e10vq

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q


þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2005


o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 333-107219

UNITED COMPONENTS, INC.

(Exact Name of Registrant as Specified in Its Charter)


Delaware		04-3759857
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)


14601 Highway 41 North Evansville, Indiana (Address of Principal Executive Offices)		47725 (Zip Code)

(812) 867-4156

(Registrant’s Telephone Number, Including Area Code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes o No þ

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).

Yes o No þ

The registrant had 1,000 shares of its $0.01 par value common stock outstanding as of August 12, 2005.

United Components, Inc.

Index


Part I		FINANCIAL INFORMATION

Item 1.		Financial Statements (unaudited)
		Condensed consolidated balance sheets—June 30, 2005 and December 31, 2004
		Condensed consolidated income statements—Three and six months ended June 30, 2005 and 2004
		Condensed consolidated statements of cash flows—Six months ended June 30, 2005 and 2004
		Condensed consolidated statements of changes in shareholder’s equity—Six months ended June 30, 2005 and 2004
		Notes to condensed consolidated financial statements

Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations

Item 3.		Quantitative and Qualitative Disclosures About Market Risk

Item 4.		Controls and Procedures

Part II		OTHER INFORMATION

Item 1.		Legal Proceedings

Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds

Item 3.		Default Upon Senior Securities

Item 4.		Submission of Matters to Vote of Security Holders

Item 5.		Other Information

Item 6.		Exhibits

Signatures

Exhibits

FORWARD-LOOKING STATEMENTS

In this periodic report on Form 10-Q, United Components, Inc. makes some “forward-looking” statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933, as amended. These statements are included throughout this report on Form 10-Q and relate to analyses and other information based on forecasts of future results and estimates of amounts not yet determinable. These forward-looking statements are identified by their use of terms and phrases such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “predict,” “project,” “will,” “continue,” and other similar terms and phrases, including references to assumptions.

These forward-looking statements are based on the Company’s expectations and beliefs concerning future events affecting the Company. They are subject to uncertainties and factors relating to the Company’s operations and business environment, all of which are difficult to predict and many of which are beyond the Company’s control. Although we believe that the expectations reflected in our forward-looking statements are reasonable, we do not know whether our expectations will prove correct. They can be affected by inaccurate assumptions we make or by known or unknown risks and uncertainties. Many factors mentioned in our discussions in this report will be important in determining future results.

Although we believe the expectations reflected in our forward-looking statements are based upon reasonable assumptions, we can give no assurance that we will attain these expectations or that any deviations will not be material. Except as otherwise required by the Federal securities laws, we disclaim any obligation or undertaking to publicly release any updates or revisions to any forward-looking statement contained in this periodic report on Form 10-Q to reflect any change in our expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based.

PART I
FINANCIAL INFORMATION

Item 1. Financial Statements

United Components, Inc.

Condensed Consolidated Balance Sheets (unaudited)
(in thousands)


	June 30,			December 31,
	2005			2004
Assets

Current assets
Cash and cash equivalents	$	8,771		$	11,291
Accounts receivable, net		268,713			238,581
Inventories, net		182,794			188,212
Deferred tax assets		20,796			18,578
Other current assets		13,654			12,188

Total current assets		494,728			468,850

Property, plant and equipment, net		209,368			216,849
Goodwill		166,559			166,559
Other intangible assets, net		97,587			94,229
Deferred financing costs, net		6,823			7,686
Pension and other assets		12,558			12,772


Total assets	$	987,623		$	966,945


Liabilities and shareholder’s equity

Current liabilities
Accounts payable	$	113,460		$	91,505
Short-term borrowings		3,264			1,267
Current maturities of long-term debt		80			228
Accrued expenses and other current liabilities		73,422			67,808

Total current liabilities		190,226			160,808

Long-term debt, less current maturities		441,978			456,674
Pension and other postretirement liabilities		55,615			53,141
Deferred tax liabilities		6,386			6,430
Other liabilities		2,019			1,972
Contingencies – Note H		—			—

Total liabilities		696,224			679,025


Shareholder’s equity
Common stock		—			—
Additional paid in capital		263,720			263,120
Retained earnings		29,177			22,074
Accumulated other comprehensive income (loss)		(1,498	)		2,726

Total shareholder’s equity		291,399			287,920


Total liabilities and shareholder’s equity	$	987,623		$	966,945

The accompanying notes are an integral part of these statements.

United Components, Inc.

Condensed Consolidated Income Statements (unaudited)
(in thousands)


	Three Months ended June 30,						Six Months ended June 30,
	2005			2004			2005			2004
Net sales	$	269,285		$	273,952		$	514,791		$	530,763
Cost of sales		215,993			214,156			415,413			415,420

Gross profit		53,292			59,796			99,378			115,343

Operating expenses
Selling and warehousing		18,595			19,342			36,858			38,387
General and administrative		12,342			12,127			24,761			24,199
Amortization of intangible assets		1,532			1,851			3,064			3,702
Losses on abandonment of an operation (Note K)		2,182			—			2,182			—


Operating income		18,641			26,476			32,513			49,055

Other income (expense)
Interest expense, net		(8,850	)		(9,022	)		(17,622	)		(18,588	)
Management fee expense		(500	)		(500	)		(1,000	)		(1,000	)
Miscellaneous, net		(91	)		41			(143	)		126


Income before income taxes		9,200			16,995			13,748			29,593
Income tax expense		4,826			6,778			6,645			11,841


Net income	$	4,374		$	10,217		$	7,103		$	17,752

The accompanying notes are an integral part of these statements.

United Components, Inc.

