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 JUNE 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 - 70,509,583 shares as of July 31, 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.
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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
------------------------ ------------------------
2000 1999 2000 1999
--------- --------- --------- ---------
Net sales $ 1,593.2 $ 1,687.1 $ 3,236.9 $ 3,329.3
Cost of products sold 1,181.0 1,204.5 2,390.6 2,397.2
--------- --------- --------- ---------
Gross margin 412.2 482.6 846.3 932.1
Selling, general and administrative expenses 207.9 214.7 418.9 437.2
Amortization of goodwill and other intangible assets 31.3 31.1 62.5 63.9
Implementation costs 1.8 - 2.6 -
Restructuring charges - - 68.7 -
Adjustment of assets held for sale and other
long-lived assets to fair value - - 10.0 -
Integration costs - 13.3 - 23.4
Interest expense 71.4 68.5 142.4 139.4
Interest income (1.0) (1.0) (2.3) (2.0)
International currency exchange losses (gains) (2.6) 0.4 (2.0) 2.7
Other expense, net 9.2 4.8 16.8 10.1
--------- --------- --------- ---------
Earnings before income taxes, extraordinary items and
cumulative effect of change in accounting principle 94.2 150.8 128.7 257.4
Income tax expense 44.3 63.5 64.9 108.7
--------- --------- --------- ---------
Earnings before extraordinary items and
cumulative effect of change in accounting principle 49.9 87.3 63.8 148.7
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 49.9 87.3 63.8 112.9
Preferred stock dividends, net of related tax benefits 0.5 0.5 1.0 1.3
--------- --------- --------- ---------
Net Earnings Available for Common Shareholders $ 49.4 $ 86.8 $ 62.8 $ 111.6
========= ========= ========= =========
EARNINGS PER COMMON SHARE
Basic
Earnings before extraordinary items and cumulative
effect of change in accounting principle $ .70 $ 1.24 $ .89 $ 2.13
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 Available for Common Shareholders $ .70 $ 1.24 $ .89 $ 1.61
========= ========= ========= =========
Diluted
Earnings before extraordinary items and cumulative
effect of change in accounting principle $ .65 $ 1.11 $ .84 $ 1.91
Extraordinary items - loss on early retirement
of debt, net of applicable income tax benefits - - - (.27)
Cumulative effect of change in accounting for costs of
start-up activities, net of applicable income tax benefit - - - (.15)
--------- --------- --------- ---------
Net Earnings Available for Common Shareholders $ .65 $ 1.11 $ .84 $ 1.49
========= ========= ========= =========
See accompanying notes.
-3-
FEDERAL-MOGUL CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Millions of Dollars)
(Unaudited)
June 30 December 31
2000 1999
----------- -----------
ASSETS
Cash and equivalents $ 56.7 $ 64.5
Accounts receivable 539.6 514.6
Investment in accounts receivable securitization 251.9 232.2
Inventories 889.8 883.6
Prepaid expenses and income tax benefits 335.5 331.6
-------- --------
Total Current Assets 2,073.5 2,026.5
Property, plant and equipment, net 2,428.6 2,503.7
Goodwill 3,369.7 3,547.8
Other intangible assets 754.4 796.3
Asbestos-related insurance recoverable 325.4 325.9
Other noncurrent assets 656.3 745.0
-------- --------
TOTAL ASSETS $9,607.9 $9,945.2
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Short-term debt, including current portion of long-term debt $ 181.5 $ 190.8
Accounts payable 517.7 621.9
Accrued compensation 163.7 182.9
Restructuring and rationalization reserves 86.4 46.0
Current portion of asbestos liability 240.0 180.0
Income taxes payable 75.5 72.3
Other accrued liabilities 399.6 488.7
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Total Current Liabilities 1,664.4 1,782.6
Long-term debt 3,194.3 3,020.0
Long-term portion of asbestos liability 1,101.3 1,335.3
Postemployment benefits 643.8 661.9
Other accrued liabilities 472.1 454.9
Minority interest in consolidated subsidiaries 60.9 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 42.1 41.5
Common stock 352.1 352.1
Additional paid-in capital 1,780.1 1,782.4
Retained earnings 232.1 170.3
Unearned ESOP compensation (4.0) (7.9)
Accumulated other comprehensive loss (505.7) (262.1)
Other (0.6) (1.1)
-------- --------
TOTAL SHAREHOLDERS' EQUITY 1,896.1 2,075.2
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $9,607.9 $9,945.2
======== ========
See accompanying notes.
