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 June 30, 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)
(248) 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 - 35,648,269 shares as of August 11, 1997
2
FORWARD-LOOKING STATEMENTS
INFORMATION CONTAINED OR INCORPORATED IN THIS QUARTERLY REPORT ON
FORM 10-Q CONTAINS FORWARD-LOOKING STATEMENTS WHICH ARE NOT HISTORICAL
FACTS AND WHICH INVOLVE CERTAIN RISKS AND UNCERTAINTIES AND,
ACCORDINGLY, ACTUAL RESULTS EVENTS AND PERFORMANCE COULD DIFFER
MATERIALLY FROM THOSE CONTEMPLATED BY THESE FORWARD-LOOKING STATEMENTS.
3
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 Six Months Ended
June 30 June 30
-------------------- ----------------------
1997 1996 1997 1996
-------- -------- ---------- ----------
(Millions of Dollars, Except Per Share Amounts)
Net sales $ 481.8 $ 536.4 $ 967.4 $1,058.3
Cost of products sold 366.5 419.1 740.0 828.8
------- ------- ------- -------
Gross margin 115.3 117.3 227.4 229.5
Selling, general and
administrative expenses 73.5 81.0 151.9 164.0
Interest expense 9.0 10.6 18.8 21.8
Interest income (1.1) (.7) (1.8) (1.5)
International currency
exchange losses (gains) (.1) 1.4 - 2.3
Other, net (.4) .2 1.6 1.1
------- ------- ------- -------
Earnings Before Income Taxes
and Extraordinary Item 34.4 24.8 56.9 41.8
Income taxes 5.9 9.0 14.5 15.4
------- ------- ------- -------
Net Earnings Before
Extraordinary Item 28.5 15.8 42.4 26.4
Extraordinary item - loss on
early retirement of debt,
net of applicable income
tax benefit 2.6 - 2.6 -
------- ------- ------- -------
Net Earnings 25.9 15.8 39.8 26.4
Preferred stock dividends,
net of tax benefits 2.1 2.2 4.3 4.4
------- ------- ------- -------
Net Earnings Available
for Common Shares $ 23.8 $ 13.6 $ 35.5 $ 22.0
======= ======= ======= =======
Earnings Per Common Share
Primary
Income before
extraordinary item $ .74 $ .39 $1.08 $ .63
Extraordinary item -
loss on early
retirement of debt,
net of applicable
income tax benefit (.07) - (.07) -
---- ---- ---- ----
Net Earnings $ .67 $ .39 $1.01 $ .63
==== ==== ==== ====
Fully Diluted
Income before
extraordinary item $ .67 $ .36 $ .99 $ .59
Extraordinary item -
loss on early
retirement of debt,
net of applicable
income tax benefit (.06) - (.06) -
---- ---- ---- ----
Net Earnings $ .61 $ .36 $ .93 $ .59
==== ==== ==== ====
See accompanying notes.
4
FEDERAL-MOGUL CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Millions of Dollars)
June 30 December 31,
1997 1996
------------ ------------
(Unaudited)
Assets
Current Assets:
Cash and equivalents $ 19.6 $ 33.1
Accounts receivable (net of allowance for
doubtful accounts of $16.9 million and
$16.3 million) 232.8 231.3
Inventories 303.5 417.0
Prepaid expenses and income tax benefits 83.4 81.5
------- -------
Total Current Assets 639.3 762.9
Property, Plant and Equipment 319.0 350.3
Goodwill 148.4 154.0
Other Intangible Assets 62.5 63.1
Business Investments and Other Assets 130.9 124.9
------- -------
Total Assets $1,300.1 $1,455.2
======= =======
Liabilities and Shareholders' Equity
Current Liabilities:
Short-term debt $ 66.9 $ 280.1
Accounts payable 123.1 142.7
Accrued compensation 40.1 37.6
Other accrued liabilities 189.4 203.4
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Total Current Liabilities 419.5 663.8
Long-Term Debt 279.7 209.6
Postemployment Benefits 201.1 207.1
Other Accrued Liabilities 64.8 56.2
------- -------
Total Liabilities 965.1 1,136.7
Shareholders' Equity:
Series D preferred stock 76.6 76.6
Series C ESOP preferred stock 50.6 53.1
Unearned ESOP compensation (25.3) (28.4)
Common stock 177.5 175.7
Additional paid-in capital 293.9 283.5
Accumulated deficit (166.6) (193.0)
Currency translation and other (71.7) (49.0)
------- -------
Total Shareholders' Equity 335.0 318.5
------- -------
Total Liabilities and Shareholders' Equity $1,300.1 $1,455.2
======= =======
See accompanying notes.
