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Federal-Mogul Announces Restructuring Plan, Special Charge,
and 1996 Financial Results
Significant restructuring actions improve cost structure, streamline
operations, and divest underperforming assets, including sale of
international retail operations.
Restructuring charge of $204 million pre-tax and special charge of
$60 million pre-tax taken against fourth quarter earnings.
1996 revenues increased to a record $2,030 million.
Fourth quarter earnings per share from operations at ($.03), excluding
special charges.
Debt reduced by $104 million or 17% for 1996.
Southfield, Michigan, February 6, 1997...Federal-Mogul Corporation
(NYSE:FMO) today announced the details of a restructuring plan and other
fourth quarter special charges along with 1996 financial results. The
restructuring is designed to aggressively improve Federal-Mogul's cost
structure, streamline operations and divest the company of underperforming
assets.
"We have embraced a strategy to return Federal-Mogul to high levels of
profitability and return on assets," said Dick Snell, chairman and chief
executive officer. "Prompt, decisive action was essential to improve our
financial performance."
"Our goal is to have the leanest cost structure to support our strategy
and provide shareholder value," said Snell. "We've had a negative economic
value added (EVA) over the past seven years and that is unacceptable. It is
of the highest urgency that we return Federal-Mogul into a positive EVA
situation."
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Restructuring Plan and Charges
The components of the restructuring plan include: the planned sale of
132 international retail operations located in Australia, Chile, Ecuador,
Panama, Puerto Rico, South Africa, and Venezuela; the planned sale or
restructuring of approximately 30 wholesale operations in 10 countries;
the rationalization of European manufacturing operations involving
relocation of product lines and work force reductions; consolidation of
lighting products in Juarez, Mexico resulting in the closure of the
Leiters Ford, Indiana manufacturing facility; closure of two of Maysville,
Kentucky's three central distribution warehouses; consolidation of
customer support functions in the United States; and the streamlining of
administration and operational staff functions worldwide including the
consolidation of European aftermarket management functions in Geneva,
Switzerland into the Wiesbaden, Germany's manufacturing headquarters.
"We have realigned our growth strategy behind our core competencies of
engineering, manufacturing and distribution," said Snell. "Our retail
operations are good viable businesses that can be operated better by
someone else. We have neither the skills nor the infrastructure
necessary to operate and grow them to realize their fullest potential."
The restructuring of Federal-Mogul focuses the company on
organizational excellence in manufacturing and distribution. The company
recognizes manufacturing as core to the organization's ability to deliver
the highest quality products and services.
The restructuring charge of $204 million pre-tax is comprised of:
a write-off of $155 million of impaired goodwill and certain assets and
other costs associated with the restructuring of international aftermarket
operations; $13 million for employee severance costs; $22 million for
facility closures and consolidations; and $14 million for other miscellaneous
items.
The restructuring actions will take most of 1997 to complete. An
anticipated result from completion of the restructuring will be a reduction
of approximately 2,900 people from Federal-Mogul's worldwide headcount of
15,700. The company expects to use proceeds from the sale of its various
international retail operations to pay down debt.
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Special Charge
The balance sheet and business unit reviews underway since last summer
continued through the fourth quarter and are now complete. The reviews have
resulted in a pre-tax special charge of $60 million against fourth quarter
earnings. Included in the special charge are adjustments in accounting
estimates, largely based upon new information and changed circumstances, of:
$15 million for obsolete inventory; a $25 million increase in provisions for
customer programs and receivables; a $3 million write-down of fixed assets,
$9 million in professional fees and employee severance costs, and $8 million
in other miscellaneous items.
As previously reported, the company recognized a third quarter pre-tax
special charge of approximately $38 million. Total special charges for the
third and fourth quarters were approximately $98 million pre-tax.
The cash flow impact in 1997 of the restructuring and special charges
will be approximately $40 million or 13% of the total pre-tax charges. The
company's lending agreements have been amended to accommodate both the
fourth quarter special and restructuring charges.
The company expects to take further restructuring charges in future
years to rationalize its European manufacturing and to provide for
additional consolidation of warehouse facilities in the United States. The
financial justification and pay back of these longer term efforts are
expected to be significant.
1996 Year End and Fourth Quarter Results
Full year sales were a record $2,030 million compared to $1,996 million
in 1995. Excluding restructuring and special charges, operating margin was
$100 million compared to $99 million in 1995. Fourth quarter sales were $480
million compared to $485 million for 1995.
Excluding restructuring and special charges, the company reported fourth
quarter net earnings from operations of $1.4 million or a loss of $.03 per
share. Including the fourth quarter restructuring and special charge, the
company reported for 1996 a net loss of $211 million or $6.26 per share
compared to a net loss of $10 million or $.53 per share in 1995.