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/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
Condensed Consolidated Statements of Cash Flows (Unaudited)
(Millions of Dollars)
Six Months Ended
June 30
----------------------
2000 1999
--------- ----------
CASH PROVIDED FROM (USED BY) OPERATING ACTIVITIES
Net earnings $ 63.8 $ 112.9
Adjustments to reconcile net earnings to net cash
provided from operating activities:
Depreciation and amortization 192.6 182.8
Restructuring charge 68.7 -
Adjustment of assets held for sale and other
long-lived assets to fair value 10.0 -
Loss on early retirement of debt - 36.6
Cumulative effect of change in accounting principle - 19.5
Increase in accounts receivable (81.4) (124.0)
(Increase) decrease in inventories (39.8) 36.1
Increase (decrease) in accounts payable (90.7) 32.0
Increase in current liabilities and other 9.6 57.5
Payments against restructuring and rationalization reserves (27.1) (62.1)
Payments against asbestos liability (159.5) (65.8)
-------- --------
NET CASH PROVIDED FROM (USED BY) OPERATING ACTIVITIES (53.8) 225.5
CASH PROVIDED FROM (USED BY) INVESTING ACTIVITIES
Expenditures for property, plant and equipment
and other long-term assets (143.2) (174.9)
Business acquisitions, net of cash acquired - (239.4)
Other 14.1 28.6
-------- --------
NET CASH USED BY INVESTING ACTIVITIES (129.1) (385.7)
CASH PROVIDED FROM (USED BY) FINANCING ACTIVITIES
Issuance of common stock - 0.7
Proceeds from the issuance of long-term debt 285.0 2,123.0
Principal payments on long-term debt (107.0) (1,959.9)
Increase (decrease) in short-term debt 1.2 (6.3)
Fees paid for debt issuance and other securities - (25.5)
Sale (repurchase) of accounts receivable under securitization (1.5) 44.1
Dividends (2.0) (2.3)
Other (0.6) (4.3)
-------- --------
NET CASH PROVIDED FROM FINANCING ACTIVITIES 175.1 169.5
-------- --------
INCREASE (DECREASE) IN CASH AND EQUIVALENTS (7.8) 9.3
Cash and Equivalents at Beginning of Period 64.5 77.2
-------- --------
CASH AND EQUIVALENTS AT END OF PERIOD $ 56.7 $ 86.5
======== ========
See accompanying notes.
-5-
FEDERAL-MOGUL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 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 six-month period ended June 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 accounting principles to the recognition, presentation, and disclosure
of revenue in financial statements. The Company does not believe that the
adoption of the SAB in the fourth quarter of 2000 will have a material effect on
the Company's financial position or it's results of operations.
2. RESTRUCTURING
2000 Restructuring Program:
During the first quarter of 2000, the Company recognized $68.7 million of
restructuring charges, $54.7 million related to severance and $14.0 million
related to 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.
Cash payments against the 2000 restructuring reserves were $13.1 million ($11.5
million for severance and $1.6 million for exit) for the six months ended June
30, 2000. The plan originally called 4,000 employees to be severed. As of June
30, 2000, approximately 550 employees have been severed. The plan originally
called for the closing and or consolidation of 40 facilities. As of June 30,
2000, 25 facilities have been closed or consolidated.
1999 and 1998 Restructuring Programs:
Cash payments against the 1999 and 1998 restructuring reserves were $7.9 million
($7.4 million for severance and $0.5 million for exit) for the six months ended
June 30, 2000.
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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 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 $900 million), 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. 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, 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 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. One of these former members 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.
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
-7-
their obligation to pay, should the claims filed after June 30, 1996 exceed the
(pound)690 million trigger point.
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 and 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.
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. 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 a $325.4 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
-8-
coverage which, barring unforeseen insolvencies of excess carriers or other
adverse events, should 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 been named as a defendant in a
number of product liability cases involving asbestos, primarily involving gasket
or packing products. The Company is defending all such claims vigorously and
believes that it and Fel-Pro have substantial defenses to liability and adequate
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 June 30, 2000, will not have a
material effect on the Company's financial position.
AGGREGATE OF ASBESTOS LIABILITY
As of June 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 and the current legal environment. The Company
has a corresponding receivable from certain insurance carriers of approximately
$325.4 million.
Other
The Company is involved in various other legal actions and claims, directly and
through its subsidiaries (including T&N and Fel-Pro). The Company was named as a
defendant in various class action lawsuits during the second quarter of 2000. As
of June 30, 2000, a lead plaintiff had not been identified and the class had not
been certified. The Company believes these claims are without merit and believes
it has meritorious defenses against these claims. The Company will vigorously
defend these claims, and does not believe they 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 its outcomes are not reasonably likely to have a material adverse
affect on the Company's financial position, operating results, or cash flows.
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
-9-
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 $67.9 million at June 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.
