UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from __________ to __________
Commission File Number: 1-1511
FEDERAL-MOGUL CORPORATION
(Exact name of Registrant as specified in its charter)
Michigan 38-0533580
(State or other jurisdiction of (IRS employer
incorporation or organization) identification number)
26555 Northwestern Highway, Southfield, Michigan 48034
(Address of principal executive offices) (Zip Code)
(248) 354-7700
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days. Yes X No
--- ---
As of April 30, 2002, there were 82,383,257 outstanding shares of the
registrant's $5.00 stated value common stock.
FORWARD-LOOKING STATEMENTS
Certain statements contained or incorporated in this Quarterly Report on
Form 10-Q which are not statements of historical fact constitute
"Forward-Looking Statements" within the meaning of the Private Securities
Litigation Reform Act of 1995 (The "Reform Act"). Such statements are made in
good faith by Federal-Mogul (the "Company") pursuant to the "Safe Harbor"
provisions of the Reform Act.
Forward-looking statements include financial projections, estimates and
statements regarding plans, objectives and expectations of the Company and its
management, as well as the Company's views regarding industry and economic
conditions and trends. Forward looking statements include, without limitation,
plans to implement restructuring initiatives relating to manufacturing and
warehouse facilities, plans to address issues related to financing of the
Company's business operations, statements regarding industry conditions, and
statements regarding the scope and effect of asbestos liabilities and any
plan(s) of reorganization and scheme(s) of arrangement associated with the
Company's Chapter 11 filing in the U.S. and Administration in the U.K.
Forward-looking statements may involve known and unknown risks,
uncertainties and other factors, which may cause the actual results,
performance, experience or achievements of the Company to differ materially from
any future results, performance, experience or achievements expressed or implied
by such forward-looking statements. Such risks, uncertainties and other factors
include, without limitation, fluctuation in demand for both original equipment
and replacement components in the automotive, heavy-duty vehicular and
industrial markets, the effect of certain global and regional economic
conditions, the ability of the Company to control operating and other costs,
legal proceedings and claims (including environmental and asbestos matters)
involving the Company, changes in the Company's relationships with customers and
suppliers, the effect of the Chapter 11 voluntary reorganization filing by the
Company and its wholly owned U.S. subsidiaries and filings of certain of the
Company's U.K. subsidiaries for Chapter 11 and Administration, legislative risks
and uncertainties, and other factors, some of which are beyond the Company's
control.
2
PART I - FINANCIAL INFORMATION
- ------------------------------
Item 1. Financial Statements
--------------------
Federal-Mogul Corporation and Subsidiaries
Condensed Consolidated Statements of Operations
(Millions of Dollars, Except Per Share Amounts)
(Unaudited)
Three Months Ended
March 31
--------
2002 2001
---- ----
Net sales .......................................................................... $1,346.1 $ 1,450.7
Cost of products sold .............................................................. 1,084.8 1,147.4
-------- ----------
Gross margin .................................................................... 261.3 303.3
Selling, general and administrative expenses ....................................... 213.4 227.6
Amortization of goodwill and other intangible assets ............................... 3.6 30.4
Restructuring charges .............................................................. 9.5 29.8
Adjustment of assets held for sale and other long-lived assets to
fair value .................................................................... -- 0.6
Interest expense, net .............................................................. 30.3 82.6
Chapter 11 and Administration related reorganization expenses ...................... 14.9 --
Other expense, net ................................................................. 1.0 6.5
-------- ----------
Loss before income tax expense (benefit) ................................. (11.4) (74.2)
Income tax expense (benefit) ....................................................... 14.2 (12.0)
-------- ----------
Net loss ................................................................. (25.6) (62.2)
Preferred dividends ................................................................ -- 0.4
-------- ----------
Net Loss Attributable to Common Shareholders ....................................... $ (25.6) $ (62.6)
======== ==========
Loss Per Common Share:
Basic and Diluted
Net Loss Per Common Share ..................................................... $ (0.31) $ (0.89)
========= ========
See accompanying notes.
3
Federal-Mogul Corporation and Subsidiaries
Condensed Consolidated Balance Sheets
(Millions of Dollars)
(Unaudited)
March 31 December 31
2002 2001
---- ----
ASSETS
Cash and equivalents ............................................................... $ 315.8 $ 346.9
Accounts receivable ................................................................ 1,023.4 944.8
Inventories ........................................................................ 746.5 721.9
Deferred taxes ..................................................................... 55.4 55.4
Prepaid expenses and income tax benefits ........................................... 165.4 177.6
-------- --------
Total Current Assets .......................................................... 2,306.5 2,246.6
Property, plant and equipment, net ................................................. 2,121.3 2,163.7
Goodwill ........................................................................... 2,713.5 2,738.9
Other intangible assets, net ....................................................... 607.1 624.7
Asbestos-related insurance recoverable ............................................. 712.6 723.2
Other noncurrent assets ............................................................ 532.8 556.1
-------- --------
Total Assets .................................................................. $8,993.8 $ 9,053.2
======== =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Short-term debt, including current portion of long-term debt ....................... $ 15.0 $ 24.9
Accounts payable ................................................................... 328.5 299.5
Accrued compensation ............................................................... 211.6 193.9
Restructuring and rationalization reserves ......................................... 81.4 81.1
Other accrued liabilities .......................................................... 428.5 382.9
-------- --------
Total Current Liabilities ..................................................... 1,065.0 982.3
Long-term debt ..................................................................... 258.7 266.7
Postemployment benefits ............................................................ 817.4 819.8
Other accrued liabilities .......................................................... 242.3 258.5
Minority interest in consolidated subsidiaries ..................................... 46.7 50.3
Liabilities subject to compromise .................................................. 6,244.8 6,256.6
Shareholders' Equity:
Series C ESOP preferred stock ................................................... 28.0 28.0
Common stock .................................................................... 411.9 411.9
Additional paid-in capital ...................................................... 1,845.1 1,844.6
Accumulated deficit ............................................................. (1,140.6) (1,115.0)
Accumulated other comprehensive loss ............................................ (825.2) (750.1)
Other ........................................................................... (0.3) (0.4)
-------- --------
Total Shareholders' Equity .................................................... 318.9 419.0
-------- --------
Total Liabilities and Shareholders' Equity .................................... $8,993.8 $9,053.2
======== ========
See accompanying notes.
4
Federal-Mogul Corporation and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Millions of Dollars)
(Unaudited)
Three Months Ended
March 31
--------
2002 2001
---- ----
Cash Provided From (Used By) Operating Activities
Net loss ............................................................................ $ (25.6) $ (62.2)
Adjustments to reconcile net loss to net cash provided from (used by) operating
activities:
Depreciation and amortization ..................................................... 67.4 97.8
Restructuring charges ............................................................. 9.5 29.8
Chapter 11 and Administration related reorganization expenses ..................... 14.9 --
Adjustment of assets held for sale and other long-lived assets to fair value ...... -- 0.6
Postemployment benefits ........................................................... 0.2 3.5
Increase in accounts receivable ................................................... (83.8) (38.3)
Decrease (increase) in inventories ................................................ (38.7) 9.1
Increase in accounts payable ...................................................... 25.7 21.9
Changes in other current liabilities and other current assets ..................... 84.0 (38.8)
Payments against restructuring and rationalization reserves ....................... (8.6) (16.0)
Payments for Chapter 11 and Administration related reorganization expenses ........ (13.9) --
Payments against asbestos liability, net of insurance receipts .................... 0.4 (88.3)
------- -------
Net Cash Provided From (Used By) Operating Activities .......................... 31.5 (80.9)
Cash Used By Investing Activities
Expenditures for property, plant and equipment and other long-term assets ........... (63.5) (65.0)
Proceeds from sales of businesses ................................................... 21.8 --
------- -------
Net Cash Used By Investing Activities .......................................... (41.7) (65.0)
Cash Provided From (Used By) Financing Activities
Proceeds from issuance of long-term debt ............................................ -- 236.0
Principal payments on long-term debt ................................................ (1.9) (22.1)
Principal payments on DIP credit facility ........................................... (6.1) --
Decrease in short-term debt ......................................................... (9.9) (32.1)
Fees paid for debt agreements ....................................................... --
(14.2)
Repurchase of accounts receivable under securitization .............................. -- (48.2)
Dividends ........................................................................... -- (0.7)
Other ............................................................................... (3.0) 3.0
------- -------
Net Cash Provided From (Used By) Financing Activities .......................... (20.9) 121.7
------- -------
Decrease in Cash and Equivalents ............................................... (31.1) (24.2)
Cash and Equivalents at Beginning of Period .................................... 346.9 107.2
------- -------
Cash and Equivalents at End of Period .......................................... $ 315.8 $ 83.0
======== =======
See accompanying notes.
5
Federal-Mogul Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
March 31, 2002
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with accounting principles generally accepted in the
United States ("U.S. GAAP") for interim financial information and with
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do
not include all of the information and footnotes required by U.S. GAAP for
complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring adjustments) considered necessary for a fair
presentation have been included. Operating results for the three-month period
ended March 31, 2002 are not necessarily indicative of the results that may be
expected for the year ended December 31, 2002. For further information, refer to
the consolidated financial statements and footnotes thereto included in the
Company's Annual Report on Form 10-K for the year ended December 31, 2001.
Certain items in the prior year's condensed consolidated financial statements
have been reclassified to conform to the presentation used in 2002.
2. VOLUNTARY REORGANIZATION UNDER CHAPTER 11 AND ADMINISTRATION
On October 1, 2001 (the "Petition Date"), Federal-Mogul Corporation
("Company" or "Federal-Mogul") and all of its wholly owned United States
subsidiaries filed voluntary petitions for reorganization (the "U.S.
Restructuring") under Chapter 11 of the United States Bankruptcy Code (the
"Bankruptcy Code") in the United States Bankruptcy Court for the District of
Delaware (the "Bankruptcy Court"). Also on October 1, 2001, certain of the
Company's United Kingdom subsidiaries filed voluntary petitions for
reorganization under Chapter 11 of the Bankruptcy Code and petitions for
Administration (the "U.K. Restructuring") under the United Kingdom Insolvency
Act of 1986 (the "Act") in the High Court of Justice, Chancery division in
London, England (the "High Court"). The Company and its U.S. and U.K.
subsidiaries included in the U.S. Restructuring and U.K. Restructuring are
herein referred to as the "Debtors". The U.S. Restructuring and U.K.
Restructuring are herein referred to as the "Restructuring Proceedings". The
Chapter 11 cases of the Debtors (collectively, the "Chapter 11 Cases") have been
consolidated for purposes of joint administration as In re: Federal-Mogul Global
Inc., T&N Limited, et al (Case No. 01-10578(SLR)). The Chapter 11 Cases do not
include any of the Company's non-U.S. subsidiaries outside of the U.K.
subsidiaries mentioned above.
The Restructuring Proceedings were undertaken to resolve the Company's
asbestos-related litigation in a fair and equitable manner, to protect the
long-term value of the Debtors' businesses and to maintain the Debtors'
leadership positions in their markets.
