UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Period Ended September 30, 2000
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Commission File Number 1-1511
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FEDERAL-MOGUL CORPORATION
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(Exact name of Registrant as specified in its charter)
Michigan 38-0533580
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
26555 Northwestern Highway, Southfield, Michigan 48034
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(Address of principal executive offices) (Zip Code)
(248) 354-7700
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(Registrant's telephone number, including area code)
Not Applicable
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(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days.
Yes X No _______
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Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Common Stock Outstanding - 70,509,415 shares as of October 27, 2000
FORWARD-LOOKING STATEMENTS
--------------------------
Certain statements contained or incorporated in this Quarterly Report on
Form 10-Q, which are not statements of historical fact constitute "Forward-
Looking Statements" within the meaning of the Private Securities Litigation
Reform Act of 1995 (The "Act"). Such statements are made in good faith by
Federal-Mogul pursuant to the "Safe Harbor" provisions of the Act.
Forward-looking statements include financial projections, estimates and
statements regarding plans, objectives and expectations of Federal-Mogul and its
management, including, without limitation, plans to implement the recently
announced restructuring initiatives relating to manufacturing and warehouse
facilities, plans to address the issues related to the conversion to the Euro,
and the scope of the effect of T&N and Cooper Automotive asbestos liabilities.
Forward-looking statements may involve known and unknown risks,
uncertainties and other factors, which may cause the actual results, performance
or achievements of Federal-Mogul to differ materially from any future results,
performance or achievements expressed or implied by such forward-looking
statements. Such risks, uncertainties and other factors include, without
limitation, fluctuation in demand for both original equipment and replacement
components in the automotive, heavy-duty vehicular and industrial markets, as
well as certain global and regional economic conditions, including without
limitation, the effects of world wide currency fluctuations, and other factors
detailed herein and from time to time in the documents incorporated by reference
herein. Moreover, Federal-Mogul's plans, objectives and intentions are subject
to change based on these and other factors, some of which are beyond Federal-
Mogul's control.
2
PART I - FINANCIAL INFORMATION
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Item 1. Financial Statements
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FEDERAL-MOGUL CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Operations (Unaudited)
(Millions of Dollars, Except Per Share Amounts)
Three Months Ended Nine Months Ended
September 30 September 30
------------------------- -------------------------
2000 1999 2000 1999
----------- ------------ ---------- -----------
Net sales $ 1,427.9 $ 1,583.9 $ 4,664.8 $ 4,913.2
Cost of products sold 1,089.2 1,142.7 3,482.4 3,539.9
------- ------- ------- -------
Gross margin 338.7 441.2 1,182.4 1,373.3
Selling, general and administrative expenses 210.5 201.1 629.4 638.3
Amortization of goodwill and other intangible assets 31.2 30.5 93.7 94.4
Restructuring charge 8.6 - 77.3 -
Adjustment of assets held for sale and other long-lived
assets to fair value 4.6 7.9 14.6 7.9
Integration costs - 13.2 - 36.6
Interest expense 74.2 68.0 216.6 207.4
Interest income (0.8) (0.8) (3.1) (2.8)
International currency exchange losses 3.3 0.8 1.3 3.5
Other expense, net 8.6 7.4 25.4 17.5
---------- ---------- --------- ---------
Earnings (loss) before income taxes, extraordinary items and
cumulative effect of change in accounting principle (1.5) 113.1 127.2 370.5
Income tax expense 6.1 43.0 71.0 151.7
--------- --------- ------- ----------
Earnings (loss) before extraordinary items and
cumulative effect of change in accounting principle (7.6) 70.1 56.2 218.8
Extraordinary items - loss on early retirement of debt, net
of applicable income tax benefits - - - 23.1
Cumulative effect of change in accounting for costs of
start-up activities, net of applicable income tax benefit - - - 12.7
----------- ------------ ---------- ----------
Net earnings (loss) (7.6) 70.1 56.2 183.0
Preferred stock dividends, net of related tax benefits 0.5 0.5 1.5 1.8
---------- ----------- ---------- ----------
Net Earnings (Loss) Available for Common Shareholders $ (8.1) $ 69.6 $ 54.7 $ 181.2
========== ============ ========== ==========
Earnings (Loss) Per Common Share
Basic
Earnings (loss) before extraordinary items and cumulative
effect of change in accounting principle $ (.12) $ .99 $ .78 $3.12
Extraordinary items - loss on early retirement
of debt, net of applicable income tax benefits - - - (.34)
Cumulative effect of change in accounting for costs of
start-up activities, net of applicable income tax benefit - - - (.18)
----------- ------------ ---------- ----------
Net Earnings (Loss) Available for Common Shareholders $ (.12) $ .99 $ .78 $ 2.60
=========== ============ ========== ==========
Diluted
Earnings (loss) before extraordinary items and cumulative
effect of change in accounting principle $ (.12) $ .91 $ .70 $2.82
Extraordinary items - loss on early retirement
of debt, net of applicable income tax benefits - - - (.28)
Cumulative effect of change in accounting for costs of
start-up activities, net of applicable income tax benefit - - - (.15)
----------- ------------ ---------- ----------
Net Earnings (Loss) Available for Common Shareholders $ (.12) $ .91 $ .70 $ 2.39
=========== ============ ========== ==========
See accompanying notes.
3
FEDERAL-MOGUL CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Millions of Dollars)
(Unaudited)
September 30 December 31
2000 1999
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Assets
Cash and equivalents $ 55.8 $ 64.5
Accounts receivable 526.0 514.6
Investment in accounts receivable securitization 258.2 232.2
Inventories 873.1 883.6
Prepaid expenses and income tax benefits 317.0 331.6
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Total Current Assets 2,030.1 2,026.5
Property, plant and equipment, net 2,391.2 2,503.7
Goodwill 3,279.4 3,547.8
Other intangible assets 735.1 796.3
Asbestos-related insurance recoverable 332.0 325.9
Other noncurrent assets 653.0 745.0
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Total Assets $ 9,420.8 $ 9,945.2
========== ==========
Liabilities and Shareholders' Equity
Short-term debt, including current portion of long-term debt $ 148.9 $ 190.8
Accounts payable 487.0 621.9
Accrued compensation 163.2 182.9
Restructuring and rationalization reserves 77.8 46.0
Current portion of asbestos liability 330.0 180.0
Income taxes payable 69.1 72.3
Other accrued liabilities 373.4 488.7
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Total Current Liabilities 1,649.4 1,782.6
Long-term debt 3,329.8 3,020.0
Long-term portion of asbestos liability 929.8 1,335.3
Postemployment benefits 623.3 661.9
Other accrued liabilities 473.8 454.9
Minority interest in consolidated subsidiaries 58.8 40.3
Company-obligated, mandatorily redeemable preferred securities
of subsidiary trust holding solely convertible subordinated
debentures of the Company/1/ 575.0 575.0
Shareholders' Equity:
Series C ESOP preferred stock 41.3 41.5
Common stock 352.3 352.1
Additional paid-in capital 1,780.9 1,782.4
Retained earnings 223.5 170.3
Unearned ESOP compensation (4.0) (7.9)
Accumulated other comprehensive loss (612.2) (262.1)
Other (0.9) (1.1)
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Total Shareholders' Equity 1,780.9 2,075.2
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Total Liabilities and Shareholders' Equity $ 9,420.8 $ 9,945.2
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See accompanying notes.
____________________
/1/ The sole assets of the Trust are convertible subordinated debentures of
Federal-Mogul with an aggregate principal amount of $575.0 million, which bear
interest at a rate of 7% per annum and mature on December 1, 2027. Upon
repayment of the subordinated debentures, the Company-obligated mandatorily
redeemable preferred securities of subsidiary trust will be mandatorily
redeemed.
