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, 1999 ------------------------------------------------------ Commission File Number 1-1511 ----------------------------------------------------- FEDERAL-MOGUL CORPORATION - - -------------------------------------------------------------------------------- (Exact name of Registrant as specified in its charter) Michigan 38-0533580 - - ------------------------------------------------- ----------------------------- (State or other jurisdiction (I.R.S. Employer Identification No.) of incorporation or organization) 26555 Northwestern Highway, Southfield, Michigan 48034 - - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (248) 354-7700 - - -------------------------------------------------------------------------------- (Registrant's telephone number, including area code) Not Applicable - - -------------------------------------------------------------------------------- (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 ------ ------- 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 - 70,507,680 shares as of August 10, 1999 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 integrate the businesses of T&N, Fel-Pro and Cooper Automotive into Federal-Mogul, plans to address computer software issues related to the approach of the year 2000, plans to address the issue related to the conversion to the Euro, and the scope of the effect of T&N asbestos liability. Forward-looking statements may involve known and unknown risks, uncertainties and other factors, which may cause the actual results, performance or achievements of Federal-Mogul to differ materially from any future results, performance or achievements expressed or implied by such Forward-looking statements. Such risks, uncertainties and other factors include, without limitation, those relating to the combination of Federal-Mogul's business with those of T&N, Fel-Pro and Cooper Automotive and the anticipated synergies and operating efficiencies and restructuring charges in connection with such acquisitions, conditions in the automotive components industry, certain global and regional economic conditions and other factors detailed herein and from time to time in the documents incorporated by reference herein. Moreover, Federal-Mogul's plans, objectives and intentions are subject to change based on these and other factors, some of which are beyond Federal-Mogul's control. -2- PART I - FINANCIAL INFORMATION Item 1. Financial Statements FEDERAL-MOGUL CORPORATION AND SUBSIDIARIES Condensed Consolidated Statements of Operations (Unaudited) (Millions of Dollars, Except Per Share Amounts) Three Months Ended Six Months Ended June 30 June 30 ---------------------- ---------------------- 1999 1998 1999 1998 --------- --------- --------- --------- Net sales $ 1,687.1 $ 1,214.0 $ 3,329.3 $ 1,872.0 Cost of products sold 1,204.5 896.6 2,397.2 1,393.3 --------- --------- --------- --------- Gross margin 482.6 317.4 932.1 478.7 Selling, general and administrative expenses 214.7 180.8 437.2 278.9 Amortization 31.1 21.3 63.9 30.2 Purchased in-process research and development charge -- -- -- 18.6 Restructuring charge -- -- -- 10.5 Adjustment of assets held for sale and other long-lived assets to fair value -- (1.0) -- 19.0 Integration costs 13.3 4.7 23.4 4.7 Interest expense 68.5 56.3 139.4 72.8 Interest income (1.0) (2.1) (2.0) (8.8) International currency exchange losses 0.4 1.2 2.7 2.3 Net gain on British pound currency option and forward contract -- -- -- (13.3) Other expense, net 4.8 2.9 10.1 8.9 --------- --------- --------- --------- Earnings before income taxes, extraordinary items and cumulative effect of change in accounting principle 150.8 53.3 257.4 54.9 Income tax expense 63.5 24.9 108.7 33.7 --------- --------- --------- --------- Earnings before extraordinary items and cumulative effect of change in accounting principle 87.3 28.4 148.7 21.2 Extraordinary items - loss on early retirement of debt, net of applicable income tax benefits -- 31.3 23.1 31.3 Cumulative effect of change in accounting for costs of start-up activities, net of applicable income tax benefit -- -- 12.7 -- --------- --------- --------- --------- Net earnings (loss) 87.3 (2.9) 112.9 (10.1) Preferred stock dividends, net of related tax benefits 0.5 1.0 1.3 1.7 --------- --------- --------- --------- Net Earnings (Loss) Available for Common Shareholders $ 86.8 $ (3.9) $ 111.6 $ (11.8) ========= ========= ========= ========= Earnings (Loss) Per Common Share Basic Earnings before extraordinary items and cumulative effect of change in accounting principle $ 1.24 $ .63 $ 2.13 $ .47 Extraordinary items - loss on early retirement of debt, net of applicable income tax benefits -- (.72) (.34) (.75) 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 $ 1.24 $ (.09) $ 1.61 $ (.28) ========= ========= ========= ========= Diluted Earnings before extraordinary items and cumulative effect of change in accounting principle $ 1.11 $ .55 $ 1.91 $ .42 Extraordinary items - loss on early retirement of debt, net of applicable income tax benefits -- (.62) (.27) (.65) 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 $ 1.11 $ (.07) $ 1.49 $ (.23) ========= ========= ========= ========= See accompanying notes. -3- FEDERAL-MOGUL CORPORATION AND SUBSIDIARIES Condensed Consolidated Balance Sheets (Millions of Dollars) (Unaudited) June 30 December 31 1999 1998 -------- --------- Assets Cash and equivalents $ 86.5 $ 77.2 Accounts receivable 912.0 1,025.0 Investment in accounts receivable securitization 236.4 91.1 Inventories 1,006.3 1,068.6 Prepaid expenses and income tax benefits 283.2 337.7 -------- -------- Total Current Assets 2,524.4 2,599.6 Property, plant and equipment, net 2,422.3 2,477.5 Goodwill 3,577.1 3,398.4 Other intangible assets 832.3 886.4 Other noncurrent assets 564.2 578.2 -------- -------- Total Assets $9,920.3 $9,940.1 ======== ======== Liabilities and Shareholders' Equity Short-term debt, including current portion of long-term debt $ 193.6 $ 211.0 Accounts payable 516.9 498.4 Accrued compensation 195.8 200.3 Restructuring and rationalization reserves 116.8 178.9 Current portion of asbestos liability 188.0 125.0 Income taxes payable 131.5 142.2 Other accrued liabilities 590.2 673.7 -------- -------- Total Current Liabilities 1,932.8 2,029.5 Long-term debt 3,314.3 3,130.7 Long-term portion of asbestos liability 1,084.3 1,176.7 Postemployment benefits 663.5 677.0 Other accrued liabilities 352.8 327.0 Minority interest in consolidated subsidiaries 40.1 38.0 Company-obligated, mandatorily redeemable preferred securities of subsidiary trust holding solely convertible subordinated debentures of the Company1 575.0 575.0 Shareholders' Equity: Series C ESOP preferred stock 42.8 44.4 Series E preferred stock -- 132.7 Common stock 352.0 336.8 Additional paid-in capital 1,781.3 1,665.8 Retained earnings (accumulated deficit) 42.0 (69.9) Unearned ESOP compensation (11.6) (15.1) Accumulated other comprehensive income (247.2) (106.0) Other (1.8) (2.5) -------- -------- Total Shareholders' Equity 1,957.5 1,986.2 -------- -------- Total Liabilities and Shareholders' Equity $9,920.3 $9,940.1 ======== ======== 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, 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 ------------------------- 1999 1998 --------- ---------- Cash Provided From (Used By) Operating Activities Net earnings (loss) $ 112.9 $ (10.1) Adjustments to reconcile net earnings (loss) to net cash provided from operating activities: Depreciation and amortization 182.8 84.9 Purchased in-process research and development