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, 1996
----------------------------------------------------
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 - 35,222,236 shares as of November 8, 1996
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
-------------------- --------------------
1996 1995 1996 1995
-------- -------- -------- --------
(Millions of Dollars, Except Per Share Amounts)
Net sales $ 491.6 $ 480.2 $1,549.9 $1,510.8
Cost of products sold 411.5 392.2 1,240.3 1,213.5
------- ------- ------- -------
Gross margin 80.1 88.0 309.6 297.3
Selling, general and
administrative expenses 84.1 62.1 248.1 209.3
------- ------- ------- -------
Operating Margin (4.0) 25.9 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) -
------- ------- ------- -------
(16.0) 25.9 49.5 88.0
Other income (expense):
Interest expense (11.0) (9.6) (32.8) (26.2)
Interest income .6 2.1 2.1 4.0
International currency
exchange losses (.7) (.7) (3.0) (2.3)
Other, net (.3) - (1.4) (.3)
------- ------- ------- -------
Earnings (Loss) Before
Income Taxes (27.4) 17.7 14.4 63.2
Income tax expense (benefit) (10.1) 6.7 5.3 23.8
------- ------- ------- -------
Net Earnings (Loss) (17.3) 11.0 9.1 39.4
Preferred stock dividends,
net of tax benefits 2.2 2.2 6.6 6.6
------- ------- ------- -------
Net Earnings (Loss) Available
for Common Shares $ (19.5) $ 8.8 $ 2.5 $ 32.8
======= ======= ======= =======
Earnings Per Common Share
Primary $ (.56) $ .25 $ .07 $ .94
======= ======= ======= =======
Fully Diluted $ (.56) $ .25 $ .07 $ .91
======= ======= ======= =======
See accompanying notes.
3
FEDERAL-MOGUL CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Millions of Dollars)
September 30 December 31
1996 1995
------------ ------------
(Unaudited)
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
------- -------
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
------- -------
Total Assets $1,635.5 $1,714.4
======= =======
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
------- -------
Total Current Liabilities 413.0 418.8
Long-Term Debt 439.0 481.5
Postemployment Benefits 213.3 213.0
Other Accrued Liabilities 48.3 46.0
------- -------
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)
------- -------
Total Shareholders' Equity 521.9 555.1
------- -------
Total Liabilities and Shareholders' Equity $1,635.5 $1,714.4
======= =======
See accompanying notes.
4
FEDERAL-MOGUL CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Unaudited)
Nine Months Ended
September 30
--------------------
1996 1995
-------- --------
(Millions of Dollars)
Cash Provided From (Used By) Operating Activities
Net earnings $ 9.1 $ 39.4
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
Postemployment 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)
----- -----
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)
----- -----
Net Cash Used By Investing Activities (24.0) (98.1)
Cash (Used By) Provided From Financing Activities
Issuance of common stock .4 .2
Repurchase of common stock - (9.0)
Net (decrease) increase in debt (57.6) 166.1
Dividends (19.4) (19.7)
Other (3.4) .1
----- -----
Net Cash (Used By) Provided From Financing Activities (80.0) 137.7
----- -----
Increase (Decrease) in Cash and Equivalents 16.2 (2.8)
Cash and Equivalents at Beginning of Period 19.4 25.0
----- -----
Cash and Equivalents at End of Period $ 35.6 $ 22.2
===== =====
See accompanying notes.
5
FEDERAL-MOGUL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 30, 1996
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, 1996 are not necessarily indicative
of the results that may be expected for the year ended December 31, 1996.
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, 1995.
Certain items in the prior period financial statements have been reclassified
to conform with the presentation used in 1996.
2. SALE OF ELECTRICAL PRODUCTS BUSINESS
On September 11, 1996, the Company completed the previously announced sale of
the assets and business of its Electrical Products to Capsonic Automotive, Inc.
The Company received $11 million in cash and retained customer receivables,
while Capsonic Automotive acquired the assets and assumed liabilities of the
Electrical Products business. The Company expects to realize an additional
$3 - $5 million in cash from the collection of the customer receivables. The
results of operations of the Electrical Products business have been included
in the Company's consolidated statement of earnings through the date of sale.