Condensed Consolidated Statements of Cash Flows (unaudited)
(in thousands)


	Six Months ended June 30,
	2005			2004
Cash flows from operating activities:
Net income	$	7,103		$	17,752

Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		16,515			17,779
Amortization of intangible assets		3,064			3,702
Amortization of deferred financing costs and debt issuance costs		1,179			1,670
Deferred income taxes		(1,162	)		3,163
Other non-cash, net		(374	)		(301	)
Changes in operating assets and liabilities
Accounts receivable		(30,884	)		(38,889	)
Inventories		4,741			(6,510	)
Other current assets		(1,529	)		1,530
Accounts payable		21,955			27,496
Accrued expenses and other current liabilities		5,614			16,464
Other assets		214			2,150
Other liabilities		2,521			3,644


Net cash provided by operating activities		28,957			49,650


Cash flows from investing activities:
Final Acquisition purchase price payment		—			(8,000	)
Capital expenditures		(18,891	)		(17,165	)
Proceeds from sale of property, plant and equipment		211			184


Net cash used in investing activities		(18,680	)		(24,981	)


Cash flows from financing activities:
Issuances of debt		10,500			467
Debt repayments		(23,663	)		(40,134	)
Shareholder’s equity contribution		600			(28	)


Net cash used in financing activities		(12,563	)		(39,695	)


Effect of exchange rate changes on cash		(234	)		(27	)


Net decrease in cash and cash equivalents		(2,520	)		(15,053	)

Cash and cash equivalents at beginning of year		11,291			46,130


Cash and cash equivalents at end of period	$	8,771		$	31,077

The accompanying notes are an integral part of these statements.

United Components, Inc.

Condensed Consolidated Statements of Changes in Shareholder’s Equity (unaudited)
(in thousands)


									Accumulated
			Additional			Retained			Other			Total
	Common		Paid In			Earnings			Comprehensive			Shareholder’s			Comprehensive
	Stock		Capital			(Deficit)			Income (Loss)			Equity			Income
Balance at January 1, 2004	$	—	$	261,385		$	(8,755	)	$	1,460		$	254,090
Additions to paid in capital				(28	)								(28	)
Comprehensive income
Net income							17,752						17,752		$	17,752
Other comprehensive income
Interest rate swaps										(405	)		(405	)		(405	)
Foreign currency adjustment										499			499			499

Total comprehensive income															$	17,846


Balance at June 30, 2004	$	—	$	261,357		$	8,997		$	1,554		$	271,908


Balance at January 1, 2005	$	—	$	263,120		$	22,074		$	2,726		$	287,920
Additions to paid in capital				600									600
Comprehensive income
Net income							7,103						7,103		$	7,103
Other comprehensive income
Interest rate swaps										(279	)		(279	)		(279	)
Foreign currency adjustment										(3,945	)		(3,945	)		(3,945	)

Total comprehensive income															$	2,879


Balance at June 30, 2005	$	—	$	263,720		$	29,177		$	(1,498	)	$	291,399

The accompanying notes are an integral part of these statements.

United Components, Inc.

Notes to Condensed Consolidated Financial Statements (unaudited)

NOTE A — GENERAL AND BASIS OF FINANCIAL STATEMENT PRESENTATION

General

United Components, Inc. (“UCI”) is a wholly-owned subsidiary of UCI Acquisition Holdings, Inc. UCI Acquisition Holdings, Inc. and United Components, Inc. are corporations formed at the direction of The Carlyle Group. As of June 30, 2005, affiliates of The Carlyle Group own 98.6% of UCI Acquisition Holdings, Inc.’s common stock, and the remainder is owned by certain members of senior management and UCI’s Board of Directors.

On June 20, 2003, United Components, Inc. purchased, from UIS, Inc. and UIS Industries, Inc., their vehicle parts businesses. This acquisition is referred to in these notes to the financial statements as the “Acquisition”.

The Company operates in one business segment through its subsidiaries. The Company manufactures and distributes vehicle parts, primarily servicing the vehicle replacement parts market, in North America and Europe.

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements include the accounts of UCI and its subsidiaries. All significant intercompany accounts and transactions have been eliminated. In these notes to the financial statements, the term the “Company” refers to UCI and its subsidiaries.

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles for interim financial information and with the 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 accounting principles generally accepted in the United States for complete financial statements.

The December 31, 2004 consolidated balance sheet has been derived from the audited financial statements included in the Company’s annual report on Form 10-K for the year ended December 31, 2004. The financial statements at June 30, 2005 and for the three and six month periods ended June 30, 2005 and 2004 are unaudited. In the opinion of the Company, these financial statements include all adjustments necessary for a fair presentation of the financial position and results of operations for such periods. Such adjustments include normal recurring adjustments and, in the case of the income statement for the six months ended June 30, 2004, includes the effects of the preliminary allocation of the Acquisition purchase price. For all periods subsequent to March 31, 2004, the financial information presented in these financial statements and related notes reflects the final allocation of the Acquisition purchase price. The final allocation had no impact on previously reported results of operations.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions in determining the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of sales and expenses during the reporting period. The estimates and assumptions include estimates of the collectibility of accounts receivable and the realizability of inventory, goodwill and other intangible assets. They also include estimates of cost accruals, environmental liabilities, warranty and product returns, insurance reserves, income taxes, pensions and other postretirement benefits and other factors. Management has exercised reasonableness in deriving these estimates; however, actual results could differ from these estimates.

These financial statements should be read in conjunction with the financial statements and notes thereto included in the Company’s annual report on Form 10-K for the year ended December 31, 2004.

Operating results for the three and six months ended June 30, 2005 are not necessarily indicative of the results that may be expected for the year ended December 31, 2005.

United Components, Inc.

Notes to Condensed Consolidated Financial Statements (unaudited)

NOTE B — SALES OF RECEIVABLES

The Company has agreements to sell undivided interests in certain of its receivables to a factoring company, which in turn has the right to sell an undivided interest to a financial institution or other third party. The Company enters these agreements at its discretion when it determines that the cost of factoring is less than the cost of servicing its receivables with existing debt. Pursuant to these agreements, the Company sold $5.2 million and $10.3 million of receivables during the three and six months ended June 30, 2005, respectively, of which $5.2 million would otherwise have been outstanding at June 30, 2005. The Company retained no rights or interest and has no obligations with respect to the sold receivables. The Company does not service the receivables after the sales.

