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Federal-Mogul reports third quarter results, including special
charge
SOUTHFIELD, MICHIGAN, October 25, 1996...Federal-Mogul
Corporation (NYSE-FMO) today reported results for its third quarter
ended September 30, 1996. Sales for the quarter were $492 million
compared to $480 million in 1995. The company reported a net loss
of $17 million or $.56 per share compared to net earnings of $11
million or $.25 per share in 1995. This loss included a special
after-tax charge of $24 million or $.70 per share. Excluding the
special charge, operating earnings were $22 million, net earnings
were $7 million and earnings per share were $.14.
Reported sales for the first nine months of 1996 were $1,550
million compared to $1,511 million in 1995. Including the special
charge, net earnings were $9 million compared to $39 million and
earnings per share were $.07 compared to $.91 last year.
"We are disappointed with our earnings and do not believe the
company will be able to exceed 1995 results as previously
expected," commented Acting Chief Executive Officer Robert S.
(Steve) Miller. "This being said, we are pleased with the $120
million in cash generated from operations compared to a $42 million
usage last year. While we will continue to focus on cash flow and
working capital productivity, we anticipate that the positive
impact of our reengineering initiatives and operational
improvements should start appearing on the earnings line by early
next year."
SPECIAL CHARGE
The third quarter special charge is the result of a
top-to-bottom review of the company's balance sheet and business
units begun at the request of the Board of Directors this summer.
This review has intensified since September 18 when the previously
announced change in management occurred.
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The Board's business review was conducted under the direction
of Chief Financial Officer Thomas W. VanHimbergen using outside
consultants including the company's auditors. The review to-date
has resulted in a pre-tax charge of $38 million ($24 million
after-tax) against third quarter earnings. Included in the charge
is a loss on the previously announced sale of the U.S. ball bearing
manufacturing business of $6 million and professional fees and
severance costs of $6 million related to management changes.
Additionally, changes in accounting estimates of $6 million in
environmental liabilities and of $10 million in customer programs
were recorded. The company changed its methodology for the
recognition of capitalized interest to better reflect the asset
value resulting in a charge of $3 million. The balance reflects
inventory adjustments of $3 million, recognition of additional
employee benefits of $2 million and miscellaneous items totaling $2
million.
The Board is satisfied that the charge will not adversely
affect the earnings capacity of the company. Approximately $5
million, or 15% of the total, will have a cash impact through 1997.
The balance sheet and business unit review will continue
through year-end. Accordingly, a charge in the fourth quarter is
anticipated for additional severance and professional fees,
supplier issues, the impact of potential operational changes in the
international aftermarket and of losses related to the sale of
business units. Additionally, a global examination of the
company's inventories, receivables, fixed assets, intangibles and
other related liabilities will be concluded. When completed, this
review could result in a fourth quarter after-tax charge of as much
as $40 million, which would predominantly be of a non-cash nature.
The Board of Directors anticipates that the new chief
executive officer will wish to review possible restructuring
alternatives which could result in an additional charge in the
fourth quarter as well.
The company's revolving credit agreements have been amended to
accommodate the third quarter charges.
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IMPROVEMENT IN FINANCIAL POSITION
The company continued to take actions to improve its financial
position. During the third quarter, cash generated from operations
was $48 million, inventory was reduced by $10 million and accounts
receivable was reduced by $32 million. These actions, and the $11
million cash from the sale of Electrical Products on September 11,
resulted in a $46 million reduction in debt during the quarter.
Year-to-date, inventory was reduced by $36 million compared to
an increase of $73 million in 1995. Accounts receivable was
reduced by $10 million compared to an increase of $42 million in
1995. After increasing debt by $194 million for the first nine
months of 1995, debt was reduced by $66 million in 1996.
RECENT EVENTS
On September 18, Chairman and Chief Executive Officer Dennis
J. Gormley resigned. Roderick M. Hills, a Federal-Mogul director
since 1977, was named chairman of the board of directors. Robert
S. (Steve) Miller, a Federal-Mogul director since 1993, was named
acting chief executive officer. The company retained Richard Ferry
of Korn/Ferry International to assist in the search for a new chief
executive officer. Subsequently, the company announced the
resignation of Wayne G. Smith, president - Worldwide Aftermarket
Operations, effective immediately. Alan C. Johnson, president -
Worldwide Manufacturing Operations, has temporarily broadened his
responsibilities to additionally assist in managing aftermarket
operations until the permanent chief executive officer defines the
company's organizational structure.