charge -- 18.6 Restructuring charge -- 10.5 Adjustment of assets held for sale and other long-lived assets to fair value -- 19.0 Loss on early retirement of debt 23.1 47.1 Cumulative effect of change in accounting principle 12.7 -- Increase in accounts receivable (124.0) (30.0) Decrease in inventories 36.1 43.8 Increase (decrease) in accounts payable 32.0 (1.3) Increase in current liabilities and other 77.8 56.5 Payments against restructuring and rationalization reserves (62.1) (20.7) Payments against asbestos liability (65.8) (32.7) -------- -------- Net Cash Provided From Operating Activities 225.5 185.6 Cash Provided From (Used By) Investing Activities Expenditures for property, plant and equipment and other long-term assets (174.9) (81.1) Proceeds from sale of business investments 28.6 53.9 Proceeds from sale of options -- 39.1 Business acquisitions, net of cash acquired (239.4) (2,786.5) -------- -------- Net Cash Used By Investing Activities (385.7) (2,774.6) Cash Provided From (Used By) Financing Activities Issuance of common stock 0.7 601.4 Proceeds from the issuance of long-term debt 2,123.0 3,805.0 Principal payments on long-term debt (1,959.9) (2,105.5) Decrease in short-term debt (6.3) (32.0) Fees paid for debt issuance and other securities (25.5) (76.8) Investment in accounts receivable securitization 44.1 10.3 Dividends (2.3) (5.9) Other (4.3) (6.8) -------- -------- Net Cash Provided From Financing Activities 169.5 2,189.7 Increase (Decrease) in Cash and Equivalents 9.3 (399.3) Cash and Equivalents at Beginning of Period 77.2 541.4 -------- -------- Cash and Equivalents at End of Period $ 86.5 $ 142.1 ======== ======== See accompanying notes. -5- FEDERAL-MOGUL CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) June 30, 1999 1. BASIS OF PRESENTATION 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 periods ending June 30, 1999 are not necessarily indicative of the results that may be expected for the year ended December 31, 1999. 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, 1998. Certain items in the prior year condensed consolidated financial statements have been reclassified to conform with the presentation used in 1999. 2. ACQUISITIONS OF BUSINESSES In January 1999, the Company completed the acquisition of Crane Technologies, Inc. (Crane). In June 1999, the Company completed the acquisition of the piston division of Alcan Deutschland GmbH (Alcan) in Germany, a subsidiary of Alcan Aluminum Limited in Canada. Crane and Alcan have annual sales of approximately $36 million and $150 million, respectively. In connection with the acquisition of Cooper Automotive in October of 1998, the Company is in the process of having valuations of acquired property, plant and equipment, identifiable intangible assets and certain assessments of asbestos liability completed. The related purchase price allocation will be finalized when such valuations and the final purchase price adjustments are completed during 1999. Sales of Businesses On April 21, 1999, the Company sold its South African heat transfer business. The business had sales of approximately $56 million in 1998 in four South African locations and employs approximately 1,200 people. The Company did not record a significant gain or loss on this transaction. Pro Forma Results The following unaudited financial information for the three and six months ended June 30, 1998 assume the T&N, Cooper Automotive and Fel-Pro acquisitions occurred as of the beginning of the period, after giving effect to certain adjustments, including the amortization of intangible assets, interest expense on acquisition debt, divestiture of the T&N Bearings Business and Fel-Pro Chemical Business, 1998 equity offerings and income tax effects. The 1998 pro forma results (in millions of dollars, except per share data) have been prepared for comparative purposes only and are not necessarily indicative of the results of operations which may occur in the future or that would have occurred had the acquisitions of T&N, Cooper Automotive and Fel-Pro been consummated on the dates indicated, nor are they necessarily indicative of the Company's future results of operations. -6- Unaudited Financial Information ------------------------------- Six Months Ended June 30 ------------------------ Actual Pro Forma 1999 1998 ---- ---- (Millions of Dollars, Except Per Share Amounts) Net sales $ 3,329.3 $ 3,303.0 Net earnings $ 112.9 $ 70.4 Earnings per share $ 1.61 $ 1.42 Earnings per share assuming dilution $ 1.49 $ 1.36 An $18.6 million charge for purchased in-process research and development associated with the T&N acquisition has been excluded from the 1998 unaudited pro forma financial information. 3. ASBESTOS LIABILITY AND LEGAL PROCEEDINGS T&N Asbestos In the United States, the Company's United Kingdom subsidiary, T&N Ltd., and two of T&N's 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 to property damage litigation in the United States based upon asbestos products allegedly installed in buildings. 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 expenditure 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. As of June 30, 1999, T&N is one of a large number of defendants named in one pending property damage case. Provision has been made in the asbestos reserve for anticipated expenditures in relation to this case. In arriving at the provision, assumptions have been made regarding the total number of claims which it is anticipated may 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 and the timing of settlement and, in the United Kingdom, the level of subrogation claims brought by insurance companies. The T&N Companies have appointed the Center for Claims Resolution (CCR) as their exclusive representative in relation to all asbestos-related personal injury claims made against the T&N Companies in the United States. The CCR provides to its 19 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 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. In 1996, T&N purchased a (pound)500 million (approximately $845 million at the insurance agreement exchange -7- rate of $1.69/(pound)) layer of insurance which will be triggered should the aggregate amount 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 Company's reserve for claims filed after June 30, 1996 approximates 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. While management believes that reserves are appropriate for anticipated losses arising from T&N's asbestos-related claims, given the nature and complexity of the factors affecting the estimated liability, the actual liability may differ. No absolute assurances can be given that T&N 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 T&N Companies reserves will be reevaluated periodically as additional information becomes available. Federal-Mogul, Fel-Pro and Cooper Automotive Asbestos Litigation The Company also is one of a large number of defendants in a number of lawsuits brought by claimants alleging injury due to exposure to asbestos. Fel-Pro has been named as a defendant in a number of product liability cases involving asbestos, primarily involving gasket or packing products sold to ship owners. In addition, subsidiaries of Cooper Automotive have been named as defendants in a number of product liability cases involving asbestos, primarily involving friction products. The Company is defending all such claims vigorously and believes that it, Fel-Pro and the Cooper Automotive subsidiaries 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, Fel-Pro and the Cooper Automotive subsidiaries as of June 30, 1999, will not have a material effect on the Company's financial position. Asbestos Liability As of June 30, 1999, the Company has provided a net reserve of approximately $1.2 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 is in the process of completing its assessment of the asbestos liability and related insurance recoveries related to the Cooper Automotive acquisition. The Company believes its total net asbestos reserves in the aggregate are sufficient to cover the Company's exposure, although adjustments to the gross liability and related insurance recoveries could be made as a result of the current assessment. Other The Company is involved in various other legal actions and claims, directly and through its subsidiaries (including T&N and Fel-Pro). 