4
Federal-Mogul Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
(Millions of Dollars)
Nine Months Ended
September 30
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2000 1999
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Cash Provided From (Used By) Operating Activities
Net earnings $ 56.2 $ 183.0
Adjustments to reconcile net earnings to net
cash provided from operating activities:
Depreciation and amortization 287.3 271.8
Restructuring charge 77.3 --
Adjustment of assets held for sale and other
long-lived assets to fair value 14.6 7.9
Loss on early retirement of debt -- 36.6
Cumulative effect of change in accounting principle -- 19.5
Postemployment benefits (13.4) (0.7)
Increase in accounts receivable (42.9) (121.5)
(Increase) decrease in inventories (41.8) 45.2
Increase (decrease) in accounts payable (112.0) 51.3
Decrease in current liabilities and other (26.4) (2.9)
Payments against restructuring and rationalization reserves (42.8) (73.9)
Payments against asbestos liability (234.7) (122.4)
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Net Cash Provided From (Used By) Operating Activities (78.6) 294.6
Cash Provided From (Used By) Investing Activities
Expenditures for property, plant and equipment
and other long-term assets (229.4) (290.1)
Business acquisitions, net of cash acquired -- (370.7)
Proceeds from sales of businesses 60.9 37.4
Other (3.4) --
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Net Cash Used By Investing Activities (171.9) (623.4)
Cash Provided From (Used By) Financing Activities
Issuance of common stock -- 1.2
Proceeds from issuance of long-term debt 485.0 2,123.0
Principal payments on long-term debt (168.1) (2,014.9)
Decrease in short-term debt (26.9) (21.7)
Fees paid for debt issuance and other securities -- (25.5)
Sale (repurchase) of accounts receivable under securitization (46.9) 261.1
Dividends (3.1) (3.4)
Other 1.8 (3.3)
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Net Cash Provided From Financing Activities 241.8 316.5
-------- ----------
Decrease in Cash and Equivalents (8.7) (12.3)
Cash and Equivalents at Beginning of Period 64.5 77.2
-------- ----------
Cash and Equivalents at End of Period $ 55.8 $ 64.9
======== ==========
See accompanying notes.
5
Federal-Mogul Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 30, 2000
1. BASIS OF PRESENTATION
General - The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with United States generally accepted
accounting principles (U.S. GAAP) for interim financial information and with
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do
not include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for the
three and nine-month periods ended September 30, 2000 are not necessarily
indicative of the results that may be expected for the year ended December 31,
2000. 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, 1999. Certain items in the prior year condensed
consolidated financial statements have been reclassified to conform with the
presentation used in 2000.
Recently Issued Accounting Pronouncements -- In December 1999, the Securities
and Exchange Commission issued Staff Accounting Bulletin ("SAB") No. 101,
"Revenue Recognition in Financial Statements." SAB No. 101 provides guidance on
applying generally accepted accounting principles to the recognition,
presentation and disclosure of revenue in financial statements. The Company does
not believe that the implementation of SAB No. 101 in the fourth quarter of 2000
will have a significant impact on our financial position or results of
operations.
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement requires the recognition of
derivative instruments as assets and liabilities, based on their fair value, and
specifies certain methods for the recognition of related gains and losses. In
June 2000, the FASB issued SFAS No. 138, which amends and clarifies certain
guidance in SFAS No. 133.
The Company is in the process of implementing the appropriate systems and
processes to adopt these statements effective January 1, 2001. The statements
provide for the recognition of a cumulative adjustment for an accounting change,
as of the date of adoption. The amount of such adjustment, and the effect of
such statements on the Company's financial position and results of operations
during 2001, will depend in part on future derivative transactions entered into
prior to January 1, 2001, and the fair value of derivatives held as of such
date, and therefore is not determinable at this time.
In October 2000, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 140, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities -
a replacement of FASB SFAS No. 125." This statement provides accounting and
reporting standards for transfers and servicing of financial assets and
extinguishment of liabilities. This statement is effective March 2001; the
Company's current AR Securitization program would require expanded disclosures
and the statement would be prospectively applied to programs entered into after
January 1, 2001.
2. RESTRUCTURING
2000 Restructuring Program:
During the first quarter of 2000, the Board of Directors of the Company
approved, and the Company has begun to implement, a global restructuring plan.
As a result of this plan, the Company may incur restructuring charges up to $120
million, up to an additional $120 million in incremental expenses and capital
6
expenditures and may incur up to $35 million of non-cash asset write-downs.
During the first quarter of 2000, the Company recognized $68.7 million of
restructuring charges related to severance and exit costs and a $10.0 million
charge for the write-down of certain long lived assets associated with the
restructuring to their fair values. The Company recognizes restructuring and
impairment expenses in its financials statements as detailed plans are finalized
and approved and once related costs can be quantified and estimated.
The Company reviews the adequacy of its restructuring reserves and adjusts the
reserves as the various activities are completed or new information becomes
available. As a result of this review process, the Company recorded a net
restructuring charge in the third quarter of 2000 of approximately $8.6 million.
This charge includes approximately $12.2 million of charges consisting
principally of additional severance and benefit costs associated with additional
employee reductions. Such amounts were offset by $3.6 million in cost reductions
from estimates recorded in the first quarter for severance costs that are no
longer required as the Company was able to sell one business unit instead of
closing it and other various cost reductions.
Aggregated severance costs from the first and third quarters of 2000 of $63.3
million included the planned closure of 22 North American aftermarket branch
warehouses; consolidation of the Company's heavy wall bearings into one plant;
the closure of Australian and Taiwanese sales, administrative, and distribution
facilities; the consolidation of certain administrative and human resource
functions in Europe; and various other programs in North America and Europe.
Total employee reductions are expected to be approximately 2,600 comprised of
3,950 reductions associated with facility closings offset by 1,350 necessary new
hires in new or expanded facilities.
Exit costs of $14.0 million from the 1st quarter of 2000 included the
consolidation of administrative facility at the Company's Toledo, Ohio Ignition
facility, the closure of aftermarket branch warehouses in North America and
Latin America, and the closure of Australian and Taiwanese sales, administrative
and distribution facilities, and various other programs in North America and
Europe.
Asset writedowns of $10.0 million, in the first quarter of 2000, included the
closure of aftermarket branch warehouses and the Company's Toledo, Ohio ignition
facility's administrative center. Asset writedowns of $4.6 million, in the
third quarter of 2000, include the closure of a foundry facility in Mexico.
Cash payments against the 2000 restructuring reserves were $25.0 million ($22.8
million for severance and $2.2 million for exit) for the nine months ended
September 30, 2000. As of September 30, 2000, approximately 882 employees have
been severed and, 25 facilities have been closed or consolidated.
1999 and 1998 Restructuring Programs:
Cash payments against the 1999 and 1998 restructuring reserves were $10.1
million ($9.4 million for severance and $0.7 million for exit) for the nine
months ended September 30, 2000. As of September 30, 2000 the remaining reserve
for the 1999 and 1998 programs were approximately $5.1 million, the majority of
which will be paid out by year end.
3. ASBESTOS LIABILITY AND LEGAL PROCEEDINGS
T&N Asbestos Litigation
In the United States, the Company's United Kingdom subsidiary, T&N Ltd., and two
United States subsidiaries (the "T&N Companies") are among many defendants named
in numerous court actions alleging personal injury resulting from exposure to
asbestos or asbestos-containing products. T&N is also subject to
asbestos-disease litigation, to a lesser extent, in the United Kingdom and
France. Because of the slow onset of asbestos-related diseases, management
anticipates that similar claims will
7
be made in the future. It is not known how many such claims may be made nor the
expenditures which may arise therefrom. There are a number of factors that could
impact the settlement costs into the future, including but not limited to:
changes in legal environment; possible insolvency of co-defendants; and the
establishment of an acceptable administrative (non-litigation) claims resolution
mechanism.
In arriving at the total provision for the T&N Companies described below
(approximately $.9 billion), assumptions have been made regarding the total
number of claims anticipated to be received in the future, 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 timing of settlements and, in
the United Kingdom, the level of subrogation claims brought by insurance
companies.
T&N Ltd. is a defendant in approximately 56,000 pending personal injury claims
as of September 30, 2000. During the first nine months of 2000, approximately
33,000 new claims naming T&N Ltd. were received. The two United States
subsidiaries are defendants in approximately 100,000 pending personal injury
claims as of September 30, 2000. During the first nine months of 2000,
approximately 26,000 new claims naming the two United States subsidiaries were
received.
T&N Ltd. has appointed the Center for Claims Resolution ("CCR") as its exclusive
representative in relation to all asbestos-related personal injury claims made
against it in the United States. The CCR provides to its member companies a
litigation defense, claims-handling and administration service in respect to
United States asbestos-related disease claims. Pursuant to the CCR Producer
Agreement, T&N Ltd. is entitled to appoint a representative as one of the five
voting directors on the CCR's Board of Directors. Members of the CCR contribute
towards indemnity payments in each claim in which the member is named.
Contributions to such indemnity payments are calculated on a case by case basis
according to sharing agreements among the CCR's members. Effective January 18,
2000, the two United States subsidiaries appointed a law firm specializing in
asbestos matters as their litigation defense, claims handling and administrative
service provider. Indemnity and defense obligations incurred while members of
the CCR will continue to be honored. This change is intended to create greater
economic and defense efficiencies for the two companies. The T&N Companies have
entered into $250 million of surety to meet collateral requirements for
settlements established by the CCR. The Company is currently in negotiation on
both the amount and form of the surety needed to meet its continuing collateral
requirements.