The sales of receivables were accounted for as a sale in accordance with SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.” The sold receivables were removed from the balance sheet at the time of sales. The costs of the sales were a 0.25% agent’s fee and a discount deducted by the factoring company, which is calculated based on LIBOR plus 1.5%. These costs were $64 thousand and $121 thousand in the three and six months ended June 30, 2005, respectively, and are recorded in the condensed consolidated income statements as miscellaneous, net.

NOTE C — INVENTORIES

The components of inventory are as follows (in thousands):


	June 30,			December 31,
	2005			2004
Raw materials	$	29,619		$	34,461
Work in process		51,583			49,376
Finished products		122,900			125,620
Valuation reserves		(21,308	)		(21,245	)

	$	182,794		$	188,212

NOTE D — ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

Accrued expenses and other current liabilities consists of the following (in thousands):


	June 30,		December 31,
	2005		2004
Salaries and wages	$	4,580	$	2,756
Bonuses		2,646		4,245
Vacation pay		6,594		5,721
Pension and other postretirement liabilities		3,769		4,039
Product returns		15,924		15,291
Rebates, credits and discounts due customers		8,585		6,475
Insurance		9,458		9,337
Interest		2,289		1,751
Taxes payable		4,159		4,081
Other		15,418		14,112

	$	73,422	$	67,808

United Components, Inc.

Notes to Condensed Consolidated Financial Statements (unaudited)

NOTE E — PRODUCT RETURNS LIABILITY

The product returns liability is included in accrued expenses and other current liabilities. It includes accruals for parts returned due to manufacturing defects and for certain parts returned because of customer excess quantities. The changes in the Company’s product returns liability are as follows (in thousands):


	Six Months ended June 30,
	2005			2004
Beginning of year	$	15,291		$	13,999
Returned parts expense		(18,740	)		(17,258	)
Additional loss provision		19,373			19,963

End of period	$	15,924		$	16,704

NOTE F — PENSION

The following are the components of net periodic pension expense (in thousands):


	Three Months ended June 30,						Six Months ended June 30,
	2005			2004			2005			2004
Service cost	$	2,347		$	2,034		$	4,564		$	4,069
Interest cost		3,224			2,947			6,448			5,894
Expected return on plan assets		(3,486	)		(3,358	)		(6,972	)		(6,753	)
Amortization of transition asset		6			—			12			—
Amortization of prior service cost		22			—			44			—
Amortization of unrecognized gain		10			—			20			—

	$	2,123		$	1,623		$	4,116		$	3,210

NOTE G — DEBT

On June 16, 2005, the Company entered into an amendment to the senior credit facility which permits the Company to repurchase from time to time up to $75 million in aggregate principal amount of the senior subordinated notes. As of June 30, 2005, there were no such repurchases.

In connection with the Company’s senior credit facilities, the Company had interest rate swap agreements which expired in August 2005. These agreements effectively converted $118 million of variable rate debt to fixed rate debt for the two years ended August 2005. On August 10, 2005, the Company entered into new interest rate swap agreements. These agreements effectively convert $80 million of variable rate debt to fixed rate debt for the two years ending August 2007, and $40 million for the 12-month period ending August 2008. The variable component of the interest rate on borrowings under the senior credit facilities is based on LIBOR. Under the swap agreements, the Company will pay 4.4%, and will receive the then current LIBOR, on $80 million through August 2007 and $40 million for the 12-month period ending August 2008.

United Components, Inc.

Notes to Condensed Consolidated Financial Statements (unaudited)

NOTE H — CONTINGENCIES

Environmental

The Company is subject to a variety of Federal, state, local and foreign environmental laws and regulations, including those governing the discharge of pollutants into the air or water, the management and disposal of hazardous substances or wastes and the cleanup of contaminated sites. The Company has been identified as a potentially responsible party for contamination at two sites. One of these sites is a former facility in Edison, New Jersey, where a state agency has ordered the Company to continue with the monitoring and investigation of chlorinated solvent contamination. The Company has informed the agency that this contamination was caused by another party at a neighboring facility and has initiated a lawsuit against that party for damages and to compel it to take responsibility for any further investigation or remediation. The second site is a previously owned site in Solano County, California, where the Company, at the request of the regional water board, is investigating and analyzing the nature and extent of the contamination and is conducting some remediation. Based on currently available information, management believes that the cost of the ultimate outcome of these environmental matters will not exceed the $3.1 million accrued at June 30, 2005 by a material amount, if at all. However, because all investigation and analysis has not yet been completed and because of the inherent uncertainty in such environmental matters, it is reasonably possible that the ultimate outcome of these matters could have a material adverse effect on results for a single quarter.

Litigation

The Company is subject to various other contingencies, including routine legal proceedings and claims arising out of the normal course of business. These proceedings primarily involve commercial claims, product liability claims, personal injury claims and workers’ compensation claims. The outcome of these lawsuits, legal proceedings and claims cannot be predicted with certainty. Nevertheless, the Company believes that the outcome of any currently existing proceedings, even if determined adversely, would not have a material adverse effect on financial condition or results of operations.

NOTE I — GEOGRAPHIC INFORMATION

The Company had the following net sales by country (in thousands):


	Three Months ended June 30,				Six Months ended June 30,
	2005		2004		2005		2004
United States	$	218,029	$	227,913	$	415,895	$	437,550
Canada		8,581		9,208		16,411		17,500
United Kingdom		10,397		10,679		20,199		20,909
Mexico		7,643		6,435		13,804		13,550
Germany		3,479		3,155		7,571		6,845
Spain		1,080		988		2,144		1,962
Belgium		1,956		1,660		3,830		3,654
France		2,934		1,029		5,799		4,053
Sweden		1,680		1,545		3,383		3,113
Other		13,506		11,340		25,755		21,627

	$	269,285	$	273,952	$	514,791	$	530,763

United Components, Inc.