5
FEDERAL-MOGUL CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Unaudited)
Six Months Ended
June 30
--------------------
1997 1996
-------- --------
(Millions of Dollars)
Cash Provided From (Used By) Operating Activities
Net earnings $ 39.8 $ 26.4
Adjustments to reconcile net earnings to net cash
provided from operating activities
Depreciation and amortization 27.3 30.6
Deferred income taxes 5.2 (.7)
Postemployment benefits 2.0 1.6
Increase in accounts receivable (30.9) (21.7)
Decrease in inventories 40.5 25.5
Decrease in accounts payable (1.0) (.6)
Increase in current liabilities and other 15.3 20.1
Loss on early retirement of debt 4.1 -
Payments against restructuring
and reengineering reserves (12.5) (8.9)
----- -----
Net Cash Provided From Operating Activities 89.8 72.3
Cash Provided From (Used By) Investing Activities
Expenditures for property, plant and equipment (20.8) (24.2)
Proceeds from sale of business investments 66.6 -
Purchases of business investments - (.3)
Other - .7
----- -----
Net Cash Provided From (Used By) Investing Activities 45.8 (23.8)
Cash Provided From (Used By) Financing Activities
Issuance of common stock 9.7 .4
Fees for early retirement of debt (4.1) -
Net decrease in debt (138.8) (11.7)
Dividends (13.5) (13.6)
Other (2.4) (3.1)
----- -----
Net Cash Used By Financing Activities (149.1) (28.0)
----- -----
Increase (Decrease) in Cash and Equivalents (13.5) 20.5
Cash and Equivalents at Beginning of Period 33.1 19.4
----- -----
Cash and Equivalents at End of Period $ 19.6 $ 39.9
===== =====
See accompanying notes.
6
FEDERAL-MOGUL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
June 30, 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- and six-month periods ended June 30, 1997 are not necessarily
indicative of the results that may be expected for the year ended 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 June 30, 1997 and the number of preferred shares held by the
Employee Stock Ownership Plan (ESOP) that were allocated to participants'
accounts as of June 30 of each of the respective years.
The primary weighted average number of common and equivalent shares
outstanding (in thousands) was 35,414 and 35,297 for the three- and
six-month periods ended June 30, 1997, and 35,099 and 35,081 for the
three- and six-month periods ended June 30, 1996. The fully diluted
weighted average number of common and equivalent shares outstanding
(in thousands) was 41,576 and 41,537 for the three- and six-month
periods ended June 30, 1997, and 41,989 and 37,543 for the three- and
six-month periods ended June 30, 1996, 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
their effect is anti-dilutive 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 and the six months ended June 30,
1997 and 1996 and is not expected to impact the results of the
earnings per share calculation for the year ended December 31, 1997.
Quarterly dividends of $.12 per common share were declared for both
the first and second quarters of 1997 and 1996.
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3. INVENTORIES
At June 30, 1997 and December 31, 1996, inventories consisted of the
following:
1997 1996
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Finished products $283.7 $417.0
Work-in-process 22.5 28.0
Raw materials 15.0 20.0
------ ------
321.2 465.0
Reserve for inventory valuation (17.7) (48.0)
----- ------
$303.5 $417.0
====== ======
4. DEBT
In June 1997, the Company entered into a new $350 million multicurrency
revolving credit facility agreement with a consortium of international
banks which matures in June 2002. This new agreement replaces the
exiting U.S. and European revolving credit facilities and has similar
pricing terms. The revolving credit facility contains restrictive
covenants that, among other matters, require the Company to maintain
certain financial ratios. As of June 30, 1997, the Company had
$25 million borrowed against the revolving credit facility at a rate
of 6.19%. The revolving credit facility is included in long-term debt.