The membership of the CCR has decreased in the past year for both voluntary and
involuntary reasons. One instance involved the termination of a member by the
CCR board. That former member has refused to pay its share of certain agreed to
settlements made while a member. To date plaintiffs have been successful in
obtaining court orders requiring this former member to pay, however, further
defaults by the former member may significantly increase the cost of resolving
cases for the remaining members. Additionally, another member has terminated its
participation due to its determination that, as a trust, it lacked sufficient
assets to commit to any new settlements. This member has also asserted that it
is entitled to certain reimbursements which the CCR does not believe to be
appropriate. T&N Ltd could experience an increase in its liability if there are
any negative developments in these areas.
In 1996, T&N purchased a (pound)500 million (approximately $845 million at the
insurance agreement exchange rate of $1.69/(pound)) layer of insurance which
will be triggered should the aggregate costs of claims filed after June 30,
1996, where the exposure occurred prior to that date, exceed (pound)690 million
(approximately $1,166 million at the $1.69/(pound) exchange rate). The initial
reserve provided for the T&N Companies for claims filed after June 30, 1996
approximated the trigger point of the insurance. The Company has reviewed the
financial viability and legal obligations of the three reinsurance companies
involved and has concluded, at this time, that there is little risk of the
reinsurers not being able to meet their obligation to pay, should the claims
filed after June 30, 1996 exceed the (pound)690 million trigger point.
8
While management believes that reserves are appropriate for anticipated losses
arising from asbestos-related claims against the T&N Companies, given the nature
and complexity of the factors affecting the estimated liability, the actual
liability may differ. No absolute assurance can be given that the T&N Companies
will not be subject to material additional liabilities and significant
additional litigation relating to asbestos. In the possible, but unlikely event
that such liabilities exceed the reserves recorded by the Company or the
additional (pound)500 million of insurance coverage, the Company's results of
operations, business, liquidity and financial condition could be materially
adversely affected. The reserve for the T&N Companies is re-evaluated
periodically as additional information becomes available. While management still
believes the reserve plus insurance to be adequate, T&N has contracted with an
econometric firm that specializes in these types of issues to give a current
estimate of the total liability. T&N expects the study to be completed before
year-end.
During 1999, T&N Ltd. was named in a complaint filed in the United States
District Court for the Eastern District of Texas by Owens-Illinois, alleging
that T&N, as a former supplier of asbestos fibers, is liable to Owens-Illinois
for Owens-Illinois' own indemnity and defense costs pertaining to
asbestos-related personal injury claims. In May 2000, Owens-Illinois amended its
complaint to include T&N Ltd.'s parent company, Federal-Mogul Corporation. The
Company is alleged to have fraudulently transferred subsidiaries of T&N to the
Company leaving the asbestos liabilities with T&N. Both T&N and the Company
believe that they have meritorious defenses to such allegations.
Cooper Automotive Asbestos Litigation
Former businesses of Cooper Automotive, primarily Abex and Wagner, are involved
as defendants in numerous court actions in the United States alleging personal
injury from exposure to asbestos or asbestos-containing products, mainly
involving friction products. Abex is a defendant in approximately 16,700 pending
claims as of September 30, 2000. During the first nine months of 2000,
approximately 8,200 new claims naming this defendant were received. Wagner is a
defendant in approximately 16,600 claims as of September 30, 2000. During the
first nine months of 2000, approximately 5,100 new claims naming this defendant
were received. In 1998, the Company acquired the capital stock of a Cooper
entity resulting in the assumption by a Company subsidiary of contractual
liability, under certain circumstances, for all claims pending and to be filed
in the future alleging exposure to certain Wagner automotive and industrial
friction products and for all claims filed after August 29, 1998, alleging
exposure to certain Abex (non-railroad and non-aircraft) friction products. The
Company has recorded approximately a $330 million insurance recoverable asset
and a liability of the subsidiaries involved of approximately $400 million. This
is the Company's estimate, after taking into account legal counsel's evaluation
related to amounts expected to be paid or reimbursed by insurers. In arriving at
these provisions, certain assumptions have been made regarding the total number
of claims which may be received in the future against these two entities and the
average costs associated with such claims.
Abex maintained product liability insurance coverage for most of the time that
it manufactured products that contained asbestos. The subsidiary of the Company
that may be liable for the post-August 1998 asbestos claims against Abex has the
benefit of that insurance. Abex has been in litigation since 1982 with the
insurance carriers of its primary layer of liability concerning coverage for
asbestos claims. Abex also has substantial excess layer liability insurance
coverage which, 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. 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
9
provide coverage for asbestos claims against Wagner.
The ultimate exposure of the Company's subsidiary with respect to claims against
Abex and Wagner will depend upon the extent to which the insurance described
above will be available to cover such claims, the amounts paid for indemnity and
defense, changes in the legal environment, and other factors. While the Company
believes that the liability and receivable recorded for these claims are
reasonable and appropriate, given the nature and complexity of factors affecting
the estimated liability and potential insurance recovery, the actual liability
and insurance recovery may differ. In the possible, but unlikely event that the
actual liability net of insurance proceeds recovered exceeds the reserve net of
insurance receivable recorded by the Company, the Company's results of
operations, business, liquidity and financial condition could be materially
adversely affected. The asbestos reserves for the businesses acquired as part of
the Cooper Automotive acquisition will be re-evaluated periodically as
additional information becomes available.
Federal-Mogul and Fel-Pro Asbestos Litigation
The Company also is sued in its own name as one of a large number of defendants
in a number of lawsuits brought by claimants alleging injury due to exposure to
asbestos. The Company's Fel-Pro subsidiary has also been named as a defendant in
a number of product liability cases involving asbestos, primarily involving
gasket or packing products. Fel-Pro is a defendant in approximately 31,000
pending claims as of September 30, 2000. During the first nine months of 2000
approximately 3,000 new claims were filed. Over 30,000 of these claims have been
transferred to a federal court where they reside subject to removal back into
the tort system only if certain medical and product identification conditions
are met. The Company is defending all such claims vigorously and believes that
it and Fel-Pro have substantial defenses to liability and insurance coverage for
defense and indemnity. While the outcome of litigation cannot be predicted with
certainty, management believes that asbestos claims pending against the Company
and Fel-Pro as of September 30, 2000, will not have a material effect on the
Company's financial position.
Aggregate of Asbestos Liability
As of September 30, 2000, the Company has provided a total reserve for all of
its subsidiaries and businesses with potential asbestos liability of
approximately $1.3 billion as its best estimate for future costs related to
resolving asbestos claims. The Company estimates claims will be filed and paid
in excess of the next 20 years. This estimate is based in part on recent and
historical claims experience, medical information, the impact, if any in
membership issues associated with the CCR and the current legal environment. The
Company has a corresponding receivable from certain insurance carriers of
approximately $330 million.
Other
The Company is involved in various other legal actions and claims, directly and
through its subsidiaries. The Company has been named in a class action lawsuit
captioned In Re Federal-Mogul Corp. Securities Litigation, alleging violations
-----------------------------------------------
by the Company of various federal securities laws. The Company believes that the
claims contained in the suit are without merit and that it has meritorious
defenses against the claims. The Company will vigorously defend itself against
the suit, and does not believe the suit will have a material adverse effect on
the Company's cash flows or financial position. After taking into consideration
legal counsel's evaluation of such actions, management is of the opinion that
the outcomes are not reasonably likely to have a material adverse effect on the
Company's financial position, operating results, or cash flows.
10
Environmental Matters
The Company is a defendant in lawsuits filed in various jurisdictions pursuant
to the federal Comprehensive Environmental Response Compensation and Liability
Act of 1980 (CERCLA) or other similar federal or state environmental laws which
require responsible parties to pay for cleaning up contamination resulting from
hazardous wastes which were discharged into the environment by them or by others
to which they sent such wastes for disposition. In addition, the Company has
been notified by the United States Environmental Protection Agency and various
state agencies that it may be a potentially responsible party (PRP) under such
law for the cost of cleaning up certain other hazardous waste storage or
disposal facilities pursuant to CERCLA and other federal and state environmental
laws. PRP designation requires the funding of site investigations and subsequent
remedial activities. At most of the sites that are likely to be costliest to
clean up, which are often current or former commercial waste disposal facilities
to which numerous companies sent waste, the Company's exposure is expected to be
limited. Despite the joint and several liability which might be imposed on the
Company under CERCLA and some of the other laws pertaining to these sites, the
Company's share of the total waste is usually quite small; the other companies
which also sent wastes, often numbering in the hundreds or more, generally
include large, solvent publicly-owned companies; and in most such situations,
the government agencies and courts have imposed liability in some reasonable
relationship to contribution of waste. In addition, the Company has identified
certain present and former properties at which it may be responsible for
cleaning up environmental contamination. The Company is actively seeking to
resolve these matters. Although difficult to quantify based on the complexity of
the issues, the Company has accrued the estimated cost associated with such
matters based upon current available information from site investigations and
consultants. The environmental and legal reserve was approximately $66.1 million
at September 30, 2000 and $74.5 million at December 31, 1999. Management
believes that such accruals will be adequate to cover the Company's estimated
liability for its exposure in respect of such matters.