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4. EARNINGS PER SHARE, NON-CASH TRANSACTION AND COMPREHENSIVE INCOME
Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per
share for the three and six months ended June 30, 2000 and 1999 (in millions,
except per share data):
Three Months Ended Six Months Ended
June 30 June 30
-------------------- -------------------
2000 1999 2000 1999
-------- -------- -------- -------
Numerator:
Net earnings $ 49.9 $ 87.3 $ 63.8 $ 112.9
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 before extraordinary items and cumulative
effect of change in accounting for costs of start-up activities 49.9 87.3 63.8 148.7
Series C preferred dividend requirement (0.5) (0.5) (1.0) (1.1)
Series E preferred dividend requirement - - - (0.2)
------- ------- ------- -------
Numerator for basic earnings per share - income available to common
shareholders before extraordinary items and cumulative effect of change
in accounting for costs of start-up activities 49.4 86.8 62.8 147.4
Effect of dilutive securities:
Series C preferred dividend requirement 0.5 0.5 1.0 1.1
Series E preferred dividend requirement - - - 0.2
Minority interest - preferred securities of an affiliate 6.3 6.3 - 12.7
Additional required ESOP contribution (0.5) (0.5) (1.0) (1.1)
------- ------- ------- -------
Numerator for diluted earnings 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 $ 55.7 $ 93.1 $ 62.8 $ 160.3
======= ======= ======= =======
Numerator for basic earnings per share - income available to common
shareholders after extraordinary items and cumulative
effect of change in accounting for costs of start-up activities $ 49.4 $ 86.8 $ 62.8 $ 111.6
======= ======= ======= =======
Numerator for diluted earnings per share - income available to common
shareholders after extraordinary items and cumulative
effect of change in accounting for start-up activities $ 55.7 $ 93.1 $ 62.8 $ 124.5
======= ======= ======= =======
Denominator:
Denominator for basic earnings per share - weighted
average shares 70.3 70.2 70.3 69.3
Effect of dilutive securities:
Dilutive stock options outstanding - 0.6 - 0.8
Nonvested stock 0.2 0.2 0.2 0.2
Conversion of Series C preferred stock 1.3 1.4 1.4 1.4
Conversion of Series E preferred stock - - - 0.9
Conversion of Company-obligated mandatorily redeemable securities 11.2 11.2 - 11.2
Contingently issuable shares of common stock 2.8 - 2.8 -
------- ------- ------- -------
Denominator for dilutive earnings per share adjusted
weighted average shares and assumed conversions 85.8 83.6 74.7 83.8
======= ======= ======= =======
Basic earnings per share before extraordinary items and cumulative
effect of change in accounting for costs of start-up activities $ .70 $ 1.24 $ .89 $ 2.13
======= ======= ======= =======
Basic earnings per share after extraordinary items and cumulative
effect of change in accounting for costs of start-up activities $ .70 $ 1.24 $ .89 $ 1.61
======= ======= ======= =======
Diluted earnings per share before extraordinary items and cumulative
effect of change in accounting for costs of start-up activities $ .65 $ 1.11 $ .84 $ 1.91
======= ======= ======= =======
Diluted earnings per share after extraordinary items and cumulative
effect of change in accounting for costs of start-up activities $ .65 $ 1.11 $ .84 $ 1.49
======= ======= ======= =======
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Quarterly dividends of $0.0025 per common share were declared for the quarters
ended June 30, 2000 and 1999, respectively.
5. COMPREHENSIVE LOSS
Total comprehensive income (loss) is summarized as follows (in millions of
dollars):
Three Months Ended Six Months Ended
June 30 June 30
-------------------- ---------------------
2000 1999 2000 1999
------ ------ ------ ------
Net Earnings $ 49.9 $ 87.3 $ 63.8 $112.9
Other Comprehensive Income (Loss)
Foreign currency translation adjustment, net of tax (99.6) (14.2) (153.1) (89.6)
Unrealized gain/(loss) on investments, net of tax (0.1) 0.7 (0.4) 0.7
------ ------ ------ ------
Total Comprehensive Loss $(49.8) $ 73.8 $(89.7) $ 24.0
====== ====== ====== ======
6. INVENTORIES
Inventories consisted of the following (in millions of dollars):
June 30, December 31,
2000 1999
--------- --------
Finished products $625.5 $638.9
Work-in-process 142.9 133.1
Raw materials 152.0 138.1
------ ------
920.4 910.1
Reserve for inventory valuation (30.6) (26.5)
------ ------
$889.8 $883.6
====== ======
-12-
7. 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
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 operations in
South Africa and Italy.