On September 30, the company entered into an agreement to sell
its U.S. ball bearing manufacturing operations to NTN BCA
Corporation, a member of the NTN Group headquartered in Osaka,
Japan. Federal-Mogul will continue to sell product to its
worldwide aftermarket customers through a long-term supply
agreement with NTN. The sale, which is subject to various
conditions, is expected to be completed during the fourth quarter
of 1996. Proceeds from the transaction will be used to further
reduce debt.
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NORTH AMERICAN REPLACEMENT
The North American replacement business posted essentially
flat third quarter sales compared to $191 million in 1995.
Consolidation of businesses within the replacement channel,
reduction in inventories at the customer level and mild weather
contributed to the softness.
The company continued to reinforce the sales policy change it
made at the beginning of the year eliminating special extended
payment terms and certain additional discounts. Even though the
change continues to negatively impact year-over-year sales
comparisons, it has been a key element in the reduction of
receivables and improvement in distribution efficiencies.
Operational improvements have resulted in a year-to-date North
American replacement business inventory reduction of $41 million
and improvement in inventory turns by 15% while maintaining
customer service levels.
INTERNATIONAL REPLACEMENT
The international replacement business posted a third quarter
sales increase of 6% to $149 million from $140 million. Sales were
negatively impacted by foreign exchange, primarily in South Africa
and Venezuela, but offset by the 1995 acquisition of Centropiezas
in Puerto Rico.
During the quarter, the international replacement business was
successful in reducing inventories by $11 million as the operating
units continued their focus on working capital productivity.
The 131 international auto parts stores posted a third quarter
3% increase in same store sales and sales per square foot,
excluding the impact of foreign exchange. Reported same store
sales decreased 11% primarily due to the South African rand
depreciation.
Significant focus during the first nine months of the year has
been on remodeling and re-merchandising existing stores to the new
Federal-Mogul Auto Parts Warehouse image rather than on opening new
stores. Through September, 43 stores have been converted to the
new format with a plan to complete 21 more by year-end.
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WORLDWIDE ORIGINAL EQUIPMENT
The North American original equipment business posted third
quarter 1996 sales of $111 million compared to $98 million in 1995,
a 14% increase.
Excluding the acquisition of Sealed Technology Systems on
September 26, 1995, and the divestiture of Electrical Products on
September 11, 1996, this business posted a 10% increase.
Additional penetration in the sealing products line contributed
to the increase in sales.
The international original equipment business reported third
quarter sales of $52 million, essentially flat with $51 million
last year. Excluding the impact of foreign exchange, this business
enjoyed a 5% increase.
Both the North American and international original equipment
businesses have exceeded their productivity goals through September
by continuing to streamline processes and reduce cycle times.
Headquartered in Southfield, Michigan, Federal-Mogul is a $2
billion global distributor and manufacturer of a broad range of
non-discretionary parts primarily for automobiles, light trucks,
heavy trucks, and farm and construction vehicles. The company
serves both the aftermarket and original equipment market providing
the right part, to the right place at the right time to customers
around the world. Federal-Mogul operates more than 80 distribution
centers, 131 international auto parts stores, 25 plants and four
major research centers worldwide.