Notes to Condensed Consolidated Financial Statements (unaudited)

Net long-lived assets by country are as follows (in thousands):


	June 30,		December 31,
	2005		2004
United States	$	271,660	$	268,947
United Kingdom		36,660		43,932
Mexico		13,707		13,708
Spain		3,764		4,366
Canada		545		583
Goodwill		166,559		166,559

	$	492,895	$	498,095

NOTE J — STOCK OPTIONS

The Company has adopted the disclosure only provisions of SFAS 123, “Accounting for Stock-Based Compensation”. Accordingly, stock options are accounted for by the “intrinsic-value-method” of APB Opinion No. 25, “Accounting for Stock Issued to Employees”. Had the compensation cost of the stock option plan been applied using the fair-value-based method at the grant date, rather than the intrinsic-value method of accounting, the pro forma amounts would be as follows (in millions):


	Three Months ended June 30,				Six Months ended June 30,
	2005		2004		2005		2004
Net income as reported	$	4.4	$	10.2	$	7.1	$	17.8
Pro forma stock-based compensation expense, net of tax		0.3		0.5		0.7		1.0

Pro forma net income	$	4.1	$	9.7	$	6.4	$	16.8

Pro forma disclosures for stock option accounting may not be representative of the effects on reported net income in future periods.

NOTE K — ABANDONMENT OF AN OPERATION

Airtex Products Ltd. (“Airtex UK”) is an indirect wholly-owned subsidiary of the Company with operations in the United Kingdom. During the second quarter of 2005, the largest customer of Airtex UK became insolvent and ceased operations, resulting in the loss of more than 50% of the revenue of Airtex UK.

As a result of this situation, the Company has decided to cease additional funding of the operations of Airtex UK. The Company has entered into a non-binding term sheet to sell Airtex UK to a newly incorporated English company owned by the existing management of Airtex UK, and a definitive agreement for the sale is under negotiation. Under the term sheet, for the purchase price of £1, the new entity would purchase the entire issued share capital of Airtex UK and assume substantially all of its liabilities. The Company expects this transaction to be completed during the third quarter of 2005.

United Components, Inc.

Notes to Condensed Consolidated Financial Statements (unaudited)

There can be no assurance that the Company will be able to complete the sale of Airtex UK as described above, if at all. In the event that the transaction is not completed, Airtex UK is expected to become subject to an administration proceeding under the insolvency laws of the United Kingdom.

In June 2005, the Company recorded a pre-tax non-cash charge of $2.2 million for the impairment of certain assets of Airtex UK. If the Company completes the aforementioned sale of Airtex UK, the Company expects to record additional pre-tax charges of approximately $0.5 million in the second half of 2005 for future losses that the Company is expected to incur as a result of the abandonment of Airtex UK. If the sale is not completed and if Airtex UK becomes subject to an administration proceeding, the Company expects to record additional pre-tax charges of approximately $1.3 million in the second half of 2005. The future charges expected in the second half of 2005 will result in the use of cash.

Sales of Airtex UK, which were included in the Company’s consolidated results of the years ended December 31, 2004 and 2003 and for the six months ended June 30, 2005 and 2004, were $7.5 million, $8.4 million, $3.4 million and $4.2 million, respectively. Pre-tax income (losses), which were included in the Company’s consolidated results for the same four periods, were $(0.2) million, $1.0 million, $(0.7) million and $0.1 million, respectively.

NOTE L — INCOME TAXES

Income tax expense as a percentage of income before taxes was 48.3% in the first half of 2005 compared to 40.0% in the first half of 2004 and 52.5% in the second quarter of 2005 compared to 39.9% in the 2004 quarter. The higher percentages in 2005 were primarily because the Company did not record any tax benefit on the $2.2 million losses on abandonment of an operation. Tax benefit was not recorded on these losses because realizing such benefit is not probable.

NOTE M — NEW ACCOUNTING PRONOUNCEMENTS

In June 2005, the FASB issued FASB Staff Position No. 143-1 (“FSP 143-1”), “Accounting for Electronic Equipment Waste Obligations.” FSP 143-1 provides direction for the application of SFAS No. 143, “Accounting for Asset Retirement Obligations,” as it relates to European Union Directive 2002/96/EC. This European Union Directive, among other things, defines the parties who are financially responsible for the proper disposal of certain electronic and electric appliances and equipment. FSP 143-1 is effective June 2005. The implementation of FSP 143-1 had an immaterial effect on the Company’s financial statements.

In December 2004, SFAS No. 123R, “Share-Based Payment” was issued. SFAS No. 123R requires the measurement of share-based payments to employees using a fair-value-based method and the recording of such expense in the income statement. The accounting provisions of SFAS No. 123R are effective for reporting periods beginning after December 15, 2005 and are to be applied prospectively. Also, in March 2005, the Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin 107 (“SAB 107”). SAB 107 provides clarification on the implementation of SFAS No. 123R and the relationship of SFAS No. 123R to certain SEC rules and regulations. The pro forma disclosures previously permitted under SFAS No. 123 will no longer be an alternative to financial statement recognition. See Note J for the pro forma net income as if the Company had used a fair-value-based method, similar to the methods required under SFAS No.123R, to measure compensation expense. Had SFAS No. 123R been applied in the periods disclosed, the impact would have been similar to those pro forma amounts. The future impact is dependent upon if and when additional options are granted or expire, as well as the vesting period of such options.

United Components, Inc.

Notes to Condensed Consolidated Financial Statements (unaudited)

In December 2004, the FASB issued SFAS No. 151, “Inventory Costs.” SFAS No. 151 primarily clarifies the accounting for inventory when there are abnormal amounts of idle facility expense, freight, handling costs and wasted materials. Under existing guidelines, items such as idle facility expense, excessive spoilage and re-handling costs may be ‘so abnormal’ as to require treatment as current period charges rather than recorded adjustments to the value of inventory. SFAS No. 151 requires that such items be recognized as current period charges regardless of whether they meet the ‘so abnormal’ criteria. The accounting provisions of SFAS No. 151 are to be applied prospectively and are effective for inventory costs incurred during fiscal years beginning after June 15, 2005. The Company does not expect SFAS No. 151 to have a material effect on its financial statements.

