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 June 30, 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 July 31, 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, without limitation, 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 filing for Chapter 11 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 and pricing 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 (Unaudited)
(Millions of Dollars, Except Per Share Amounts)
Three Months Ended Six Months Ended
June 30 June 30
------- -------
2002 2001 2002 2001
---- ---- ---- ----
Net sales ...................................................... $ 1,442.3 $ 1,425.4 $ 2,788.4 $ 2,876.1
Cost of products sold .......................................... 1,151.0 1,126.4 2,235.8 2,273.8
--------- --------- --------- ---------
Gross margin ................................................ 291.3 299.0 552.6 602.3
Selling, general and administrative expenses ................... 213.4 203.6 426.8 431.2
Amortization of goodwill and other intangible assets ........... 3.5 29.8 7.1 60.2
Restructuring charges .......................................... 1.5 2.1 11.0 31.9
Adjustment of assets held for sale and other long-lived
assets to fair value ......................................... 2.6 0.1 2.6 0.7
Interest expense, net .......................................... 29.9 81.2 60.2 163.8
Chapter 11 and Administration related reorganization
expenses ..................................................... 18.5 -- 33.4 --
Gain on extinguishment of debt ................................. -- (25.1) -- (25.1)
Other income, net .............................................. (14.8) (27.8) (13.8) (21.3)
--------- --------- --------- ---------
Earnings (loss) before income tax expense and
cumulative effect of change in accounting
principle .............................................. 36.7 35.1 25.3 (39.1)
Income tax expense ............................................. 20.7 52.6 50.5 40.6
--------- --------- --------- ---------
Earnings (loss) before cumulative effect of change
in accounting principle ................................ 16.0 (17.5) (25.2) (79.7)
Cumulative effect of change in accounting principle, net
of applicable income tax benefit ......................... -- -- 1,428.4 --
--------- --------- --------- ---------
Net Earnings (Loss) ................................. 16.0 (17.5) (1,453.6) (79.7)
Preferred dividends ............................................ -- 0.4 -- 0.8
--------- --------- --------- ---------
Net Earnings (Loss) Attributable to Common Shareholders ........ $ 16.0 $ (17.9) $(1,453.6) $ (80.5)
========= ========= ========= =========
Earnings (Loss) Per Common Share:
Basic
Earnings (Loss) Per Common Share before cumulative
effect of change in accounting principle ................... $ 0.19 $ (0.25) $ (0.31) $ (1.14)
========= ========= ========= =========
Net Earnings (Loss) Per Common Share ......................... $ 0.19 $ (0.25) $ (17.65) $ (1.14)
========= ========= ========= =========
Diluted
Earnings (Loss) Per Common Share before cumulative
effect of change in accounting principle ................... $ 0.17 $ (0.25) $ (0.31) $ (1.14)
========= ========= ========= =========
Net Earnings (Loss) Per Common Share ......................... $ 0.17 $ (0.25) $ (17.65) $ (1.14)
========= ========= ========= =========
See accompanying notes.
3
FEDERAL-MOGUL CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Millions of Dollars)
(Unaudited)
June 30 December 31
2002 2001
----------- -----------
ASSETS
Cash and equivalents ............................................................... $ 350.5 $ 346.9
Accounts receivable ................................................................ 1,103.4 944.8
Inventories ........................................................................ 786.7 721.9
Deferred taxes ..................................................................... 62.0 55.4
Other current assets ............................................................... 171.0 177.6
----------- -----------
Total Current Assets .......................................................... 2,473.6 2,246.6
Property, plant and equipment, net ................................................. 2,217.4 2,163.7
Goodwill ........................................................................... 1,454.5 2,738.9
Other intangible assets, net ....................................................... 457.1 624.7
Asbestos-related insurance recoverable ............................................. 751.8 723.2
Other noncurrent assets ............................................................ 550.0 556.1
----------- -----------
Total Assets .................................................................. $ 7,904.4 $ 9,053.2
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Short-term debt, including current portion of long-term debt ....................... $ 17.4 $ 24.9
Accounts payable ................................................................... 351.6 299.5
Accrued compensation ............................................................... 237.8 193.9
Restructuring and rationalization reserves ......................................... 78.6 81.1
Other accrued liabilities .......................................................... 460.9 382.9
----------- -----------
Total Current Liabilities ..................................................... 1,146.3 982.3
Long-term debt ..................................................................... 259.9 266.7
Postemployment benefits ............................................................ 847.3 819.8
Other accrued liabilities .......................................................... 237.5 258.5
Minority interest in consolidated subsidiaries ..................................... 47.2 50.3
Liabilities subject to compromise .................................................. 6,250.4 6,256.6
Shareholders' Equity (Deficit):
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 ............................................................. (2,568.6) (1,115.0)
Accumulated other comprehensive loss ............................................ (600.4) (750.1)
Other ........................................................................... (0.2) (0.4)
----------- -----------
Total Shareholders' Equity (Deficit) .......................................... (884.2) 419.0
----------- -----------
Total Liabilities and Shareholders' Equity (Deficit) .......................... $ 7,904.4 $ 9,053.2
=========== ===========
See accompanying notes.
4
FEDERAL-MOGUL CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Millions of Dollars)
(Unaudited)
Six Months Ended
June 30
-------
2002 2001
----------- ---------
Cash Provided From (Used By) Operating Activities
Net loss ............................................................................... $ (1,453.6) $ (79.7)
Adjustments to reconcile net loss to net cash provided from (used by) operating
activities:
Cumulative effect of change in accounting principle .................................. 1,464.5 --
Depreciation and amortization ........................................................ 136.8 191.1
Gain on extinguishment of debt ....................................................... -- (25.1)
Restructuring charges ................................................................ 11.0 31.9
Chapter 11 and Administration related reorganization expenses ........................ 33.4 --
Adjustment of assets held for sale and other long-lived assets to fair value ......... 2.6 0.7
Postemployment benefits .............................................................. 7.0 (0.4)
(Increase) decrease in accounts receivable ........................................... (122.5) 11.4
(Increase) decrease in inventories ................................................... (48.2) 34.7
Increase in accounts payable ......................................................... 21.2 17.8
Changes in other assets and liabilities .............................................. 108.3 5.8
Payments against restructuring and rationalization reserves .......................... (17.8) (37.5)
Payments for Chapter 11 and Administration related reorganization expenses ........... (36.2) --
Payments against asbestos liability, net of insurance receipts ....................... -- (170.7)
----------- ---------
Net Cash Provided From (Used By) Operating Activities ............................. 106.5 (20.0)
Cash Provided From (Used By) Investing Activities
Expenditures for property, plant and equipment and other long-term assets .............. (127.2) (146.0)
Proceeds from sale of property, plant and equipment .................................... -- 19.0
Proceeds from sales of businesses ...................................................... 21.8 160.2
----------- ---------
Net Cash Provided From (Used By) Investing Activities ............................. (105.4) 33.2
Cash Provided From (Used By) Financing Activities
Proceeds from issuance of long-term debt ............................................... 1.5 346.8
Principal payments on long-term debt ................................................... (1.9) (135.5)
Principal payments on DIP credit facility .............................................. (6.1) --
Decrease in short-term debt ............................................................ (7.5) (25.3)
Fees paid for debt agreements .......................................................... -- (18.5)
Repurchase of accounts receivable under securitization ................................. -- (129.6)
Dividends .............................................................................. -- (1.5)
Other .................................................................................. -- 1.4
----------- ---------
Net Cash Provided From (Used By) Financing Activities ............................. (14.0) 37.8
----------- ---------
Effect of Foreign Currency Exchange Rate Fluctuations on Cash ..................... 16.5 (4.8)
----------- ---------
Increase in Cash and Equivalents .................................................. 3.6 46.2
Cash and Equivalents at Beginning of Period ............................................... 346.9 107.2
----------- ---------
Cash and Equivalents at End of Period ..................................................... $ 350.5 $ 153.4
=========== =========
See accompanying notes.
5
Federal-Mogul Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
June 30, 2002
1. BASIS OF PRESENTATION
Interim Financial Statements
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 and six month
periods ended June 30, 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.
New Accounting Pronouncements
Accounting for Extraordinary Item:
On April 30, 2002, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 145, "Rescission
of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and
Technical Corrections." This pronouncement, among other things, requires certain
gains and losses on the extinguishment of debt previously treated as
extraordinary items to be classified as income or loss from continuing
operations. As a result of the adoption of SFAS No. 145, the Company has
reclassified the $25.1 million gain, before income tax expense of $8.8 million,
on extinguishment of debt previously recorded as an extraordinary item to other
expense and income tax expense, respectively, in its condensed consolidated
statements of operations for the three and six months ended June 30, 2001.
Accounting for Goodwill and Other Intangible Assets:
On July 20, 2001, the FASB issued 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 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 11 to the condensed consolidated financial statements.
