UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 2001
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from __________ to __________
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 (IRS employer
incorporation or organization) identification number)
26555 Northwestern Highway, Southfield, Michigan 48034
(Address of principal executive offices) (Zip Code)
(248) 354-7700
(Registrant's telephone number, including area code)
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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As of April 30, 2001, there were 70,619,316 outstanding shares of the
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registrant's $5.00 stated value common stock
FORWARD-LOOKING STATEMENTS
Certain statements contained or incorporated in this Quarterly Report on
Form 10-Q, which are not statements of historical fact constitute "Forward-
Looking Statements" within the meaning of the Private Securities Litigation
Reform Act of 1995 (The "Act"). Such statements are made in good faith by
Federal-Mogul pursuant to the "Safe Harbor" provisions of the Act.
Forward-looking statements include financial projections, estimates and
statements regarding plans, objectives and expectations of Federal-Mogul (the
"Company") and its management, including, without limitation, plans to implement
the previously announced restructuring initiatives relating to manufacturing and
warehouse facilities and the Company's six global initiatives ("SGI")
(Aftermarket Rationalization, Facility Rationalization, Shared Services,
Constraint Management, Supply Chain Management and Investment Strategy,), plans
to address the issues related to the conversion to the Euro, and the scope of
the effect of T&N, Abex and Wagner asbestos liabilities.
Forward-looking statements may involve known and unknown risks,
uncertainties and other factors, which may cause the actual results, performance
or achievements of Federal-Mogul to differ materially from any future results,
performance or achievements expressed or implied by such forward-looking
statements. Such risks, uncertainties and other factors include, without
limitation, fluctuation in demand for both original equipment and replacement
components in the automotive, heavy-duty vehicular and industrial markets, as
well as certain global and regional economic conditions, including, without
limitation, the effects of world wide currency fluctuations, asbestos and other
factors detailed herein and from time to time in the documents incorporated by
reference herein. Moreover, Federal-Mogul's plans, objectives and intentions are
subject to change based on these and other factors, some of which are beyond
Federal-Mogul's control.
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PART I - FINANCIAL INFORMATION
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Item 1. Financial Statements
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Federal-Mogul Corporation and Subsidiaries
Condensed Consolidated Statements of Operations (Unaudited)
(Millions of Dollars, Except Per Share Amounts)
Three Months Ended
March 31
--------
2001 2000
---- ----
Net sales ......................................................................... $1,450.7 $1,643.7
Cost of products sold.............................................................. 1,145.4 1,210.4
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Gross margin.................................................................... 305.3 433.3
Selling, general and administrative expenses....................................... 229.6 211.0
Amortization of goodwill and other intangible assets............................... 30.4 31.2
Restructuring charges ............................................................. 29.8 68.7
Adjustment of assets held for sale and other long-lived assets to fair value....... 0.6 10.0
Interest expense................................................................... 83.8 71.0
Interest income.................................................................... (1.2) (1.3)
International currency exchange losses............................................. 0.7 0.6
Other expense, net................................................................. 5.8 7.6
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Earnings (loss) before income taxes...................................... (74.2) 34.5
Income tax expense (benefit)....................................................... (12.0) 20.6
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Net earnings (loss)...................................................... (62.2) 13.9
Preferred dividends, net of related tax benefit.................................... 0.4 0.5
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Net Earnings (Loss) Available for Common Shareholders.............................. $ (62.6) $ 13.4
========== =========
Earnings (Loss) Per Common Share:
Basic.............................................................................. $ (0.89) $ 0.19
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Diluted............................................................................ $ (0.89) $ 0.18
========== =========
See accompanying notes.
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FEDERAL-MOGUL CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Millions of Dollars)
(Unaudited)
March 31 December 31
2001 2000
---- ----
(Millions of Dollars)
ASSETS
Cash and equivalents................................................................... $ 83.0 $ 107.2
Accounts receivable.................................................................... 517.6 512.8
Investment in accounts receivable securitization....................................... 293.7 229.1
Inventories............................................................................ 785.9 808.6
Deferred taxes......................................................................... 232.0 235.5
Prepaid expenses and income tax benefits............................................... 191.2 195.1
----------- -----------
Total Current Assets.............................................................. 2,103.4 2,088.3
Property, plant and equipment, net..................................................... 2,342.2 2,388.8
Goodwill, net.......................................................................... 3,220.9 3,303.1
Other intangible assets, net........................................................... 727.3 746.4
Asbestos-related insurance recoverable................................................. 745.3 771.1
Other noncurrent assets................................................................ 1,167.1 1,155.7
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Total Assets...................................................................... $10,306.2 $10,453.4
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LIABILITIES AND SHAREHOLDERS' EQUITY
Short-term debt, including current portion of long-term debt........................... $ 113.9 $ 147.8
Accounts payable....................................................................... 446.6 431.9
Accrued compensation................................................................... 183.9 157.8
Restructuring and rationalization reserves............................................. 120.3 107.9
Current portion of asbestos liability.................................................. 350.0 350.0
Interest payable....................................................................... 63.6 94.4
Other accrued liabilities.............................................................. 395.3 439.3
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Total Current Liabilities......................................................... 1,673.6 1,729.1
Long-term debt......................................................................... 3,773.2 3,559.7
Long-term portion of asbestos liability................................................ 1,363.4 1,461.9
Postemployment benefits................................................................ 635.1 637.6
Other accrued liabilities.............................................................. 861.2 882.4
Minority interest in consolidated subsidiaries......................................... 57.0 57.5
Company-obligated mandatorily redeemable preferred securities of subsidiary trust
holding solely convertible subordinated debentures of the Company (1)............... 575.0 575.0
Shareholders' Equity:
Series C ESOP preferred stock....................................................... 37.3 38.1
Common stock........................................................................ 353.1 352.5
Additional paid-in capital.......................................................... 1,778.2 1,778.6
Accumulated deficit................................................................. (172.4) (113.5)
Accumulated other comprehensive loss................................................ (627.8) (504.7)
Other............................................................................... (0.7) (0.8)
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Total Shareholders' Equity........................................................ 1,367.7 1,550.2
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Total Liabilities and Shareholders' Equity........................................ $10,306.2 $10,453.4
=========== =========
__________
(1) The sole assets of the Trust are convertible subordinated debentures of
Federal-Mogul with an aggregate principal amount of $575.0 million, which
bear interest at a rate of 7% per annum and mature on December 1, 2027.
Upon repayment of the subordinated debentures, the Company-obligated
mandatorily redeemable preferred securities of subsidiary trust will be
mandatorily redeemed.
See accompanying notes.
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FEDERAL-MOGUL CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Unaudited)
(Millions of Dollars)
Three Months Ended
March 31
--------
2001 2000
---- ----
Cash Provided From (Used By) Operating Activities
Net earnings (loss) ............................................................... $(62.2) $ 13.9
Adjustments to reconcile net earnings (loss) to net cash provided from (used by)
operating activities .....................................................