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 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 -8- 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 $47 million at June 30, 1999 and approximately $50 million at December 31, 1998. Management believes that such accruals will be adequate to cover the Company's estimated liability for its exposure in respect of such matters. 4. DEBT On January 14, 1999, the Company issued $1.0 billion of bonds with maturities ranging from seven to ten years, a weighted average yield of 7.53% and a weighted average coupon of 7.45%. Proceeds were used to repay borrowings under the Senior Credit Agreements. On February 24, 1999, the Company entered into a new $1.75 billion Senior Credit Agreement at variable interest rates, which contains a $1.0 billion multicurrency revolving credit facility and two term loan components. The revolving credit facility has a five-year maturity. The term loan components of $400 million and $350 million mature in five and six years, respectively. The proceeds of this Senior Credit Agreement were used to refinance the prior Senior Credit Agreements entered into in connection with the T&N and Cooper Automotive acquisitions as well as the $400 million multicurrency revolving credit facility related to the T&N acquisition. As a result of the above mentioned transactions, the Company recognized an extraordinary charge in the first quarter of 1999 of $23.1 million, net of related tax benefits of $13.4 million, related to the early extinguishment of debt. The Company has pledged 100% of the capital stock of certain United States subsidiaries, 65% of capital stock of certain foreign subsidiaries and certain intercompany loans to secure the Senior Credit Agreements of the Company; certain of such pledges also extend to the Company's Notes, Medium-Term notes and Senior notes. In addition, certain subsidiaries of the Company have guaranteed the senior debt. (Refer to Note 9, "Consolidating Condensed Financial Information of Guarantor Subsidiaries.") 5. CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE In 1998, the American Institute of Certified Public Accountants issued Statement of Position (SOP) 98-5, Reporting the Costs of Start-Up Activities. SOP 98-5 was effective January 1, 1999 and requires that start-up costs capitalized prior to January 1, 1999 be written off and any future start-up costs be expensed as incurred. The Company adopted SOP 98-5 on January 1, 1999 and wrote off, as a cumulative effect of an accounting change, the unamortized balance of start-up costs totaling $12.7 million, net of applicable income tax benefits of $6.7 million, in the quarter ended March 31, 1999. -9- 6. 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, 1999 and 1998 (in millions, except per share data): Three Months Ended Six Months Ended June 30 June 30 --------------------- ---------------------- 1999 1998 1999 1998 -------- -------- -------- -------- Numerator: Net earnings (loss) $ 87.3 $ (2.9) $ 112.9 $ (10.1) Extraordinary items - loss on early retirement of debt, net of applicable income tax benefits -- 31.3 23.1 31.3 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 87.3 28.4 148.7 21.2 Series C preferred dividend requirement (0.5) (0.6) (1.1) (1.1) Series E preferred dividend requirement -- (0.4) (0.2) (0.6) ------- ------- ------- ------- 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 86.8 27.4 147.4 19.5 Effect of dilutive securities: Series C preferred dividend requirement 0.5 0.6 1.1 1.1 MIPS dividend requirement 6.3 -- 12.7 -- Series E preferred dividend requirement -- 0.4 0.2 0.6 Additional required ESOP contribution (0.5) (0.6) (1.1) (1.0) ------- ------- ------- ------- 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 $ 93.1 $ 27.8 $ 160.3 $ 20.2 ======= ======= ======= ======= Numerator for basic earnings per share - income (loss) available to common shareholders after extraordinary items and cumulative effect of change in accounting for costs of start-up activities $ 86.8 $ (3.9) $ 111.6 $ (11.8) ======= ======= ======= ======= Numerator for diluted earnings per share - income (loss) available to common shareholders after extraordinary items and cumulative effect of change in accounting for start-up activities $ 93.1 $ (3.5) $ 124.5 $ (11.1) ======= ======= ======= ======= Denominator: Denominator for basic earnings per share - weighted average shares 70.2 43.3 69.3 41.7 Effect of dilutive securities: Dilutive stock options outstanding 0.6 0.9 0.8 0.8 Nonvested stock 0.2 0.2 0.2 0.2 Conversion of Series C preferred stock 1.4 1.5 1.4 1.5 Conversion of MIPS 11.2 -- 11.2 -- Conversion of Series E preferred stock -- 4.6 0.9 3.4 ------- ------- ------- ------- Denominator for dilutive earnings per share adjusted weighted average shares and assumed conversions 83.6 50.5 83.8 47.6 ======= ======= ======= ======= Basic earnings per share before extraordinary items and cumulative effect of change in accounting for costs of start-up activities $ 1.24 $ .63 $ 2.13 $ .47 ======= ======= ======= ======= Basic earnings (loss) per share after extraordinary items and cumulative effect of change in accounting for costs of start-up activities $ 1.24 $ (.09) $ 1.61 $ (.28) ======= ======= ======= ======= Diluted earnings per share before extraordinary items and cumulative effect of change in accounting for costs of start-up activities $ 1.11 $ .55 $ 1.91 $ .42 ======= ======= ======= ======= Diluted earnings (loss) per share after extraordinary items and cumulative effect of change in accounting for costs of start-up activities $ 1.11 $ (.07) $ 1.49 $ (.23) ======= ======= ======= ======= -10- Convertible preferred securities redeemable for 11.2 million shares of common stock were outstanding during the second quarter of 1998 but were not included in the computation of 1998 diluted earnings per share because the effect would be anti-dilutive. Quarterly dividends of $0.0025 per common share were declared for the quarters ended June 30, 1999 and 1998, respectively. Non-Cash Transaction In connection with the February 1998 Fel-Pro acquisition, the Company issued 1,030,326 million shares of Series E Stock with an imputed value of $225 million. The shares of Series E Stock were exchangeable into shares of the Company's common stock at a rate of five shares of common stock per share of Series E Stock. Subsequently, in June 1998, in conjunction with an equity offering of the Company's common stock, the Company converted 422,581 shares of Series E stock into 2,112,907 shares of common stock. On February 24, 1999, each of the 607,745 remaining shares of the Series E Stock were exchanged into 3,038,725 shares of the Company's common stock. Comprehensive Income Total comprehensive income (loss), net of the related estimated tax, was $73.8 million and $(19.7) million for the three months ended June 30, 1999 and 1998, respectively, and $24.0 million and $(24.2) million for the six months ended June 30, 1999 and 1998, respectively. 