1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-Q QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Period Ended September 30, 1995 ---------------------------------------------------- Commission File Number 1-1511 -------------------------------------------------- FEDERAL-MOGUL CORPORATION - -------------------------------------------------------------------------- (Exact name of Registrant as specified in its charter) Michigan 38-0533580 - ------------------------------- -------------------------- (State or other jurisdiction of (I.R.S. Employer I.D. No.) incorporation or organization) 26555 Northwestern Highway, Southfield, Michigan 48034 - -------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (810) 354-7700 - --------------------------------------------------------------------------- (Registrant's telephone number, including area code) Not Applicable - -------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) 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, and (2) has been subject to such filing requirements for the past 90 days. Yes X No ---------------- ----------------- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: Common Stock, 34,995,859 shares as of November 7, 1995 2 PART I - FINANCIAL INFORMATION - ------------------------------ Item 1. Financial Statements FEDERAL-MOGUL CORPORATION AND SUBSIDIARIES Condensed Consolidated Statements of Earnings (Unaudited) Three Months Ended Nine Months Ended September 30 September 30 -------------------- ------------------ 1995 1994 1995 1994 -------- -------- -------- -------- (Millions of Dollars, Except Per Share Amounts) Net sales $ 480.2 $ 445.3 $1,510.8 $1,380.4 Cost of products sold 373.4 349.7 1,176.6 1,083.3 Selling, distribution and administrative expenses 78.1 66.0 237.5 195.6 ------- ------- ------- ------- Operating Earnings 28.7 29.6 96.7 101.5 Other income (expense): Amortization of intangible assets (2.8) (2.5) (8.7) (7.0) Interest expense (9.6) (4.0) (26.2) (13.3) Interest income 2.1 2.7 4.0 6.5 International currency exchange gains (losses) (.7) .4 (2.3) (5.0) Other, net - (.2) (.3) .4 ------- ------- ------- ------- Earnings Before Income Taxes 17.7 26.0 63.2 83.1 Income taxes 6.7 9.9 23.8 31.6 ------- ------- ------- ------- Net Earnings 11.0 16.1 39.4 51.5 Preferred stock dividends, net of tax benefits 2.2 2.3 6.6 6.9 ------- ------- ------- ------- Net Earnings Available for Common Shares $ 8.8 $ 13.8 $ 32.8 $ 44.6 ------- ------- ------- ------- ------- ------- ------- ------- Earnings Per Common Share Primary $ .25 $ .38 $ .94 $ 1.27 ------- ------- ------- ------- ------- ------- ------- ------- Fully Diluted $ .25 $ .37 $ .91 $ 1.19 ------- ------- ------- ------- ------- ------- ------- ------- See accompanying notes. 3 FEDERAL-MOGUL CORPORATION AND SUBSIDIARIES Condensed Consolidated Balance Sheets (Millions of Dollars) September 30, December 31, 1995 1994 ------------ ------------ (Unaudited) Assets Current Assets: Cash and equivalents $ 22.2 $ 25.0 Accounts receivable 341.6 269.5 Inventories 491.9 372.1 Prepaid expenses and income tax benefits 48.2 37.6 ------- ------- Total Current Assets 903.9 704.2 Property, Plant and Equipment 459.0 437.3 Goodwill 226.6 172.9 Other Intangible Assets 68.2 71.2 Business Investments and Other Assets 115.8 110.5 ------- ------- Total Assets $1,773.5 $1,496.1 ------- ------- ------- ------- Liabilities and Shareholders' Equity Current Liabilities: Short-term debt $ 120.6 $ 74.0 Accounts payable 167.4 136.6 Accrued compensation 38.4 33.3 Other accrued liabilities 100.8 92.0 ------- ------- Total Current Liabilities 427.2 335.9 Long-Term Debt 466.5 319.4 Postemployment Benefits 206.5 199.8 Other Accrued Liabilities 52.0 43.8 ------- ------- Total Liabilities 1,152.2 898.9 Shareholders' Equity: Series D preferred stock 76.6 76.6 Series C ESOP preferred stock 59.0 59.1 Unearned ESOP compensation (37.1) (39.8) Common stock 175.0 174.9 Additional paid-in capital 279.3 277.8 Retained earnings 100.6 82.0 Currency translation and other (32.1) (33.4) ------- ------- Total Shareholders' Equity 621.3 597.2 ------- ------- Total Liabilities and Shareholders' Equity $1,773.5 $1,496.1 ------- ------- ------- ------- See accompanying notes. 