sales volume decreases that reduced margins by $121 million, net customer price decreases of $6 million and increased pension expense of $3 million. The impact of the U.S. dollar strengthening, primarily against the euro, decreased reported gross margin by $4 million.

Reporting Segment Results – Three Months Ended September 30, 2009 vs. Three Months Ended September 30, 2008

The following table provides a reconciliation of changes in sales and gross margin for the three months ended September 30, 2009 compared with the three months ended September 30, 2008 for each of the Company’s reporting segments. “PTE”, “PTSB”, “VSP”, and “GA” represent Powertrain Energy, Powertrain Sealing and Bearings, Vehicle Safety and Protection, and Global Aftermarket, respectively. The Company consolidated its reporting segments from six to five reporting segments during the first quarter of 2009, eliminating the Automotive Products segment. Prior year reporting segment amounts have been reclassified to conform to the new reporting segment structure.

	PTE			PTSB			VSP			GA			Corporate			Total
	(Millions of Dollars)
Sales
Three months ended September 30, 2008	$	518		$	289		$	240		$	645		$	—		$	1,692
Sales volumes		(110	)		(69	)		(22	)		(43	)		—			(244	)
Customer pricing		(12	)		—			(1	)		7			—			(6	)
Foreign currency		(26	)		(11	)		(9	)		(16	)		—			(62	)
Three months ended September 30, 2009	$	370		$	209		$	208		$	593		$	—		$	1,380

	PTE			PTSB			VSP			GA			Corporate			Total
	(Millions of Dollars)
Cost of Products Sold
Three months ended September 30, 2008	$	(443	)	$	(277	)	$	(191	)	$	(505	)	$	3		$	(1,413	)
Sales volumes / mix		64			39			4			16			—			123
Productivity, net of inflation		6			16			6			6			(3	)		31
Materials and services sourcing		6			8			11			3			3			31
Depreciation		4			1			1			(1	)		—			5
Pension		—			—			—			—			(3	)		(3	)
Foreign currency		27			14			10			7			—			58
Three months ended September 30, 2009	$	(336	)	$	(199	)	$	(159	)	$	(474	)	$	—		$	(1,168	)

	PTE			PTSB			VSP			GA			Corporate			Total
	(Millions of Dollars)
Gross Margin
Three months ended September 30, 2008	$	75		$	12		$	49		$	140		$	3		$	279
Sales volumes / mix		(46	)		(30	)		(18	)		(27	)		—			(121	)
Customer pricing		(12	)		—			(1	)		7			—			(6	)
Productivity, net of inflation		6			16			6			6			(3	)		31
Materials and services sourcing		6			8			11			3			3			31
Depreciation		4			1			1			(1	)		—			5
Pension		—			—			—			—			(3	)		(3	)
Foreign currency		1			3			1			(9	)		—			(4	)
Three months ended September 30, 2009	$	34		$	10		$	49		$	119		$	—		$	212

	PTE			PTSB			VSP			GA			Corporate			Total
	(Millions of Dollars)
Operational EBITDA
Three months ended September 30, 2008	$	87		$	7		$	50		$	89		$	(54	)	$	179
Sales volumes / mix		(46	)		(30	)		(18	)		(27	)		—			(121	)
Customer pricing		(12	)		—			(1	)		7			—			(6	)
Productivity – Cost of products sold		6			16			6			6			(3	)		31
Productivity – SG&A		6			3			3			6			5			23
Sourcing – Cost of products sold		6			8			11			3			3			31
Sourcing – SG&A		—			—			—			3			1			4
Foreign currency		2			3			1			(5	)		4			5
Equity earnings on non-consolidated affiliates		1			—			—			—			—			1
Other		(3	)		1			(3	)					(8	)		(13	)
Three months ended September 30, 2009	$	47		$	8		$	49		$	82		$	(52	)	$	134
Interest expense, net																	(32	)
Depreciation and amortization																	(82	)
Restructuring, net																	1
Non-cash expense associated with U.S. based funded pension plans																	(17	)
Other																	6
Income before income taxes																$	10

Powertrain Energy

Sales decreased by $148 million, or 29%, to $370 million for the third quarter of 2009 from $518 million in the same period of 2008. PTE generates approximately 80% of its revenue outside the United States and the resulting currency movements decreased reported sales by $26 million. Sales volumes decreased by $110 million due to OE production volume declines in the Americas and Europe, partially offset by slight production volume increases in Asia. Price downs associated with customer contractual agreements reduced sales by $12 million.

Cost of products sold decreased by $107 million to $336 million for the third quarter of 2009 compared to $443 million in the same period of 2008. This was primarily due to a $64 million decrease associated with the decline in sales volume. This reduction is due to reduced material, manufacturing labor and variable overhead costs as a direct consequence of the lower production volumes, partly offset by increases in the cost base resulting from changes in the mix of products manufactured and sold in the period. Productivity in excess of labor and benefits inflation of $6 million represents improvements in the total manufacturing cost base in excess of those due to reduced production volume and mix changes. Other factors contributing to this decrease were currency movements of $27 million, improved materials services sourcing of $6 million and decreased depreciation of $4 million.

Gross margin decreased by $41 million to $34 million, or 9.2% of sales, for the third quarter of 2009 compared to $75 million, or 14.5% of sales, for the third quarter of 2008. The unfavorable impact of sales volumes contributed to a $46 million decrease in gross margin, which was partially offset by decreased depreciation of $4 million. Customer price decreases of $12 million were offset by favorable productivity in excess of labor and benefits inflation of $6 million and improved materials and services sourcing of $6 million.

Operational EBITDA decreased by $40 million to $47 million for the third quarter of 2009 from $87 million in the same period of 2008. The unfavorable impact of sales volumes declines of $46 million and customer price decreases of $12 million were partially offset by favorable productivity in excess of labor and benefits inflation of $12 million and improved materials and services sourcing of $6 million.

Powertrain Sealing and Bearings

Sales decreased by $80 million, or 28%, to $209 million for the third quarter of 2009 from $289 million in the same period of 2008. Approximately 70% of PTSB’s revenues are generated outside the United States and the resulting foreign currency movements decreased reported sales by $11 million. Sales volumes decreased by $69 million due to OE production volume declines in all regions.