7. INVENTORIES At June 30, 1999 and December 31, 1998, inventories consisted of the following (in millions of dollars): June 30, December 31, 1999 1998 -------- --------- Finished products $ 714.0 $ 737.9 Work-in-process 175.0 147.1 Raw materials 150.8 208.5 -------- -------- 1,039.8 1,093.5 Reserve for inventory valuation (33.5) (24.9) -------- -------- $1,006.3 $1,068.6 ======== ======== -11- 8. OPERATIONS BY INDUSTRY SEGMENT The Company evaluates segmental performance based on several factors, including both Economic Value Added (EVA) and Operational EBIT, defined as Operational Earnings before certain nonrecurring items (such as certain purchase accounting adjustments and integration costs associated with new acquisitions), interest and income taxes. 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 June 30 June 30 1999 1998 1999 1998 ---------- ---------- ---------- --------- Net Sales: Powertrain Systems $ 755 $ 636 $ 1,493 $ 931 Sealing Systems 319 303 622 466 General Products 609 248 1,195 435 Divested Activities 4 27 19 40 ------- ------- ------- ------- Total $ 1,687 $ 1,214 $ 3,329 $ 1,872 ======= ======= ======= ======= Three Months Ended Six Months Ended ------------------------- ----------------------- June 30 June 30 June 30 June 30 1999 1998 1999 1998 ---------- ---------- ---------- --------- Operational EBIT: Powertrain Systems $ 87 $ 66 $ 172 $ 93 Sealing Systems 62 31 112 51 General Products 93 29 167 51 Divested Activities -- (4) (1) (4) ------- ------- ------- ------- Total $ 242 $ 122 $ 450 $ 191 ======= ======= ======= ======= Three Months Ended Six Months Ended ------------------------- ----------------------- June 30 June 30 June 30 June 30 1999 1998 1999 1998 ---------- ---------- ---------- --------- Reconciliation: Total segments operational EBIT $ 242 $ 122 $ 450 $ 191 Net interest and other financing costs (78) (64) (158) (84) Acquisition related costs (13) (5) (34) (35) Restructuring, impairment and other special charges -- -- -- (17) ------- ------- ------- ------- Earnings before income taxes, extraordinary items and cumulative effect of accounting change $ 151 $ 53 $ 258 $ 55 ======= ======= ======= ======= -12- 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"). T&N Holding Companies - - --------------------- Federal-Mogul Dutch Holdings Inc. Federal-Mogul UK Holdings Inc. Federal-Mogul UK Holdings Limited Federal-Mogul Global Inc. Federal-Mogul Subsidiaries - - -------------------------- Federal-Mogul Venture Corporation Federal-Mogul Global Properties Inc. Carter Automotive Company Federal-Mogul Worldwide Inc. Cooper Automotive Subsidiaries - - ------------------------------ Federal-Mogul Ignition Company Federal-Mogul Products, Inc. Federal-Mogul Aviation, Inc. The Company issued notes in 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. The T&N Holding Companies (as listed above) are wholly owned subsidiaries of the Company and were incorporated in January 1998 in order to effectuate the Company's acquisition of T&N plc. These subsidiaries have no operations and act solely as holding companies of subsidiaries which have guaranteed fully and unconditionally on a joint and several basis, the obligation to pay principal and interest of the Notes, Medium-term notes and Senior notes (the "Guarantees"). In addition, certain other wholly owned subsidiaries of the Company, the Federal-Mogul Subsidiaries (as listed above), provided the Guarantees. The Federal-Mogul Subsidiaries are included in the Company's consolidated financial statements for all periods. The Cooper Automotive Subsidiaries (as listed above) acquired on October 9, 1998, are wholly owned subsidiaries of the Company and also provided the Guarantees. 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. -13- 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 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 ======== ======== ======== ======== ======== -14- Federal-Mogul Corporation Notes to Consolidated Financial Statements Unaudited Consolidating Condensed Statement of Operations Three Months Ended June 30, 1998 (Millions of Dollars) (Unconsolidated) ---------------------------------------- Guarantor Non-Guarantor Parent Subsidiaries Subsidiaries Eliminations Consolidated ------ ------------ ------------ ------------ ------------ Net sales $ 335.2 $ -- $ 904.8 $ (26.0) $1,214.0 Cost of products sold 232.9 -- 689.7 (26.0) 896.6 -------- -------- -------- -------- -------- Gross margin 102.3 -- 215.1 -- 317.4 Selling, general and administrative expenses 94.7 -- 86.1 -- 180.8 Amortization 4.6 -- 16.7 -- 21.3 Adjustment of assets held for sale and other long-lived assets to fair value -- -- (1.0) -- (1.0) Integration costs 2.6 -- 2.1 -- 4.7 Interest expense 66.5 -- 42.4 (52.6) 56.3 Interest income (12.3) (34.6) (7.8) 52.6 (2.1) International currency exchange (gains) losses 0.5 (0.4) 1.1 -- 1.2 Other (income) expense, net (14.0) (3.5) 20.4 -- 2.9 -------- -------- -------- -------- -------- Earnings (loss) before income taxes and extraordinary items (40.3) 38.5 55.1 -- 53.3 Income tax expense (benefit) (16.0) (5.3) 46.2 -- 24.9 -------- -------- -------- -------- -------- Earnings (loss) before extraordinary item (24.3) 43.8 8.9 -- 28.4 Extraordinary items - loss on early retirement of debt, net of applicable income tax benefits 12.4 -- 18.9 -- 31.3 -------- -------- -------- -------- -------- Net earnings (loss) $ (36.7) $ 43.8 $ (10.0) $ -- $ (2.9) -------- -------- -------- -------- -------- Equity in earnings of subsidiaries 33.8 15.3 -- (49.1) -- -------- -------- -------- -------- -------- Net Earnings (Loss) $ (2.9) $ 59.1 $ (10.0) $ (49.1) $ (2.9) ======== ======== ======== ======== ======== -15- 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 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 ======== ======== ======== ======== ======== -16- Federal-Mogul Corporation Notes to Consolidated Financial Statements Unaudited Consolidating Condensed Statement of Operations Six Months Ended June 30, 1998 (Millions of Dollars) (Unconsolidated) ---------------------------------------- Guarantor Non-Guarantor Parent Subsidiaries Subsidiaries Eliminations Consolidated ------ ------------ ------------ ------------ ------------ Net sales $ 615.3 $ 36.2 $1,272.2 $ (51.7) $1,872.0 Cost of products sold 436.3 23.1 985.6 (51.7) 1,393.3 -------- -------- -------- -------- -------- Gross margin 179.0 13.1 286.6 -- 478.7 Selling, general and administrative expenses 142.7 7.5 128.7 -- 278.9 Amortization 6.2 0.6 23.4 -- 30.2 Purchased in-process research and development charge -- -- 18.6 -- 18.6 Restructuring charge 5.6 -- 4.9 -- 10.5 Adjustment of assets held for sale and other long-lived assets to fair value -- -- 19.0 -- 19.0 Integration costs 2.6 -- 2.1 -- 4.7 Interest expense 85.7 1.5 49.9 (64.3) 72.8 Interest (income) expense (19.0) (42.3) (11.8) 64.3 (8.8) International currency exchange (gains) losses 0.6 (0.4) 2.1 -- 2.3 Net gain on British pound currency option and forward contract (13.3) -- -- -- (13.3) Other expense, net (13.2) (9.6) 31.7 -- 8.9 -------- -------- -------- -------- -------- Earnings (loss) before income taxes and extraordinary items (18.9) 55.8 18.0 -- 54.9 Income tax expense (benefit) (12.9) 1.6 45.0 -- 33.7 -------- -------- -------- -------- -------- Earnings (loss) before extraordinary items (6.0) 54.2 (27.0) -- 21.2 Extraordinary items - loss on early retirement of debt, net of