1
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------------
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
COMMISSION FILE NUMBER: 1-1511
-------------------------
FEDERAL-MOGUL CORPORATION
(Exact name of Registrant as specified in its charter)
MICHIGAN
(State or other jurisdiction of
incorporation or organization)
26555 NORTHWESTERN HIGHWAY
SOUTHFIELD, MICHIGAN
(Address of principal executive office)
38-0533580
(IRS Employer Identification No.)
48034
(Zip Code)
Registrant's telephone number including area code: (248) 354-7700
Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS
Common Stock and Rights to
Purchase Preferred Shares
NAME OF EACH EXCHANGE ON
WHICH REGISTERED
New York Stock Exchange
and Pacific Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: NONE
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 (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of
the Registrant was approximately $1,984,081,618 as of February 27, 1998 based on
the reported last sale price as published for the New York Stock Exchange --
Composite Transactions for such date.
The Registrant had 40,439,468 shares of common stock outstanding as of
February 27, 1998.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive Proxy Statement for its 1998 Annual
Meeting of Shareholders to be filed with the Securities and Exchange Commission
pursuant to Regulation 14A not later than April 30, 1998, are incorporated by
reference in Part III (Items 10, 11, 12 and 13) of this Report.
================================================================================
2
FORWARD-LOOKING STATEMENTS
CERTAIN STATEMENTS CONTAINED OR INCORPORATED IN THIS ANNUAL REPORT ON FORM
10-K, 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
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, THOSE RELATING TO THE COMPLETION OF THE
ACQUISITION OF T&N AND THE COMBINATION OF FEDERAL-MOGUL'S BUSINESS WITH THOSE OF
T&N AND FEL-PRO AND THE ANTICIPATED SYNERGIES AND OPERATING EFFICIENCIES AND
RESTRUCTURING CHARGES IN CONNECTION THEREWITH, CONDITIONS IN THE AUTOMOTIVE
COMPONENTS INDUSTRY, CERTAIN GLOBAL AND REGIONAL ECONOMIC CONDITIONS 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.
i
3
PART I
ITEM 1. BUSINESS.
OVERVIEW
Federal-Mogul Corporation founded in 1899 and incorporated in Michigan in
1924 (referred to herein as "Federal-Mogul" or the "Company"), is a global
manufacturer and distributor of a broad range of precision parts, primarily
vehicular components for automobiles and light trucks, heavy duty trucks, farm
and construction vehicles and industrial products. The Company manufactures
engine bearings, sealing systems, fuel systems, lighting products, pistons and
chassis products. The Company engineers and manufactures products for original
equipment ("OE") manufacturers, principally, the world's major manufacturers of
automobiles, light trucks, heavy duty trucks, farm and construction vehicles,
and industrial products. Federal-Mogul also manufactures and supplies its
products and related parts to the aftermarket (replacement parts).
During the first quarter of 1997, the Company announced the details of a
restructuring plan developed in 1996, which was intended to realign the
Company's growth strategy behind its core competencies of manufacturing,
engineering and distribution. Included as part of the restructuring plan was the
sale of 132 international retail operations throughout the world and the
consolidation of various manufacturing facilities, customer support functions
and European replacement market management functions.
As of December 31, 1997, the Company had completed substantially all of its
planned restructuring program, including the sale of a significant majority of
its international retail operations. With the restructuring behind it, the
Company has pursued its growth strategy by focusing efforts and resources on
complimentary acquisitions of manufacturing companies that will enhance its
product base and expand its global reach. Federal-Mogul has made a commitment to
expand its manufactured products to offer OE customers systems and modules. The
Company also intends to expand the global reach of its manufacturing operations
to follow the expansion of OE manufacturers into Latin America, Eastern Europe
and the Asian markets. The Company intends to couple its expansion of OE
business in new geographic markets with growth in global aftermarket sales.
In October 1997, the Company announced it made a cash offer to acquire all
of the outstanding common stock of T&N plc ("T&N") for 260 pence per share. The
offer valued T&N's issued share capital at approximately $2.4 billion. The
completion of this acquisition remains subject to applicable regulatory
approvals in the United States and Europe; however, the Company expects that the
closing will occur in March 1998. T&N, based in Manchester, England,
manufactures and supplies high technology engineered automotive components and
industrial materials including pistons, friction products, bearings, composites,
camshafts and sealing products. In 1997, T&N had sales of approximately $2.9
billion and operated 200 manufacturing locations in 24 countries, employing
approximately 28,000 people.
On February 24, 1998, the Company acquired Fel-Pro Incorporated
("Fel-Pro"), a privately-owned manufacturer headquartered in Skokie, Illinois,
for total consideration of $720 million, which included $225 million in equity
and $495 million in cash. In 1997, Fel-Pro had sales of approximately $500
million. Fel-Pro employs more than 2,700 people in 16 locations organized into
four business units; Gaskets, FP Diesel, FP Chemical Products, and FP
Performance. Gaskets is the largest business unit with approximately $350
million in sales in 1997.
The Fel-Pro acquisition and pending T&N acquisition are major steps toward
Federal-Mogul's strategic goal of developing global engine and sealing systems
for its OE customers. With the T&N acquisition, the Company will also acquire a
friction products line of business, which it views as another platform for
product expansion.
The Company's integrated operations are conducted under four operating
units: Powertrain Systems; Sealing Systems; General Products; and Worldwide
Aftermarket. The major product categories in Powertrain Systems include engine
bearings and piston products; Sealing Systems include dynamic seals and gaskets;
General Products include friction products, lighting products, fuel system
components, chassis products,
1
4
composites, camshafts, heat transfer products, powder metal products and
protective sleeving products; and Worldwide Aftermarket includes virtually all
automotive products sold in the aftermarket.
Federal-Mogul maintains technology centers in Europe and North America to
develop and provide advanced materials, products and manufacturing processes for
all of its manufacturing units.
The following table sets forth the Company's net sales by market segment
and geographic region as a percentage of total net sales.
YEAR ENDED
DECEMBER 31,
------------------------
1997 1996 1995
---- ---- ----
Original Equipment
Americas.................................................. 25% 22% 22%
International............................................. 9 9 9
Aftermarket
United States and Canada.................................. 39 37 39
International............................................. 27 30 27
Other(1)
United States and Canada.................................. -- -- 1
International............................................. -- 2 2
--- --- ---
100% 100% 100%
=== === ===
- -------------------------
(1) Sales of these products -- air bearing spindles, heavy-wall bearings, and
precision forged powdered metal parts -- are accounted for by the Company
primarily as OE sales for financial reporting purposes. The precision forged
powdered metal parts operation was sold in April 1995. In January 1997, the
Company sold its heavy-wall bearing divisions in Germany and Brazil.
The Company is now redirecting its efforts and resources to expand its core
competencies in manufacturing and distribution by growing the manufacturing base
globally while capitalizing on the aftermarket distribution network. Some of the
growth in connection with the new strategy is expected to come through
acquisitions which the Company will be exploring on an ongoing basis.
MANUFACTURED PRODUCTS
The Company manufactures the following vehicular and industrial components:
Engine Bearings -- The Company manufactures engine bearings, bushings and
washers, including bimetallic and trimetallic journal bearings (main, connecting
rod, thrust and tilting pad), bimetallic and trimetallic bushings and washers,
valve plates and labyrinth seals. These products are used in automotive and
light truck, heavy duty, industrial, marine, agricultural, and power generation
applications. These products are marketed under the brand names Federal-Mogul(R)
and Glyco(R).
Sealing Systems -- The Company manufactures a line of sealing products
consisting of oil seals, high technology precision gaskets, valve stem seals,
air conditioning compression seals, crank shaft seal carrier assemblies and
unipistons. Sealing products are used in the automotive and light truck, heavy
duty truck, agricultural, off-highway, railroad and industrial applications.
These products are marketed under the brand names National(R), Mather(R), and
Seal Technology Systems(R)(STS).
Lighting Products -- The Company manufactures lighting and safety products
consisting of clearance marker lamps, front, side and rear signal lamps, stop,
tail and turn lights, emergency lighting, turn signal switches and back-up
lamps. Lighting products are used in automotive, medium through heavy duty truck
and trailer, off-road, industrial and emergency applications. These products are
marketed under the brand name Signal-Stat(R).
2
5
Fuel System Components -- The Company manufactures a full line of fuel
pumps including mechanical fuel pumps, diesel lift pumps, electric fuel pumps,
electric fuel modules and hanger assemblies. These products are used in
automotive and light truck, heavy duty truck, marine, agricultural and
industrial applications. These products are marketed under the brand name
Carter(R).
Pistons -- The Company manufactures cast aluminum pistons for automotive,
light duty diesel and air-cooled engines. These products are marketed under the
brand name Sterling(R).
Chassis Products -- The Company manufactures chassis products including
clutch bearings, king pins and universal joints for automotive and light truck
applications. These products are marketed under the brand name Federal-Mogul(R).
ORIGINAL EQUIPMENT
The Company supplies OE customers with a wide variety of precision
engineered parts including engine bearings, oil seals, fuel system components,
lighting products, and pistons. The Company manufactures all of the products
that it sells to OE customers.
Customers consist primarily of automotive, heavy duty vehicle and farm and
industrial equipment manufacturers. In 1997, approximately 13% of the Company's
net sales were to the three major automotive manufacturers in the United States,
with General Motors Corporation accounting for approximately 6% of the Company's
net sales, Ford Motor Company accounting for approximately 5% of the Company's
net sales and Chrysler Corporation accounting for approximately 2% of the
Company's net sales. In addition, the Company sells OE products to most of the
major automotive manufacturers headquartered outside the United States. The
Weisbaden facility in Germany sells OE products to Volkswagen, Daimler-Benz and
BMW. The Company also sells Federal-Mogul engine bearings to Renault and Peugeot
in France and to Fiat in Italy. In addition, the Company sells a small amount of
OE products to certain Japanese manufacturers, including Nissan, certain Toyota
operations in the United States and Komatsu in Japan.
AFTERMARKET
The Company supplies a wide variety of aftermarket products, including
engine and transmission products (engine bearings, pistons, piston rings,
valves, camshafts, valve lifters, valvetrain parts, timing components and engine
kits, bushings and washers), ball and roller bearings, sealing devices (gaskets
and oil seals and other high performance specialty seals), lighting and
electrical components, and automotive fuel pumps, water pumps, oil pumps and
related systems. The Company also sells steering and suspension parts which
include such items as tie rod ends, ball joints, idler and pitman arms, center
links, constant velocity parts, rack and pinion assemblies, coil springs,
universal joints, engine mounts and alignment products.
Federal-Mogul sells aftermarket products under its own brand names such as
Federal-Mogul(R), Glyco(R), National(R), Mather(R), Carter(R), Sterling(R),
Signal-Stat(R) and Seal Technology Systems(R) (STS), as well as under brand
names for which it has long-term licenses such as TRW(R) and Sealed Power(R). It
also packages its products under third-party private brand labels such as
NAPA(R) and CARQUEST(R).
The Company's aftermarket business supplies approximately 150,000 part
numbers to almost 10,000 customers. Federal-Mogul's customers are located in
more than 90 countries around the world. For 1997, aftermarket net sales in the
United States and Canada represented 59% of total aftermarket net sales, with
net sales outside of the United States and Canada representing 41% of such
sales.
Domestic customers include independent warehouse distributors who
redistribute products to local parts suppliers called jobbers, industrial
bearing distributors, distributors of heavy duty vehicular parts, engine
rebuilders and retail parts stores. Internationally, the Company sells
aftermarket products to jobbers, local retail parts stores and independent
warehouse distributors. Aftermarket sales to jobbers and local retail parts
stores comprise a larger proportion of total international aftermarket sales
than of total domestic aftermarket sales.
3
6
Federal-Mogul's North American distribution centers in Jacksonville,
Alabama, LaGrange, Indiana, and Maysville, Kentucky (the "Distribution
Centers"), serve as the core of the Company's domestic aftermarket distribution
network. Products are shipped from these Distribution Centers to service centers
in the United States and Canada. For Latin American sales, products are shipped
through a facility in Weston, Florida to two international regional distribution
centers and 15 Latin American branches. For European sales, products are shipped
through Federal-Mogul's facility in Kontich, Belgium.
RESEARCH AND DEVELOPMENT
The Company's expertise in engineering and research and development ensures
that the latest technologies, processes and materials are considered in solving
problems for customers. Federal-Mogul provides its customers with real-time
engineering capabilities and design development in their home countries.
Research and development activities are conducted at the Company's major
research centers in Ann Arbor, Michigan; Wiesbaden; Germany; Logansport,
Indiana; Malden, Missouri; Cardiff, Wales; Hoisdorf, Germany; and Minoshima,
Japan. Each of the Company's operating units is engaged in various engineering
and research and development efforts working side by side with customers to
develop custom solutions unique to their needs.
Total expenditures for research and development activities were
approximately $13.1 million in 1997, $14.4 million in 1996 and $15.1 million in
1995. Expenditures for research and development have declined due to
consolidation of the lighting and fuel research centers and the sale of the
United States ball bearings manufacturing operations.
RECENT ACQUISITIONS AND DIVESTITURES
Acquisitions
On February 24, 1998, the Corporation announced the completion of its
acquisition of Fel-Pro Incorporated ("Fel-Pro"), a privately-owned manufacturer
headquartered in Skokie, Illinois for $720 million. The transaction involved
$225 million in equity and $495 million in cash. Fel-Pro is the premier gasket
manufacturer for the North American aftermarket and OE heavy duty market. In
1997, Fel-Pro had sales of approximately $500 million. The Company has more than
2,700 employees in 16 locations organized into four business units: Gaskets, FP
Diesel, FP Chemical Products, and FP Performance. Gasket sales for 1997 were
approximately $350 million and included cylinder head and molded rubber gaskets,
and marine and performance gaskets marketed under various brand names including
Permatorque Blue(R), Fel-Coprene(R), Print-O-Seal(R) and PermaDry Plus(R).
On October 16, 1997, the Corporation announced the terms of a recommended
cash offer by Federal-Mogul of 260 pence per share for all of the outstanding
common stock of T&N plc ("T&N"). The offer valued T&N's issued share capital at
approximately $2.4 billion. Management believes that Federal-Mogul's acquisition
of T&N will:
- create a highly competitive Tier I automotive supplier worldwide;
- expand its manufactured product portfolio to offer systems and
modules;
- enhance Federal-Mogul's position as a supplier of engine and
transmission products worldwide;
- reinforce Federal-Mogul's ability to provide a high quality service
to both its original equipment and aftermarket customers;
- extend Federal-Mogul's international reach and accelerate its
worldwide aftermarket growth; and
- create an organization that builds on the strength of the
leadership, expertise and working practices of both companies to further
improve efficiencies.
The T&N transaction is subject to regulatory approval and is expected to
close in March of 1998.
4
7
Divestitures and Closings
On February 10, 1998, the Company announced the divestiture of its minority
interest in Dichtungstechnik G. Bruss GmbH & Co. KG, a German manufacturer of
seals and gaskets. As part of this transaction, the Company increased its
ownership in a related U. S. partnership to 100%.
In Venezuela, Federal-Mogul has sold six retail stores to local companies,
closed two stores and is in negotiations with prospective buyers for the
remaining seven stores.
In Ecuador, Federal-Mogul is in negotiations with two parties for the sale
of three retail stores.
In Puerto Rico, two retail stores have been closed and other actions have
been taken to improve profitability. The Company will continue through 1998 to
pursue the sale of this operation while managing it for positive economic value
added ("EVA").
In December 1997, the U.S. service center network was streamlined to gain
greater value from Federal-Mogul's product distribution capabilities in the
aftermarket.
In December 1997, Federal-Mogul also completed the sale of its four retail
stores and one central distribution center in Chile to Inversiones Federal,
S.A., a Chilean corporation headquartered in Santiago, Chile. Federal-Mogul
entered into a supply and distribution arrangement with the buyer to serve the
Chilean market in the future.
In November 1997, Federal-Mogul announced the closure of aftermarket
distribution centers in Malaysia and Singapore. The Company also closed its
distribution center in Taiwan. Federal-Mogul will continue to maintain sales
offices in Singapore and Taiwan.
The Company withdrew from a retail-related joint venture initiative in
Russia during the fourth quarter of 1997 and expects to complete its withdrawal
from another joint venture in Israel by the end of the first quarter of 1998.
During 1997, the Company closed its aftermarket operations in Turkey,
Australia and South Africa.
SUPPLIERS
Federal-Mogul sells its manufactured parts as well as parts manufactured by
other manufacturers to the aftermarket. The products not manufactured by
Federal-Mogul are supplied by over 600 companies. In 1997, no outside supplier
of the Company provided products that accounted for more than 5% of the
Company's net sales.
In connection with the acquisition of the automotive aftermarket business
of TRW, Inc. ("TRW") in 1992, the Company and TRW entered into a Supply
Agreement for an initial term of 15 years (the "Supply Period"), pursuant to
which TRW agreed to supply the Company with parts manufactured by TRW and
distributed by the Company. During the first five years of the Supply Period
(the "Exclusive Period"), the Company is an exclusive distributor of such TRW
parts and thereafter will be a nonexclusive distributor for the remaining term
of the Supply Agreement, subject to certain exceptions. Thereafter, both the
Exclusive Period and the Supply Period are automatically renewable for one-year
periods and are terminable upon one year's notice by either party.
EMPLOYEE RELATIONS
On December 31, 1997, the Company had approximately 13,300 full-time
employees, of whom approximately 7,700 were employed in the United States.
Approximately 54% of the Company's United States employees are represented
by 4 unions. Approximately 44% of the Company's foreign employees are
represented by various unions. Each of the Company's unionized manufacturing
facilities has its own contract with its own expiration date, and as a result,
no contract expiration date affects more than one facility. The Company believes
its labor relations to be good.
5
8
ENVIRONMENTAL REGULATIONS
The Company's operations, in common with those of industry generally, are
subject to numerous existing and proposed laws and governmental regulations
designed to protect the environment, particularly regarding plant wastes and
emissions and solid waste disposal. Capital expenditures for property, plant and
equipment for environment control activities did not have a material impact on
the Company's financial position or results of operations in 1997 and are not
expected to have a material impact on the Company's financial position or
results of operations in 1998 or 1999.
RAW MATERIALS
The Company does not normally experience supply shortages of raw materials.
Certain of the Company's relationships with its long-term suppliers are
contractual. No outside supplier of the Company provided more than 5% of
products purchased.
BACKLOG
The majority of the Company's products are not on a backlog status. They
are produced from readily available materials and have a relatively short
manufacturing cycle. For products supplied by outside suppliers, the Company
generally purchases products from more than one source. The Company expects to
be capable of handling the anticipated 1998 sales volumes.
PATENTS AND LICENSES
The Company is committed to protecting its technology investments and
market share through an active and growing international patent portfolio. The
international patent portfolio is composed of a large number of foreign (non
U.S.) patents and pending patent applications which relate to a wide variety of
products and processes. In the aggregate, the Company's international patent
portfolio is of material importance to its business; however, the Company does
not consider any international patent or group of international patents relating
to a particular product or process to be of material importance when judged from
the standpoint of the business as a whole.
COMPETITION
The global vehicular parts business is highly competitive. The Company
competes with many of its customers that produce their own components as well as
with independent manufacturers and distributors of component parts in the United
States and abroad. In general, competition for such sales is based on price,
product quality, customer service and the breadth of products offered by a given
supplier. The Company has attempted to meet these competitive challenges through
more efficiently integrating its manufacturing and distribution operations,
expanding its product coverage within its core businesses, and expanding its
worldwide distribution network.
INFORMATION ABOUT INTERNATIONAL AND DOMESTIC OPERATIONS AND EXPORT SALES
The Company has both manufacturing and distribution facilities for its
products, principally in the United States, Europe, Latin America, Mexico and
Canada. Certain of these products, primarily engine bearings and oil seals, are
sold to international original equipment manufacturers and vehicular aftermarket
customers.