4 FEDERAL-MOGUL CORPORATION AND SUBSIDIARIES Condensed Consolidated Statements of Cash Flows (Unaudited) Nine Months Ended September 30, 1995 1994 -------- -------- (Millions of Dollars) Cash Provided From (Used By) Operating Activities Net earnings $ 39.4 $ 51.5 Adjustments to reconcile net earnings to net cash provided from (used by) operating activities Depreciation and amortization 45.9 40.9 Gain on sale of business investment (7.8) - Restructuring charge 7.8 - Deferred income taxes .1 (7.5) Postemployment benefits other than pensions 2.3 4.9 Increase in accounts receivable (41.5) (73.1) Increase in inventories, prepaid expenses and other (80.8) (13.5) Increase (decrease) in other current liabilities (1.1) 25.8 Payments against restructuring reserves (6.7) (9.1) ----- ----- Net Cash Provided From (Used By) Operating Activities (42.4) 19.9 Cash Provided From (Used By) Investing Activities Expenditures for property, plant and equipment (56.6) (48.1) Payments for rationalization of acquired businesses (5.9) (22.7) Proceeds from sale of business investment 28.0 - Purchase of business investments (63.6) - Other - 3.2 ----- ----- Net Cash Used By Investing Activities (98.1) (67.6) Cash Provided From (Used By) Financing Activities Proceeds from issuance of common stock .2 197.0 Expenditures for purchase of common stock (9.0) - Net increase (decrease) in debt 166.1 (154.5) Dividends (19.7) (19.7) Other .1 .5 ----- ----- Net Cash Provided From Financing Activities 137.7 23.3 ----- ----- Decrease in Cash and Equivalents (2.8) (24.4) Cash and Equivalents at Beginning of Period 25.0 33.8 ----- ----- Cash and Equivalents at End of Period $ 22.2 $ 9.4 ----- ----- ----- ----- See accompanying notes. 5 FEDERAL-MOGUL CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) September 30, 1995 1. BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and nine-month periods ended September 30, 1995 are not necessarily indicative of the results that may be expected for the year ended December 31, 1995. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's annual report on Form 10-K for the year ended December 31, 1994. Certain items in the prior period financial statements have been reclassified to conform with the presentation used in 1995. 2. SALE OF PFPD On April 26, 1995, the Company completed the previously announced sale of the operations and substantially all of the operating assets of its Precision Forged Products Division to Borg-Warner Automotive, Inc. (Borg-Warner) in a transaction valued at approximately $45 million. The Company received $28 million in cash, retained the division's customer receivables, and recognized a pretax gain of $7.8 million. Additionally, Borg Warner assumed certain operating liabilities. The results of operations of the Precision Forged Products Division have been included in the Company's consolidated statement of earnings through the date of sale. 3. PURCHASES OF BUSINESS INVESTMENTS On September 30, 1995, the Company completed its acquisition of the Centropiezas group, one of Puerto Rico's largest retailers of automotive aftermarket parts. The acquisition has been accounted for as a purchase and, accordingly, the purchase price was allocated to the acquired assets and assumed liabilities based on their estimated fair values as of the acquisition date. Annual sales of Centropiezas are approximately $40 million. Results of operations of Centropiezas will be reflected in the consolidated statement of earnings beginning October 1, 1995. On September 25, 1995, the Company acquired Cardiff, Wales-based Seal Technology Systems Ltd. (STS), a leading designer and manufacturer of a specialized range of seals and gaskets for the automotive sector and other industrial markets. The acquisition has been accounted for as a purchase and, accordingly, the purchase price was allocated to the acquired assets and assumed liabilities based on their estimated fair values as of the acquisition date. Annual sales of STS are approximately $15 million. Results of operations of STS will be reflected in the consolidated statement of earnings beginning October 1, 1995. 6 On June 28, 1995, the Company completed its acquisition of Bertolotti Pietro e Figli S.r.l. (Bertolotti), a distributor of premium brand European auto and truck parts throughout Italy. The acquisition has been accounted for as a purchase and, accordingly, the purchase price was allocated to the acquired assets and assumed liabilities based on their estimated fair values as of the acquisition date. Annual sales of Bertolotti are approximately $60 million. The consolidated statement of earnings includes the results of operations of Bertolotti from July 1, 1995. 4. RESTRUCTURING CHARGE During the second quarter of 1995, the Company recorded a restructuring charge of $7.8 million applicable to employee termination payments, closed operations, lease termination costs and other write-downs of assets. The charge is comprised of $4.9 million to pay terminated employees primarily in Argentina, the United States and Europe, $1.7 million to write down impaired assets in Italy to their net realizable value, and $1.2 million for location closings and lease terminations. 