applicable income tax benefits 12.4 -- 18.9 -- 31.3 -------- -------- -------- -------- -------- Net earnings (loss) $ (18.4) $ 54.2 $ (45.9) $ -- $ (10.1) -------- -------- -------- -------- -------- Equity in earnings of subsidiaries 8.3 4.6 -- (12.9) -- -------- -------- -------- -------- -------- Net Earnings (Loss) $ (10.1) $ 58.8 $ (45.9) $ (12.9) $ (10.1) ======== ======== ======== ======== ======== -17- Federal-Mogul Corporation Notes to Consolidated Financial Statements Unaudited Consolidating Condensed Balance Sheet June 30, 1999 (Millions of Dollars) (Unconsolidated) ---------------------------------------- Guarantor Non-Guarantor Parent Subsidiaries Subsidiaries Eliminations Consolidated ------ ------------ ------------ ------------ ------------ ASSETS Cash and equivalents $ 5.9 $ 10.2 $ 70.4 $ -- $ 86.5 Accounts receivable 17.1 275.2 619.7 -- 912.0 Investment in accounts receivable securitization -- -- 236.4 -- 236.4 Inventories 191.8 370.5 444.0 -- 1,006.3 Prepaid expenses and income tax benefits 74.4 140.7 68.1 -- 283.2 -------- -------- -------- -------- -------- Total Current Assets 289.2 796.6 1,438.6 -- 2,524.4 Property, plant and equipment 250.8 648.3 1,523.2 -- 2,422.3 Goodwill 611.3 753.5 2,212.3 -- 3,577.1 Other intangible assets 7.3 412.1 412.9 -- 832.3 Investment in subsidiaries 5,348.9 1,578.5 -- (6,927.6) -- Intercompany accounts,net (611.8) 1,436.5 (824.7) -- -- Other noncurrent assets 88.3 71.4 404.7 -- 564.2 -------- -------- -------- -------- -------- Total Assets $5,984.0 $5,696.9 $5,167.0 $(6,927.6) $9,920.3 ======== ======== ======== ========= ======== LIABILITIES Short-term debt, including current portion of long-term debt $ 77.8 $ 8.3 $ 107.5 $ -- $ 193.6 Accounts payable 83.9 167.7 265.3 -- 516.9 Accrued compensation 48.2 26.2 121.4 -- 195.8 Restructuring and rationalization reserves -- -- 116.8 -- 116.8 Current portion of asbestos liability -- -- 188.0 -- 188.0 Income taxes payable -- -- 131.5 -- 131.5 Other accrued liabilities 275.0 183.5 131.7 -- 590.2 -------- -------- -------- -------- -------- Total Current Liabilities 484.9 385.7 1,062.2 -- 1,932.8 Long-term debt 3,273.9 0.3 40.1 -- 3,314.3 Long-term portion of asbestos liability -- 55.4 1,028.9 -- 1,084.3 Postemployment benefits 218.3 214.9 230.3 -- 663.5 Other accrued liabilities 43.5 197.8 111.5 -- 352.8 Minority interest in consolidated subsidiaries 5.9 1.8 32.4 -- 40.1 Company-obligated, mandatorily redeemable preferred securities of subsidiary trust holding solely convertible subordinated debentures of the Company -- -- 575.0 -- 575.0 Shareholders' Equity 1,957.5 4,841.0 2,086.6 (6,927.6) 1,957.5 -------- -------- -------- -------- -------- Total Liabilities and Shareholders' Equity $5,984.0 $5,696.9 $5,167.0 $(6,927.6) $9,920.3 ======== ======== ======== ========= ======== -18- Federal-Mogul Corporation Notes to Consolidated Financial Statements Audited Consolidating Condensed Balance Sheet December 31, 1998 (Millions of Dollars) (Unconsolidated) ------------------------------------------ Guarantor Non-Guarantor Parent Subsidiaries Subsidiaries Eliminations Consolidated ------ ------------ ------------ ------------ ------------ ASSETS Cash and equivalents $ 25.3 $ 20.7 $ 31.2 $ -- $ 77.2 Accounts receivable 13.9 395.9 615.2 -- 1,025.0 Investment in accounts receivable securitization -- -- 91.1 -- 91.1 Inventories 186.8 441.2 440.6 -- 1,068.6 Prepaid expenses and income tax benefits 52.9 174.9 109.9 -- 337.7 -------- -------- -------- -------- -------- Total Current Assets 278.9 1,032.7 1,288.0 -- 2,599.6 Property, plant and equipment 230.0 684.7 1,562.8 -- 2,477.5 Goodwill 589.4 676.4 2,132.6 -- 3,398.4 Other intangible assets 44.6 423.6 418.2 -- 886.4 Investment in subsidiaries 5,114.7 1,666.7 -- (6,781.4) -- Intercompany accounts, net (515.2) 1,208.2 (693.0) -- -- Other noncurrent assets 103.0 51.9 423.3 -- 578.2 -------- -------- -------- -------- -------- Total Assets $5,845.4 $5,744.2 $5,131.9 $(6,781.4) $9,940.1 ======== ======== ======== ========= ======== LIABILITIES Short-term debt, including current portion of long-term debt $ 90.7 $ 16.0 $ 104.3 $ -- $ 211.0 Accounts payable 82.0 149.5 266.9 -- 498.4 Accrued compensation 45.1 84.7 70.5 -- 200.3 Restructuring and rationalization reserves 5.8 -- 173.1 -- 178.9 Current portion of asbestos liability -- -- 125.0 -- 125.0 Income taxes payable 21.7 24.3 96.2 -- 142.2 Other accrued liabilities 298.2 148.0 227.5 -- 673.7 -------- -------- -------- -------- -------- Total Current Liabilities 543.5 422.5 1,063.5 -- 2,029.5 Long-term debt 3,077.2 1.2 52.3 -- 3,130.7 Long-term portion of asbestos liability -- 20.0 1,156.7 -- 1,176.7 Postemployment benefits 218.2 207.6 251.2 -- 677.0 Other accrued liabilities 12.2 255.0 59.8 -- 327.0 Minority interest in consolidated subsidiaries 8.1 1.5 28.4 -- 38.0 Company-obligated mandatorily redeemable preferred securities of subsidiary trust holding solely convertible subordinated debentures of the Company -- -- 575.0 -- 575.0 Shareholders' Equity 1,986.2 4,836.4 1,945.0 (6,781.4) 1,986.2 -------- -------- -------- -------- -------- Total Liabilities and Shareholders' Equity $5,845.4 $5,744.2 $5,131.9 $(6,781.4) $9,940.1 ======== ======== ======== ========= ======== -19- 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 -- -- Investment in accounts receivable 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 ========= ========= ========= ========= ========= -20- Federal-Mogul Corporation Notes to Consolidated Financial Statements Unaudited Consolidating Condensed Statement of Cash Flows Six Months Ended June 30, 1998 (Millions of Dollars) (Unconsolidated) -------------------------------------------- Guarantor Non-Guarantor Parent Subsidiaries Subsidiaries Eliminations Consolidated ------ ------------ ------------ ------------ ------------ Net Cash Provided From Operating Activities $ 128.6 $ 53.7 $ 3.3 $ -- $ 185.6 -------- -------- -------- -------- -------- Expenditures for property, plant and equipment and other long-term assets (17.2) (3.0) (60.9) -- (81.1) Proceeds from sale of business investments 3.4 -- 50.5 -- 53.9 Proceeds from sales of options -- -- 39.1 -- 39.1 Business acquisitions, net of cash acquired (541.4) -- (2,245.1) -- (2,786.5) -------- -------- -------- -------- -------- Net Cash Used By Investing Activities (555.2) (3.0) (2,216.4) -- (2,774.6) Issuance of common stock 601.4 -- -- -- 601.4 Proceeds from issuance of long-term debt 3,805.0 -- -- -- 3,805.0 Principal payments on long- term debt (1,587.6) -- (517.9) -- (2,105.5) Increase (decrease) in short term debt (598.0) 1.5 564.5 -- (32.0) Fees paid for debt issuance and other securities (49.4) -- (27.4) -- (76.8) Change in intercompany accounts 25.9 (1,702.8) 1,676.9 -- -- Contributions paid to affiliates (2,217.4) (565.4) -- 2,782.8 -- Contributions received from affiliates -- 2,217.4 565.4 (2,782.8) -- Investment in accounts receivable securitization 10.3 -- -- -- 10.3 Dividends (5.9) -- -- -- (5.9) Other (0.8) -- (6.0) -- (6.8) -------- -------- -------- -------- -------- Net Cash Provided From (Used By) Financing Activities (16.5) (49.3) 2,255.5 -- 2,189.7 -------- -------- -------- -------- -------- Net Increase (Decrease) in Cash $ (443.1) $ 1.4 $ 42.4 $ -- $ (399.3) ======== ======== ======== ======== ======== -21- 11. SUBSEQUENT EVENTS During the month of July 1999, the Company entered into a new $450 million accounts receivable securitization agreement replacing the existing $150 million agreement. The facility maturity date is June 28, 2000. Proceeds of $300 million were used to repay borrowings under the Senior