Accounting for Certain Sales Incentives:
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 $2.2 million and $4.2 million, respectively, of
expenditures previously recorded by the Company as selling, general, and
administrative expenses to costs of products sold for the three and six month
period ended June 30, 2001.
6
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 and preferred
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., three creditors' committees, representing asbestos claimants,
unsecured creditors and equity holders have been appointed as official
committees in the Chapter 11 Cases and, in accordance with the provisions of the
Bankruptcy 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 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 requested the Bankruptcy Court to
extend the period of exclusivity to November 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 to 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
7
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 has set March 3, 2003
as a bar date for asbestos property damage claims. It is expected that a bar
date will also be set in the future for general and commercial claims and
asbestos personal injury claims.
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.
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 a portion of the proceeds received from an asset sale
or business unit divestiture. The total commitment under the DIP credit facility
has been reduced to $659 million as of June 30, 2002 due to a first quarter
divestiture (see Note 6).
At June 30, 2002 the Company had $243.9 million outstanding and $347.8
million available to borrow under its DIP credit facility. Available borrowings
under the DIP credit facility 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 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
8
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 June 30,
2002, the Debtors' pre-petition debt is classified under the caption
"Liabilities Subject to Compromise." This includes debt outstanding of $1,902.2
million under the pre-petition Senior Credit Agreements and $2,118.2 million of
other outstanding debt, primarily notes payable at various unsecured rates, less
capitalized debt issuance fees of $45.5 million. The carrying value of the
pre-petition debt will be adjusted once it has become an allowed claim by the
Court to the extent the related carrying value differs from the amount of the
allowed claim. Such adjustment may be material.
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 June 30, 2002 consolidated condensed balance sheet.
As reflected in the consolidated condensed 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 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. A March 3, 2003 bar date has been set for the filing
of proofs of claim against the Debtors. The ultimate number and allowed amount
of such claims are not yet 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
9
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 Debtors' condensed combined balance sheets have been adjusted as
previously reported to reflect the reclassification of 1) $1.0 billion from
Loans Payable, Non-Debtors, to Liabilities subject to compromise at March 31,
2002 and December 31, 2001, and 2) a reduction of approximately $5.8 billion
from Investment in Non-Debtor subsidiaries to Stockholders' Equity (Deficit) at
December 31, 2001. These changes have no impact on the Debtors' condensed
consolidated statements of operations or statements of cash flows as of or for
the three months ended March 31, 2002 and the year ended December 31, 2001.
These changes also have no impact on Federal-Mogul Corporation's consolidated
statements of operations, balance sheets, or statements of cash flows as of or
for the three months ended March 31, 2002 and the year ended December 31,2001.
In addition, as required by SFAS No. 142, the March 31, 2002 condensed
consolidated balance sheet has been restated to reflect the adoption of SFAS No.
142.
The condensed combined financial statements of the Debtors are presented as
follows:
Federal-Mogul Corporation
Debtors' Condensed Consolidated Statements of Operations (Unaudited)
(Millions of Dollars)
Three Months Six Months
Ended Ended
June 30 June 30
2002 2002
------------ ------------
Net sales .................................................................... $ 997.1 $ 1,931.6
Cost of products sold ........................................................ 817.7 1,589.5
------- -------
Gross margin .............................................................. 179.4 342.1
Selling, general and administrative expenses ................................. 146.0 296.1
Amortization of other intangible assets ...................................... 3.1 6.0
Restructuring charges ........................................................ 4.0 4.5
Adjustment of assets held for sale and other long-lived
assets to fair value ....................................................... 2.6 2.6
Interest expense, net ........................................................ 30.7 61.6
Chapter 11 and Administration related reorganization
expenses ................................................................... 18.5 33.4
Other income, net ............................................................ (43.0) (75.6)
------- -------
Earnings before income taxes, cumulative effect
of change in accounting principle and equity
loss of Non-Debtor subsidiaries .................................... 17.5 13.5
Income tax expense ........................................................... 4.0 28.2
------- -------
Earnings before cumulative effect of change in
accounting principle and equity loss of
Non-Debtor subsidiaries ............................................ 13.5 (14.7)
Cumulative effect of change in accounting principle, net
of applicable income tax benefit ........................................... -- 1,100.7
------- -------
Income (Loss) before equity loss of Non-Debtor subsidiaries .................. 13.5 (1,115.4)
------- --------
Equity earnings (loss) of Non-Debtor subsidiaries ............................ 2.5 (338.2)
------- --------
Net Earnings (Loss) .................................................. $ 16.0 $(1,453.6)
======= =========
10
Federal-Mogul Corporation
Debtors' Condensed Consolidated Balance Sheets
(Millions of Dollars)
(Unaudited) (Unaudited)
June 30 March 31 December 31
2002 2002 2001
---- ---- ----
ASSETS
Cash and equivalents ..................................................... $ 160.3 $ 118.0 $ 146.5
Accounts receivable ...................................................... 664.1 630.3 604.0
Accounts receivable, Non-Debtors ......................................... 173.1 180.1 150.5
Inventories .............................................................. 470.2 459.2 440.4
Deferred taxes ........................................................... 44.0 37.3 37.0
Other current assets ..................................................... 93.5 102.2 114.7
---------- ---------- -----------
Total Current Assets ................................................ 1,605.2 1,527.1 1,493.1
Property, plant and equipment, net ....................................... 1,216.5 1,212.3 1,235.2
Goodwill, net ............................................................ 1,224.2 1,170.0 2,202.4
Other intangible assets, net ............................................. 469.3 460.8 600.3
Asbestos-related insurance recoverable ................................... 751.8 712.6 723.2
Loans receivable and investments in Non-Debtors .......................... 4,381.7 4,210.8 4,510.0
Other noncurrent assets .................................................. 339.6 427.4 438.0
---------- ---------- -----------
Total Assets ........................................................ $ 9,988.3 $ 9,721.0 $ 11,202.2
========== ========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Accounts payable ......................................................... $ 297.8 $ 276.2 $ 237.1
Accounts payable, Non-Debtors ............................................ 57.5 52.4 37.3
Other accrued liabilities ................................................ 324.6 316.7 292.2
---------- ---------- -----------
Total Current Liabilities ........................................... 679.9 645.3 566.6
Long-term debt ........................................................... 243.9 243.9 250.0
Postemployment benefits .................................................. 658.8 656.7 655.9
Other accrued liabilities ................................................ 61.2 61.4 75.6
Liabilities subject to compromise ........................................ 9,228.9 9,223.3 9,235.1
Shareholders' Equity (Deficit) ........................................... (884.4) (1,109.6) 419.0
---------- ---------- -----------
Total Liabilities and Shareholders' Equity (Deficit) .................. $ 9,988.3 $ 9,721.0 $ 11,202.2
========== ========== ===========
11
Federal-Mogul Corporation
Debtors' Condensed Consolidated Statement of Cash Flows (Unaudited)
(Millions of Dollars)
Six
Months Ended
June 30
2002
------------
Cash Provided From (Used By)Operating Activities
Net loss ............................................................................. $ (1,453.6)
Adjustments to reconcile net loss to net cash provided from
operating activities:
Cumulative effect of change in accounting principle ................................ 1,139.5
Depreciation and amortization ...................................................... 80.3
Chapter 11 and Administration related reorganization expenses ...................... 33.4
Adjustment of assets held for sale and other long-lived assets to fair value ....... 2.6
Equity loss of Non-Debtor subsidiaries ............................................. 338.2
Postemployment benefits ............................................................ 1.9
Changes in working capital, other assets, and other liabilities .................... (58.1)
Payments for Chapter 11 and Administration related reorganization expenses ......... (36.2)
Payments against restructuring and rationalization reserves ........................ (9.6)
------------
Net Cash Provided From Operating Activities ..................................... 38.4
Cash Provided From (Used By) Investing Activities
Expenditures for property, plant and equipment and other long-term assets ............ (56.8)
Proceeds from sales of businesses .................................................... 21.8
------------
Net Cash Used By Investing Activities ........................................... (35.0)
Cash Provided From (Used By) Financing Activities
Principal payments on DIP credit facility ............................................ (6.1)
------------
Net Cash Used By Financing Activities ........................................... (6.1)
Effect of Foreign Currency Exchange Rate Fluctuations on Cash ................... 16.5
-----------
Increase in Cash and Equivalents ................................................ 13.8
Cash and Equivalents at Beginning of Period ............................................. 146.5
------------
Cash and Equivalents at End of Period ................................................... $ 160.3
============
12
Liabilities subject to compromise are comprised of (in millions):
June 30 March 31 December 31
2002 2002 2001
---- ---- ----
Debt ........................... $ 3,975.0 $ 3,973.3 $ 3,971.4
Asbestos liabilities ........... 1,558.7 1,547.3 1,550.2
Company-obligated
mandatorily redeemable
preferred securities ........ 448.9 448.9 449.5
Accounts payable ............... 186.3 194.4 200.2
Interest payable ............... 41.2 41.2 43.7
Environmental liabilities ...... 22.8 23.0 23.3
Other accrued liabilities ...... 17.5 16.7 18.3
--------- --------- -----------
Subtotal .................... 6,250.4 6,244.8 6,256.6
Intercompany payables to
Affiliates .................. 2,978.5 2,978.5 2,978.5
--------- --------- -----------
Liabilities subject to
Compromise .................. $ 9,228.9 $ 9,223.3 $ 9,235.1
========= ========= ===========
Chapter 11 and Administration related reorganization expenses in the
condensed consolidated statements of operations for the three and six month
period ending June 30, 2002 consist of legal, financial and advisory fees and
other directly related internal costs.