Depreciation and amortization.................................................... 97.8 99.1
Restructuring charges............................................................ 29.8 68.7
Adjustment of assets held for sale and other long-lived assets to fair value..... 0.6 10.0
Postemployment benefits.......................................................... 3.5 1.2
Increase in accounts receivable.................................................. (38.3) (84.8)
Decrease (increase) in inventories............................................... 9.1 (31.3)
Increase (decrease) in accounts payable.......................................... 21.9 (99.6)
Changes in other current liabilities and other current assets.................... (38.8) (25.5)
Payments against restructuring and rationalization reserves...................... (16.0) (14.7)
Payments against asbestos liability.............................................. (88.3) (75.4)
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Net Cash Used By Operating Activities......................................... (80.9) (138.4)
Cash Provided From (Used By) Investing Activities
Expenditures for property, plant and equipment and other long-term assets, net..... (65.0) (72.8)
Proceeds from sales of businesses.................................................. -- 4.7
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Net Cash Used By Investing Activities......................................... (65.0) (68.1)
Cash Provided From (Used By) Financing Activities
Proceeds from issuance of long-term debt........................................... 236.0 285.0
Principal payments on long-term debt............................................... (22.1) (17.2)
Decrease in short-term debt........................................................ (32.1) (23.8)
Fees paid for debt agreements...................................................... (14.2) --
Repurchase of accounts receivable under securitization............................. (48.2) (31.0)
Dividends.......................................................................... (0.7) (1.0)
Other.............................................................................. 3.0 2.1
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Net Cash Provided From Financing Activities................................... 121.7 214.1
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Increase (Decrease) in Cash and Equivalents................................... (24.2) 7.6
Cash and Equivalents at Beginning of Period............................... 107.2 64.5
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Cash and Equivalents at End of Period......................................... $ 83.0 $ 72.1
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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, 2001
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with United States generally accepted accounting
principles ("U.S. GAAP") for interim financial information and with 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 ended March 31, 2001 are not necessarily indicative of the results that
may be expected for the year ended December 31, 2001. 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, 2000.
Certain items in the prior year condensed consolidated financial statements have
been reclassified to conform to the presentation used in 2001.
2. DERIVATIVE FINANCIAL INSTRUMENTS
Effective January 1, 2001, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments
and Hedging Activities", as amended, which establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts and for hedging activities. All derivatives, whether
designated in hedging relationships or not, are required to be recorded on the
balance sheet at fair value. If the derivative is designated as a fair value
hedge, the changes in the fair value of the derivative and of the hedged item
attributable to the hedged risk are recognized in earnings. If the derivative is
designated as a cash flow hedge, the effective portions of changes in the fair
value of the derivative are recorded in other comprehensive income ("OCI") and
are recognized in the statement of operations when the hedged item affects
operations. Ineffective portions of changes in the fair value of cash flow
hedges are recognized in operations.
The cumulative effect of adopting SFAS No. 133 resulted in a pre-tax
reduction to OCI of $350,000 ($228,000 after-tax). The effect on net loss was
not significant, primarily because the hedges in place as of January 1, 2001
were highly effective. The net derivative losses included in OCI as of January
1, 2001 will be reclassified into operations during the twelve months ended
December 31, 2001.
The Company is exposed to market risks, such as fluctuations in foreign
currency risk and commodity price risk. To manage the volatility relating to
these exposures, the Company aggregates its exposures on a consolidated basis to
take advantage of natural offsets. For exposures that are not offset within its
operations, the Company enters into various derivative transactions pursuant to
its risk management policies. Designation is performed on a transaction basis to
support hedge accounting. The changes in fair value of these hedging instruments
are offset in part or in whole by corresponding changes in the fair value or
cash flows of the underlying exposures being hedged. The Company assesses the
initial and ongoing effectiveness of its hedging relationships in accordance
with its documented policy. The Company does not hold or issue derivative
financial instruments for trading purposes. The Company's objectives for holding
derivatives are to minimize the risks using the most effective methods to
eliminate or reduce the impacts of these exposures.
Foreign Currency Risk
Certain forecasted transactions and recorded transactions and assets and
liabilities are exposed to foreign currency risk. The Company monitors its
foreign currency exposures daily to maximize the overall effectiveness of its
foreign currency hedge positions. Principal currencies hedged include the Euro,
British pound, Japanese yen and Canadian dollar. Options used to hedge a portion
of forecasted transactions, for up to twelve months in the future, are
designated as cash flow hedging instruments. Options and forwards used to hedge
certain booked transactions and assets and liabilities are not designated as
hedging instruments under SFAS 133 as they are natural hedges. The
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effect of changes in the fair value of these hedges and the underlying exposures
are recorded in earnings each period.
Commodity Price Risk
The Company is dependent upon the supply of certain raw materials in its
production process. These commodities are exposed to price fluctuations on the
open market. The primary purpose of the Company's commodity price hedging
activities is to manage the volatility associated with these forecasted
inventory purchases. The Company monitors its commodity price risk exposures
daily to maximize the overall effectiveness of its commodity forward contracts.
Principal commodities hedged include copper, nickel, lead, high-grade aluminum,
and aluminum alloy. Forward contracts used to hedge commodities, for up to
eighteen months in the future, are designated as cash flow hedging instruments.
These instruments are intended to offset the effect of changes in commodity
prices on forecasted inventory purchases.
Other
For options designated either as fair value or cash flow hedges, changes in
the time value are excluded from the assessment of hedge effectiveness. Hedge
ineffectiveness, determined in accordance with SFAS 133, did not have a material
effect on operations for the three months ended March 31, 2001. No fair value
hedges or cash flow hedges were de-designated or discontinued for the three
months ended March 31, 2001.
For the three months ended March 31, 2001, Other expenses, net included
approximately a $0.1 million net loss comprised of approximately $4.1 million of
net losses and $4.0 million of net gains on fair value of derivatives not
designated as hedging instruments.
Derivative gains and losses included in OCI are reclassified into operations
at the time forecasted transactions are recognized. During the three months
ended March 31, 2001, $194,000 of derivative losses were reclassified to cost of
goods sold. The Company also reduced OCI by approximately $800,000 pre-tax
during the three months ended March 31, 2001 for market fluctuations on its
commodity hedges. The Company estimates as of March 31, 2001, that $1.0 million
of net derivative losses included in other comprehensive income will be
reclassified into earnings within the next twelve months.
3. RESTRUCTURING AND RATIONALIZATION
During the first quarter of 2001, the Company recognized $29.8 million of
restructuring charges related to severance and exit costs. Severance costs of
$27.8 million included the planned consolidation of the European friction
business and the January 2001 salaried employee reductions in North America and
Europe. Total employee reductions are expected to be approximately 1,000 of
which 600 have been terminated as of March 31, 2001. Exit costs of $2.0 million
are primarily comprised of planned consolidation of the European friction
business
Restructuring Rationalization Total
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Balance of reserves at December 31, 2000.................. $ 89.9 $18.0 $107.9
Q1 2001 restructuring charges............................. 29.8 -- 29.8
Effect of foreign exchange................................ (1.3) (0.1) (1.4)
Payments against restructuring reserves................... (13.8) (2.2) (16.0)
------ ----- ------
Balance of reserves at March 31, 2001..................... $104.6 $15.7 $120.3
====== ===== ======
Of the $16.0 million of payments during the first quarter of 2001,
approximately $2.0 million were exits costs and $14.0 million were severance
costs.
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4. ASBESTOS LIABILITY AND LEGAL PROCEEDINGS
T&N Asbestos Litigation
In the United States, the Company's United Kingdom subsidiary, T&N Ltd., and
two United States subsidiaries (the "T&N Companies") are among many defendants
named in numerous court actions alleging personal injury resulting from exposure
to asbestos or asbestos-containing products. T&N Ltd. is also subject to
asbestos-disease litigation, to a lesser extent, in the United Kingdom and
France. Because of the slow onset of asbestos-related diseases, management
anticipates that similar claims will be made in the future. It is not known how
many claims may be made nor the expenditures which may ultimately arise
therefrom. In addition, there are a number of factors that could impact the
settlement costs into the future, including but not limited to: changes in the
legal environment; possible insolvency of co-defendants; and establishment of an
acceptable administrative (non-litigation) claims resolution mechanism.