In April 1997, the Company issued $125 million of 10-year 8.8% senior
notes.
5. ADJUSTMENT OF ASSETS HELD FOR SALE
The results of operations have been included in the Company's consolidated
statements of earnings through the date of sale for the following
transactions. The Company received $66.6 million in cash in the first
six months of 1997 related to the following transactions with an additional
$10.7 million to be received in July 1997, while the purchaser assumed
certain liabilities.
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.
On May 13, 1997, the Company completed the previously announced sale of its
Australian replacement operations to Automotive Components Limited.
On June 3, 1997, the Company completed the previously announced sale of
its South African replacement operations. The Company sold the distribution
operations to Chariots Holding Limited and the retail operations to
Lexshell 16 Investment Holdings (Proprietary) Limited.
During the second quarter of 1997, in addition to the above transactions,
the Company reviewed and updated its impairment reserves related to the
divestiture of its remaining retail/wholesale replacement operations and
adjusted the reserve components to approximate the net fair value of its
remaining businesses held for sale. There was no material net effect on
the statement of earnings related to the above events.
8
6. INCOME TAXES
During the second quarter of 1997, the Company recognized an income tax
benefit of $6.8 million related to the sales of the South African and
Australian businesses.
7. EXTRAORDINARY ITEM
During the second quarter of 1997, the Company retired $64.7 million in
private placement debt. The early retirement of the debt required a
make-whole payment of $4.1 million, which was recorded as an extraordinary
item of $2.6 million, net of the related tax benefit.
8. SUBSEQUENT EVENT
On August 8, 1997, the Company announced its call for the redemption of
all its outstanding $3.875 Series D Convertible Exchangeable Preferred
Stock to be redeemed on August 28, 1997. Each share of preferred stock
is convertible into 2.778 shares of common stock and the Company expects
all shares to be converted to common stock.
9
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
THREE MONTHS ENDED JUNE 30, 1997 COMPARED WITH THREE MONTHS ENDED
JUNE 30, 1996
NET SALES
Sales for the second quarter of 1997 were $481.8 million compared to
$536.4 million in the same 1996 quarter. North American original equipment
sales were $118.7 million in the second quarter of 1997 compared to
$118.2 million in 1996. Excluding the electrical products and ball bearing
operation divestitures, North American original equipment sales were up
17.9% largely due to strong sealing system product sales. International
original equipment sales decreased 19.3% to $44.8 million from $55.5 million
in the same 1996 quarter. Excluding the sale of the heavy wall bearing
operations in Germany and Brazil and foreign currency effects, International
original equipment sales increased 13% primarily due to increased sales of
conventional engine bearings as the weak Deutsche mark contributed to higher
car production volumes. The sputter bearing business also added to the
increase due to higher diesel engine production demands. North American
replacement sales decreased 12% to $185.8 million from $211.2 million in
the second quarter of 1996. The decrease was attributable to softness in
the North American replacement market, particularly in engine and chassis
products. International replacement second quarter 1997 sales were
$132.5 million compared to $151.4 million for the second quarter of 1996.
Excluding the divestitures in Turkey, Australia and South Africa,
International replacement sales were relatively flat quarter over quarter.
COST OF PRODUCTS SOLD
Cost of products sold as a percent of net sales decreased to 76.1% for the
second quarter of 1997 from 78.1% for the second quarter of 1996. The
decrease in cost of products sold as a percent of net sales is attributable
to productivity improvements, cost controls and streamlined operations.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
While declining $7.5 million, selling, general and administrative expenses
as a percent of net sales were relatively flat for the second quarter of
1997 compared to the same 1996 period.
ADJUSTMENT OF ASSETS HELD FOR SALE
The results of operations have been included in the Company's consolidated
statements of earnings through the date of the sale for the following
transactions. The Company received $56.2 million in the second quarter of
1997 related to the following transactions with an additional $10.7 million
to be received in July 1997, while the purchaser assumed certain
liabilities.
On May 13, 1997, the Company completed the previously announced sale of
its Australian replacement operations to Automotive Components Limited.
10
On June 3, 1997, the Company completed the previously announced sale of
its South African replacement operations. The Company sold the distribution
operations to Chariots Holding Limited and the retail operations to
Lexshell 16 Investment Holdings (Proprietary) Limited.