11
4. EARNINGS (LOSS) PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share for the three and nine months ended September 30, 2000 and 1999 (in
millions, except per share data):
Three Months Ended Nine Months Ended
September 30 September 30
---------------------- ---------------------
2000 1999 2000 1999
-------- -------- -------- ---------
Numerator:
Net earnings (loss) $ (7.6) $ 70.1 $ 56.2 $ 183.0
Extraordinary items - loss on early retirement of debt,
net of applicable income tax benefits -- -- -- 23.1
Cumulative effect of change in accounting for costs of start-up
activities, net of applicable income tax benefit -- -- -- 12.7
------ ------ ------ --------
Net earnings (loss) before extraordinary items and cumulative
effect of change in accounting for costs of start-up activities (7.6) 70.1 56.2 218.8
Series C preferred dividend requirement (0.5) (0.5) (1.5) (1.6)
Series E preferred dividend requirement -- -- -- (0.2)
------ ------ ------ --------
Numerator for basic earnings (loss) per share - income available to common
shareholders before extraordinary items and cumulative
effect of change in accounting for costs of start-up activities (8.1) 69.6 54.7 217.0
Effect of dilutive securities:
Series C preferred dividend requirement -- 0.5 1.5 1.6
Series E preferred dividend requirement -- -- -- 0.2
Minority interest - preferred securities of an affiliate -- 6.3 -- 19.0
Additional required ESOP contribution -- (0.5) (1.5) (1.6)
------ ------ ------ -------
Numerator for diluted earnings (loss) per share - income available to
common shareholders after assumed conversions, before extraordinary
items and cumulative effect of change in
accounting for costs of start-up activities $ (8.1) $ 75.9 $ 54.7 $ 236.2
====== ====== ====== =======
Numerator for basic earnings (loss) per share - income available
to common shareholders after extraordinary items and cumulative
effect of change in accounting for costs of start-up activities $ (8.1) $ 69.6 $ 54.7 $ 181.2
====== ====== ====== =======
Numerator for diluted earnings (loss) per share - income available
to common shareholders after extraordinary items and cumulative
effect of change in accounting for start-up activities $ (8.1) $ 75.9 $ 54.7 $ 200.4
====== ====== ====== =======
Denominator:
Denominator for basic earnings (loss) per share - weighted
average shares 70.3 70.3 70.4 69.6
Effect of dilutive securities:
Dilutive stock options outstanding -- 0.6 -- 0.8
Nonvested stock -- 0.2 0.2 0.2
Conversion of Series C preferred stock -- 1.4 1.3 1.4
Conversion of Company-obligated mandatorily redeemable securities -- 11.2 -- 11.2
Contingently issuable shares of common stock -- -- 6.0 --
Conversion of Series E preferred stock -- -- -- 0.6
------ ------ ------ -------
Denominator for dilutive earnings per share adjusted
weighted average shares and assumed conversions 70.3 83.7 77.8 83.8
====== ====== ====== =======
Basic earnings (loss) per share before extraordinary items and cumulative
effect of change in accounting for costs of start-up activities $ (.12) $ .99 $ .78 $ 3.12
====== ====== ====== =======
Basic earnings (loss) per share after extraordinary items and cumulative
effect of change in accounting for costs of start-up activities $ (.12) $ .99 $ .78 $ 2.60
====== ====== ====== =======
Diluted earnings (loss) per share before extraordinary items and cumulative
effect of change in accounting for costs of start-up activities $ (.12) $ .91 $ .70 $ 2.82
====== ====== ====== =======
Diluted earnings (loss) per share after extraordinary items and cumulative
effect of change in accounting for costs of start-up activities $ (.12) $ .91 $ .70 $ 2.39
====== ====== ====== =======
Quarterly dividends of $0.0025 per common share were declared for the quarters
ended September 30, 2000 and 1999, respectively.
12
5. COMPREHENSIVE INCOME (LOSS)
Total comprehensive income (loss) is summarized as follows (in millions of
dollars):
Three Months Ended Nine Months Ended
September 30 September 30
---------------------- ---------------------
2000 1999 2000 1999
-------- -------- ------ -------
Net Earnings (Loss) $ (7.6) $ 70.1 $ 56.2 $183.0
Other Comprehensive Income (Loss)
Foreign currency translation adjustment, net of tax (67.0) 41.9 (220.1) (47.8)
Unrealized gain/(loss) on investments, net of tax (0.1) 0.3 (0.5) 1.0
------ ------- ------ -----
Total Comprehensive Loss $ (74.7) $ 112.3 $ (163.4) $136.2
====== ======= ====== =====
6. INVENTORIES
Inventories consisted of the following (in millions of dollars):
September 30, December 31,
2000 1999
------------ ----------
Finished products $608.5 $638.9
Work-in-process 141.3 133.1
Raw materials 157.1 138.1
----- -----
906.9 910.1
Reserve for inventory valuation (33.8) (26.5)
----- -----
$873.1 $883.6
===== =====
7. DEBT
The Company is currently in compliance with all of its debt covenants. At
December 31, 2000, one of the Company's financial covenants becomes more
restrictive, and it is possible that the Company will not be in compliance with
this covenant. The Company is working on various alternatives with its Bank
Group and fully expects to be in compliance with future debt covenants as they
become effective.
8. OPERATIONS BY INDUSTRY SEGMENT
The Company's integrated operations are conducted under three operating segments
corresponding to major product areas: Powertrain Systems; Sealing Systems,
Visibility and Systems Protection Products; and Brake, Chassis, Ignition and
Fuel Products.
Powertrain Systems products are used primarily in automotive, light truck, heavy
13
duty, industrial, agricultural, power generation and small air-cooled engine
applications. The primary products of this operating unit include camshafts,
sintered products, engine bearings, large bearings, pistons, piston pins, rings,
cylinder liners and connecting rods.
Sealing Systems, Visibility and Systems Protection Products are used in
automotive, light truck, heavy duty, agricultural, off-highway, railroad, high
performance and industrial applications. The primary products of this operating
unit include dynamic seals, gaskets, lighting products, wiper blades and systems
protection products.
Brake, Chassis, Ignition and Fuel Products are used in automotive, light truck,
heavy duty, agricultural, off-highway, marine, and high performance
applications. The primary products of this operating unit include brake and
friction products, chassis products, ignition products and fuel system
components.
Divested Activities include the historical operating results of certain divested
operations in South Africa, Italy, and the UK.
The accounting policies of the business segments are consistent with those
described in the summary of significant accounting policies in the Company's
Annual Report on Form 10K for the year ended December 31, 1999. The Company
evaluates segmental performance based on several factors, including both
Economic Value Added (EVA) and Operational EBIT. Operational EBIT is defined as
earnings before interest, income taxes and extraordinary items and before
certain nonrecurring items such as certain acquisition-related adjustments and
integration costs associated with new acquisitions. Operational EBIT for each
segment is shown below, as it is most consistent with the measurement principles
used in measuring the corresponding amounts in the consolidated financial
statements.
Three Months Ended Nine Months Ended
September 30 September 30
-------------------------- --------------------------
2000 1999 2000 1999
---------- ---------- ---------- --------
Net Sales:
Powertrain Systems $ 548 $ 611 $1,809 $1,811
Sealing Systems, Visibility and
Systems Protection Products 421 460 1,376 1,426
Brake, Chassis, Ignition and Fuel Products 459 498 1,472 1,608
Divested Activities - 15 8 68
------ ------ ------ ------
Total $1,428 $1,584 $4,665 $4,913
====== ====== ====== ======
Three Months Ended Nine Months Ended
September 30 September 30
-------------------------- --------------------------
2000 1999 2000 1999
--------- --------- ---------- -------
Operational EBIT:
Powertrain Systems $ 23 $ 56 $ 136 $ 192
Sealing Systems, Visibility and
Systems Protection Products 37 75 166 241
Brake, Chassis, Ignition and Fuel Products 35 79 159 225
Divested Activities - 1 2 3
------ ------ ------ ------
Total $ 95 $ 211 $ 463 $ 661
====== ====== ====== ======
Three Months Ended Nine Months Ended
September 30 September 30
-------------------------- --------------------------
2000 1999 2000 1999
---------- ---------- ---------- --------
Reconciliation:
Total Segments Operational EBIT $ 95 $ 211 $ 463 $ 661
Net interest and other financing costs (84) (77) (244) (234)
Acquisition related costs -- (13) -- (48)
Restructuring, impairment and other
special charges (13) (8) (92) (8)
------ ------ ------ ------
Earnings (loss) before income taxes,
extraordinary items and cumulative
effect of change in accounting principle $ (2) $ 113 $ 127 $ 371
====== ====== ====== ======
14
9. 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 Agreement with The Chase Manhattan Bank, NA, ("Chase").