3. TAXES
For the six months ended June 30, 2002, the Company recorded income tax
expense of $50.5 million on earnings of $25.3 million before income taxes and
cumulative effect of change in accounting principle, compared to an income tax
expense of $40.6 million on a loss of $39.1 million before income taxes in the
same period of 2001. Income tax expense for the six months ended June 30, 2002
resulted primarily from the adjustments to the valuation allowances related to
the implementation of SFAS No. 141 and 142, not providing a tax benefit for
losses in the United States and from limitations on specific interest expense
deductions in the U.K.
4. OPERATIONS BY REPORTABLE SEGMENT
The segment information for the three and six months ended June 30, 2001
has been restated to reflect the Company's internal organization changes
implemented in September 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
13
segment include dynamic seals, gaskets and element resistant sleeving systems
protection products.
Friction products are used in automotive, heavy duty, railroad and
industrial 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 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).
14
The Company has aggregated individual operating 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, cumulative effect of
change in accounting principle and certain nonrecurring items such as
restructuring and impairment charges, Chapter 11 and Administration related
reorganization expenses, gains on extinguishment of debt 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 Net Sales Operational EBIT
--------- ---------------- --------- ----------------
Three Months Three Months Six Months Six Months
Ended June 30 Ended June 30 Ended June 30 Ended June 30
------------- ------------- ------------- -------------
2002 2001 2002 2001 2002 2001 2002 2001
------ ------ ------ ------ ------ ------ ------ ------
Powertrain .................. $ 449.2 $ 414.0 $ 42.2 $ 37.1 $ 879.5 $ 863.4 $ 67.3 $ 84.1
Sealing Systems and
Systems Protection ...... 158.3 156.5 15.9 12.1 306.7 311.2 24.3 20.9
Friction .................... 94.8 89.8 16.3 4.1 181.4 180.0 29.9 5.9
Aftermarket ................. 642.1 630.9 90.4 72.5 1,215.0 1,247.7 158.0 129.1
Other, including Corporate... 97.9 95.7 (76.2) (62.1) 192.6 188.0 (155.9) (132.5)
Divested Operations ......... -- 38.5 -- 2.7 13.2 85.8 1.9 7.9
--------- --------- --------- --------- --------- --------- --------- ---------
Total ....................... $ 1,442.3 $ 1,425.4 $ 88.6 $ 66.4 $ 2,788.4 $ 2,876.1 $ 125.5 $ 115.4
========= ========= ========= ========= ========= ========= ========= =========
Three Months Six Months
Ended June 30 Ended June 30
------------- -------------
Reconciliation: 2002 2001 2002 2001
------ ------ ------ ------
Total segments Operational EBIT ...................................... $ 88.6 $ 66.4 $ 125.5 $ 115.4
Net interest and other financing costs ............................... (29.3) (91.4) (60.0) (184.2)
Restructuring, impairment and other special charges .................. (4.1) (2.2) (13.6) (32.6)
Gain on sale of businesses ........................................... -- 37.2 6.8 37.2
Chapter 11 and Administration related reorganization expenses ........ (18.5) -- (33.4) --
Gain on extinguishment of debt ....................................... -- 25.1 -- 25.1
--------- --------- --------- --------
Earnings (loss) before income tax expense and cumulative effect
of change in accounting principle ............................... $ 36.7 $ 35.1 $ 25.3 $ (39.1)
========= ========= ========= ========
Total assets by reportable segment are as follows:
June 30, December 31,
2002 2001
--------- ---------
Powertrain .................... $ 1,678.5 $ 2,728.6
Sealing Systems and
Systems Protection ........ 1,094.8 1,031.8
Friction ...................... 314.6 398.9
Aftermarket ................... 3,465.1 3,360.3
Other, including Corporate .... 1,247.8 1,429.6
Divested Operations ........... 103.6 104.0
--------- ---------
Total ......................... $ 7,904.4 $ 9,053.2
========= =========
15
5. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings
(loss) per share (in millions of dollars, except per share data):
Three Months Six Months
Ended June 30 Ended June 30
2002 2001 2002 2001
-------- -------- -------- --------
Numerator:
Net Earnings (loss) ........................................................... $ 16.0 $ (17.5) $(1,453.6) $ (79.7)
Cumulative effect of change in accounting principle, net of applicable
tax benefit............................................................... -- -- 1,428.4 --
-------- --------- --------- --------
Earnings (loss) before cumulative effect of change in accounting principle .... 16.0 (17.5) (25.2) (79.7)
Series C preferred dividend requirement ....................................... -- (0.4) -- (0.8)
-------- --------- --------- --------
Numerator for basic and diluted earnings (loss) per share - loss
attributable to common shareholders before effect of cumulative
change in accounting principle............................................ $ 16.0 $ (17.9) $ (25.2) $ (80.5)
======== ========= ========= ========
Numerator for basic and diluted earnings (loss) per share ..................... $ 16.0 $ (17.9) $(1,453.6) $ (80.5)
======== ========= ========= ========
Denominator:
Denominator for basic earnings (loss) per share - weighted average
shares ................................................................... 82.4 71.2 82.4 70.9
======== ========= ========= ========
Effect of diluted securities:
Conversion of Series C preferred stock ................................... 0.9 -- -- --
Conversion of Company-obligated mandatorily redeemable
securities .......................................................... 8.7 -- -- --
-------- --------- --------- --------
Dilutive potential common shares ............................................ 9.6 -- -- --
-------- --------- --------- --------
Denominator for dilutive earnings (loss) per share - adjusted weighted
average shares and assumed conversions .............................. 92.0 71.2 82.4 70.9
======== ========= ========= ========
Basic earnings (loss) per share before cumulative effect of change in
accounting principle ........................................................ $ 0.19 $ (0.25) $ (0.31) $ (1.14)
======== ========= ========= ========
Basic earnings (loss) per share .................................................. $ 0.19 $ (0.25) $ (17.65) $ (1.14)
======== ========= ========= ========
Diluted earnings (loss) per share before cumulative effect of change in
accounting principle ........................................................ $ 0.17 $ (0.25) $ (0.31) $ (1.14)
======== ========= ========= ========
Diluted earnings (loss) per share ................................................ $ 0.17 $ (0.25) $ (17.65) $ (1.14)
======== ========= ========= ========
As a result of the Restructuring Proceedings, the Company stopped accruing
and paying its dividends on its Series C Preferred Stock.
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 income, net" in the
accompanying condensed consolidated statements of operations.
In May 2002, the Company announced an agreement to sell certain United
States camshaft operations to ASIMCO, an automotive components manufacturing
company based in Beijing, China. The sale is subject to approval by the U.S.
Bankruptcy Court and certain other conditions. The operations to be sold had
combined net sales of approximately $80 million in 2001. The Company does not
expect to record a material gain or loss on this transaction.
16
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. 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.
Notice of complaints continue to be received Post-Petition which are in
violation of the Automatic Stay.
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 June 30, 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 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 has set a bar date
of March 3, 2003 for the filing of all asbestos-related property damage claims.
Bar dates for personal injury claims or for commercial and general claims have
not yet been set by the Bankruptcy Court. 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 their prior membership in the Center for Claims Resolution ("CCR"). As a
result of the filing, the T&N Companies have sought declaratory and injunctive
relief in an adversary proceeding filed in the Bankruptcy Court, in order to
enjoin any post-petition payments to asbestos claimants by the CCR and any
post-petition draw by the CCR on $225 million in face amount of the surety
bonds. CCR now seeks to draw on the surety bonds to fund past and future
payments although the basis of such draw, its validity under the pre- petition
bond terms, and whether such draw may be utilized to pay obligations of other
CCR members are all disputed.
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 June 30, 2002 for the Company's U.S. and U.K. subsidiaries.