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 Six Months Ended
June 30 June 30
-------------------- --------------------
2000 1999 2000 1999
------ ------ ------ ------
Net Sales:
Powertrain Systems $ 621 $ 618 $1,269 $1,208
Sealing Systems, Visibility and
Systems Protection Products 465 479 955 967
Brake, Chassis, Ignition and Fuel Products 507 573 1,013 1,109
Divested Activities - 17 - 45
------ ------ ------ ------
Total $1,593 $1,687 $3,237 $3,329
====== ====== ====== ======
-13-
Three Months Ended Six Months Ended
June 30 June 30
-------------------- --------------------
2000 1999 2000 1999
------ ------ ------ ------
Operational EBIT:
Powertrain Systems $ 53 $ 87 $ 115 $ 172
Sealing Systems, Visibility and
Systems Protection Products 61 62 129 112
Brake, Chassis, Ignition and Fuel Products 61 93 124 167
Divested Activities - - - (1)
----- ----- ----- -----
Total $ 175 $ 242 $ 368 $ 450
===== ===== ===== =====
Three Months Ended Six Months Ended
June 30 June 30
-------------------- --------------------
2000 1999 2000 1999
------ ------ ------ ------
Reconciliation:
Total Segments Operational EBIT $ 175 $ 242 $ 368 $ 450
Net interest and other financing costs (81) (78) (160) (158)
Acquisition-related costs - (13) - (35)
Restructuring, impairment and other
special charges - - (79) -
----- ----- ----- -----
Earnings before income taxes,
extraordinary items and cumulative
effect of accounting change $ 94 $ 151 $ 129 $ 257
===== ===== ===== =====
-14-
8. 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.
-15-
Federal-Mogul Corporation
Notes to Consolidated Financial Statements
Unaudited Consolidating Condensed Statement of Operations
Three Months Ended June 30, 2000
(Millions of Dollars)
(Unconsolidated)
-----------------------------------------
Guarantor Non-Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
--------- ------------ -------------- ------------ ------------
Net sales $ 390.9 $ 384.8 $1,006.7 $ (189.2) $1,593.2
Cost of products sold 292.0 270.8 807.4 (189.2) 1,181.0
-------- -------- -------- -------- --------
Gross margin 98.9 114.0 199.3 - 412.2
Selling, general and
administrative expenses 85.9 35.6 86.4 - 207.9
Amortization of goodwill
and other intangible assets 5.1 7.2 19.0 - 31.3
Implementation costs 0.5 - 1.3 - 1.8
Interest expense 68.2 0.1 66.5 (63.4) 71.4
Interest income (0.1) - (64.3) 63.4 (1.0)
International currency
exchange (gains) losses 0.3 (1.2) (1.7) - (2.6)
Other (income) expense, net 60.1 (15.4) (35.5) - 9.2
-------- -------- -------- -------- --------
Earnings (loss) before
income taxes (121.1) 87.7 127.6 - 94.2
Income tax expense (benefit) (44.8) 32.4 56.7 - 44.3
-------- -------- -------- -------- --------
Net earnings (loss) $ (76.3) $ 55.3 $ 70.9 $ - $ 49.9
Equity in earnings
of subsidiaries 126.2 100.7 - (226.9) -
-------- -------- -------- -------- --------
Net Earnings $ 49.9 $ 156.0 $ 70.9 $ (226.9) $ 49.9
======== ======== ======== ======== ========
-16-
Federal-Mogul Corporation
Notes to Consolidated Financial Statements
Unaudited Consolidating Condensed Statement of Operations
Three Months Ended June 30, 1999
(Millions of Dollars)
(Unconsolidated)
----------------------------------------
Guarantor Non-Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
--------- ------------ ------------- ------------ ------------
Net sales $ 349.7 $ 436.0 $ 982.0 $ (80.6) $1,687.1
Cost of products sold 218.5 307.4 759.2 (80.6) 1,204.5
-------- -------- -------- -------- --------
Gross margin 131.2 128.6 222.8 - 482.6
Selling, general and
administrative expenses 88.7 37.6 88.4 - 214.7
Amortization of goodwill and
other intangible assets 1.9 6.7 22.5 - 31.1
Integration costs 1.0 2.8 9.5 - 13.3
Interest expense 64.4 0.2 70.8 (66.9) 68.5
Interest income (0.2) (0.1) (67.6) 66.9 (1.0)
International currency
exchange (gains) losses - 1.0 (0.6) - 0.4
Other (income) expense, net (13.6) 8.3 10.1 - 4.8
-------- -------- -------- -------- --------
Earnings (loss) before
income taxes (11.0) 72.1 89.7 - 150.8
Income tax expense (benefit) (4.1) 26.7 40.9 - 63.5
-------- -------- -------- -------- --------
Net earnings (loss) $ (6.9) $ 45.4 $ 48.8 $ - $ 87.3
Equity in earnings
of subsidiaries 94.2 59.2 - (153.4) -
-------- -------- -------- -------- --------
Net Earnings $ 87.3 $ 104.6 $ 48.8 $ (153.4) $ 87.3
======== ======== ======== ======== ========
-17-
Federal-Mogul Corporation
Notes to Consolidated Financial Statements
Unaudited Consolidating Condensed Statement of Operations
Six Months Ended June 30, 2000
(Millions of Dollars)