In December 2004, the FASB issued FASB Staff Position No. 109-1 (“FSP 109-1”), “Application of SFAS No. 109, “Accounting for Income Taxes,” to the Tax Deduction on Qualified Production Activities Provided by the American Jobs Creation Act of 2004.” FSP 109-1 states that the tax deduction of qualified domestic production activities, which is provided by the American Jobs Creation Act of 2004 (the “Jobs Act”), will be treated as a special deduction as described in SFAS No. 109. Consequently, the impact of the deduction, which was effective January 1, 2005, will be reported in the period in which the deduction is claimed on the Company’s income tax returns. The effect of FSP 109-1 is expected to be less than $0.3 million for the year ended December 31, 2005.

In December 2004, the FASB issued FASB Staff Position No. 109-2 (“FSP 109-2”), “Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004.” FSP 109-2 provides accounting and disclosure guidance related to the Jobs Act provision for the limited time 85% dividends received deduction on the repatriation of certain foreign earnings. Although adoption is effective immediately, FSP 109-2 states that a company is allowed time beyond the financial reporting period to evaluate the effects of the Jobs Act on its plan for reinvestment or repatriation of foreign earnings. The Company is evaluating the impact of the repatriation provisions of the Jobs Act and will complete its review by December 31, 2005. These provisions are not expected to have a material impact on the Company’s financial statements. Accordingly, as provided for in FSP 109-2, the Company has not adjusted its tax expense or net deferred tax assets to reflect the repatriation provisions of the Jobs Act.

In March 2005, the FASB issued FASB Interpretation No. 47 (“FIN 47”), “Accounting for Conditional Asset Retirement Obligations.” FIN 47 clarifies that a company must record a liability for a “conditional” asset retirement obligation if the fair value of the obligation can be reasonably estimated. FIN 47 is effective no later than the end of fiscal years ending after December 15, 2005. The Company does not expect FIN 47 to have a material effect on its financial statements.

NOTE N — OTHER INFORMATION

At June 30, 2005, 1,000 shares of common stock were authorized, issued and outstanding. The par value of each share of common stock is $0.01 per share.

Cash payments for interest and income taxes (net of refunds) are as follows (in thousands):


	Three Months ended June 30,				Six Months ended June 30,
	2005		2004		2005		2004
Interest	$	14,184	$	11,902	$	17,140	$	15,837
Income taxes (net of refunds)		4,600		656		9,309		2,555

United Components, Inc.

Notes to Condensed Consolidated Financial Statements (unaudited)

NOTE O — GUARANTOR AND NON-GUARANTOR FINANCIAL STATEMENTS

The senior credit facilities are secured by substantially all the assets of the Company. The senior subordinated notes (the “Notes”) are unsecured and rank equally in right of payment with any of the Company’s future senior subordinated indebtedness. The Notes are subordinated to indebtedness and other liabilities of UCI’s subsidiaries that are not guarantors of the Notes. The Notes and borrowings under the senior credit facilities are guaranteed on a full and unconditional and joint and several basis by UCI’s domestic subsidiaries.

The information, which follows in this Note O, includes condensed financial statements for (a) UCI, which is the issuer of the Notes and borrower under the senior credit facilities, (b) the domestic subsidiaries, which guarantee the Notes and borrowings under the senior credit facilities (the “Guarantors”), (c) the foreign subsidiaries (the “Non-Guarantors”), and (d) consolidated UCI. Also included are consolidating entries, which principally consist of eliminations of investments in consolidated subsidiaries and intercompany balances and transactions. All goodwill is included in UCI’s balance sheet.

The condensed balance sheets at June 30, 2005 and December 31, 2004 and the condensed income statements for the 2005 periods, which follow in this Note O, include the final allocation of the Acquisition purchase price. The amounts included in the condensed income statements for the 2004 period prior to March 31, 2004 are based on preliminary estimates of the fair value of assets acquired and liabilities assumed.

Separate financial statements of the Guarantor subsidiaries are not presented because their guarantees are full and unconditional and joint and several, and the Company thinks separate financial statements and other disclosure regarding the Guarantor subsidiaries are not material to investors.

United Components, Inc.

Notes to Condensed Consolidated Financial Statements (unaudited)

Consolidating Condensed Balance Sheet
June 30, 2005
(in thousands)


	UCI											Non-
	Consolidated		Eliminations			UCI			Guarantors			Guarantors
Assets

Current assets
Cash and cash equivalents	$	8,771	$	—		$	—		$	1,688		$	7,083
Accounts receivable, net		268,713		—			—			242,545			26,168
Inventories, net		182,794		—			—			166,941			15,853
Deferred tax assets		20,796		—			(71	)		19,830			1,037
Other current assets		13,654		—			1,317			5,148			7,189

Total current assets		494,728		—			1,246			436,152			57,330

Property, plant and equipment, net		209,368		—			833			158,030			50,505
Intercompany receivables		—		(85,506	)		710			83,051			1,745
Intercompany notes receivable		—		(482,000	)		482,000			—			—
Investment in subsidiaries		—		(157,342	)		149,769			7,573			—
Goodwill		166,559		—			166,559			—			—
Other intangible assets, net		97,587		—			14,088			81,078			2,421
Deferred financing costs, net		6,823		—			6,823			—			—
Pension and other assets		12,558		—			305			12,088			165


Total assets	$	987,623	$	(724,848	)	$	822,333		$	777,972		$	112,166


Liabilities and shareholder’s equity

Current liabilities
Accounts payable	$	113,460	$	—		$	6,651		$	90,332		$	16,477
Short-term borrowings		3,264		—			2,500			—			764
Current maturities of long-term debt		80		—			—			—			80
Accrued expenses and other current liabilities		73,422		—			2,432			62,285			8,705

Total current liabilities		190,226		—			11,583			152,617			26,026

Long-term debt, less current maturities		441,978		—			441,957			—			21
Pension and other postretirement liabilities		55,615		—			—			39,331			16,284
Deferred tax liabilities		6,386		—			8,993			(1,022	)		(1,585	)
Other liabilities		2,019		—			—			2,019			—
Intercompany payables		—		(85,506	)		68,401			1,465			15,640
Intercompany notes payable		—		(482,000	)		—			462,000			20,000


Total shareholder’s equity		291,399		(157,342	)		291,399			121,562			35,780


Total liabilities and shareholder’s equity	$	987,623	$	(724,848	)	$	822,333		$	777,972		$	112,166

United Components, Inc.