17
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 June 30,
2002 the recorded insurance recoverable was $581.9 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 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 June 30, 2002, the $581.9 million insurance
recoverable asset is net of an exchange rate discount of approximately $55.2
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. Pre-petition claims that were in the
pipeline that were received after the Petition Date continue to be entered into
the claims system and
18
represent an immaterial amount of claims. Notice of complaints continue to be
received Post-petition which are in violation of the Automatic Stay.
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 ($216.6 million as of June 30, 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 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
19
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. Notice of
complaints continue to be received post-petition which are in violation of the
Automatic Stay. 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 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 June 30, 2002, the Company has provided an aggregated
asbestos-related liability for all of its subsidiaries and businesses of
$1,558.7 million classified in the balance sheet under the caption liabilities
subject to compromise. Also as of June 30, 2002, the Company has recorded an
insurance recoverable asset of $751.8 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.
20
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 national or state environmental laws. These laws
require responsible parties to pay for cleaning up contamination resulting from
hazardous substances which were discharged into the environment by them, or by
others to whom they sent such substances for treatment or other disposition. In
addition, the Company has been notified by the United States Environmental
Protection Agency, other national environmental agencies, and various state
agencies that it may be a potentially responsible party ("PRP") under such laws
for the cost of cleaning up hazardous substances pursuant to CERCLA and other
national 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, in some
cases as a result of contractual commitments. 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 reserves were approximately $64.0 million and
$62.8 million at June 30, 2002 and December 31, 2001, respectively. The increase
in the reserve resulted primarily from the addition of new sites, offset 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, $22.9 million of this reserve has been reclassified to Liabilities
subject to compromise in the consolidated balance sheet, and the Company is
evaluating such classification for other sites.
8. INVENTORIES
Inventories consisted of the following (in millions):
June 30 December 31
2002 2001
------- -------
Finished products ........................................ $ 542.0 $ 511.2
Work-in-process .......................................... 137.3 116.4
Raw materials ............................................ 170.2 144.1
------- -------
849.5 771.7
Reserve for inventory valuation .......................... (62.8) (49.8)
------- -------
$ 786.7 $ 721.9
======= =======
21
9. RESTRUCTURING AND RATIONALIZATION
During the first six months of 2002, the Company recognized $11.0 million
of restructuring charges, net of reversals of $7.2 million of prior reserves,
related to severance and exit costs of $7.0 million and $4.0 million,
respectively. The restructuring charges related to announced manufacturing site
consolidations and closures in North America and Europe for Lighting, Friction,
Sealing Systems and Powertrain. This amount also includes reversals of previous
charges where the estimated liability was less than the existing reserve balance
for a particular initiative. Total employee reductions are expected to be 1,300
of which 850 have been terminated as of June 30, 2002.
The following table sets forth the restructuring and rationalization
reserves for the six months ended June 30, 2002 (in millions of dollars):
Restructuring Rationalization Total
------------- --------------- -----
Balance of reserves at December 31, 2001 ................ $ 68.3 $ 12.8 $ 81.1
Restructuring charges ................................... 12.0 -- 12.0
Reversals ............................................... (2.5) -- (2.5)
------ ------ ------
Net 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
====== ====== ======
Restructuring charges ................................... 6.2 -- 6.2
Reversals ............................................... (4.7) -- (4.7)
------ ------ ------
Net restructuring charges .......................... 1.5 -- 1.5
Effect of foreign exchange .............................. 4.8 0.1 4.9
Payments against restructuring reserves ................. (9.2) -- (9.2)
------ ------ ------
Balance of reserves at June 30, 2002 .................... 68.1 10.5 $ 78.6
====== ====== ======
10. COMPREHENSIVE INCOME (LOSS)
Total comprehensive income (loss) is summarized as follows (in millions of
dollars):
Three Months Six Months
Ended June 30 Ended June 30
------------- -------------
2002 2001 2002 2001
-------- -------- -------- --------
Net earnings (loss) ............................ $ 16.0 $ (17.5) $ (1,453.6) $ (79.7)
Other Comprehensive Income (Loss)
Foreign currency translation adjustments ... 224.8 (66.1) 149.7 (188.2)
Other, net of tax .............................. -- 2.8 -- 1.8
-------- -------- -------- --------
Total Comprehensive Income (Loss) .............. $ 240.8 $ (80.8) $(1,303.9) $ (266.1)
======== ======== ========= =========
22
11. GOODWILL AND OTHER INTANGIBLE ASSETS - ADOPTION OF SFAS No. 142
As discussed in Note 1 to the condensed consolidated financial statements,
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. During the second quarter of 2002, the
Company, along with the assistance of an outside valuation firm, performed the
impairment tests of its goodwill and indefinite-lived intangible assets required
by SFAS No. 142. The Company's initial impairment test indicated that the
carrying value of certain of its operating segments exceeded the corresponding
fair values, which were determined by using discounted cash flows and market
multiples. The implied fair value of goodwill in these operating segments was
then determined through the allocation of the fair value to the underlying
assets and liabilities. The performance of certain operating units and changes
in market conditions were the primary reasons for the decrease in certain
operating units' fair values that resulted in the impairment charge. The
majority of this charge relates to the impairment of goodwill associated with
the acquisitions of T&N, Plc. and Cooper Automotive.
The Company recorded the non-cash charge of $1,428.4 million, net of
applicable income tax benefit, to reduce the carrying value of its goodwill and
indefinite-lived intangible assets to their fair value as required by SFAS No.
142. The tax impact related to the charge was $36.1 million and was limited to
the benefit derived from the impairment of certain intangible assets other than
goodwill. Additionally, the charge decreased other comprehensive income by
approximately $32 million due primarily to changes in the Euro and British Pound
during the first six months of 2002. The charge is presented as a cumulative
effect of change in accounting principle in the condensed consolidated statement
of operations for the six month period ended June 30, 2002. The majority of this
charge relates to the impairment of goodwill associated with the acquisition of
T&N, Plc. and Cooper Automotive. The Company will continue to perform an
impairment review on an annual basis (or more frequently if impairment
indicators arise). The first annual review will take place in the fourth quarter
of 2002.
A summary of the changes in the Company's goodwill and other intangible
assets by business segment is as follows (in millions of dollars):
Goodwill
---------------------------------------------------------
Balance at Balance at
January 1, 2002 Other/(1)/ Impairments June 30, 2002
--------------- ----------- ----------- -------------
Powertrain .................................... $ 510.5 $ 9.7 $ (450.5) $ 69.7
Sealing Systems and System Protection ......... 586.7 10.2 -- 596.9
Friction ...................................... 338.9 0.4 (339.3) 0.0
Aftermarket ................................... 729.7 32.6 (154.1) 608.2
Other, including Corporate .................... 568.9 16.2 (409.7) 175.4
Divested Operations ........................... 4.2 0.1 -- 4.3
--------- -------- ----------- ---------
Total ......................................... $ 2,738.9 $ 69.2 $ (1,353.6) $ 1,454.5
========= ======== =========== =========
Other Intangible Assets/(2)/
---------------------------------------------------------
Balance at Balance at
January 1, 2002 Other/(1)/ Impairments June 30, 2002
--------------- ----------- ----------- -------------
Powertrain .................................... $ 3.3 $ -- $ (3.3) $ --
Sealing Systems and System Protection ......... 5.2 0.4 -- 5.6
Friction ...................................... 42.6 -- (42.6) --
Aftermarket ................................... 139.0 1.6 (1.2) 139.4
Other, including Corporate .................... 81.4 0.5 (63.8) 18.1
Divested Operations ........................... -- -- -- --
--------- -------- ---------- ---------
Total ......................................... $ 271.5 $ 2.5 $ (110.9) $ 163.1
========= ======== ========== =========
________________________
/(1)/ Other reflects the effect of foreign currency exchange
/(2)/ Other Intangible Assets is comprised of Trademarks.
24
At June 30, 2002 and December 31, 2001, goodwill and other intangible assets
consists of the following (in millions of dollars):
June 30, 2002 December 31, 2001
--------------------------------------- -------------------------------------
Gross Net Gross Net
Carrying Accumulated Carrying Carrying Accumulated Carrying
Amount Amortization Amount Amount Amortization Amount
------ ------------ ------ ------ ------------ ------
Amortized Intangible Assets:
Developed technology ....................... $ 245.6 $ (47.2) $ 198.4 $ 289.8 $ (44.4) $ 245.4
Other ...................................... 64.5 (43.0) 21.5 74.2 (40.5) 33.7
-------- -------- ------- -------- ------- -------
Total Amortized Intangible Assets ....... $ 310.1 $ (90.2) $ 219.9 $ 364.0 $ (84.9) $ 279.1
======== ======== ======= ======== ======= =======
Unamortized Intangible Assets:
Goodwill ................................... $1,454.5 $2,738.9
Trademarks ................................. 163.1 271.5
Intangible Pension Asset ................... 74.1 74.1
-------- --------
Total Unamortized Intangible Assets ..... $1,691.7 $3,084.5
======== ========
The following table shows the pro-forma effect of SFAS No. 142 on the Company's
earnings (in millions of dollars, except Per share amounts):
Three Months Ended Six Months Ended June
June 30, 2001 30, 2001
------------- --------
Reported Net Loss ..................................... $ (17.5) $ (79.7)
Addback: Gooodwill amortization ................. 23.1 45.6
Addback: Indefinite-Lived Intangible
Asset amortization ....................... 3.1 7.5
-------- ---------
Adjusted Net Earnings (Loss) .......................... $ 8.7 $ (26.6)
======== =========
Basic and diluted earnings (loss) per share:
Reported Net Loss ..................................... $ (0.25) $ (1.14)
Gooodwill amortization ........................... 0.32 0.64
Indefinite-Lived Intangible
Asset amortization ....................... 0.04 0.10
-------- --------
Adjusted .............................................. $ 0.11 $ (0.40)
======== =========
12. 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.