In 2000, the Company increased its estimate of asbestos-related liability
for the T&N Companies by $751 million and recorded a related insurance
recoverable asset of $577 million. The revision in the estimate of probable
asbestos-related liability principally resulted from a study performed by an
econometric firm that specializes in these types of matters. The liability
(approximately $1.5 billion at March 31, 2001) represents the Company's estimate
for claims currently pending and those which can be reasonably estimated to be
asserted in a future period. The Company believes that these claims will be paid
over approximately the next 12 years. In arriving at the revised liability for
the T&N Companies, assumptions have been made regarding the total number of
claims anticipated to be received in the future period, the typical cost of
settlement (which is sensitive to the industry in which the plaintiff claims
exposure, the alleged disease type and the jurisdiction in which the action is
being brought), the rate of receipt of claims, the settlement strategy in
dealing with outstanding claims and the timing of settlements.
While management believes that the liability and receivable recorded are
appropriate for anticipated losses arising from asbestos-related claims against
the T&N Companies for the period covered, given the nature and complexity of the
factors affecting the estimated liability and potential insurance recovery the
actual liability and insurance recovery may differ. No assurance can be given
that the T&N Companies will not be subject to material additional liabilities
and significant additional litigation relating to asbestos for the period
covered. In the event that such liabilities exceed the amounts recorded by the
Company or the remaining insurance coverage, the Company's results of
operations, business, liquidity and financial condition could be materially
adversely affected.
The ultimate liability for all pending and future claims is highly uncertain
due to the difficulty of forecasting the numerous variables that can affect the
liability. The Company does not believe it can reasonably determine the ultimate
liability as the level of uncertainty is too great to provide for reasonable
estimation of the number of future claims, the nature of such claims and the
cost to resolve them. As additional experience is gained regarding claims or
other new information becomes available regarding the potential liability, the
Company will reassess its potential liability and revise the estimates as
appropriate. Accordingly it is reasonably possible that the ultimate losses from
asbestos-related claims will be greater than amounts recorded.
T&N Ltd. is a defendant in approximately 74,000 pending personal injury
claims as of March 31, 2001. During the first three months of 2001,
approximately 9,000 new claims naming T&N Ltd. were received. The two United
States subsidiaries are defendants in approximately 125,000 pending personal
injury claims as of March 31, 2001. During the first three months of 2001,
approximately 17,000 new claims naming the two United States subsidiaries were
received.
A number of years ago, T&N Ltd. appointed the Center for Claims Resolution
("CCR") as exclusive representative in relation to all asbestos-related personal
injury claims made against the T&N Companies in the United States. The CCR has
provided to its member companies a litigation defense, claims-handling and
administration service in respect to United States asbestos-related disease
claims. Pursuant to the CCR Producer Agreement, T&N Ltd. was entitled to appoint
a representative as one of the five voting directors on the CCR's Board of
Directors. Also pursuant to that agreement, members of the CCR contributed
towards indemnity payments in each claim in which the member is named.
Contributions to such indemnity payments were calculated on a case by case basis
according to sharing agreements among the CCR's members. Effective January 18,
2000, the two United States
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subsidiaries appointed a law firm specializing in asbestos matters as their
litigation defense, claims handling and administrative service provider.
Indemnity and defense obligations incurred while members of the CCR are
continuing to be honored. This change was intended to create greater economic
and defense efficiencies for the two companies. The T&N Companies have entered
into $250 million of surety to meet CCR collateral requirements for past
obligations. The surety has a declining balance and is effective through
February 24, 2004.
The membership of the CCR has decreased beginning in 2000 for both voluntary
and involuntary reasons. One instance involved the termination of a member by
the CCR board. That former member had refused to provide required surety for
agreed to settlements made while a member. The CCR has tried to recover the
funds owed; however, the former member has since filed for bankruptcy and
recovery is therefore uncertain. Another member has terminated its participation
due to its determination that, as a trust, it lacked sufficient assets to commit
to any new settlements. This member has also asserted that it is entitled to
certain reimbursements which the CCR does not believe to be appropriate.
Additionally, a third member had filed for bankruptcy in December 2000. Any
additional cost to the remaining CCR members, net of the security provided, is
uncertain. The Company however has provided for its best estimate of the impact
of these events. The T&N Companies could experience an increase in liability if
there are any future negative developments in these areas.
Certain codefendant companies (both members and nonmembers of the CCR) have
recently filed for reorganization under Chapter 11 of the Federal Bankruptcy
Code. As a consequence, litigation against them (with some exceptions) has been
stayed or restricted. Due to the uncertainties involved, the long-term effect of
these proceedings on the Company's current and future exposure cannot be
determined.
In February 2001, the CCR and its members significantly amended its
indemnity naming and services agreement. The CCR indemnity naming formula has
been replaced with a provision that, for all claims settled on or after February
1, 2001, CCR members would be directly responsible for payment of their own
indemnity obligations. The amendments will allow CCR members to choose the
services they wish to continue receiving from the CCR. T&N Ltd. has continued
with the CCR for claims handling and administrative services. However, T&N Ltd.
has appointed an outside law firm specializing in asbestos matters to handle its
litigation defense.
In 1996, T&N Ltd. purchased for the T&N Companies a (pound)500 million layer
of insurance which will be triggered should the aggregate costs of claims filed
after June 30, 1996, where the exposure occurred prior to that date, exceed
(pound)690 million. The Company believes that the aggregate cost of claims filed
after June 30, 1996 will exceed the trigger point. The Company believes based on
its review of the insurance policy and its advice from outside counsel, that it
is probable that the T&N Companies will be entitled to receive payment from the
reinsurers for the cost of claims in excess of the trigger point of the
insurance. Based on this assessment, the Company has recorded as of March 31,
2001 an insurance recoverable asset under the T&N policy of $554 million. The
Company has reviewed the financial viability and legal obligations of the three
reinsurance companies involved and has concluded that there is little risk of
the reinsurers not being able to meet their obligation to pay, once the claims
filed after June 30, 1996 exceed the (pound)690 million trigger point. The
Company does not expect to reach the trigger point of the insurance or begin to
collect on this insurance recoverable for the next several years. The US claims'
costs applied against this policy are converted at a fixed exchange rate of
$1.69/(pound). As such, if the market exchange rate is less then $1.69/(pound),
the Company will effectively have a discount from 100% recovery on claims made
with the insurance companies. At March 31, 2001, the $554 million insurance
recoverable asset is net of an exchange rate discount of approximately $89
million.
The ultimate exposure of the T&N companies with respect to claims will
depend upon the extent to which the insurance described above will be available
to cover such claims, the amount paid for indemnity and defense, changes in the
legal environment and other factors.
Abex and Wagner Asbestos Litigation
Former businesses of Cooper Automotive, primarily Abex and Wagner, are
involved as defendants in numerous court actions in the United States alleging
personal injury from exposure to asbestos or asbestos-containing products,
mainly involving friction products. Abex is a defendant in approximately 28,000
pending claims as of March 31, 2001. During the first three months of 2001,
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approximately 5,500 new claims naming this defendant were received. Wagner is a
defendant in approximately 20,000 claims as of March 31, 2001. During the first
three months of 2001, approximately 3,000 new claims naming this defendant were
received. In 1998, the Company acquired the capital stock of a former Cooper
Automotive entity resulting in the assumption by a Company subsidiary of
contractual liability, under certain circumstances, for all claims pending and
to be filed in the future alleging exposure to certain Wagner automotive and
industrial friction products and for all claims filed after August 29, 1998,
alleging exposure to certain Abex (non-railroad and non-aircraft) friction
products. In 2000, the Company decreased its estimate of probable
asbestos-related liability by $127 million, which was accompanied by an
approximately equivalent reduction in the insurance recoverable asset. The
revised estimate of probable asbestos-related liability principally resulted
from a study performed by an econometric firm that specializes in these types of
matters. The liability (approximately $247 million as of March 31, 2001)
represents the Company's estimate for claims currently pending and those which
can be reasonably estimated to be asserted in a future period. The Company
believes that these claims will be paid over approximately the next 12 years. In
arriving at the revised liability for Abex and Wagner, assumptions have been
made regarding the number of claims anticipated to be received in the future
period, the typical cost of settlement (which is sensitive to the alleged
disease type and the jurisdiction in which the action is being brought), the
rate of receipt of claims, and the timing of settlements.