Consequences of the Restructuring Proceedings:
The U.S. Debtors are operating their businesses as debtors-in-possession
subject to the provisions of the Bankruptcy Code. The U.K. Debtors are
continuing to manage their operations under the supervision of an Administrator
approved by the High Court. All vendors will be paid for all goods furnished and
services provided after the Petition Date. However, as a consequence of the
Restructuring Proceedings, all pending litigation against the Debtors as of the
Petition Date is stayed (subject to certain exceptions in the case of
governmental authorities), and no party may take any action to pursue or collect
pre-petition claims except pursuant to an order of the Bankruptcy Court or the
High Court as applicable. It is the Debtors' intention to address all pending
and future asbestos-related claims and all other pre-petition claims through a
unified plan of reorganization under the Bankruptcy Code or scheme of
arrangement under the Act. However, it is currently impossible to predict with
any degree of certainty how a plan of reorganization or a scheme of arrangement
will treat asbestos and other pre-petition claims and what impact the
Restructuring Proceedings and any plan of reorganization or scheme of
arrangement may have on the shares of the Company's common stock. The
formulation and implementation of the plan of reorganization or scheme of
arrangement could take a significant period of time.
In the U.S., two creditors' committees, representing asbestos claimants and
unsecured creditors have been appointed as official committees in the Chapter 11
Cases and, in accordance with the provisions of the Bankruptcy
6
Code, will have the right to be heard on all matters that come before the
Bankruptcy Court. The Company expects that the appointed committees, together
with the now appointed legal representative for the future asbestos claimants
will play important roles in the Restructuring Proceedings. In the U.K., the
Administrator has appointed a creditor's committee, representing both asbestos
claimants and general unsecured creditors. The Company expects this committee to
play an important role in the negotiation of any scheme of arrangement.
As provided by the Bankruptcy Code, the Debtors initially had the exclusive
right to propose a plan of reorganization within 120 days following the Petition
Date with the Bankruptcy Court. The Debtors have asked the Bankruptcy Court to
extend the period of exclusivity to August 1, 2002, and the request was granted.
If the Debtors fail to file a plan of reorganization during such period or any
extension thereof, or if such plan of reorganization is not accepted by the
requisite numbers of creditors and equity holders entitled to vote on the plan,
other parties in interest in the Chapter 11 Cases may be permitted to propose
their own plan(s) of reorganization for the Debtors. As provided by the Act, the
Administrator will propose a scheme of arrangement with the High Court.
The Company is unable to predict at this time what the treatment of
creditors and equity security holders of the respective Debtors will be under
any proposed plan(s) of reorganization or scheme(s) of arrangement. One
alternative such plan(s) of reorganization may provide, among other things, that
all present and future asbestos-related liabilities of the Debtors will be
discharged and assumed and resolved by one or more independently administered
trusts established in compliance with Section 524(g) of the Bankruptcy Code.
Such plan(s) may also provide for the issuance of an injunction by the
Bankruptcy Court pursuant to Section 524(g) of the Bankruptcy Code that will
enjoin actions against the reorganized Debtors alleging asbestos-related claims,
which claims will be paid in whole or in part by one or more Section 524(g)
trusts. Similar plans of reorganization have been confirmed in Chapter 11 cases
of other companies involved in asbestos-related litigation. Section 524(g) of
the Bankruptcy Code provides that, if certain specified conditions are
satisfied, a court may issue a supplemental permanent injunction barring the
assertion of asbestos-related claims against the reorganized company and
channeling those claims to an independent trust.
There are two possible types of U.K. schemes of arrangements. The first is
under Section 425 of the Companies Act of 1985, which may involve a scheme for
the reconstruction of the Company. If a majority in number representing
three-fourths in value of the creditors or members or any class of them agree to
the compromise or arrangement, it is binding if sanctioned by the High Court.
Section 425 may be invoked where there is an Administration order in force in
relation to the Company. The other possible type of scheme arises under Section
1 of the Insolvency Act of 1986 in relation to Company Voluntary Arrangements
("CVA"). If a majority in value representing more than three-fourths of the
creditors agrees to the compromise or arrangement set out in the CVA proposal,
it will be approved.
The Company is unable to predict at this time what treatment will be
accorded under any such plan(s) of reorganization to intercompany indebtedness,
licenses, executory contracts, transfers of goods and services, and other
intercompany arrangements, transactions and relationships that were entered into
prior to the Petition Date. These arrangements, transactions, and relationships
may be challenged by various parties in the Chapter 11 cases, and the outcome of
those challenges, if any, may have an impact on the treatment of various claims
under such plan(s) of reorganization.
The Bankruptcy Court may confirm a plan of reorganization only upon making
certain findings required by the Bankruptcy Code, and a plan may be confirmed
over the dissent of non-accepting creditors and equity security holders if
certain requirements of the Bankruptcy Code are met. The payment rights and
other entitlements of pre-petition creditors and equity shareholders may be
substantially altered by any plan(s) of reorganization confirmed in the Chapter
11 Cases. There is no assurance that there will be sufficient assets to satisfy
the Debtors' pre-petition liabilities in whole or in part, and the pre-petition
creditors of some Debtors may be treated differently than those of other
Debtors. Pre-petition creditors may receive under the proposed plan(s) less than
100% of the face value of their claims, and the interests of the Company's
equity security holders may be substantially diluted or cancelled in whole or in
part. As noted above, it is not possible at this time to predict the outcome of
the Chapter 11 cases, the terms and provisions of any plan(s) of reorganization,
or the effect of the Chapter 11 reorganization process on the claims of the
pre-petition creditors of the Debtors or the interests of the Company's equity
security holders.
7
Chapter 11 Financing:
In connection with the Restructuring Proceedings, the Company entered into
a $675 million debtor-in-possession ("DIP") credit facility to supplement
liquidity and fund operations during the reorganization process. The DIP credit
facility expires in October, 2003 and bears interest at either the alternate
base rate ("ABR") plus 2.5 percentage points or a formula based on the London
Inter-Bank Offered Rate ("LIBOR") plus 3.5 percentage points. The ABR is the
greatest of either the bank's prime rate or the base CD rate plus 1 percentage
point or the fed funds rate plus 1/2 percentage point. The $675 million
commitment is reduced by proceeds received from an asset sale or business unit
divestiture. As a result of a first quarter divestiture (see Note 6), the total
commitment under the DIP credit facility has been reduced to $659 million as of
March 31, 2002.
At March 31, 2002 the Company had $244.6 million outstanding and $329.0
million available to borrow under its DIP credit facility. The borrowings were
used to pay off the Company's accounts receivable securitization facility during
2001 as a result of the facility being closed in conjunction with the U.S.
Restructuring.
Financial Statement Presentation:
The accompanying condensed consolidated financial statements have been
prepared in accordance with AICPA Statement of Position 90-7 ("SOP 90-7"),
"Financial Reporting by Entities in Reorganization under the Bankruptcy Code"
and on a going concern basis, which contemplates continuity of operations,
realization of assets and liquidation of liabilities in the ordinary course of
business. However, as a result of the Restructuring Proceedings, such
realization of assets and liquidation of liabilities, without substantial
adjustments and/or changes of ownership, are highly uncertain. Given this
uncertainty, there is substantial doubt about the ability of the Company to
continue as a going concern. While operating as debtors-in-possession under the
protection of Chapter 11 of the Bankruptcy Code and Administration under the
Act, and subject to approval of the Bankruptcy Court, Administrator or the High
Court or otherwise as permitted in the ordinary course of business, the Debtors,
or some of them, may sell or otherwise dispose of assets and liquidate or settle
liabilities for some amounts other than those reflected in the condensed
consolidated financial statements. Further, a plan of reorganization or scheme
of arrangement could materially change the amounts and classifications in the
historical consolidated financial statements.
Virtually all of the Company's pre-petition debt is in default. At
March 31, 2002, the Debtors' pre-petition debt is classified under the caption
"Liabilities Subject to Compromise." This includes debt outstanding of $1,901.9
million under the pre-petition Senior Credit Agreements and $2,119.0 million of
other outstanding debt, primarily notes payable at various unsecured rates, less
capitalized debt issuance fees of $47.6 million.
As a result of the Restructuring Proceedings, the Company is in default to
its affiliate holder of its convertible junior subordinated debentures and is no
longer accruing interest expense or making interest payments on the debentures.
As a result, the affiliate will no longer have the funds available to pay
distributions on the Company-Obligated Mandatorily Redeemable Preferred
Securities and stopped accruing and paying such distributions in October 2001.
The affiliate is in default on the Company-Obligated Mandatorily Redeemable
Preferred Securities. The Company is a guarantor on the outstanding debentures,
and, as a result of the default, the Company has become a debtor to the holders
of the debentures directly. This liability is a pre-petition liability. As a
result, the Company has classified these securities as "Liabilities Subject to
Compromise" in the March 31, 2002 consolidated balance sheet.
As reflected in the consolidated financial statements, "Liabilities Subject
to Compromise" refers to Debtors' liabilities incurred prior to the commencement
of the Restructuring Proceedings. The amounts of the various liabilities that
are subject to compromise are set forth below. These amounts represent the
Company's estimate of known or potential pre-petition claims to be resolved in
connection with the Restructuring Proceedings. Such claims remain subject to
future adjustments. Future adjustments may result from (i) negotiations; (ii)
actions of the Bankruptcy Court, High Court or Administrator; (iii) further
developments with respect to disputed claims; (iv) rejection of executory
contracts and unexpired leases; (v) the determination as to the value of any
collateral securing claims; (vi) proofs of claim; or (vii) other events. Payment
terms for these claims will be established in connection with the Restructuring
Proceedings.
Pursuant to the Bankruptcy Code, the Debtors have filed schedules with the
Bankruptcy Court setting forth the
8
assets and liabilities of the Debtors as of the Petition Date. Differences
between amounts recorded by the Debtors and claims filed by creditors will be
investigated and resolved as part of the Restructuring Proceedings. No bar dates
have been set for the filing of proofs of claim against the Debtors.
Accordingly, the ultimate number and allowed amount of such claims are not
presently known. The Debtors have received approval from the Bankruptcy Court to
pay or otherwise honor certain of their pre-petition obligations, including
employee wages, salaries, benefits and other employee obligations and from
limited available funds, pre-petition claims of certain critical vendors,
certain customer programs and warranty claims and certain other pre-petition
claims.
The appropriateness of using the going concern basis for its financial
statements is dependent upon, among other things, (i) the Company's ability to
comply with the terms of the DIP credit facility and any cash management order
entered by the Bankruptcy Court in connection with the Chapter 11 Cases; (ii)
the ability of the Company to maintain adequate cash on hand; (iii) the ability
of the Company to generate cash from operations; (iv) confirmation of a plan(s)
of reorganization under the Bankruptcy Code; and (v) the Company's ability to
achieve profitability following such confirmation.
