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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 March 31, 1997
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Commission File Number 1-1511
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FEDERAL-MOGUL CORPORATION
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(Exact name of Registrant as specified in its charter)
Michigan 38-0533580
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(State or other jurisdiction of (I.R.S. Employer I.D. No.)
incorporation or organization)
26555 Northwestern Highway, Southfield, Michigan 48034
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(Address of principal executive offices) (Zip Code)
(810) 354-7700
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(Registrant's telephone number, including area code)
Not Applicable
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(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
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Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date:
Common Stock - 35,181,205 shares as of May 8, 1997
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PART I - FINANCIAL INFORMATION
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Item 1. Financial Statements
FEDERAL-MOGUL CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Earnings (Unaudited)
Three Months Ended
March 31,
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1997 1996
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(Millions of Dollars,
Except Per Share Amounts)
Net sales $ 485.6 $ 521.9
Cost of products sold 373.5 409.7
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Gross margin 112.1 112.2
Selling, general and administrative expenses 78.4 83.0
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Operating earnings 33.7 29.2
Other income (expense):
Interest expense (9.8) (11.2)
Interest income .7 .8
International currency exchange losses (.1) (.9)
Other, net (2.0) (.9)
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Earnings Before Income Taxes 22.5 17.0
Income taxes 8.6 6.4
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Net Earnings 13.9 10.6
Preferred stock dividends, net of tax benefits 2.1 2.2
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Net Earnings Available for Common Shares $ 11.8 $ 8.4
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Earnings Per Common Share
Primary $ .33 $ .24
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Fully Diluted $ .32 $ .23
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See accompanying notes.
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FEDERAL-MOGUL CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Unaudited)
March 31, December 31,
1997 1996
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(Millions of Dollars)
Assets
Current Assets:
Cash and equivalents $ 33.0 $ 33.1
Accounts receivable 255.5 231.3
Inventories 385.7 417.0
Prepaid expenses and income tax benefits 83.0 81.5
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Total Current Assets 757.2 762.9
Property, Plant and Equipment 325.3 350.3
Goodwill 149.3 154.0
Other Intangible Assets 61.9 63.1
Business Investments and Other Assets 126.0 124.9
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Total Assets $1,419.7 $1,455.2
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Liabilities and Shareholders' Equity
Current Liabilities:
Short-term debt $ 258.7 $ 280.1
Accounts payable 134.1 142.7
Accrued compensation 37.1 37.6
Other accrued liabilities 209.7 203.4
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Total Current Liabilities 639.6 663.8
Long-Term Debt 206.9 209.6
Postemployment Benefits 199.8 207.1
Other Accrued Liabilities 63.2 56.2
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Total Liabilities 1,109.5 1,136.7
Shareholders' Equity:
Series D preferred stock 76.6 76.6
Series C ESOP preferred stock 51.5 53.1
Unearned ESOP compensation (28.4) (28.4)
Common stock 175.3 175.7
Additional paid-in capital 282.9 283.5
Retained earnings (186.0) (193.0)
Currency translation and other (61.7) (49.0)
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Total Shareholders' Equity 310.2 318.5
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Total Liabilities and Shareholders' Equity $1,419.7 $1,455.2
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See accompanying notes.
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FEDERAL-MOGUL CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Unaudited)
Three Months Ended
March 31,
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1997 1996
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(Millions of Dollars)
Cash Provided From (Used By) Operating Activities
Net earnings $ 13.9 $ 10.6
Adjustments to reconcile net earnings to net cash
provided from (used by) operating activities
Depreciation and amortization 14.0 15.5
Deferred income taxes 4.6 (.7)
Postemployment benefits (.4) 1.4
Increase in accounts receivable (38.0) (15.9)
Decrease in inventories 17.1 3.5
Decrease in accounts payable (2.4) (4.8)
Increase in current liabilities and other 28.3 22.5
Payments against restructuring
and reengineering reserves (9.0) (7.0)
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Net Cash Provided From Operating Activities 28.1 25.1
Cash Provided From (Used By) Investing Activities
Expenditures for property, plant and equipment (8.4) (13.0)
Proceeds from sale of business investments 10.4 -
Purchase of business investments - (.3)
Other - .3
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Net Cash Provided From (Used By) Investing Activities 2.0 (13.0)
Cash Provided From (Used By) Financing Activities
Proceeds from issuance of common stock .8 .4
Net increase (decrease) in debt (23.3) 13.8
Dividends (5.7) (5.7)
Other (2.0) (.9)
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Net Cash Provided From (Used By) Financing Activities (30.2) 7.6
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Increase (Decrease) in Cash and Equivalents (.1) 19.7
Cash and Equivalents at Beginning of Period 33.1 19.4
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Cash and Equivalents at End of Period $ 33.0 $ 39.1
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See accompanying notes.