International operations are subject to certain risks inherent in carrying
on business abroad, including expropriation and nationalization, currency
exchange rate fluctuations and currency controls, and export and import
restrictions. The likelihood of such occurrences and their potential effect on
the Company vary from country to country and are unpredictable.
6
9
Original equipment and aftermarket sales by major geographical regions
were:
1997 1996 1995
---- ---- ----
(MILLIONS OF DOLLARS)
Original Equipment
Americas.................................................. $ 451.4 $ 449.1 $ 465.4
International............................................. 170.3 219.5 222.7
Aftermarket
United States and Canada.................................. 699.1 759.8 780.8
International............................................. 485.8 604.3 530.9
-------- -------- --------
Total Sales............................................ $1,806.6 $2,032.7 $1,999.8
======== ======== ========
Detailed results of operations and assets by geographic area for each of
the years ended December 31, 1997, 1996 and 1995 appear in Note 17 of Notes to
Consolidated Financial Statements contained in Item 8 of this Report.
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company are its elected officers, other than
its assistant officers. Set forth below are the names, ages, positions and
offices held, and a brief account of the business experience during the past 5
years of each executive officer.
RICHARD A. SNELL (56). Chairman of the Board, Chief Executive Officer and
President, Federal-Mogul Corporation. Mr. Snell has served as Chairman of the
Board, Chief Executive Officer and President and a director of the Corporation
since November 1996. He also serves as Chairman of the Executive and Finance
Committee and as a member of the Pension Committee. Mr. Snell was previously
employed by Tenneco, Inc., from November 1987 to November 1996, most recently
having served as President and Chief Executive Officer of Tenneco Automotive
from September 1993 until he was employed by the Corporation.
KEVIN W. BAIRD (36). Vice President -- Distribution and Logistics of the
Company since July 1996. Prior thereto, Mr. Baird was employed by the Company as
Vice President -- Worldwide Aftermarket Operations from October 1995 to July
1996; Plant Manager of the Company's Frankfort, Indiana and Van Wert, Ohio
plants from September 1993 to October 1995; and Product Line Manager for the
Company's Van Wert, Ohio and Summerton, South Carolina plants from September
1990 to September 1993. He first became an executive officer in 1996.
DAVID A. BOZYNSKI (43). Vice President and Treasurer since April 1996.
Prior thereto, Mr. Bozynski was employed by Unisys Corporation as Vice President
and Assistant Treasurer, from October 1994 to April 1996; Vice President,
Finance -- Lines of Business from April 1993 to September 1993; and Vice
President, Corporate Business Analysis, March 1992 to April 1993. He first
became an executive officer in 1996.
JAMES B. CARANO (48). Vice President and General Manager -- Latin America
since 1995; Vice President and Controller, December 1992 to March 1995;
International Distribution Manager -- Port Everglades, Florida, February 1990 to
November 1992. He first became an executive officer in 1992.
ROBERT F. EGAN (51). Vice President, Distributor Sales -- Aftermarket since
October 1996; Vice President, Automotive Sales -- Aftermarket from December 1993
to October 1996; Vice President, Automotive Sales -- Worldwide Aftermarket
Operation, November 1992 to December 1993; National Sales Manager, Automotive
Aftermarket -- Worldwide Aftermarket Operation May 1985 to November 1992. He
first became an executive officer in 1993.
CHARLES B. GRANT (53). Vice President -- Corporate Development since
December 1992; Vice President and Controller, May 1988 to December 1992. He
first became an executive officer in 1985.
ALAN C. JOHNSON (49). Executive Vice President since February 1997; Vice
President and President, Operations from April 1996 to February 1997; Vice
President and President, Worldwide Operations from January 1996 to April 1996;
Vice President and President, Worldwide Manufacturing Operation from
7
10
February 1995 until January 1996; Vice President, Powertrain Operations --
Americas from December 1993 until February 1995; Vice President and General
Manager -- Seal Operations, November 1992 to December 1993; General Manager --
Oil Seal Operations, January 1990 to November 1992. He first became an executive
officer in 1993.
DIANE L. KAYE (47). Vice President, General Counsel and Secretary since
April 1995. Prior thereto, Divisional Counsel, Buick Motor Division and Cadillac
Motor Car Division, General Motors Corporation from April 1990 to April 1995.
She first became an executive officer in 1995.
JEFF J. O'NEILL (41). Vice President -- Marketing since July 1997. Prior
thereto Mr. O'Neill served as business director -- Quaker Snacks with The Quaker
Oats Company. During his 17 years with The Quaker Oats Company he worked both in
the U.S. and Canada. He first became an executive officer at Federal-Mogul in
1997.
RICHARD P. RANDAZZO (54). Vice President -- Human Resources since January
1997. Prior thereto, Senior Vice President -- Human Resources of Nextel
Communications, Inc. from December 1994 to December 1996, and Senior Vice
President, Human Resources -- Americas Region of Asea Brown Boveri, Inc.,
December 1990 to December 1994. He first became an executive officer in 1997.
THOMAS W. RYAN (51). Senior Vice President and Chief Financial Officer
since February 1997. Prior thereto, Chief Financial Officer of Tenneco
Automotive, a division of Tenneco, Inc. from January 1995 to February 1997, and
Vice President, Treasurer and Controller of A. O. Smith Corporation from March
1985 to January 1995. He first became a Federal-Mogul executive officer in 1997.
WILHELM A. SCHMELZER (57). Vice President and Group Executive -- Engine and
Transmission Products since April 1995; Vice President and Group Executive -- E
& T Products -- Europe, April 1993 to April 1995; Vice President and Group
Executive -- Engine and Transmission Products Group -- Europe, January 1992 to
April 1993. He first became an executive officer in 1992.
MICHAEL L. SCHULTZ (50). Vice President and General Manager -- North
American Aftermarket Sales and Marketing since December 1995; Vice President,
Marketing -- Worldwide Aftermarket, December 1994 to December 1995; Eastern Zone
Sales Manager, November 1992 to December 1994. Mr. Schultz was Vice President of
Sales, North America for TRW Inc. before joining the Company in 1992. He first
became an executive officer in 1995.
KENNETH P. SLABY (46). Vice President and Controller since April 1996.
Prior thereto, Manager -- Financial Operations for the global silicones business
of General Electric Company, November 1990 to April 1996. He first became an
executive officer in 1996.
JAMES J. ZAMOYSKI (51). Vice President -- Strategic Planning since June
1997; Vice President and General Manager, April 1995 to June 1997; Worldwide
Aftermarket Operation -- International, November 1993 to April 1996; General
Manager, Worldwide Aftermarket -- Distribution and Logistics, August 1991 to
November 1993. He first became an executive officer in 1980.
Generally, officers of the Company are elected at the time of the Annual
Meeting of Shareholders, but the Board also elects officers at various other
times during the year. Each officer holds office until his or her successor is
elected or appointed or until his or her resignation or removal.
8
11
ITEM 2. PROPERTIES.
The Company conducts its business from its World Headquarters complex in
Southfield, Michigan, which is leased pursuant to a sale/leaseback arrangement.
The principal manufacturing and other materially important physical properties
of the Company at December 31, 1997, are listed below. All properties are owned
in fee except where otherwise noted.
A. Manufacturing Facilities.
NO. OF SQ. FT.
FACILITIES AT 12/31/97
---------- -----------
NORTH AMERICAN MANUFACTURING FACILITIES
Frankfort, Indiana.......................................... 1 179,350
Milan, Michigan............................................. 1 80,800
Van Wert, Ohio.............................................. 1 195,864
Blacksburg, Virginia........................................ 1 226,000
Greenville, Michigan........................................ 1 210,000
Logansport, Indiana......................................... 1 166,000
Malden, Missouri(1)......................................... 1 123,280
Mooresville, Indiana........................................ 1 65,944
St. Johns, Michigan......................................... 1 262,000
Puebla, Mexico.............................................. 1 100,571
Mexico City, Mexico......................................... 2 153,136
Juarez, Mexico(1)........................................... 1 102,885
Summerton, South Carolina................................... 1 136,000
-- ---------
14 2,001,830
-- ---------
INTERNATIONAL MANUFACTURING FACILITIES
Cuorgne, Italy.............................................. 1 114,900
Gonnet, Argentina........................................... 1 49,252
San Martin, Argentina....................................... 1 5,638
Orleans, France............................................. 1 130,046
Wiesbaden, Germany.......................................... 1 837,900
Cardiff, Wales.............................................. 1 151,200
San Luis, Argentina......................................... 2 6,400
-- ---------
8 1,295,336
-- ---------
Total Manufacturing Facilities......................... 22 3,297,166
== =========
- -------------------------
(1) Leased by the Company and accounted for as an operating lease. The Company
believes that these leases could be renewed or comparable facilities could
be obtained without materially affecting operations.
All owned and leased properties are well maintained and equipped for the
purposes for which they are used. The Company believes that its facilities
are suitable and adequate for the operations involved.
B. Aftermarket Warehouses. The Company operates 82 warehouses and
distribution centers of which 62 are leased. In addition, 2 warehouses are
financed and leased through the issuance of industrial revenue bonds. Certain of
these warehouses will be closed or consolidated in connection with the
integration of T&N and Fel-Pro.
C. Retail Properties. The Company leases 13 facilities in Venezuela, 6
facilities in Panama, 41 facilities in Puerto Rico and 3 facilities in Ecuador.
The Company expects to dispose of or close these facilities in connection with
the completion of its planned sales of its international retail operations.
All owned and leased properties are well maintained and equipped for the
purposes for which they are used. The Company believes that its facilities are
suitable and adequate for the operations involved.
9
12
ITEM 3. LEGAL PROCEEDINGS
The Company is one of a large number of defendants in a number of lawsuits
brought by claimants alleging injury due to exposure to asbestos. The Company is
defending all such claims vigorously and believes that it has substantial
defenses to liability and adequate insurance coverage for its defense costs.
While the outcome of litigation cannot be predicted with certainty, after
consulting with the office of the Company's general counsel, management believes
that asbestos claims pending against Federal-Mogul as of December 31, 1997 will
not have a material effect on the Company's financial position.
The Company is involved in various other legal actions and claims. After
taking into consideration legal counsel's evaluation of such actions, management
is of the opinion that their outcomes are not reasonably likely to have a
material adverse effect on the Company's financial position.
For information respecting lawsuits concerning environmental matters to
which the Company is a party, see "Item 7. Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Environmental and Legal
Matters".
There were no material legal proceedings which were terminated during the
fourth quarter of 1997.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS.
No matter was submitted to a vote of security holders through the
solicitation of proxies or otherwise during the fourth quarter of 1997.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
The Company's common stock is listed on the New York Stock Exchange and the
Pacific Exchange under the trading symbol FMO. The approximate number of
shareholders of record of the Company's common stock at February 27, 1998 was
9,207. The following table sets forth the high and low sales prices of the
Company's common stock for each calendar quarter as reported on the New York
Stock Exchange-Composite Tape for the last two years:
1997 1996
---------------- ----------------
QUARTER HIGH LOW HIGH LOW
------- ---- --- ---- ---
First......................................... $26.75 $21.63 $20.88 $17.38
Second........................................ 35.38 24.50 19.88 17.88
Third......................................... 39.94 32.75 22.50 16.25
Fourth........................................ 47.63 36.75 24.50 20.38
The closing price of the Company's common stock as reported on the New York
Stock Exchange-Composite Tape on February 27, 1998 was $49.063.
Quarterly dividends of $.12 per common share were declared during 1997 and
1996. In February 1998, the Company's Board of Directors declared a quarterly
dividend of $.12 per common share. This was the 248th consecutive quarterly
dividend declared by the Company. The Company's dividend policy is under
consideration, and there can be no assurance that dividends at the current rate,
or that any dividends, will be paid in the future.
10
13
ITEM 6. SELECTED FINANCIAL DATA
The following table presents information from the Company's consolidated
financial statements for the five years ended December 31, 1997. This
information should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations," and the "Financial
Statements and Supplementary Data."
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(MILLIONS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
CONSOLIDATED STATEMENT OF OPERATIONS DATA
Net sales................................. $ 1,806.6 $ 2,032.7 $ 1,999.8 $ 1,889.5 $ 1,575.5
Costs and expenses........................ (1,703.7)(1) (2,258.0)(2) (2,000.7)(3) (1,795.5) (1,523.1)(4)
Other income (expense).................... (3.4) (3.4) (2.4) (2.5) 4.0
Income tax (expense) benefit.............. (27.5) 22.4 (2.5) (31.8) (19.5)
--------- --------- --------- --------- ---------
Net earnings (loss) before extraordinary
item.................................... 72.0 (206.3) (5.8) 59.7 36.9
Extraordinary item -- loss on early
retirement of debt, net of applicable
income tax benefit...................... (2.6) -- -- -- --
--------- --------- --------- --------- ---------
Net earnings (loss)....................... $ 69.4 $ (206.3) $ (5.8) $ 59.7 $ 36.9
========= ========= ========= ========= =========
COMMON SHARE SUMMARY (DILUTED)
Average shares and equivalents outstanding
(in thousands).......................... 41,854 34,659 34,642 41,800 33,900
Earnings (loss) per share:
Before extraordinary item............... $ 1.67 $ (6.20) $ (.42) $ 1.38 $ 1.02
Extraordinary item -- loss on early
retirement of debt, net of applicable
income
tax benefit........................... (.06) -- -- -- --
--------- --------- --------- --------- ---------
Net earnings (loss) per share............. $ 1.61 $ (6.20) $ (.42) 1.38 1.02
========= ========= ========= ========= =========
Dividends declared per share.............. $ .48 $ .48 $ .48 $ .48 $ .48
========= ========= ========= ========= =========
CONSOLIDATED BALANCE SHEET DATA
Total assets.............................. $ 1,802.1 $ 1,455.2 $ 1,701.1 $ 1,481.7 $ 1,300.2
Short-term debt(5)........................ 28.6 280.1 111.9 74.0 39.2
Long-term debt............................ 273.1 209.6 481.5 319.4 382.5
Shareholders' equity...................... 369.3 318.5 550.3 588.5 366.0
OTHER FINANCIAL INFORMATION
Net cash provided from (used by) operating
activities.............................. $ 215.7 $ 149.0 $ (34.7) $ 24.3 $ 43.5
Expenditures for property, plant,
equipment and other long term assets.... 49.7 54.2 78.5 74.9 60.0
Depreciation and amortization expense..... 52.8 63.7 61.0 55.7 50.7
- -------------------------
(1) Includes $1.1 million for a net restructuring credit, a $2.4 million charge
for an adjustment of assets held for sale to fair value and other long lived
assets, a $1.6 million credit for reengineering and other related charges,
and a $10.5 million net charge related to the British pound currency option.
(2) Includes $57.6 million for a restructuring charge, $151.3 million for
adjustment of assets held for sale to fair value and other long lived assets
and $11.4 million relating to reengineering and other related charges.
(3) Includes $26.9 million for restructuring charges, $51.8 million for
adjustment of assets held for sale to fair value and other long lived assets
and $13.9 million relating to reengineering and other related charges.
(4) Includes $19.2 million for a restructuring charge.
(5) Includes current maturities of long-term debt (see Note 10 to the
consolidated financial statements).
11
14
MANAGEMENT'S DISCUSSION AND ANALYSIS
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Overview
Federal-Mogul Corporation (the Company) is a global manufacturer and
distributor of a broad range of non-discretionary parts primarily for
automobiles, light trucks, heavy trucks, farm and construction vehicles. During
1997, the Company initiated an action plan to expand its manufacturing product
offerings in related product lines to provide system approaches and to grow
internationally to supply its original equipment customers in new markets.
Significant components of the Company's action plan include the divestiture of
under-performing assets and the pursuit of synergistic acquisitions that will
build on core product lines.
T&N plc Transaction
In October 1997, the Company announced it made a cash offer to acquire all
the outstanding common stock of T&N plc (T&N) for 260 pence per share. The offer
valued T&N's issued share capital at approximately $2.4 billion. On January 6,
1998, the Company's offer to acquire all of the outstanding common stock of T&N
was declared unconditional as to acceptances. By the second closing date under
the offer, January 2, 1998, valid acceptances of the offer had been received for
approximately 95% of the entire issued share capital of T&N.
T&N, based in Manchester, England, manufactures and supplies high
technology engineered automotive components and industrial materials including
pistons, friction products, bearings, composites, camshafts and sealing
products. In 1997, T&N had sales of approximately $2.9 billion and operated 200
manufacturing locations in 24 countries, employing approximately 28,000 people.
The Company will fund the T&N transaction through a bridge facility
provided by a reputable financial institution. Subsequent to the planned T&N
acquisition, the Company intends to put in place a permanent capital structure
with an appropriate combination of equity and debt.
The offer is subject to various conditions customary in the United Kingdom,
including the receipt of all applicable regulatory approvals in the United
States and Europe. As part of the acquisition process, certain financing,
professional and other related fees approximating $28 million had been
capitalized as of December 31, 1997. Management expects the T&N transaction to
close in the first quarter of 1998; however, in the event the acquisition is not
completed, these fees would be charged to operations and would materially impact
earnings at that time. In addition, the Company may elect to accelerate payment
of certain portions of the bridge facility, which would result in an
extraordinary charge due to the write-off of the financing costs associated with
the early retirement of debt. In addition, the Company purchased a foreign
currency option to cap the effect of potential unfavorable fluctuations in the
British pound/U.S. dollar exchange rate (see Foreign Currency and Commodity
Contracts, described later in this section).
Fel-Pro Incorporated Transaction
In addition on February 24, 1998 the Company acquired Fel-Pro Incorporated
(Fel-Pro), a privately-owned manufacturer headquartered in Skokie, Illinois, for
total consideration of $720 million, which includes $225 million in equity and
$495 million in cash. The $495 million in cash was primarily provided through
available borrowings on the $350 million multicurrency revolver. The remaining
consideration paid was through the issuance of promissory notes.
In 1997, Fel-Pro had sales of approximately $500 million. Fel-Pro employs
more than 2,700 people in 16 locations organized into four business units:
Gaskets, FP Diesel, FP Chemical Products and FP Performance. Gaskets is the
largest business unit with approximately $350 million in sales in 1997.
12
15
MANAGEMENT'S DISCUSSION AND ANALYSIS -- CONTINUED
Management believes the planned acquisition of T&N and the acquisition of
Fel-Pro will:
- create a highly competitive Tier 1 automotive supplier worldwide;
- expand its manufactured product portfolio to offer systems and
modules;
- enhance the Company's position as a supplier of engine and
transmission products worldwide;
- reinforce the Company's ability to provide a high quality service to
both its original equipment and aftermarket customers; and
- extend the Company's international reach and accelerate its
worldwide aftermarket growth.
Upon completion of the T&N and Fel-Pro acquisitions, the Company expects to
have annual sales of approximately $5 billion.
Unless otherwise indicated, the remainder of the discussion and analysis
pertains only to the results of operations the Company had in place as of
December 31, 1997.
Restructuring Actions Update
During 1997, the following actions related to the significant 1996
restructuring plan, described later in this section, were completed. The
Company:
- sold its aftermarket operations in Turkey, Australia, South Africa
and Chile. The Company also closed international aftermarket distribution
centers in Malaysia and Singapore. In total, the Company divested 72
international retail aftermarket operations and sold or restructured 25
wholesale aftermarket operations. Net sales for international aftermarket
operations divested in 1997 approximated $70 million, $186 million and $193
million in 1997, 1996 and 1995, respectively;
- closed its Leiters Ford, Indiana manufacturing facility and
consolidated its lighting products operations in Juarez, Mexico;
- consolidated certain of its North American warehouse facilities;
- consolidated its customer support functions previously housed in
Phoenix, Arizona into the Company's Southfield headquarters;
- consolidated its European aftermarket management functions in
Geneva, Switzerland into the Wiesbaden, Germany manufacturing headquarters;
and
- streamlined certain of its administrative and operational staff
functions worldwide.