While management believes that the liability and receivable recorded for
these claims are appropriate for anticipated losses arising from
asbestos-related claims against Abex and Wagner for the covered period, given
the nature and complexity of factors affecting the estimated liability and
potential insurance recovery the actual liability and insurance recovery may
differ. No assurance can be given that Abex and Wagner will not be subject to
material additional liabilities and significant additional litigation relating
to asbestos for the period covered. In the event that such liabilities exceed
the amounts recorded by the Company or the remaining insurance coverage, the
Company's results of operations, business, liquidity and financial condition
could be materially adversely affected.
The ultimate liability for all pending and future claims is highly uncertain
due to the difficulty of forecasting the numerous variables that can affect the
liability. The Company does not believe it can reasonably determine the ultimate
liability as the level of uncertainty is too great to provide for reasonable
estimation of the number of future claims, the nature of such claims, and the
cost to resolve them. As additional experience is gained regarding claims or
other new information becomes available regarding the potential liability, the
Company will reassess its potential liability and revise the estimates as
appropriate. Accordingly it is reasonably possible that the ultimate losses from
asbestos-related claims will be greater than amounts recorded.
Abex maintained product liability insurance coverage for most of the time
that it manufactured products that contained asbestos. The subsidiary of the
Company that may be liable for the post-August 1998 asbestos claims against Abex
has the benefit of that insurance. Abex has been in litigation since 1982 with
the insurance carriers of its primary layer of liability concerning coverage for
asbestos claims. Abex also has substantial excess layer liability insurance
coverage that, barring unforeseen insolvencies of excess carriers or other
adverse events, should provide coverage for asbestos claims against Abex. The
Company believes that based on its review of the insurance policies, the
viability of the insurance carriers, and advice from outside legal counsel, it
is probable that Abex will receive payments for a substantial majority of the
cost of claims.
Wagner also maintained product liability insurance coverage for some of the
time that it manufactured products that contained asbestos. The subsidiary of
the Company that may be liable for asbestos claims against Wagner has the
benefit of that insurance. Primary layer liability insurance coverage for
asbestos claims against Wagner is the subject of an agreement with Wagner's
solvent primary carriers. The agreement provides for partial reimbursement of
indemnity and defense costs for Wagner asbestos claims until exhaustion of
aggregate limits. Wagner also has substantial excess layer liability insurance
coverage which, barring unforeseen insolvencies of excess carriers or other
adverse events, should provide coverage for asbestos claims against Wagner. The
Company believes that based on its review of the insurance policies, the
financial viability of the insurance carriers, and advice from outside legal
counsel, it is probable that Wagner will receive payment for a portion of the
cost of claims. Based on the probable conclusion of collection under the
insurance policies, the Company has recorded a $185 million insurance
recoverable asset related to the Abex and Wagner liability.
Federal-Mogul and Fel-Pro Asbestos Litigation
The Company also is sued in its own name as one of a large number of
defendants in a number of lawsuits brought by claimants alleging injury due to
exposure to asbestos. The Company's Fel-Pro subsidiary has also been
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named as a defendant in a number of product liability cases involving asbestos,
primarily involving gasket or packing products. Fel-Pro is a defendant in
approximately 34,000 pending claims as of March 31, 2001. During the first three
months of 2001, approximately 2,700 new claims were filed. Over 31,000 of these
claims have been transferred to a federal court where they reside subject to
removal back into the tort system only if certain medical and product
identification conditions are met. The Company is defending all such claims
vigorously and believes that it and Fel-Pro have substantial defenses to
liability and insurance coverage for defense and indemnity. While the outcome of
litigation cannot be predicted with certainty, management believes that asbestos
claims pending against the Company and Fel-Pro as of March 31, 2001, will not
have a material effect on the Company's financial position.
Aggregate of Asbestos Liability and Insurance Recoverable Asset
As of March 31, 2001, the Company has provided an aggregated liability for
all of its subsidiaries and businesses with potential asbestos liability of
approximately $1.7 billion for claims currently pending and those which can be
reasonably expected to be asserted in a future period. The Company believes that
these claims will be paid over approximately the next 12 years. Of this amount,
the Company expects to incur asbestos payments of approximately $350 million
over approximately the next 12 months and has reflected this as a current
liability. This estimate is based in part on recent and historical claims
experience, medical information, the impact of changes in indemnity sharing
within the CCR and the current legal environment. The Company cannot reasonably
estimate a liability beyond the period encompassed in its estimates as the level
of uncertainty is too great to provide for reasonable estimation of the number
of future claims, the nature of such claims, or the cost to resolve them.
The Company believes that it is probable that its subsidiaries with
asbestos-related liabilities and related insurance policies, the T&N Companies,
Abex, Wagner and Fel-Pro will collect the recorded aggregated insurance
recoverable asset of $745.3 million.
Environmental Matters
The Company is a defendant in lawsuits filed, or the recipient of
administrative orders issued, in various jurisdictions pursuant to the federal
Comprehensive Environmental Response Compensation and Liability Act of 1980
(CERCLA) or other similar federal or state environmental laws. These laws
require responsible parties to pay for cleaning up contamination resulting from
hazardous wastes which were discharged into the environment by them or by others
to which they sent such wastes for disposition. In addition, the Company has
been notified by the United States Environmental Protection Agency and various
state agencies that it may be a potentially responsible party (PRP) under such
law for the cost of cleaning up certain other hazardous waste storage or
disposal facilities pursuant to CERCLA and other federal and state environmental
laws. PRP designation requires the funding of site investigations and subsequent
remedial activities. At most of the sites that are likely to be costliest to
clean up, which are often current or former commercial waste disposal facilities
to which numerous companies sent waste, the Company's exposure is expected to be
limited. Despite the joint and several liability which might be imposed on the
Company under CERCLA and some of the other laws pertaining to these sites, the
Company's share of the total waste has generally been small. The other companies
which also sent wastes, often numbering in the hundreds or more, generally
include large, solvent publicly-owned companies, and in most such situations the
government agencies and courts have imposed liability in some reasonable
relationship to contribution of waste. In addition, the Company has identified
certain present and former properties at which it may be responsible for
cleaning up environmental contamination. The Company is actively seeking to
resolve these matters. Although difficult to quantify based on the complexity of
the issues, the Company has accrued the estimated cost associated with such
matters based upon current available information from site investigations and
consultants. The environmental reserve was approximately $61.2 million and $67.9
million at March 31, 2001 and December 31, 2000, respectively. Management
believes that such accruals will be adequate to cover the Company's estimated
liability for its exposure in respect to such matters.