Guarantor Subsidiaries:
- - ----------------------
Carter Automotive Company
F-M UK Holdings Limited
Federal-Mogul Aviation, Inc.
Federal-Mogul Dutch Holdings Inc.
Federal-Mogul Global Inc.
Federal-Mogul Global Properties Inc.
Federal-Mogul Ignition Company
Federal-Mogul Products, Inc.
Federal-Mogul UK Holdings Inc.
Federal-Mogul Venture Corporation
Federal-Mogul Worldwide Inc.
The Company issued notes in 1999 and 1998 which are guaranteed by the Guarantor
Subsidiaries. The Guarantor Subsidiaries also guarantee the Company's previously
existing publicly registered Medium-term notes and Senior notes.
In lieu of providing separate audited 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.
In 1999, the guarantor and non-guarantor subsidiaries recorded annual inter-
company interest expense and the related inter-company interest income on a
certain inter-company loan in the fourth quarter of 1999. In 2000, such inter-
company interest expense and income has been recorded quarterly. The Company has
restated the guarantor and non-guarantor subsidiaries consolidating statements
of operations and cash flows for the three and nine month periods ended
September 30, 1999 to include the related interest expense/income for each
period. Such restatements has no effect on the consolidated result of the
Company for such periods. Intercompany interest income for the guarantor
subsidiaries increased by $29.3 million and $87.9 million for the three and nine
months ended September 30, 1999, with a corresponding increase in inter-company
interest expense for the non-guarantor subsidiaries for the same periods. Inter-
company interest income and interest expense is included in other (income)
expense, net in the financial statements. Similarly, in the first and second
quarters of 1999, inter-company interest income for the Guarantor Subsidiaries
increased by $29.3 million ($18.5 million net of tax) for each of the quarters,
with a corresponding increase in inter-company interest expense for the non-
guarantor subsidiaries for the same periods.
15
Federal-Mogul Corporation
Notes to Consolidated Financial Statements
Unaudited Consolidating Condensed Statement of Operations
Three Months Ended September 30, 2000
(Millions of Dollars)
(Unconsolidated)
---------------------------------------------
Guarantor Non-Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
-------- ------------ ------------- ------------ ------------
Net sales $345.8 $ 359.0 $893.4 $(170.3) $1,427.9
Cost of products sold 275.5 263.0 721.0 (170.3) 1,089.2
----- ------- ------- ------- -------
Gross margin 70.3 96.0 172.4 - 338.7
Selling, general and
administrative expenses 92.7 33.2 84.6 - 210.5
Amortization of goodwill
and other intangible assets 5.4 7.0 18.8 - 31.2
Restructuring charge 3.1 2.5 3.0 - 8.6
Adjustment of assets held for
sale and other long-lived
assets to fair value - - 4.6 4.6
Interest expense, net 71.9 0.3 1.2 - 73.4
International currency
exchange losses 1.6 1.4 0.3 - 3.3
Other (income) expense, net (68.2) (31.9) 108.7 - 8.6
------ ------- -------- ------- -------
Earnings (loss) before
income taxes (36.2) 83.5 (48.8) - (1.5)
Income tax expense (benefit) (13.4) 30.9 (11.4) - 6.1
------ ------- -------- ------- -------
Net earnings (loss) (22.8) 52.6 (37.4) - (7.6)
Equity in earnings (loss)
of subsidiaries 15.2 63.7 - (78.9) -
------ ------- -------- ------ -------
Net Earnings (Loss) $ (7.6) $ 116.3 $ (37.4) $ (78.9) $ (7.6)
====== ======= ======== ====== =======
16
Federal-Mogul Corporation
Notes to Consolidated Financial Statements
Unaudited Consolidating Condensed Statement of Operations
Three Months Ended September 30, 1999
(Millions of Dollars)
(Unconsolidated)
---------------------------------------------
Restated Restated
Guarantor Non-Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
-------- ------------ ------------- ------------ ------------
Net sales $ 265.7 $389.9 $ 1,054.0 $(126.1) $ 1,583.9
Cost of products sold 155.4 268.9 844.5 (126.1) 1,142.7
------ ----- -------- ------ --------
Gross margin 110.3 121.0 209.9 - 441.2
Selling, general and
administrative expenses 79.4 31.1 90.6 - 201.1
Amortization of goodwill
and other intangible assets 2.1 15.6 12.8 - 30.5
Adjustment of assets held for
sale and other long-lived
assets to fair value 7.9 - - - 7.9
Integration costs 9.1 2.3 1.8 - 13.2
Interest expense, net 64.6 0.3 2.3 - 67.2
International currency
exchange (gains) losses 1.1 (0.9) 0.6 - 0.8
Other (income) expense, net 8.7 (20.9) 19.6 - 7.4
------ ------ -------- ------ --------
Earnings (loss) before
income taxes (62.6) 34.9 140.8 - 113.1
Income tax expense (benefit) (23.1) 12.9 53.2 - 43.0
------ ------ -------- ------ --------
Net earnings (loss) (39.5) 22.0 87.6 - 70.1
Equity in earnings
of subsidiaries 109.6 55.7 - (165.3) -
------ ------ -------- ------ --------
Net Earnings $ 70.1 $ 77.7 $ 87.6 $(165.3) $ 70.1
====== ====== ======== ====== ========
17
Federal-Mogul Corporation
Notes to Consolidated Financial Statements
Unaudited Consolidating Condensed Statement of Operations
Nine Months Ended September 30, 2000
(Millions of Dollars)
(Unconsolidated)
---------------------------------------------
Guarantor Non-Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
-------- ------------ ------------- ------------ ------------
Net sales $ 1,130.1 $1,149.1 $2,945.4 $(559.8) $4,664.8
Cost of products sold 867.9 821.9 2,352.4 (559.8) 3,482.4
-------- ------- ------- ------ -------
Gross margin 262.2 327.2 593.0 - 1,182.4
Selling, general and
administrative expenses 263.2 102.9 263.3 - 629.4
Amortization of goodwill
and other intangible assets 15.6 20.6 57.5 - 93.7
Restructuring charge 5.9 12.9 58.5 - 77.3
Adjustment of assets held for
sale and other long-lived
assets to fair value - 4.8 9.8 14.6
Interest expense, net 205.9 0.7 6.9 - 213.5
International currency
exchange (gains) losses 2.1 0.4 (1.2) - 1.3
Other (income) expense, net 33.3 (72.7) 64.8 - 25.4
-------- ------- -------- ------ -------
Earnings (loss) before income
taxes (263.8) 257.6 133.4 - 127.2
Income tax expense (benefit) (97.6) 95.3 73.3 - 71.0
-------- ------- -------- ------ -------
Net earnings (loss) (166.2) 162.3 60.1 - 56.2
Equity in earnings
of subsidiaries 222.4 232.4 - (454.8) -
-------- ------- -------- ------ -------
Net Earnings $ 56.2 $ 394.7 $ 60.1 $(454.8) $ 56.2
======== ======= ======== ====== =======
18
Federal-Mogul Corporation
Notes to Consolidated Financial Statements
Unaudited Consolidating Condensed Statement of Operations
Nine Months Ended September 30, 1999
(Millions of Dollars)
(Unconsolidated)
----------------------------------------------
Restated Restated
Guarantor Non-Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
-------- ------------ ---------------- ------------ ------------
Net sales $ 924.3 $ 1,299.5 $ 2,950.6 $ (261.2) $ 4,913.2
Cost of products sold 577.7 920.0 2,303.4 (261.2) 3,539.9
-------- ------------ ----------- --------- -----------
Gross margin 346.6 379.5 647.2 - 1,373.3
Selling, general and
administrative expenses 257.5 111.2 269.6 - 638.3
Amortization of goodwill
and other intangible assets 5.5 29.4 59.5 - 94.4
Adjustment of assets held for
sale and other long-lived
assets to fair value 7.9 - - - 7.9
Integration costs 13.6 6.2 16.8 - 36.6
Interest expense, net 194.9 0.1 9.6 - 204.6
International currency
exchange losses 1.0 1.7 0.8 - 3.5
Other (income) expense, net (20.2) (62.3) 100.0 - 17.5
-------- ------------ ----------- --------- -----------
Earnings (loss) before income
taxes, extraordinary
item and cumulative
effect of change in
accounting principle (113.6) 293.2 190.9 - 370.5
Income tax expense (benefit) (7.5) 108.5 50.7 - 151.7
-------- ------------ ----------- --------- -----------
Earnings (loss) before
extraordinary item and
cumulative effect of change
in accounting principle (106.1) 184.7 140.2 - 218.8
Extraordinary item - loss on
early retirement of debt, net
of applicable income tax
benefit 23.1 - - - 23.1
Cumulative effect of change in
accounting for costs of start-up
activities, net of applicable
income tax benefit 12.7 - - - 12.7
-------- ------------ ----------- --------- -----------
Net earnings (loss) (141.9) 184.7 140.2 - 183.0
Equity in earnings
of subsidiaries 324.9 168.0 - (492.9) -
-------- ------------ ----------- --------- -----------
Net Earnings $ 183.0 $ 352.7 $ 140.2 $ (492.9) $ 183.0
======== ============ =========== ========= ===========
19