Primarily due to the planned 1998 acquisitions of T&N and Fel-Pro, the
Company elected not to fully implement the following actions under the 1996
restructuring plan:
- Reductions to the operational and administrative staff were not made
to the extent originally planned;
- Reconfiguration of the North American distribution network was
altered to accommodate the planned integration of T&N and Fel-Pro
aftermarket operations;
- Relocation of certain European manufacturing product lines to lower
cost areas within Europe and related workforce reductions did not take
place. Management of the Company decided not to pursue this action
primarily in anticipation of the integration of future acquisitions.
By the end of the first quarter of 1998, the Company expects to have
successfully exited all of its retail businesses, except for Puerto Rico where
the Company continues to seek a buyer.
The Company expects to incur additional restructuring charges in the future
to implement its corporate strategy, specifically related to the planned
acquisition of T&N and the acquisition of Fel-Pro, although the
13
16
MANAGEMENT'S DISCUSSION AND ANALYSIS -- CONTINUED
specific actions have not been determined and the precise amounts have not been
established. While the charges relating to these restructuring actions will
decrease net income in the year incurred, these restructuring actions are
projected to decrease operating costs, thereby enhancing the profitability of
the Company in future years. The restructuring charges expected to be incurred
in 1998 are anticipated to be in excess of $100 million for T&N and in excess of
$15 million for Fel-Pro.
RESULTS OF OPERATIONS
Net Sales
Consolidated net sales decreased 11.1% in 1997, primarily due to the
divestiture of certain international retail and wholesale operations, the sale
of the heavy wall bearings operations in Brazil and Germany, the sale of the
United States ball bearing business and continued softness in the North American
aftermarket business. These decreases were partially offset by certain volume
increases primarily in the original equipment business.
Original equipment and aftermarket sales were:
1997 1996 1995
---- ---- ----
(MILLIONS OF DOLLARS)
ORIGINAL EQUIPMENT:
Americas.................................................. $ 451.4 $ 449.1 $ 465.4
International............................................. 170.3 219.5 222.7
AFTERMARKET:
United States and Canada.................................. 699.1 759.8 780.8
International............................................. 485.8 604.3 530.9
-------- -------- --------
Total sales............................................ $1,806.6 $2,032.7 $1,999.8
======== ======== ========
Original equipment business sales in the Americas were flat in 1997 as
compared to 1996. However, excluding the effect of the Company's divestitures of
its electrical products business in September 1996 and its United States ball
bearing operations in November 1996, net sales increased 15.7% in 1997 compared
to 1996. Management attributes this increase primarily to strong 1997 sales in
its sealing products division. Sales decreased in 1996 as compared to 1995 due
to the sale of the Precision Forged Products Division in April 1995 and the 1996
sales of the electrical products business and the United States ball bearings
manufacturing operations, offset slightly by the acquisition of Seal Technology
Systems Limited in September 1995. Excluding the effect of these acquisitions
and divestitures, sales increased 2.7% in 1996.
International original equipment business sales decreased in 1997 as
compared to 1996 due to the effects of exchange rate fluctuations and the
divestiture of the heavy wall bearing operations in Germany and Brazil completed
on January 2, 1997. Excluding the effects of exchange rate fluctuations and the
divestiture, sales increased 11.7%. Management attributes this increase to
strong customer demand for sputter bearings and Glycodur material products. In
1996, sales decreased as compared to 1995 due to the Company's decision to exit
some conventional engine bearing business that did not meet appropriate
profitability levels.
North American aftermarket sales decreased in 1997 as compared to 1996 due
to continued weak sales in engine products. Sales decreased in 1996 as compared
to 1995 primarily due to the elimination of special extended payment terms.
International aftermarket business sales in 1997 as compared to 1996
decreased primarily due to the effects of foreign exchange fluctuations and the
1997 divestitures of Turkey, Australia, South Africa and Chile. Excluding the
effects of exchange and 1997 divestitures, sales were essentially flat. In 1996,
sales increased as compared to 1995 due to the full year impact of the
acquisitions of Bertolotti in June 1995 and Centropiezas in September 1995, and
to a lesser extent, volume and pricing increases in Mexico, increased sales
volume in Australia and new local operations in Brazil. These increases were
partially offset by
14
17
MANAGEMENT'S DISCUSSION AND ANALYSIS -- CONTINUED
$21 million resulting from the devaluation of the South African rand and a
decrease in Venezuela due to a recession.
Original equipment sales as a percentage of total sales of the Company
increased to 34.4% in 1997 from 32.8% in 1996, with a corresponding decrease in
aftermarket sales. This shift in 1997 reflects the Company's pursuit and
implementation of its strategy to focus on manufacturing and distribution, as
demonstrated by the previously discussed 1997 divestitures and planned
acquisitions. Previously, as the Company was implementing its retail growth
strategy, original equipment sales as a percentage of total sales of the Company
decreased to 32.8% in 1996 from 34.4% in 1995, with a corresponding increase in
aftermarket sales.
Cost of Products Sold
Cost of products sold as a percent of net sales decreased to 76.5% in 1997
compared to 81.7% for 1996. The decrease is primarily due to the 1997
divestitures of less profitable operations and productivity improvements in the
North American aftermarket and the Americas original equipment business. In
addition, a portion of the 1997 decrease is attributable to 1996 third and
fourth quarter charges incurred of $8 million for customer incentive programs
and $13 million for excess and obsolete inventory (see Changes in Accounting
Estimates, described later in this section).
Cost of products sold as a percent of net sales increased to 81.7% in 1996
compared to 80.2% in 1995. The increase is primarily attributable to 1996 third
and fourth quarter charges incurred of $8 million for customer incentive
programs and $13 million for excess and obsolete inventory (see Changes in
Accounting Estimates).
Selling, General and Administrative Expenses
Selling, general and administration (SG&A) expenses as a percent of net
sales decreased to 15.8% for 1997 compared to 16.4% for 1996. In contrast, SG&A
expenses as a percent of net sales increased to 16.4% for 1996 compared to 15.0%
for 1995. The 1997 decrease and 1996 increase in SG&A as a percent of net sales
is primarily attributable to bad debt expense, customer incentive programs and
environmental and legal matters (see Changes In Accounting Estimates of $3
million for bad debt expense, $8 million for customer incentive programs and $9
million for environmental and legal matters) incurred in the third and fourth
quarters of 1996. In addition, the 1996 increase was partially due to higher
SG&A costs in the international aftermarket business.
Changes in Accounting Estimates
In 1996, the Company made certain changes in accounting estimates totaling
$51 million in the third and fourth quarters attributable to 1996 events and new
information becoming available. The changes in accounting estimates included the
following:
Customer Incentive Programs: The increase in the provision for customer
incentive programs of $18 million resulted from contractual changes implemented
primarily in the third and fourth quarters of 1996 with certain customers, new
sales programs, additional customer participation in these programs and current
experience with these programs.
Excess and Obsolete Inventory: Business volume growth remained below
expectations in 1996, principally in the third and fourth quarters, causing a
build up of certain inventories beyond anticipated demand. In addition, the
Company's strategic initiative to focus on its manufacturing business and divest
its retail and certain aftermarket businesses and the sale of the U.S. ball
bearings operations in the fourth quarter adversely affected the utility of the
North American aftermarket business inventory. As a result, the Company recorded
an additional $13 million provision for excess and obsolete inventory.
Bad Debts: The increase in the bad debt provision of $3 million was
principally attributable to the deterioration of account balances of numerous
low volume customers and termination of business with certain North American
aftermarket customers during 1996.
15
18
MANAGEMENT'S DISCUSSION AND ANALYSIS -- CONTINUED
Environmental and Legal Matters: The environmental and legal provision was
increased by $9 million due to the completion of environmental studies and
related analyses, new issues arising and changes in the status of other legal
matters.
Other: The remaining $8 million of changes in accounting estimates is
comprised of $1 million for changes in the workers' compensation reserve based
on worsening experience in outstanding claims in certain older policy years, $3
million for interest capitalization, $2 million to adjust estimates of
inventoriable costs and $2 million for other items.
Sales of Businesses
During 1997, the Company received $73.6 million in net cash proceeds from
the sale of its aftermarket operations in South Africa, Australia, and Chile,
and its heavy wall bearing operations in Germany and Brazil.
During 1996, the Company received $42.0 million in net cash proceeds from
the sale of its United States ball bearings and electrical products
manufacturing operations.
Except for the sale of the electrical products manufacturing operations,
sales of businesses in 1997 and 1996 relate to assets previously adjusted to
fair value (see Adjustment of Assets Held for Sale to Fair Value and Other Long
Lived Assets, described later in this section). Accordingly, no gain or loss was
recognized on the date of sale related to these transactions. In addition, no
gain or loss was recognized related to the sale of the electrical products
manufacturing operations.
During 1995, the Company sold its equity interest in Westwind Air Bearings,
Limited, recognizing a pretax gain of $16.2 million and its Precision Forged
Products Division for a pretax gain of $7.8 million.
Restructuring Charges
Primarily as a result of the amendments to the 1996 restructuring plan,
described previously in this section, the Company's 1997 operating results were
increased by $23.1 million for the reversal of previously recognized 1996 and
1995 restructuring charges. Offsetting this reversal is a $22.0 million charge
for new 1997 restructuring programs. The net impact on 1997 operations, as a
result of the restructuring activities, was a credit of $1.1 million. The 1997
charge includes $3.1 million for exiting certain European aftermarket product
lines and the related employment reductions, $6.8 million for termination of
certain European administrative and support personnel, $7.5 million for
additional exit and severance costs related to the Puerto Rican retail
operations, $2.6 million for consolidation and reconfiguration of the North
American aftermarket service branch network and $2.0 million for other actions.
The Company anticipates that the actions related to the 1997 restructuring plan
will be complete by the end of 1998, and that most of the severance and exit
costs will be paid in 1998.
In the fourth quarter of 1996, the Company recognized a restructuring
charge of $57.6 million for costs associated with employee severance, exit and
consolidation costs for 132 international retail operations and 30 wholesale
aftermarket operations, rationalization of European manufacturing operations,
consolidation of lighting products, consolidation or closure of certain North
American warehouse facilities, consolidation of customer support functions in
the United States and streamlining of administrative and operational staff
functions worldwide. The charge consists of $22.7 million for the sale of 132
international retail aftermarket and 30 wholesale aftermarket operations, $14.7
million for corporate employee severance costs, $7.7 million for the
rationalization of European manufacturing operations, $5.3 million for
consolidation or closure of certain North American warehouse facilities, $2.8
million for consolidation of customer support functions in the United States,
$2.5 million for closure of the Leiters Ford facility and $1.9 million for other
miscellaneous actions, including the consolidation of the European after market
market management function into the European manufacturing headquarters. The
Company's 1997 progress and actual implementation of the 1996 restructuring plan
resulted in 1997 operating results being increased by $20.8 million for
severance and
16
19
MANAGEMENT'S DISCUSSION AND ANALYSIS -- CONTINUED
$1.4 million of exit and consolidation costs being reversed. The Company expects
to pay out most of the remaining 1996 severance and exit costs in 1998.
Results of operations in the second and fourth quarters of 1995 include
restructuring charges of $6.1 million and $20.8 million, respectively. These
charges were comprised of $20.1 million for employee severance and $6.8 million
for exit costs and consolidation of certain facilities. The workforce reductions
and consolidation of facilities were completed as of December 31, 1996.
Operating results for 1997 were increased by $0.9 million relating to 1995 exit
costs being reversed. The Company expects to pay out the remaining 1995 exit
costs in 1998.
Reengineering and Other Related Charges
Operating results for 1997 include a credit of $1.6 million relating to
1996 reengineering and other related charges being reversed.
In 1996, the Company initiated an extensive effort to strategically review
its businesses and focus on its competencies manufacturing, engineering and
distribution. As a result of this process, the Company recognized a charge of
$11.4 million for professional fees and personnel costs related to the strategic
review of the Company and changes in management and related costs.
In 1995, the Company recognized a charge of $13.9 million for reengineering
and other costs. These costs included $7.0 million for professional fees and
personnel costs, and $6.9 million primarily for certain other non-recurring
costs relating to brand consolidation at the customer level of the Company's
Federal-Mogul(R), TRW(R) and Sealed Power(R) branded engine parts.
Adjustment of Assets Held for Sale to Fair Value and Other Long Lived Assets
The Company continually reviews all components of its businesses for
possible improvement of future profitability through acquisition, divestiture,
reengineering or restructuring. The Company also continually reviews and updates
its impairment reserves related to the divestiture of its remaining
international retail aftermarket operations and adjusts the reserve components
to approximate their net fair value.
In the fourth quarter of 1997, the Company recognized a charge of $2.4
million to write-down certain long lived assets to fair value. As of December
31, 1997, assets held for sale primarily include retail aftermarket operations
in Puerto Rico, Ecuador, Venezuela and Panama. By the end of the first quarter
of 1998, the Company expects to have successfully exited all of its retail
aftermarket businesses, except for Puerto Rico where the Company continues to
seek a buyer.
During 1996, management designed a restructuring plan to aggressively
improve the Company's cost structure, streamline operations and divest the
Company of underperforming assets. As part of this plan, the Company decided to
sell 132 international retail aftermarket operations, sell or restructure 30
wholesale aftermarket operations and consolidate a North American manufacturing
operation. The carrying value of assets held for sale was reduced to fair value
based on estimates of selling values less costs to sell. Selling values used to
determine the fair value of assets held for sale were determined using market
prices (i.e. valuation multiples) of comparable companies from other 1996
transactions. The resulting adjustment of $148.5 million to reduce assets held
for sale to fair value was recorded in the fourth quarter of 1996. As previously
described in this section, the Company made significant progress related to the
implementation of the 1996 restructuring plan. Also in 1996, based upon the
final sale, the Company recognized an additional writedown of $2.8 million to
the net asset value of the United States ball bearings operations. In 1995, the
Company decided to sell the ball bearings operations and reduced the carrying
value by $17.0 million to record assets held for sale at fair value.
In 1995, the Company also decided to sell its heavy wall bearing operations
in Germany and Brazil. The Company estimated the fair value of the businesses
held for sale based on discussions with prospective buyers, adjusted for selling
costs. The Company reduced its carrying value by $17 million to record assets
held for sale
17
20
MANAGEMENT'S DISCUSSION AND ANALYSIS -- CONTINUED
at fair value. The heavy wall bearing operations were sold in January 1997 for
net proceeds of $8.9 million, which approximated the carrying value of the
assets at December 31, 1996.
In addition, in 1995, the Company reduced the carrying value of certain
other impaired long-lived assets by $17.8 million to record them at fair value.
No further fair value adjustments were recorded for these assets in 1996 or
1997.
Net sales for all assets held for sale and adjusted to fair value
approximated $114 million, $335 million, and $322 million in 1997, 1996 and
1995, respectively. Net sales for the remaining retail aftermarket operations
held for sale at December 31, 1997 approximated $44 million, $48 million and $22
million in 1997, 1996 and 1995, respectively.
Interest Expense
Interest expense decreased $10.6 million in 1997 to $32.0 million. The
decrease was primarily due to a $188 million reduction of debt which resulted
from improvements in working capital and the sale of the South African and
Australian businesses. Although the Company decreased its debt by $104 million
from 1995 to 1996, interest expense increased $5.3 million in 1996 primarily due
to a higher average debt level than in 1995. Excluding the U.S. and European
revolving credit facilities, which were classified as short-term debt during
1996 and as long-term debt during 1995, the weighted average interest rate for
short-term debt increased to 10.9% for 1996 from 9.5% for 1995. The interest
rate on the U.S. and European revolving credit facilities at December 31, 1996
and 1995 was 6.1% and 6.2%, respectively.
Income Taxes
At December 31, 1997, the Company had deferred tax assets, net of a $44.4
million valuation allowance, of $140.5 million and deferred tax liabilities of
$75.9 million.
The net deferred tax asset of $64.6 million included the tax benefits of
$58.2 million related to the Company's postretirement benefit obligation at
December 31, 1997. The Company expects to realize the benefits associated with
this obligation over a period of 35 to 40 years.
The difference between the 1997 effective income tax rate and the statutory
tax rate is principally due to utilization of losses on foreign investment and
an income tax benefit related to the sales of the South African and Australian
businesses (refer also to Note 16 of the Consolidated Financial Statements).
LIQUIDITY AND CAPITAL RESOURCES
Cash flow from operations of $215.7 million in 1997 increased significantly
during 1997 primarily due to increased earnings. The Company also reduced
inventory from operations by $59.9 million in 1997. Inventory reductions in the
North American aftermarket business were primarily responsible for the decrease.
The decrease in North America aftermarket inventory is attributable to reduced
lead times while still maintaining availability of products and modifying safety
stock levels.
Cash flow used by investing activities of $5.5 million in 1997 include
$28.1 million for the British pound currency option, described later in this
section, and $2.4 million for other professional fees paid in anticipation of
the T&N acquisition. In addition, cash flows used by investing activities
include the receipt of $73.6 million in net proceeds from the 1997 divestitures.
Capital expenditures, excluding the T&N and Fel-Pro transactions, are
anticipated to be approximately $65 million in 1998, primarily for enhanced
manufacturing capabilities and process improvements.
Cash flow from 1997 financing activities were $298.1 million, an increase
of $420.9 million from 1996. The following events were primarily responsible for
the net increase for 1997:
Issuance of Preferred Securities of Affiliate: In December 1997, the
Company's financing trust completed a $575 million private issuance of
11,500,000 shares of 7% Trust Convertible Preferred Securities. The
18
21
MANAGEMENT'S DISCUSSION AND ANALYSIS -- CONTINUED
convertible preferred securities are redeemable at the Company's option, in
whole or in part, on or after December 6, 2000. All outstanding convertible
securities are required to be redeemed no later than December 1, 2027. The
Company intends to use the proceeds, net of $17.2 million in related fees, to
finance a portion of the proposed T&N transaction.
Issuance of Senior Notes: In April 1997, the Company issued a fully
subscribed $125 million debt offering of ten year 8.8% senior notes. Proceeds
from the offering were used to reduce the Company's short-term debt and the
early extinguishment of the private placement debt.
Extinguishment of Private Placement Debt: In the second quarter of 1997,
the Company retired $64.7 million in private placement debt. The early
retirement of this debt eliminated high coupon debt and potentially restrictive
covenants giving the Company greater financial flexibility in the future. In
addition, the early retirement of this debt involved a make whole payment that
resulted in a $4.1 million pretax ($2.6 million after tax) extraordinary loss.
Accounts Receivable Securitization: During 1997, the Company replaced an
existing accounts receivable securitization program with a new program which
provides up to $100 million of financing. On an ongoing basis, the Company sells
certain accounts receivable to a subsidiary of the Company, which then sells
such receivables, without recourse, to a master trust. Amounts sold under this
arrangement were $63.2 million as of December 31, 1997, and have been excluded
from the balance sheet. During 1997, cash payments totaling $31.8 million were
made to the master trust related to the Company's accounts receivable
securitization. These cash payments effectively increased the Company's
investment in the accounts receivable securitization.
Multicurrency Revolver: In June 1997, the Company entered into a new $350
million multicurrency revolving credit facility with a consortium of
international banks which matures in June 2002. The multicurrency revolving
credit facility replaced the existing U.S. and European revolving credit
facilities. The multicurrency revolving credit facility contains restrictive
covenants that, among other matters, require the Company to maintain certain
financial ratios. As of December 31, 1997, there were no borrowings outstanding
against the multicurrency revolving credit facility.