-11-
5. INVENTORIES
Inventories consisted of the following (in millions of dollars):
March 31 December 31
2001 2000
-------- -----------
Finished products.................................................. $536.4 $545.8
Work-in-process.................................................... 134.3 136.3
Raw materials...................................................... 142.4 155.8
------ ------
813.1 837.9
Reserve for inventory valuation.................................... (27.2) (29.3)
------ ------
$785.9 $808.6
====== ======
6. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings
(loss) per share (in millions, except per share data):
Three Months Ended
March 31
-----------------
2001 2000
-------- ------
Numerator:
Net earnings (loss)........................................................................... $(62.2) $13.9
Series C preferred dividend requirement....................................................... (0.4) (0.5)
------ -----
Numerator for basic earnings (loss) per share - income available to common shareholders $(62.6) $13.4
======= =====
Effect of dilutive securities:
Series C preferred dividend requirement.................................................. 0.4 0.5
Additional required ESOP contribution.................................................... -- (0.5)
------ -----
Numerator for diluted earnings (loss) per share - income available to common shareholders
after assumed conversions................................................................ $(62.2) $13.4
Denominator:
Denominator for basic earnings per share - weighted average shares............................ 70.6 70.2
Effect of dilutive securities:
Nonvested stock.......................................................................... -- 0.2
Conversion of Series C preferred stock................................................... -- 1.4
Contingently issuable shares of common stock............................................. -- 1.1
------ -----
Dilutive potential common shares.............................................................. -- 2.7
------ -----
Denominator for dilutive earnings per share - adjusted weighted average shares and assumed
conversions.............................................................................. 70.6 72.9
====== =====
Basic earnings (loss) per share.................................................................... $(.89) $.19
====== ====
Diluted earnings (loss) per share.................................................................. $(.89) $.18
====== ====
7. COMPREHENSIVE LOSS
Other comprehensive income includes foreign currency translation adjustments and
unrealized gains (losses) on investments. Total comprehensive income (loss) is
summarized as follows (in millions of dollars):
Three Months Ended
March 31
--------
2001 2000
---- ----
Net earnings (loss)............................................ $(62.2) $13.9
Other Comprehensive Income (Loss)
Foreign currency translation adjustments................... (122.1) (85.0)
Derivatives and other, net of tax.......................... (1.0) (0.3)
------- ------
Total comprehensive loss.......................................... $(185.3) $(71.4)
======= ======
-12-
8. OPERATIONS BY INDUSTRY SEGMENT
The Company is a global manufacturer with two reportable segments:
Americas/Asia Pacific, which includes the operations of North and South America,
Asia and Australia; and Europe/Africa, which includes the operations of Europe
and Africa. Divested Activities include the historical operating results and
assets of certain divested operations in South Africa, Italy, the UK, the US and
India. Each segment manufactures and distributes products in the following
product groups: powertrain systems; sealing systems, visibility and system
protection products; and brake, chassis, ignition and fuel products. The Company
has not aggregated individual product segments within these reportable segments.
The accounting policies of the segments are the same as that of the Company.
The Company evaluates segment performance based on several factors,
including both Operational EBIT and Economic Value Added (EVA). Operational EBIT
is defined as earnings before interest, income taxes, extraordinary items and
certain nonrecurring items such as restructuring and impairment charges.
Operational EBIT for each segment is shown below, as it is most consistent with
the measurement principles used in measuring the corresponding amounts in the
consolidated financial statements.
Net Sales Operational EBIT
--------- ----------------
Three Months Three Months
Ended March 31 Ended March 31
----------------- -----------------
2001 2000 2001 2000
------- -------- ------- ------
Americas/Asia Pacific................ $ 936.7 $1,100.4 $30.6 $142.2
Europe/Africa........................ 514.0 536.3 18.4 50.0
Divested Activities.................. -- 7.0 -- 1.0
-------- -------- ----- ------
Total $1,450.7 $1,643.7 $49.0 $193.2
======== ======== ===== ======
Three Months
Ended March 31
------------------
2001 2000
------- ------
Reconciliation:
Total segments Operational EBIT........................................ $ 49.0 $193.2
Net interest and other financing costs................................. (92.8) (79.0)
Restructuring, impairment and other special charges.................... (30.4) (79.7)
------ ------
Earnings (loss) before income taxes................................ $ (74.2) $ 34.5
======= ======
9. SUBSEQUENT EVENT
On April 23, 2001 the Company signed an agreement to sell its torque
converter business ("TCI") to Competition Cams, Inc. TCI remanufactures torque
converters for high-performance automotive aftermarket applications. TCI became
a part of Federal-Mogul when the Company purchased Fel-Pro in 1998. TCI had net
sales of approximately $12 million in 2000. The business has approximately 90
employees in Ashland, Mississippi, and a small engineering office in Brighton,
Michigan.
On May 1, 2001 the Company signed an agreement to sell its Champion
aviation ignition products division ("Aviation") to TransDigm Inc. The sale is
subject to regulatory review, with an expected approval in second quarter 2001.
Aviation provides products for all major commercial, military and general
aircraft applications. Aviation became part of Federal-Mogul when the Company
purchased the Cooper Automotive division of Cooper Industries in 1998. Aviation
had net sales of approximately $70 million in 2000. The business has
approximately 385 employees in Liberty, South Carolina.
The Company does not expect these divestitures to have a material impact
on the Company's financial position.
10. CONSOLIDATING CONDENSED FINANCIAL INFORMATION OF GUARANTOR SUBSIDIARIES
Certain subsidiaries of the Company (as listed below, collectively the
"Guarantor Subsidiaries") have guaranteed fully and unconditionally, on a joint
and several basis, the obligation to pay principal and interest under the
Company's Senior Credit Agreements.
Federal-Mogul Venture Corporation Federal-Mogul Dutch Holdings Inc.
Federal-Mogul Global Properties Inc. Federal-Mogul UK Holdings Inc.
Carter Automotive Company F-M UK Holdings Limited
Federal-Mogul Worldwide Inc. Federal-Mogul Global Inc.
Federal-Mogul Ignition Company T&N Industries, Inc.
Federal-Mogul Products, Inc. Federal-Mogul Powertrain, Inc.
Federal-Mogul Aviation, Inc.
The Company issued notes in 1999 and 1998 which are guaranteed by the
Guarantor Subsidiaries. The Guarantor Subsidiaries also guarantee the Company's
previously existing publicly registered Medium-term notes and Senior notes.
-13-
T&N Industries, Inc. and Federal-Mogul Powertrain, Inc. are wholly owned
subsidiaries of the Company and were incorporated in 1998 with the acquisition
of T&N. These subsidiaries became guarantors as a result of the Company's fourth
amended and restated Senior Credit Agreement dated December 31, 2000. The 1999
and 1998 statements have been restated to include the entities since their
acquisition date within the Guarantor Subsidiaries.
In lieu of providing separate unaudited financial statements for the
Guarantor Subsidiaries, the Company has included the accompanying unaudited
consolidating condensed financial statements based on the Company's
understanding of the Securities and Exchange Commission's interpretation and
application of Rule 3-10 of the Securities and Exchange Commission's Regulation
S-X and Staff Accounting Bulletin 53. Management does not believe that separate
financial statements of the Guarantor Subsidiaries are material to investors.
Therefore, separate financial statements and other disclosures concerning the
Guarantor Subsidiaries are not presented.