Cost of products sold decreased by $78 million to $199 million for the third quarter of 2009 compared to $277 million in the same period of 2008. This was primarily due to a $39 million decrease associated with the decline in sales volume. This reduction is due to reduced material, manufacturing labor and variable overhead costs as a direct consequence of the lower production volumes, partly offset by increases in the cost base resulting from changes in the mix of products manufactured and sold in the period. Productivity in excess of labor and benefits inflation of $16 million represents improvements in the total manufacturing cost base in excess of those due to reduced production volume and mix changes. Other factors contributing to this decrease were currency movements of $14 million and improved materials and services sourcing of $8 million.

Gross margin decreased by $2 million to $10 million, or 4.8% of sales, for the third quarter of 2009 compared to $12 million, or 4.2% of sales, for the third quarter of 2008. The decrease was due to decreased sales volumes, which reduced gross margin by $30 million. This decrease was partially offset by favorable productivity in excess of labor and benefits inflation of $16 million and improved materials and services sourcing of $8 million.

Operational EBITDA increased by $1 million to $8 million for the third quarter of 2009 from $7 million in the same period of 2008. The unfavorable impact of sales volumes declines of $30 million was offset by favorable productivity in excess of labor and benefits inflation of $19 million, improved materials and services sourcing of $8 million and currency movements of $3 million.

Vehicle Safety and Protection

Sales decreased by $32 million, or 13%, to $208 million for the third quarter of 2009 from $240 million in the same period of 2008. Approximately 75% of VSP sales are generated outside the United States and the resulting currency movements decreased reported sales by $9 million. Sales volumes fell by $22 million due to lower OE production in all regions.

Cost of products sold decreased by $32 million to $159 million for the third quarter of 2009 compared to $191 million in the same period of 2008. This was partially due to a $4 million decrease associated with the decline in sales volume. This reduction is due to reduced material, manufacturing labor and variable overhead costs as a direct consequence of the lower production volumes, partly offset by increases in the cost base resulting from changes in the mix of products manufactured and sold in the period. Productivity in excess of labor and benefits inflation of $6 million represents improvements in the total manufacturing cost base in excess of those due to reduced production volume and mix changes. Other factors contributing to this decrease were improved materials and services sourcing of $11 million and currency movements of $10 million.

Gross margin remained constant at $49 million, which was 23.6% and 20.4% of sales for the third quarters of 2009 and 2008, respectively. The adverse impact on margin of $18 million due to reduced sales volumes, which includes $9 million of reduced margin due to lower shipments to Global Aftermarket, was offset by improved materials and services sourcing of $11 million, favorable productivity in excess of labor and benefits of $6 million and decreased depreciation of $1 million.

Operational EBITDA decreased by $1 million to $49 million for the third quarter of 2009 from $50 million in the same period of 2008. The unfavorable impact of sales volumes declines of $18 million was more than offset by improved materials and services sourcing of $11 million and favorable productivity in excess of labor and benefits inflation of $9 million.

Global Aftermarket

Sales decreased by $52 million, or 8%, to $593 million for the third quarter of 2009 from $645 million in the same period of 2008. This decrease was caused by decreased sales volumes in all regions of $43 million due to a combination of factors including the economic recession reducing consumer spending and the frailty of Eastern European financial markets, and unfavorable foreign currency movements of $16 million, partially offset by customer price increases of $7 million.

Cost of products sold decreased by $31 million to $474 million for the third quarter of 2009 compared to $505 million in the same period of 2008. This was primarily due to a $16 million decrease associated with the decline in sales volume. This reduction is due to reduced volume of product purchased as a direct consequence of the lower market demand, partly offset by increases in the cost base resulting from changes in the mix of products bought and sold in the period. Productivity in excess of labor and benefits inflation of $6 million represents improvements in the total cost base in excess of those due to reduced sales volume and mix changes. Another factor contributing to this decrease was currency movements of $7 million.

Gross margin decreased by $21 million to $119 million, or 20.1% of sales, for the third quarter of 2009 compared to $140 million, or 21.7% of sales, in the same period of 2008. The impact of lower sales volumes reduced gross margin by $27 million and unfavorable foreign currency movements of $9 million were partially offset by customer pricing increases of $7 million and favorable productivity in excess of labor and benefits of $6 million.

Operational EBITDA decreased by $7 million to $82 million for the third quarter of 2009 from $89 million in the same period of 2008. The unfavorable impact of sales volumes declines of $27 million was partially offset by favorable productivity in excess of labor and benefits inflation of $12 million and customer pricing increases of $7 million.

Selling, General and Administrative Expenses

Selling, general and administrative expenses (“SG&A”) were $173 million, or 12.5% of net sales, for the third quarter of 2009 as compared to $192 million, or 11.3% of net sales, for the same quarter of 2008. Increased pension expense of $14 million was more than offset by favorable productivity in excess of labor and benefits inflation of $23 million, favorable foreign currency movements of $6 million and sourcing savings of $4 million.

The Company maintains technical centers throughout the world designed to integrate the Company’s leading technologies into advanced products and processes, to provide engineering support for all of the Company’s manufacturing sites, and to provide technological expertise in engineering and design development providing solutions for customers and bringing new, innovative products to market. Included in SG&A were research and development (“R&D”) costs, including product and validation costs, of $36 million for the quarter ended September 30, 2009 compared with $43 million for the same period in 2008. As a percentage of OE sales, R&D was 4.5% and 4.1% for the quarters ended September 30, 2009 and 2008, respectively.

Other Income, Net

Other income, net was $9 million in the third quarter of 2009 compared to $16 million for the third quarter of 2008.

Interest Expense, Net

Net interest expense was $32 million in the third quarter of 2009 compared to $47 million for the third quarter of 2008. The decrease is primarily due to lower average interest rates.

Restructuring Activities

The following is a summary of the Company’s consolidated restructuring reserves and related activity as of and for the three months ended September 30, 2009:

	PTE			PTSB			VSP			GA			Corporate			Total
	(Millions of dollars)

Balance at June 30, 2009	$	37.3		$	40.8		$	16.9		$	6.2		$	3.9		$	105.1
Provisions		1.1			0.1			6.2			0.7			0.9			9.0
Reversals		—			(0.4	)		(9.8	)		(0.2	)		—			(10.4	)
Payments		(9.1	)		(11.1	)		(4.2	)		(1.7	)		(1.0	)		(27.1	)
Foreign currency		1.2			1.0			0.1			—			—			2.3

Balance at September 30, 2009	$	30.5		$	30.4		$	9.2		$	5.0		$	3.8		$	78.9

Chapter 11 and U.K. Administration Related Reorganization Expenses

	Three Months Ended
	September 30
	2009		2008
	(Millions of Dollars)

Professional fees directly related to Chapter 11 and UK Administration	$	0.4	$	2.3

Cash payments for Chapter 11 and U.K. Administration related reorganization expenses totaled $1 million and $11 million for the three months ended September 30, 2009 and 2008, respectively.