In December 1997, the Company entered into a $3.25 billion committed bank
facility with a reputable financial institution related to the proposed T&N
acquisition. The facility provides for up to $2.75 billion of senior debt and up
to $500 million of subordinated debt. This facility is contingent upon the
acquisition of T&N, and accordingly no amounts are outstanding as of December
31, 1997. Certain fees relating to this facility have been incurred and paid as
of December 31, 1997. Subsequent to the planned T&N acquisition, the Company
intends to put in place a permanent capital structure with an appropriate
combination of equity and debt.
The Company believes that cash flow from operations will continue to be
sufficient to meet its ongoing working capital requirements.
ENVIRONMENTAL MATTERS
The Company is a party to lawsuits filed in various jurisdictions alleging
claims pursuant to the Comprehensive Environmental Response Compensation and
Liability Act of 1980 (CERCLA) or other state or federal environmental laws. In
addition, the Company has been notified by the Environmental Protection Agency
and various state agencies that it may be a potentially responsible party (PRP)
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. Although these laws could impose joint and several
liability upon each party at any site, the potential exposure is expected to be
limited because at all sites other companies, generally including many large,
solvent public companies, have been named as PRPs. In addition, the Company has
identified certain present and former properties at which it may be responsible
for cleaning up environmental contamination.
19
22
MANAGEMENT'S DISCUSSION AND ANALYSIS -- CONTINUED
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 and
legal reserve was approximately $11 million at December 31, 1997 and $12 million
at December 31, 1996. Management believes that such accruals will be adequate to
cover the Company's estimated liability for its exposure in respect of such
matters.
FOREIGN CURRENCY AND COMMODITY CONTRACTS
In connection with the proposed T&N acquisition, the Company purchased for
$28.1 million a foreign currency option with a notional amount of $2.5 billion
to cap the effect of potential unfavorable fluctuations in the British
pound/U.S. dollar exchange rate. The cost of the option and its change in fair
value has been reflected in the results of operations in the fourth quarter of
1997. At December 31, 1997 the Company has recognized a net loss on this
transaction of $10.5 million.
The Company is subject to exposure to market risks from changes in foreign
exchange rates and raw material price fluctuations, derivative financial
instruments are utilized by the Company to reduce those risks. Except for the
British pound currency option discussed above, the Company does not hold or
issue derivative financial instruments for trading purposes.
Other than the British pound currency option discussed above, the Company
does not have foreign exchange forward or currency option contracts outstanding
at December 31, 1997.
In the first quarter of 1998, the Company settled the British pound
currency option, resulting in a pretax loss of $17.3 million. Also in the first
quarter of 1998, the Company entered into a forward contract to purchase 1.5
billion British pounds for a notional amount approximating $2.45 billion. The
forward contract expires in the first quarter of 1998.
OTHER MATTERS
Conversion of Series D Convertible Exchangeable Preferred Stock
In August 1997, the Company announced a call for the redemption of all its
outstanding $3.875 Series D Convertible Exchangeable Preferred Stock. These
preferred stockholders elected to convert each preferred share into 2.778 shares
of common stock. The Company issued 4.4 million shares of common stock in
exchange for all of the outstanding Series D convertible exchangeable preferred
stock.
Year 2000 Costs
The Year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. The Company has
established a team that has completed an awareness program and assessment
project to address the Year 2000 issue. In addition, the Board of Directors has
received status reports related to the Company's progress in addressing the Year
2000 issue. The Company has determined that it will be required to modify or
replace portions of its software so that its computer systems will properly
utilize dates beyond December 31, 1999. The Company has initiated remediation,
and is implementing the action plan to address the Year 2000 issue. The Company
presently believes that with modifications to existing software and conversions
to new software, the Year 2000 issue can be mitigated. However, if such
modifications and conversions are not made, or are not completed timely, the
Year 2000 issue could have a material impact on the operations of the Company.
The Company has initiated formal communications with a substantial majority
of its significant suppliers and large customers to determine their plans to
address the Year 2000 issue. While the Company expects a successful resolution
of all issues, there can be no guarantee that the systems of other companies on
which the Company's systems rely will be converted in a timely manner, or that a
failure to convert by a supplier or customer, or a conversion that is
incompatible with the Company's systems, would not have a material adverse
20
23
MANAGEMENT'S DISCUSSION AND ANALYSIS -- CONTINUED
effect on the Company. The Company has determined it has no exposure to
contingencies related to the Year 2000 issue for the products it has sold.
The Company has contracts in place with external resources and has
allocated internal resources to reprogram or replace, and test the software for
Year 2000 modifications. The Company plans to complete the Year 2000 project
within one year. The total cost of the Year 2000 project is estimated to be $17
million and is being funded through operating cash flows. Of the total project
cost, approximately $11 million is attributable to the purchase of new software
which will be capitalized. The remaining $6 million represents maintenance and
repair of existing systems and will be expensed as incurred. The Company expects
a substantial majority of the costs will be incurred in 1998, and any remaining
costs incurred in 1999 are expected to be immaterial. As of December 31, 1997,
the Company had incurred and expensed approximately $0.7 million related to the
completed awareness program and assessment project and the implementation of
their remediation plan.
The costs of the project and the date which the Company plans to complete
the Year 2000 modifications are based on management's best estimates, which were
derived utilizing numerous assumptions of future events including the continued
availability of certain resources, third party modification plans and other
factors. However, there can be no guarantee that these estimates will be
achieved and actual results could differ materially from those plans. Specific
factors that might cause such material differences include, but are not limited
to, the availability and cost of personnel trained in this area, the ability to
locate and correct all relevant computer codes and similar uncertainties.
As a result of the Company's due diligence related to the proposed T&N
acquisition and the Fel-Pro acquisition, the Company expects costs to address
the Year 2000 issue for Fel-Pro to be immaterial, and T&N costs for repair and
maintenance of existing systems are expected to approximate $8 million.
Divestiture of Minority Interest
In February 1998, the Company announced the divestiture of its minority
interest in G. Bruss GmBH & Co. KG, a German manufacturer of seals and gaskets.
As part of the divestiture agreement, the Company increased their ownership to
100% in the Summerton, South Carolina gasket business. The Company also received
cash and recognized a gain as a result of these transactions. The gain
recognized is not expected to be significant to 1998 first quarter operating
results.
Customer Reorganization
On February 2, 1998, APS Holding Corporation (APS), filed for
reorganization protection under Chapter 11 of the United States Bankruptcy Code.
As of the date of the Chapter 11 filing, the Company's total receivables with
APS approximated $10 million. APS has received a capital line of credit from a
reputable financial institution and is continuing business operations. The
Company continues to do business with APS on a cash in advance basis. Although
difficult to quantify based upon the uncertainty of the financial condition of
APS, the Company believes that net uncollectible receivables, if any, from APS
will be immaterial.
In addition, APS is a customer of Fel-Pro. The Company believes that the
allowance established by Fel-Pro prior to the acquisition of Fel-Pro related to
receivables from APS is adequate to cover any uncollectible amounts.
Effect of Accounting Pronouncements
In 1997, the Financial Accounting Standards Board issued Statement No. 130,
Reporting Comprehensive Income. This Statement establishes standards for the
reporting and display of comprehensive income and its components in a full set
of general purpose financial statements. Statement 130 is effective for fiscal
years beginning after December 15, 1997. Beginning in 1998, the Company will
provide the information relating to comprehensive income to conform to the
Statement 130 requirements.
21
24
MANAGEMENT'S DISCUSSION AND ANALYSIS -- CONTINUED
Also in 1997, the Financial Accounting Standards Board issued Statement No.
131, Disclosures about Segments of an Enterprise and Related Information. The
statement supersedes Financial Accounting Standards Board Statement No. 14 and
establishes standards for the way public business enterprises report selected
information about operating segments in annual reports and interim financial
reports issued to shareholders. Statement 131 is effective for fiscal years
beginning after December 15, 1997. For the year ended 1998, the Company will
provide financial and descriptive information about its reportable operating
segments to conform to the Statement 131 requirements. Management plans to
report the requirements of Statement 131 for the following operating segments:
sealing systems, powertrain systems and general products.
22
25
CONSOLIDATED STATEMENTS OF OPERATIONS
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
YEAR ENDED DECEMBER 31
--------------------------------
1997 1996 1995
---- ---- ----
(MILLIONS OF DOLLARS,
EXCEPT PER SHARE AMOUNT)
Net sales................................................... $1,806.6 $2,032.7 $1,999.8
Cost of products sold....................................... 1,381.8 1,660.5 1,602.2
-------- -------- --------
Gross margin................................................ 424.8 372.2 397.6
Selling, general and administrative expenses................ (286.2) (333.8) (299.3)
Gain on sales of businesses................................. -- -- 24.0
Restructuring (charges) credits............................. 1.1 (57.6) (26.9)
Reengineering and other related (charges) credits........... 1.6 (11.4) (13.9)
Adjustment of assets held for sale to fair value and other
long lived assets......................................... (2.4) (151.3) (51.8)
Interest expense............................................ (32.0) (42.6) (37.3)
Interest income............................................. 7.1 2.9 9.6
International currency exchange losses...................... (0.6) (3.7) (2.9)
British pound currency option cost, net..................... (10.5) -- --
Other expense, net.......................................... (3.4) (3.4) (2.4)
-------- -------- --------
Earnings (loss) before income taxes and extraordinary
item.............................................. 99.5 (228.7) (3.3)
Income tax expense (benefit)................................ 27.5 (22.4) 2.5
-------- -------- --------
Net Earnings (Loss) before Extraordinary Item........ 72.0 (206.3) (5.8)
======== ======== ========
Extraordinary item -- loss on early retirement of debt, net
of applicable income tax benefit.......................... (2.6) -- --
-------- -------- --------
Net Earnings (Loss).................................. 69.4 (206.3) (5.8)
Preferred dividends......................................... 5.5 8.7 8.9
-------- -------- --------
Net Earnings (Loss) Available to Common
Shareholders...................................... $ 63.9 $ (215.0) $ (14.7)
======== ======== ========
EARNINGS (LOSS) PER COMMON SHARE:
Income (loss) before extraordinary item................... $ 1.81 $ (6.20) $ (.42)
Extraordinary item........................................ (.07) -- --
-------- -------- --------
Net Earnings (Loss) Per Common Share................. $ 1.74 $ (6.20) $ (.42)
======== ======== ========
EARNINGS (LOSS) PER COMMON SHARE ASSUMING DILUTION:
Income (loss) before extraordinary item................... $ 1.67 $ (6.20) $ (.42)
Extraordinary item........................................ (.06) -- --
-------- -------- --------
Net Earnings (Loss) Per Common Share Assuming
Dilution.......................................... $ 1.61 $ (6.20) $ (.42)
======== ======== ========
See accompanying Notes to Consolidated Financial Statements.
23
26
CONSOLIDATED BALANCE SHEETS
DECEMBER 31
----------------------
1997 1996
---- ----
(MILLIONS OF DOLLARS)
ASSETS
Cash and equivalents........................................ $ 541.4 $ 33.1
Accounts receivable......................................... 158.9 204.3
Investment in accounts receivable securitization............ 48.7 27.0
Inventories................................................. 277.0 417.0
Prepaid expenses and income tax benefits.................... 113.2 81.5
-------- --------
Total current assets................................... 1,139.2 762.9
Property, plant and equipment............................... 313.9 350.3
Goodwill.................................................... 143.8 154.0
Other intangible assets..................................... 48.4 63.1
Business investments and other assets....................... 156.8 124.9
-------- --------
Total Assets........................................... $1,802.1 $1,455.2
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Short-term debt............................................. $ 28.6 $ 280.1
Accounts payable............................................ 102.3 142.7
Accrued compensation........................................ 36.8 37.6
Accrued customer incentives................................. 22.4 20.3
Restructuring reserves...................................... 31.5 55.2
Other accrued liabilities................................... 108.0 127.9
-------- --------
Total current liabilities.............................. 329.6 663.8
Long-term debt.............................................. 273.1 209.6
Postemployment benefits..................................... 190.9 207.1
Other accrued liabilities................................... 64.2 56.2
-------- --------
Total liabilities...................................... 857.8 1,136.7
Minority interest -- preferred securities of affiliate...... 575.0 --
SHAREHOLDERS' EQUITY
Series D preferred stock.................................... -- 76.6
Series C ESOP preferred stock............................... 49.0 53.1
Common stock................................................ 201.0 175.7
Additional paid-in capital.................................. 332.6 283.5
Accumulated deficit......................................... (123.6) (193.0)
Unearned ESOP compensation.................................. (21.8) (28.4)
Currency translation and other.............................. (67.9) (49.0)
-------- --------
Total Shareholders' Equity............................. 369.3 318.5
-------- --------
Total Liabilities and Shareholders' Equity............. $1,802.1 $1,455.2
======== ========
See accompanying Notes to Consolidated Financial Statements.
24
27
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31
-----------------------------
1997 1996 1995
---- ---- ----
(MILLIONS OF DOLLARS)
CASH PROVIDED FROM (USED BY) OPERATING ACTIVITIES
Net earnings (loss)....................................... $ 69.4 $(206.3) $ (5.8)
Adjustments to reconcile net earnings (loss) to net cash
provided from (used by) operating activities:
Depreciation and amortization.......................... 52.8 63.7 61.0
Gain on sales of businesses............................ -- -- (24.0)
Restructuring charges (credits)........................ (1.1) 57.6 26.9
Reengineering and other related charges (credits)...... (1.6) 11.4 13.9
Adjustment of assets held for sale to fair value and
other long lived assets.............................. 2.4 151.3 51.8
Vesting of restricted stock............................ 9.0 0.4 0.1
Loss on early retirement of debt....................... 4.1 -- --
British pound currency option cost, net................ 10.5 -- --
Deferred income taxes.................................. 13.0 (27.8) (16.2)
Postemployment benefits................................ (7.7) (2.0) 1.8
Decrease (increase) in accounts receivable............. 7.6 46.5 (5.0)
Decrease (increase) in inventories..................... 59.9 54.5 (103.9)
Increase (decrease) in accounts payable................ (19.5) (25.5) 7.2
Payments against restructuring and reengineering
reserves............................................. (26.2) (17.6) (19.4)
Increase (decrease) in current liabilities and other 43.1 42.8 (23.1)
------- ------- -------
Net Cash Provided From (Used By) Operating
Activities........................................... $ 215.7 $ 149.0 $ (34.7)
======= ======= =======
CASH PROVIDED FROM (USED BY) INVESTING ACTIVITIES
Expenditures for property, plant and equipment and other
long-term assets....................................... $ (49.7) $ (54.2) $ (78.5)
Acquisitions of businesses................................ -- (.3) (72.1)
Payments for rationalization of acquired businesses....... -- -- (7.3)
Proceeds from sales of business investments............... 73.6 42.0 48.5
Fees paid in anticipation of business acquisition......... (30.5) -- --
Other..................................................... 1.1 -- --
------- ------- -------
Net Cash Used By Investing Activities.................. $ (5.5) $ (12.5) $(109.4)
======= ======= =======
CASH PROVIDED FROM (USED BY) FINANCING ACTIVITIES
Issuance of common stock.................................. $ 14.2 $ .6 $ .2
Repurchase of common stock................................ -- -- (9.0)
Proceeds from issuance of long-term debt.................. 179.6 -- 166.2
Principal payments on long-term debt...................... (127.4) (29.4) (24.9)
Increase (decrease) in short-term debt.................... (235.8) (61.4) 33.7
Fees for early retirement of debt......................... (4.1) -- --
Fees paid for debt issuance............................... (25.6) -- --
Investment in accounts receivable securitization.......... (31.8) -- --
Issuance of preferred securities of affiliate............. 575.0 -- --
Fees paid for issuance of preferred securities of
affiliate.............................................. (17.2) -- --
Dividends................................................. (24.8) (26.9) (27.3)
Other..................................................... (4.0) (5.7) (.4)
------- ------- -------
Net Cash Provided From (Used By) Financing
Activities........................................... 298.1 (122.8) 138.5
------- ------- -------
Increase (Decrease) In Cash And Equivalents............ 508.3 13.7 (5.6)
Cash and equivalents at beginning of year................... 33.1 19.4 25.0
------- ------- -------
Cash and Equivalents at End of Year.................... $ 541.4 $ 33.1 $ 19.4
======= ======= =======
See accompanying Notes to Consolidated Financial Statements
25
28
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
SERIES C RETAINED
SERIES C ESOP ADDITIONAL EARNINGS UNEARNED CURRENCY
PREFERRED PREFERRED COMMON PAID-IN (ACCUMULATED ESOP TRANSLATION
STOCK STOCK STOCK CAPITAL DEFICIT) COMPENSATION AND OTHER TOTAL
--------- --------- ------ ---------- ------------ ------------ ----------- -----
(MILLIONS OF DOLLARS)
BALANCE AT DECEMBER 31,
1994....................... $76.6 $59.1 $174.9 $277.8 $ 73.3 $(39.8) $(33.4) $ 588.5
Net loss..................... (5.8) (5.8)
Net issuance of restricted
stock...................... 2.2 6.5 (7.7) 1.0
Exercise of stock options.... .2 .2
Repurchase of common stock... (1.9) (5.3) (7.2)
Retirement of Series C ESOP
preferred stock............ (2.3) (2.3)
Amortization of unearned ESOP
compensation............... 5.5 5.5
Dividends.................... (27.3) (27.3)
Preferred dividend tax
benefits................... 1.6 1.6
Currency translation......... (1.5) (1.5)
Pension adjustment........... (2.4) (2.4)
----- ----- ------ ------ ------- ------ ------ -------
BALANCE AT DECEMBER 31,
1995....................... $76.6 $56.8 $175.2 $280.8 $ 40.2 $(34.3) $(45.0) $ 550.3
===== ===== ====== ====== ======= ====== ====== =======
Net loss..................... (206.3) (206.3)
Net issuance of restricted
stock...................... .3 .9 (1.2) --
Exercise of stock options.... .2 .4 .6
Retirement of Series C ESOP
preferred stock............ (3.7) (3.7)
Amortization of unearned ESOP
compensation............... 5.9 5.9
Dividends.................... (26.9) (26.9)
Preferred dividend tax
benefits................... 1.4 1.4
Currency translation effect
on assets held for sale.... 20.1
Currency translation......... (24.4)
Pension adjustment........... 1.5 1.5
----- ----- ------ ------ ------- ------ ------ -------
BALANCE AT DECEMBER 31,
1996....................... $76.6 $53.1 $175.7 $283.5 $(193.0) $(28.4) $(49.0) $ 318.5
===== ===== ====== ====== ======= ====== ====== =======
Net earnings................. 69.4 69.4
Conversion of Series D
preferred stock............ (76.6) 22.3 54.3 --
Net repurchase of restricted
stock...................... (.4) (1.1) 1.5 --
Vesting of restricted
stock...................... 5.0 5.2 10.2
Exercise of stock options.... 3.4 10.8 14.2
Retirement of Series C ESOP
preferred stock............ (4.1) (4.1)
Amortization of unearned ESOP
compensation............... 6.6 6.6
Dividends.................... (24.8) (24.8)
Preferred dividend tax
benefits................... 4.9 4.9
Currency translation......... (27.4) (27.4)
Pension adjustment........... 1.8 1.8
----- ----- ------ ------ ------- ------ ------ -------
BALANCE AT DECEMBER 31,
1997....................... $ -- $49.0 $201.0 $332.6 $(123.6) $(21.8) $(67.9) $ 369.3
===== ===== ====== ====== ======= ====== ====== =======
See accompanying Notes to Consolidated Financial Statements.