Federal-Mogul Corporation
Notes to Consolidated Financial Statements
Unaudited Consolidating Condensed Balance Sheet
September 30, 2000
(Millions of Dollars)
(Unconsolidated)
-----------------------------------------------
Guarantor Non-Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
--------- ------------ ------------- ----------- -------------
ASSETS
Cash and equivalents $ 58.9 $ 65.9 $ (69.0) $ - $ 55.8
Accounts receivable 27.5 67.2 431.3 - 526.0
Investment in accounts
receivable securitization - - 258.2 - 258.2
Inventories 145.9 325.1 402.1 - 873.1
Prepaid expenses and
income tax benefits 223.2 80.0 13.8 - 317.0
-------- -------- --------- --------- --------
Total current assets 455.5 538.2 1,036.4 - 2,030.1
Property, plant & equipment,net 292.5 548.4 1,550.3 - 2,391.2
Goodwill 588.4 790.3 1,900.7 - 3,279.4
Other intangible assets 30.4 359.7 345.0 - 735.1
Investment in subsidiaries 5,075.0 1,840.2 - (6,915.2) -
Intercompany accounts, net (785.0) 1,735.5 (950.5) - -
Asbestos-related insurance
recoverable - 325.4 6.6 - 332.0
Other noncurrent assets 247.2 13.7 392.1 - 653.0
-------- -------- --------- --------- --------
Total Assets $5,904.0 $6,151.4 $ 4,280.6 $(6,915.2) $9,420.8
======== ======== ========= ========= ========
LIABILITIES
Short-term debt, including
current portion of
long-term debt $ 74.5 $ - $ 74.4 $ - $ 148.9
Accounts payable 126.3 151.6 209.1 - 487.0
Accrued compensation 25.2 21.6 116.4 - 163.2
Restructuring and
rationalization reserves 6.1 13.2 58.5 - 77.8
Current portion of
asbestos liability - - 330.0 - 330.0
Income taxes payable 0.2 19.7 49.2 69.1
Other accrued liabilities 86.8 58.1 228.5 - 373.4
-------- -------- --------- --------- --------
Total current liabilities 319.1 264.2 1,066.1 - 1,649.4
Long-term debt 3,299.9 0.3 29.6 - 3,329.8
Long-term portion of
asbestos liability - 387.7 542.1 - 929.8
Postemployment benefits 132.0 208.2 283.1 - 623.3
Other accrued liabilities 315.7 27.6 130.5 - 473.8
Minority interest in
consolidated subsidiaries 56.7 2.0 0.1 - 58.8
Company-obligated mandatorily
redeemable preferred securities
of subsidiary trust holding
solely convertible subordinated
debentures of the Company - - 575.0 - 575.0
Shareholders' equity 1,780.9 5,261.4 1,653.8 (6,915.2) 1,780.9
-------- -------- --------- --------- --------
Total Liabilities and
Shareholders' Equity $5,904.0 $6,151.4 $ 4,280.3 $(6,915.2) $9,420.8
======== ======== ========= ========= ========
20
Federal-Mogul Corporation
Notes to Consolidated Financial Statements
Unaudited Consolidating Condensed Balance Sheet
December 31, 1999
(Millions of Dollars)
(Unconsolidated)
-----------------------------------------------
Guarantor Non-Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
--------- ------------ ------------- ------------ ------------
ASSETS
Cash and equivalents $ 54.1 $ 20.3 $ (9.9) $ - $ 64.5
Accounts receivable 18.1 73.3 423.2 - 514.6
Investment in accounts
receivable securitization - - 232.2 - 232.2
Inventories 187.9 328.0 367.7 - 883.6
Prepaid expenses and
income tax benefits 100.8 121.2 109.6 - 331.6
-------- -------- --------- --------- --------
Total current assets 360.9 542.8 1,122.8 - 2,026.5
Property, plant & equipment,net 292.9 619.7 1,591.1 - 2,503.7
Goodwill 558.4 810.9 2,178.5 - 3,547.8
Other intangible assets 38.4 396.0 361.9 - 796.3
Investment in subsidiaries 4,912.7 1,641.8 - (6,554.5) -
Intercompany accounts, net (498.3) 1,821.3 (1,323.0) - -
Asbestos-related insurance
recoverable - 325.9 - - 325.9
Other noncurrent assets 233.2 53.1 458.7 - 745.0
-------- -------- --------- --------- --------
Total Assets $5,898.2 $6,211.5 $ 4,390.0 $(6,554.5) $9,945.2
======== ======== ========= ========= ========
LIABILITIES
Short-term debt, including
current portion of
long-term debt $ 127.7 $ 6.0 $ 57.1 $ - $ 190.8
Accounts payable 152.8 152.0 317.1 - 621.9
Accrued compensation 46.3 28.5 108.1 - 182.9
Restructuring and
rationalization reserves - - 46.0 - 46.0
Current portion of
asbestos liability - - 180.0 - 180.0
Income taxes payable 16.0 12.2 44.1 72.3
Other accrued liabilities 151.9 85.7 251.1 - 488.7
-------- -------- --------- --------- --------
Total current liabilities 494.7 284.4 1,003.5 - 1,782.6
Long-term debt 2,977.0 - 43.0 - 3,020.0
Long-term portion of
asbestos liability - 408.9 926.4 - 1,335.3
Postemployment benefits 188.0 219.7 254.2 - 661.9
Other accrued liabilities 157.2 162.8 134.9 - 454.9
Minority interest in
consolidated subsidiaries 6.1 2.1 32.1 - 40.3
Company-obligated mandatorily
redeemable preferred securities
of subsidiary trust holding
solely convertible subordinated
debentures of the Company - - 575.0 - 575.0
Shareholders' equity 2,075.2 5,133.6 1,420.9 (6,554.5) 2,075.2
-------- -------- --------- --------- --------
Total Liabilities and
Shareholders' Equity $5,898.2 $6,211.5 $ 4,390.0 $(6,554.5) $9,945.2
======== ======== ========= ========= ========
21
Notes to Consolidated Financial Statements
Unaudited Consolidating Condensed Statement of Cash Flows
Nine Months Ended September 30, 2000
(Millions of Dollars)
(Unconsolidated)
-----------------------------------
Guarantor Non-Guarantor
Parent Subsidiaries Subsidiaries Consolidated
------ ------------ ------------ ------------
Net Cash Provided From
(Used By) Operating
Activities $(130.4) $ 159.1 $(107.3) $ (78.6)
Expenditures for property,
plant and equipment and
other long-term assets, net (4.1) (40.7) (184.6) (229.4)
Proceeds from sales of
businesses 0.8 - 60.1 60.9
Other - - (3.4) (3.4)
------- ------- ------- -------
Net Cash Used By
Investing Activities (3.3) (40.7) (127.9) (171.9)
Proceeds from issuance
of long-term debt 485.0 - - 485.0
Principal payments on long-
term debt (162.1) (0.2) (5.8) (168.1)
Increase (decrease) in short-
term debt (49.3) (6.0) 28.4 (26.9)
Change in intercompany
accounts (8.7) (66.6) 75.3 -
Investment in accounts
receivable securitization (46.9) - - (46.9)
Dividends (3.1) - - (3.1)
Other (3.3) - 5.1 1.8
------- ------- ------- -------
Net Cash Provided From
(Used By) Financing
Activities 211.6 (72.8) 103.0 241.8
------- ------- ------- -------
Net Increase (Decrease)
in Cash $ 77.9 $ 45.6 $(132.2) $ 8.7
======= ======= ======= =======
22
Federal-Mogul Corporation
Notes to Consolidated Financial Statements
Unaudited Consolidating Condensed Statement of Cash Flows
Nine Months Ended September 30, 1999
(Millions of Dollars)
(Unconsolidated)
----------------------------------
Restated Restated
Guarantor Non-Guarantor
Parent Subsidiaries Subsidiaries Consolidated
------ ------------ ------------ ------------
Net Cash Provided From
(Used By) Operating
Activities $ (55.6) $ 229.5 $ 120.7 $ 294.6
Expenditures for property,
plant and equipment
and other long-term assets (46.1) (46.0) (198.0) (290.1)
Proceeds from sale of
business investments 3.9 - 33.5 37.4
Business acquisitions, net of
cash acquired (97.0) (1.9) (271.8) (370.7)
-------- ------- ------- --------
Net Cash Used By
Investing Activities (139.2) (47.9) (436.3) (623.4)
Issuance of common stock 1.2 - - 1.2
Proceeds from issuance
of long-term debt 2,123.0 - - 2,123.0
Principal payments on long-
term debt (1,990.5) (0.9) (23.5) (2,014.9)
Increase (decrease) in short-
term debt 10.9 (1.9) (30.7) (21.7)
Fees paid for debt issuance
and other securities (25.5) - - (25.5)
Change in intercompany
accounts (149.6) (133.2) 282.8 -
Investment in accounts
receivable securitization 261.1 - - 261.1
Dividends (3.4) - - (3.4)
Other (3.3) - - (3.3)
-------- ------- ------- --------
Net Cash Provided From
(Used By) Financing
Activities 223.9 (136.0) 228.6 316.5
-------- ------- ------- --------
Net Increase (Decrease)
in Cash $ 29.1 $ 45.6 $ (87.0) $ (12.3)
======== ======= ======= ========
23
Item 2. Management's Discussion and Analysis of Financial Condition and
---------------------------------------------------------------
Results of Operations
---------------------
OVERVIEW
Federal-Mogul is an automotive parts manufacturer providing innovative solutions
and systems to global customers in the automotive, small engine, heavy-duty and
industrial markets. The Company manufactures engine bearings, sealing systems,
fuel systems, lighting products, pistons, ignition, brake, friction and chassis
products. The Company's principal customers include many of the world's major
original equipment ("OE") manufacturers of such vehicles and industrial
products. The Company also manufactures and supplies its products and related
parts to the aftermarket.