(Unconsolidated)
----------------------------------------
Guarantor Non-Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
--------- ------------ ------------- ------------ ------------
Net sales $ 784.3 $ 790.1 $2,052.0 $ (389.5) $3,236.9
Cost of products sold 591.2 558.9 1,630.0 (389.5) 2,390.6
-------- -------- -------- -------- --------
Gross margin 193.1 231.2 422.0 - 846.3
Selling, general and
administrative expenses 170.5 69.7 178.7 - 418.9
Amortization of goodwill and
other intangible assets 10.2 13.6 38.7 - 62.5
Implementation costs 1.2 - 1.4 - 2.6
Restructuring charge 2.8 10.4 55.5 - 68.7
Adjustment of assets held for
Sale and other long-lived
Assets - 4.8 5.2 - 10.0
Interest expense 134.6 0.4 135.0 (127.6) 142.4
Interest income (0.6) - (129.3) 127.6 (2.3)
International currency
exchange (gains) losses 0.5 (1.0) (1.5) - (2.0)
Other (income) expense, net 101.5 (40.8) (43.9) - 16.8
-------- -------- -------- -------- --------
Earnings (loss) before
income taxes (227.6) 174.1 182.2 - 128.7
Income tax expense (84.2) 64.4 84.7 - 64.9
-------- -------- -------- -------- --------
Net earnings (loss) $ (143.4) $ 109.7 $ 97.5 $ - $ 63.8
Equity in earnings
of subsidiaries 207.2 168.7 - (375.9) -
-------- -------- -------- -------- --------
Net Earnings $ 63.8 $ 278.4 $ 97.5 $ (375.9) $ 63.8
======== ======== ======== ======== ========
-18-
Federal-Mogul Corporation
Notes to Consolidated Financial Statements
Unaudited Consolidating Condensed Statement of Operations
Six Months Ended June 30, 1999
(Millions of Dollars)
(Unconsolidated)
----------------------------------------
Guarantor Non-Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
--------- ------------ ------------- ------------ ------------
Net sales $ 658.6 $ 909.6 $1,896.2 $ (135.1) $3,329.3
Cost of products sold 422.3 651.1 1,458.9 (135.1) 2,397.2
-------- -------- -------- -------- --------
Gross margin 236.3 258.5 437.3 - 932.1
Selling, general and
administrative expenses 178.1 80.1 179.0 - 437.2
Amortization of goodwill and
other intangible assets 3.4 13.8 46.7 - 63.9
Integration costs 4.5 3.9 15.0 - 23.4
Interest expense 130.7 0.4 142.1 (133.8) 139.4
Interest income (0.4) (0.6) (134.8) 133.8 (2.0)
International currency
exchange (gains) losses (0.1) 2.6 0.2 - 2.7
Other (income) expense, net (28.9) 17.1 21.9 - 10.1
-------- -------- -------- -------- --------
Earnings (loss) before income
taxes, extraordinary
items and cumulative
effect of change in
accounting principle (51.0) 141.2 167.2 - 257.4
Income tax expense 15.6 41.2 51.9 - 108.7
-------- -------- -------- -------- --------
Earnings (loss) before
extraordinary item and
cumulative effect of
change in accounting
principle (66.6) 100.0 115.3 - 148.7
Extraordinary items - loss on
early retirement of debt, net
of applicable income tax
benefits 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) $ (102.4) $ 100.0 $ 115.3 $ - $ 112.9
Equity in earnings
of subsidiaries 215.3 112.3 - (327.6) -
-------- -------- -------- -------- --------
Net Earnings $ 112.9 $ 212.3 $ 115.3 $ (327.6) $ 112.9
======== ======== ======== ======== ========
-19-
Federal-Mogul Corporation
Notes to Consolidated Financial Statements
Unaudited Consolidating Condensed Balance Sheet
June 30, 2000
(Millions of Dollars)
(Unconsolidated)
---------------------------------------------
Guarantor Non-Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
--------- ------------ -------------- ------------ ------------
ASSETS
Cash and equivalents $ 40.0 $ 54.2 $ (37.5) $ - $ 56.7
Accounts receivable 20.4 76.7 442.5 - 539.6
Investment in accounts
receivable securitization - - 251.9 - 251.9
Inventories 155.3 319.9 414.6 - 889.8
Prepaid expenses and
income tax benefits 217.3 82.9 35.3 - 335.5
-------- -------- -------- --------- --------
Total Current Assets 433.0 533.7 1,106.8 - 2,073.5
Property, plant and
equipment, net 301.3 554.2 1,573.1 - 2,428.6
Goodwill 595.8 790.8 1,983.1 - 3,369.7
Other intangible assets 31.4 362.8 360.2 - 754.4
Investment in subsidiaries 5,103.2 1,696.5 - (6,799.7) -
Intercompany accounts,net (756.9) 1,869.9 (1,113.0) - -
Asbestos-related insurance
recoverable - 325.4 - - 325.4
Other noncurrent assets 247.6 15.2 393.5 - 656.3
-------- -------- -------- --------- --------
Total Assets $5,955.4 $6,148.5 $4,303.7 $(6,799.7) $9,607.9
======== ======== ======== ========= ========
LIABILITIES
Short-term debt, including
current portion of
long-term debt $ 118.6 - $ 62.9 $ - $ 181.5
Accounts payable 133.5 154.7 229.5 - 517.7
Accrued compensation 13.7 26.9 123.1 - 163.7