Income Taxes

For the three months ended September 30, 2009, the Company recorded an income tax benefit of $6 million on income before income taxes of $10 million. This compares to income tax expense of $18 million on income before income taxes of $26 million in the same period of 2008.

Generally, the amount of tax expense or benefit allocated to continuing operations is determined without regard to the tax effects of the other categories of income or loss, such as other comprehensive income. However, an exception exists when, within a tax jurisdiction, there is a pre-tax loss from continuing operations, pre-tax income from other categories, and a valuation allowance has been established against deferred tax assets within that jurisdiction. In such an instance, tax benefit is allocated to continuing operations as an offset to the tax expense recorded against other categories of income. The Company recorded a tax benefit of $7 million to continuing operations pursuant to this rule during the nine months ended September 30, 2009. Also, during the current period, the Company recognized a net tax benefit of $11 million from the reversal of a valuation allowance against certain net deferred tax assets of an Indian subsidiary. Further, the income tax benefit for the nine months ended September 30, 2009 differs from the U.S. statutory tax rate due primarily to non-recognition of income tax benefits on certain operating losses and non-deductible items in various jurisdictions.

Consolidated Results – Nine Months Ended September 30, 2009 vs. Nine Months Ended September 30, 2008

Net sales by reporting segment were:

	Nine Months Ended September 30
	2009		2008
	(Millions of Dollars)

Powertrain Energy	$	999	$	1,722
Powertrain Sealing and Bearings		576		947
Vehicle Safety and Protection		545		811
Global Aftermarket		1,802		2,066
	$	3,922	$	5,546

The percentage of net sales by group and region for the nine months ended September 30, 2009 and 2008 are listed below. “PTE”, “PTSB”, “VSP”, and “GA” represent Powertrain Energy, Powertrain Sealing and Bearings, Vehicle Safety and Protection, and Global Aftermarket, respectively.

	PTE			PTSB			VSP			GA			Total
2009
United States and Canada		20	%		32	%		27	%		65	%		44	%
Europe		63	%		55	%		55	%		20	%		41	%
Rest of World		17	%		13	%		18	%		15	%		15	%

2008
United States and Canada		19	%		29	%		28	%		63	%		38	%
Europe		67	%		60	%		56	%		23	%		48	%
Rest of World		14	%		11	%		16	%		14	%		14	%

Cost of products sold by reporting segment was:

	Nine Months Ended September 30
	2009			2008
	(Millions of Dollars)

Powertrain Energy	$	(925	)	$	(1,459	)
Powertrain Sealing and Bearings		(574	)		(873	)
Vehicle Safety and Protection		(416	)		(623	)
Global Aftermarket		(1,439	)		(1,656	)
Corporate		(1	)		6
	$	(3,355	)	$	(4,605	)

Gross margin by reporting segment was:

	Nine Months Ended September 30
	2009			2008
	(Millions of Dollars)

Powertrain Energy	$	74		$	263
Powertrain Sealing and Bearings		2			74
Vehicle Safety and Protection		129			188
Global Aftermarket		363			410
Corporate		(1	)		6
	$	567		$	941

Net sales decreased by $1,624 million, or 29%, to $3,922 million for the nine months ended September 30, 2009 from $5,546 million in the same period of 2008. The impact of the U.S. dollar strengthening, primarily against the euro, decreased reported sales by $386 million.

In general, light and commercial vehicle OE production volumes declined in all regions. Despite these production volume declines, the Company generally maintained its OE market share in all regions. Global aftermarket volumes decreased due to a combination of factors including the economic recession reducing consumer spending and the frailty of Eastern European financial markets. The combined impact of these factors was a net sales volume decline of $1,255 million. Net customer price increases were $17 million.

Cost of products sold decreased by $1,250 million to $3,355 million for the nine months ended September 30, 2009 compared to $4,605 million in the same period of 2008. This was primarily due to a $766 million decrease associated with the decline in sales volume. This reduction is due to reduced material, manufacturing labor and variable overhead costs as a direct consequence of the lower production volumes, partly offset by increases in the cost base resulting from changes in the mix of products manufactured and sold in the period. Productivity in excess of labor and benefits inflation of $76 million represents improvements in the total manufacturing cost base in excess of those due to reduced production volume and mix changes. Other factors contributing to this decrease were currency movements of $336 million and the non-recurring 2008 fresh-start reporting impact on inventory of $68 million.

Gross margin was $567 million, or 14.5% of sales, for the nine months ended September 30, 2009 and $941 million, or 17.0% of sales, in the same period of 2008. Favorable productivity in excess of labor and benefits inflation of $76 million, the non-recurring 2008 fresh-start reporting impact on inventory of $68 million, improved materials and services sourcing of $24 million and net customer price increases of $17 million were more than offset by sales volume decreases that reduced margins by $489 million, increased depreciation of $12 million and increased pension expense of $8 million. The impact of the U.S. dollar strengthening, primarily against the euro, decreased reported gross margin by $50 million.

In connection with fresh-start reporting completed as of December 31, 2007, inventory balances as of that date were increased by $68 million. During the three months ended March 31, 2008, the Company recognized $68 million in additional cost of goods sold, which reduced gross margin by the same. The non-recurrence of this one-time event has resulted in an increase in gross margin for the nine months ended September 30, 2009 when compared to the same period of 2008.

Reporting Segment Results – Nine Months Ended September 30, 2009 vs. Nine Months Ended September 30, 2008

The following table provides a reconciliation of changes in sales and gross margin for the nine months ended September 30, 2009 compared with the nine months ended September 30, 2008 for each of the Company’s reporting segments. “PTE”, “PTSB”, “VSP”, and “GA” represent Powertrain Energy, Powertrain Sealing and Bearings, Vehicle Safety and Protection, and Global Aftermarket, respectively. The Company consolidated its reporting segments from six to five reporting segments during the first quarter of 2009, eliminating the Automotive Products segment. Prior year reporting segment amounts have been reclassified to conform to the new reporting segment structure.