Debtors' Financial Statements:
The condensed combined financial statements of the Debtors are presented
below. These statements reflect the financial position, results of operations
and cash flows of the combined Debtor subsidiaries, including certain amounts
and activities between Debtors and non-debtor subsidiaries of the Company which
are eliminated in the condensed consolidated financial statements. The condensed
combined financial statements of the Debtors are presented as follows:
Federal-Mogul Corporation
Debtors' Condensed Combined Statement of Operations (Unaudited)
Three Months
Ended
March 31
2002
----
(Millions of Dollars)
Net sales ......................................................................... $ 934.5
Cost of products sold ............................................................. 771.8
-------
Gross margin ................................................................... 162.7
Selling, general and administrative expenses ...................................... 150.1
Amortization of other intangible assets ........................................... 2.9
Restructuring charges ............................................................. 0.5
Interest expense .................................................................. 30.9
Chapter 11 and Administration related reorganization expenses ..................... 14.9
Other income, net ................................................................. (32.6)
-------
Loss before income taxes and equity loss of Non-Debtor subsidiaries ........ (4.0)
Income tax expense ................................................................ 5.4
-------
Loss before equity loss of Non-Debtor subsidiaries ......................... (9.4)
Equity loss of Non-Debtor subsidiaries ............................................ (16.2)
--------
Net loss ................................................................... $ (25.6)
========
9
Federal-Mogul Corporation
Debtors' Condensed Combined Balance Sheet (Unaudited)
March 31
2002
----
(Millions of Dollars)
ASSETS
Cash and equivalents .................................................................. $ 118.0
Accounts receivable ................................................................... 630.3
Accounts receivable, Non-Debtors ...................................................... 180.5
Inventories ........................................................................... 459.1
Deferred taxes ........................................................................ 37.3
Prepaid expenses and income tax benefits .............................................. 102.2
---------
Total Current Assets ............................................................. 1,527.4
Property, plant and equipment, net .................................................... 1,212.3
Goodwill .............................................................................. 2,202.2
Other intangible assets, net .......................................................... 565.1
Asbestos-related insurance recoverable ................................................ 712.6
Loans receivable and investments in Non-Debtors ....................................... 4,553.6
Other noncurrent assets ............................................................... 441.7
---------
Total Assets ..................................................................... $11,214.9
=========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable ...................................................................... $276.1
Accounts payable, Non-Debtors ......................................................... 52.4
Other accrued liabilities ............................................................. 316.8
---------
Total Current Liabilities ........................................................ 645.3
Long-term debt ........................................................................ 243.9
Postemployment benefits ............................................................... 656.7
Other accrued liabilities ............................................................. 61.0
Loans payable, Non -Debtors ........................................................... 1,019.8
Liabilities subject to compromise ..................................................... 8,269.3
Shareholders' Equity .................................................................. 318.9
---------
Total Liabilities and Shareholders' Equity ......................................... $11,214.9
=========
10
Federal-Mogul Corporation
Debtors' Condensed Combined Statement of Cash Flows (Unaudited)
Three Months Ended
March 31
2002
----
(Millions of Dollars)
Cash Used By Operating Activities
Net loss ............................................................................ $ (25.6)
Adjustments to reconcile net loss to net cash used by
operating activities:
Depreciation and amortization ..................................................... 42.3
Restructuring charges ............................................................. 0.5
Chapter 11 and Administration related reorganization expenses ..................... 14.9
Equity loss of Non-Debtor subsidiaries ............................................ 16.2
Postemployment benefits ........................................................... 1.2
Changes in working capital, other assets, and other liabilities ................... (44.6)
Payments of Chapter 11 and Administration related reorganization expenses ......... (13.9)
Payments against restructuring and rationalization reserves ....................... (4.6)
Refunds against asbestos liability, net of insurance receipts ..................... 0.4
-------
Net Cash Used By Operating Activities ........................................... (13.2)
Cash Used By Investing Activities
Expenditures for property, plant and equipment and other long-term assets ........... (28.0)
Proceeds from sales of businesses ................................................... 21.8
-------
Net Cash Used By Investing Activities ........................................... (6.2)
Cash Used By Financing Activities
Principal payments on DIP credit facility ........................................... (6.1)
Other ............................................................................... (3.0)
-------
Net Cash Used By Financing Activities ........................................... (9.1)
Decrease in Cash and Equivalents ................................................ (28.5)
Cash and equivalents at beginning of quarter .................................... 146.5
-------
Cash and Equivalents at end of quarter .......................................... $ 118.0
=======
Liabilities subject to compromise at March 31, 2002 are comprised of
(in millions):
Debt ........................... $3,973.3
Asbestos liabilities ........... 1,547.3
Company-obligated
mandatorily redeemable
preferred securities ........ 448.9
Accounts payable ............... 194.4
Interest payable ............... 41.2
Environmental liabilities ...... 23.0
Other accrued liabilities ...... 16.7
-------
Subtotal .................... 6,244.8
Intercompany payables to
Affiliates .................. 2,024.5
-------
Liabilities subject to
Compromise .................. $8,269.3
========
11
Chapter 11 and Administration related reorganization expenses in the
condensed consolidated statements of operations for the three month period
ending March 31, 2002 consist of legal, financial and advisory fees and other
directly related internal costs.
3. TAXES
For the three months ended March 31, 2002, the Company recorded income tax
expense of $14.2 million on a loss of $11.4 million before income taxes,
compared to an income tax benefit of $12.0 million on a loss of $74.2 million
before income taxes in the same period of 2001. Income tax expense for the three
months ended March 31, 2002, resulted primarily from not providing a tax benefit
for current losses in the United States and from specific interest expense
deductions in the U.K.
Through the Petition Date, tax expense has historically differed from
income taxes currently payable due to timing differences most significantly
related to asbestos payments. As a result of the Restructuring Proceedings, the
Company does not expect to make payments for the settlement of asbestos claims
in the near term, and as such, income taxes payable in the U.K. may increase.
The Company does not expect the effect of suspended asbestos payments to have a
significant effect on income taxes payable in the U.S. in the near term.
4. OPERATIONS BY REPORTABLE SEGMENT
The segment information for the three months ended March 31, 2001 has been
restated to reflect the Company's internal organization changes subsequently
implemented in 2001. The Company is a global manufacturer with six reportable
segments: Powertrain; Sealing Systems and Systems Protection; Friction;
Aftermarket; Other; and Divested Operations.
Powertrain products are used primarily in automotive, light truck, heavy
duty, industrial, marine, agricultural, power generation and small air-cooled
engine applications. The primary products of this reportable segment include
engine bearings, pistons, piston pins, rings, cylinder liners, camshafts,
sintered products, and connecting rods.
Sealing Systems and Systems Protection products are used in automotive,
light truck, heavy duty, agricultural, off-highway, marine, railroad, high
performance and industrial applications. The primary products of this reportable
segment include dynamic seals, gaskets and element resistant sleeving systems
protection products.
Friction products are used in automotive and heavy duty applications. The
primary products of this reportable segment unit include discs, pads and brake
shoes.
Aftermarket provides products from the above segments to the independent
automotive and heavy duty aftermarkets as well as the manufacturing operations
of North American brake, chassis, ignition, fuel and wipers.
Other includes the non-core businesses of lighting, European wipers &
ignition manufacturing, as well as Asia Pacific, South America and other
Corporate functions.
Divested Operations include the historical operating results of the
Company's divestitures (see Note 6).
12
The Company has aggregated individual product segments within its six
reportable segments. The accounting policies of the segments are the same as
that of the Company. The Company evaluates segment performance based on several
factors, including Operational EBIT and major cash flow drivers. Operational
EBIT is defined as earnings before interest, income taxes, extraordinary items
and certain nonrecurring items such as restructuring and impairment charges,
Chapter 11 and Administration related reorganization expenses and gains or
losses on the sales of businesses. Operational EBIT for each segment is shown
below, as it is most consistent with the corresponding condensed consolidated
financial statements (in millions).
Net Sales Operational EBIT
--------- ----------------
Three Months Three Months
Ended March 31 Ended March 31
-------------- --------------
2002 2001 2002 2001
---- ---- ----- ----
Powertrain ..................... $ 430.3 $ 449.4 $ 25.1 $ 44.3
Sealing Systems and
Systems Protection ......... 148.4 154.7 8.4 8.9
Friction ....................... 86.6 90.2 13.6 1.8
Aftermarket .................... 572.9 616.8 67.6 56.5
Other, including Corporate ..... 94.7 92.3 (79.7) (67.8)
Divested Operations ............ 13.2 47.3 1.9 5.3
-------- -------- ------ ------
Total .......................... $1,346.1 $1,450.7 $ 36.9 $ 49.0
======== ======== ====== ======
Three Months Ended
March 31
--------
Reconciliation: 2002 2001
---- ----
Total segments Operational EBIT .................................. $ 36.9 $ 49.0
Net interest and other financing costs ........................... (30.7) (92.8)
Restructuring, impairment and other special charges .............. (9.5) (30.4)
Gain on sale of businesses ....................................... 6.8 --
Chapter 11 and Administration related reorganization expenses .... (14.9) --
------ ------
Loss before income taxes ..................................... $(11.4) $(74.2)
====== ======
Total assets by reportable segment are as follows:
Total Assets
------------
March 31, December 31,
2002 2001
---- ----
Powertrain ................... $ 2,691.7 $ 2,728.6
Sealing Systems and
Systems Protection ....... 1,052.6 1,031.8
Friction ..................... 437.1 398.9
Aftermarket .................. 3,590.9 3,360.3
Other, including Corporate ... 1,198.0 1,429.6
Divested Operations .......... 23.5 104.0
--------- ---------
Total ........................ $ 8,993.8 $ 9,053.2
========== =========
13
5. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted loss
per share (in millions, except per share data):
Three Months Ended
March 31
--------
2002 2001
---- ----
Numerator:
Net loss ................................................................. $ (25.6) $ (62.2)
Series C preferred dividend requirement ................................. -- (0.4)
------- -------
Numerator for basic and diluted loss per share - loss attributable to
common shareholders before extraordinary items .................... $ (25.6) $ (62.6)
======= =======
Denominator:
Denominator for basic and diluted loss per share - weighted
average shares ......................................................... 82.4 70.6
======= =======
Basic and diluted loss per share .............................................. $ (0.31) $ (0.89)
======= =======
Convertible preferred securities redeemable for 9.2 million and 11.2
million shares of common stock were outstanding at March 31, 2002 and 2001,
respectively, but were not included in the computation of diluted earnings per
share because the effect would be antidilutive.
6. DIVESTITURES
During the first quarter of 2002 the Company completed the divestiture of
its Signal-Stat Lighting Products business ("Signal-Stat") to Truck-Lite Co.,
Inc. Signal-Stat produces exterior lighting and power distribution products
primarily for heavy duty and commercial vehicle markets. Signal-Stat had 2001
net sales of $53.0 million. The Company received aggregate proceeds of $20.9
million and recognized an aggregate gain of $6.8 million for this divestiture in
the first quarter of 2002. The gain is included in "Other expense, net" in the
accompanying condensed consolidated statements of operations.