Restructuring and
rationalization reserves 3.5 18.5 64.4 - 86.4
Current portion of
asbestos liability - - 240.0 - 240.0
Income taxes payable 11.4 19.0 45.1 - 75.5
Other accrued liabilities 122.8 54.5 222.3 - 399.6
-------- -------- -------- --------- --------
Total Current Liabilities 403.5 273.6 987.3 - 1,664.4
Long-term debt 3,161.7 0.3 32.3 - 3,194.3
Long-term portion of
asbestos liability - 395.7 705.6 - 1,101.3
Postemployment benefits 104.7 297.5 241.6 - 643.8
Other accrued liabilities 330.5 28.7 112.9 - 472.1
Minority interest in
consolidated subsidiaries 58.9 1.9 0.1 - 60.9
Company-obligated, mandatorily
redeemable preferred securities
of subsidiary trust holding
solely convertible subordinated
debentures of the Company - - 575.0 - 575.0
Shareholders' Equity 1,896.1 5,150.8 1,648.9 (6,799.7) 1,896.1
-------- -------- -------- --------- --------
Total Liabilities and
Shareholders' Equity $5,955.4 $6,148.5 $4,303.7 $(6,799.7) $9,607.9
======== ======== ======== ========= ========
-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-
Federal-Mogul Corporation
Notes to Consolidated Financial Statements
Unaudited Consolidating Condensed Statement of Cash Flows
Six Months Ended June 30, 2000
(Millions of Dollars)
(Unconsolidated)
-----------------------------------------
Guarantor Non-Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
--------- ------------ -------------- ------------ ------------
Net Cash Provided From
(Used By) Operating
Activities $(136.1) $179.2 $(96.9) $ - $(53.8)
Expenditures for property,
plant and equipment
and other long-term assets (2.6) (23.8) (116.8) - (143.2)
Other - - 14.1 - 14.1
------ ------ ------ ------ ------
Net Cash Used By
Investing Activities (2.6) (23.8) (102.7) - (129.1)
Proceeds from the issuance
of long-term debt 285.0 - - - 285.0
Principal payments on long-
term debt (100.3) (0.2) (6.5) - (107.0)
Increase (decrease) in short-
term debt (5.2) (6.0) 12.4 - 1.2
Change in intercompany
accounts (48.9) (115.3) 164.2 - -
Sale (repurchase) of accounts
receivable under
securitization (1.5) - - - (1.5)
Dividends (2.0) - - - (2.0)
Other (2.5) - 1.9 - (0.6)
------ ------ ------ ------ ------
Net Cash Provided From
(Used By) Financing
Activities 124.6 (121.5) 172.0 - 175.1
------ ------ ------ ------ ------
Net Increase (Decrease)
in Cash $(14.1) $ 33.9 $(27.6) $ - $ (7.8)
====== ====== ====== ====== ======
-22-
Federal-Mogul Corporation
Notes to Consolidated Financial Statements
Unaudited Consolidating Condensed Statement of Cash Flows
Six Months Ended June 30, 1999
(Millions of Dollars)
(Unconsolidated)
-------------------------------------------------
Guarantor Non-Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
----------- ------------ -------------- ------------ ------------
Net Cash Provided From
Operating Activities $ 49.1 $ 129.7 $ 46.7 $ - $ 225.5
Expenditures for property,
plant and equipment
and other long-term assets (26.3) (28.8) (119.8) - (174.9)
Proceeds from sale of
business investments - - 28.6 - 28.6
Business acquisitions, net of
cash acquired (97.9) (1.9) (139.6) - (239.4)
-------- -------- -------- -------- --------
Net Cash Used By
Investing Activities (124.2) (30.7) (230.8) - (385.7)
Issuance of common stock 0.7 - - - 0.7
Proceeds from the issuance
of long-term debt 2,123.0 - - - 2,123.0
Principal payments on long-
term debt (1,926.3) (0.9) (32.7) - (1,959.9)
Increase (decrease) in short-
term debt (9.4) (7.5) 10.6 - (6.3)
Fees paid for debt issuance
and other securities (25.5) - - - (25.5)
Change in intercompany
accounts (146.2) (101.7) 247.9 - -
Sale (repurchase) of accounts
receivable under
securitization 44.1 - - - 44.1
Dividends (2.3) - - - (2.3)
Other (2.4) 0.6 (2.5) - (4.3)
-------- -------- -------- -------- --------
Net Cash Provided From
(Used By) Financing
Activities 55.7 (109.5) 223.3 - 169.5
-------- -------- -------- -------- --------
Net Increase (Decrease)
in Cash $ (19.4) $ (10.5) $ 39.2 $ - $ 9.3
======== ======== ======== ======== ========
-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
expects to incur restructuring charges of approximately $100 million, an
additional $100 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 the first quarter of 2000, the Company recorded pre-tax
charges of $68.7 million for restructuring and $10.0 million to adjust certain
assets associated with the restructuring to their fair value. The significant
activities that resulted in the charges were 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 1,300 employees.