-14-
Federal-Mogul Corporation
Notes to Consolidated Financial Statements
Unaudited Consolidating Condensed Statement of Operations
Three Months Ended March 31, 2001
(Millions of Dollars)
(Unconsolidated)
-------------------------------------
Guarantor Non-Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
------ ------------ ------------ ------------ ------------
Net sales........................................ $334.0 $ 484.6 $ 708.4 $ (76.3) $1,450.7
Cost of products sold............................ 273.3 396.1 552.3 (76.3) 1,145.4
------ ------- ------ ------- --------
Gross margin................................ 60.7 88.5 156.1 -- 305.3
Selling, general and administrative expenses..... 75.6 57.4 96.6 -- 229.6
Amortization of goodwill and other intangible
assets...................................... 5.2 11.8 13.4 -- 30.4
Restructuring charges............................ 12.2 -- 17.6 -- 29.8
Adjustment of assets held for sale and other
long-lived assets to fair value............. 0.6 -- -- -- 0.6
Interest expense, net............................ 80.4 0.2 2.0 -- 82.6
International currency exchange losses........... 0.2 -- 0.5 -- 0.7
Other expense (income), net...................... 88.7 (6.2) (76.7) -- 5.8
------ ------- ------ ------- --------
Earnings (loss) before income taxes and
equity in earnings (loss) of subsidiaries.. (202.2) 25.3 102.7 -- (74.2)
Income tax expense (benefit)..................... (32.4) 4.0 16.4 -- (12.0)
------ ------- ------ ------- --------
Earnings (loss) before equity in
earnings (loss) of subsidiaries.......... (169.8) 21.3 86.3 -- (62.2)
Equity in earnings (loss) of subsidiaries........ 107.6 32.2 -- (139.8) --
------ ------- ------ ------- --------
Net Earnings (Loss).............................. $(62.2) $ 53.5 $ 86.3 $(139.8) $ (62.2)
======= ======= ====== ======= ========
-15-
Federal-Mogul Corporation
Notes to Consolidated Financial Statements
Unaudited Consolidating Condensed Statement of Operations
Three Months Ended March 31, 2000
(Millions of Dollars)
(Unconsolidated)
--------------------------------------------
Non-
----
Guarantor Guarantor
--------- ---------
Parent Subsidiaries Subsidiaries Eliminations Consolidated
--------- ------------ ------------ ------------ ------------
Net sales........................................ $393.4 $566.2 $ 884.4 $ (200.3) $ 1,643.7
Cost of products sold............................ 299.9 414.1 696.7 (200.3) 1,210.4
--------- ----------- ------------ ----------- -----------
Gross margin................................ 93.5 152.1 187.7 -- 433.3
Selling, general and administrative expenses..... 56.9 59.3 94.8 -- 211.0
Amortization of goodwill and other intangible
assets...................................... 5.1 9.6 16.5 -- 31.2
Restructuring charges............................ 2.8 5.4 60.5 -- 68.7
Adjustment of assets held for sale and other
long-lived assets to fair value............. -- 4.6 5.4 -- 10.0
Interest expense, net............................ 65.9 0.2 3.6 -- 69.7
International currency exchange (gains) losses... 0.2 0.9 (0.5) -- 0.6
Other expense (income), net...................... 31.4 (20.2) (3.6) -- 7.6
--------- ---------- ----------- ---------- ----------
Earnings (loss) before income taxes and
equity in earnings (loss) of
subsidiaries..................................... (68.8) 92.3 11.0 -- 34.5
Income tax expense (benefit)..................... (41.1) 55.1 6.6 -- 20.6
--------- --------- ---------- ---------- ---------
Earnings (loss) before equity in earnings
(loss) of subsidiaries............... (27.7) 37.2 4.4 -- 13.9
Equity in earnings (loss) of subsidiaries........ 41.6 60.1 -- (101.7) --
-------- --------- ---------- --------- ---------
Net Earnings (Loss).............................. $ 13.9 $97.3 $ 4.4 $ (101.7) $ 13.9
======== ========= ========== ========= =========
-16-
Federal-Mogul Corporation
Notes to Consolidated Financial Statements
Unaudited Consolidating Condensed Balance Sheet
March 31, 2001
(Millions of Dollars)
(Unconsolidated)
----------------------------------------
Non-
----
Guarantor Guarantor
--------- ---------
Parent Subsidiaries Subsidiaries Eliminations Consolidated
--------- ------------ ------------ ------------ ------------
ASSETS
Cash and equivalents............................. $ 141.5 $ 9.1 $ (67.6) $ -- $ 83.0
Accounts receivable.............................. 19.2 6.1 492.3 -- 517.6
Investment in accounts receivable securitization. -- -- 293.7 -- 293.7
Inventories...................................... 131.3 298.5 356.1 -- 785.9
Deferred taxes................................... 149.8 5.1 77.1 -- 232.0
Prepaid expenses and income tax benefits......... 55.3 51.9 84.0 -- 191.2
--------- --------- --------- ---------- ---------
Total Current Assets........................ 497.1 370.7 1,235.6 -- 2,103.4
Property, plant and equipment.................... 275.1 878.8 1,188.3 -- 2,342.2
Goodwill......................................... 584.3 1,254.2 1,382.4 -- 3,220.9
Other intangible assets.......................... 38.9 402.2 286.2 -- 727.3
Investment in subsidiaries....................... 6,256.3 2,768.3 -- (9,024.6) --
Intercompany accounts, net....................... (1,680.2) 1,782.8 (102.6) -- --
Asbestos-related insurance recoverable........... -- 191.2 554.1 -- 745.3
Other noncurrent assets.......................... 465.2 73.2 628.7 -- 1,167.1
--------- --------- --------- ---------- ---------
--
Total Assets................................ $ 6,436.7 $ 7,721.4 $ 5,172.7 $ (9,024.6) $10,306.2
========= ========= ========= ========== =========
LIABILITIES
Short-term debt, including current portion of
long-term debt................................ $ 99.7 $ 2.2 $ 12.0 $ -- $ 113.9
Accounts payable................................. 94.2 145.6 206.8 -- 446.6
Accrued compensation............................. 45.4 29.0 109.5 -- 183.9
Restructuring and rationalization reserves....... 26.2 19.6 74.5 -- 120.3
Current portion of asbestos liability............ -- -- 350.0 -- 350.0
Interest payable................................. 62.1 0.1 1.4 -- 63.6
Other accrued liabilities........................ 35.2 129.9 230.2 395.3
--------- --------- --------- ---------- ---------
Total Current Liabilities................... 362.8 326.4 984.4 -- 1,673.6
Long-term debt................................... 3,756.7 6.5 10.0 -- 3,773.2
Long-term portion of asbestos liability.......... -- 582.8 780.6 -- 1,363.4
Postemployment benefits.......................... 472.9 0.4 161.8 -- 635.1
Other accrued liabilities........................ 428.3 0.4 432.5 -- 861.2
Minority interest in consolidated subsidiaries... 48.3 8.7 -- -- 57.0
Company-obligated mandatorily redeemable
preferred securities of subsidiary holding
solely convertible subordinated debentures
of the Company................................ -- -- 575.0 -- 575.0
Shareholders' Equity............................. 1,367.7 6,796.2 2,228.4 (9,024.6) 1,367.7
--------- --------- --------- ---------- ---------
Total Liabilities and Shareholders' Equity.. $ 6,436.7 $ 7,721.4 $ 5,172.7 $ (9,024.6) $10,306.2
========= ========= ========= ========== =========
-17-
Federal-Mogul Corporation
Notes to Consolidated Financial Statements
Unaudited Consolidating Condensed Balance Sheet
December 31, 2000
(Millions of Dollars)
(Unconsolidated)
----------------
Non-
----
Guarantor Guarantor
--------- ---------
Parent Subsidiaries Subsidiaries Eliminations Consolidated