3. SALE OF U.S. BALL BEARING MANUFACTURING DIVISION
On September 27, 1996 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. The Company will continue to sell
products 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.
6
4. CHANGES IN ESTIMATES, ADJUSTMENT OF ASSETS HELD FOR SALE TO NET
REALIZABLE VALUE, SEVERANCE AND OTHER RELATED CHARGES
During the third quarter of 1996, the Company recorded a charge of $38.5
million. The charge is primarily the result of a change in accounting
estimate in customer sales programs of $9.9 million, a $6.4 million adjustment
to net realizable value on the announced sale of the U.S. ball bearing
manufacturing business, and severance costs and professional fees of $5.6
million relating to management changes. In addition, the Company increased
its accounting estimate $6.1 million for environmental liabilities, changed
its methodology for recognition of capitalized interest to better reflect the
asset value which resulted in a $2.7 million charge, recorded inventory
adjustments of $2.9 million and additional employee benefits of $2.1 million.
Approximately $5 million of the above charges will have a cash impact through
1997.
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, accounts receivable, 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.
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 when their effect is dilutive. The number of
contingent shares used in the fully diluted calculation is based on the common
stock market price on September 27, 1996, 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 35,097 and 35,088 for the three- and nine-month periods
ended September 30, 1996, and 35,043 and 34,975 for the three- and nine-month
periods ended September 30, 1995. The fully diluted weighted average number
of common and equivalent shares outstanding (in thousands) was 35,097 and
35,122 for the three- and nine-month periods ended September 30, 1996, and
41,894 and 41,844 for the three- and nine-month periods ended September 30,
1995, 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
preferred stock dividends when the effect of their conversion to common shares
is anti-dilutive and 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 when their
effect is dilutive.
7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
THREE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED WITH THREE MONTHS ENDED
SEPTEMBER 30, 1995
Sales for the third quarter of 1996 were $491.6 million compared to $480.2
million in the same 1995 quarter. North American replacement sales decreased
to $180.5 million in the third quarter of 1996 compared with $191.0 million in
the third quarter of 1995. The decrease was attributable to a change in
accounting estimate in customer sales programs of $9.9 million and the
consolidation of businesses within the replacement channel, reduction in
inventories at the customer level and mild weather. International replacement
sales increased 6 percent to $148.5 million from $140.3 million in the third
quarter of 1995. Excluding the impact of foreign exchange, the auto parts
stores sales increased 3 percent for same store sales and sales per square
foot compared to the same 1995 quarter. North American original equipment
sales increased 14 percent to $110.9 million from $97.7 million in the third
quarter of 1995. The increase was attributable to additional penetration in
the sealing products line and the acquisition of Sealed Technology Systems in
September 1995, partially offset by the divestiture of Electrical Products in
September 1996. International original equipment sales increased 1 percent to
$51.7 million from $51.1 million in the same 1995 quarter. Excluding foreign
exchange impact, sales increased 5.0 percent over the third quarter of 1995.
The Company's operating earnings decreased to $(16.0) million from $25.9
million in the third quarter of 1995. The decrease in operating earnings is
primarily due to a change in accounting estimate in customer sales programs of
$9.9 million, a $6.4 million adjustment to net realizable value on the U.S.
ball bearing manufacturing business, and severance costs and professional
fees of $5.6 million relating to management changes. In addition, the Company
increased its accounting estimate $6.1 million for environmental liabilities,
changed its methodology for recognition of capitalized interest to better
reflect the asset value which resulted in a $2.7 million charge, recorded
inventory adjustments of $2.9 million and additional employee benefits of
$2.1 million.
Pretax earnings decreased to $(27.4) million for the third quarter of 1996
compared to $17.7 million for the same 1995 quarter. The decrease is
attributable to decreased operating earnings and additional interest expense
due to higher levels of debt. Net earnings were $(17.3) million or $(.56)
per common share on a fully diluted basis in the third quarter of 1996
compared to $11.0 million or $.25 per common share in the third quarter of
1996.