During the second quarter of 1997, in conjunction with the above events,
the Company reviewed and updated its impairment reserve components related
to the divestiture of its remaining retail/wholesale replacement operations
and adjusted the reserves to approximate the net fair value of its
remaining businesses held for sale. There was no material net effect on
the statement of earnings related to the above transactions.
INCOME TAXES
During the second quarter of 1997, the Company recognized an income tax
benefit of $6.8 million related to the sales of the South African and
Australian businesses.
EXTRAORDINARY ITEM
During the second quarter of 1997, the Company retired $64.7 million in
private placement debt. This eliminated 10% coupon debt and potentially
restrictive covenants and will provide the Company greater financial
flexibility. The early retirement of debt required a make-whole payment
of $4.1 million, which was recorded as an extraordinary item of
$2.6 million, net of the related tax benefit.
SIX MONTHS ENDED JUNE 30, 1997 COMPARED WITH SIX MONTHS ENDED
JUNE 30, 1996
NET SALES
Sales for the six-month period ended June 30, 1997 were $967.4 million
compared to $1,058.3 million for the same 1996 period. North American
original equipment sales were $229.3 million for the six-month period
ended June 30, 1997 compared to $231 million in 1996. Excluding the
electrical products and ball bearing operation divestitures, North American
original equipment sales were up 14.3% largely due to strong sealing system
product sales. International original equipment sales decreased 22.3% to
$89 million for the six-month period ended June 30, 1997 from
$114.5 million in the same 1996 period. Excluding the sale of the heavy
wall bearing operations in Germany and Brazil and foreign currency effects,
International original equipment sales increased 10%. North American
replacement sales decreased 8.5% to $372 million from $406.4 million for
the six-month period ended June 30, 1996. The decrease was attributable
to softness in the North American replacement market, particularly in engine
and chassis products. International replacement sales for the six-month
period ended June 30, 1997 were $277.2 million compared to $306.3 million
for the same 1996 period. Excluding the divestitures in Turkey, Australia
and South Africa, International replacement sales were relatively flat.
COST OF PRODUCTS SOLD
Cost of products sold as a percent of net sales decreased to 76.5% for the
six-month period ended June 30, 1997 from 78.3% for the same 1996 period.
The decrease in cost of products sold as a percent of net sales is
attributable to productivity improvements, cost controls and streamlined
operations.
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SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
While declining $12.1 million, selling, general and administrative expenses
as a percent of net sales were relatively flat for the six-month period
ended June 30, 1997 compared to the same 1996 period.
ADJUSTMENT OF ASSETS HELD FOR SALE
The results of operations have been included in the Company's consolidated
statements of earnings through the date of sale for the following
transactions. The Company received $66.6 million in cash in the first
six months of 1997 related to the following transactions with an additional
$10.7 million to be received in July 1997, while the purchaser assumed
certain liabilities.
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.
On May 13, 1997, the Company completed the previously announced sale of its
Australian replacement operations to Automotive Components Limited.
On June 3, 1997, the Company completed the previously announced sale of
its South African replacement operations. The Company sold the distribution
operations to Chariots Holding Limited and the retail operations to
Lexshell 16 Investment Holdings (Proprietary) Limited.
During the second quarter of 1997, in addition to the above transactions,
the Company reviewed and updated its impairment reserves related to the
divestiture of its remaining retail/wholesale replacement operations and
adjusted the reserve components to approximate the net fair value of its
remaining businesses held for sale. There was no material net effect on
the statement of earnings related to the above events.
INCOME TAXES
During the second quarter of 1997, the Company recognized an income tax
benefit of $6.8 million related to the sales of the South African and
Australian businesses during the second quarter.
EXTRAORDINARY ITEM
During the second quarter of 1997, the Company retired $64.7 million in
private placement debt. This eliminated 10% coupon debt and potentially
restrictive covenants and will provide the Company greater financial
flexibility. The early retirement of the debt required a make-whole
payment of $4.1 million, which was recorded as an extraordinary item of
$2.6 million, net of the related tax benefit.