Credit Agreement's mulitcurrency revolving credit facility. The Company also made its final payment of $125.8 million, related to its purchase of Cooper Automotive during the month of July 1999. Additionally, during July 1999, the Company announced an agreement to sell its Italian auto parts distributor, Bertolotti Pietro & Figli S.r.I. to the Rhiag Group Ltd. The transaction is subject to regulatory approval and is expected to close by the end of 1999. The Bertolotti business had sales of approximately $50 million in 1998. During the month of August 1999, the Company announced its intent to acquire Sabo Industria e Comercio Ltda., a family owned business headquartered in Sao Paulo, Brazil. Sabo is a leader in gaskets, seals and hoses in South America and a leader in seals in Europe. Sabo employs approximately 3,000 people at its seven manufacturing facilities located in Brazil, Argentina, Germany, Hungary and Austria. Sabo has annual sales in excess of $180 million. The transaction is subject to regulatory and other approvals and is expected to close by the end of 1999. -22- Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations OVERVIEW Federal-Mogul is a leading global manufacturer and distributor of a broad range of vehicular components for automobiles and light trucks, heavy-duty trucks, farm and construction vehicles and industrial products. The Company manufactures engine bearings, sealing systems, fuel systems, lighting products, pistons, ignition, brake, friction and chassis products. The Company's principal customers include many of the world's major original equipment manufacturers of such vehicles and industrial products. The Company also manufactures and supplies its products and related parts to the aftermarket. THREE MONTHS ENDED JUNE 30, 1999 COMPARED TO THREE MONTHS ENDED JUNE 30, 1998 RESULTS OF OPERATIONS The Company's integrated operations are conducted under three operating units corresponding to major product areas: Powertrain Systems, Sealing Systems and General Products. The major product categories in Powertrain Systems include camshafts, sintered products, engine bearings, bushings, washers, large bearings, pistons, piston pins, ring liners and ignition products. Sealing Systems includes dynamic seals, and gaskets. General Products include brake and friction products, systems protection products, fuel systems components, wiper blades, lighting products and chassis products. Net Sales Net sales for the second quarter of 1999 were $1,687.1 million compared to $1,214.0 million in the same 1998 quarter. The 39% increase in net sales is primarily attributable to the acquisition of Cooper Automotive, the results of which were included from its date of acquisition. Powertrain Systems sales were $755 million for the second quarter of 1999 compared to $636 million for the same 1998 quarter. Sales increased 18.7% from 1998 to 1999 primarily due to the acquisition of Cooper Automotive. Excluding the impact of these and other acquisitions, sales decreased 2.7% due to the impact of foreign exchange rate fluctuations and lower aftermarket sales offset by higher North American original equipment sales. Sales in the aftermarket were impacted by an overall decrease in the engine parts market size due to improved original equipment quality. Sealing Systems sales were $319 million in the second quarter of 1999 compared to $303 million in the second quarter of 1998. Sales increased 5.2% from 1998 to 1999 primarily due to certain original equipment model volume increases, while aftermarket sales also increased slightly due to new business. General Products sales were $609 million in the second quarter of 1999 compared to $248 million in 1998. Sales increased 145% from 1998 to 1999 primarily due to the acquisition of Cooper Automotive. Excluding the impact of the Cooper Automotive acquisition and other acquisitions and dispositions, sales increased 1% primarily due to the impact of certain North American original equipment volume increases offset by the impact of foreign exchange rates and lower aftermarket sales. -23- Cost of Products Sold Cost of products sold as a percent of net sales decreased to 71.3% for the second quarter of 1999 from 73.8% for the same 1998 quarter. Management attributes this decrease to productivity improvements, cost controls, streamlined operations, the divestiture of underperforming assets and the T&N, Cooper Automotive and Fel-Pro acquisitions. Selling, General and Administrative Expenses Selling, general and administrative ("SG&A") expenses as percent of net sales decreased to 12.7% for the second quarter of 1999 compared to 14.8% for the second quarter of 1998. The decrease is primarily attributable to the benefits of prior restructuring actions and the realization of combined efficiencies from the T&N, Cooper Automotive and Fel-Pro acquisitions. Amortization Expense Amortization expense in the second quarter of 1999 was $31.1 million compared to $21.3 million for the second quarter of 1998. The increase in amortization expense was attributable to an increase in goodwill and other intangible assets associated with the Cooper Automotive and other smaller acquisitions. 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 in the second quarter of 1999 was $68.5 million compared to $56.3 million for the second quarter of 1998. The increase is attributable to a $38 million increase in interest expense related to the issuance of new debt financing for the Cooper Automotive acquisition, offset by reductions in interest expense of approximately $26 million as a result of the refinancing of existing debt. Net Gain on British Pound Currency Option and Forward Contract The Company recognized a net gain of $13.3 million in the first quarter of 1998 resulting from a loss of $17.3 million on the British pound currency option and a $30.6 million gain on the British pound forward contract as a result of favorable exchange fluctuations during the contract period. The Company entered into the above transactions to serve as economic hedges for the purchase of T&N. Such transactions, however, do not qualify for hedge accounting under U.S. GAAP, and therefore both the loss on the British pound currency option and the gain on the British pound forward contract are reflected in the consolidated statement of operations caption "Net gain on British pound currency option and forward contract." Income Tax Expense The differences in the effective tax rates from the statutory rate for the quarters ended June 30, 1999 and 1998 is primarily related to non-deductible goodwill and foreign tax rate differences. -24- Extraordinary Items As a result of certain financing transactions (see Liquidity and Capital Resources), the Company incurred extraordinary losses on the early retirement of debt of $23.1 million, net of related tax benefits of $13.4 million, for the six months ended June 30, 1999. Cumulative Effect of Change in Accounting In 1998, the American Institute of Certified Public Accountants issued Statement of Position (SOP) 98-5, Reporting the Costs of Start-Up Activities. SOP 98-5 was effective January 1, 1999 and requires that start-up costs capitalized prior to January 1, 1999 be written off and any future start-up costs be expensed as incurred. The Company adopted SOP 98-5 on January 1, 1999 and subsequently wrote off, as a cumulative effect of an accounting change, the unamortized balance of start-up costs totaling $12.7 million, net of applicable income tax benefits of $6.7 million, in the quarter ended March 31, 1999. ASBESTOS LIABILITY AND LEGAL PROCEEDINGS T&N Asbestos In the United States, the Company's United Kingdom subsidiary, T&N Ltd., and two of T&N's 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 to property damage litigation in the United States based upon asbestos products allegedly installed in buildings. 