8
NINE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED WITH NINE MONTHS ENDED
SEPTEMBER 30, 1995
Sales for the nine-month period ended September 30, 1996 increased 3 percent
to $1,549.9 million from $1,510.8 million for the nine-month period ended
September 30, 1995. North American sales decreased from $586.9 million
during the nine-month period ended September 30, 1996 to $596.4 million in
the same prior year period due to a change in accounting estimate in
customer sales programs of $9.9 million. Other than the change in estimate,
sales were essentially flat. International replacement sales increased 20.0
percent to $454.9 million from $379.1 million in the same prior year period.
Excluding the 1995 acquisitions of Bertolotti in Italy and Centropiezas in
Puerto Rico, international replacement sales increased 3 percent. North
American original equipment sales decreased 7 percent to $341.9 million from
$365.7 million for the nine-month period ended September 30, 1995. The
decrease was attributable to the divestiture of Precision Forged Products
Division in April 1995, offset slightly by the acquisition of Seal Technology
Systems in September 1995. Excluding this divestiture and acquisition, sales
decreased 2 percent over prior year. International original equipment sales
decreased 2 percent to $166.2 million from $169.6 million in the same 1995
period. The sales decrease was primarily due to unfavorable foreign exchange.
The Company's operating earnings decreased to $49.5 million from $88.0 million
for the nine-month period ended September 30, 1995. The decrease in operating
earnings is primarily due to a change in accounting estimate in customer sales
programs of $9.9 million, a $6.4 million adjustment to net realizable value on
the U.S. ball bearing manufacturing business, and severance costs and
professional fees of $5.6 million relating to management changes. In addition,
the Company increased its accounting estimate $6.1 million for environmental
liabilities, changed its methodology for recognition of capitalized interest
to better reflect the asset value which resulted in a $2.7 million charge,
recorded inventory adjustments of $2.9 million and additional employee benefits
of $2.1 million.
Pretax earnings decreased to $14.4 million from $63.2 million for the
nine-month period ended September 30, 1995. The decrease in pretax earnings
is attributable to the above charges to operations and additional interest
expense due to higher borrowing rates. Net earnings were $9.1 million or
$.07 per common share on a fully-diluted basis for the nine-month period
September 30, 1996 compared to net earnings of $39.4 million or $.91 per
common share for the nine-month period ended September 30, 1995.
9
LIQUIDITY AND CAPITAL RESOURCES
Working capital was impacted by a $10.3 million decrease in accounts receivable
during the nine-month period ended September 30, 1996 compared to an increase
of $41.5 million in 1995. This decrease is accounts receivable is primarily
due to a sales policy change in the North American replacement business. In
addition, inventories decreased $35.6 million in the nine-month period ended
September 30, 1996 compared to an increase of $73.3 million in 1995. The
Company's revolving credit agreements were amended to accommodate a
$38.5 million charge (See Note 4). Further, the potential fourth quarter
charge (See Note 4) could require a similar amendment. 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, information technology and new product introductions. Capital
expenditures for the nine-month period ended September 30, 1996 were $34.7
million compared to $56.6 million for the same prior year period. Net cash
provided from investing activities consists of proceeds received from the sale
of the Company's electrical business during the nine-month period ended
September 30, 1996.
9
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits:
10.28 First Amendment to Revolving Credit Agreement dated
as of June 30, 1994 among the Company, various banks,
and Chemical Bank, as agent ("1994 Revolving Credit
Agreement").
10.29 Second Amendment dated as of October 21, 1996, and
effective as of September 30, 1996, to 1994 Revolving
Credit Agreement.
11.1 Statement Re Computation of Per Share Earnings for
the three months ended September 30, 1996 (filed with
this report).
11.2 Statement Re Computation of Per Share Earnings for
the nine months ended September 30, 1996 (filed with
this report).
(b) Report on Form 8-K:
On September 18, 1996, the Company filed a Current Report on
Form 8-K during the quarter ended on September 30, 1996,
concerning the resignation of Dennis J. Gormley as chairman,
president and chief executive officer of the Company and the
appointment on an interim basis of Roderick M. Hills as
chairman and Robert S. Miller, Jr. as chief executive officer
and president of the Company.
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
(Thomas W. VanHimbergen)
By:
---------------------------------
THOMAS W. VANHIMBERGEN
Senior Vice President and
Chief Financial Officer
(Kenneth P. Slaby)
By:
---------------------------------
KENNETH P. SLABY
Vice President and Controller,
Chief Accounting Officer
Dated: November 14, 1996