	PTE			PTSB			VSP			GA			Corporate			Total
	(Millions of Dollars)
Sales
Nine months ended September 30, 2008	$	1,722		$	947		$	811		$	2,066		$	—		$	5,546
Sales volumes		(528	)		(310	)		(205	)		(212	)		—			(1,255	)
Customer pricing		(30	)		10			(1	)		38			—			17
Foreign currency		(165	)		(71	)		(60	)		(90	)		—			(386	)
Nine months ended September 30, 2009	$	999		$	576		$	545		$	1,802		$	—		$	3,922

	PTE			PTSB			VSP			GA			Corporate			Total
	(Millions of Dollars)
Cost of Products Sold
Nine months ended September 30, 2008	$	(1,459	)	$	(873	)	$	(623	)	$	(1,656	)	$	6		$	(4,605	)
Sales volumes / mix		343			194			113			116			—			766
Productivity, net of inflation		22			23			28			4			(1	)		76
Materials and services sourcing		3			7			8			4			2			24
Depreciation		(6	)		(5	)		(1	)		—			—			(12	)
Pension		—			—			—			—			(8	)		(8	)
Non-recurrence of 2008 fresh-start reporting impact on inventory		11			7			5			45			—			68
Foreign currency		161			73			54			48			—			336
Nine months ended September 30, 2009	$	(925	)	$	(574	)	$	(416	)	$	(1,439	)	$	(1	)	$	(3,355	)

	PTE			PTSB			VSP			GA			Corporate			Total
	(Millions of Dollars)
Gross Margin
Nine months ended September 30, 2008	$	263		$	74		$	188		$	410		$	6		$	941
Sales volumes / mix		(185	)		(116	)		(92	)		(96	)		—			(489	)
Customer pricing		(30	)		10			(1	)		38			—			17
Productivity, net of inflation		22			23			28			4			(1	)		76
Materials and services sourcing		3			7			8			4			2			24
Depreciation		(6	)		(5	)		(1	)		—			—			(12	)
Pension		—			—			—			—			(8	)		(8	)
Non-recurrence of 2008 fresh-start reporting impact on inventory		11			7			5			45			—			68
Foreign currency		(4	)		2			(6	)		(42	)		—			(50	)
Nine months ended September 30, 2009	$	74		$	2		$	129		$	363		$	(1	)	$	567

	PTE			PTSB			VSP			GA			Corporate			Total
	(Millions of Dollars)
Operational EBITDA
Nine months ended September 30, 2008	$	299		$	57		$	180		$	303		$	(195	)	$	644
Sales volumes / mix		(185	)		(116	)		(92	)		(96	)		—			(489	)
Customer pricing		(30	)		10			(1	)		38			—			17
Productivity – Cost of products sold		22			23			28			4			(1	)		76
Productivity – SG&A		23			16			12			14			21			86
Sourcing – Cost of products sold		3			7			8			4			2			24
Sourcing – SG&A		—			—			—			3			2			5
Foreign currency		(9	)		1			(6	)		(26	)		23			(17	)
Equity earnings on non-consolidated affiliates		(10	)		(2	)		(1	)		1			—			(12	)
Other		(10	)		7			(3	)		(1	)		6			(1	)
Nine months ended September 30, 2009	$	103		$	3		$	125		$	244		$	(142	)	$	333
Interest expense, net																	(100	)
Depreciation and amortization																	(240	)
Restructuring, net																	(38	)
Chapter 11 and U.K. Administration related reorganization expenses																	(3	)
Non-cash expense associated with U.S. based funded pension plans																	(50	)
Other																	8
Loss before income taxes																$	(90	)

Powertrain Energy

Sales decreased by $723 million, or 42%, to $999 million for the nine months ended September 30, 2009 from $1,722 million in the same period of 2008. PTE generates approximately 80% of its revenue outside the United States and the resulting currency movements decreased reported sales by $165 million. Sales volumes decreased by $528 million due to OE production volume declines in all regions. Price downs associated with customer contractual agreements reduced sales by $30 million.

Cost of products sold decreased by $534 million to $925 million for the nine months ended September 30, 2009 compared to $1,459 million in the same period of 2008. This was primarily due to a $343 million decrease associated with the decline in sales volume. This reduction is due to reduced material, manufacturing labor and variable overhead costs as a direct consequence of the lower production volumes, partly offset by increases in the cost base resulting from changes in the mix of products manufactured and sold in the period. Productivity in excess of labor and benefits inflation of $22 million represents improvements in the total manufacturing cost base in excess of those due to reduced production volume and mix changes. Other factors contributing to this decrease were currency movements of $161 million and the non-recurrence of the 2008 fresh-start reporting impact on inventory of $11 million.

Gross margin decreased by $189 million to $74 million, or 7.4% of sales, for the nine months ended September 30, 2009 compared to $263 million, or 15.3% of sales, in the same period of 2008. The unfavorable impact of sales volumes contributed to a $185 million decrease in gross margin, while the non-recurrence of the 2008 fresh-start reporting impact on inventory increased reported gross margin by $11 million. Other factors contributing to the margin erosion were $30 million in customer pricing decreases and $6 million in increased depreciation, partially offset by $22 million of favorable productivity in excess of labor and benefits inflation.

Operational EBITDA decreased by $196 million to $103 million for the nine months ended September 30, 2009 from $299 million in the same period of 2008. The unfavorable impact of sales volumes declines of $185 million and customer price decreases of $30 million were partially offset by favorable productivity in excess of labor and benefits inflation of $45 million.

Powertrain Sealing and Bearings

Sales decreased by $371 million, or 39%, to $576 million for the nine months ended September 30, 2009 from $947 million in the same period of 2008. Approximately 70% of PTSB’s revenues are generated outside the United States and the resulting foreign currency movements decreased reported sales by $71 million. Sales volumes decreased by $310 million due to OE production volume declines in all regions. Customer pricing increased sales by $10 million.