During the first quarter of 2000, the Board of Directors of the Company
approved, and the Company has begun to implement, a global restructuring plan.
The primary purposes of this plan are to improve the Company's cost structure
and drive out non-productive assets. As a result of this plan, the Company may
incur restructuring charges up to $120 million, an additional $120 million in
incremental expenses and capital expenditures and may incur up to $35 million of
non-cash asset write-downs. The Company will record these charges as specific
actions are finalized over the next two years related to the plan. During 2000,
the Company recorded pre-tax charges of $77.3 million for restructuring and
$14.6 million to adjust certain assets associated with the restructuring to
their fair value.
The significant activities that are part of the 2000 plan are as follows:
Consolidation of European Operations: The Company has developed plans
to take advantage of opportunities to achieve synergies in and
consolidate activities of its European operations. As part of these
plans, four of its manufacturing facilities will be closed or
consolidated and the operations that were being performed within these
facilities will be moved to other European locations. The Company will
also sever approximately 1,200 employees, comprised of 1,650 reductions
associated with facility closings offset by 450 necessary new hires in
new or expanded facilities.
Consolidation of North American and Latin American Operations: The
Company has implemented a plan to consolidate certain manufacturing,
distribution, and administrative functions in North American and Latin
America. As a result of these plans the Company will close or
consolidate 36 facilities and the operations that were being performed
within these facilities will be moved to other North American and Latin
American locations. The Company will also sever approximately 1,400
employees, comprised of 2,300 reductions associated with facility
closings offset by 900 necessary new hires in new or expanded
facilities.
For more details relating to the restructuring charge and the asset write-downs,
see Note 2 of the Company's Condensed Consolidated Financial Statements. The
Company has excluded the impact of the restructuring and other charges from the
following management's discussion and analysis, unless otherwise noted. The
Company's management believes that the results of operations before these
charges are the most meaningful representation of the Company's performance for
the periods presented.
24
THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1999
RESULTS OF OPERATIONS
The following management's discussion and analysis of financial condition and
results of operation (MD&A) should be read in conjunction with the MD&A included
in our Annual Report on Form 10-K for the fiscal year ended December 31, 1999.
Net Sales
Net sales for the third quarter of 2000 were $1,427.9 million compared to
$1,583.9 million in the same 1999 quarter. The 10% decrease in net sales is
primarily attributable to the effects of foreign exchange from European
operations of $62 million, decreases in global aftermarket sales of
approximately 7% and decreases in global OE sales of approximately 4%. In
addition the Company divested of its OCS Filter and Bertolotti businesses in the
second quarter of 2000 and third quarter of 1999, respectively.
Powertrain Systems sales were $548 million for the third quarter of 2000
compared to $617 million for the same 1999 quarter. Sales decreased 11% from
1999 to 2000 primarily due to the effects of foreign exchange mentioned above,
lower aftermarket sales due to an overall decrease in the engine parts market
size due to continuing improvement in OE quality and the divestiture of the
Company's OCS filter business in the second quarter of 2000, and. These
decreases were partially off set by net new business recorded during the
quarter.
Sealing Systems, Visibility and Systems Protection Products sales were $421
million for the third quarter of 2000 compared to $461 million for the same 1999
quarter. Sales decreased 9% from 1999 to 2000 primarily due to the effects of
foreign exchange mentioned above, the North American aftermarket branch network
consolidations and lower aftermarket sales due to an overall decrease in the
replacement parts market size due to continuing improvement in OE quality. These
decreases were partially offset by net new business recorded during the quarter.
Brake, Chassis, Ignition, and Fuel Products sales were $459 million for the
third quarter of 2000 compared to $506 million for the same 1999 quarter. Sales
decreased 9% from 1999 to 2000 primarily due to the effects of foreign exchange
mentioned above, the North American aftermarket branch network consolidations,
lower aftermarket sales due to an overall decrease in the repair parts market
size due to continuing improvement in OE quality and the divestiture of the
Company's Bertolotti business in the third quarter of 1999. These decreases were
partially offset by net new business recorded during the quarter.
Gross Margin
Gross margin for the third quarter of 2000 was $338.7 million compared to $441.2
million in the same 1999 quarter. The 23% decrease in gross margin is primarily
attributable to changes in volume, mix, the effects of foreign exchange and
certain productivity and inflationary issues. The decreased aftermarket and OE
volumes mentioned above reduced gross margin approximately $26 million from
1999. Changes in the mix from aftermarket to OE business reduced margins
approximately $9 million.
25
OE business was 55% for the three months ended September 30, 2000 compared to
54% in the same 1999 period. The effects of foreign exchange decrease margin by
approximately $15 million from 1999.
Selling, General and Administrative Expenses
Selling, general and administrative expenses as a percent of net sales increased
to 14.7% for the third quarter of 2000 compared to 12.7% for the same 1999
quarter. Management attributes this increase to higher employee-related,
medical, and certain one-time transaction costs, partially offset by recent cost
saving actions. The majority of the Company's SG&A costs are fixed over the
short-term and the Company is not able to take out these costs commensurate with
sales declines.
Integration Costs
The Company recognized $13.2 million of integration costs in the third quarter
of 1999 in connection with the acquisitions of T&N, Cooper Automotive and Fel-
Pro. These expenses included such one-time items as brand integration, costs to
pack and move productive inventory and fixed assets from one location to another
and costs to change the identity of entities acquired.
Interest Expense
Interest expense was $74.2 million for the third quarter of 2000 compared to
$68.0 million for the same 1999 quarter. The increase is attributable to
increased interest rates on the Company's variable rate senior credit agreements
and additional borrowings on the Company's variable rate revolver.
Income Tax Expense
The effective tax rate was higher in the third quarter of 2000 compared to the
same 1999 quarter. The increase in the effective tax rates for the third quarter
of 2000 is primarily related to the effect of non-deductible goodwill
amortization at lower pre-tax income levels and foreign tax rate variances and
also rate differentials on restructuring and impairment charges in the first and
third quarters of 2000.
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1999
RESULTS OF OPERATIONS
Net Sales
Net sales for the nine months ended September 30, 2000 were $4,664.8 million
compared to $4,913.2 million for the same 1999 period. The 5% decrease in net
sales is primarily attributable to the effects of foreign exchange from European
operations of $195 million and decreases in global aftermarket sales of
approximately 6%. In addition the Company divested of its heat transfer,
Bertolotti, and OCS Filter businesses in the second and third quarter of 1999
and second quarter of 2000, respectively, and the had a loss of a major
aftermarket customer in the second quarter of 1999. These decreases were
partially offset by net new business recorded during the first nine months of
2000, increases in global OE sales of approximately 3% and the full year effect
of the Company's 1999 Alcan acquisition.