5. EARNINGS PER COMMON SHARE The computation of primary earnings per share is based on the weighted average number of outstanding common shares during the period plus, when their effect is dilutive, common stock equivalents consisting of certain shares subject to stock options. Fully diluted earnings per share additionally assumes the conversion of outstanding Series C ESOP and Series D preferred stock and the contingent issuance of common stock to satisfy the Series C ESOP preferred stock redemption price guarantee. The number of contingent shares used in the fully diluted calculation is based on the common stock market price on September 30, 1995, and the number of preferred shares held by the Employee Stock Ownership Plan (ESOP) that were allocated to participants' accounts as of September 30 of each of the respective years. The primary weighted average number of common and equivalent shares outstanding (in thousands) was 35,043 and 34,975 for the three and nine-month periods ended September 30, 1995, and 36,000 and 35,166 for the three and nine-month periods ended September 30, 1994. The fully diluted weighted average number of common and equivalent shares outstanding (in thousands) was 41,894 and 41,844 for the three and nine-month periods ended September 30, 1995, and 42,805 and 41,983 for the three and nine-month periods ended September 30, 1994, respectively. Net earnings used in the computations of primary earnings per share are reduced by preferred stock dividend requirements. Net earnings used in the computation of fully diluted earnings per share are reduced by amounts representing the additional after-tax contribution that would be necessary to meet ESOP debt service requirements under an assumed conversion of the Series C ESOP preferred stock. 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations THREE MONTHS ENDED SEPTEMBER 30, 1995 COMPARED WITH THREE MONTHS ENDED SEPTEMBER 30, 1994 Third quarter 1995 sales increased by 7.8 percent to $480.2 million from $445.3 million for the third quarter of 1994, with most of the increase occurring in the international replacement market. The international replacement business achieved sales of $140.3 million, an increase of $56.0 million over the third quarter of 1994. This increase is largely attributable to the acquisitions of Varex Corporation in South Africa and Bertolotti in Italy. Excluding the acquisitions and the impact of the peso devaluation in Mexico, international replacement sales increased 15.3 percent over the third quarter of 1994. North American replacement sales decreased 1.9 percent primarily due to overall industry softness, particularly along the Mexican border, and continued pressure on engine parts sales due to brand consolidation at customer locations. North American original equipment sales decreased 20.7 percent due primarily to the sale of the Company's Precision Forged Products Division (PFPD). Excluding the operations of PFPD, North American original equipment sales decreased 8.1 percent. European original equipment sales advanced 15.8 percent as a result of market penetration of engine bearings and favorable currency translation. Excluding the impact of exchange rates, European original equipment sales increased 6.8 percent. The Company's operating earnings decreased to $28.7 million from $29.6 million for the third quarter of 1994 due primarily to a change in the sales mix as described above. Pretax earnings decreased to $17.7 million from $26.0 million for the third quarter of 1994. The decrease in pretax earnings is attributable to the decrease in operating earnings and additional interest expense due to higher levels of debt incurred to finance the Varex and Bertolotti acquisitions, a stock repurchase program completed in January 1995 and increased levels of working capital. Net earnings decreased to $11.0 million or $.25 per common share on a fully diluted basis for the third quarter of 1995 compared to net earnings of $16.1 million or $.37 per common share for the third quarter of 1994. 8 NINE MONTHS ENDED SEPTEMBER 30, 1995 COMPARED WITH NINE MONTHS ENDED SEPTEMBER 30, 1994 Sales for the nine-month period ended September 30, 1995 increased by 9.4 percent to $1,510.8 million from $1,380.4 million for the nine-month period ended September 30, 1994. Most of this increase is in the international replacement market. The increase in international replacement sales of $138.0 million over the nine-month period ended September 30, 1994 is largely attributable to the acquisitions of Varex Corporation in South Africa and Bertolotti in Italy. Excluding the acquisitions, international replacement sales increased 11.5 percent. North American replacement sales decreased 3.1 percent. Of the Company's five major product segments in the North American replacement market, engine parts account for a majority of the sales decline. Engine