-------- ------------ ------------ ------------ ------------
ASSETS
Cash and equivalents............................. $ 148.3 $ 10.9 $ (52.0) $ -- $ 107.2
Accounts receivable.............................. 22.4 -- 490.4 -- 512.8
Investment in accounts receivable securitization. -- -- 229.1 -- 229.1
Inventories...................................... 137.9 299.2 371.5 -- 808.6
Deferred taxes................................... 148.2 -- 87.3 -- 235.5
Prepaid expenses and income tax benefits......... 49.4 53.0 92.7 195.1
-------- --------- --------- ---------- ---------
Total Current Assets........................ 506.2 363.1 1,219.0 -- 2,088.3
Property, plant and equipment.................... 270.4 887.2 1,231.2 -- 2,388.8
Goodwill......................................... 584.5 1,256.7 1,461.9 -- 3,303.1
Other intangible assets.......................... 39.8 406.2 300.4 -- 746.4
Investment in subsidiaries....................... 6,186.0 2,871.6 -- (9,057.6) --
Intercompany accounts, net....................... (1,591.5) 1,787.5 (196.0) -- --
Asbestos-related insurance recoverable........... -- 194.4 576.7 -- 771.1
Other noncurrent assets.......................... 460.5 88.6 606.6 1,155.7
-------- --------- --------- ---------- ---------
Total Assets................................ $6,455.9 $ 7,855.3 $ 5,199.8 $ (9,057.6) $ 10,453.4
======== ========= ========= ========== =========
LIABILITIES
Short-term debt, including current portion of
long-term debt................................ $ 124.4 $ 3.0 $ 20.4 $ -- $ 147.8
Accounts payable................................. 78.0 145.0 208.9 -- 431.9
Accrued compensation............................. 31.8 27.6 98.4 -- 157.8
Restructuring and rationalization reserves....... 12.6 27.1 68.2 -- 107.9
Current portion of asbestos liability............ -- -- 350.0 -- 350.0
Interest payable................................. 92.9 0.3 1.2 -- 94.4
Other accrued liabilities........................ 60.1 141.9 237.3 439.3
-------- --------- --------- ---------- ---------
Total Current Liabilities................... 399.8 344.9 984.4 -- 1,729.1
Long-term debt................................... 3,534.0 7.6 18.1 -- 3,559.7
Long-term portion of asbestos liability.......... -- 606.4 855.5 -- 1,461.9
Postemployment benefits.......................... 470.1 -- 167.5 -- 637.6
Other accrued liabilities........................ 446.5 -- 435.9 -- 882.4
Minority interest in consolidated subsidiaries... 55.3 2.2 -- -- 57.5
Company-obligated mandatorily redeemable
preferred securities of subsidiary holding
solely convertible subordinated debentures
of the Company................................ -- -- 575.0 -- 575.0
Shareholders' Equity............................. 1,550.2 6,894.2 2,163.4 (9,057.6) 1,550.2
-------- --------- --------- ---------- ---------
Total Liabilities and Shareholders' Equity.. $6,455.9 $ 7,855.3 $ 5,199.8 $ (9,057.6) $10,453.4
======== ========= ========= ========== =========
-18-
Federal-Mogul Corporation
Notes to Consolidated Financial Statements
Unaudited Consolidating Condensed Statement of Cash Flows
Three Months Ended March 31, 2001
(Millions of Dollars)
(Unconsolidated)
-----------------------------------------
Guarantor Non-Guarantor
--------- -------------
Parent Subsidiaries Subsidiaries Eliminations Consolidated
-------- ------------ ------------ ------------ ------------
Net Cash Provided From (Used By)
Operating Activities......................... $ 20.5 $39.4 $(140.8) $ -- $(80.9)
Cash Provided From (Used By) Investing
Activities:
Expenditures for property, plant and
equipment and other long-term assets......... (9.7) (26.8) (28.5) -- (65.0)
Cash Provided From (Used By) Financing
Activities:
Proceeds from issuance of long-term debt........ 236.0 -- -- -- 236.0
Principal payments on long-term debt............ (13.3) (1.6) (7.2) -- (22.1)
Decrease in short-term debt..................... (24.7) (0.8) (6.6) -- (32.1)
Fees paid for debt issuance and other securities (14.2) -- -- -- (14.2)
Change in intercompany accounts................. (155.5) (12.0) 167.5 -- --
Sale of accounts receivable under securitization (48.2) -- -- -- (48.2)
Dividends....................................... (0.7) -- -- -- (0.7)
Other........................................... 3.0 -- -- -- 3.0
------ ------ ------ ------ ------
Net Cash Provided From (Used By)
Financing Activities.................... (17.6) (14.4) 153.7 -- 121.7
------ ------ ------ ------ ------
Net Decrease in Cash and Equivalents....... $ (6.8) $ (1.8) $(15.6) $ -- $(24.2)
====== ====== ====== ====== ======
-19-
Federal-Mogul Corporation
Notes to Consolidated Financial Statements
Unaudited Consolidating Condensed Statement of Cash Flows
Three Months Ended March 31, 2000
(Millions of Dollars)
(Unconsolidated)
--------------------------------------
Guarantor Non-Guarantor
--------- -------------
Parent Subsidiaries Subsidiaries Eliminations Consolidated
-------- ------------ ------------ ------------ ------------
Net Cash Provided From (Used By)
Operating Activities............................ $ (153.2) $ 73.7 $(58.9) $ -- $(138.4)
Expenditures for property, plant and equipment
and other long-term assets................... (1.5) (31.8) (39.5) -- (72.8)
Other.............................................. -- -- 4.7 4.7
------- ------ ------ ------- -------
Net Cash Used By Investing Activities......... (1.5) (31.8) (34.8) -- (68.1)
Cash Provided From (Used By) Financing
Activities:
Proceeds from issuance of long-term debt........... 285.0 -- -- -- 285.0
Principal payments on long-term debt............... (11.5) (0.5) (5.2) -- (17.2)
Decrease in short-term debt........................ (16.9) (3.9) (3.0) -- (23.8)
Change in intercompany accounts.................... (77.9) (9.1) 87.0 -- --
Sale of accounts receivable under securitization... (31.0) -- -- -- (31.0)
Dividends.......................................... (1.0) -- -- -- (1.0)
Other.............................................. (1.7) -- 3.8 -- 2.1
------- ------ ------ ------- -------
Net Cash Provided From (Used By)
Financing Activities....................... 145.0 (13.5) 82.6 -- 214.1
------- ------ ------ ------- -------
Net Increase (Decrease) in Cash and
Equivalents................................ $ (9.7) $ 28.4 $(11.1) $ -- $ 7.6
======= ====== ====== ======= =======
-20-
Item 2. Management's Discussion and Analysis of Financial Condition and
---------------------------------------------------------------
Results of Operations
---------------------
OVERVIEW:
Federal-Mogul is an automotive parts manufacturer providing innovative
solutions and systems to global customers in the automotive, small engine,
heavy-duty and industrial markets. The Company manufactures engine bearings,
pistons, piston pins, rings, cylinder liners, camshafts, sintered products,
sealing systems, fuel systems, wipers, lighting, ignition, brake, friction and
chassis products. The Company's principal customers include many of the world's
original equipment ("OE") manufacturers of such vehicles and industrial
products. The Company also manufactures and supplies its products and related
parts to the aftermarket.
THREE MONTHS ENDED MARCH 31, 2001 COMPARED TO THREE MONTHS ENDED MARCH 31, 2000
RESULTS OF OPERATIONS
The following management's discussion and analysis of financial condition
and results of operation (MD&A) should be read in conjunction with the MD&A
included in our Annual Report on Form 10-K for the fiscal year ended December
31, 2000.