7. ASBESTOS LIABILITY AND LEGAL PROCEEDINGS
T&N Companies Asbestos Litigation
Background:
The Company's U.K. subsidiary, T&N Ltd., and two U.S. subsidiaries (the
"T&N Companies") are among many defendants named in numerous court actions in
the U.S. alleging personal injury resulting from exposure to asbestos or
asbestos-containing products. T&N Ltd. is also subject to asbestos-disease
litigation, to a lesser extent, in the United Kingdom and France. As of the
Petition Date, T&N Ltd. was a defendant in approximately 91,000 pending personal
injury claims. The two United States subsidiaries were defendants in
approximately 172,000 pending personal injury claims.
Recorded Liability:
In 2000, the Company increased its estimate of asbestos-related liability
for the T&N Companies by $751 million and recorded a related insurance
recoverable asset of $577 million. The revision in the estimate of probable
asbestos-related liability principally resulted from a study performed by an
econometric firm that specializes in these types of matters. The liability
(approximately $1.3 billion at March 31, 2002) represented the Company's
estimate prior to the Restructuring Proceedings for claims currently pending and
those which were reasonably estimated to be asserted and paid through 2012. The
Company did not provide a liability for claims that may be paid subsequent to
this period as it could not reasonably estimate such claims. In estimating the
liability prior to the Restructuring Proceedings, the Company made assumptions
regarding the total number of claims anticipated to be received in a future
period, the typical cost of settlement (which is sensitive to the industry in
which the plaintiff claims exposure, the alleged disease type and the
jurisdiction in which the action is being brought), the rate of receipt of
claims, the
14
settlement strategy in dealing with outstanding claims and the timing of
settlements. As a result of the Restructuring Proceedings (see Note 2), all
pending asbestos-related litigation against the Company is stayed (subject to
certain exceptions in the case of governmental authorities), and no party may
take any action to pursue or collect on such asbestos claims absent specific
authorization of the Bankruptcy Court or the High Court. Since the Restructuring
Proceedings, the Company has ceased making payments with respect to
asbestos-related lawsuits. An asbestos creditors' committee has been appointed
in the U.S. representing asbestos claimants with pending claims against the
Company, and the Bankruptcy Court has appointed a legal representative for the
interests of potential future asbestos claimants. In the U.K. a creditors'
committee consisting in large part of representatives of asbestos claimants has
been appointed. The Bankruptcy Court likely will set a deadline for the filing
of all present asbestos-related claims, including claims by plaintiffs who
allegedly entered into settlement agreements with the Company that have not been
paid. As part of the Restructuring Proceedings, it will be determined which
asbestos claims should be allowed, or compensated, and the aggregate value of
such claims. The Company's obligations with respect to present and future claims
could be determined through litigation in Bankruptcy Court, the High Court of
Justice, Chancery Division in London, England and/or through negotiations with
each of the official committees appointed; that determination may provide the
basis for a plan of reorganization or scheme of arrangement. The T&N Companies
previously entered into $225 million of surety to meet certain collateral
requirements for asbestos indemnity obligations associated with its prior
membership in the Center for Claims Resolution. Performance under these bonds is
subject to approval by the Bankruptcy Court. Except for exchange rates, the
Company has not adjusted its estimate of the asbestos liability since September
30, 2001. This liability is included in the consolidated balance sheet under the
caption "Liabilities subject to compromise" at March 31, 2002 for the Company's
U.S. and U.K. subsidiaries.
While the Company believes that the liability recorded was appropriate for
anticipated losses arising from asbestos-related claims against the T&N
Companies through 2012, it is the Company's view that, as a result of the
Restructuring Proceedings, there is even greater uncertainty in estimating the
future asbestos liability and related insurance recovery for pending and future
claims. There are significant differences in the treatment of asbestos claims in
a bankruptcy proceeding as compared to the tort litigation system. Among other
things, it is uncertain at this time as to the number of asbestos-related claims
that will be filed in the Restructuring Proceedings; the number of future claims
that will be included in a plan of reorganization; how claims for punitive
damages and claims by persons with no asbestos-related physical impairment will
be treated and whether such claims will be allowed; and the impact that
historical settlement values for asbestos claims may have on the estimation of
asbestos liability in the bankruptcy proceeding.
No assurance can be given that the T&N Companies will not be subject to
material additional liabilities and significant additional litigation relating
to asbestos matters through 2012 or thereafter. In the event that such
liabilities exceed the amounts recorded by the Company or the remaining
insurance coverage, the Company's results of operations and financial condition
could be materially affected.
Insurance Recoverable:
In 1996, T&N Ltd. purchased for itself and its then defined global
subsidiaries a (pound)500.0 million layer of insurance which will be triggered
should the aggregate costs of claims made or brought after June 30, 1996, where
the exposure occurred prior to that date, exceed (pound)690.0 million. During
2000, the Company concluded that the aggregate cost of the claims filed after
June 30, 1996 would exceed the trigger point and accordingly recorded an
insurance recoverable asset under the T&N policy of $577.0 million. At March 31,
2002 the recorded insurance recoverable was $542.7 million. The Company believes
that based on its review of the insurance policies and advice from outside legal
counsel that it is probable that the T&N Companies will be entitled to receive
payment from the reinsurers for the cost of the claims in excess of the trigger
point of the insurance. In December 2001, one of the three reinsurers filed suit
in a London, England court to challenge the validity of its insurance contract
with the T&N Companies. The Company believes that the suit is without merit and
has responded accordingly.
The ultimate realization of insurance proceeds is directly related to the
amount of related covered claims paid by the Company. If the ultimate asbestos
claims are higher than the recorded liability, the Company expects the ultimate
insurance recoverable to be higher than the recorded amount, up to the cap of
the insurance layer. If the ultimate asbestos claims are lower than the recorded
liability, the Company expects the ultimate insurance recoverable to be lower
than the recorded amount. While the Restructuring Proceedings will impact the
timing and amount of the asbestos claims and the insurance recoverable, there
has been no change to the recorded amounts since
15
the Company initiated the Restructuring Proceedings. Accordingly, this asset
could change significantly based upon events that occur from the Restructuring
Proceedings.
The Company has reviewed the financial viability and legal obligations of
the three reinsurance companies involved and has concluded that currently there
is little risk that the reinsurers will not be able to meet their obligation to
pay, once the claims filed after June 30, 1996 exceed the (pound)690.0 million
trigger point. The U.S. claims' costs applied against this policy are converted
at a fixed exchange rate of $1.69/(pound). As such, if the market exchange rate
is less then $1.69/(pound), the Company will effectively have a discount from
100% recovery on claims paid. At March 31, 2002, the $542.7 million insurance
recoverable asset is net of an exchange rate discount of approximately $90.4
million.
Abex and Wagner Asbestos Litigation
Background:
Two of the Company's businesses formerly owned by Cooper Industries, Inc.
known as Abex and Wagner are involved as defendants in numerous court actions in
the U.S. alleging personal injury from exposure to asbestos or
asbestos-containing products. These claims mainly involve friction products. As
of the Petition Date, Abex and Wagner were defendants in approximately 68,000
and 37,000 pending claims, respectively.
The liability of the Company with respect to claims alleging exposure to
Wagner products arises from the 1998 stock purchase from Cooper Industries of
the corporate successor by merger to Wagner Electric Company; the purchased
entity is now a wholly-owned subsidiary of the Company and one of the Debtors in
the Restructuring Proceedings. As a consequence, all claims against the debtors,
including asbestos- related claims, have been stayed.
The liability of the Company with respect to claims alleging exposure to
Abex products arises from a contractual liability entered into in 1994 by the
predecessor to the Company whose stock the Company purchased in 1998. Pursuant
to that contract, prior to the Restructuring Proceedings, the Company, through
the relevant subsidiary, was liable for certain indemnity and defense payments
incurred on behalf of an entity known as Pneumo Abex Corporation, the successor
in interest to Abex Corporation. Effective as of the Petition Date, the Company
has ceased making such payments and is currently considering whether to accept
or reject the 1994 contractual liability.
As mentioned above, as of the Petition Date, all pending asbestos litigation
of Abex (as to the Company only) and Wagner is stayed (subject to certain
exceptions in the case of governmental authorities), and no party may take any
action to pursue or collect on such asbestos claims absent specific
authorization of the Bankruptcy Court or the High Court.
Recorded Liability:
The liability ($216.4 million as of March 31, 2002) represented the
Company's estimate prior to the Restructuring Proceedings for claims currently
pending and those which were reasonably estimated to be asserted and paid
through 2012. The Company did not provide a liability for claims that may be
brought subsequent to this period as it could not reasonably estimate such
claims. In estimating the liability prior to the Restructuring Proceedings, the
Company made assumptions regarding the total number of claims anticipated to be
received in a future period, the typical cost of settlement (which is sensitive
to the industry in which the plaintiff claims exposure, the alleged disease type
and the jurisdiction in which the action is being brought), the rate of receipt
of claims, the settlement strategy in dealing with outstanding claims and the
timing of settlements.
As a result of the Restructuring Proceedings (see Note 2), all pending
asbestos-related litigation is stayed as previously described for the T&N
Companies.
While the Company believes that the liability recorded was appropriate for
anticipated losses arising from asbestos-related claims related to Abex and
Wagner through 2012, it is the Company's view that, as a result of the
Restructuring Proceedings, there is even greater uncertainty in estimating the
future asbestos liability and related insurance recovery for pending and future
claims. There are significant differences in the treatment of asbestos claims in
a bankruptcy proceeding as compared to the tort litigation system. Among other
things, it is uncertain at
16
this time as to the number of asbestos-related claims that will be filed in the
proceeding; the number of future claims that will be included in a plan of
reorganization; how claims for punitive damages and claims by persons with no
asbestos-related physical impairment will be treated and whether such claims
will be allowed; and the impact historical settlement values for asbestos claims
may have on the estimation of asbestos liability in the Restructuring
Proceedings.
No assurance can be given that the Company will not be subject to material
additional liabilities and significant additional litigation relating to Abex
and Wagner asbestos matters through 2012 or thereafter. In the event that such
liabilities exceed the amounts recorded by the Company or the remaining
insurance coverage, the Company's results of operations and financial condition
could be materially affected.
Insurance Recoverable:
Abex maintained product liability insurance coverage for most of the time
that it manufactured products that contained asbestos. The subsidiary of the
Company that may be liable for certain indemnity and defense payments with
respect to Abex has the benefit of that insurance up to the extent of that
liability. Abex has been in litigation since 1982 with the insurance carriers of
its primary layer of liability concerning coverage for asbestos claims. Abex
also has substantial excess layer liability insurance coverage that, barring
unforeseen insolvencies of excess carriers or other adverse events, should
provide coverage for asbestos claims against Abex.