26
29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ACCOUNTING POLICIES
ORGANIZATION -- Federal-Mogul Corporation (the Company) is a global
manufacturer and distributor of a broad range of non-discretionary parts
primarily for automobiles, light trucks, heavy trucks, farm and construction
vehicles. The Company was founded in 1899.
PRINCIPLES OF CONSOLIDATION -- The consolidated financial statements
include the accounts of the Company and its majority-owned subsidiaries.
Intercompany accounts and transactions have been eliminated in consolidation.
CASH AND EQUIVALENTS -- The Company considers all highly liquid investments
with maturities of 90 days or less from the date of purchase to be cash
equivalents.
INVENTORIES -- Inventories are stated at the lower of cost or market. Cost
determined by the last-in, first-out (LIFO) method was used for 55% and 48% of
the inventory at December 31, 1997 and 1996, respectively. The remaining
inventories are costed using the first-in, first-out (FIFO) method. If
inventories had been valued at current cost, amounts reported at December 31
would have been increased by $44.5 million in 1997 and $49.4 million in 1996.
Inventory quantity reductions resulting in liquidations of certain LIFO
inventory layers increased net earnings by $3.2 million and $3.1 million ($.08
and $.09 per diluted share) in 1997 and 1996, respectively. There was no effect
on operations for 1995.
At December 31, inventories consisted of the following:
1997 1996
---- ----
(MILLIONS OF
DOLLARS)
Finished products........................................... $254.6 $417.0
Work-in-process............................................. 21.8 28.0
Raw materials............................................... 15.7 20.0
------ ------
292.1 465.0
Reserve for inventory valuation............................. (15.1) (48.0)
------ ------
$277.0 $417.0
====== ======
The $32.9 million decrease in the reserve for inventory valuation resulted
primarily from the Company's initiative to dispose of fully reserved slow moving
and obsolete inventory, and the sales of certain international retail and
wholesale businesses.
GOODWILL AND OTHER INTANGIBLE ASSETS -- Intangible assets, which result
principally from acquisitions, consist of goodwill, trademarks, non-compete
agreements, patents and other intangibles. Intangible assets are periodically
reviewed for impairment based on an assessment of future cash flows, or fair
value for assets held for sale, to ensure that they are appropriately valued.
Intangible assets are amortized on a straight-line basis over their estimated
useful lives, generally ranging from three to fifteen years for other intangible
assets and generally forty years for goodwill. Goodwill and other intangible
assets reflected in the consolidated balance sheets are net of accumulated
amortization of $20.0 million and $18.7 million for goodwill and $28.9 million
and $22.1 million for other intangible assets at December 31, 1997 and 1996,
respectively. Impairment charges recorded in 1997, 1996 and 1995 related
primarily to assets held for sale. Management believes that the remaining
intangible assets, which relate only to the core manufacturing and distribution
businesses, are not impaired, and their remaining amortization periods are
appropriate.
REVENUE RECOGNITION -- The Company recognizes revenue and returns from
product sales and the related customer incentive and warranty expense when goods
are shipped to the customer.
27
30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
RESEARCH AND DEVELOPMENT AND ADVERTISING COSTS -- The Company expenses
research and development costs as incurred. Research and development expense was
$13.1 million, $14.4 million and $15.1 million for 1997, 1996 and 1995,
respectively.
Costs associated with advertising and promotion are expensed as incurred.
Advertising and promotion expense was $31.8 million, $34.0 million and $19.1
million for 1997, 1996 and 1995, respectively.
CURRENCY TRANSLATION -- Exchange adjustments related to international
currency transactions and translation adjustments for subsidiaries whose
functional currency is the United States dollar (principally those located in
highly inflationary economies) are reflected in the consolidated statements of
operations. Translation adjustments of international subsidiaries for which the
local currency is the functional currency are reflected in the consolidated
financial statements as a separate component of shareholders' equity.
EARNINGS PER SHARE -- In 1997, the Financial Accounting Standards Board
issued Statement No. 128, Earnings Per Share. Statement 128 replaced the
calculation of primary and fully-diluted earnings per share with basic and
diluted earnings per share. Unlike primary earnings per share, basic earnings
per share excludes any dilutive effects of options, warrants and convertible
securities. Diluted earnings per share is similar to the previously reported
fully diluted earnings per share. All earnings per share amounts for all periods
have been presented, and where appropriate, restated to conform to the Statement
128 requirements (refer to Note 13).
EFFECT OF ACCOUNTING PRONOUNCEMENT -- In 1997, the Financial Accounting
Standards Board issued Statement No. 130, Reporting Comprehensive Income. This
Statement establishes standards for the reporting and display of comprehensive
income and its components in a full set of general purpose financial statements.
Statement 130 is effective for fiscal years beginning after December 15, 1997.
Beginning in 1998, the Company will provide the information relating to
comprehensive income to conform to the requirements.
ENVIRONMENTAL LIABILITIES -- The Company recognizes estimated environmental
liabilities when a loss is probable. Such liabilities are generally not subject
to insurance coverage.
Each environmental obligation is estimated by engineering and legal
specialists within the Company based on current law and existing technologies.
Such estimates are based primarily upon the estimated cost of investigation and
remediation required and the likelihood that other potentially responsible
parties will be able to fulfill their commitments at the sites where the Company
may be jointly and severally liable with such parties (refer to Note 18).
The Company regularly evaluates and revises its estimates for environmental
obligations based on expenditures against established reserves and the
availability of additional information.
USE OF ESTIMATES -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
RECLASSIFICATIONS -- Certain items in the prior year financial statements
have been reclassified to conform with the presentation used in 1997.
28
31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
2. RESTRUCTURING CHARGES
The following is a summary of restructuring charges and related activity
for 1995, 1996 and 1997 (in millions of dollars):
1995 RESTRUCTURING 1996 RESTRUCTURING 1997 RESTRUCTURING
PROVISION PROVISION PROVISION
------------------- ------------------- --------------------
SEVERANCE EXIT SEVERANCE EXIT SEVERANCE EXIT TOTAL
--------- ---- --------- ---- --------- ---- -----
1995 restructuring charge.......... $ 20.1 $ 6.8 $ -- $ -- $ -- $ -- $ 26.9
Payments against restructuring
reserves......................... (16.2) -- -- -- -- -- (16.2)
------ ----- ------ ----- ----- ---- ------
Balance of restructuring reserves
at December 31, 1995............. 3.9 6.8 -- -- -- -- 10.7
1996 restructuring charge.......... -- -- 42.8 14.8 -- -- 57.6
Payments against restructuring
reserves......................... (3.9) (3.4) (4.8) (1.0) -- -- (13.1)
------ ----- ------ ----- ----- ---- ------
Balance of restructuring reserves
at December 31, 1996............. -- 3.4 38.0 13.8 -- -- 55.2
1997 restructuring charge.......... -- -- -- -- 16.7 5.3 22.0
Adjustment to restructuring
reserves......................... -- (.9) (20.8) (1.4) -- -- (23.1)
------ ----- ------ ----- ----- ---- ------
1997 restructuring charges (net)... -- (.9) (20.8) (1.4) 16.7 5.3 (1.1)
Payments against restructuring
reserves......................... -- (1.7) (14.0) (3.7) (.1) -- (19.5)
------ ----- ------ ----- ----- ---- ------
Balance of restructuring reserves
at December 31, 1997............. $ -- $ 0.8 $ 3.2 $ 8.7 $16.6 $5.3 $ 34.6
====== ===== ====== ===== ===== ==== ======
1997
The Company's total restructuring reserves at December 31, 1997 of $34.6
million include $3.1 million of severance which will be paid over the next two
years and has been classified as noncurrent other accrued liabilities in the
balance sheet.
Results of operations in the fourth quarter of 1997 include a $22.0 million
charge for 1997 severance and exit costs. The restructuring actions are designed
to improve the Company's cost structure, streamline operations and divest the
Company of underperforming assets. The majority of the 1997 charge is expected
to be paid out during 1998.
Employee severance costs for 1997 result from the planned termination of
approximately 500 employees, in various business operations of the Company. The
severance costs were based on the minimum levels that will be paid to the
affected employees pursuant to the Company's workforce reduction policies and
certain foreign governmental regulations.
Exit costs for 1997 principally include lease termination costs for certain
North American distribution service branches and retail aftermarket operations
in Puerto Rico, and the consolidation of certain European distribution, and
North American and European manufacturing operations.
1996
Primarily due to the T&N and Fel-Pro transactions (refer to Note 20), the
Company elected not to fully implement the following actions under the 1996
restructuring plan:
- Reductions to the operational and administrative staff were not made
to the extent that was originally planned.
29
32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
- Reconfiguration of the North American distribution network was
altered to accommodate the planned integration of T&N and Fel-Pro
aftermarket operations;
- Relocation of certain European manufacturing product lines to lower
cost areas within Europe and related workforce reductions did not take
place. Management of the Company decided not to pursue this action
primarily in anticipation of the integration of future acquisitions.
Primarily as a result of actions not fully implemented under the 1996
restructuring plan, the Company's 1997 operating results were increased by $23.1
million for the reversal of previously recognized 1996 and 1995 restructuring
charges.
Results of operations in the fourth quarter of 1996 include a restructuring
charge of $57.6 million for severance and exit costs for certain facilities.
As of December 31, 1997, employee severance costs related to the 1996
charge have resulted in the termination of approximately 600 employees,
primarily in the international retail aftermarket and wholesale aftermarket
operations, the North American distribution business and a closed manufacturing
operation. The Company expects to pay out most of the remaining 1996 severance
charge in 1998.
Exit costs for 1996 principally include lease termination costs of
international retail aftermarket stores and certain international wholesale
aftermarket operations, the consolidation of certain North American distribution
facilities and the closing of a North American manufacturing operation. The
Company expects to pay out most of the remaining 1996 exit costs in 1998.
1995
Results of operations in the second and fourth quarters of 1995 include
restructuring charges of $6.1 million and $20.8 million, respectively, for
employee severance and exit costs for certain facilities.
Employee severance costs for 1995 resulted from the termination of
approximately 750 employees, primarily in Argentina, the United States and
Europe. Exit costs for 1995 include efforts to consolidate and restructure
selected operations primarily in the United States including costs for certain
aftermarket and related facilities consolidated after the acquisition of SPX
Corporation's Sealed Power Replacement aftermarket business. Operating results
for 1997 were increased by $0.9 million relating to 1995 exit costs being
reversed.
3. ADJUSTMENT OF ASSETS HELD FOR SALE TO FAIR VALUE AND OTHER LONG LIVED ASSETS
The Company continually reviews all components of its businesses for
possible improvement of future profitability through acquisition, divestiture,
reengineering or restructuring.
The Company also continually reviews and updates its impairment reserves
related to the divestiture of its remaining international retail/wholesale
aftermarket operations and other long lived assets and adjusts the reserve
components to approximate their net fair value.
In the fourth quarter of 1997, the Company recognized a charge of $2.4
million to write-down certain long lived assets to fair value. As of December
31, 1997, assets held for sale primarily include retail aftermarket operations
in Puerto Rico, Ecuador, Venezuela and Panama. The Company expects to complete
the actions related to those assets to be disposed of in 1998.
During 1996, management designed and implemented a restructuring plan to
aggressively improve the Company's cost structure, streamline operations and
divest the Company of underperforming assets. As part of this plan, the Company
decided to sell 132 international retail aftermarket operations, sell or
restructure 30 wholesale aftermarket operations and consolidate a North American
manufacturing operation. The carrying value of the assets held for sale was
reduced to fair value based on estimates of selling values less costs to sell.
Selling values used to determine the fair value of assets held for sale were
determined using
30
33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
market prices (i.e. valuation multiples) of comparable companies from other 1996
transactions. The resulting adjustment of $148.5 million to reduce assets held
for sale to fair value was recorded in the fourth quarter of 1996. During 1997,
the Company completed the following actions related to the 1996 restructuring
plan; 1) divested 72 international retail aftermarket operations, 2) sold or
restructured 25 wholesale aftermarket operations, and 3) consolidated a North
American manufacturing operation (refer to Note 7). In 1996, the Company also
recorded an additional writedown of $2.8 million to the net asset value of the
United States ball bearings manufacturing operations. In 1995, the Company
decided to sell the ball bearings operations and reduced the carrying value by
$17.0 million to record assets held for sale at fair value.
In 1995, the Company decided to sell its heavy wall bearing operations in
Germany and Brazil and certain other non-strategic assets. The Company estimated
the fair value of the businesses held for sale based on discussions with
prospective buyers, adjusted for selling costs. The Company reduced its carrying
value by $17.0 million to record assets held for sale at fair value.
In addition, in 1995, the Company reduced the carrying value of certain
other impaired long-lived assets by $17.8 million to record them at fair value.
No further significant fair value adjustments were recorded for these assets in
1996 or 1997.
The carrying value of net assets held for sale as of December 31, 1997 and
1996 are as follows:
1997 1996
---- ----
(MILLIONS OF
DOLLARS)
Accounts receivable......................................... $ 5 $ 38
Inventory................................................... 27 88
Noncurrent assets........................................... 3 11
Accounts payable............................................ (4) (29)
Other net current liabilities............................... (2) (1)
--- ----
Total....................................................... $29 $107
=== ====
Net sales for all assets held for sale and adjusted to fair value
approximated $114 million, $335 million and $322 million in 1997, 1996 and 1995,
respectively. Net sales for the remaining retail aftermarket operations held for
sale at December 31, 1997 approximated $44 million, $48 million and $22 million
in 1997, 1996 and 1995, respectively.
4. REENGINEERING AND OTHER RELATED CHARGES
Operating results for 1997 include a credit of $1.6 million relating to the
reversal of certain 1996 reengineering and other related charges.
In 1996, the Company initiated an extensive effort to strategically review
its businesses and focus on its competencies of manufacturing, engineering and
distribution. As a result of this process, the Company incurred $11.4 million
for professional fees and personnel costs related to the strategic review of the
Company and changes in management and related costs.
In 1995, the Company recognized $13.9 million for reengineering and other
costs. These costs included $7.0 million in professional fees and personnel
costs to reengineer the business on a Company-wide basis and $6.9 million
primarily for certain other non-recurring costs relating to brand consolidation
at the customer level of the Company's Federal-Mogul(R), TRW(R) and Sealed
Power(R) branded engine parts.
5. CHANGES IN ACCOUNTING ESTIMATES
During the third and fourth quarters of 1996, the Company made certain
changes in accounting estimates totaling $51 million ($34 million after tax,
$.98 per share) attributable to 1996 events and new information
31
34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
becoming available. The changes in accounting estimates included increasing the
provision for customer incentive programs and related sales initiatives by $18
million, increasing the provision for excess and obsolete inventory by $13
million, increasing the provision for bad debts by $3 million, increasing the
provision for environmental and legal matters by $9 million and increasing
various other provisions by approximately $8 million.
6. ACQUISITIONS OF BUSINESSES
The Company accounted for the following acquisitions as purchases, and
accordingly, the purchase prices have been allocated to the acquired assets and
assumed liabilities based on their estimated fair values as of the acquisition
date. The consolidated statements of operations include the operating results of
the acquired businesses from the acquisition dates.
In September 1995, the Company completed its acquisition of the
Centropiezas group, a chain of retail stores in Puerto Rico.
Also in September 1995, the Company purchased United Kingdom-based Seal
Technology Systems Ltd., a leading designer and manufacturer of a specialized
range of seals and gaskets for the automotive sector and other industrial
markets.
In June 1995, the Company acquired Bertolotti Pietro e Figli, S.r.1.
(Bertolotti), a distributor of premium brand European auto and truck parts
throughout Italy.
7. SALES OF BUSINESSES
Results of operations have been included through the applicable date of
sale for the following transactions:
During 1997, the Company received $73.6 million in net cash proceeds for
sales of their aftermarket operations in South Africa, Australia, and Chile and
their heavy wall bearing operations in Germany and Brazil.
During 1996, the Company received $42 million in net cash proceeds for
sales of their United States ball bearings and electrical products manufacturing
operations.
Except for the sale of the electrical products manufacturing operations,
sales of businesses in 1997 and 1996 relate to assets previously adjusted to
fair value (refer to Note 3). Accordingly, no gain or loss was recognized on the
date of sale related to these transactions. In addition, no gain or loss was
recognized related to the sale of the electrical products manufacturing
operations.
In December 1995, the Company sold its equity interest in Westwind Air
Bearings, Ltd. in the United Kingdom and its affiliated operations in the United
States and Japan for $20.5 million. The Company recognized a pretax gain on the
sale of $16.2 million.
In April 1995, the Company completed the sale of the operations and
substantially all of the assets of its Precision Forged Products Division to
Borg-Warner Automotive, Inc. The Company received $28.0 million in cash and
retained customer receivables while Borg-Warner assumed certain liabilities. The
Company recognized a pretax gain on the sale of $7.8 million.
8. FINANCIAL INSTRUMENTS
Foreign Exchange Risk and Commodity Price Management
In connection with the proposed T&N plc acquisition (refer to Note 20) the
Company purchased a British pound currency option for $28.1 million with a
notional amount of $2.5 billion to cap the effect of potential unfavorable
fluctuations in the British pound/U.S. dollar exchange rate. The cost of the
option and its change in fair value has been reflected in the results of
operations in the fourth quarter of 1997. At
32
35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
December 31, 1997, the Company recognized a net loss on this transaction of
$10.5 million. The option was settled in the first quarter of 1998 resulting in
a loss of $17.3 million (refer to Note 20).
The Company is subject to exposure to market risks from changes in foreign
exchange rates and raw material price fluctuations. Derivative financial
instruments are utilized by the Company to reduce those risks. Except for the
British pound currency option discussed above, the Company does not hold or
issue derivative financial instruments for trading purposes.
Other than the British pound currency option discussed above, the Company
does not have foreign exchange forward or currency option contracts outstanding
at December 31, 1997. As of December 31, 1996, the Company had foreign exchange
forward contracts principally for Japanese yen and South African rand totaling a
notional amount of $6.6 million. At December 31, 1996, there was no deferred
gain or loss related to foreign exchange forward contracts.
The Company has entered into copper contracts to hedge against the risk of
price increases. These contracts are expected to offset the effects of price
changes on the firm purchase commitments for copper and expire in 1998. Under
the agreements, the Company is committed to purchase 7.3 million pounds of
copper. The net unrealized loss on these firm purchase commitments at December
31, 1997 is $0.7 million.
Deferred gains and losses are included in other assets and liabilities and
recognized in operations when the future purchase or sale occurs, or at the
point in time when the purchase or sale is no longer expected to occur.
Accounts Receivable Securitization
During 1997, the Company replaced an existing accounts receivable
securitization program with a new program which provides up to $100 million of
financing. On an ongoing basis, the Company sells certain accounts receivable to
Federal-Mogul Funding Corporation (FMFC), a wholly-owned subsidiary of the
Company, which then sells such receivables, without recourse, to a master trust.
Amounts sold under these arrangements were $63.2 million and $95 million at
December 31, 1997 and 1996 respectively, and have been excluded from the balance
sheets. The Company's retained interest in the accounts receivable sold to FMFC
is included in the balance sheet caption Investment in Accounts Receivable
Securitization.
Concentrations of Credit Risk
Financial instruments which potentially subject the Company to
concentrations of credit risk consist primarily of accounts receivable and cash
investments. The Company's customer base includes virtually every significant
global automotive manufacturer and a large number of distributors and installers
of automotive aftermarket parts. The Company's credit evaluation process,
reasonably short collection terms and the geographical dispersion of sales
transactions help to mitigate any concentration of credit risk. The Company
requires placement of investments in financial institutions evaluated as highly
creditworthy.
The Company does not generally require collateral for its trade accounts
receivable or those assets included in the investment in accounts receivable
securitization. The allowance for doubtful accounts of $18.7 million and $16.3
million at December 31, 1997 and 1996 is based upon the expected collectibility
of trade accounts receivable.