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 2,700
employees.
For more details relating to the $68.7 million restructuring charge and the
$10.0 million of 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 JUNE 30, 2000 COMPARED TO THREE MONTHS ENDED
JUNE 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 second quarter of 2000 were $1,593.2 million compared to
$1,687.1 million in the same 1999 quarter. The 6% decrease in net sales is
primarily attributable to the effects of foreign exchange from European
operations, the divestitures of the Company's heat transfer and Bertolotti
businesses in the second and third quarter of 1999, respectively, and the loss
of a major aftermarket customer in the second quarter of 1999. Currency rates in
effect this quarter compared to the same 1999 quarter decreased net sales by $60
million or 4%. These decreases were partially offset by net new business
recorded during the quarter and the full year effect of the Company's 1999 Alcan
acquisition.
Powertrain Systems sales were $621 million for the second quarter of 2000
compared to $622 million for the same 1999 quarter. Sales were flat from 1999 to
2000 primarily due to the effects of foreign exchange mentioned above and lower
aftermarket sales due to an overall decrease in the engine parts market size due
to continuing improvement in OE quality. These decreases were off set by the
full-year effect of the Company's 1999 Alcan acquisition and net new business
recorded during the quarter.
Sealing Systems, Visibility and Systems Protection Products sales were $465
million for the second quarter of 2000 compared to $479 million for the same
1999 quarter. Sales decreased 3% 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 engine 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 $507 million for the
second quarter of 2000 compared to $586 million for the same 1999 quarter. Sales
decreased 14% from 1999 to 2000 primarily due to the effects of foreign exchange
mentioned above, the divestitures of the Company's heat transfer and Bertolotti
businesses in the second and third quarters of 1999, respectively, and the
loss of a major aftermarket customer in the second quarter of 1999. These
decreases were partially offset by net new business recorded during the quarter.
Gross Margin
Gross margin was 25.9% for the second quarter of 2000 compared to 28.6% for the
same 1999 quarter. Management attributes this decrease primarily to the change
in mix from aftermarket to OE business. OE business was 56% in the second
quarter of 2000 compared to 53% in the same 1999 quarter. The decrease is also
attributable to increased spending in the Company's central warehousing system
installations and associated startup difficulties and certain productivity
issues.
-25-
Selling, General and Administrative Expenses
Selling, general and administrative expenses as a percent of net sales increased
to 13.0% for the second quarter of 2000 compared to 12.7% for the same 1999
quarter. After the effects of foreign exchange mentioned above, SG&A was down
compared to 1999.
Implementation Costs
The Company recognized $1.8 million of implementation costs for the second
quarter of 2000 in connection with the recently announced restructuring
programs. These expenses included such one-time items as costs to pack and move
productive inventory and fixed assets from one location to another, training,
and travel costs associated with the restructuring programs.
Integration Costs
The Company recognized $13.3 million of integration costs in the second 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 $71.4 million for the second quarter of 2000 compared to
$68.5 million for the same 1999 quarter. The increase is attributable to an
increase in interest rates on the Company's variable senior credit agreements.
Income Tax Expense
The effective tax rate was 47.0% for the second quarter of 2000 compared to
42.1% for the same 1999 quarter. The differences in the effective tax rates from
the statutory rate for the respective quarters is primarily related to
non-deductible goodwill amortization and foreign tax rate variances.
SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO SIX MONTHS ENDED
JUNE 30, 1999
RESULTS OF OPERATIONS
Net Sales
Net sales for the six months ended June 30, 2000 were $3,236.9 million compared
to $3,329.3 million for the same 1999 period. The 3% decrease in net sales is
primarily attributable to the effects of foreign exchange from European
operations, the divestitures of the Company's heat transfer and Bertolotti
businesses in the second and third quarter of 1999, respectively, and the loss
of a major aftermarket customer in the second quarter of 1999. Currency rates in
effect for the six months ended June 30, 2000 compared to the same 1999 period
decreased net sales by $134 million or 4%. These decreases were partially offset
by net new business recorded during the first six months of 2000 and the full
year effect of the Company's 1999 Alcan acquisition.
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Powertrain Systems sales were $1,269 million for the six months ended June 30,
2000 compared to $1,217 million for the same 1999 period. Sales increased 4.2%
from 1999 to 2000 primarily due to the full-year effect of the Company's 1999
Alcan acquisition and net new business recorded in the first six months of 2000.
These increases were partially offset by effects of foreign exchange mentioned
above and lower aftermarket sales due to an overall decrease in the engine parts
market size due to continued improvement in OE quality.