part sales were negatively impacted primarily by a conscious reduction in engine part inventories at the customer level and brand consolidation at customer locations. Worldwide sales of original equipment products increased 2.1 percent. North American original equipment sales decreased 7.2 percent, due primarily to the sale of PFPD. Excluding the operations of PFPD, sales decreased 2.0 percent. European original equipment sales increased 30.5 percent as a result of market penetration of engine bearings and favorable currency translation. Excluding the impact of exchange rates, European original equipment sales increased 15.3 percent. The Company's operating earnings decreased to $96.7 million from $101.5 million for the nine-month period ended September 30, 1994 due primarily to a change in the sales mix as described above. Pretax earnings decreased to $63.2 million from $83.1 million for the nine-month period ended September 30, 1994. The decrease in pretax earnings is attributable to the decrease in operating earnings and additional interest expense due to higher levels of debt incurred to finance the Varex and Bertolotti acquisitions, a stock repurchase program completed in January 1995 and increased levels of working capital. In addition, amortization expense increased $1.7 million due primarily to the acquisitions of Varex and Bertolotti. Net earnings decreased to $39.4 million or $.91 per common share on a fully diluted basis for the nine-month period ended September 30, 1995 compared to net earnings of $51.5 million or $1.19 per common share for the nine-month period ended September 30, 1994. 9 LIQUIDITY AND CAPITAL RESOURCES Working capital was impacted by an increase of $80.8 million in inventories, prepaid expenses and other during the nine-month period ended September 30, 1995 compared to an increase of $13.5 million during the nine-month period ended September 30, 1994. This increase is due primarily to an inventory build which enhanced product availability at various locations throughout the world. The Company expects that available cash and existing short-term lines of credit will be sufficient to meet its normal operating requirements. Net cash used for investing activities consists primarily of capital expenditures for property, plant and equipment to implement process improvements and new product introductions. In both periods, the Company incurred payments for the rationalization of acquired businesses. These payments were $16.8 million less during the nine-month period ended September 30, 1995 than during the nine-month period ended September 30, 1994 as integrations are near completion. The company received $28.0 million from the sale of PFPD during the nine-month period ended September 30, 1995. Net cash provided from financing activities reflects an increase in both long and short-term debt. These borrowings were used to finance the Varex, Bertolotti, Centropiezas and STS acquisitions, repurchase common stock and fund increased levels of working capital. In February 1994, the Company issued 5.75 million shares of common stock in a public offering which generated net proceeds of $191 million. The proceeds were used to repay outstanding debt resulting from the acquisition of the Sealed Power Replacement business in October 1993. 10 PART II - OTHER INFORMATION - --------------------------- Item 1. Legal Proceedings ----------------- On August 30, 1995, Zeller Corporation, an auto parts supplier, filed a lawsuit against the Company and Neapco, Inc. in the United States District Court for the Northern District of Ohio, Western Division, seeking damages for alleged violations of federal antitrust laws and certain state laws. The Company believes the claims asserted are without merit and is defending the lawsuit vigorously. After consulting with counsel for the Company, management believes that this matter will not have a material effect on the Company's consolidated financial statements. Item 6. Exhibits and Reports on Form 8-K -------------------------------- (a) Exhibits: 11.1 Statement Re Computation of Per Share Earnings for the three months ended September 30, 1995 (filed with this report). 11.2 Statement Re Computation of Per Share Earnings for the nine months ended September 30, 1995 (filed with this report). The Company will furnish upon request any exhibit described above upon payment of the Company's reasonable expenses for furnishing such exhibit. (b) Reports on Form 8-K: No reports on Form 8-K were filed during the quarter ended September 30, 1995. SIGNATURE 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: (Michael J. Viola) ---------------------------------------- Michael J. Viola Vice President, Controller and Treasurer Chief Accounting Officer Dated: November 9, 1995