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 expenditure 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. As of June 30, 1999, T&N is one of a large number of defendants named in one pending property damage case. Provision has been made in the asbestos reserve for anticipated expenditures in relation to this case. In arriving at the provision, assumptions have been made regarding the total number of claims which it is anticipated may 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 and the timing of settlement and, in the United Kingdom, the level of subrogation claims brought by insurance companies. The T&N Companies have appointed the Center for Claims Resolution (CCR) as their exclusive representative in relation to all asbestos-related personal injury claims made against the T&N Companies in the United States. The CCR provides to its 19 member companies a litigation defense, claims-handling and -25- administration service in respect to United States asbestos-related disease claims. Pursuant to the CCR Producer Agreement, T&N 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. 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 amount 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 Company's reserve for claims filed after June 30, 1996 approximates 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. While management believes that reserves are appropriate for anticipated losses arising from T&N's asbestos-related claims, given the nature and complexity of the factors affecting the estimated liability, the actual liability may differ. No absolute assurances can be given that T&N 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 T&N Companies reserves will be reevaluated periodically as additional information becomes available. Federal-Mogul, Fel-Pro and Cooper Automotive Asbestos Litigation The Company also is one of a large number of defendants in a number of lawsuits brought by claimants alleging injury due to exposure to asbestos. Fel-Pro has been named as a defendant in a number of product liability cases involving asbestos, primarily involving gasket or packing products sold to ship owners. In addition, subsidiaries of Cooper Automotive have been named as defendants in a number of product liability cases involving asbestos, primarily involving friction products. The Company is defending all such claims vigorously and believes that it, Fel-Pro and the Cooper Automotive subsidiaries 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, Fel-Pro and the Cooper Automotive subsidiaries as of June 30, 1999, will not have a material effect on the Company's financial position. Asbestos Liability As of June 30, 1999, the Company has provided a net reserve of approximately $1.2 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 is in the process of completing its assessment of the asbestos liability and related insurance recoveries related to the Cooper Automotive acquisition. The Company believes its total net asbestos reserves in the aggregate are sufficient to cover the Company's exposure, although adjustments to the gross liability and related insurance recoveries could be made as a result of the current assessment. -26- LIQUIDITY AND CAPITAL RESOURCES Cash Flow Provided From Operating Activities Cash flow provided from operating activities of $225.5 million for the six months ended June 30, 1999 resulted primarily from net earnings plus depreciation and amortization. Additional cash flow was generated primarily from an increase in current liabilities and other of $77.8 million and accounts payable of $32.0 million along with decreases in inventories of $36.1 million. These additional cash flow items were more than offset by an increase in accounts receivable of $124.0 million in addition to payments related to restructuring/ rationalization reserves and asbestos of $62.1 million and $65.8 million, respectively. Cash Flow Used By Investing Activities Cash flow used by investing activities was $385.7 million. The Company used $239.4 million to fund business acquisitions in the six months ended June 30, 1999. Capital expenditures of $174.9 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 $169.5 million for the six months ended June 30, 1999, primarily arising from proceeds of $2,123.0 million from the issuance of long-term debt and $44.1 provided by the investment in accounts receivable securitization. This was offset primarily by principal payments on long-term debt of $1,959.9 million and fees of $25.5 million paid for debt issuance and other securities. On January 14, 1999, the Company issued $1.0 billion of bonds with maturities ranging from seven to ten years. A weighted average yield of 7.53% and a weighted average coupon of 7.45%. Proceeds were used to repay borrowings under the Senior Credit Agreements. On February 24, 1999, the Company entered into a new $1.75 billion Senior Credit Agreement at variable interest rates, which contains a $1.0 billion multicurrency revolving credit facility and two term loan components. The revolving credit facility has a five-year maturity. The term loan components of $400 million and $350 million mature in five and six years, respectively. The proceeds of this Senior Credit Agreement were used to refinance the prior Senior Credit Agreements entered into in connection with the T&N and Cooper Automotive acquisitions as well as the $400 million multicurrency revolving credit facility related to the T&N acquisition. Outlook Additional cash outflow for the remainder of 1999 is anticipated to fund the acquisition of Sabo Industria e Comerico Ltda. (see Subsequent Events) and an expected increase in asbestos payments to approximately $58 million per quarter, as the Company intends to pursue settlements very aggressively. These asbestos payments are expected to be approximately $144 million in 2000. The actual amount of asbestos payments made during the remainder of 1999 and 2000 may vary significantly from these estimates due to the nature and complexity of the factors affecting the cash payments. -27- Additional sources of cash for the remainder of 1999 are expected from additional proceeds of $300 million from the $450 million accounts receivable securitization agreement and the sale of Bertolotti Pietro & Figli S.r.l. (see Subsequent Events). 