"1996 has been a difficult year for the corporation," said Snell. "We
are urgently implementing restructuring and margin enhancement efforts to
turnaround our performance."
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The company generated $95 million cash for the year from
operations after reinvestment in property, plant and equipment. This
compared to a usage of $113 million during 1995. The $208 million cash
improvement resulted from an emphasis on working capital producti vity and
capital expenditures. The sale of the electrical products and U.S. ball
bearing manufacturing operations generated an additional $42 million cash.
Debt was reduced by $104 million during 1996.
"We had a good cash flow year in 1996, but look forward to an even
better year in 1997," said Snell. "We had put considerable attention in 1996
toward generating cash to reduce debt. 1997 cash generation will be driven
by increased earnings, additional working capital improvements and the sale
of our retail business."
North American Original Equipment
The North American original equipment business posted full year sales
of $449 million compared to $465 million in 1995. Excluding the sales from
the Precision Forged Products Division, which the company sold in April 1995,
the divestitures in 1996 of the electrical products business sold in
September and U.S. ball bearing manufacturing operations sold in November,
and the acquisition of Seal Technology Systems in September 1995, sales for
1996 were up 3%.
North American original equipment business posted fourth quarter sales
of $107 million up from $100 million in 1995, a 7% increase year over year.
Sales were up 17% when the electrical products and ball bearing sales were
excluded from quarter to quarter comparisons. Federal-Mogul attributes the
fourth quarter sales increase to new business in its core OEM product lines
of engine bearings and seals.
"We are gaining new business by being leaders in product technology
and advanced engineering. With our lean manufacturing processes, we are
solidifying Federal-Mogul as a key supplier to most of the major OE
manufacturers worldwide", said Alan C. Johnson, executive vice president.
"Our capabilities enable us to develop custom product applications to the
increasingly demanding standards of our customers."
Fourth quarter sales increased in sealing systems primarily due to new
Unipistons business with General Motors. Unipistons are a single-piece
bonded transmission piston custom designed and engineered for each customer
application and pioneered by Federal-Mogul. Engine bearing sales also
increased in the fourth quarter.
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"We plan to strengthen our competitive position in engine bearings
through new product offerings," said Johnson. "Currently we are underway
with tests at Ford, General Motors, Chrysler, Toyota and Caterpillar with
a new unplated aluminum engine bearing material we believe will improve
performance without increasing costs. Our testing has shown this is the best
seizure resistant material in the world and were proud to have developed
this."
In line with its commitment to technology, the company opened in August
1996 a new engineering center for research and development on fuel systems
next to its Logansport,Indiana manufacturing facility. The synergy of having
the engineers and technicians next door has proven very cost effective for
the operation.
During 1996, Federal-Mogul's Blacksburg, Virginia engine bearing
manufacturing facility was awarded the Chrysler Corporation's Gold Pentastar
award recognizing outstanding manufacturing plant performance in the areas
of quality,delivery and warranty.
International Original Equipment
The international original equipment business reported full year sales
of $220 million compared to $223 million in 1995. Federal-Mogul's decision
to exit some conventional engine bearing business that did not meet
appropriate profitability levels adversely affected sales volumes. While the
sales of conventional product dropped slightly, sales of Federal-Mogul's
high value product lines, Glyco sputter engine bearings and Glycodur
bushings, continue to be strong.
International original equipment business reported fourth quarter sales
of $53 million, essentially flat compared to 1995. Increased sales in engine
bearings and bushings were offset with a slight decrease in sales at the
company's BHW heavy wall bearing business in Germany. Federal-Mogul had
announced in December 1995 the intention to sell this non-automotive business
and the sale was completed in January 1997.
The continued efforts to streamline operations resulted in improved
delivery performance to all customers, reduced inventories and improved
profitability. Federal-Mogul's European manufacturing operations have reduced
headcount approximately 35% over the last five years.
During 1996, Federal-Mogul's engine bearing manufacturing facility in
Orleans, France was honored with the first ever Platinum Award for Supplier
Excellence from the Rover Group, Ltd., in recognition of being awarded the
Gold Supplier Excellence Award for an unprecedented third consecutive year.
The Silver Award for Supplier Excellence from the Rover Group was also
presented to Federal-Mogul's Seal Technology Systems, its seal manufacturing
operation in Cardiff, Wales, for the second consecutive year.
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North American Replacement
The North American replacement business reported sales of $757 million
compared to $777 million in 1995. During the first quarter of 1996,
Federal-Mogul eliminated special extended payment terms that were used
in 1995, negatively impacting the year-over-year sales comparisons.
North American replacement business reported fourth quarter sales of
$171 million compared to $180 million in 1995. The general market conditions
for replacement parts in the automotive aftermarket have been soft throughout
the industry especially during November and December 1996.
The distribution and logistics processes changed radically in 1996.