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FEDERAL-MOGUL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
March 31, 1997
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-month period ending March 31, 1997 are not necessarily indicative
of the results that may be expected for the year ending December 31, 1997.
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, 1996.
2. 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 market price of the common stock
on March 31 and the number of preferred shares held by the Employee Stock
Ownership Plan (ESOP) that were allocated to participants' accounts as of
March 31 of each of the respective years.
The primary weighted average number of common and equivalent shares
outstanding (in thousands) was 35,210 for the three-month period ended
March 31, 1997 and 35,066 for the three-month period ended March 31, 1996.
The fully diluted weighted average number of common and equivalent shares
outstanding (in thousands) was 37,159 for the three-month period ended
March 31, 1997 and 37,464 for the three-month period ended March 31, 1996.
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 their effect is antidilutive
and 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.
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share".
SFAS No. 128 is effective for financial statements issued for periods ending
after December 15, 1997. The adoption of SFAS No. 128 would not impact the
results of the earnings per share calculation for the three months ended
March 31, 1997 and 1996 and is not expected to impact the results of the
earnings per share calculation for the year ended December 31, 1997.
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3. SALE OF HEAVY WALL BEARING DIVISION
In January 1997, the company completed the previously announced sale of its
heavy wall bearing division in Germany and Brazil to Zollern BHW Gleitlager
GmbH, a member of Fuerstlich Hohenzollernsche Werke Laucherthal GmbH Co.
The company received $10.4 million, which approximated the carrying value
of the assets. The results of operations of the heavy wall bearing division
have been included in the company's consolidated statements of earnings
through the date of the sale.
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Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
THREE MONTHS ENDED MARCH 31, 1997 COMPARED WITH THREE MONTHS ENDED
MARCH 31, 1996
Sales for the first quarter of 1997 were $485.6 million compared to $521.9
million in the same 1996 quarter. North American original equipment sales
decreased 2.3 percent to $110.5 million from $112.8 million in the first
quarter of 1996. Excluding the effect of the divestiture of the U.S. ball
bearing and the electrical product operations, sales increased 15.4 percent
from the first quarter of 1996. International original equipment sales
decreased 25.1 percent to $44.2 million from $59.0 million in the same 1996
quarter. The sales decrease was primarily attributable to the sale of the
company's heavy wall bearing operations in early January 1997, combined with
unfavorable exchange rates. Excluding the effect of the divestiture and
the unfavorable exchange rates, sales increased 7.0 percent due to new
projects awarded by Volvo, SKF, Renault, Bertrand Farre and Saab. North
American replacement sales decreased 4.6 percent to $186.2 million, from
$195.2 million in the first quarter of 1996. The decrease was primarily
due to continued industry softness in the automotive aftermarket.
International replacement sales decreased 6.6 percent to $144.7 million
from $154.9 million in the first quarter of 1996. The decrease in sales
was primarily attributable to unfavorable currency fluctuations.
The company's operating earnings increased $4.5 million to $33.7 million
compared to the first quarter of 1996. The operating margin increased from
5.6 percent in the first quarter of 1996 to 6.9 percent in the first
quarter of 1997. The company attributes this increase to an increased
focus on the company's cost structure and productivity improvements in its
businesses.
Pretax earnings increased to $22.5 million for the first quarter of 1997
compared to $17.0 million for the same 1996 quarter. The increase is
attributable to higher operating earnings and reduced interest expense
due to lower levels of debt. Net earnings were $13.9 million or $.32 per
common share on a fully diluted basis in the first quarter of 1997 compared
to $10.6 million or $.23 per common share in the first quarter of 1996.