12
LIQUIDITY AND CAPITAL RESOURCES
Cash flow from operations of $89.8 million for the six-month period ended
June 30, 1997 increased 24.2% from $72.3 million for the same 1996 period.
The increase in cash flow from operations is due to increased earnings
combined with working capital productivity improvements. Inventory
reduction increased over the 1996 period due to a decrease in lead times
and lot sizes and an increase in fill rates in the North American
replacement business.
Cash flow from investing activities of $45.8 million for the six-month
period ended June 30, 1997 includes $66.6 million of proceeds from the
sales of the heavy wall bearing division in Germany and Brazil, and
64 retail stores and 17 warehouse locations in Turkey, Australia and
South Africa. Cash flow from investing activities also includes capital
expenditures of $20.8 million for property, plant and equipment and
equipment to implement process improvements, information technology and
new product introductions.
Cash flow used by financing activities of $(149.1) million for the
six-month period ended June 30, 1997 reflects a reduction in borrowings
of $138.8 million. The cash used to reduce borrowings was primarily
generated from operations and proceeds from the sales of businesses noted
above. In April 1997, the Company issued $125 million of 10-year 8.8%
senior notes. Proceeds from the senior notes were used to pay down the
revolving credit facility. Also during the six-month period ended June 30,
1997, the Company retired $64.7 million in private placement debt using
its revolving credit facility. This eliminated 10% coupon debt and
potentially restrictive covenants and will provide the Company greater
financial flexibility. The early retirement of debt required a make-whole
payment of $4.1 million which decreased cash from financing activities.
Also in the first quarter of 1997, the Company entered into a new
$100 million accounts receivable securitization program, and in the second
quarter of 1997, the Company entered into a new 5-year $350 million
revolving credit agreement which expires in June 2002.
On August 8, 1997, the Company announced its call for the redemption of
all of its outstanding $3.875 Series D Convertible Exchangeable Preferred
Stock to be redeemed on August 28, 1997. Each share of preferred stock is
convertible into 2.778 shares of common stock and the Company expects all
shares to be converted to common stock.
The Company believes that cash flow from operations, together with borrowings
available under the Company's revolving credit facility, will continue to
be sufficient to meet its ongoing working capital requirements.
13
PART II - OTHER INFORMATION
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Item 4. Submission of Matters to a Vote of Security Holders
The Company held its Annual Meeting of Shareholders on April 23,
1997, at which the shareholders considered and voted on (i) the
election of seven directors, (ii) the approval of the appointment
of Ernst & Young LLP as independent accountants for 1997, and
(iii) the approval of the 1997 Long Term Incentive Plan.
Each of the nominees for director at the meeting was an incumbent
and all nominees were elected. The following table sets forth the
number of votes for and withheld with respect to each nominee:
Nominee Votes For Votes Withheld
J. J. Fannon 27,656,481 309,384
R. M. Hills 27,596,631 369,234
A. Madero 27,462,121 503,743
R. S. Miller, Jr. 27,674,114 291,751
J. C. Pope 27,609,408 356,457
H. M. Sekyra 27,679,056 286,809
R. A. Snell 27,702,976 262,888
The appointment of Ernst & Young LLP as independent accountants for
1997 was approved, with 27,765,598 votes cast "For", 152,723 votes
cast "Against" and 102,702 abstentions. The 1997 Long Term Incentive
Plan was approved with 25,865,640 votes cast "For", 1,089,857 votes
cast "Against" and 211,666 abstentions.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
*10 $350,000,000 Revolving Credit, Competitive Advance and
Multicurrency Facility, dated June 16, 1997.
*11.1 Statement Re Computation of Per Share Earnings for the
three months ended June 30, 1997.
*11.2 Statement Re Computation of Per Share Earnings for the
six months ended June 30, 1997.
(b) Reports on Form 8-K:
No reports on Form 8-K were filed by the Company during the
three months ended June 30, 1997.
- --------------------
*Filed herewith.
14
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)
---------------------------
THOMAS W. RYAN
Senior Vice President and
Chief Financial Officer
FEDERAL-MOGUL CORPORATION
By: (Kenneth P. Slaby)
---------------------------
KENNETH P. SLABY
Vice President and Controller and
Chief Accounting Officer
Dated: August 14, 1997