25
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 June 30, 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.
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 .............................. $ 39.8 $ 118.0 $ 28.5 $ 186.3
Other accrued liabilities ..................... 2.2 1.4 13.9 17.5
Environmental liabilities ..................... 22.2 -- 0.6 22.8
Interest payable .............................. 41.0 0.2 -- 41.2
Debt .......................................... 3,973.9 1.1 -- 3,975.0
Asbestos liabilities .......................... 1.4 239.8 1,317.5 1,558.7
Company-obligated mandatorily redeemable
preferred securities of subsidiary
holding solely convertible subordinated
debentures of the Company ................... -- -- 448.9 448.9
-------- --------- --------- ---------
$4,080.5 $ 360.5 $ 1,809.4 $ 6,250.4
======== ========= ========= =========
26
Federal-Mogul Corporation
Notes to Condensed Consolidated Financial Statements
Unaudited Consolidating Condensed Statement of Operations
Three Months Ended June 30, 2002
(Millions of Dollars)
(Unconsolidated)
----------------------------------------
Non-
Guarantor Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
---------- --------------- ---------------- ---------------- --------------
Net sales ......................................... $ 339.0 $ 472.5 $ 807.6 $ (176.8) $ 1,442.3
Cost of products sold ............................. 270.9 378.9 678.0 (176.8) 1,151.0
--------- -------- --------- ----------- -----------
Gross margin ................................. 68.1 93.6 129.6 -- 291.3
Selling, general and administrative expenses ...... 59.7 67.6 86.1 -- 213.4
Amortization of other intangible assets ........... 1.4 1.0 1.1 -- 3.5
Restructuring charges ............................. -- 4.1 (2.6) -- 1.5
Adjustment of assets held for sale and other
long-lived assets to fair value ................... -- 0.3 2.3 -- 2.6
Interest expense, net ............................. 31.4 -- (1.5) -- 29.9
Chapter 11 and Administration related
reorganization expenses ................... 18.5 -- -- -- 18.5
Other (income) expense, net ....................... (14.3) (28.1) 27.6 -- (14.8)
--------- -------- --------- ----------- -----------
Earnings (loss) before income taxes and equity in
earnings (loss) of subsidiaries .................. (28.6) 48.7 16.6 -- 36.7
--------- -------- --------- ----------- -----------
Income tax expense ................................ 0.7 0.4 19.6 -- 20.7
--------- -------- --------- ----------- -----------
Earnings (loss) before equity in earnings (loss)
of subsidiaries ................................... (29.3) 48.3 (3.0) -- 16.0
--------- -------- --------- ----------- -----------
Equity in earnings (loss) of subsidiaries ......... 45.3 26.8 -- (72.1) --
--------- -------- --------- ----------- -----------
Net Earnings (Loss) ............................... $ 16.0 $ 75.1 $ (3.0) $ (72.1) $ 16.0
========= ======== ========= =========== ===========
27
Federal-Mogul Corporation
Notes to Condensed Consolidated Financial Statements
Unaudited Consolidating Condensed Statement of Operations
Six Months Ended June 30, 2002
(Millions of Dollars)
(Unconsolidated)
----------------------------------------
Non-
Guarantor Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
---------- -------------- -------------- -------------- --------------
Net sales ........................................ $ 654.0 $ 916.8 $ 1,553.0 $ (335.4) $ 2,788.4
Cost of products sold ............................ 527.1 733.9 1,310.2 (335.4) 2,235.8
--------- --------- --------- --------- ---------
Gross margin ................................ 126.9 182.9 242.8 -- 552.6
Selling, general and administrative expenses ..... 124.6 130.7 171.5 -- 426.8
Amortization of other intangible assets .......... 2.8 2.0 2.3 -- 7.1
Restructuring charges ............................ -- 4.1 6.9 -- 11.0
Adjustment of assets held for sale and other
long-lived assets to fair value ................ -- 0.3 2.3 -- 2.6
Interest expense, net ............................ 62.9 -- (2.7) -- 60.2
Chapter 11 and Administration related
reorganization expenses ..................... 33.4 -- -- -- 33.4
Other (income) expense, net ...................... (34.3) (60.1) 80.6 -- (13.8)
--------- --------- --------- --------- ---------
Earnings (loss) before income taxes,
cumulative effect of change in accounting
principle and equity in earnings (losses)
of subsidiaries ................................ (62.5) 105.9 (18.1) -- 25.3
--------- --------- --------- --------- ---------
Income tax expense ............................... 0.7 23.7 26.1 -- 50.5
--------- --------- --------- --------- ---------
Earnings (loss) before cumulative effect of
change in accounting principle and equity in
earnings (loss) of subsidiaries .............. (63.2) 82.2 (44.2) -- (25.2)
Cumulative effect of change in accounting
principle net of applicable income tax benefit.. (63.7) 448.5 1,043.6 -- 1,428.4
Earnings (loss) before equity earnings (loss)
of subsidiaries ................................ 0.5 (366.3) (1,087.8) -- (1,453.6)
--------- --------- --------- --------- ---------
Equity in earnings (loss) of subsidiaries ........ (1,454.1) (690.9) -- 2,145.0 --
--------- --------- --------- --------- ---------
Net Earnings (Loss) .............................. $(1,453.6) $(1,057.2) $(1,087.8) $ 2,145.0 $(1,453.6)
========= ========= ========= ========= =========
28
Federal-Mogul Corporation
Notes to Condensed Consolidated Financial Statements
Unaudited Consolidating Condensed Statement of Operations
Three Months Ended June 30, 2001
(Millions of Dollars)
(Unconsolidated)
--------------------------------------
Non-
Guarantor Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
--------- ------------ ------------ ------------ ------------
Net sales ......................................... $ 335.0 $ 479.2 $ 825.4 $ (214.2) $ 1,425.4
Cost of products sold ............................. 273.1 377.8 689.7 (214.2) 1,126.4
------- ------- ------- --------- ---------
Gross margin ................................. 61.9 101.4 135.7 -- 299.0
Selling, general and administrative expenses ...... 63.1 56.0 84.5 -- 203.6
Amortization of goodwill and other intangible
assets .......................................... 5.0 11.6 13.2 -- 29.8
Restructuring charges ............................. -- 2.1 -- -- 2.1
Adjustment of assets held for sale and other
long-lived assets to fair value ................. -- -- 0.1 -- 0.1
Gain on early extinguishment of debt .............. (25.1) -- -- -- (25.1)
Interest expense, net ............................. 78.8 -- 2.4 -- 81.2
Other income, net ................................. 8.7 (60.6) 24.1 -- (27.8)
------- ------- ------- --------- ---------
Earnings (loss) before income taxes and equity in
earnings (loss) of subsidiaries ................. (68.6) 92.3 11.4 -- 35.1
------- ------- ------- --------- ---------
Income tax expense (benefit) ...................... (13.4) 61.8 4.2 -- 52.6
------- ------- ------- --------- ---------
Earnings (loss) before equity in earnings (loss)
of subsidiaries ................................. (55.2) 30.5 7.2 -- (17.5)
------- ------- ------- --------- ---------
Equity in earnings (loss) of subsidiaries ......... 37.7 46.7 -- (84.4) --
------- ------- ------- --------- ---------
Net Earnings (Loss) ............................... (17.5) $ 77.2 $ 7.2 $ (84.4) $ (17.5)
======= ======= ======= ========= =========
29
Federal-Mogul Corporation
Notes to Condensed Consolidated Financial Statements
Unaudited Consolidating Condensed Statement of Operations
Six Months Ended June 30, 2001
(Millions of Dollars)
(Unconsolidated)
--------------------------------------
Non-
Guarantor Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
-------- ------------ ------------ ------------ ------------
Net sales ............................................. $ 669.0 $ 956.2 $ 1,541.6 $ (290.7) $ 2,876.1
Cost of products sold ................................. 550.3 767.7 1,246.5 (290.7) 2,273.8
-------- ------------ ------------ ------------ ------------
Gross margin ..................................... 118.7 188.5 295.1 -- 602.3
Selling, general and administrative expenses .......... 137.0 112.7 181.5 -- 431.2
Amortization of goodwill and other intangible assets .. 10.1 23.4 26.7 -- 60.2
Restructuring charge .................................. 14.5 2.1 15.3 -- 31.9