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F E D E R A L - M O G U L C O R P O R A T I O N
E A R N I N G S S T A T E M E N T
(Millions of Dollars, Except Per Share Data)
(Unaudited)
Three Months Ended Nine Months Ended
September 30 September 30
1996 1996
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Before After Before After
Special Special Special Special
Charge Charge 1995 Charge Charge 1995
Net sales $501.5 $491.6 $480.2 $1,559.8 $1,549.9 $1,510.8
----- ----- ----- ------- ------- -------
Cost of products sold 398.0 411.5 392.2 1,226.8 1,240.3 1,213.5
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Gross margin 103.5 80.1 88.0 333.0 309.6 297.3
Selling, general and
administrative expenses 81.0 84.1 62.1 245.0 248.1 209.3
----- ----- ----- ------- ------- -------
Operating Margin 22.5 (4.0) 25.9 88.0 61.5 88.0
Reengineering, severance
and other related
charges - (5.6) - - (5.6) -
Adjustment of assets held
for sale to net
realizable value - (6.4) - - (6.4) -
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22.5 (16.0) 25.9 88.0 49.5 88.0
Other income (expense):
Interest expense (11.0) (11.0) (9.6) (32.8) (32.8) (26.2)
Interest income .6 .6 2.1 2.1 2.1 4.0
International
currency exchange
losses (.7) (.7) (.7) (3.0) (3.0) (2.3)
Other, net (.3) (.3) - (1.4) (1.4) (.3)
----- ----- ----- ------- ------- -------
Earnings (Loss)
Before Income
Taxes 11.1 (27.4) 17.7 52.9 14.4 63.2
Income tax expense
(benefit) 4.2 (10.1) 6.7 19.6 5.3 23.8
----- ----- ----- ------- ------- -------
Net Earnings
(Loss) $ 6.9 $(17.3) $ 11.0 $ 33.3 $ 9.1 $ 39.4
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Earnings (Loss) Per
Common Share
Primary $ .14 $(.56) $ .25 $ .73 $ .07 $ .94
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Fully Diluted $ .14 $(.56) $ .25 $ .73 $ .07 $ .91
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F E D E R A L - M O G U L C O R P O R A T I O N
B A L A N C E S H E E T
(Millions of Dollars)
(Unaudited)
September 30 December 31
1996 1995
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Assets
Current Assets:
Cash and equivalents $ 35.6 $ 19.4
Accounts receivable 283.5 303.4
Inventories 456.0 507.1
Prepaid expenses and
income tax benefits 67.5 55.8
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Total Current Assets 842.6 885.7
Property, Plant and Equipment 402.3 426.6
Goodwill 218.7 226.5
Other Intangible Assets 60.9 66.6
Business Investments and Other Assets 111.0 109.0
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Total Assets $1,635.5 $1,714.4
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Liabilities and Shareholders' Equity
Current Liabilities:
Short-term debt $ 88.5 $ 111.9
Accounts payable 151.7 172.7
Accrued compensation 43.6 32.3
Other accrued liabilities 129.2 101.9
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Total Current Liabilities 413.0 418.8
Long-Term Debt 439.0 481.5
Post-employment Benefits 213.3 213.0
Other Accrued Liabilities 48.3 46.0
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Total Liabilities 1,113.6 1,159.3
Shareholders' Equity:
Series D preferred stock 76.6 76.6
Series C ESOP preferred stock 54.4 56.8
Unearned ESOP compensation (31.4) (34.3)
Common stock 175.5 175.2
Additional paid-in capital 282.4 280.8
Retained earnings 33.3 45.0
Currency translation and other (68.9) (45.0)
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Total Shareholders' Equity 521.9 555.1
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Total Liabilities and
Shareholders' Equity $1,635.5 $1,714.4
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F E D E R A L - M O G U L C O R P O R A T I O N
C A S H F L O W S
(Millions of Dollars)
(Unaudited)
Nine Months Ended
September 30
1996 1995
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Cash Provided From (Used By) Operating
Activities
Net earnings $ 9.1 $ 39.4
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Adjustments to reconcile net earnings
to net cash provided from (used by)
operating activities
Gain on sale of business investment - (7.8)
Restructuring charge - 7.8
Reengineering, severance and other
related charges 5.6 -
Adjustment of assets held for sale
to net realizable value 6.4 -
Depreciation and amortization 46.4 45.9
Deferred income taxes (.7) .1
Post-employment benefits .3 6.7
Decrease (increase) in accounts
receivable 10.3 (41.5)
Decrease (increase) in inventories 35.6 (73.3)
Increase (decrease) in current
liabilities and other 20.4 (13.0)
Payments against restructuring and
reengineering reserves (13.2) (6.7)
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Net Cash Provided From (Used By)
Operating Activities 120.2 (42.4)
Cash Provided From (Used By) Investing
Activities
Expenditures for property, plant and
equipment (34.7) (56.6)
Payments for rationalization of acquired
businesses - (5.9)
Proceeds from sale of business investments 11.0 28.0
Purchases of business investments (.3) (63.6)
Other - -
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Net Cash Used By Investing Activities (24.0) (98.1)
Cash Provided From (Used By) Financing
Activities
Issuance of common stock .4 .2
Repurchase of common stock - (9.0)
Net increase (decrease) in debt (57.6) 166.1
Dividends (19.4) (19.7)
Other (3.4) .1
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Net Cash Provided From
(Used By) Financing Activities (80.0) 137.7
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Increase (Decrease) in Cash and
Equivalents 16.2 (2.8)
Cash and Equivalents at Beginning of Period 19.4 25.0
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Cash and Equivalents at End of Period $ 35.6 $ 22.2
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