Cost of products sold decreased by $299 million to $574 million for the nine months ended September 30, 2009 compared to $873 million in the same period of 2008. This was primarily due to a $194 million decrease associated with the decline in sales volume. This reduction is due to reduced material, manufacturing labor and variable overhead costs as a direct consequence of the lower production volumes, partly offset by increases in the cost base resulting from changes in the mix of products manufactured and sold in the period. Productivity in excess of labor and benefits inflation of $23 million represents improvements in the total manufacturing cost base in excess of those due to reduced production volume and mix changes. Other factors contributing to this decrease were currency movements of $73 million and the non-recurrence of the 2008 fresh-start reporting impact on inventory of $7 million.

Gross margin decreased by $72 million to $2 million, or 0.3% of sales, for the nine months ended September 30, 2009 compared to $74 million, or 7.8% of sales, in the same period of 2008. The decrease was due to decreased sales volumes, which reduced gross margin by $116 million and increased depreciation of $5 million. These decreases were partially offset by productivity in excess of labor and benefits inflation of $23 million, customer price increases of $10 million and the non-recurrence of the 2008 fresh-start reporting impact on inventory, which increased reported gross margin by $7 million.

Operational EBITDA decreased by $54 million to $3 million for the nine months ended September 30, 2009 from $57 million in the same period of 2008. The unfavorable impact of sales volumes declines of $116 million was partially offset by favorable productivity in excess of labor and benefits inflation of $39 million and customer price increases of $10 million.

Vehicle Safety and Protection

Sales decreased by $266 million, or 33%, to $545 million for the nine months ended September 30, 2009 from $811 million in the same period of 2008. Approximately 75% of VSP sales are generated outside the United States and the resulting currency movements decreased reported sales by $60 million. Sales volumes fell by $205 million due to lower OE production in all regions.

Cost of products sold decreased by $207 million to $416 million for the nine months ended September 30, 2009 compared to $623 million in the same period of 2008. This was primarily due to a $113 million decrease associated with the decline in sales volume. This reduction is due to reduced material, manufacturing labor and variable overhead costs as a direct consequence of the lower production volumes, partly offset by increases in the cost base resulting from changes in the mix of products manufactured and sold in the period. Productivity in excess of labor and benefits inflation of $28 million represents improvements in the total manufacturing cost base in excess of those due to reduced production volume and mix changes. Other factors contributing to this decrease were currency movements of $54 million and the non-recurrence of the 2008 fresh-start reporting impact on inventory of $5 million.

Gross margin decreased by $59 million to $129 million, or 23.7% of sales, for the nine months ended September 30, 2009 compared to $188 million, or 23.2% of sales, in the same period of 2008. The adverse impact on margin of $92 million due to reduced sales volumes was partially offset by favorable productivity in excess of labor and benefits inflation of $28 million, improved materials and services sourcing of $8 million and the non-recurrence of the 2008 fresh-start reporting impact on inventory, which increased reported gross margin by $5 million.

Operational EBITDA decreased by $55 million to $125 million for the nine months ended September 30, 2009 from $180 million in the same period of 2008. The unfavorable impact of sales volumes declines of $92 million was partially offset by favorable productivity in excess of labor and benefits inflation of $40 million.

Global Aftermarket

Sales decreased by $264 million, or 13%, to $1,802 million for the nine months ended September 30, 2009, from $2,066 million in the same period of 2008. This change was caused by decreased sales volumes in all regions totaling $212 million due to a combination of factors including the economic recession reducing consumer spending and the frailty of Eastern European financial markets, and unfavorable foreign currency movements of $90 million, partially offset by customer price increases of $38 million.

Cost of products sold decreased by $217 million to $1,439 million for the nine months ended September 30, 2009 compared to $1,656 million in the same period of 2008. This was primarily due to a $116 million decrease associated with the decline in sales volume. This reduction is due to reduced volume of product purchased as a direct consequence of the lower market demand, partly offset by increases in the cost base resulting from changes in the mix of products bought and sold in the period. Productivity in excess of labor and benefits inflation of $4 million represents improvements in the total cost base in excess of those due to reduced sales volume and mix changes. Other factors contributing to this decrease were currency movements of $48 million and the non-recurring 2008 fresh-start reporting impact on inventory of $45 million.

Gross margin decreased by $47 million to $363 million, or 20.1% of sales, for the nine months ended September 30, 2009 compared to $410 million, or 19.8% of sales, in the same period of 2008. The non-recurrence of the 2008 fresh-start reporting impact on inventory increased reported gross margin by $45 million and customer price increases of $38 million were more than offset due to the adverse impact on margin of $96 million caused by reduced sales volumes and unfavorable foreign currency movements of $42 million.

Operational EBITDA decreased by $59 million to $244 million for the nine months ended September 30, 2009 from $303 million in the same period of 2008. The unfavorable impact of sales volumes declines of $96 million and foreign currency movements of $26 million were partially offset by customer price increases of $38 million and favorable productivity in excess of labor and benefits inflation of $18 million.

Selling, General and Administrative Expenses

Selling, general and administrative expenses (“SG&A”) were $527 million, or 13.4% of net sales, for the nine months ended September 30, 2009 as compared to $613 million, or 11.1% of net sales, for the same period of 2008. Increased pension expense of $40 million was more than offset by favorable productivity in excess of labor and benefits inflation of $86 million, favorable foreign currency movements of $35 million and sourcing savings of $5 million.

The Company maintains technical centers throughout the world designed to integrate the Company’s leading technologies into advanced products and processes, to provide engineering support for all of the Company’s manufacturing sites, and to provide technological expertise in engineering and design development providing solutions for customers and bringing new, innovative products to market. Included in SG&A were research and development (“R&D”) costs, including product and validation costs, of $105 million for the nine months ended September 30, 2009 compared with $137 million for the same period in 2008. As a percentage of OE sales, R&D was 4.9% and 4.0% for the nine months ended September 30, 2009 and 2008, respectively.

Other Income, Net

Other income, net was $39 million in the nine months ended September 30, 2009 compared to $13 million for the nine months ended September 30, 2008.

The Company has commenced a lawsuit in Ohio against a number of insurers relating to insurance indemnification for costs arising from environmental releases from industrial operations of the Predecessor Company prior to 1986. Most of the insurer-defendants in this lawsuit have been dismissed because of settlements that the Company has reached with them. The case is proceeding against several non-settling insurers. The settlements with insurers reached by the Company during the nine months ended September 30, 2009 resulted in a net recovery to the Company of $12 million. The Company continues to engage in settlement discussions with several of the parties remaining in the case, although no assurances can be given regarding the outcome of such discussions.