Fair Value of Financial Instruments
The carrying amounts of certain financial instruments such as cash and
equivalents, accounts receivable, accounts payable, British pound currency
option, and short-term debt approximate their fair values. The carrying amounts
and estimated fair values of the Company's long term debt were $273.1 million
and $286.1 million at December 31, 1997. The fair value of the long-term debt is
estimated using discounted cash flow analysis and the Company's current
incremental borrowing rates for similar types of arrangements.
33
36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
9. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost and include expenditures
which materially extend the useful lives of existing buildings, machinery and
equipment.
Depreciation is computed principally by the straight-line method for
financial reporting purposes and by accelerated methods for income tax purposes.
Depreciation expense for the years ended December 31, 1997, 1996 and 1995, was
$42.6 million, $49.8 million and $48.3 million, respectively.
At December 31, property, plant and equipment consisted of the following:
ESTIMATED
USEFUL LIFE 1997 1996
----------- ---- ----
(MILLIONS OF DOLLARS)
Land............................................. -- $ 29.1 $ 32.1
Buildings and building improvements.............. 40 yrs. 124.0 144.1
Machinery and equipment.......................... 3-12 yrs. 363.4 378.8
------- -------
516.5 555.0
Accumulated depreciation......................... (202.6) (204.7)
------- -------
$ 313.9 $ 350.3
======= =======
The Company leases various facilities and equipment under both capital and
operating leases. Net assets subject to capital leases were not significant at
December 31, 1997 and 1996.
The balance of the deferred gain resulting from the 1988 sale and leaseback
of a portion of the corporate headquarters complex was $7.1 million at December
31, 1997. The deferred gain is being amortized over the term of the lease as a
reduction of rent expense. Future minimum payments under noncancelable operating
leases with initial or remaining terms of more than 1 year are, in millions:
1998 -- $20.3; 1999 -- $16.8; 2000 -- $13.8; 2001 -- $11.8; 2002 -- $10.6 and
thereafter $42.0. Future minimum lease payments have been reduced by
approximately $26.2 million for amounts to be received under sublease
agreements.
Total rental expense under operating leases was $29.1 million in 1997,
$33.8 million in 1996 and $34.0 million in 1995, exclusive of property taxes,
insurance and other occupancy costs generally payable by the Company.
10. DEBT
In December 1997, the Company entered into a $3.25 billion committed bank
facility with a reputable financial institution related to the proposed T&N plc
acquisition (refer to Note 20). The facility provides for up to $2.75 billion of
senior debt and up to $500 million of subordinated debt. This facility is
contingent upon the acquisition of T&N plc. Accordingly no amounts are
outstanding as of December 31, 1997.
In June 1997, the Company entered into a new $350 million multicurrency
revolving credit facility with a consortium of international banks which matures
in June 2002. The multicurrency revolving credit facility replaced the existing
U.S. and European revolving credit facilities. The multicurrency revolving
credit facility contains restrictive covenants that, among other matters,
require the Company to maintain certain financial ratios. As of December 31,
1997, there were no borrowings outstanding against the multicurrency revolving
credit facility. As of December 31, 1996, the Company had $185 million borrowed
against the U.S. revolver and $9 million borrowed against the European revolver,
both of which were included in short-term debt. Short-term debt also includes
international subsidiaries local credit arrangements that have terms in
accordance with local customary practice. The weighted average interest rate for
the Company's short-term debt was 9.9% and 7.9% as of December 31, 1997 and
1996, respectively.
34
37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
Long-term debt at December 31 consists of the following:
1997 1996
---- ----
(MILLIONS OF
DOLLARS)
Medium-term notes........................................... $125.0 $125.0
Senior notes................................................ 124.6 --
Private placement debt...................................... -- 64.7
ESOP obligation............................................. 21.9 28.0
Other....................................................... 11.8 17.8
------ ------
283.3 235.5
Less current maturities included in short-term debt......... 10.2 25.9
------ ------
$273.1 $209.6
====== ======
In April 1997, the Company issued $125.0 million of ten-year 8.8% senior
notes.
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 recognized as an extraordinary item of $2.6
million, net of the related tax benefit.
In August 1994, the Company initiated a medium-term note program for up to
$200 million. Notes were issued in maturities ranging from five to ten years.
The average interest rate was approximately 8.4%.
The ESOP obligation represents the unpaid principal balance on an 11 year
loan entered into by the Company's ESOP in 1989. Proceeds of the loan were used
by the ESOP to purchase the Company's Series C ESOP preferred stock. Payment of
principal and interest on the notes is unconditionally guaranteed by the
Company, and therefore, the unpaid principal balance of the borrowing is
classified as long-term debt. Company contributions and dividends on the
preferred shares held by the ESOP are used to meet semi-annual principal and
interest obligations.
The original ESOP obligation bore an annual interest rate of 11.5%. The
obligation was refinanced on June 30, 1995 at a fixed interest rate of 7.2%. The
ESOP obligation matures in December 2000.
Aggregate maturities of long-term debt for each of the years following 1998
are, in millions: 1999 -- $29.2; 2000 -- $31.8; 2001 -- $45.0; 2002 -- $6.0 and
thereafter $161.1.
Interest paid in 1997, 1996 and 1995 was $30.7 million, $43.5 million and
$37.1 million, respectively.
11. CAPITAL STOCK AND PREFERRED SHARE PURCHASE RIGHTS
The Company's articles of incorporation authorize the issuance of
60,000,000 shares of common stock, of which 40,196,603 shares, 35,130,359 shares
and 35,044,859 shares were outstanding at December 31, 1997, 1996 and 1995,
respectively.
In August 1997, the Company announced a call for the redemption of all its
outstanding $3.875 Series D Convertible Exchangeable Preferred Stock. These
preferred stockholders elected to convert each preferred share into 2.778 shares
of common stock. The Company issued 4.4 million shares of common stock in
exchange for all of the outstanding Series convertible exchangeable preferred
stock.
The Company's ESOP covers substantially all domestic salaried employees and
allocates Series ESOP Convertible Preferred Stock to eligible employees based on
their contributions to the Salaried Employees' Investment Program and their
eligible compensation. There were 773,351, 835,898 and 892,620 shares of Series
C ESOP preferred stock outstanding at December 31, 1997, 1996 and 1995,
respectively. The Series C ESOP preferred shares are nonvoting and pay dividends
at a rate of 7.5%. The Company repurchased and retired 62,547 Series C ESOP
preferred shares valued at $4.0 million during 1997 and 56,722 Series C ESOP
35
38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
preferred shares valued at $3.6 million during 1996, all of which were forfeited
by participants upon early withdrawal from the plan.
The Series C ESOP preferred stock is convertible into shares of the
Company's common stock at a rate of two shares of common stock for each share of
preferred stock. The Series C ESOP preferred stock may be issued only to a
trustee acting on behalf of an employee stock ownership plan or other employee
benefit plan of the Company. These shares are automatically converted into
shares of common stock in the event of any transfer to any person other than the
plan trustee. The Series C ESOP preferred stock is redeemable, in whole or in
part, at the option of the Company.
The charge to operations for the cost of the ESOP was $5.2 million in 1997,
$4.2 million in 1996 and $4.4 million in 1995. The Company made cash
contributions to the plan of $8.1 million in 1997 and 1996, and $8.5 million in
1995, including preferred stock dividends of $3.8 million in 1997, $4.1 million
in 1996 and $4.3 million in 1995. ESOP shares are released as principal and
interest on the debt is paid. The ESOP Trust uses the preferred dividends not
allocated to employees to make principal and interest payments on the debt.
Compensation expense is measured based on the fair value of shares committed to
be released to employees. Dividends on ESOP shares are treated as a reduction of
retained earnings in the period declared. The number of allocated shares and
suspense shares held by the ESOP were 532,817 and 240,534 at December 31, 1997,
and 504,435 and 331,463 at December 31, 1996, respectively. There were no
committed-to-be-released shares at December 31, 1997 and December 31, 1996. Any
repurchase of the ESOP shares is strictly at the option of the Company.
In 1988, the Company's Board of Directors authorized the distribution of
one Preferred Share Purchase Right (Right) for each outstanding share of common
stock of the Company. Each Right entitles shareholders to buy one-half of
one-hundredth of a share of a new Series of preferred stock at a price of $70.
As distributed, the Rights trade together with the common stock of the
Company. They may be exercised or traded separately only after the earlier to
occur of: (i) ten days following a public announcement that a person or group of
persons has obtained the right to acquire 10% or more of the outstanding common
stock of the Company (20% in the case of certain institutional investors), or
(ii) ten business days (or such later date as may be determined by action of the
Board of Directors) following the commencement or announcement of an intent to
make a tender offer or exchange offer which would result in beneficial ownership
by a person or group of persons of 10% or more of the Company's outstanding
common stock. Additionally, if the Company is acquired in a merger or other
business combination, each Right will entitle its holder to purchase, at the
Right's exercise price, shares of the acquiring Company's common stock (or stock
of the Company if it is the surviving corporation) having a market value of
twice the Right's exercise price.
The Rights may be redeemed at the option of the Board of Directors for
$.005 per Right at any time before a person or group of persons acquires 10% or
more of the Company's common stock. The Board may amend the Rights at any time
without shareholder approval. The Rights will expire by their terms on November
14, 1998.
12. MINORITY INTEREST -- PREFERRED SECURITIES OF AFFILIATE
In December 1997, the Company's wholly-owned financing trust ("Affiliated")
completed a $575 million private issue of 11.5 million shares of 7.0% Trust
Convertible Preferred Securities ("TCP Securities") with a liquidation value of
$50 per convertible security. The net proceeds from the TCP Securities were used
to purchase an equal amount of 7.0% Convertible Junior Subordinate Debentures
("Debentures") of the Company. The TCP Securities represent an undivided
interest in the Affiliate's assets, with a liquidation preference of $50 per
security.
Distribution on the TCP Securities are cumulative and will be paid
quarterly in arrears at an annual rate of 7.0%, and are included in the
consolidated statement of operations as a component of Other Expense, Net.
36
39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
The Company has the option to defer payment of the distributions for an
extension period of up to 20 consecutive quarters if the Company is in
compliance with the terms of the TCP Securities.
The shares of the TCP Securities are convertible, at the option of the
holder, into the Company's common stock at an equivalent conversion price of
approximately $51.50 per share, subject to adjustment in certain events. The TCP
Securities and the Debentures will be redeemable, at the option of the Company,
on or after December 6, 2000 at a Redemption Price, expressed as a percentage of
principal which is added to accrued and unpaid interest. The Redemption Price
range is from 104.2% on December 6, 2000 to 100.0% after December 1, 2007. All
outstanding TCP Securities and Debentures are required to be redeemed by
December 1, 2027.
37
40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
13. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share (in millions, except per share data):
1997 1996 1995
---- ---- ----
Numerator:
Net earnings (loss) after extraordinary item.............. $69.4 $(206.3) $ (5.8)
Extraordinary item -- loss on early retirement of debt net
of applicable tax benefit.............................. (2.6) -- --
----- ------- ------
Net earnings (loss) before extraordinary item............. 72.0 (206.3) (5.8)
Series C preferred dividend requirement................... (2.4) (2.5) (2.7)
Series D preferred dividend requirement................... (3.1) (6.2) (6.2)
----- ------- ------
Numerator for basic earnings per share -- income (loss)
available to common shareholders before extraordinary
item................................................... $66.5 $(215.0) $(14.7)
Effect of dilutive securities:
Series C preferred dividend requirement................ 2.4 -- --
Series D preferred dividend requirement................ 3.1 -- --
Additional required ESOP contribution.................. (1.9) -- --
----- ------- ------
Numerator for diluted earnings per share -- income (loss)
available to common shareholders after assumed
conversions, before extraordinary item................. $70.1 $(215.0) $(14.7)
----- ------- ------
Numerator for basic earnings per share -- income (loss)
available to common shareholders after extraordinary
item...................................................... $63.9 $(215.0) $(14.7)
Numerator for diluted earnings per share -- income (loss)
available to common shareholders after extraordinary
item...................................................... $67.5 $(215.0) $(14.7)
Denominator:
Denominator for basic earnings per share -- weighted
average shares......................................... 36.6 34.7 34.6
Effect of dilutive securities:
Dilutive stock options outstanding..................... 0.4 -- --
Nonvested stock........................................ 0.3 -- --
Conversion of Series C preferred stock................. 1.6 -- --
Conversion of Series D preferred stock................. 3.0 -- --
----- ------- ------
Dilutive potential common shares.......................... 5.3 -- --
Denominator for dilutive earnings per share -- adjusted
weighted average shares and assumed conversions....... 41.9 34.7 34.6
===== ======= ======
Basic earnings (loss) per share before extraordinary item... $1.81 $ (6.20) $(0.42)
===== ======= ======
Basic earnings (loss) per share after extraordinary item.... $1.74 $ (6.20) $(0.42)
===== ======= ======
Diluted earnings (loss) per share before extraordinary
item...................................................... $1.67 $ (6.20) $(0.42)
===== ======= ======
Diluted earnings (loss) per share after extraordinary
item...................................................... $1.61 $ (6.20) $(0.42)
===== ======= ======
For additional disclosures regarding the Series C and Series D preferred
stock, the employee stock options and nonvested stock shares, refer to Notes 11
and 14.
Convertible preferred securities (refer to Note 12) redeemable for 11.5
million shares of common stock were outstanding for a portion of 1997 but were
not included in the computation of diluted earnings per share because the effect
would be antidilutive.
38
41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
14. INCENTIVE STOCK PLANS
The Company's shareholders adopted stock option plans in 1976 and 1984 and
performance incentive stock plans in 1989 and 1997. These plans provide
generally for awarding restricted shares or granting options to purchase shares
of the Company's common stock. Restricted shares entitle employees to all the
rights of common stock shareholders, subject to certain transfer restrictions
and to forfeiture in the event that the conditions for their vesting are not
met. Options entitle employees to purchase shares at an exercise price not less
than 100% of the fair market value on the grant date and expire after a five or
ten year period as determined by the Board of Directors.
Under the plans, awards vest from 6 months to 5 years after their date of
grant, as determined by the Board of Directors at the time of grant. At December
31, 1997, there were 934,245 shares available for future grants under the plans.
In October 1997, the Company met certain share price performance criteria
under the 1989 Long-Term Incentive Plan which resulted in the recognition of
$5.4 million in compensation expense relating to the vesting of restricted stock
awards. The total compensation cost that has been charged to operations for
vesting of restricted stock awards was $9.0 million, $0.4 million and $0.1
million in 1997, 1996 and 1995, respectively.
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB 25) and related
interpretations in accounting for its employee stock awards. Accordingly, no
compensation cost has been recognized for its stock option grants, as the
exercise price of the Company's employee stock options equals the underlying
stock price on the date of grant. Had compensation cost for the Company's
stock-based compensation plans been determined based on the fair value at the
grant dates for awards under those plans consistent with the method of Financial
Accounting Standards Board Statement No. 123 "Accounting for Stock Based
Compensation," the Company's net earnings (loss), in millions, and earnings
(loss) per share would have been adjusted to the pro forma amounts indicated
below:
1997 1996 1995
---- ---- ----
Net earnings (loss) as reported............................. $69.4 $(206.3) $(5.8)
Pro forma................................................... $70.7 $(207.1) $(6.0)
Basic earnings (loss) per share as reported................. $1.74 $ (6.20) $(.42)
Pro forma................................................... $1.78 $ (6.22) $(.43)
Diluted earnings (loss) per share as reported............... $1.61 $ (6.20) $(.42)
Pro forma................................................... $1.64 $ (6.22) $(.43)
Pro forma information regarding net income and earnings per share is
required by Statement 123 as if the Company had accounted for its employee stock
options under the fair value method. The fair value for options is estimated at
the date of grant using a Black-Scholes option pricing model with the following
weighted-average assumptions for 1997, 1996 and 1995, respectively: risk-free
interest rates of 6.5%; dividend yields of 1.5%, 2.3% and 2.4%; volatility
factors of the expected market price of the Company's common stock of 27.2%,
11.2% and 8.1% and a weighted average expected life of the option of five years.
The fair value of nonvested stock awards is equal to the market price of the
stock on the date of the grant.
Since the above pro forma disclosures of results are only required to
consider grants awarded in 1995 and thereafter, the pro forma effects during
this initial phase-in period may not be representative of the effects on the
reported results for future years.
The weighted average fair value and the total number (in millions) of
options granted was $9.99, $3.34 and $3.09, and 0.9, 0.3 and 0.1 for 1997, 1996
and 1995, respectively. The weighted average fair value and total number of
nonvested stock awards granted was $24.47, $18.90 and $18.38 and 0.1, 0.2 and
0.4 for 1997, 1996 and 1995, respectively. All options and stock awards that are
not vested at December 31, 1997, vest solely on employees' rendering additional
service.
39
42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
The following table summarizes the activity relating to the Company's
incentive stock plans:
NUMBER OF SHARES WEIGHTED-AVERAGE
(IN MILLIONS) PRICE
---------------- ----------------
Outstanding at January 1, 1995.............................. 2.4 $22.98
Options/stock granted..................................... .5 18.72
Options/stock lapsed or canceled.......................... (.3) 23.69
---- ------
Outstanding at December 31, 1995............................ 2.6 22.02
Options/stock granted..................................... .5 22.08
Options exercised......................................... -- --
Options/stock lapsed or canceled.......................... (.6) 22.32
---- ------
Outstanding at December 31, 1996............................ 2.5 22.03
Options/stock granted..................................... 1.0 31.74
Options exercised/stock vested............................ (1.0) 21.94
Options/stock lapsed or canceled.......................... (0.3) 22.29
---- ------
Outstanding at December 31, 1997............................ 2.2 $26.46
==== ======
Options exercisable at December 31, 1997.................. 0.9 $23.07
==== ======
Options exercisable at December 31, 1996.................. 1.3 $22.50
==== ======
Options exercisable at December 31, 1995.................. 1.5 $21.50
==== ======
The following is a summary of the range of exercise prices for stock
options that are outstanding and the amount of nonvested stock awards at
December 31, 1997:
WEIGHTED AVERAGE
OUTSTANDING -----------------------
RANGE AWARDS PRICE REMAINING LIFE
----- ----------- ----- --------------
Options:
$15.69 to $23.50.............................. 0.8 $21.63 4 years
$23.50 to $41.28.............................. 1.2 $31.26 5 years
Nonvested stock............................... 0.2 -- --
---
Total......................................... 2.2
===
15. POSTEMPLOYMENT BENEFITS
The Company maintains several defined benefit pension plans which cover
substantially all domestic employees and certain employees in other countries.
Benefits for domestic salaried employees are based on compensation, age and
years of service, while hourly employees' benefits are primarily based on
negotiated rates and years of service. International plans maintained by the
Company provide benefits based on years of service and compensation.
The Company's funding policy is consistent with funding requirements of
federal and international laws and regulations. Plan assets consist primarily of
listed equity securities and fixed income instruments.