Wagner also maintained product liability insurance coverage for some of the
time that it manufactured products that contained asbestos. The subsidiary of
the Company that may be liable for asbestos claims against Wagner has the
benefit of that insurance, subject to the rights of other potential insureds
under the policies. Primary layer liability insurance coverage for asbestos
claims against Wagner is the subject of an agreement with Wagner's solvent
primary carriers. The agreement provides for partial reimbursement of indemnity
and defense costs for Wagner asbestos claims until exhaustion of aggregate
limits. Wagner also has substantial excess layer liability insurance coverage
which, barring unforeseen insolvencies of excess carriers or other adverse
events, should provide coverage for asbestos claims against Wagner.
The ultimate realization of insurance proceeds is directly related to the amount
of related covered claims paid by the Company. If the ultimate asbestos claims
are higher than the recorded liability, the Company expects the ultimate
insurance recoverable to be higher than the recorded amount. If the ultimate
asbestos claims are lower than the recorded liability, the Company expects the
ultimate insurance recoverable to be lower than the recorded amount. While the
Restructuring Proceedings will impact the timing and amount of the asbestos
claims and the insurance recoverable, there has been no change to the recorded
amounts due to the uncertainties created by the Restructuring Proceedings.
Accordingly, this asset could change significantly based upon events that occur
from the Restructuring Proceedings.
The Company believes that based on its review of the insurance policies, the
financial viability of the insurance carriers, and advice from outside legal
counsel, it is probable that Abex and Wagner will realize an insurance
recoverable correlating with the respective liability.
Federal-Mogul and Fel-Pro Asbestos Litigation:
Prior to the Restructuring Proceedings the Company was also sued in its own
name as one of a large number of defendants in a number of lawsuits brought by
claimants alleging injury from exposure to asbestos due to its ownership of
certain assets involved in gasket making. As of the Petition Date, the Company
was a defendant in approximately 61,500 Pre-Petition pending claims. Over 40,000
of these claims were transferred to a federal court, where prior to the
Restructuring Proceedings they were pending. Pre-petition claims that were in
the pipeline that were received after the Petition Date continue to be entered
into the claims system and represent an immaterial amount of claims. Prior to
the Restructuring Proceedings the Company's Fel-Pro subsidiary also was named as
a defendant in a number of product liability cases involving asbestos, primarily
involving gasket or packing products. Fel-Pro was a defendant in approximately
34,000 pending claims as of the Petition Date. Over 32,000 of these claims were
transferred to a federal court where, prior to the Restructuring Proceedings,
they were pending. The Company was defending all such claims vigorously and
believed that it and Fel-Pro had substantial defenses to liability and insurance
coverage for defense and indemnity. All claims alleging exposure to the products
of the
17
Company and of Fel-Pro have been stayed as a result of the Restructuring
Proceedings.
Aggregate of Asbestos Liability and Insurance Recoverable Asset:
As of March 31, 2002, the Company has provided an aggregated
asbestos-related liability for all of its subsidiaries and businesses of $1.6
billion classified in the balance sheet under the caption liabilities subject to
compromise. Also as of March 31, 2002, the Company has recorded an insurance
recoverable asset of $712.6 million.
The Company's estimate of asbestos-related liabilities for pending and
expected future asbestos claims is subject to considerable uncertainty because
such liabilities are influenced by numerous variables that are inherently
difficult to predict. The Restructuring Proceedings significantly increase the
inherent difficulties and uncertainties involved in estimating the number and
cost of resolution of present and future asbestos-related claims against the
Company and may have the effect of increasing the ultimate cost of the
resolution of such claims.
Other
The Company is involved in other legal actions and claims, directly and
through its subsidiaries. After taking into consideration legal counsel's
evaluation of such actions, management is of the opinion that the outcomes are
not likely to have a material adverse effect on the Company's financial
position, operating results, or cash flows.
On Apri1 22, 2002, the Company received notice from the New York Stock
Exchange (the "Exchange") that the Company's common stock would be delisted from
the Exchange effective April 24, 2002. On April 24, 2002, the Company's common
stock began trading on the NASD over-the-counter bulletin board market under the
new ticker symbol "FDMLQ".
Environmental Matters
The Company is a defendant in lawsuits filed, or the recipient of
administrative orders issued, in various jurisdictions pursuant to the Federal
Comprehensive Environmental Response Compensation and Liability Act of 1980
("CERCLA") or other similar federal or state environmental laws. These laws
require responsible parties to pay for cleaning up contamination resulting from
hazardous wastes, which were discharged into the environment by them, or by
others to which they sent such wastes for disposition. In addition, the Company
has been notified by the United States Environmental Protection Agency and
various state agencies that it may be a potentially responsible party ("PRP")
under such law for the cost of cleaning up certain other hazardous waste storage
or disposal facilities pursuant to CERCLA and other federal and state
environmental laws. PRP designation requires the funding of site investigations
and subsequent remedial activities. At most of the sites that are likely to be
costliest to clean up, which are often current or former commercial waste
disposal facilities to which numerous companies sent waste, the Company's
exposure is expected to be limited. Despite the joint and several liability
which might be imposed on the Company under CERCLA and some of the other laws
pertaining to these sites, the Company's share of the total waste has generally
been small. The other companies, which also sent wastes, often numbering in the
hundreds or more, generally include large, solvent publicly owned companies, and
in most such situations the government agencies and courts have imposed
liability in some reasonable relationship to contribution of waste. In addition,
the Company has identified certain present and former properties at which it may
be responsible for cleaning up environmental contamination. The Company is
actively seeking to resolve these matters. Although difficult to quantify based
on the complexity of the issues, the Company has accrued the estimated cost
associated with such matters based upon current available information from site
investigations and consultants. The environmental reserve was approximately
$62.7 million and $62.8 million at March 31, 2002 and December 31, 2001,
respectively. The reserve was impacted by the addition of a new site resulting
from a joint venture in Poland, offset primarily by remediation payments made
during the period. Management believes that such accruals will be adequate to
cover the Company's estimated liability for its exposure in respect to such
matters. As a result of the Restructuring Proceedings, approximately $23.0
million of this reserve has reclassified to Liabilities Subject to Compromise in
the consolidated balance sheet, and is evaluating such classification for other
sites.
18
8. INVENTORIES
Inventories consisted of the following (in millions):
March 31 December 31
2002 2001
-------- -----------
Finished products $518.9 $511.2
Work-in-process 126.0 116.4
Raw materials 156.7 144.1
------ ------
801.6 771.7
Reserve for inventory valuation (55.1) (49.8)
------ ------
$746.5 $721.9
====== ======
9. RESTRUCTURING AND RATIONALIZATION
During the first three months of 2002, the Company recognized $9.5 million
of restructuring charges related to severance and exit costs. Severance costs of
$6.0 million primarily included the planned consolidation of the European
friction and powertrain businesses, as well as employee reductions in Europe.
Total employee reductions are expected to be 1,000 of which 850 have been
terminated as of March 31, 2002. Exit costs of $3.5 million are primarily
comprised of planned consolidation of the European friction and Powertrain
businesses.
The following table sets forth the restructuring and rationalization
reserves for the three months ended March 31, 2002 (in millions):
Restructuring Rationalization Total
------------- --------------- -----
Balance of reserves at December 31, 2001 $68.3 $12.8 $81.1
Restructuring charges 9.5 -- 9.5
Effect of foreign exchange (0.3) (0.3) (0.6)
Payments against restructuring reserves (6.5) (2.1) (8.6)
----- ----- -----
Balance of reserves at March 31, 2002 $71.0 $10.4 $81.4
===== ===== =====
10. COMPREHENSIVE LOSS
Total comprehensive loss is summarized as follows (in millions of dollars):
Three Months
Ended March 31
--------------------
2002 2001
-------- --------
Net loss $ (25.6) $ (62.2)
Other Comprehensive Loss
Foreign currency translation adjustments (75.1) (122.1)
Other, net of tax -- (1.0)
------- -------
Total Comprehensive Loss $(100.7) $(185.3)
======== =======
11. NEW ACCOUNTING PRONOUNCEMENTS
On July 20, 2001, the FASB issued Statement of Financial Accounting
Standards ("SFAS") No. 141, "Business Combinations" and SFAS No. 142 "Goodwill
and Other Intangible Assets". These pronouncements significantly change the
accounting for business combinations, goodwill, and intangible assets. SFAS No.
141 eliminates the pooling-of-interests method of accounting for business
combinations and further clarifies the criteria to recognize
19
intangible assets separately from goodwill. The requirements of SFAS No. 141 are
effective for any business combination accounted for by the purchase method that
was completed after June 30, 2001. The Company has not made acquisitions since
such time. Under SFAS No. 142 goodwill and indefinite lived intangible assets
are no longer amortized but are reviewed for impairment annually (or more
frequently if impairment indicators arise). Separable intangible assets that are
not deemed to have an indefinite life will continue to be amortized over their
useful lives. The amortization provisions of SFAS No. 142 apply to goodwill and
intangible assets acquired after June 30, 2001. With respect to goodwill and
intangible assets acquired prior to July 1, 2001, companies are required to
adopt the pronouncement in their fiscal year beginning after December 15, 2001.
The Company's adoption of SFAS No. 142 is further discussed in Note 12 to the
condensed consolidated financial statements.
In May 2000, the Emerging Issues Task Force ("EITF") issued EITF 00-14,
"Accounting for Certain Sales Incentives", which changes the way companies must
account for certain sales incentives offered to customers. The Company has
adopted EITF 00-14, effective January 1, 2002. The adoption of EITF 00-14
required the reclassification of $2.0 million of expenses previously recorded by
the Company as selling, general, and administrative expenses to costs of
products sold for the three month period ended March 31, 2001.
12. GOODWILL AND OTHER INTANGIBLE ASSETS - ADOPTION OF SFAS No. 142
Effective January 1, 2002, the Company adopted SFAS No. 142. The adoption
has resulted in the discontinuance of amortization of goodwill and
indefinite-lived intangible assets. The adoption of SFAS No. 142 has also
resulted in the reclassification of various intangible asset classes according
to the measurability of their useful lives. The Company continues to evaluate
the impairment test required by SFAS No. 142 and expects to record the
cumulative effect of the change in accounting principle as of January 1, 2002 in
the second quarter of 2002. Initial assessments indicate that this adjustment
will require a substantial write-off of its $2.7 billion of goodwill recorded at
March 31, 2002. At March 31, 2002 and December 31, 2001, goodwill and other
intangible assets consisted of the following:
March 31, 2002 December 31, 2001
Gross Carrying Accumulated Gross Carrying Accumulated
Amount Amortization Amount Amortization
(Millions of dollars)
Amortized Intangible Assets:
Developed technology $ 287.8 $ (44.9) $ 289.8 $ (44.4)
Other 63.8 (43.7) 74.2 (40.5)
--------- ------- --------- -------
Total Amortized Intangible Assets $ 351.6 $ (88.6) $ 364.0 $ (84.9)
========= ======= ========= =======
Unamortized Intangible Assets:
Goodwill $ 2,713.5 $ 2,738.9
Trademarks 270.0 271.5
Intangible Pension Asset 74.1 74.1
--------- ---------
Total Unamortized Intangible Assets $ 3,057.6 $ 3,084.5
========= =========
20
The following table shows the pro-forma effect of SFAS No. 142 on the Company's earnings.