During the second quarter of 2009, an affiliate purchased and sold debt investments on the Company’s behalf for $22 million and $30 million, respectively. This resulted in a single cash transaction with the affiliate for an $8 million net gain, which the Company recognized in other income.

During 2008, a fire occurred at a plant in Europe. The Company received insurance proceeds of $8 million during the nine months ended September 30, 2009, $7 million of which were recognized as involuntary conversion gains.

Interest Expense, Net

Net interest expense was $100 million in the nine months ended September 30, 2009 compared to $137 million for the same period of 2008. The decrease is due to lower average interest rates.

Restructuring Activities

The following is a summary of the Company’s consolidated restructuring reserves and related activity as of and for the nine months ended September 30, 2009:

	PTE			PTSB			VSP			GA			Corporate			Total
	(Millions of dollars)

Balance at December 31, 2008	$	34.2		$	47.2		$	22.0		$	4.8		$	5.0		$	113.2
Provisions		26.2			8.8			3.6			4.2			0.4			43.2
Reversals		(4.4	)		(0.1	)		(0.3	)		—			(0.1	)		(4.9	)
Payments		(7.6	)		(4.9	)		(6.2	)		(1.4	)		(1.5	)		(21.6	)
Foreign currency		(1.3	)		(2.7	)		(0.4	)		—			0.1			(4.3	)
Balance at March 31, 2009	$	47.1		$	48.3		$	18.7		$	7.6		$	3.9		$	125.6
Provisions		5.2			10.5			6.5			1.7			1.4			25.3
Reversals		(11.2	)		(9.8	)		(2.0	)		(0.8	)		—			(23.8	)
Payments		(7.6	)		(11.2	)		(6.7	)		(2.5	)		(1.3	)		(29.3	)
Foreign currency		3.8			3.0			0.4			0.2			(0.1	)		7.3
Balance at June 30, 2009	$	37.3		$	40.8		$	16.9		$	6.2		$	3.9		$	105.1
Provisions		1.1			0.1			6.2			0.7			0.9			9.0
Reversals		—			(0.4	)		(9.8	)		(0.2	)		—			(10.4	)
Payments		(9.1	)		(11.1	)		(4.2	)		(1.7	)		(1.0	)		(27.1	)
Foreign currency		1.2			1.0			0.1			—			—			2.3

Balance at September 30, 2009	$	30.5		$	30.4		$	9.2		$	5.0		$	3.8		$	78.9

Chapter 11 and U.K. Administration Related Reorganization Expenses

	Nine Months Ended
	September 30
	2009	2008
	(Millions of Dollars)

Professional fees directly related to Chapter 11 and UK Administration	$ 2.8	$ 15.3

Cash payments for Chapter 11 and U.K. Administration related reorganization expenses totaled $5 million and $43 million for the nine months ended September 30, 2009 and 2008, respectively.

Income Taxes

For the nine months ended September 30, 2009, the Company recorded an income tax benefit of $11 million on a loss before income taxes of $90 million. This compares to income tax expense of $72 million on income before income taxes of $139 million in the same period of 2008.

Generally, the amount of tax expense or benefit allocated to continuing operations is determined without regard to the tax effects of the other categories of income or loss, such as other comprehensive income. However, an exception exists when, within a tax jurisdiction, there is a pre-tax loss from continuing operations, pre-tax income from other categories, and a valuation allowance has been established against deferred tax assets within that jurisdiction. In such an instance, tax benefit is allocated to continuing operations as an offset to the tax expense recorded against other categories of income. The Company recorded a tax benefit of $20 million to continuing operations pursuant to this rule during the nine months ended September 30, 2009. Also, during the current period, the Company recognized a net tax benefit of $11 million from the reversal of a valuation allowance against certain net deferred tax assets of an Indian subsidiary. Further, the income tax benefit for the nine months ended September 30, 2009 differs from the U.S. statutory tax rate due primarily to non-recognition of income tax benefits on certain operating losses and non-deductible items in various jurisdictions.

Litigation and Environmental Contingencies

For a summary of material litigation and environmental contingencies, refer to Note 14 of the consolidated financial statements, “Commitments and Contingencies”.

Liquidity and Capital Resources

Cash Flow

Cash flow provided from operating activities was $48 million for the nine months ended September 30, 2009 compared to cash provided from operating activities of $375 million for the comparable period of 2008. The most significant factors contributing to operating activity cash flows during the nine months ended September 30, 2008 are those in relation to emergence from Chapter 11. Cash provided from operations, excluding the impacts of emergence related cash flows, is shown below:

	Nine Months Ended September 30
	2009		2008
	(Millions of Dollars)

Net cash provided from operating activities:	$	48	$	375

Adjustments:
Cash received from 524(g) Trust		—		(225	)
Net payments for implementation of the Plan, including settlement of non-debt liabilities subject to compromise		11		19

Cash provided from operations, excluding the impacts of the Plan	$	59	$	169

The cash outflow due to changes in accounts receivable in the nine months ended September 30, 2009 of $118 million is comprised of two major elements as follows:

Days sales outstanding increased over year-end 2008 by 1.5 days, which accounted for about $20 million of the cash outflow

Excluding the impact of foreign exchange, increased sales revenue in the last two months of the third quarter of 2009 as compared to the last two months of 2008 accounted for about $98 million of the cash outflow

The cash outflow due to changes in accounts payable in the nine months ended September 30, 2009 of $106 million is comprised of two major elements as follows:

Days payables outstanding decreased over year-end 2008 by 12 days, which accounted for about $146 million of the cash outflow, including settlement of non-debt liabilities subject to compromise of about $11 million

Excluding the impact of foreign exchange, increased purchasing in the last two months of the third quarter of 2009 as compared to the last two months of 2008 accounted for about $40 million of a partially offsetting cash inflow

Cash flow used by investing activities was $137 million for the first nine months of 2009, compared to cash used by investing activities of $234 million for the comparable period of 2008. This decrease is due to planned reductions in capital spending.

Cash flow used by financing activities was $34 million for the first nine months of 2009, compared to cash provided from financing activities of $227 million for the comparable period of 2008, which included borrowings on the Company’s Exit Facilities.