Sealing Systems, Visibility and Systems Protection Products sales were $955
million for the six months ended June 30, 2000 compared to $967 million for the
same 1999 period. Sales decreased 1% 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 engine 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 $1,013 million for the
six months ended June 30, 2000 compared to $1,146 million for the same 1999
period. Sales decreased 12% from 1999 to 2000 primarily due to the effects of
foreign exchange mentioned above, the divestitures of the Company's heat
transfer and Bertolotti businesses in the second and third quarters of 1999,
respectively, and the loss of a major aftermarket customer in the second quarter
of 1999. These decreases were partially offset by net new business recorded
during the period.
Gross Margin
Gross margin was 26.1% for the six months ended June 30, 2000 compared to 28.0%
for the same 1999 period. Management attributes this decrease primarily to the
change in mix from aftermarket to OE business. OE business was 56% for the six
months ended June 30, 2000 compared to 54% in the same 1999 period. The decrease
is also attributable to increased spending in the Company's central warehousing
system installations and associated startup difficulties and certain
productivity issues.
Selling, General and Administrative Expenses
Selling, general and administrative expenses as percent of net sales decreased
to 12.9% for the six months ended June 30, 2000 compared to 13.1% for the same
1999 period. This decrease is primarily attributable to the benefits of prior
restructuring actions and the realization of combined efficiencies from the 1998
acquisitions Fel-Pro, T&N, and Cooper Automotive.
Implementation Costs
The Company recognized $2.6 million of implementation costs for the six months
ended June 30, 2000 in connection with the recently announced restructuring
programs. These expenses included such one-time items as costs to pack and move
productive inventory and fixed assets from one location to another, training,
and travel costs associated with the restructuring programs.
Integration Costs
The Company recognized $23.4 million of integration costs for the six months
ended June 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.
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Interest Expense
Interest expense for the six months ended June 30, 2000 was $142.4 million
compared to $139.4 million for the six months ended June 30, 2000. 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 50.4% for the six months ended June 30, 2000 compared
to 42.1% for the same 1999 period. The difference in the effective rates from
the statutory rate for the respective quarters is primarily related to
non-deductible goodwill amortization and foreign tax rate differences in both
years and also restructuring and impairment charges in the first quarter 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
Liquidity
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 June 30, 2000, the Company had $1.0 billion outstanding under the primary
credit facilities, and approximately $725 million available to borrow on these
facilities. In addition to debt outstanding under the primary credit facilities,
the Company had $2.4 billion of debt, including short-term borrowings,
outstanding as of June 30, 2000, consisting primarily of $124 million of senior
notes due 2007, $2.0 billion of subordinated notes due between 2004 and 2010,
$104 million of medium term notes due between 2001 and 2005 and approximately
$200 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 United States 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
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as a component of income for its foreign subsidiaries using the US Dollar as the
functional currency. The Company's equity was reduced, net of tax, by $99.6
million and $153.1 million during the three and six months ended June 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 $53.8 million for the six months
ended June 30, 2000. Cash flow usages resulted primarily from an increase in
accounts receivable of $81.4 million, increases in inventories of $47.8 million,
decreases in accounts payable of $90.7 million, and payments related to
restructuring/rationalization reserves and asbestos of $27.1 million and $159.5
million, respectively. These usages were partially offset by cash generated from
operations.
Cash Flow Used By Investing Activities
Cash flow used by investing activities was $129.1 million for the six months
ended June 30, 2000. Capital expenditures of $143.2 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.
Cash Flow Provided From Financing Activities
Cash flow provided from financing activities was $175.1 million for the six
months ended June 30, 2000, primarily arising from proceeds of $285.0 million
from the issuance of long-term debt which was offset primarily by principal
payments on long-term debt of $107.0 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.
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.
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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 4. Submission of Matters to a Vote of Security Holders
The Company held its Annual Meeting of Shareholders on April 19, 2000,
at which time the shareholders considered and voted on (i) the
election of eight directors, and (ii) the approval of the appointment
of Ernst & Young as independent accountants for 2000.
The eight directors nominated for director at the meeting were
incumbents, and all nominees were elected. The following table sets
forth the number of votes "For" and "Withheld" with respect to each
nominee:
NOMINEE VOTES FOR VOTES WITHHELD
J. J. Fannon 57,602,177 2,828,509
R. M. Hills 57,378,564 3,052,122
P. S. Lewis 57,672,274 2,758,412
A. Madero 57,664,481 2,766,205
R. S. Miller, Jr. 57,430,339 3,000,347
J. C. Pope 57,435,324 2,995,362
R. A. Snell 57,136,636 3,294,050
G. Whalen 57,680,740 2,749,946
The appointment of Ernst & Young LLP as independent accountants for
2000 was approved, with 59,586,716 votes cast "For", 552,934 votes
cast "Against" and 291,036 abstentions.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
*27 Financial Data Schedule
(b) Reports on Form 8-K:
None
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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: July 31, 2000
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