Adjustment of assets held for sale and other
long-lived assets to fair value ....................... 0.6 -- 0.1 -- 0.7
Gain on early extinguishment of debt .................. (25.1) -- -- (25.1)
Interest expense, net ................................. 159.2 0.1 4.5 -- 163.8
Other (income) expense, net ........................... 97.8 (79.6) (39.5) -- (21.3)
-------- ------------ ------------ ------------ ------------
Earnings (loss) before income taxes and equity in
earnings (loss) of subsidiaries ...................... (275.4) 129.8 106.5 -- (39.1)
-------- ------------ ------------ ------------ ------------
Income tax expense (benefit) .......................... (46.5) 67.8 19.3 -- 40.6
-------- ------------ ------------ ------------ ------------
Earnings (loss) before equity in earnings (loss)
of subsidiaries ....................................... (228.9) 62.0 87.2 -- (79.7)
-------- ------------ ------------ ------------ ------------
Equity in earnings (loss) of subsidiaries ............. 149.2 76.7 -- (225.9) --
-------- ------------ ------------ ------------ ------------
Net Earnings (Loss) ................................... $ (79.7) $ 138.7 $ 87.2 $ (225.9) $ (79.7)
======== ============ ============ ============ ============
30
Federal-Mogul Corporation
Notes to Condensed Consolidated Financial Statements
Unaudited Consolidating Condensed Balance Sheet
June 30, 2002
(Millions of Dollars)
(Unconsolidated)
----------------------------------------
Non-
Guarantor Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
------------------------ ------------- ------------ ------------
ASSETS
Cash and equivalents ............................... $ 42.4 $ 3.0 $ 305.1 $ -- $ 350.5
Accounts receivable ................................ 566.5 -- 536.9 -- 1,103.4
Inventories ........................................ 62.5 346.5 377.7 -- 786.7
Deferred taxes ..................................... 25.8 -- 36.2 -- 62.0
Other current assets ............................... 24.9 35.5 110.6 -- 171.0
---------- ---------- ---------- ----------- ---------
Total Current Assets .......................... 722.1 385.0 1,366.5 -- 2,473.6
Property, plant and equipment ...................... 244.4 697.4 1,275.6 -- 2,217.4
Goodwill ........................................... 547.5 539.4 367.6 -- 1,454.5
Other intangible assets ............................ 61.7 237.3 158.1 -- 457.1
Investment in subsidiaries ......................... 6,362.2 2,789.1 -- (9,151.3) --
Intercompany accounts, net ......................... (3,621.4) 2,575.7 1,045.7 -- --
Asbestos-related insurance recoverable ............. -- 171.9 579.9 -- 751.8
Other noncurrent assets ............................ 94.6 41.5 413.9 -- 550.0
---------- ---------- ---------- ----------- ---------
Total Assets .................................. $ 4,411.1 $ 7,437.3 $ 5,207.3 $ (9,151.3) $ 7,904.4
========== ========== ========== =========== =========
LIABILITIES AND SHAREHOLDERS' EQUITY
(DEFICIT)
Short-term debt, including current portion of
Long-term debt .................................. $ -- $ 1.0 $ 16.4 $ -- $ 17.4
Accounts payable ................................... 70.2 73.7 207.7 -- 351.6
Accrued compensation ............................... 76.4 28.4 133.0 -- 237.8
Restructuring and rationalization reserves ......... 15.0 15.8 47.8 -- 78.6
Other accrued liabilities .......................... 81.1 138.6 241.2 -- 460.9
---------- ---------- ---------- ----------- ---------
Total Current Liabilities ..................... 242.7 257.5 646.1 -- 1,146.3
Long-term debt ..................................... 243.9 -- 16.0 -- 259.9
Postemployment benefits ............................ 637.1 0.2 210.0 -- 847.3
Other accrued liabilities .......................... 72.3 0.5 164.7 -- 237.5
Minority interest in consolidated subsidiaries ..... 18.8 28.4 -- -- 47.2
Liabilities subject to compromise .................. 4,080.5 360.5 1,809.4 -- 6,250.4
Shareholders' Equity (Deficit) ..................... (884.2) 6,790.2 2,361.1 (9,151.3) (884.2)
---------- ---------- ---------- ----------- ---------
Total Liabilities and Shareholders' Equity
(Deficit) ................................ $ 4,411.1 $ 7,437.3 $ 5,207.3 $ (9,151.3) $ 7,904.4
========== ========== ========== =========== =========
31
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
Other current assets................................. 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
========== ========= ======== ========== =========
32
Federal-Mogul Corporation
Notes to Condensed Consolidated Financial Statements
Unaudited Consolidating Condensed Statement of Cash Flows
Six Months Ended June 30, 2002
(Millions of Dollars)
(Unconsolidated)
---------------------------------------
Guarantor Non-Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
---------- ------------ ------------ ------------ ------------
Net Cash Provided From (Used By)
Operating Activities ......................... $ 60.4 $ 113.4 $ (67.3) $ -- $ 106.5
Cash Provided From (Used By) Investing
Activities:
Expenditures for property, plant and
Equipment and other long-term assets ........ (13.6) (33.8) (79.8) -- (127.2)
Proceeds from sales of businesses ............... 5.9 6.0 9.9 -- 21.8
-------- -------- -------- -------- --------
Net Cash Used By
Investing Activities .................. (7.7) (27.8) (69.9) -- (105.4)
Cash Provided From (Used By) Financing
Activities:
Proceeds from the issuance of long-term debt .... -- -- 1.5 -- 1.5
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 -- 0.5 (8.0) -- (7.5)
Change in intercompany accounts ................. (94.7) (86.6) 181.3 -- --
-------- -------- -------- -------- --------
Net Cash Provided From (Used By)
Financing Activities .................... (100.8) (86.1) 172.9 -- (14.0)
-------- -------- -------- -------- --------
Effect of Foreign Currency Exchange Rate
Fluctuations on Cash..................... (3.0) -- 19.5 -- 16.5
-------- -------- -------- -------- --------
Net Increase (Decrease) in Cash
and Equivalents ......................... $ (51.1) $ (0.5) $ 55.2 $ -- $ 3.6
======== ======== ======== ======== ========
33
Federal-Mogul Corporation
Notes to Condensed Consolidated Financial Statements
Unaudited Consolidating Condensed Statement of Cash Flows
Six Months Ended June 30, 2001
(Millions of Dollars)
(Unconsolidated)
---------------------------------------
Guarantor Non-Guarantor
---------- --------------
Parent Subsidiaries Subsidiaries Eliminations Consolidated
--------- ------------ ------------ ------------ ------------
Net Cash Provided From (Used By)
Operating Activities ............................ $ (70.0) $ 48.0 $ 2.0 $ -- $ (20.0)
Cash Provided From (Used By) Investing
Activities:
Expenditures for property, plant and equipment
and other long-term assets .................... (21.7) (66.9) (57.4) -- (146.0)
Proceeds from sale of property, plant and
equipment ..................................... -- 9.4 9.6 -- 19.0
Proceeds from sales of businesses ................... 5.2 155.0 -- -- 160.2
-------- -------- -------- ------- --------
Net Cash Provided From (Used By) Investing
Activities ................................. (16.5) 97.5 (47.8) -- 33.2
Cash Provided From (Used By) Financing Activities:
Proceeds from issuance of long-term debt ............ 346.8 -- -- -- 346.8
Principal payments on long-term debt ................ (125.6) (3.2) (6.7) -- (135.5)
Increase (decrease) in short-term debt .............. (28.5) (1.3) 4.5 -- (25.3)
Fees paid for debt issuance and other securities .... (18.5) -- -- -- (18.5)
Change in intercompany accounts ..................... (67.2) (132.3) 199.5 -- --
Sale of accounts receivable under securitization .... (129.6) -- -- -- (129.6)
Dividends ........................................... (1.5) -- -- -- (1.5)
Other ............................................... 1.4 -- -- -- 1.4
-------- -------- -------- ------- --------
Net Cash Provided From (Used By)
Financing Activities ....................... (22.7) (136.8) 197.3 -- 37.8
-------- -------- -------- ------- --------
Effect of Foreign Currency Exchange Rate
Fluctuations on Cash ....................... -- -- (4.8) -- (4.8)
-------- -------- -------- ------- --------
Net Increase (Decrease) in Cash and
Equivalents ................................ $ (109.2) $ 8.7 $ 146.7 $ -- $ 46.2
======== ======== ======== ======= ========
34
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.