Operational improvements yielded processing time reductions and frequency
increases. These changes, coupled with an inventory management overhaul,
resulted in improved responsiveness, less inventory and newly created space.
As a result, inventory levels in the North American replacement business were
reduced by $51 million, while inventory turns improved by 21%. Efforts
continue to improve the company's working capital productivity.
In 1996, Federal-Mogul's North American replacement business received
a Bronze Service award from Forest City Auto Parts for excellent supplier
performance. Jasper Engines and Transmissions awarded the highly coveted
Preferred Vendor Award to Federal-Mogul for its Sterling pistons, manufactured
by Federal-Mogul in Malden, Missouri, and for its Federal-Mogul engine
bearings, manufactured in Blacksburg, Virginia and Greenville, Michigan.
This award recognizes superior performance in service, technical help,
shipping and packaging.
Federal-Mogul was recently named the 1996 Car Craft Magazine Sportsman
Sponsor of the Year by popular vote from the magazine's readers who
appreciated the company's support for the sport of sportsman drag racing.
International Replacement
The international replacement business reported sales of $604 million
compared to $531 million in 1995, an increase of 14% Excluding sales from
the operations slated for divestiture, international aftermarket sales were
approximately $370 million. Wholesale sales for the year improved 8% The
international replacement business posted fourth quarter sales of $149
million compared to $152 million in 1995. Excluding the impact of exchange
rates, primarily the South African rand and deutsche mark, sales improved
5% compared to fourth quarter 1995.
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In Latin America, wholesale sales improvement was attributed to new
local operations in Brazil and significant volume and pricing increases
in Mexico. Sales decreased in Venezuela as the country experienced the
most significant recession in recent history. U.S. export sales to Latin
America declined due to decreased orders from Colombia, Ecuador, Panama and
Venezuela. In the rest of the world, moderate sales growth was experienced
throughout Europe, partially due to the full year impact of the 1995
Bertolotti acquisition. Australia's sales increase was due to higher volume.
Local currency sales increases in South Africa were offset throughout the
year due to devaluation.
Future Outlook
"We are approaching the restructuring with the utmost urgency and expect
to be executing our plan throughout 1997. We anticipate a positive cash flow
from our restructuring and are expecting to have positive EVA in 1998," said
Snell. "As we look forward, our original equipment customers continue to look
for and need system approaches with products. We have opportunities to
logically expand our manufacturing product offerings in related product lines
so that in the future we can be more of a systems provider." "We anticipate
substantial future growth internationally as we follow our original equipment
customers to new markets," said Snell. "This allows subsequent expansion into
the global aftermarket in a more cost effective manner."
"The fundamentals of the company are strong," said Snell. "Our lean
manufacturing processes and quality standards have contributed to the strong
brand franchise we carry with our manufactured products. We will continue to
strengthen those brands and our capabilities as technology leaders providing
high quality products to our original equipment and aftermarket customers.
We have not exploited our good brand names in the aftermarket and now is
the time for us to aggressively promote our market and product leadership."
Headquartered in Southfield, Michigan, Federal-Mogul is a $2 billion
global manufacturer and distributor of a broad range of non-discretionary
part primarily for automobiles, light trucks, heavy trucks, and farm and
construction vehicles.
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Information in this press release contains forward-looking statements
which are not historical facts and involve risk and uncertainties. Actual
results, events and performance could differ materially from those
contemplated by these forward-looking statements including, without
limitations, the company's ability to effectively divest certain assets,
the cost and timing of implementing restructuring actions, certain global
and regional economic conditions and other factors discussed in this press
release and those detailed from time to time in the company's filings with
the Securities and Exchange Commission.