Three months ended March 31
---------------------------
2002 2001
(Millions of Dollars, except per share amounts)
Reported Net Loss........................ $ (25.6) $ (62.2)
Addback: Gooodwill amortization....... -- 22.5
Addback: Indefinite-Lived Intangible..
Asset amortization.................. -- 4.4
--------- ---------
Adjusted Net Loss........................ $ (25.6) $ (35.3)
========= =========
Basic and diluted loss per share:
Reported Net Loss........................ $ (0.31) $ (0.89)
Gooodwill amortization................. -- 0.32
Indefinite-Lived Intangible
Asset amortization.................. -- 0.06
--------- ---------
Adjusted................................. $ (0.31) $ (0.51)
========= ==========
13. CONSOLIDATING CONDENSED FINANCIAL INFORMATION OF GUARANTOR SUBSIDIARIES
Certain subsidiaries of the Company (as listed below, collectively the
"Guarantor Subsidiaries") have guaranteed fully and unconditionally, on a joint
and several basis, the obligation to pay principal and interest under the
Company's Senior Credit Agreements.
Federal-Mogul Venture Corporation Federal-Mogul Dutch Holdings Inc. Felt Products Mfg. Co.
Federal-Mogul Global Properties Inc. Federal-Mogul UK Holdings Inc. Ferodo America, Inc.
Carter Automotive Company F-M UK Holdings Limited McCord Sealing, Inc.
Federal-Mogul Worldwide Inc. Federal-Mogul Global Inc.
Federal-Mogul Ignition Company T&N Industries, Inc.
Federal-Mogul Products, Inc. Federal-Mogul Powertrain, Inc.
Federal-Mogul Piston Rings, Inc. Federal-Mogul Mystic, Inc.
The Company issued notes in 1999 and 1998, which are guaranteed by the
Guarantor Subsidiaries. The Guarantor Subsidiaries also guarantee the Company's
previously existing publicly registered Medium-term notes and Senior notes.
T&N Industries, Inc. and Federal-Mogul Powertrain, Inc. are wholly owned
subsidiaries of the Company and were acquired with the acquisition of T&N, plc.
These subsidiaries became guarantors as a result of the Company's Fourth Amended
and Restated Senior Credit Agreement dated December 29, 2000.
In lieu of providing separate unaudited financial statements for the
Guarantor Subsidiaries, the Company has included the accompanying unaudited
consolidating condensed financial statements based on the Company's
understanding of the Securities and Exchange Commission's interpretation and
application of Rule 3-10 of the Securities and Exchange Commission's Regulation
S-X and Staff Accounting Bulletin 53. Management does not believe that separate
financial statements of the Guarantor Subsidiaries are material to investors.
Therefore, separate financial statements and other disclosures concerning the
Guarantor Subsidiaries are not presented.
The consolidating condensed financial information of the Guarantor
subsidiaries as of March 31, 2001 and for the period then ended has been
restated to include Federal-Mogul Mystic, Inc., Felt Products Mfg. Co., Ferodo
America, Inc., and McCord Sealing, Inc.
21
As a result of the Restructuring Proceedings (see Note 2 "Voluntary
Reorganization Under Chapter 11 and Administration") certain of the liabilities,
as shown below, were Liabilities Subject to Compromise as of the Petition date:
Guarantor Non-Guarantor
Parent Subsidiaries Subsidiaries Consolidated
-------- ------------ ------------- ------------
Accounts payable................................... $ 40.0 $ 125.8 $ 28.6 $ 194.4
Other accrued liabilities.......................... 2.2 1.3 13.2 16.7
Environmental liabilities.......................... 22.4 -- 0.6 23.0
Interest payable................................... 41.0 0.2 -- 41.2
Debt............................................... 3,972.2 1.1 -- 3,973.3
Asbestos liabilities............................... 1.5 239.6 1,306.2 1,547.3
Company-obligated mandatorily redeemable
preferred securities of subsidiary holding solely
convertible subordinated debentures of the Company
-- -- 448.9 448.9
-------- ------- -------- --------
$4,079.3 $ 368.0 $1,797.5 $6,244.8
======== ======= ======== ========
22
Federal-Mogul Corporation
Notes to Condensed Consolidated Financial Statements
Unaudited Consolidating Condensed Statement of Operations
Three Months Ended March 31, 2002
(Millions of Dollars)
(Unconsolidated)
--------------------------------------
Non-
Guarantor Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
------ ------------ ------------ ------------ ------------
Net sales........................................ $315.0 $444.3 $745.4 $(158.6) $1,346.1
Cost of products sold............................ 256.2 355.0 632.2 (158.6) 1,084.8
------ ------ ------ ------- --------
Gross margin................................. 58.8 89.3 113.2 -- 261.3
Selling, general and administrative expenses..... 64.9 63.1 85.4 -- 213.4
Amortization of other intangible assets.......... 1.4 1.0 1.2 -- 3.6
Restructuring charge............................. -- -- 9.5 -- 9.5
Interest expense, net............................ 31.5 -- (1.2) -- 30.3
Chapter 11 and Administration related
reorganization expenses........................ 14.9 -- -- -- 14.9
Other (income) expense, net...................... (20.0) (32.0) 53.0 -- 1.0
------ ------ ------ ------- --------
Earnings (loss) before income taxes and
equity in earnings (losses) of subsidiaries... (33.9) 57.2 (34.7) -- (11.4)
------ ------ ------ ------- --------
Income tax expense............................... -- 7.7 6.5 -- 14.2
------ ------ ------ ------- --------
Earnings (loss) before equity in earnings
(losses) of subsidiaries....................... (33.9) 49.5 (41.2) -- (25.6)
Equity in earnings (losses) of subsidiaries...... 8.3 12.6 -- (20.9) --
------ ------ ----- ------- --------
Net Earnings (Loss) ............................. $(25.6) $ 62.1 $(41.2) $ (20.9) $ (25.6)
====== ====== ====== ======= ========
23
Federal-Mogul Corporation
Notes to Condensed Consolidated Financial Statements
Unaudited Consolidating Condensed Statement of Operations
Three Months Ended March 31, 2001
(Millions of Dollars)
(Unconsolidated)
--------------------------------------
Non-
Guarantor Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
------- ------------ ------------ ------------ ------------
Net sales $ 334.0 $477.0 $716.2 $ (76.5) $ 1,450.7
Cost of products sold 277.2 389.9 556.8 (76.5) 1,147.4
------- ------ ------ ------- ---------
Gross margin 56.8 87.1 159.4 -- 303.3
Selling, general and administrative expenses 73.9 56.7 97.0 -- 227.6
Amortization of goodwill and other intangible
assets 5.1 11.8 13.5 -- 30.4
Restructuring charge 14.5 -- 15.3 -- 29.8
Adjustment of assets held for sale and other
long-lived assets to fair value 0.6 -- -- -- 0.6
Interest expense, net 80.4 0.1 2.1 -- 82.6
Other (income) expense, net 89.1 (19.0) (63.6) -- 6.5
------- ------ ------ ------- ---------
Earnings (loss) before income taxes and
equity in earnings (loss) of (206.8) 37.5 95.1 -- (74.2)
subsidiaries
Income tax expense (benefit) (33.1) 6.0 15.1 -- (12.0)
------- ------ ------ -- --------
Earnings (loss) before equity in earnings
(loss) of subsidiaries (173.7) 31.5 80.0 -- (62.2)
Equity in earnings (loss) of subsidiaries 111.5 30.0 -- (141.5) --
------- ------ ------ ------- --------
Net Earnings (Loss) $ (62.2) $ 61.5 $ 80.0 $(141.5) $ (62.2)
======= ====== ====== ======= ========
24
Federal-Mogul Corporation
Notes to Condensed Consolidated Financial Statements
Unaudited Consolidating Condensed Balance Sheet
March 31, 2002
(Millions of Dollars)
(Unconsolidated)
-----------------------------------------
Non-
Guarantor Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
--------- ------------ ------------ ------------ ------------
ASSETS
Cash and equivalents.............................. $ 22.9 $ 6.7 $ 286.2 $ -- $ 315.8
Accounts receivable............................... 545.5 -- 477.9 -- 1,023.4
Inventories....................................... 63.9 337.9 344.7 -- 746.5
Deferred taxes.................................... 13.8 -- 41.6 -- 55.4
Prepaid expenses and income tax benefits.......... 42.5 40.2 82.7 -- 165.4
--------- -------- -------- --------- --------
Total Current Assets......................... 688.6 384.8 1,233.1 -- 2,306.5
Property, plant and equipment..................... 248.8 703.8 1,168.7 -- 2,121.3
Goodwill.......................................... 529.9 947.1 1,236.5 -- 2,713.5
Other intangible assets........................... 89.8 279.1 238.2 -- 607.1
Investment in subsidiaries........................ 6,362.3 2,783.3 -- (9,145.6) --
Intercompany accounts, net........................ (2,430.3) 2,317.1 113.2 -- --
Asbestos-related insurance recoverable............ -- 171.9 540.7 -- 712.6
Other noncurrent assets........................... 112.2 42.3 378.3 -- 532.8
--------- -------- -------- --------- --------
Total Assets................................. $ 5,601.3 $7,629.4 $4,908.7 $(9,145.6) $8,993.8
========= ======== ======== ========= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Short-term debt, including current portion of
long-term debt................................. $ -- $ 0.8 $ 14.2 $ -- $ 15.0
Accounts payable.................................. 68.3 67.7 192.5 -- 328.5
Accrued compensation.............................. 65.9 27.7 118.0 -- 211.6
Restructuring and rationalization reserves........ 13.1 12.9 55.4 -- 81.4
Other accrued liabilities......................... 74.9 132.0 221.6 -- 428.5
--------- -------- -------- --------- --------
Total Current Liabilities.................... 222.2 241.1 601.7 -- 1,065.0
Long-term debt.................................... 243.9 -- 14.8 -- 258.7
Postemployment benefits........................... 636.1 0.2 181.1 -- 817.4
Other accrued liabilities......................... 81.3 0.5 160.5 -- 242.3
Minority interest in consolidated subsidiaries.... 19.6 27.1 -- -- 46.7
Liabilities subject to compromise................. 4,079.3 368.0 1,797.5 -- 6,244.8
Shareholders' Equity.............................. 318.9 6,992.5 2,153.1 (9,145.6) 318.9
--------- -------- -------- --------- --------
Total Liabilities and Shareholders' Equity... $ 5,601.3 $7,629.4 $4,908.7 $(9,145.6) $8,993.8
========= ======== ======== ========= ========
25
Federal- Federal-Mogul Corporation
Notes to Condensed Consolidated Financial Statements
Unaudited Consolidating Condensed Balance Sheet
December 31, 2001
(Millions of Dollars)
(Unconsolidated)
--------------------------------------
Non-
Guarantor Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
-------- ------------ ------------ ------------ ------------
ASSETS
Cash and equivalents................................. $ 74.0 $ 3.5 $ 269.4 $ -- $ 346.9
Accounts receivable.................................. 522.5 -- 422.3 -- 944.8