Notes to Condensed Consolidated Financial Statements (unaudited)

Consolidating Condensed Balance Sheet
December 31, 2004
(in thousands)


	UCI											Non-
	Consolidated		Eliminations			UCI			Guarantors			Guarantors
Assets

Current assets
Cash and cash equivalents	$	11,291	$	—		$	3,916		$	2,114		$	5,261
Accounts receivable, net		238,581		—			—			215,425			23,156
Inventories, net		188,212		—			—			169,664			18,548
Deferred tax assets		18,578		—			(250	)		17,825			1,003
Other current assets		12,188		—			2,123			3,670			6,395

Total current assets		468,850		—			5,789			408,698			54,363

Property, plant and equipment, net		216,849		—			604			160,907			55,338
Intercompany receivables		—		(58,212	)		—			58,212			—
Intercompany notes receivable		—		(482,000	)		482,000			—			—
Investment in subsidiaries		—		(146,288	)		135,414			10,874			—
Goodwill		166,559		—			166,559			—			—
Other intangible assets, net		94,229		—			7,738			84,068			2,423
Deferred financing costs, net		7,686		—			7,686			—			—
Pension and other assets		12,772		—			272			12,325			175


Total assets	$	966,945	$	(686,500	)	$	806,062		$	735,084		$	112,299


Liabilities and shareholder’s equity

Current liabilities
Accounts payable	$	91,505	$	—		$	4,020		$	72,678		$	14,807
Short-term borrowings		1,267		—			500			—			767
Current maturities of long-term debt		228		—			—			—			228
Accrued expenses and other current liabilities		67,808		—			3,811			56,423			7,574

Total current liabilities		160,808		—			8,331			129,101			23,376

Long-term debt, less current maturities		456,674		—			456,641			—			33
Pension and other postretirement liabilities		53,141		—			—			35,911			17,230
Deferred tax liabilities		6,430		—			6,824			(40	)		(354	)
Other liabilities		1,972		—			—			1,972			—
Intercompany payables		—		(58,212	)		46,346			—			11,866
Intercompany notes payable		—		(482,000	)		—			462,000			20,000

Total shareholder’s equity		287,920		(146,288	)		287,920			106,140			40,148


Total liabilities and shareholder’s equity	$	966,945	$	(686,500	)	$	806,062		$	735,084		$	112,299

United Components, Inc.

Notes to Condensed Consolidated Financial Statements (unaudited)

Consolidating Condensed Income Statement
Three Months Ended June 30, 2005
(in thousands)


	UCI												Non-
	Consolidated			Eliminations			UCI			Guarantors			Guarantors
Net sales	$	269,285		$	(3,284	)	$	—		$	238,258		$	34,311
Cost of sales		215,993			(3,284	)		—			190,322			28,955

Gross profit		53,292			—			—			47,936			5,356

Operating expenses
Selling and warehousing		18,595			—			—			16,522			2,073
General and administrative		12,342			—			2,962			5,581			3,799
Amortization of intangible assets		1,532			—			—			1,532			—
Losses on abandonment of an operation		2,182			—			—			—			2,182

Operating income (loss)		18,641						(2,962	)		24,301			(2,698	)

Other income (expense)
Interest expense, net		(8,850	)		—			(8,980	)		51			79
Intercompany interest		—			—			9,690			(9,196	)		(494	)
Management fee expense		(500	)		—			(500	)		—			—
Miscellaneous, net		(91	)		—			—			43			(134	)


Income (loss) before income taxes		9,200			—			(2,752	)		15,199			(3,247	)
Income tax expense (benefit)		4,826			—			(985	)		6,202			(391	)


Increase (decrease) before equity in earnings of subsidiaries		4,374			—			(1,767	)		8,997			(2,856	)

Equity in earnings of subsidiaries		—			(4,012	)		6,141			(2,129	)		—


Net income	$	4,374		$	(4,012	)	$	4,374		$	6,868		$	(2,856	)

United Components, Inc.

Notes to Condensed Consolidated Financial Statements (unaudited)

Consolidating Condensed Income Statement
Three Months Ended June 30, 2004
(in thousands)


	UCI												Non-
	Consolidated			Eliminations			UCI			Guarantors			Guarantors
Net sales	$	273,952		$	(3,718	)	$	—		$	245,791		$	31,879
Cost of sales		214,156			(3,718	)		—			191,508			26,366

Gross profit		59,796			—			—			54,283			5,513

Operating expenses
Selling and warehousing		19,342			—			—			17,526			1,816
General and administrative		12,127			—			2,563			6,719			2,845
Amortization of intangible assets		1,851			—			—			1,851			—

Operating income (loss)		26,476			—			(2,563	)		28,187			852

Other income (expense)
Interest expense, net		(9,022	)		—			(9,050	)		86			(58	)
Management fee expense		(500	)		—			(500	)		—			—
Miscellaneous, net		41			—			—			68			(27	)


Income (loss) before income taxes		16,995			—			(12,113	)		28,341			767
Income tax expense (benefit)		6,778			—			(4,769	)		10,902			645


Increase (decrease) before equity in earnings of subsidiaries		10,217			—			(7,344	)		17,439			122

Equity in earnings of subsidiaries		—			(16,546	)		17,561			(1,015	)		—


Net income	$	10,217		$	(16,546	)	$	10,217		$	16,424		$	122

United Components, Inc.