Financing Activities

The obligations under the revolving credit facility mature December 27, 2013 and bear interest for the first six months at LIBOR plus 1.75% or at the alternate base rate (“ABR”, defined as the greater of Citibank, N.A.’s announced prime rate or 0.50% over the Federal Funds Rate) plus 0.75%, and thereafter shall be adjusted in accordance with a pricing grid based on availability under the revolving credit facility. Interest rates on the pricing grid range from LIBOR plus 1.50% to LIBOR plus 2.00% and ABR plus 0.50% to ABR plus 1.00%. The tranche B term loans mature December 27, 2014 and the tranche C term loans mature December 27, 2015; provided, however, that in each case, such maturity may be shortened to December 27, 2013 under certain circumstances. In addition, the tranche C term loans are subject to a pre-payment premium, should the Company choose to prepay the loans prior to December 27, 2011. All Exit Facilities term loans bear interest at LIBOR plus 1.9375% or at the ABR plus 0.9375% at the Company’s election. To the extent that interest rates change by 25 basis points, the Company’s annual interest expense would show a corresponding change of approximately $5 million.

Other Liquidity and Capital Resource Items

The Company maintains investments in 14 non-consolidated affiliates, which are located in China, Germany, India, Italy, Korea, Turkey, the United Kingdom, and the United States. The Company’s direct ownership in such affiliates ranges from approximately 1% to 50%. The aggregate investments in these affiliates are $231.5 million and $220.6 million at September 30, 2009 and December 31, 2008, respectively. Dividends received from non-consolidated affiliates by the Company during the nine months ended September 30, 2009 were not material.

The Company’s joint ventures are businesses established and maintained in connection with its operating strategy and are not special purpose entities. In general, the Company does not extend guarantees, loans or other instruments of a variable nature that may result in incremental risk to the Company’s liquidity position. Furthermore, the Company does not rely on dividend payments or other cash flows from its non-consolidated affiliates to fund its operations and, accordingly, does not believe that they have a material effect on the Company’s liquidity.

The Company has determined that its investments in Chinese joint venture arrangements are considered to be “limited-lived” as such entities have specified durations ranging from 30 to 50 years pursuant to regional statutory regulations. In general, these arrangements call for extension, renewal or liquidation at the discretion of the parties to the arrangement at the end of the contractual agreement. Accordingly, a reasonable assessment cannot be made as to the impact of such contingencies on the future liquidity position of the Company.

The Company’s subsidiaries in Brazil, France, Germany, Italy, Japan and Spain are party to accounts receivable factoring arrangements. Gross accounts receivable factored under these facilities were $215 million and $222 million as of September 30, 2009 and December 31, 2008, respectively. Of those gross amounts, $194 million and $209 million, respectively, were factored without recourse and treated as sales. Under terms of these factoring arrangements, the Company is not obligated to draw cash immediately upon the factoring of accounts receivable. As of September 30, 2009 and December 31, 2008, the Company had outstanding factored amounts of $3 million and $8 million, respectively, for which cash had not yet been drawn. Expenses associated with receivables factored or discounted are recorded in the consolidated statements of operations within “Other income, net.”

Critical Accounting Policies

Goodwill

The Company performs its annual goodwill impairment analysis as of October 1. This impairment analysis compares the estimated fair value of these assets to the related carrying value, and an impairment charge is recorded for any excess of carrying value over estimated fair value. The estimated fair value is based upon consideration of various valuation methodologies, including guideline transaction multiples, multiples of current earnings, and projected future cash flows discounted at rates commensurate with the risk involved. If the results of this analysis conclude that an impairment of goodwill is necessary, then the Company would record a charge in the fourth quarter. In the event that the Company would be required to record a significant goodwill impairment, it would have a material adverse effect on the Company’s consolidated statement of operations.

The Company’s goodwill balance by reporting segment as of September 30, 2009 is as follows (in millions):

Powertrain Energy (“PTE”)	$	273.1
Powertrain Sealing and Bearings (“PTSB”)		95.0
Vehicle Safety and Protection (“VSP”)		676.5
	$	1,044.6

The Company recorded a goodwill impairment of $238.7 million during the fourth quarter of 2008. After recording this impairment based on the results of “Step 2” testing, $421.6 million of goodwill remains in reporting units that were subjected to the 2008 “Step 2” testing and is contained within the following reporting segments: PTE of $103.2 million; PTSB of $95.0 million; and VSP of $223.4 million.

ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK

In the normal course of business, the Company is subject to market exposure from changes in foreign currency exchange rates, interest rates and raw material prices. To manage a portion of these inherent risks, the Company purchases various derivative financial instruments to hedge against unfavorable market changes. The Company does not hold or issue derivative financial instruments for trading or speculative purposes.

Foreign Currency Risk

As currency exchange rates change, translation of the statements of operations of the Company's international businesses into United States dollars affects year-over-year comparability of operating results. The Company does not generally hedge operating translation risks because cash flows from international operations are generally reinvested locally. Changes in foreign currency exchange rates are generally reported as a component of stockholders’ equity for the Company’s foreign subsidiaries reporting in local currencies and as a component of income for its foreign subsidiaries using the U.S. dollar as the functional currency. The Company’s other comprehensive income (loss) was increased by $69 million and decreased by $60 million for the nine months ended September 30, 2009 and 2008, respectively. The changes were due to cumulative translation adjustments resulting primarily from changes in the U.S. Dollar to the euro and British Pound.

The Company generally tries to use natural hedges within its foreign currency activities, including the matching of revenues and costs, to minimize foreign currency risk. Where natural hedges are not in place, the Company considers managing certain aspects of its foreign currency activities and larger transactions through the use of foreign currency options or forward contracts. Principal currencies hedged have historically included the euro, British pound, Japanese yen and Canadian dollar. The effect of changes in the estimated fair value of these hedges and the underlying exposures are recognized in earnings each period. These hedges were highly effective and their impact on earnings was not significant during the nine months ended September 30, 2009 and 2008. The Company had notional values of approximately $10 million and $5 million of foreign currency hedge contracts outstanding at September 30, 2009 and December 31, 2008, respectively, that were designated as hedging instruments for accounting purposes. Unrealized net losses of $0.3 million and $1.0 million were recorded in “Accumulated other comprehensive loss” as of September 30, 2009 and December 31, 2008, respectively. No hedge ineffectiveness was recognized during the nine months ended September 30, 2009.