Net Sales
Net sales for the first quarter of 2001 were $1,450.7 million compared to
$1,643.7 million in the same quarter of 2000. Sales decreased primarily due to
weak North American vehicle production schedules, further softening of U.S.
aftermarket demand and year over year weakening of the Euro and British pound.
These decreases were slightly offset by an increase in OE volumes in Europe.
Americas/Asia Pacific: Net sales for the first quarter of 2001 decreased
15% to $936.7 million from $1,100.4 million in the same quarter of 2000.
Management attributes this decrease to lower OE production levels in North
America and further softening of aftermarket sales in North America.
Europe/Africa: Net sales for the first quarter of 2001 decreased 4% to
$514.0 million from $536.3 million in the same quarter of 2000. Management
attributes this decrease to the effects of foreign exchange on European
operations, which decreased sales 8%. This was partially off set by an increase
in OE volumes.
Gross Margin
Gross Margin was 21.0% for the first quarter of 2001 compared to 26.3% for
the same quarter in 2000. Management attributes the decrease to lower sales
volumes as mentioned above, changes in OE/aftermarket mix, and the effects of
foreign exchange. Gross margin was also negatively impacted by increased medical
benefit costs, amortization of losses on lower than expected returns on the
pension plans' assets and increased natural gas costs.
Selling, General and Administrative Expenses
Selling, general and administrative expenses as percent of net sales
increased to 15.8% for the first quarter of 2001 compared to 12.8% for the same
quarter of 2000. Management attributes this increase primarily to lower sales as
mentioned above and to increases in medical benefit costs, certain employee
incentive programs and professional fees associated with the Company's amended
bank facility and with the implementation of the investment strategy initiative.
Restructuring
In 2000, the Company began to implement, a global restructuring plan. The
primary purposes of this plan are to improve the Company's cost structure and
reduce non-productive assets. The significant activities that are part of the
2000 plan are as follows:
-21-
Consolidation of European Operations: The Company has developed plans to
take advantage of opportunities to achieve synergies in and consolidate
activities of its European operations. As part of these plans, four of its
manufacturing facilities will be closed or consolidated, and the operations that
were being performed within these facilities will be moved to other European
locations.
Consolidation of North American and South American Operations: The Company
has implemented a plan to consolidate certain manufacturing, distribution and
administrative functions in North and South America. As a result of these plans
the Company will close or consolidate 36 facilities, and the operations that
were being performed within these facilities will be moved to other North
American and South American locations.
Also during 2000, the Company began implementing a program to focus on six
global initiatives aimed at improving the operational efficiency of the
business. The SGI's are grouped into six strategic actions: Aftermarket
Rationalization, Facility Rationalization, Shared Services, Constraint
Management, Supply Chain Management and Investment Strategy. During 2001
management expects to refine this program and may incur additional restructuring
charges. As such, the aggregate annualized EBIT benefits of these actions have
not been determined.
During the first quarter of 2001, in connection with these programs, the
Company recognized $29.8 million of restructuring charges related to severance
and exit costs. Severance costs of $27.8 million included the planned
consolidation of the European friction business and the January 2001 salaried
employee reductions in North America and Europe. Total employee reductions are
expected to be approximately 1,000 of which 600 have been terminated as of March
31, 2001. Exit costs of $2.0 million are primarily comprised of planned
consolidation of the European friction business
Interest Expense
Interest expense was $83.8 million in the first quarter of 2001 compared to
$71.0 million for the same quarter of 2000. Management attributes this increase
to additional borrowings on the Company's Credit Facilities since March 31, 2000
and increased interest rates on its Credit Facility.
Income Tax Expense
The effective tax rate was 16.2% for the first quarter of 2001 compared to
59.7% for the same quarter of 2000. The effective tax rates differ from
statutory rates primarily due to non-deductible goodwill. Tax expense (benefit)
differs from current income taxes payable due to timing differences, including
asbestos. The Company expects that future income tax expense will continue to
differ from income taxes payable primarily due to temporary differences.
LITIGATION & ENVIRONMENTAL CONTINGENCIES
The Company is named in numerous lawsuits. For a summary of material
contingencies as a result of those lawsuits, refer to Note 4 of the Consolidated
Condensed Financial Statements, "Asbestos Liability and Legal Proceedings".
LIQUIDITY AND CAPITAL RESOURCES
Cash Flow Provided From (Used By) Operating Activities
Cash flow used by operating activities was $80.9 million in the first
quarter of 2001. Among the factors impacting operating cash flows were payments
related to asbestos of $88.3 million and restructuring and rationalization
reserves of $16.0 million, an increase in accounts receivable of $38.3 million,
and changes in other current liabilities and assets of $38.8 million. These
usages were partially offset by decreases in inventory of $9.1 million and
increases in accounts payable of $21.9 million.
Cash Flow Used By Investing Activities
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Capital expenditures of $76.3 million were made for property, plant and
equipment to implement process improvements, increase manufacturing capacity,
and new product introductions during the first quarter of 2001. These
expenduitures were offset by proceeds from the sales of certain buildings and
equipment of $11.3 million during the quarter.
The Company anticipates that 2001 capital expenditures, exclusive of
acquisitions and investments in affiliates, will be at the low end of a range of
$350 million to $380 million. The Company expects that funding for these
expenditures will be from operations and external sources as required.
Cash Flow Provided From Financing Activities
Cash flow provided from financing activities was $121.7 million for the
first quarter of 2001 primarily resulting from proceeds received from the
issuance of long-term debt of $236.0 million offset by principal payments on
long-term debt of $22.1 million and a decrease in accounts receivable
securitizations of $48.2 million and net short term borrowing of $32.1 million.
The Company's ability to obtain cash adequate to fund its needs depends
generally on the results of its operations, restructuring initiatives, amounts
and timing of asbestos payments and the availability of financing. Management
believes that cash flow from operations, in conjunction with borrowings from its
existing credit agreements, will be sufficient to meet current debt service
requirements, fund capital expenditures in the future and meet its asbestos
obligations. In the long term, the Company believes that the benefits from the
recently announced restructuring and SGI programs and changes to its asbestos
strategy along with financing available under its Senior Credit Agreements and
any future credit agreements will provide adequate long-term cash flows.
However, there can be no assurance in this regard or that the terms available
for any future financing, if required, would be favorable to the Company. Also
certain obligations, particularly asbestos obligations, can be impacted by
factors outside the Company's control. A significant increase in such
obligations or asbestos claims, could impair the Company's liquidity.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes to our exposures to market risk since
December 31, 2000.
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PART II - OTHER INFORMATION
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Item 1. Legal Proceedings
-----------------
(a) Contingencies. Note 4 to the Consolidated Condensed Financial
Statements, "Asbestos Liability and Legal Proceedings", that is
included in Part I of this report, is incorporated herein by
reference.
Item 6. Exhibits and Reports on Form
----------------------------
(a) Exhibits:
None
(b) Reports on Form 8-K:
(1) On January 17, 2001 the Company filed a Current Report on
Form 8-K to file the documentation executed in connection with
its Fourth Amended and Restated Credit Agreement, dated as of
December 29, 2000.
(2) On March 19, 2001 the Company filed a Current Report on Form
8-K to report the execution of an amendment to its Fourth Amended
and Restated Credit Agreement.
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: /s/ G. Michael Lynch
--------------------------------
G. Michael Lynch
Executive Vice President and Chief Financial Officer,
Principal Financial Officer
By: /s/ Michael L. Pape
--------------------------------
Michael L. Pape
Vice President and Controller,
Chief Accounting Officer
Dated: May 02, 2001
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