Inventories.......................................... 76.8 303.2 341.9 -- 721.9
Deferred taxes....................................... 16.0 -- 39.4 -- 55.4
Prepaid expenses and income tax benefits............. 47.1 42.5 88.0 -- 177.6
--------- -------- -------- --------- --------
Total Current Assets............................ 736.4 349.2 1,161.0 -- 2,246.6
Property, plant and equipment........................ 263.6 702.5 1,197.6 -- 2,163.7
Goodwill............................................. 563.6 935.1 1,240.2 -- 2,738.9
Other intangible assets.............................. 91.9 289.9 242.9 -- 624.7
Investment in subsidiaries........................... 6,366.8 2,839.9 -- (9,206.7) --
Intercompany accounts, net........................... (2,400.5) 2,277.2 123.3 -- --
Asbestos-related insurance recoverable............... -- 162.7 560.5 -- 723.2
Other noncurrent assets.............................. 130.4 44.8 380.9 -- 556.1
--------- -------- -------- --------- --------
Total Assets.................................... $ 5,752.2 $7,601.3 $4,906.4 $(9,206.7) $9,053.2
========= ======== ======== ========== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Short-term debt, including current portion of
long-term debt ................................... $ -- $ 0.5 $ 24.4 $ -- $ 24.9
Accounts payable .................................... 61.6 50.4 187.5 -- 299.5
Accrued compensation ................................ 63.4 24.1 106.4 -- 193.9
Restructuring and rationalization reserves .......... 25.3 13.8 42.0 -- 81.1
Other accrued liabilities ........................... 85.0 130.1 167.8 -- 382.9
--------- ----- -------- --------- --------
Total Current Liabilities ...................... 235.3 218.9 528.1 -- 982.3
Long-term debt ...................................... 250.0 -- 16.7 -- 266.7
Postemployment benefits ............................. 655.1 0.1 164.6 -- 819.8
Other accrued liabilities ........................... 87.8 0.5 170.2 -- 258.5
Minority interest in consolidated subsidiaries ...... 22.1 28.2 -- -- 50.3
Liabilities subject to compromise ................... 4,082.9 358.2 1,815.5 -- 6,256.6
Shareholders' Equity ................................ 419.0 6,995.4 2,211.3 (9,206.7) 419.0
--------- ------- -------- ---------- -------
Total Liabilities and Shareholders' Equity ..... $ 5,752.2 $7,601.3 $4,906.4 $(9,206.7) $9,053.2
========= ======== ======== ========== ========
26
Federal-Mogul Corporation
Notes to Condensed Consolidated Financial Statements
Unaudited Consolidating Condensed Statement of Cash Flows
Three Months Ended March 31, 2002
(Millions of Dollars)
(Unconsolidated)
--------------------------------------
Guarantor Non-Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
------- ------------ ------------- ------------ ------------
Net Cash Provided From (Used By)
Operating Activities ............. $(12.9) $ 50.9 $ (6.5) $ -- $ 31.5
Cash Provided From (Used By) Investing
Activities:
Expenditures for property, plant and (6.1) (18.3) (39.1) -- (63.5)
equipment and other long-term assets
Proceeds from sales of businesses .... 5.9 6.0 9.9 -- 21.8
------ ------ ----- ------ ------
Net Cash Used By
Investing Activities ......... (0.2) (12.3) (29.2) -- (41.7)
Cash Provided From (Used By) Financing
Activities:
Principal payments on long-term debt . -- -- (1.9) -- (1.9)
Principal payments on DIP credit
facility............................ (6.1) -- -- -- (6.1)
Increase (decrease) in short-term debt -- 0.3 (10.2) -- (9.9)
Change in intercompany accounts ...... (28.9) (35.7) 64.6 -- --
Other ................................ (3.0) -- -- -- (3.0)
------ ------ ----- ------ ------
Net Cash Provided From (Used By)
Financing Activities ......... (38.0) (35.4) 52.5 -- (20.9)
------ ------ ----- ------ ------
Net Increase (Decrease) in Cash
and Equivalents .............. $(51.1) $ 3.2 $ 16.8 $ -- $(31.1)
====== ====== ====== ====== ======
27
Federal-Mogul Corporation
Notes to Condensed Consolidated Financial Statements
Unaudited Consolidating Condensed Statement of Cash Flows
Three Months Ended March 31, 2001
(Millions of Dollars)
(Unconsolidated)
-----------------------------------------
Non-
Guarantor Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
--------- ------------ ------------ ------------ ------------
Net Cash Provided From (Used By)
Operating Activities $(128.4) $ 42.6 $ 4.9 $ -- $(80.9)
Expenditures for property, plant and equipment
and other long-term assets (8.1) (24.8) (32.1) -- (65.0)
------- ------ ------ ------- ------
Net Cash Used By Investing Activities (8.1) (24.8) (32.1) -- (65.0)
Cash Provided From (Used By) Financing
Activities:
Proceeds from issuance of long-term debt 236.0 -- -- -- 236.0
Principal payments on long-term debt (13.3) (2.4) (6.4) -- (22.1)
Decrease in short-term debt (24.7) (0.8) (6.6) -- (32.1)
Fees paid for debt issuance and other securities (14.2) -- -- -- (14.2)
Change in intercompany accounts (8.2) (18.0) 26.2 -- --
Sale of accounts receivable under securitization (48.2) -- -- -- (48.2)
Dividends (0.7) -- -- -- (0.7)
Other 3.0 -- -- -- 3.0
------- ------ ------ ------- ------
Net Cash Provided From (Used By)
Financing Activities 129.7 (21.2) 13.2 -- 121.7
------- ------ ------ ------- ------
Net Decrease in Cash and
Equivalents $ (6.8) $ (3.4) $(14.0) $ -- $(24.2)
======= ====== ====== ======= ======
28
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
OVERVIEW:
Federal-Mogul Corporation (the "Company" or "Federal-Mogul") is an
automotive parts manufacturer providing innovative solutions and systems to
global customers in the automotive, small engine, heavy-duty and industrial
markets. The Company manufactures engine bearings, pistons, piston pins, rings,
cylinder liners, camshafts, sintered products, sealing systems, systems
protection sleeving products, fuel systems, wipers, lighting, ignition, brake,
friction and chassis products. The Company's principal customers include many of
the world's original equipment ("OE") manufacturers of such vehicles and
industrial products. The Company also manufactures and supplies its products to
the aftermarket.
VOLUNTARY BANKRUPTCY FILING:
On October 1, 2001 (the "Petition Date"), Federal-Mogul Corporation
and all of its wholly owned United States subsidiaries filed voluntary petitions
for reorganization (the "U.S. Restructuring") under Chapter 11 of the United
States Bankruptcy Code (the "Bankruptcy Code") in the United States Bankruptcy
Court for the District of Delaware (the "Bankruptcy Court"). Also on October 1,
2001, certain of the Company's United Kingdom subsidiaries filed voluntary
petitions for reorganization under Chapter 11 of the Bankruptcy Code and
petitions for Administration (the "U.K. Restructuring") under the United Kingdom
Insolvency Act of 1986 (the "Act") in the High Court of Justice, Chancery
division in London, England (the "High Court"). The Company and its U.S. and
U.K. subsidiaries included in the U.S. Restructuring and U.K. Restructuring are
herein referred to as the "Debtors". The U.S. Restructuring and U.K.
Restructuring are herein referred to as the "Restructuring Proceedings". The
Chapter 11 cases of the Debtors (collectively, the "Chapter 11 Cases") have been
consolidated for purposes of joint administration as In re: Federal-Mogul Global
Inc., T&N Limited, et al (Case No. 01-10578(SLR)). The Chapter 11 Cases do not
include any of the Company's non-U.S. subsidiaries outside of the U.K.
subsidiaries mentioned above. The Chapter 11 Cases are discussed in Note 2 to
the condensed consolidated financial statements.
The Debtors filed for relief under Chapter 11 to address the growing
demands on the Company's cash flow resulting from its multi-billion dollar
asbestos liability. This liability is discussed in Note 7 to the condensed
consolidated financial statements.
CONTINUING OPERATIONS
THREE-MONTHS ENDED MARCH 31, 2002 COMPARED TO THREE-MONTHS ENDED MARCH 31, 2001
RESULTS OF OPERATIONS
The following management's discussion and analysis of financial condition
and results of operations ("MD&A") should be read in conjunction with the MD&A
included in the Company's Annual Report on Form 10-K for the year ended December
31, 2001.
Net Sales: Consolidated net sales by reportable segment for the three-months
ended March 31, 2002 and 2001 were as follows (in millions):
2002 2001 Change
---- ---- ------
Powertrain $ 430.3 $ 449.4 $ (19.1)
Sealing Systems and
Systems Protection 148.4 154.7 (6.3)
Friction 86.6 90.2 (3.6)
Aftermarket 572.9 616.8 (43.9)
Other, including Corporate 94.7 92.3 2.4
Divested Operations 13.2 47.3 (34.1)
-------- -------- --------
Total $1,346.1 $1,450.7 $ (104.6)
======== ======== ========
29
Gross Margin: Consolidated gross margin by reportable segment for the
three-months ended March 31, 2002 and 2001 was (in millions): 2002 2001 Change
Powertrain $ 68.7 $ 87.2 $(18.5)
Sealing Systems and
Systems Protection 26.5 34.8 (8.3)
Friction 24.4 15.1 9.3
Aftermarket 126.3 138.6 (12.3)
Other, including Corporate 11.4 16.0 (4.6)
Divested Operations 4.0 11.6 (7.6)
------ ----- -----
Total $261.3 $303.3 $(42.0)
====== ====== ======
Powertrain:
Net sales for the first quarter of 2002 were $430.3 million compared to $449.4
million in the same quarter of 2001. The sales decline is primarily attributable
to negative foreign currency exchange in Europe and customer pricing reductions
in both North America and Europe. Stronger OE sales volumes in North America
partially offset the adverse impact of foreign currency and pricing.
Gross margin was 16.0% of sales for the first quarter of 2002 compared to 19.4%
for the same quarter in 2001. The decrease is primarily attributable to customer
pricing reductions and adverse product line mix as well as certain costs
incurred for future OE product launches.
Sealing Systems and Systems Protection:
Net sales for the first quarter of 2002 were $148.4 million compared to $154.7
million in the same quarter of 2001. The sales decline is largely attributable
to negative foreign currency exchange in Europe and customer pricing reductions
primarily in North America offset by increased volumes in Systems Protection.
Gross margin was 17.9% for the first quarter 2002 compared to 22.5% for the same
quarter in 2001. The decrease is primarily attributable to customer pricing
reductions, adverse product mix in North America, and increased employee benefit
costs outpacing productivity actions.
Friction:
Net sales for the first quarter of 2002 were $86.6 million compared to $90.2
million in the same quarter of 2001. Sales decreased primarily due to the
softening of the North America heavy-duty market, the impact of negative foreign
currency exchange in Europe and customer pricing reductions.