Net periodic pension cost for the Company's defined benefit plans in 1997,
1996 and 1995 consists of the following:
40
43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
UNITED STATES PLANS
1997 1996 1995
---- ---- ----
(MILLIONS OF DOLLARS)
(INCOME)/EXPENSE
Service cost -- benefits earned during the period..... $ 7.8 $ 9.0 $ 7.3
Interest cost on projected benefit obligation......... 14.0 15.0 15.0
Actual return on plan assets.......................... (61.8) (30.8) (51.6)
Net amortization and deferral......................... 33.4 3.3 28.6
Curtailment loss...................................... -- 3.7 .5
------ ------ ------
Net periodic pension (income) cost.................... $ (6.6) $ .2 $ (.2)
====== ====== ======
INTERNATIONAL PLANS
1997 1996 1995
---- ---- ----
(MILLIONS OF DOLLARS)
(INCOME)/EXPENSE
Service cost -- benefits earned during the period........... $ .3 $ .4 $ .4
Interest cost on projected benefit obligation............... 1.9 2.5 2.7
---- ---- ----
Net periodic pension cost................................... $2.2 $2.9 $3.1
==== ==== ====
41
44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
The following table sets forth the funded status for the Company's defined
benefit plans at December 31:
UNITED STATES PLANS
PLANS WITH ASSETS PLANS WITH
IN EXCESS OF ACCUMULATED
ACCUMULATED BENEFITS IN EXCESS
BENEFITS OF ASSETS
------------------ -------------------
1997 1996 1997 1996
---- ---- ---- ----
(MILLIONS OF DOLLARS)
Actuarial present value of benefit obligations:
Vested benefit obligation................................ $129.9 $ 96.2 $45.8 $ 88.8
====== ====== ===== ======
Accumulated benefit obligation........................... 139.1 102.1 55.5 106.4
====== ====== ===== ======
Projected benefit obligation............................. 140.8 104.0 56.4 107.1
------ ------ ----- ------
Plan assets at fair value................................ 243.8 177.8 49.9 84.8
------ ------ ----- ------
Plan assets in excess of (less than) projected benefit
obligation............................................. 103.0 73.8 (6.5) (22.3)
Unrecognized net (asset) liability at transition......... (2.7) (5.8) .7 .5
Unrecognized prior service cost.......................... 3.7 .5 6.0 10.0
Unrecognized net (gain) loss............................. (54.7) (23.2) (5.6) 3.2
------ ------ ----- ------
Accrued pension asset (liability) included in the
consolidated balance sheets............................ $ 49.3 $ 45.3 $(5.4) $ (8.6)
====== ====== ===== ======
INTERNATIONAL PLANS
ACCUMULATED BENEFITS
EXCEED ASSETS
---------------------
1997 1996
---- ----
(MILLIONS OF DOLLARS)
Actuarial present value of benefit obligations:
Vested benefit obligation................................. $ 25.3 $ 32.9
------ ------
Accumulated benefit obligation............................ 26.6 34.5
------ ------
Projected benefit obligation.............................. 26.6 34.5
------ ------
Plan assets less than projected benefit obligation.......... (26.6) (34.5)
Unrecognized net loss....................................... 2.8 4.0
------ ------
Accrued pension liability included in the consolidated
balance sheet............................................. $(23.8) $(30.5)
====== ======
The assumptions used in computing the above information are as follows:
1997 1996 1995
---- ---- ----
Discount rates.............................................. 7 1/2% 7 1/2% 7 1/2%
Rates of increase in compensation levels.................... 4 1/2% 4 1/2% 4 1/2%
Expected long-term rates of return on assets................ 10 % 10 % 10 %
The Company's minimum liability adjustment was $1.3 million and $13.4
million for United States plans at December 31, 1997 and 1996, respectively, and
$2.7 million and $3.5 million for international plans at December 31, 1997 and
1996, respectively.
The Company also provides health care and life insurance benefits for
certain domestic retirees covered under company-sponsored benefit plans.
Participants in these plans may become eligible for these benefits if they reach
normal retirement age while working for the Company. The Company's policy is to
fund benefit costs as they are provided, with retirees paying a portion of the
costs.
42
45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
The components of net periodic postretirement benefit costs are as follows
as of December 31:
1997 1996 1995
---- ---- ----
(MILLIONS OF DOLLARS)
Service cost............................................. $ 2.5 $ 2.8 $ 2.3
Interest cost............................................ 10.5 10.8 10.4
Curtailment gain......................................... -- (7.5) (1.0)
Amortized gains.......................................... (.5) (.5) (1.1)
----- ----- -----
Net periodic postretirement benefits cost................ $12.5 $ 5.6 $10.6
===== ===== =====
The following schedule reconciles the funded status of the Company's
postretirement benefit plans to the amounts recorded in the Company's balance
sheets as of December 31:
1997 1996
---- ----
(MILLIONS OF
DOLLARS)
Accumulated postretirement benefit obligation (APBO):
Retirees.................................................... $107.6 $103.9
Active plan participants.................................... 42.8 46.9
------ ------
150.4 150.8
Unrecognized net gain (loss)................................ 3.8 (1.4)
Unrecognized prior service cost............................. 3.5 4.1
------ ------
Accrued postretirement benefits liability................... $157.7 $153.5
====== ======
The discount rate used in determining the APBO was 7.5% at December 31,
1997 and 1996.
At December 31, 1997, the assumed annual health care cost trend used in
measuring the APBO approximated 7.5% in 1997 declining to 7.1% in 1998 and to an
ultimate rate of 5.5% estimated to be achieved in 2009.
At December 31, 1996, the assumed annual health care cost trend used in
measuring the APBO approximated 7.5% in 1996, declining to 7.1% in 1997 and to
an ultimate annual rate of 5.5% estimated to be achieved in 2008.
Increasing the assumed cost trend rate by 1% each year would have increased
the APBO by approximately 8.3% and 8.4% at December 31, 1997 and 1996,
respectively. Aggregate service and interest costs would have increased by
approximately 9.4% for 1997 and 1996, and 12.9% for 1995.
In 1991, the Company established a retiree health benefits account (as
defined in Section 401(h) of the Internal Revenue Code) within its domestic
salaried employees' pension plan. Annually, the Company may elect to transfer
excess pension plan assets (subject to defined limitations) to the 401(h)
account for purposes of funding current salaried retiree health care costs. The
Company transferred excess pension plan assets of $4.4 million in 1997, $4.2
million in 1996 and $4.2 million in 1995 to the 401(h) account to fund salaried
retiree health care benefits.
The Company sponsors two defined contribution retirement saving plans
covering substantially all domestic employees. Matching Company contributions
for the Salaried Employees' Investment Program are provided through the ESOP
(refer to Note 11). In addition, the Company provided matching contributions to
eligible employees based upon their contributions to the Employee Investment
Program of approximately $1.5 million, $1.6 million, and $1.2 million for 1997,
1996, and 1995, respectively.
43
46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
16. INCOME TAXES
Under the liability method, deferred tax assets and liabilities are
determined based on differences between financial reporting and tax bases of
assets and liabilities and are measured using the enacted tax rates and laws
that will be in effect when the differences are expected to reverse. The
components of earnings (loss) before income taxes and extraordinary item
consisted of the following:
1997 1996 1995
---- ---- ----
(MILLIONS OF DOLLARS)
Domestic.................................................... $50.1 $ (88.3) $ 7.9
International............................................... 49.4 (140.4) (11.2)
----- ------- ------
$99.5 $(228.7) $ (3.3)
===== ======= ======
Significant components of the provision for income taxes (tax benefit) are
as follows:
1997 1996 1995
---- ---- ----
(MILLIONS OF DOLLARS)
Current:
Federal................................................... $ 9.6 $ (4.0) $ 12.7
State and local........................................... 0.2 2.3 1.2
International............................................. 6.6 6.3 9.3
----- ------ ------
Total current........................................ 16.4 4.6 23.2
Deferred:
Federal................................................... 6.1 (25.2) (9.0)
State and local........................................... 0.7 (1.8) (.9)
International............................................. 4.3 -- (10.8)
----- ------ ------
Total deferred....................................... 11.1 (27.0) (20.7)
----- ------ ------
$27.5 $(22.4) $ 2.5
===== ====== ======
The reconciliation of income taxes (tax benefits) computed at the United
States federal statutory tax rate to income tax expense (benefit) is:
1997 1996 1995
---- ---- ----
(MILLIONS OF DOLLARS)
Income taxes (tax benefits) at United States statutory
rate...................................................... $34.9 $(80.1) $(1.1)
Tax effect from:
Tax credits, state income taxes and other................. 2.1 1.8 (2.3)
Tax benefit related to the sale of South African and
Australian businesses.................................. (6.8) -- --
Losses on international operations without tax benefits
and foreign tax rate differences....................... (2.7) 55.9 5.9
----- ------ -----
$27.5 $(22.4) $ 2.5
===== ====== =====
The following table summarizes the Company's total provision for income
taxes/(tax benefits):
1997 1996 1995
---- ---- ----
(MILLIONS OF DOLLARS)
Income tax expense (benefit)................................ $27.5 $(22.4) $ 2.5
Allocated to equity:
Currency translation...................................... (3.6) (4.9) 5.3
Preferred dividends....................................... (1.3) (1.5) (1.6)
Investment securities..................................... (0.6) .8 --
Other..................................................... 1.2 .7 .8
----- ------ -----
$23.2 $(27.3) $ 7.0
===== ====== =====
44
47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
Significant components of the Company's deferred tax assets and liabilities
as of December 31 are as follows:
1997 1996
---- ----
(MILLIONS OF DOLLARS)
Deferred tax assets:
Postretirement benefits..................................... $ 58.2 $ 57.2
Net operating loss carryforwards of international
subsidiaries.............................................. 45.0 68.1
Loss on foreign investment.................................. 23.2 49.0
Restructuring costs......................................... -- 8.3
Inventory basis............................................. 10.3 12.0
Allowance for doubtful accounts............................. 11.3 7.0
Other temporary differences................................. 36.9 27.6
------ ------
Total deferred tax assets.............................. 184.9 229.2
Valuation allowance for deferred tax assets................. (44.4) (89.4)
------ ------
Net deferred tax assets................................ 140.5 139.8
------ ------
Deferred tax liabilities:
Fixed asset basis differences............................. (50.5) (55.0)
Pension................................................... (17.3) (12.4)
Restructuring costs....................................... (8.1) --
------ ------
Total deferred tax liabilities......................... (75.9) (67.4)
------ ------
$ 64.6 $ 72.4
====== ======
Deferred tax assets and liabilities are recorded in the consolidated
balance sheets as follows:
1997 1996
---- ----
(MILLIONS OF
DOLLARS)
ASSETS:
Prepaid expenses and income tax benefits.................... $46.6 $54.6
Business investments and other assets....................... 26.7 21.9
LIABILITIES:
Other current accrued liabilities........................... (4.2) (3.6)
Other long-term accrued liabilities......................... (4.5) (.5)
----- -----
$64.6 $72.4
===== =====
Income taxes paid in 1997, 1996 and 1995 were $2.6 million, $6.7 million
and $19.4 million, respectively.
Undistributed earnings of the Company's international subsidiaries amounted
to approximately $39 million at December 31, 1997. No taxes have been provided
on approximately $30 million of these earnings, which are considered by the
Company to be permanently reinvested.
45
48
CONSOLIDATED BALANCE SHEETS
Upon distribution of these earnings, the Company would be subject to United
States income taxes and foreign withholding taxes. Determining the unrecognized
deferred tax liability on the distribution of these earnings is not practicable
as such liability, if any, is dependent on circumstances existing when
remittance occurs.
The Company has a $67 million German net operating loss carryforward at
December 31, 1997 that has no expiration date. The Company has $50 million of
additional foreign operating losses with various expiration dates through 2003.
17. OPERATIONS BY INDUSTRY SEGMENT AND GEOGRAPHIC AREA
The Company is a global manufacturer and distributor of a broad range of
non-discretionary parts, primarily vehicular components for automobiles, light
trucks, heavy duty trucks, farm and construction vehicles. The Company sells
parts to original equipment manufacturers, principally the major automotive
manufacturers in the United States and Europe. Through its worldwide
distribution network, the Company also sells replacement parts in the vehicular
replacement market. All of these activities constitute a single business
segment. Canadian operations are aggregated with the U.S. operations as they are
not significant under the materiality thresholds of Financial Accounting
Standards Board Statement No. 14.
Financial information, summarized by geographic area, is as follows:
1997 1996 1995
---- ---- ----
(MILLIONS OF DOLLARS)
Net sales:
United States and Canada.................................. $1,132.2 $1,224.7 $1,280.6
Europe.................................................... 372.3 436.0 382.8
Other international....................................... 302.1 372.0 336.4
-------- -------- --------
$1,806.6 $2,032.7 $1,999.8
======== ======== ========
Operating earnings (loss):
United States and Canada.................................. $ 114.3 $ (53.2) $ 57.5
Europe.................................................... 20.6 11.8 (13.2)
Other international....................................... 31.9 (112.8) 13.2
-------- -------- --------
166.8 (154.2) 57.5
Corporate expenses and other................................ (27.9) (27.7) (27.8)
-------- -------- --------
$ 138.9 $ (181.9) $ 29.7
======== ======== ========
Identifiable assets:
United States and Canada.................................. $1,240.4 $ 775.5 $ 893.5
Europe.................................................... 467.0 451.0 493.9
Other international....................................... 94.7 228.7 322.7
-------- -------- --------
$1,802.1 $1,455.2 $1,710.1
======== ======== ========
Transfers between geographic areas are not significant, and when made, are
recorded at prices comparable to normal unaffiliated customer sales.
The information presented above was prepared in accordance with Statement
14. In 1997, the Financial Accounting Standards Board issued Statement No. 131,
Disclosures about Segments of an Enterprise and Related Information. The
statement supersedes Statement 14 and establishes standards for the way public
business enterprises report selected information about operating segments in
annual reports and interim financial reports issued to shareholders. Statement
131 is effective for fiscal years beginning after December 15, 1997. For the
year ended 1998, the Company will provide financial and descriptive information
about its reportable operating segments to conform to the requirements.
46
49
CONSOLIDATED BALANCE SHEETS -- CONTINUED
18. LITIGATION AND ENVIRONMENTAL MATTERS
The Company is one of a large number of defendants in a number of lawsuits
brought by claimants alleging injury due to exposure to asbestos. The Company is
defending all such claims vigorously and believes it has substantial defenses to
liability and adequate insurance coverage for its defense costs. The Company is
also involved in various other legal actions and claims. While the outcome of
litigation cannot be predicted with certainty, after consulting with counsel for
the Company, management believes that these matters will not have a material
effect on the Company's consolidated financial statements.
The Company is a party to lawsuits filed in various jurisdictions alleging
claims pursuant to the Comprehensive Environmental Response Compensation and
Liability Act of 1980 (CERCLA) or other state or federal environmental laws. In
addition, the Company has been notified by the Environmental Protection Agency
and various state agencies that it may be a potentially responsible party (PRP)
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. Although these laws could impose joint and several
liability upon each party at any site, the potential exposure is expected to be
limited because at all sites other companies, generally including many large,
solvent public companies, have been named as PRPs. 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 and legal reserve was approximately $11 million
at December 31, 1997 and $12 million at December 31, 1996 and is included in
other long-term accrued liabilities. Management believes these accruals, which
have not been reduced by any anticipated insurance proceeds, will be adequate to
cover the Company's estimated liability for these exposures.
47
50
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL REPORTING
19. QUARTERLY FINANCIAL DATA (UNAUDITED)
FIRST SECOND(1) THIRD FOURTH(2) YEAR
----- --------- ----- --------- ----
(MILLIONS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
Year ended December 31, 1997:
Net sales...................................... $485.6 $481.8 $424.2 $415.0 $1,806.6
Gross margin................................... 112.1 115.3 102.8 94.6 424.8
Net earnings before extraordinary item......... 13.9 28.5 17.4 12.2 72.0
Extraordinary item - loss on early retirement
of debt, net of tax benefit.................. -- (2.6) -- -- (2.6)
Net earnings................................... 13.9 25.9 17.4 12.2 69.4
Diluted earnings per share(5).................. .32 .61 .40 .28 1.61
FIRST SECOND THIRD(3) FOURTH(4) YEAR
----- ------ -------- --------- ----
(MILLIONS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
Year ended December 31, 1996:
Net sales...................................... $522.9 $536.6 $492.4 $480.8 $2,032.7
Gross margin................................... 113.2 117.5 83.2 58.3 372.2
Net earnings (loss)............................ 11.2 15.9 (12.6) (220.8) (206.3)
Diluted earnings (loss) per share(5)........... .25 .36 (.43) (6.43) (6.20)
- -------------------------
(1) Includes an income tax benefit of $6.8 million related to the sales of the
South African and Australian businesses.
(2) Includes $1.1 million for a net restructuring credit, a $2.4 million charge
for an adjustment of assets held for sale to fair value, a $1.6 million
credit for reengineering and other related charges, and a $10.5 million net
charge related to the British pound currency option.
(3) Net loss includes a pretax charge of $38.5 million primarily relating to
changes in estimates, adjustment of assets held for sale to fair value and
other related charges.
(4) Net loss includes a pretax charge for restructuring of $57.6 million,
adjustment of assets held for sale to fair value of $144.9 million and $61.7
million primarily relating to changes in estimates, and other related
charges.
(5) The 1996 and first three quarters of 1997 earnings per share amounts have
been restated to comply with Statement 128, Earnings Per Share.
1997 1996
---------------- ----------------
QUARTER HIGH LOW HIGH LOW
------- ---- --- ---- ---
First....................................................... $26.75 $21.63 $20.88 $17.38
Second...................................................... 35.38 24.50 19.88 17.88
Third....................................................... 39.94 32.75 22.50 16.25
Fourth...................................................... 47.63 36.75 24.50 20.38
Quarterly dividends of $.12 per common share were declared for 1997 and
1996. In February 1998, the Company's Board of Directors declared a quarterly
dividend of $.12 per common share. This was the 248th consecutive quarterly
dividend declared by the Company.
20. SUBSEQUENT EVENTS
T&N PLC Transaction
On October 16, 1997, the Company announced it made a cash offer to acquire
all the outstanding common stock of T&N plc (T&N) for 260 pence per share. The
offer valued T&N's issued share capital at approximately $2.4 billion. T&N,
headquartered in Manchester, England, had 1997 net sales of approximately $2.9
billion. On January 6, 1998, the Company's offer to acquire all of the
outstanding common stock of T&N
48
51
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL REPORTING -- CONTINUED
was declared unconditional as to acceptances. By the second closing date under
the offer, January 2, 1998, valid acceptances of the offer had been received for
approximately 95% of the entire issued share capital of T&N. The Company will
finance the acquisition through a committed bank facility from a reputable
financial institution. The Company's intention is to put in place a permanent
capital structure with an appropriate combination of equity and debt financing.
The offer is subject to various conditions customary in the United Kingdom
and the receipt of all applicable regulatory approvals in the United States and
Europe. As part of the acquisition process, certain financing, professional and
other related fees have been incurred in 1997. These fees have been capitalized
as incurred and will be accounted for as direct acquisition or financing costs
once the transaction closes. Management fully expects the acquisition to close
in the first quarter of 1998, however, in the event the acquisition is not
completed, these fees would be charged to operations and would materially impact
earnings at that time. As of December 31, 1997, the Company had capitalized $28
million of these fees. In addition, the Company may elect to accelerate payment
of certain portions of the bank facility which would result in an extraordinary
charge due to the write-off of the financing cost associated with the early
retirement of debt.
The British pound currency option (refer to Note 8) was settled by the
Company in the first quarter of 1998 resulting in a $17.3 million pretax loss.
Also in the first quarter of 1998, the Company entered into a forward contract
to purchase 1.5 billion British pounds for a notional amount of approximately
$2.45 billion. The forward contract expires in the first quarter of 1998.
Fel-Pro Incorporated Transaction
On February 24, 1998, the Company acquired Fel-Pro Incorporated, a
privately owned manufacturer, headquartered in Skokie, Illinois, with net sales
of approximately $500 million for total consideration of $720 million which
includes $225 million in equity and $495 million in cash. The $495 million in
cash was primarily provided through available borrowings on the $350 million
multicurrency revolver. The remaining consideration paid was through the
issuance of promissory notes.
Divestiture of Minority Interest
In February 1998, the Company announced the divestiture of its minority
interest in G. Bruss GmbH & Co. KG, a German manufacturer of seals and gaskets.