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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)
December 31
---------------------
1996 1995
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Assets
Current Assets:
Cash and equivalents $ 33.1 $ 19.4
Accounts receivable 231.3 303.4
Inventories 417.0 507.1
Prepaid expenses and income tax benefits 81.5 55.8
-------- -------
Total Current Assets 762.9 885.7
Property, Plant and Equipment 350.3 426.6
Goodwill 154.0 226.5
Other Intangible Assets 63.1 66.6
Business Investments and Other Assets 124.9 109.0
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Total Assets $1,455.2 $1,714.4
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Liabilities and Shareholders' Equity
Current Liabilities:
Short-term debt $ 280.1 $ 111.9
Accounts payable 142.7 172.7
Accrued compensation 37.6 32.3
Other accrued liabilities 203.4 101.9
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Total Current Liabilities 663.8 418.8
Long-Term Debt 209.6 481.5
Postemployment Benefits 207.1 213.0
Other Accrued Liabilities 56.2 46.0
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Total Liabilities 1,136.7 1,159.3
Shareholders' Equity:
Series D preferred stock 76.6 76.6
Series C ESOP preferred stock 53.1 56.8
Unearned ESOP Compensation (28.4) (34.3)
Common stock 175.7 175.2
Additional paid-in capital 283.5 280.8
Retained earnings (193.0) 45.0
Currency translation and other (49.0) (45.0)
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Total Shareholders' Equity 318.5 555.1
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Total Liabilities and Shareholders' Equity $1,455.2 $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)
Year Ended
December 31
-------------------
1996 1995
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Cash Provided From (Used By) Operating Activities
Net loss $(211.1) $ (9.7)
Adjustments to reconcile net loss to net cash
provided from (used by) operating activities
Gain on sale of business investment - (24.0)
Restructuring charges 57.6 26.9
Reengineering, severance and other related charges 11.4 13.9
Adjustment of assets held for sale to net
realizable value 151.3 51.8
Depreciation and amortization 63.7 61.0
Deferred income taxes (35.6) (16.2)
Postemployment benefits (3.5) 4.2
Decrease (increase) in accounts receivable 56.5 (3.7)
Decrease (increase) in inventories 55.8 (106.9)
Increase (decrease) in accounts payable (25.5) 7.2
Increase (decrease) in current liabilities and other 46.0 (19.8)
Payments against restructuring
and reengineering reserves (17.6) (19.4)
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Net Cash Provided From (Used By) Operating Activities 149.0 (34.7)
Cash Provided From (Used By) Investing Activities
Expenditures for property, plant and equipment (54.2) (78.5)
Payments for rationalization of acquired businesses - (7.3)
Proceeds from sale of business investments 42.0 48.5
Purchases of business investments (.3) (72.1)
------ ------
Net Cash Used By Investing Activities (12.5) (109.4)
Cash Provided From (Used By) Financing Activities
Issuance of common stock .6 .2
Repurchase of common stock - (9.0)
Net increase (decrease) in debt (90.8) 175.0
Dividends (26.9) (27.3)
Other (5.7) (.4)
------ ------
Net Cash Provided From (Used By) Financing Activities (122.8) 138.5
------ ------
Increase (Decrease) in Cash and Equivalents 13.7 (5.6)
Cash and Equivalents at Beginning of Period 19.4 25.0
------ ------
Cash and Equivalents at End of Period $ 33.1 $ 19.4
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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
E A R N I N G S S T A T E M E N T
(Millions of Dollars)
Three Months Ended Year Ended
December 31 December 31
------------------------ -------------------------
1996 1996
----------------- ------------------
Before After Before After
Restruc. Restruc. Restruc. Restruc.
and and and and
Special Special Special Special
Charges Charges 1995 Charges Charges 1995
------- ------- ------ -------- -------- --------
Net sales $480.8 $480.3 $485.1 $2,040.6 $2,030.2 $1,995.9
Cost of products sold 382.1 421.5 385.7 1,608.9 1,661.8 1,599.2
----- ------ ----- ------- ------- -------
Gross margin 98.7 58.8 99.4 431.7 368.4 396.7
Selling, general and
administrative
expenses 86.5 102.5 88.0 331.5 350.6 297.3
----- ------ ----- ------- ------- -------
Operating Margin 12.2 (43.7) 11.4 100.2 17.8 99.4
Gain on sale
of businesses - - 16.2 - - 24.0
Reengineering,
severance and other
related charges - (5.8) (12.2) - (11.4) (13.9)
Restructuring charge - (57.6) (20.8) - (57.6) (26.9)
Adjustment of assets
held for sale to
net realizable value - (144.9) (51.8) - (151.3) (51.8)
----- ------ ----- ------- ------- -------
12.2 (252.0) (57.2) 100.2 (202.5) 30.8
Other income (expense):
Interest expense (9.8) (9.8) (11.1) (42.6) (42.6) (37.3)
Interest income .8 .8 5.6 2.9 2.9 9.6
International currency
exchange losses (.7) (.7) (.6) (3.7) (3.7) (2.9)
Other, net (2.0) (2.0) (3.1) (3.4) (3.4) (3.4)
----- ------ ----- ------- ------- -------
Earnings (Loss)
Before Income
Taxes .5 (263.7) (66.4) 53.4 (249.3) (3.2)
Income tax expense
(benefit) (.9) (43.5) (17.3) 18.7 (38.2) 6.5
----- ------ ----- ------- ------- -------
Net Earnings
(Loss) $ 1.4 $(220.2) $(49.1) $ 34.7 $ (211.1) $ (9.7)
===== ====== ===== ======= ======= =======
Earnings (Loss) Per
Common Share
Primary $ (.03) $(6.32) $(1.46) $ .74 $(6.26) $ (.53)
===== ===== ===== ==== ===== =====
Fully Diluted $ (.03) $(6.32) $(1.46) $ .70 $(6.26) $ (.53)
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