26
Powertrain Systems sales were $1,810 million for the nine months ended September
30, 2000 compared to $1,834 million for the same 1999 period. Sales decreased 1%
from 1999 to 2000 primarily due to effects of foreign exchange mentioned above,
lower aftermarket sales due to an overall decrease in the engine parts market
size due to continued improvement in OE quality and the divestiture of the
Company's OCS Filter business in the second quarter of 2000. The decreases were
primarily offset by the full-year effect of the Company's 1999 Alcan acquisition
and net new business recorded in the first nine months of 2000.
Sealing Systems, Visibility and Systems Protection Products sales were $1,376
million for the nine months ended September 30, 2000 compared to $1,427 million
for the same 1999 period. Sales decreased 4% from 1999 to 2000 primarily due to
the effects of foreign exchange mentioned above, the North American aftermarket
branch network consolidations and lower aftermarket sales due to an overall
decrease in the replacement parts market size due to continued improvement in OE
quality. These decreases were offset by net new business recorded during the
period.
Brake, Chassis, Ignition, and Fuel Products sales were $1,478 million for the
nine months ended September 30, 2000 compared to $1,653 million for the same
1999 period. Sales decreased 11% from 1999 to 2000 primarily due to the effects
of foreign exchange mentioned above, the North American aftermarket branch
network consolidations, lower aftermarket sales due to an overall decrease in
the repair parts market size due to continued improvement in OE quality and the
loss of a major aftermarket customer in the second quarter of 1999. In addition
to these decreases were the divestitures of the Company's heat transfer and
Bertolotti businesses in the second and third quarters of 1999, respectively.
These decreases were partially offset by net new business recorded during the
period.
Gross Margin
Gross margin for the nine months ended September 30, 2000 was $1,182.4 million
compared to $1,373.3 million in the same 1999 period. The 14% decrease in gross
margin is primarily attributable to changes in volume, mix, the effects of
foreign exchange and certain productivity and inflationary issues. The decreased
aftermarket and OE volumes and changes in the mix from aftermarket to OE
business mentioned above reduced gross margin approximately $27 million from
1999. OE business was 55% for the nine months ended September 30, 2000 compared
to 54% in the same 1999 period. The effects of foreign exchange decrease margin
by approximately $55 million from 1999.
Selling, General and Administrative Expenses
Selling, general and administrative expenses as percent of net sales increased
to 13.5% for the nine months ended September 30, 2000 compared to 13.0% for the
same 1999 period. While this percentage has increased the overall costs have
decreased which Management attributes to lower sales and the benefits of prior
restructuring actions. The majority of the Company's SG&A costs are fixed over
the short-term and the Company is not able to take out these costs commensurate
with sales declines.
Integration Costs
The Company recognized $36.6 million of integration costs for the nine months
ended September 30, 1999 in connection with the acquisitions of T&N, Cooper
Automotive and Fel-Pro. These expenses included such one-time items as brand
integration, costs to pack and move productive inventory and fixed assets from
one location to another and costs to change the identity of entities acquired.
27
Interest Expense
Interest expense for the nine months ended September 30, 2000 was $216.6 million
compared to $207.4 million for the same 1999 period. The increase is
attributable to the full year effect of the 1999 bonds, increased interest rates
on the Company's variable rate senior credit agreements and additional
borrowings on the Company's variable rate revolver.
Income Tax Expense
The effective tax rate was higher for the nine months ended September 30, 2000
compared to the same 1999 period. The increase in the effective tax rates for
2000 is primarily related to the effect of non-deductible goodwill amortization
at lower pre-tax income levels and foreign tax rate variances and also rate
differentials on restructuring and impairment charges in the first and third
quarters of 2000.
LITIGATION & ENVIRONMENTAL CONTINGENCIES
The Company has been named as a defendant in numerous lawsuits. For a summary of
material contingencies as a result of those lawsuits, refer to Note 3 of the
Consolidated Condensed Financial Statements, "Asbestos Liability and Legal
Proceedings".
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary credit facilities contain operating and financial
covenants that, among other things, could limit its ability to obtain additional
sources of capital. The primary credit facilities are guaranteed by 100% of the
capital stock of certain United States subsidiaries and 65% of the capital stock
of certain foreign subsidiaries and certain intercompany loans. The senior
notes, notes and medium-term notes are guaranteed by the same subsidiaries that
guarantee the Company's primary credit facilities (refer to note 8 of the
consolidated condensed financial statements).
As of September 30, 2000, the Company had $1.1 billion outstanding under the
primary credit facilities, and approximately $576 million available to borrow on
these facilities. In addition to debt outstanding under the primary credit
facilities, the Company had $2.3 billion of debt, including short-term
borrowings, outstanding as of September 30, 2000, consisting primarily of $125
million of senior notes due 2007, $2.0 billion of senior notes due between 2004
and 2010, $104 million of medium term notes due between 2001 and 2005 and
approximately $114 million in other borrowings.
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 US dollar and European currencies.
As currency exchange rates change, translation of the statements of operation 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 stockholders' 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
28
currency. The Company's equity was reduced, net of tax, by $67.0 million and
$220.1 million during the three and nine months ended September 30, 2000,
respectively, primarily due to cumulative translation adjustments resulting from
the strong US dollar.
Cash Flow Provided From Operating Activities
Cash flow used by operating activities was $78.6 million for the nine months
ended September 30, 2000. Cash flow usages resulted primarily from an increase
in accounts receivable of $42.9 million, increases in inventories of $41.8
million, decreases in accounts payable of $112.0 million, and payments related
to restructuring/rationalization reserves and asbestos of $42.8 million and
$234.7 million, respectively. These usages were partially offset by cash
generated from net earnings.
Cash Flow Used By Investing Activities
Cash flow used by investing activities was $171.9 million for the nine months
ended September 30, 2000. Capital expenditures of $229.4 million were made for
property, plant and equipment to implement process improvements, manufacturing
capacity and maintenance improvements, information technology, integration of
acquired businesses and new product introductions. These usages were offset by
proceeds from the sale of businesses of $60.9 million.
Cash Flow Provided From Financing Activities
Cash flow provided from financing activities was $241.8 million for the nine
months ended September 30, 2000, primarily arising from proceeds of $485.0
million from borrowings under long-term debt arrangements offset primarily by
principal payments on long-term debt of $199.0 million.
Outlook
The Company believes that it has adequate financial resources and sufficient
credit facilities to meet its current working capital needs. Sources of the
Company's working capital include cash generated by its operations, its
mulitcurrency revolving credit facility and other credit lines. During the
remainder of 2000, management anticipates that working capital requirements will
be funded with internally generated funds and previously mentioned credit
facilities. The Company is currently in compliance with all of its debt
covenants. At December 31, 2000, one of the Company's financial covenants
becomes more restrictive, and it is possible that the Company will not be in
compliance with this covenant. The Company is working on various alternatives
with its Bank Group and fully expects to be in compliance with future debt
covenants as they become effective.
OTHER MATTERS
Euro Conversion
On January 1, 1999, certain member countries of the European Union irrevocably
fixed the conversion rates between their national currencies and a common
currency, the "Euro," which became their legal currency on that date. The
participating countries' former national currencies continue to exist as
denominations of the Euro until January 1, 2002. The Company has established a
management team that is monitoring the business implications of conversion to
the Euro, including the need to adapt internal systems to accommodate Euro-
denominated transactions. The 1998 acquisition of T&N has provided the Company
with a strong knowledge base in which to assist with the conversion. While the
Company is still in various stages of assessment and implementation, the Company
does not expect the conversion to the Euro to have a material affect on its
financial condition or results of operations.
29
Item 3. Qualitative and Quantitative Disclosures About Market Risk
----------------------------------------------------------
There have been no significant changes since year-end.
30
PART II - OTHER INFORMATION
- - ---------------------------
Item 1. Legal Proceedings
-----------------
(a) Contingencies. Note 3 to the Consolidated Condensed Financial
Statements, "Asbestos Liability and Legal Proceedings", which is
included in Part I of this report, is incorporated herein by
reference.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits:
3.1 The Company's By-laws, as amended on October 23, 2000
10.1 Amended and Restated Domestic Pledge Agreement dated as of
February 24, 1999, in favor of First Union National Bank, as
Trustee.
27 Financial Data Schedule
(b) Reports on Form 8-K:
The Company filed a Current Form 8-K, dated September 19, 2000,
disclosing that (i) Richard A. Snell resigned his position as
Chairman of the Board, Chief Executive Officer and President of
the Company, and (ii) Robert S. Miller, a member of the Board of
Directors, will serve as Chairman and Interim Chief Executive
Officer.
31
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
FEDERAL-MOGUL CORPORATION
By: /s/ G. Michael Lynch
-----------------------------
G. Michael Lynch
Executive Vice President and Chief Financial Officer,
Principal Financial Officer
By: /s/ Michael L. Pape
-----------------------------
Michael L. Pape
Vice President and Controller,
Chief Accounting Officer
Dated: October 30, 2000
32