Notes to Condensed Consolidated Financial Statements (unaudited)

Consolidating Condensed Income Statement
Six Months Ended June 30, 2005
(in thousands)


	UCI												Non-
	Consolidated			Eliminations			UCI			Guarantors			Guarantors
Net sales	$	514,791		$	(6,556	)	$	—		$	452,908		$	68,439
Cost of sales		415,413			(6,556	)		—			365,755			56,214

Gross profit		99,378			—			—			87,153			12,225

Operating expenses
Selling and warehousing		36,858			—			—			32,883			3,975
General and administrative		24,761			—			6,669			11,242			6,850
Amortization of intangible assets		3,064			—			—			3,064			—
Losses on abandonment of an operation		2,182			—			—			—			2,182

Operating income (loss)		32,513			—			(6,669	)		39,964			(782	)

Other income (expense)
Interest expense, net		(17,622	)		—			(17,739	)		53			64
Intercompany interest		—			—			18,764			(17,763	)		(1,001	)
Management fee expense		(1,000	)		—			(1,000	)		—			—
Miscellaneous, net		(143	)		—			—			162			(305	)


Income (loss) before income taxes		13,748			—			(6,644	)		22,416			(2,024	)
Income tax expense (benefit)		6,645			—			(2,458	)		9,066			37


Increase (decrease) before equity in earnings of subsidiaries		7,103			—			(4,186	)		13,350			(2,061	)

Equity in earnings of subsidiaries		—			(8,480	)		11,289			(2,809	)		—


Net income	$	7,103		$	(8,480	)	$	7,103		$	10,541		$	(2,061	)

United Components, Inc.

Notes to Condensed Consolidated Financial Statements (unaudited)

Consolidating Condensed Income Statement
Six Months Ended June 30, 2004
(in thousands)


	UCI												Non-
	Consolidated			Eliminations			UCI			Guarantors			Guarantors
Net sales	$	530,763		$	(7,741	)	$	—		$	473,333		$	65,171
Cost of sales		415,420			(7,741	)		—			370,130			53,031

Gross profit		115,343			—			—			103,203			12,140

Operating expenses
Selling and warehousing		38,387			—			—			34,696			3,691
General and administrative		24,199			—			5,154			13,322			5,723
Amortization of intangible assets		3,702			—			—			3,702			—


Operating income (loss)		49,055			—			(5,154	)		51,483			2,726
Other income (expense)
Interest expense, net		(18,588	)		—			(18,663	)		182			(107	)
Management fee expense		(1,000	)		—			(1,000	)		—			—
Miscellaneous, net		126			—			—			69			57


Income (loss) before income taxes		29,593			—			(24,817	)		51,734			2,676
Income tax expense (benefit)		11,841			—			(9,751	)		20,205			1,387


Increase (decrease) before equity in earnings of subsidiaries		17,752			—			(15,066	)		31,529			1,289

Equity in earnings of subsidiaries		—			(31,366	)		32,818			(1,452	)		—


Net income	$	17,752		$	(31,366	)	$	17,752		$	30,077		$	1,289

United Components, Inc.

Notes to Condensed Consolidated Financial Statements (unaudited)

Consolidating Condensed Statement of Cash Flows
Six Months Ended June 30, 2005
(in thousands)


	UCI											Non-
	Consolidated			Eliminations		UCI			Guarantors			Guarantors
Net cash provided by operating activities	$	28,957		$	—	$	15,177		$	8,811		$	4,969


Cash flows from investing activities:
Capital expenditures		(18,891	)		—		(6,693	)		(9,298	)		(2,900	)
Proceeds from sale of property, plant and equipment		211			—		—			61			150


Net cash used in investing activities		(18,680	)		—		(6,693	)		(9,237	)		(2,750	)


Cash flows from financing activities:
Issuances of debt		10,500			—		10,500			—			—
Debt repayments		(23,663	)		—		(23,500	)		—			(163	)
Shareholder’s equity contribution		600			—		600			—			—


Net cash used in financing activities		(12,563	)		—		(12,400	)		—			(163	)


Effect of exchange rate changes on cash		(234	)		—		—			—			(234	)


Net increase (decrease) in cash and cash equivalents		(2,520	)		—		(3,916	)		(426	)		1,822

Cash and cash equivalents at beginning of year		11,291			—		3,916			2,114			5,261


Cash and cash equivalents at end of period	$	8,771		$	—	$	—		$	1,688		$	7,083

United Components, Inc.

Notes to Condensed Consolidated Financial Statements (unaudited)

Consolidating Condensed Statement of Cash Flows
Six Months Ended June 30, 2004
(in thousands)


	UCI											Non-
	Consolidated			Eliminations		UCI			Guarantors			Guarantors
Net cash provided by operating activities	$	49,650		$	—	$	38,943		$	9,194		$	1,513


Cash flows from investing activities:
Final Acquisition purchase price payment		(8,000	)		—		(8,000	)		—			—
Capital expenditures		(17,165	)		—		(110	)		(13,772	)		(3,283	)
Proceeds from sale of property, plant and equipment		184			—		—			80			104


Net cash used in investing activities		(24,981	)		—		(8,110	)		(13,692	)		(3,179	)


Cash flows from financing activities:
Issuances of debt		467			—		—			—			467
Debt repayments		(40,134	)		—		(40,000	)		—			(134	)
Other		(28	)		—		(28	)		—			—


Net cash provided by (used in) financing activities		(39,695	)		—		(40,028	)		—			333


Effect of exchange rate changes on cash		(27	)		—		—			—			(27	)


Net decrease in cash and cash equivalents		(15,053	)		—		(9,195	)		(4,498	)		(1,360	)

Cash and cash equivalents at beginning of year		46,130			—		33,164			4,448			8,518


Cash and cash equivalents at end of period	$	31,077		$	—	$	23,969		$	(50	)	$	7,158

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

Sales. We are among North America’s largest and most diversified companies servicing the vehicle replacement parts market, or the aftermarket. We supply a broad range of filtration products, fuel and cooling systems, engine management systems, driveline components and lighting systems to the automotive, trucking, marine, mining, construction, agricultural and industrial vehicle markets. We estimate that about 77% of our net sales in 2004 were made in the aftermarket, to a customer base that includes some of the largest and fastest growing companies servicing the aftermarket. The aftermarket has grown at an annual rate of approximately 3.7% from 1994 through 2003. We believe it will continue to grow, at least in the near term. We believe we are well positioned to participate in that growth.