Gross margin was 28.2% for the first quarter of 2002 compared to 16.7% for the
same quarter of 2001. Offsetting the negative impact of pricing and foreign
currency exchange was significant productivity improvement in the North American
operations following extensive restructuring efforts undertaken in 2001.
Aftermarket:
Net sales for the first quarter of 2002 were $572.9 million compared to $616.8
million in the same quarter of 2001. The sales decrease was primarily
attributable to North America operations where replacement trends for certain
product lines were adversely impacted by the extremely mild weather experienced
during the first three months of 2002. Sales did increase slightly in Latin
America, however this increase was offset by unfavorable foreign currency
exchange in Europe.
Gross margin was 22.0% for the first quarter of 2002 compared to 22.5% for the
same quarter in 2001. The slight decrease was entirely due to product line and
geographic mix shifts.
30
Other:
Other primarily includes sales from certain businesses including Lighting,
European wipers and ignition, as well as Asia Pacific, South America and other
Corporate functions. Net sales for the first quarter of 2002 were $94.7 million
compared to $92.3 million in the same quarter of 2001. Sales increased due to a
$10.0 million increase in Lighting sales attributable to production ramp-up of
certain OE programs launched in mid 2001. The increase in Lighting was offset by
a $4.0 million decrease in South America sales attributable to economic
instability in certain countries, a $2.2 million decrease in wipers and a $1.3
million decrease in Asia Pacific sales.
Gross margin was 12.0% for the first quarter of 2002 as compared to 17.3% for
the same quarter in 2001. The decrease is primarily attributable to the negative
impact of foreign currency exchange.
Selling, General and Administrative Expenses:
Selling, general and administrative expenses as a percent of net sales increased
to 15.9% for the first quarter 2002 as compared to 15.7% for the same quarter of
2001. Year over year inflationary pressures from increasing employee health and
welfare costs, certain employee incentive and retention programs and the effect
of lower actuarial returns on the Company's pension plan assets, were partially
offset by salaried merit freezes and the elimination of Company 401(k) matching
contributions. Notwithstanding, year over year sales volume decreases
contributed to the increase in selling, general and administrative reductions as
a percentage of net sales volume.
Interest Expense, net:
Interest expense, net was $30.3 million in the first quarter of 2002 compared to
$82.6 million for the same quarter of 2001. This decrease is a result of not
accruing or paying interest on certain pre-petition debt. The effect of not
accruing the contractual interest on pre-petition debt was $39.6 million in the
quarter.
Income Tax Expense
For the three months ended March 31, 2002, the Company recorded income tax
expense of $14.2 million on a loss of $11.4 million before income taxes and
extraordinary items, compared to income tax benefits of $12.0 million on a loss
of $74.2 million before income taxes in the same period of 2001. Income tax
expense for the three months ended March 31, 2002, resulted primarily from not
providing a tax benefit for current losses in the United States and from
specific interest expense deductions in the U.K.
Through the petition date, tax expense had historically differed from
income taxes currently payable due to timing differences most significantly
related to asbestos payments. As a result of the Restructuring Proceedings, the
company does not expect to make payments for the settlement of asbestos claims
in the near term, and as such, income taxes payable in the U.K. may increase.
The company does not expect the effect of suspended asbestos payment to have a
significant effect on income taxes payable in the U.S. in the near term.
Amortization Expense:
During the three months ended March 31, 2002, and 2001, respectively, the
Company recognized amortization expense of $3.6 million and $30.4 million,
respectively. Amortization expense for the three months ended March 31, 2002
related primarily to developed technologies and other amortized intangible
assets. Excluded from amortization expense in the first quarter of 2002 was
expense related to goodwill and trademarks which are no longer subject to
amortization under Statement of Financial Accounting Standards ("SFAS") No. 142,
"Goodwill and Other Intangible Assets". The Company continues to evaluate the
impairment test required by SFAS No.142 and expects to record the cumulative
effect of the change in accounting principle as of January 1, 2002 during the
second quarter of 2002. Initial assessments indicate that this adjustment will
require a substantial write-off of its $2.7 billion of goodwill recorded at
March 31, 2002.
31
LITIGATION & ENVIRONMENTAL CONTINGENCIES
For a summary of material contingencies as a result of those lawsuits,
refer to Note 7 of the condensed consolidated financial statements, "Asbestos
Liability and Legal Proceedings".
LIQUIDITY AND CAPITAL RESOURCES
Cash Flow Provided From Operating Activities
Cash flow provided from operating activities was $31.5 million for the
first three months of 2002. Among the factors impacting operating cash flows
were income tax and value-added tax refunds received during the quarter.
Operating cash was also positively impacted by not making asbestos payments due
to the Restructuring Proceedings. Asbestos payments in the first quarter of 2001
amounted to $88.3 million.
Cash Flow Used By Investing Activities
Cash flow used by investing activities was $41.7 million in the first three
months of 2002. Among the factors impacting investing cash flows were capital
expenditures of $63.5 million made for property, plant and equipment to
implement process improvements, increase manufacturing capacity, and introduce
new products offset by proceeds from the sales of businesses of $21.8 million.
The Company anticipates that 2002 capital expenditures, exclusive of
acquisitions and investments in affiliates, will be at approximately $365.0
million. The Company expects that funding for these expenditures will be from
cash on hand, cash provided from operations and external sources as required.
Cash Flow Used By Financing Activities
Cash flow used by financing activities was $20.9 million for the first
three months of 2002 primarily resulting from repayments of certain
international debt and a required repayment on its debtor-in-possession credit
facility ("DIP credit facility") due to proceeds received from a divested
business.
To meet its liquidity needs over the next two years, the Company entered
into a DIP credit facility in the aggregate amount of $675 million, under which
it has borrowed $244.6 million as of March 31, 2002. The Company had $329.0
million available for borrowings at March 31, 2002. Available borrowings are
impacted by the underlying collateral at any point in time, consisting of
domestic fixed assets, accounts receivable and inventory. Further, any
outstanding letters of credit reduce the amount available under the facility.
The DIP credit facility has been approved by the Bankruptcy court as well as
various creditors' committees. The DIP credit facility expires in October, 2003
and bears interest at either alternate base rate ("ABR") plus 2.5 percentage
points or a formula based on the London Inter-Bank Offered Rate ("LIBOR") plus
3.5 percentage points. The ABR is the greatest of either the bank's prime rate
or the base CD rate plus 1 percentage point or the fed funds rate plus 1/2
percentage point.
The Company provided collateral in the form of a pledge of its domestic
inventories, domestic accounts receivable, domestic plant, equipment and real
property, and its domestic intellectual property to the DIP lenders. The DIP
lenders received permission from the lenders of the Senior Credit Agreements to
have priority over their collateral interest.
The DIP credit facility contains restrictive covenants. The more
significant of these covenants include the maintenance of certain levels of
EBITDA and limitation on quarterly capital expenditures. Additional covenants
include, but are not limited to, limitations on the early retirement of debt,
additional borrowings, payment of dividends and the sale of assets or
businesses.
The Company has pledged 100% of the capital stock of certain U.S.
subsidiaries, 65% of capital stock of certain foreign subsidiaries and certain
intercompany loans to secure the Senior Credit Agreements of the Company.
Certain of such pledges also extend to the Notes, Medium-Term Notes and Senior
Notes of the Company. In addition, certain subsidiaries of the Company have
guaranteed the senior debt.
32
The Company's ability to obtain cash adequate to fund its needs depends
generally on the results of its operations, restructuring initiatives, the
Bankruptcy Court's approval of management's plans and the availability of
financing. Management believes that cash on hand and cash flow from operations,
in conjunction with borrowings available from its DIP credit facility, will be
sufficient to fund capital expenditures and meet its post-petition operating
obligations in the short-term. In the long term, the Company believes that the
benefits from the previously announced restructuring programs and favorable
resolution of its asbestos liability through Chapter 11 should provide adequate
long-term cash flows. However, there can be no assurance in this regard or that
the terms available for any future financing, if required, would be favorable to
the Company. Also, certain obligations, particularly asbestos obligations, can
be impacted by factors outside the Company's control.
At March 31, 2002 the Company was in compliance with all debt covenants
under its existing DIP credit facility. Based on current forecasts, the Company
expects to be in compliance throughout 2002. Changes in the business
environment, market factors, macroeconomic factors, or the Company's ability to
achieve its forecasts and other factors outside of the Company's control, could
adversely impact its ability to remain in compliance with debt covenants. If the
Company were to not be in compliance at a measurement date, the Company would be
required to renegotiate its facility. No assurance can be provided as to the
impact of such actions.
33
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is subject to the risk of changes in foreign currency exchange
rates due to its operations in foreign jurisdictions. The Company manufactures
and sells its products in North America, Europe, South America, Africa and Asia.
As a result, the Company's financial results could be significantly affected by
factors such as changes in foreign currency exchange rates or weak economic
conditions in the foreign markets in which the Company distributes its products.
The Company's operating results are primarily exposed to changes in exchange
rates between the U.S. dollar and European currencies.
As currency exchange rates change, translation of the statements of operations
of the Company's international businesses into United States dollars affects
year-over-year comparability of operating results. The Company does not
generally hedge operating translation risks because cash flows from
international operations are generally reinvested locally. Changes in foreign
currency exchange rates are generally reported as a component of shareholders'
equity for the Company's foreign subsidiaries reporting in local currencies and
as a component of income for its foreign subsidiaries using the US dollar as the
functional currency. The Company's equity was reduced by $75.1 million during
the three months ended March 31, 2002, primarily due to cumulative translation
adjustments resulting from changes in the U.S. dollar to the Euro and the
British Pound.
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PART II - OTHER INFORMATION
- ---------------------------
Item 1. Legal Proceedings
-----------------
(a) Contingencies.
Note 7 to the Consolidated Condensed Financial Statements,
"Asbestos Liability and Legal Proceedings", that is included
in Part I of this report, is incorporated herein by reference.
Item 3. Defaults Upon Senior Securities
-------------------------------
Virtually all of the Company's pre-petition debt is in default
due to the Filing. See Note 2 "Voluntary Reorganization Under
Chapter 11 and Administration" to the Company's condensed
consolidated financial statements.
The Company-Obligated Mandatorily Redeemable Preferred Securities
are in default due to the Filing. See Note 2 "Voluntary
Reorganization Under Chapter 11 and Administration" to the
Company's condensed consolidated financial statements.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits:
None
(b) Reports on Form 8-K:
(1) On February 25, 2002, the Company filed a Current Report on
Form 8-K to announce the appointment of Jane L. Warner to the
Company's Board of Directors.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
FEDERAL-MOGUL CORPORATION
By: /s/ G. Michael Lynch
----------------------
G. Michael Lynch
Executive Vice President and Chief Financial Officer,
Principal Financial Officer
By: /s/ William G. Quigley III
----------------------------
William G. Quigley III
Vice President and Controller,
Chief Accounting Officer
Dated: May 8, 2002
35