LIQUIDITY AND CAPITAL RESOURCES
Working capital was favorably impacted by a decrease in inventory of
$17.1 million in the first quarter of 1997 compared to $3.5 million
decrease in the first quarter of 1996. The increase in the inventory
reduction is due primarily to a decrease in lead times and lot sizes and
an increase in fill rates in the North American replacement business.
Accounts receivable increased $38.0 million in the first quarter of 1997
compared to an increase of $15.9 million in the first quarter of 1996.
The increase is attributable to the timing of customer payments partially
offset by a decrease in past due accounts receivable. 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 introduction offset
by proceeds from the sale of the heavy wall bearing division in Germany
and Brazil.
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PART II - OTHER INFORMATION
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Item 6. Exhibits and Reports on Form 8-K
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(a) Exhibits:
10.1* Federal-Mogul Corporation 1997 Long-Term Incentive Plan,
as adopted by the shareholders of the company on April 23,
1997. (Filed herewith.)
10.2* Executive Severance Agreement, dated as of February 21,
1997, between the company and Thomas W. VanHimbergen.
(Filed herewith.)
10.3 Third Amendment, dated as of January 13, 1997, to
Revolving Credit and Competitive Advance Facility
Agreement, dated as of June 30, 1994, among the
company, various banks, and The Chase Manhattan Bank
(formerly Chemical Bank), as Administrative Agent.
(Filed herewith.)
10.4 Form of Amended and Restated Pooling and Servicing
Agreement ("Pooling and Servicing Agreement") among
Federal-Mogul Funding Corporation ("FMFC"), as Seller,
the company, as Servicer, and The Chase Manhattan Bank,
as trustee. (Filed herewith.)
10.5** Form of Series 1997-1 Supplement to the Pooling and
Servicing Agreement. (Filed herewith.)
10.6 Form of Amended and Restated Receivables Purchase
Agreement between the company and FMFC. (Filed herewith.)
10.7 Form of Certificate Purchase Agreement among FMFC as
Seller, Falcon Asset Securitization Corporation, as
Purchaser, The Liquidity Providers Named Therein, as
Liquidity Providers, and The First National Bank of
Chicago, as Program Agent. (Filed herewith.)
11.1 Statement Re: Computation of Per Share Earnings.
(Filed herewith.)
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*Denotes management contract of compensatory plan or
arrangement.
**Confidential treatment has been requested for portions
of this exhibit.
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:
During the first quarter of 1997, the company filed one Current
Report on Form 8-K, as follows:
Current Report on Form 8-K, dated as of February 6, 1997,
reporting under Item 5 thereof, a Press Release of the company
on February 6, 1997 relating to the company's restructuring
plan, special charge and 1996 financial results.
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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: (Thomas W. Ryan)
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THOMAS W. RYAN
Senior Vice President and
Chief Financial Officer
FEDERAL-MOGUL CORPORATION
By: (Kenneth P. Slaby)
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KENNETH P. SLABY
Vice President and Controller and
Chief Accounting Officer
Dated: May 14, 1997
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EXHIBIT INDEX
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S-K Item 601 No. Document
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10.1 Federal-Mogul Corporation 1997 Long-Term Incentive Plan,
as adopted by the shareholders of the company on April 23,
1997.
10.2 Executive Severance Agreement, dated as of February 21,
1997, between the company and Thomas W. VanHimbergen.
10.3 Third Amendment, dated as of January 13, 1997, to
Revolving Credit and Competitive Advance Facility
Agreement, dated as of June 30, 1994, among the company,
various banks, and the Chase Manhattan Bank (formerly
Chemical Bank), as Administrative Agent.
10.4 Form of Amended and Restated Pooling and Servicing
Agreement ("Pooling and Servicing Agreement") among
Federal-Mogul Funding Corporation ("FMFC"), as Seller,
the company, as Servicer, and The Chase Manhattan Bank,
as trustee.
10.5 Form of Series 1997-1 Supplement to the Pooling and
Servicing Agreement.
10.6 Form of Amended and Restated Receivables Purchase
Agreement between the company and FMFC.
10.7 Form of Certificate Purchase Agreement among FMFC as
Seller, Falcon Asset Securitization Corporation, as
Purchaser, The Liquidity Providers Named Therein, as
Liquidity Providers, and The First National Bank of
Chicago, as Program Agent.
11.1 Statement Re: Computation of Per Share Earnings.