CUMULATIVE EFFECT OF ACCOUNTING CHANGE - SFAS NO. 142
As discussed in Note 11 to the condensed consolidated financial statements,
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. During the second quarter of 2002, the
Company, along with the assistance of an outside valuation firm, performed the
impairment tests of its goodwill and indefinite-lived intangible assets required
by SFAS No. 142. The Company's initial impairment test indicated that the
carrying value of certain of its operating segments exceeded the corresponding
fair values, which were determined by using discounted cash flows and market
multiples. The implied fair value of goodwill in these operating segments was
then determined through the allocation of the fair value to the underlying
assets and liabilities. The performance of certain operating units and
charges in market conditions were the primary reasons for the decrease in
certain operating units' fair values that resulted in the impairment charge. The
majority of this charge relates to the impairment of goodwill associated with
the acquisitions of T&N, Plc. and Cooper Automative.
The Company recorded the non-cash charge of $1,428.4 million, net of
applicable income tax benefit, to reduce the carrying value of its goodwill and
indefinite-lived intangible assets to their fair value as required by SFAS No.
142. The tax impact related to the charge was $36.1 million and was limited to
the benefit derived from the impairment of certain intangible assets other than
goodwill. Additionally, the charge decreased other comprehensive income by
approximately $32 million due primarily to changes in the Euro and British Pound
during the first six months of 2002. The charge is presented as a cumulative
effect of change in accounting principle in the condensed
35
consolidated statement of operations for the six month period ended June 30,
2002. The majority of this charge relates to the impairment of goodwill
associated with the acquisitions of T&N, Plc. and Cooper Automotive. The Company
will continue to perform an impairment review on an annual basis (or more
frequently if impairment indicators arise). The first annual review will take
place in the fourth quarter of 2002.
CONTINUING OPERATIONS
THREE MONTHS ENDED JUNE 30, 2002 COMPARED TO THREE MONTHS ENDED JUNE 30, 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 June 30, 2002 and 2001 were as follows (in millions of dollars):
2002 2001 Change
-------- -------- --------
Powertrain .................. $ 449.2 $ 414.0 $ 35.2
Sealing Systems and
Systems Protection ...... 158.3 156.5 1.8
Friction .................... 94.8 89.8 5.0
Aftermarket ................. 642.1 630.9 11.2
Other, including Corporate .. 97.9 95.7 2.2
Divested Operations ......... -- 38.5 (38.5)
-------- -------- --------
Total ....................... $1,442.3 $1,425.4 $ 16.9
======== ======== ========
Gross Margin: Consolidated gross margin by reportable segment for the
three-months ended June 30, 2002 and 2001 was (in millions of dollars):
2002 2001 Change
-------- -------- --------
Powertrain ................... $ 72.0 $ 74.3 $ (2.3)
Sealing Systems and
Systems Protection ....... 33.5 36.8 (3.3)
Friction ..................... 27.7 18.3 9.4
Aftermarket .................. 149.8 145.4 4.4
Other, including Corporate ... 8.3 16.6 (8.3)
Divested Operations .......... -- 7.6 (7.6)
-------- -------- --------
Total ........................ $ 291.3 $ 299.0 $ (7.7)
======== ======== ========
Powertrain:
Net sales for the second quarter of 2002 were $449.2 million compared to $414.0
million in the same quarter of 2001. The sales increase is primarily
attributable to increased OE automotive and heavy duty sales volumes in North
America and Europe, additional sales volume from the acquisition of a Polish
piston manufacturer concluded in the third quarter of 2001 and favorable foreign
currency effects. Customer price reductions offset these favorable volume
trends.
Gross margin was 16.0% of sales for the second quarter of 2002 compared to 17.9%
for the same quarter in 2001. Although productivity and materials sourcing
programs exceeded base material and labor inflation, margin was adversely
impacted by customer price reductions, product warranty accruals and
incremental, on-going production costs associated with new product launches in
mid 2001.
36
Sealing Systems and Systems Protection:
Net sales for the second quarter of 2002 were $158.3 million compared to $156.5
million in the same quarter of 2001. Sealing Systems accounted for the increase
primarily due to North American OE automotive and heavy duty volumes. System
Protection sales volumes were essentially flat versus the same period last year.
Customer price reductions were offset by the impact of favorable foreign
currency effects.
Gross margin was 21.2% for the second quarter of 2002 compared to 23.5% for the
same quarter in 2001. The decrease is primarily attributable to productivity
actions not keeping pace with inflation and customer pricing reductions.
Friction:
Net sales for the second quarter of 2002 were $94.8 million compared to $89.8
million in the same quarter of 2001. While North America OE sales volumes were
flat, Europe OE sales volumes outpaced the prior year. The increase is primarily
attributable to increased automotive and commercial vehicle production and
aftermarket demand. Customer price reductions were offset by the impact of
favorable foreign currency effects.
Gross margin was 29.2% for the second quarter of 2002 compared to 20.4% for the
same quarter of 2001. Offsetting the impact of customer pricing and base
inflation, was significant productivity improvements in the North American
operations following extensive restructuring efforts undertaken in 2001. In
addition, the success of an aftermarket product launch in mid 2001 has resulted
in significantly increased shipments to the Aftermarket.
Aftermarket:
Net sales for the second quarter of 2002 were $642.1 million compared to $630.9
million in the same quarter of 2001. North America and Europe represent 81% and
19%, respectively, of second quarter 2002 sales. Adjusting for the sales impact
of the Signal-Stat divestiture completed in the first quarter of 2002 of
approximately $10 million, North America and Europe sales volumes increased over
the same quarter. This increase is attributable to improvements in product
availability in both regions and the success of a new North American aftermarket
friction product introduced in mid 2001. Sales were slightly improved by
favorable foreign currency effects.
Gross margin was 23.3% for the second quarter of 2002, compared to 23.0% for the
same quarter in 2001. The increase is attributable to customer price and
productivity improvements partially offset by base inflation and unfavorable
geographic and product mix.
Other:
Other primarily includes sales from certain businesses including Lighting,
European wipers and ignition, as well as Asia Pacific, South America and other
costs of Corporate functions. Net sales for the second quarter of 2002 were
$97.9 million compared to $95.7 million in the same quarter of 2001. This
increase is primarily attributable to increased Lighting sales related to the
full production of certain OE programs launched in 2001. Negative foreign
currency effects in South America and customer price reductions in Lighting and
Asia Pacific offset this increase.
Gross margin was 8.5% for the second quarter of 2002 as compared to 17.3% for
the same quarter in 2001. The decrease is primarily attributable to increased
employee health and welfare costs and the effect of lower actuarial returns on
the Company's pension plan assets included in Corporate. These increases were
partially offset by the elimination of Company 401(k) matching contributions and
other spending reductions.
Selling, General and Administrative Expenses:
Selling, general and administrative expenses as a percent of net sales increased
to 14.8% for the second quarter of 2002 as compared to 14.3% for the same
quarter of 2001. Year over year inflationary pressures from increasing employee
health and welfare costs, certain employee incentive and retention programs
related to the Restructuring Proceedings, and the effect of lower actuarial
returns on the Company's pension plan assets were partially offset by the
elimination of Company 401(k) matching contributions and other spending
reductions.
37
Interest Expense, net:
Interest expense, net was $29.9 million in the second quarter of 2002 compared
to $81.2 million for the same quarter of 2001. This decrease is a result of not
accruing or paying interest on certain pre-petition debt and lower interest
costs. The effect of not accruing the contractual interest on pre-petition debt
was $39.5 million in the quarter.
Income Tax Expense:
For the three months ended June 30, 2002, the Company recorded income tax
expense of $20.7 million on earnings of $36.7 million before income taxes and
cumulative effect of change in accounting principle, compared to income tax
expense of $52.6 million on earnings of $35.1 million before income taxes and
extraordinary items in the same period of 2001. Income tax expense for the three
months ended June 30, 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.
Amortization Expense:
During the three months ended June 30, 2002, and 2001, respectively, the Company
recognized amortization expense of $3.5 million and $29.8 million, respectively.
Amortization expense for the three months ended June 30, 2002 related primarily
to developed technologies and other amortized intangible assets. Excluded from
amortization expense in the second 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".