As part of the divestiture agreement the Company increased their ownership to
100% in the Summerton, South Carolina gasket business. The Company also received
cash and recognized a gain as a result of these transactions. The gain
recognized is not expected to be significant to 1998 first quarter results.
49
52
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL REPORTING -- CONTINUED
TO OUR SHAREHOLDERS:
The management of Federal-Mogul has the responsibility for preparing the
accompanying financial statements and for their integrity and objectivity. The
financial statements were prepared in accordance with generally accepted
accounting principles and include amounts based on the best estimates and
judgments of management. Management also prepared the other financial
information in this report and is responsible for its accuracy and consistency
with the financial statements. Federal-Mogul has retained independent auditors,
ratified by election by the shareholders, to audit the financial statements.
Federal-Mogul maintains internal accounting control systems which are
adequate to provide reasonable assurance that assets are safeguarded from loss
or unauthorized use and which produce records adequate for preparation of
financial information. The system, controls and compliance are reviewed by a
program of internal audits. There are limits inherent in all systems of internal
accounting control based on the recognition that the cost of such a system not
exceed the benefits derived. We believe Federal-Mogul's system provides this
appropriate balance.
The Audit Committee of the Board of Directors, comprised of four outside
directors, performs an oversight role related to financial reporting. The
Committee periodically meets jointly and separately with the independent
auditors, internal auditors and management to review their activities and
reports, and to take any action appropriate to their findings. At all times the
independent auditors have the opportunity to meet with the Audit Committee,
without management representatives present, to discuss matters related to their
audit.
Dick Snell
Chairman and Chief Executive Officer
Tom Ryan
Senior Vice President and
Chief Financial Officer
50
53
REPORT OF INDEPENDENT AUDITORS
TO THE SHAREHOLDERS AND BOARD OF DIRECTORS, FEDERAL-MOGUL CORPORATION:
We have audited the accompanying consolidated balance sheets of
Federal-Mogul Corporation and subsidiaries as of December 31, 1997 and 1996, and
the related consolidated statements of operations, shareholders' equity, and
cash flows for each of the three years in the period ended December 31, 1997.
Our audit also included the financial statement schedule listed in Item 14(a).
These financial statements are the responsibility of the company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Federal-Mogul Corporation and subsidiaries at December 31, 1997 and 1996, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended December 31, 1997, in conformity with
generally accepted accounting principles. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
Detroit, Michigan
January 30, 1998
except for Note 20, as
to which the date is
February 24, 1998
51
54
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required by this item will appear (a) under the caption
"Nominees for Election as Directors" in the Company's definitive Proxy Statement
to be dated not later than April 30, 1998 relating to its 1998 Annual Meeting of
Shareholders (the "1998 Proxy Statement") (except for the information appearing
under the caption "Compensation of Directors"), which information is
incorporated herein by reference; (b) under the caption "Information on
Securities -- Compliance with Section 16(a) of the Exchange Act" in the 1998
Proxy Statement, which information is incorporated herein by reference; and (c)
under the caption "Executive Officers of the Company" at the end of Part I of
this Annual Report.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this item will appear under the caption
"Information on Executive Compensation" in the 1998 Proxy Statement (excluding
the information appearing under the captions "Certain Related Transactions" and
"Compensation Committee Report on Executive Compensation") and under the caption
"Compensation of Directors" in the 1998 Proxy Statement and is incorporated
herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this item will appear under the caption
"Information on Securities -- Stock Ownership of Management" and "Other
Beneficial Owners" in the 1998 Proxy Statement and is incorporated herein by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this item will appear under the caption
"Certain Related Transactions" in the 1998 Proxy Statement and is incorporated
herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) The following documents are filed as part of this report:
1. Financial Statements: Financial statements filed as part of this Annual
Report on Form 10-K are listed under Part II, Item 8 hereof.
2. Financial Statement Schedules:
Schedule II -- Valuation and Qualifying Accounts
FINANCIAL STATEMENTS AND SCHEDULES OMITTED:
Schedules other than those listed above are omitted because they are not
required under instructions contained in Regulation S-X or because the
information called for is shown in the financial statements and notes thereto.
Individual financial statements of subsidiaries of the Company have been
omitted as the Company is primarily an operating Company and all subsidiaries
included in the consolidated financial statements filed, in the aggregate, do
not have minority equity interests and/or indebtedness to any person other than
the Company or its consolidated subsidiaries in amounts which together exceed 5%
of the total assets of the Company as shown by the most recent year-end
Consolidated Balance Sheet.
52
55
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
FEDERAL-MOGUL CORPORATION AND SUBSIDIARIES
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
-------- ------------ ---------------------------- ----------- ----------
ADDITIONS
----------------------------
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING COSTS AND OTHER ACCOUNTS- DEDUCTIONS- END OF
DESCRIPTION OF PERIOD EXPENSES DESCRIBE DESCRIBE PERIOD
----------- ---------- ---------- --------------- ----------- ----------
(IN MILLIONS)
Year Ended December 31, 1997:
Valuation allowance for trade
receivable......................... $16.3 $ 3.5 $ -- $ 1.1(1) $18.7
Valuation allowance for note
receivable......................... 0.5 -- -- -- 0.5
Reserve for inventory valuation....... 48.0 1.5 -- 34.4(5) 15.1
Valuation allowance for deferred tax
assets............................. 89.4 -- -- 45.0(6) 44.4
Year Ended December 31, 1996:
Valuation allowance for trade
receivable......................... 18.7 10.9 -- 13.3(1) 16.3
Valuation allowance for note
receivable......................... 0.5 -- -- -- 0.5
Reserve for inventory valuation....... 25.2 22.8 -- -- 48.0
Valuation allowance for deferred tax
assets............................. 23.7 65.7 -- -- 89.4
Year Ended December 31, 1995:
Valuation allowance for trade
receivable......................... 17.1 6.7 0.4(2) 5.5(1) 18.7
Valuation allowance for note
receivable......................... 0.7 -- -- 0.2(3) 0.5
Reserve for inventory valuation....... 25.7 0.7 5.3(2) 6.5(4) 25.2
Valuation allowance for deferred tax
assets............................. 20.9 2.8 -- -- 23.7
- -------------------------
(1) Uncollectible accounts charged off net of recoveries.
(2) Increase to reserve due to acquisition of automotive aftermarket businesses.
(3) Decrease to reserve due to change in market value of note.
(4) Reduction in inventory reserves for inventory disposed of during the year.
(5) Decrease due to the disposal of certain foreign subsidiaries and the
disposal of slow moving and obsolete inventory that was fully reserved.
(6) Disposition of certain international retail operations plus utilization of
foreign net operating loss carryforwards.
53
56
EXHIBITS
*2.1 Recommended Cash Offer for T&N plc, dated as of November 13,
1997.
*2.2 Equity Purchase Agreement between the Company and The
Sellers with respect to the acquisition of Fel-Pro
Incorporated, dated as of January 9, 1998.
3.1 The Company's Second Restated Articles of Incorporation, as
amended. (Incorporated by reference to Exhibit 3.1 to the
Company's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1992.)
*3.2 The Company's Bylaws, as amended.
4.1 Rights Agreement (the "Rights Agreement") between the
Company and National Bank of Detroit, as Rights Agent, with
The Bank of New York as successor Rights Agent.
(Incorporated by reference to Exhibit 1 to the Company's
Registration Statement on Form 8-A, dated November 7, 1988.)
4.2 Amendment, dated July 25, 1990, to the Rights Agreement.
(Incorporated by reference to Exhibit 4.5 to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30,
1990.)
4.3 Amendment, dated January 1, 1993, to the Rights Agreement.
(Incorporated by reference to Exhibit 10.30 to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30,
1993.)
4.4 Amendment, dated September 23, 1992, to the Rights
Agreement. (Incorporated by reference to Exhibit 4.4 to the
Company's Annual Report on Form 10-K for the year ended
December 31, 1992 (the "1992 10-K").)
4.5 Reference is made to Exhibits 10.11, 10.12 and 10.13 hereto,
which contain provisions defining the rights of holders of
certain long-term debt securities of the Company. Other
instruments defining the rights of holders of the long-term
debt securities of the Company and any of its subsidiaries
for which consolidated or unconsolidated financial
statements are required to be filed, have not been filed
because in each case the total amount of long-term debt
permitted thereunder does not exceed 10% of the Company's
consolidated assets and the Company hereby agrees to furnish
such instruments to the Securities and Exchange Commission
upon its request.
*4.6 Purchase Agreement for 10,000,000 Trust Convertible
Preferred Securities of Federal-Mogul Financing Trust, dated
as of November 24, 1997.
*4.7 Registration Rights Agreement, dated as of December 1, 1997
by and among the Company, Federal-Mogul Financing Trust and
Morgan Stanley & Co. Inc. as Initial Purchaser.
*4.8 Indenture between the Company and The Bank of New York,
dated as of December 1, 1997 with respect to the
Subordinated Debentures.
*4.9 First Supplemental Indenture between the Company and The
Bank of New York, dated as of December 1, 1997 with respect
to the Subordinated Debentures.
*4.10 Registration Agreement, dated as of January 9, 1998 by and
among the Company and the Investors identified on Schedule 1
thereto relating to the Series E Mandatory Exchangeable
Preferred Stock.
*4.11 Certificate of Designations of Series E Mandatory
Exchangeable Preferred Stock.
10.1 The Company's 1976 Stock Option Plan, as last amended.
(Incorporated by reference to Exhibit 10.1 to the Company's
Annual Report on Form 10-K for year ended December 31, 1994
(the "1994 10-K").)
10.2 The Company's 1984 Stock Option Plan, as last amended.
(Incorporated by reference to Exhibit 10.2 to the Company's
1994 10-K.)
54
57
10.3 The Company's 1977 Supplemental Compensation Plan, as
amended and restated. (Incorporated by reference to Exhibit
10.27 to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1994.)
10.4 The Company's Supplemental Compensation Retirement Trust
Agreement. (Incorporated by reference to Exhibit 10.4 to the
Company's 1994 10-K.)
10.5 Form of Executive Severance Agreement between the Company
and certain executive officers (Incorporated by reference to
Exhibit 10.5 to the Company's Annual Report on Form 10-K for
the year ended December 31, 1996 (the "1996 10-K).)
10.6 Amended and Restated Deferred Compensation Plan for
Corporate Directors. (Incorporated by reference to Exhibit
10.7 to the Company's Annual Report on Form 10-K for the
year ended December 31, 1990 (the "1990 10-K").)
10.7 Supplemental Executive Retirement Plan, as amended.
(Incorporated by reference to Exhibit 10.10 to the Company's
1992 10-K.)
10.8 Description of Umbrella Excess Liability Insurance for the
Senior Management Team. (Incorporated by reference to
Exhibit 10.11 to the Company's 1990 10-K.)
10.9 Federal-Mogul Corporation 1989 Performance Incentive Stock
Plan, as amended. (Incorporated by reference to Exhibit
10.14 to the Company's 1994 10-K.)
10.10 Supply Agreement, dated as of October 20, 1992, between the
Company, TRW Inc. and the TRW Subsidiaries (as defined
therein). (Incorporated by reference to Exhibit 10.15 to the
Company's 1992 10-K.)
10.11 Note Agreement, dated December 1, 1990, between the Company
and various financial institutions listed therein (the "Note
Agreement"). (Incorporated by reference to Exhibit 10.17 to
the Company's Annual Report Form 10-K for year ended
December 31, 1991.)
10.12 First Amendment dated as of December 11, 1992, to the Note
Agreement. (Incorporated by reference to Exhibit 10.27 to
the Company's 1992 10-K.)
10.13 Second Amendment, dated s of July 14, 1995, to the Note
Agreement. (Incorporated by reference to Exhibit 10.29 to
the Company's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1995.)
10.14 Pooling and Servicing Agreement, dated as of June 1, 1992
(the "Pooling and Servicing Agreement"), among Federal-Mogul
Funding Corporation ("FMFC"), as Seller, the Company, as
Servicer, and The Chase Manhattan Bank (formerly named
Chemical Bank), as Trustee. (Incorporated by reference to
Exhibit 10.21 to the Company's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1993.)
10.15 Series 1992-1 Supplement, dated as of June 1, 1992, to the
Pooling and Servicing Agreement. (Incorporated by reference
to Exhibit 10.22 to the Company's Quarterly Report on Form
10-Q for the quarter ended June 30, 1992.)
10.16 Series 1993-1 Supplement, dated as of March 1, 1993, to the
Pooling and Servicing Agreement. (Incorporated by reference
to Exhibit 10.29 to the Company's Quarterly Report on Form
10-Q for the quarter ended March 31, 1993.)
10.17 Receivables Purchase Agreement, dated as of June 1, 1992,
between the Company and FMFC. (Incorporated by reference to
Exhibit 10.23 to the Company's 1992 10-K.)
10.18 Federal-Mogul Corporation Executive Loan Program.
(Incorporated by reference to Exhibit 10.26 to the Company's
Quarterly Report on Form 10-Q for the quarter ended March
31, 1994.)
10.19 Federal-Mogul Corporation Non-Employee Director Stock Plan.
(Incorporated by reference to Exhibit 4 to the Company's
Registration Statement on Form S-8 (Registration No.
33-54301).)
55
58
10.20 Revolving Credit and Competitive Advance Facility Agreement
dated as of June 30, 1994, among the Company, the Lenders
(as defined therein), Chemical Bank, as Administrative Agent
and as CAF Advance Agent, and the Co-Agents (as defined
therein) (the "Revolving Credit Agreement"). (Incorporated
by reference to Exhibit 4.11 to the Company's Pre-Effective
Amendment No. 1 to Registration Statement on Form S-3
(Registration No. 33-54717).)
10.21 First Amendment, dated as of December 18, 1995, to the
Revolving Credit Agreement. (Incorporated by reference to
Exhibit 10.28 to the Company's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1996.)
10.22 Second Amendment, dated as of October 21, 1996, to the
Revolving Credit Agreement. (Incorporated by reference to
Exhibit 10.29 to the Company's Quarterly Report on Form 10-Q
for quarter ended September 30, 1996.)
10.23 Employment Agreement, dated as of December 1, 1996, between
the Company and R. A. Snell. (Incorporated by reference to
Exhibit 10.23 to the Company's 1996 10-K.)
10.24 Severance Agreement, dated as of December 27, 1996, between
the Company and D. J. Gormley (Incorporated by reference to
Exhibit 10.24 to the Company's 1996 10-K.)
10.25 Severance Agreement, dated as of December 1, 1996, between
the Company and W. G. Smith (Incorporated by reference to
Exhibit 10.25 to the Company's 1996 10-K.)
10.26 Federal-Mogul Corporation 1997 Long-Term Incentive Plan, as
adopted by the Shareholders of the Company on April 23, 1997
(Incorporated by reference to Exhibit 10.01 to the Company's
Quarterly Report on Form 10-Q for the quarter ended March
31, 1997.)
10.27 Executive Severance Agreement, dated as of February 21,
1997, between the Company and Thomas W. VanHimbergern
(Incorporated by reference to Exhibit 10.2 to the Company's
Quarterly Report on Form 10-Q for the quarter ended March
31, 1997.)
10.28 Third Amendment, dated as of January 13, 1997, to Revolving
Credit and Competitive Advance Facility Agreement, dated as
of June 30, 1994, among the Company, various banks, and The
Chase Manhattan Bank (formerly Chemical Bank), as
Administrative Agent. (Incorporated by reference to Exhibit
10.3 to the Company's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1997.)
10.29 Form of Amended and Restated Pooling and Servicing Agreement
("Pooling and Servicing Agreement") among Federal-Mogul
Funding Corporation ("FMFC"), as Seller, the Company, as
Servicer, and The Chase Manhattan Bank, as Trustee
(Incorporated by reference to Exhibit 10.4 to the Company's
Quarterly Report on Form 10-Q for quarter ended March 31,
1997.)
10.30 Form of Series 1997-1 Supplement to the Pooling and
Servicing Agreement (Incorporated by reference to Exhibit
10.5 to the Company's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1997.)
10.31 Form of Amended and Restated Receivables Purchase Agreement
between the Company and FMFC. (Incorporated by reference to
Exhibit 10.6 to the Company's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1997.)
10.32 Form of Certificate Purchase Agreement among FMFC as Seller,
Falcon Asset Securitization Corporation, as Purchaser, The
Liquidity Providers Named Therein, as Liquidity Providers,
and The First National Bank of Chicago, as Program Agent.
(Incorporated by reference to Exhibit 10.7 to the Company's
Quarterly Report on Form 10-Q for the quarter ended March
31, 1997.)
10.33 $350,000,000 Revolving Credit, Competitive Advance and
Multicurrency Facility dated as of June 16, 1997.
(Incorporated by reference to Exhibit 10 to Company's
Quarterly Report on Form 10-Q for the quarter ended June 30,
1997).
*10.34 Amended and Restated Declaration of Trust of Federal-Mogul
Financing Trust, dated as of December 1, 1997.
56
59
*10.35 Common Securities Guarantee Agreement, dated as of December
1, 1997 among the Company and Federal-Mogul Financing Trust.
*10.36 Second Amended and Restated Credit Agreement, dated as of
December 18, 1997 in the amount of $2,750,000,000 among the
Company, The Foreign Subsidiary Borrowers, the Lenders and
The Chase Manhattan Bank.
*10.37 Amended and Restated Senior Subordinated Credit Agreement,
dated as of December 18, 1997 in the amount of $500,000,000
among the Company, the Lenders and The Chase Manhattan Bank.
*10.38 First Amendment, dated as of January 20, 1998 to the Second
Amended and Restated Credit Agreement, dated as of December
18, 1997.
11 Statement Re Computation of Per Share Earnings.
(Incorporated by reference to Amendment 1 to the Company's
1996 10-K/A, dated August 18, 1997.)
*21 Subsidiaries of the Registrant.
*23.1 Consent of Ernst & Young LLP.
23.2 Consent of Nancy S. Shilts, Esq. (Incorporated by reference
to Exhibit 23.2 to the Company's 10-K/A, dated August 18,
1997.)
*24 Powers of Attorney.
*27 Financial Data Schedule.
- -------------------------
* Filed Herewith
The Company will furnish upon request any exhibit described above upon
payment of the Company's reasonable expenses for furnishing such exhibit.
(b) Reports on Form 8-K:
On October 16, 1997, the Company filed a Current Report on Form 8-K to
announce its recommended cash offer for T&N plc.
On December 8, 1997, the Company filed a Current Report on Form 8-K to
report its sale of 10,000,000 Trust Convertible Preferred Securities.
On January 12, 1998, the Company filed a Current Report on Form 8-K to
report its agreement to purchase Fel-Pro Incorporated.
57
60
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) 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/ THOMAS W. RYAN
------------------------------------
Thomas W. Ryan
Senior Vice President and Chief
Financial Officer
Dated: March 2, 1998
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THEIR CAPACITIES.
SIGNATURE TITLE
--------- -----
/s/ RICHARD A. SNELL Chairman of the Board, Chief Executive Officer and
- ------------------------------------------ President
Richard A. Snell
/s/ THOMAS W. RYAN Senior Vice President and Chief Financial Officer
- ------------------------------------------ (Principal Financial Officer)
Thomas W. Ryan
/s/ KENNETH P. SLABY Vice President and Controller (Principal Accounting
- ------------------------------------------ Officer)
Kenneth P. Slaby
* Director
- ------------------------------------------
Roderick M. Hills
* Director
- ------------------------------------------
John J. Fannon
* Director
- ------------------------------------------
Antonio Madero
* Director
- ------------------------------------------
Robert S. Miller, Jr.
* Director
- ------------------------------------------
John C. Pope
* Director
- ------------------------------------------
Dr. H. Michael Sekyra
*By: /s/ DIANE L. KAYE
------------------------------------
Diane L. Kaye
Attorney-in-Fact
58