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 its cash and equivalents, its mulitcurrency revolving credit facility and other credit lines. During the remainder of 1999, management anticipates that working capital requirements will be funded with internally generated funds and previously mentioned credit facilities. OTHER MATTERS Year 2000 Costs The Year 2000 issue is the result of computer programs being written using two digits rather than four to define the applicable year. The Company has established a team that has completed an awareness program and assessment project to address the Year 2000 issue including information technology (IT) and non-IT systems. In addition, the Board of Directors has received status reports related to the Company's progress in addressing the Year 2000 issue. The Company has determined that it will be required to modify or replace portions of its software so that its computer systems will properly utilize dates beyond December 31, 1999. The Company has initiated remediation and testing, and is implementing the action plan to address the Year 2000 issue. Much of the testing has been completed as of June 30, 1999. The Company estimates that the remainder of the testing will be completed by the end of the third quarter of 1999. A number of independent third-party reviews have been performed and others are planned. The Company presently believes that with modifications to existing software and conversions to new software, the Year 2000 issue can be mitigated. However, if such modifications and conversions are not made, or are not completed in a timely manner, the Year 2000 issue could cause production interruptions that could have a material impact on the operations of the Company. The Company has completed development of contingency plans and will continue to refine these plans throughout the program. The Company has formally communicated with a substantial majority of its significant suppliers and large customers to determine their plans to address the Year 2000 issue. While the Company expects a successful resolution of all issues, there can be no guarantee that the systems of other companies on which the Company's systems rely will be converted in a timely manner, or that a failure to convert by a supplier or customer, or a conversion that is incompatible with the Company's systems, would not have a material adverse effect on the Company. The Company has determined it has no exposure to contingencies related to the Year 2000 issue for the products it has sold. The Company has contracts in place with external resources and has allocated internal resources to reprogram or replace, and test the hardware and software for Year 2000 modifications. The total cost of the Year 2000 project is estimated to be $20 million and is being funded through operating cash flows. Of the total project cost, approximately $7 million is attributable to the purchase of new hardware and software which will be capitalized. Maintenance and repair of existing systems to be expensed as incurred is expected to be approximately $13 million. As of June 30, 1999, the Company has incurred and expensed approximately $10 million and capitalized approximately $5.5 million. The costs of the project and the date which the Company plans to complete the Year 2000 modifications are based on management's best estimates, which were derived utilizing numerous assumptions of future events including the continued availability of certain resources, third-party modification plans and other factors. However, there can be no guarantee that these estimates will be achieved and actual results could differ materially from those plans. Specific factors that might cause such material differences include, but are not -28- limited to, the availability and cost of personnel trained in this area, the ability to locate and correct all relevant computer codes and similar uncertainties. Management of the Company believes it has an effective program in place to resolve the Year 2000 issue in a timely manner. As noted above, the Company has not yet completed all necessary phases of the Year 2000 program. In the event that the Company does not complete any additional phases, the Company would be unable to take customer orders, manufacture and ship products, invoice customers or collect payments. In addition, disruptions in the economy generally resulting from Year 2000 issues could also materially adversely affect the Company. The Company could be subject to litigation for computer systems product failure, for example, equipment shutdown or failure to properly date business records. The amount of potential liability and lost revenue cannot be reasonably estimated at this time. The Company has contingency plans for critical applications. These contingency plans involve, among other actions, manual workarounds, increasing inventories, and adjusting staffing strategies. 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 steering committee that is monitoring the business implications of conversion to the Euro, including the need to adapt internal systems to accommodate Euro-denominated transactions. The 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. Subsequent Events During the month of July 1999, the Company entered into a new $450 million accounts receivable securitization agreement replacing the existing $150 million agreement. The facility maturity date is June 28, 2000. Proceeds of $300 million were used to repay borrowings under the Senior Credit Agreement's mulitcurrency revolving credit facility. The Company also made its final payment of $125.8 million, related to its purchase of Cooper Automotive during the month of July 1999. Additionally, during July 1999 the Company announced an agreement to sell its Italian auto parts distributor, Bertolotti Pietro & Figli S.r.I. to the Rhiag Group Ltd. The transaction is subject to regulatory approval and is expected to close by the end of 1999. The Bertolotti business had sales of approximately $50 million in 1998. During the month of August 1999, the Company announced its intent to acquire Sabo Industria e Comercio Ltda., a family owned business headquartered in Sao Paulo, Brazil. Sabo is a leader in gaskets, seals and hoses in South America and a leader in seals in Europe. Sabo employs approximately 3,000 people at its seven manufacturing facilities located in Brazil, Argentina, Germany, Hungary and Austria. Sabo has annual sales in excess of $180 million. The transaction is subject to regulatory and other approvals and is expected to close by the end of 1999. -29- Item 3. Qualitative and Quantitative Disclosures About Market Risk On January 15, 1999, the Company issued $1 billion in public debt, which was used to refinance existing variable rate debt. The percentages of variable rate debt and fixed rate debt changed from 58% and 42%, respectively at December 31, 1998 to 36% and 64%, respectively at June 30, 1999. Other than the aforementioned, there have been no significant changes to the information presented in Item 7 (Market Risk) of the Company's Annual Report on Form 10-K for the year ended December 31, 1998. -30- PART II - OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders The Company held its Annual Meeting of Shareholders on April 21, 1999, at which time the shareholders considered and voted on (i) the election of eight directors, (ii) approval of the appointment of Ernst & Young as independent accountants for 1999, and (iii) approval of the Federal-Mogul EVA Incentive Compensation Plan. 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 54,402,099 3,536,013 R. M. Hills 54,365,063 3,573,049 P.S. Lewis 54,409,393 3,528,719 A. Madero 54,393,811 3,544,301 R.S. Miller, Jr. 54,367,889 3,570,223 J.C. Pope 54,365,201 3,572,911 R.A. Snell 54,409,825 3,528,287 G. Whalen 54,403,985 3,534,127 The appointment of Ernst & Young LLP as independent accountants for 1999 was approved, with 57,759,127 votes cast "For", 104,942 votes cast "Against" and 74,043 abstentions. The Federal-Mogul EVA Incentive Compensation Plan was approved with 56,852,979 votes cast "For", 755,013 votes cast "Against" and 330,120 abstentions. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits: *27 Financial Data Schedule (b) Reports on Form 8-K: None -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/ Thomas W. Ryan ------------------------------- Thomas W. Ryan Executive Vice President and Chief Financial Officer By: /s/ Kenneth P. Slaby ------------------------------ Kenneth P. Slaby Vice President and Controller, Chief Accounting Officer Dated: August 16, 1999 -32-