SIX MONTHS ENDED JUNE 30, 2002 COMPARED TO SIX MONTHS ENDED JUNE 30, 2001
RESULTS OF OPERATIONS
Net Sales: Consolidated net sales by reportable segment for the six months ended
June 30, 2002 and 2001 were as follows (in millions of dollars):
2002 2001 Change
-------- -------- --------
Powertrain ................... $ 879.5 $ 863.4 $ 16.1
Sealing Systems and
Systems Protection ....... 306.7 311.2 (4.5)
Friction ..................... 181.4 180.0 1.4
Aftermarket .................. 1,215.0 1,247.7 (32.7)
Other, including Corporate ... 192.6 188.0 4.6
Divested Operations .......... 13.2 85.8 (72.6)
-------- -------- --------
Total ........................ $ 2,788.4 $ 2,876.1 $ (87.7)
========= ========= ========
Gross Margin: Consolidated gross margin by reportable segment for the six months
ended June 30, 2002 and 2001 was (in millions of dollars):
2002 2001 Change
-------- -------- --------
Powertrain ................... $ 141.3 $ 161.5 $ (20.2)
Sealing Systems and
Systems Protection ....... 60.0 71.6 (11.6)
Friction ..................... 52.1 33.4 18.7
Aftermarket .................. 275.5 284.0 (8.5)
Other, including Corporate ... 19.7 32.6 (12.9)
38
Divested Operations ...... 4.0 19.2 (15.2)
-------- -------- --------
Total .................... $ 552.6 $ 602.3 $ (49.7)
======== ======== ========
Powertrain:
Net sales for the first six months of 2002 were $879.5 million compared to
$863.4 million in the same period of 2001. North American OE sales volumes were
the major increase over the prior period. Sales volumes in Europe were lower
than the prior period, despite additional sales volumes from the acquisition of
a Polish piston manufacturer in the third quarter of 2001. Customer price
reductions and unfavorable foreign currency effects offset these favorable
volume trends.
Gross margin was 16.1% of sales for the first six months of 2002 compared to
18.7% for the same period in 2001. Although productivity and materials sourcing
programs exceeded base material and labor inflation, margin was adversely
impacted by customer price reductions, product warranty accruals and
incremental, on-going production costs associated with new product launches in
mid 2001.
Sealing Systems and Systems Protection:
Net sales for the first six months of 2002 were $306.7 million compared to
$311.2 million in the same period of 2001. Sealing Systems, primarily Europe
sales volumes, accounted for the decrease while Systems Protection was above
prior year volumes. Customer price reductions and negative foreign currency
effects also contributed to the decrease.
Gross margin was 19.6% for the second quarter of 2002 compared to 23.0% for the
same quarter in 2001. The decrease is primarily attributable to productivity
actions not keeping pace with inflation and customer pricing reductions.
Friction:
Net sales for the first six months of 2002 were $181.4 million compared to
$180.0 million in the same period of 2001. Similar to the second quarter, Europe
OE sales volumes were the primary contributor to the increase.
Gross margin was 28.7% for the first six months of 2002 compared to 18.6% for
the same period of 2001. Offsetting the impact of customer pricing and base
inflation, was significant productivity improvement in the North America
operations following extensive restructuring efforts undertaken in 2001. In
addition, the success of a recent Aftermarket new product launch has resulted in
significantly increased shipments to the Aftermarket.
Aftermarket:
Net sales for the first six months of 2002 were $1,215.0 million compared to
$1,247.7 million in the same period of 2001. Divestitures and unfavorable
foreign currency effects accounted for a significant portion of the decrease in
sales volumes. In addition, as certain product line replacement trends are
extremely sensitive to weather conditions, North America sales volumes were
adversely impacted in the first quarter due to mild weather conditions
experienced. The first quarter decline was offset in the second quarter of 2002
by increased sales volumes in both North America and Europe.
Gross margin was 22.7% for the first six months of 2002 compared to 22.8% for
the same period in 2001. Although productivity improvements exceeded base
inflation, this net productivity improvement was more than offset by unfavorable
product line and geographic mix shifts.
Other:
Other primarily includes sales from certain businesses including Lighting,
European wipers and ignition, as well as Asia Pacific, South America and other
costs of Corporate functions. Net sales for the first six months of 2002 were
39
$192.6 million compared to $188.0 million in the same period of 2001. This
increase is primarily attributable to increased lighting sales related to the
full production of certain OE product launches in 2001 of approximately $17
million. The increase in Lighting was offset by negative foreign currency
exchange in South America and Asia Pacific.
Gross margin was 10.2% for the first six months of 2002 as compared to 17.3% for
the same period in 2001. The decrease is primarily attributable to increased
employee health and welfare costs and the effect of lower actuarial returns on
the Company's pension assets included in Corporate. The increases were partially
offset by the elimination of Company 401(k) matching contributions and other
reductions.
Selling, General and Administrative Expenses:
Selling, general and administrative expenses as a percent of net sales increased
to 15.3% for the first six months of 2002 as compared to 15.0% for the same
period of 2001. Year over year inflationary pressures from increasing employee
health and welfare costs, certain employee incentive and retention programs
related to the Restructuring Proceedings and the effect of lower actuarial
returns on the Company's pension plan assets, were partially offset by the
elimination of Company 401(k) matching contributions and other spending
reductions.
Interest Expense, net:
Interest expense, net was $60.2 million in the first six months of 2002 compared
to $163.8 million for the same period of 2001. This decrease is a result of not
accruing or paying interest on certain pre-petition debt and lower interest
costs. The effect of not accruing the contractual interest on pre-petition debt
was $75.1 million in the period.
Income Tax Expense:
For the six months ended June 30, 2002, the Company recorded income tax expense
of $50.5 million on earnings of $25.3 million before income taxes and cumulative
effect of accounting change, compared to income tax expense of $40.6 million on
a loss of $39.1 million before income taxes in the same period of 2001. Income
tax expense for the six months ended June 30, 2002, resulted primarily from the
adjustments to the valuation allowances related to the implementation of SFAS
No. 141 and 142 not providing a tax benefit for current losses in the United
States and from specific interest expense deductions in the U.K.
Amortization Expense:
During the six months ended June 30, 2002, and 2001, respectively, the Company
recognized amortization expense of $7.1 million and $60.2 million, respectively.
Amortization expense for the six months ended June 30, 2002 related primarily to
developed technologies and other amortized intangible assets. Excluded from
amortization expense in the first six months 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".
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".
40
LIQUIDITY AND CAPITAL RESOURCES
Cash Flow Provided From Operating Activities
Cash flow provided from operating activities was $106.5 million for the
first six months of 2002. Among the factors impacting operating cash flows were
operating earnings offset by working capital movements and timing issues on
various accounts. Operating cash was also positively impacted by not making
asbestos payments due to the Restructuring Proceedings. Asbestos payments in the
first six months of 2001 amounted to $170.7 million.
Cash Flow Used By Investing Activities:
Cash flow used by investing activities was $105.4 million in the first six
months of 2002. Investing cash flows were comprised of capital expenditures of
$127.2 million made for property, plant and equipment to implement process
improvements, increase manufacturing capacity and production, and introduce new
products, offset by proceeds from the sales of businesses of $21.8 million. The
majority of these proceeds relate to the first quarter sale of its Signal-Stat
Lighting Products division.
Based on current forecasts, the Company anticipates that 2002 capital
expenditures, exclusive of acquisitions and investments in affiliates, will be
approximately $365.0 million. This spending level is dependent upon specific
capital expenditure projects meeting the Company's operating and financial
objectives. The company continues to scrutinize all appropriation approvals to
minimize expenditures consistent with new business opportunities and economic
conditions. 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 $14.0 million for the first six
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 $243.9 million as of June 30, 2002. At June 30, 2002 the Company
had $347.8 million available for borrowings Available borrowings under the DIP
facility 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.
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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 liabilities through Chapter 11 and Administration
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 June 30, 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, and 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.
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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 increased by $149.7 million during
the six months ended June 30, 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 4. Submission of Matters to a Vote of Security Holders
The Company held its Annual Meeting of Shareholders on May 15,
2002, at which time the shareholders considered and voted on
(i) the election of eight directors, (ii) the appointment of
Ernst & Young LLP as its independent accountants for 2002.
The eight directors were incumbents, and all nominees were
reelected. The following table sets forth the number of votes
"For" and "Withheld" with respect to each nominee:
Nominee Votes For Votes Withheld
John J. Fannon 69,401,978 5,173,865
Paul S. Lewis 69,829,064 4,746,779
Frank E. Macher 70,698,769 3,877,074
Charles G. McClure 70,719,446 3,856,397
Robert S. Miller, Jr. 69,351,418 5,224,425
John C. Pope 69,565,476 5,010,367
Jane L. Warner 70,618,682 3,957,161
Geoffrey H. Whalen 70,128,348 4,447,495
The appointment of Ernst & Young LLP as independent
accountants was approved, with 72,335,873 votes cast For,
1,496,632 votes cast Against and 743,338 Abstentions.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
None
(b) Reports on Form 8-K:
(1) On July 29, 2002, the Company filed a Current Report on
Form 8-K to announce the resignation of Jane L. Warner from the
Company's Board of Directors.
(2) 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.
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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: August 12, 2002
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