Interest Rate Risk

In connection with the consummation of the Plan, on the Effective Date, the Company entered into a Term Loan and Revolving Credit Agreement (the “Exit Facilities”). The Exit Facilities include a $540 million revolving credit facility (which is subject to a borrowing base and can be increased under certain circumstances and subject to certain conditions) and a $2,960 million term loan credit facility divided into a $1,960 million tranche B loan and a $1,000 million tranche C loan. The Company borrowed $878 million under the term loan facility on the Effective Date and the remaining $2,082 million of term loans were drawn on January 3, 2008. As of the Effective Date, existing letters of credit under the Predecessor Company’s debtor-in-possession credit agreement in the approximate amount of $34.3 million, and existing letters of credit issued under the Predecessor Company’s prepetition credit facility in the approximate amount of $39.4 million, were rolled over as letters of credit under the Exit Facilities.

The obligations under the revolving credit facility mature December 27, 2013 and bear interest rates that adjust in accordance with a pricing grid based on availability under the revolving credit facility. Interest rates on the pricing grid range from LIBOR plus 1.50% to LIBOR plus 2.00%. The tranche B term loans mature December 27, 2014 and the tranche C term loans mature December 27, 2015; provided, however, that in each case, such maturity may be shortened to December 27, 2013 under certain circumstances. All Exit Facilities term loans shall bear interest at LIBOR plus 1.9375% or at the ABR plus 0.9375% at the Company’s election. To the extent that interest rates change by 25 basis points, the Company’s annual interest expense would show a corresponding change of approximately $5 million.

The Company, during 2008, entered into a series of five-year interest rate swap agreements with a total notional value of $1,190 million to hedge the variability of interest payments associated with its variable-rate term loans under the Exit Facilities. Through these swap agreements, the Company has fixed its base interest and premium rate at a combined average interest rate of approximately 5.37% on the hedged principal amount of $1,190 million. As of September 30, 2009 and December 31, 2008, unrealized net losses of $56.4 million and $66.6 million, respectively, were recorded in “Accumulated other comprehensive loss” as a result of these hedges. As of September 30, 2009, losses of $34.1 million are expected to be reclassified from “Accumulated other comprehensive loss” to consolidated statement of operations within the next 12 months. No hedge ineffectiveness was recognized during the nine months ended September 30, 2009.

Commodity Price Risk

The Company had 214 and 364 commodity price hedge contracts outstanding with a combined notional value of $38 million and $91 million at September 30, 2009 and December 31, 2008, respectively, of which substantially all mature within one year. Of these outstanding contracts, 164 and 346 commodity price hedge contracts with a combined notional value of $26 million and $83 million at September 30, 2009 and December 31, 2008, respectively, were designated as hedging instruments for accounting purposes. Unrealized net losses of $1.8 million and $33.0 million were recorded in “Accumulated other comprehensive loss” as of September 30, 2009 and December, 31, 2008, respectively. Unrealized net gains of $0.2 million and $2.1 million were recognized in “Other income, net” during the three and nine months ended September 30, 2009, respectively, associated with ineffectiveness on contracts designated as accounting hedges.

ITEM 4. CONTROLS AND PROCEDURES

A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected.

Disclosure Controls and Procedures

The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Company's periodic Securities Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to the Company's management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

As of September 30, 2009, an evaluation was performed under the supervision and with the participation of the Company's management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based upon that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of September 30, 2009, at the reasonable assurance level previously described.

Changes to Internal Control Over Financial Reporting

Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the U.S. Securities Exchange Act of 1934. As of September 30, 2009, the Company's management, with the participation of the Chief Executive Officer and the Chief Financial Officer, has evaluated for disclosure, changes to the Company's internal control over financial reporting that occurred during the three months ended September 30, 2009 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. There were no material changes in the Company’s internal control over financial reporting during the three months ended September 30, 2009.

PART II OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

(a) Contingencies.

Note 14, that is included in Part I of this report, is incorporated herein by reference.

ITEM 1A.

RISK FACTORS

Except as noted below, there were no material changes in the risk factors previously disclosed in Item 1A, Risk Factors, in the Company’s 2008 Annual Report on Form 10-K as filed on February 24, 2009.

The Company’s operations in foreign countries exposes the Company to risks related to economic and political conditions, currency fluctuations and import/export restrictions: The Company has manufacturing and distribution facilities in many countries. International operations are subject to certain risks including:

exposure to local economic conditions;

exposure to local political conditions (including the risk of seizure of assets by foreign governments);

currency exchange rate fluctuations (including, but not limited to, material exchange rate fluctuations, such as devaluations) and currency controls; and

export and import restrictions.

The likelihood of such occurrences and their potential effect on the Company are unpredictable and vary from country to country.

Certain of the Company’s operating entities report their financial condition and results of operations in currencies other than the U.S. dollar (including, but not limited to, Brazilian real, British pound, Chinese yuan renminbi, Czech crown, euro, Indian rupee, Mexican peso, Polish zloty, Russian ruble and Venezuelan bolivar). In reporting its consolidated statements of operations, the Company translates the reported results of these entities into U.S. dollars at the applicable exchange rates. As a result, fluctuations in the dollar against foreign currencies will affect the value at which the results of these entities are included within Federal-Mogul’s consolidated results.

The Company is exposed to a risk of gain or loss from changes in foreign exchange rates whenever the Company, or one of its foreign subsidiaries, enters into a purchase or sales agreement in a currency other than its functional currency. While the Company reduces such exposure by matching most revenues and costs within the same currency, changes in exchange rates could impact the Company’s financial condition or results of operations.

ITEM 6. EXHIBITS

(a) Exhibits:

31.1		Certification by the Company’s Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934.

31.2		Certification by the Company’s Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934.

32		Certification by the Company’s Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, and Rule 13a-14(b) of the Securities Exchange Act of 1934.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

FEDERAL-MOGUL CORPORATION

By:	/s/ Jeff J. Kaminski
	Jeff J. Kaminski
	Senior Vice President and Chief Financial Officer,
	Principal Financial Officer

By:	/s/ Alan J. Haughie
	Alan J. Haughie
	Vice President, Controller, and Chief Accounting Officer
	Principal Accounting Officer

Dated: October 29, 2009

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Federal-mogul (FDML) Inactive 10-Q2009 Q3 Quarterly report

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