We believe we have leading market positions in our primary product lines. We continue to expand our product and service offerings to meet the needs of our customers, and we believe that, with over 60,000 parts, we offer one of the most comprehensive lines of products in the vehicle replacement parts market. We believe our breadth of product offering is a key competitive advantage. This product breadth, along with our extensive manufacturing and distribution capabilities, product innovation, and reputation for quality and service, makes us a leader in our market.

Because most of our sales are to the aftermarket, we believe that our sales are primarily driven by the number of vehicles on the road, the average age of those vehicles, the average number of miles driven per year, the mix of light trucks to passenger cars and the relative strength of our sales channels. Historically, our sales have not been materially adversely affected by market cyclicality, as we believe that our aftermarket sales are less dependent on economic conditions than our sales to original equipment manufacturers (“OEMs”), due to the non-discretionary nature of vehicle maintenance and repair.

However, it is also important to note that in 2004, 22% and in 2003, 23% of our total net sales were derived from our business with AutoZone, and our failure to maintain a healthy relationship with AutoZone stores would result in a significant decrease in our net sales. Even if we maintain our relationship, this sales concentration with one customer increases the potential impact to our business that could result from any changes in the economic terms of this relationship. In the first quarter of 2005, we transitioned one product line to an AutoZone program called Pay-on-Scan. Under this program, we retain title to the product at AutoZone locations, and we record sales for the product when an AutoZone customer purchases it. As part of this transition, we bought back an immaterial amount of our products from AutoZone and will resell the product to AutoZone under the Pay-on-Scan program. We do not expect the transition to the Pay-on-Scan program for this product line to have a material impact on our financial condition or results of operations. We currently have no agreement to expand the Pay-on-Scan program beyond the single product line. AutoZone may in the future, however, request that we transition additional products to the Pay-on-Scan program. Any such transition or other change in the terms of sale to this customer could result in, among other things, an increase in the time it takes for us to record sales or collect on receivables, which could have a material impact on our financial condition or results of operations. AutoZone has publicly announced its intent to transition a significant percentage of its purchases from suppliers to the Pay-on-Scan program.

Cost of Sales. Cost of sales includes all costs of manufacturing required to bring a product to a ready-for-sale condition. Such costs include direct and indirect materials (net of vendor consideration), direct and indirect labor costs, including fringe benefits, supplies, utilities, freight, depreciation, insurance, pension and postretirement benefits, information technology costs and other costs. Cost of sales also includes all costs to procure, package and ship products that we purchase and resell. The two largest components of our cost of sales are steel and labor.

Since early in 2004, global demand for steel has been high and has resulted in supplier-imposed price increases and/or surcharges for this raw material. While we have been, and expect to continue to be, able to obtain sufficient quantities to satisfy our needs, we have been required to pay significantly higher prices for the material. The Company has implemented price increases on certain products with high steel content and is considering the implementation of additional price increases on these products. Existing price increases, as well as any future increases, have not been and may not be sufficient to offset all of the steel cost increases. The higher cost of steel, net of the Company’s price increases, adversely affected pretax income by approximately $3.0 million in 2004, compared to steel prices as of the end of 2003. The higher cost of steel, net of the Company’s price increases, has also resulted in lower pretax income in 2005, compared to 2004. For the three and six months ended June 30, 2005, the adverse effects, compared to the same 2004 periods, were approximately $2.6 million and $3.9 million, respectively. The adverse effect for the full year of 2005, compared to the full year 2004, is forecasted to be in the range of $3 million to $5 million. This forecast is based on assumptions regarding the future cost of steel and the Company’s ability to increase selling prices on products with high steel content. Actual events could vary significantly from the Company’s assumptions. Consequently, the actual effect of higher steel costs could be significantly different than the Company’s forecast.

Selling and Warehousing Expenses. Selling and warehousing expenses primarily include sales and marketing, warehousing and distribution costs. Our major cost elements include salaries and wages, pension and fringe benefits, depreciation, advertising and information technology costs.

Management intends to leverage the fixed portion of sales and warehousing as sales increase. Consequently, management thinks that selling and warehousing expense as a percentage of sales is a key measure and is working to reduce this percentage.

General and Administrative Expenses. General and administrative expenses primarily include executive, accounting and administrative personnel salaries and fringe benefits, professional fees, pension benefits, insurance, provision for doubtful accounts, rent and information technology costs.

Critical Accounting Policies and Estimates

The methods, estimates and judgments we use in applying our most critical accounting policies have a significant impact on the results we report in our financial statements. We evaluate our estimates and judgments on an on-going basis. We base our estimates on historical experience and on assumptions that we believe to be reasonable under the circumstances. Our experience and assumptions form the basis for our judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may vary from what we anticipate, and different assumptions or estimates about the future could change our reported results.

We believe the following accounting policies are the most critical in that they significantly affect our financial statements, and they require our most significant estimates and complex judgments.

Accounts receivable. We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. These allowances are based on a combination of an aging analysis and our analyses of our history of write-offs. In addition, we evaluate allowance requirements on a more specific basis in the event that the financial condition of a particular customer were to deteriorate.

Inventory. We record inventory at the lower of cost or market. Cost is determined using standard cost, which approximates the first-in, first-out (FIFO) method. Estimated market value is based on assumptions for future demand and related pricing. If actual market conditions are less favorable than those projected by management, reductions in the value of inventory may be required.

Revenue recognition. We record sales when title transfers to the customer. Where we have sales rebate programs with some of our customers, we estimate amounts due under these sales rebate programs when the sale is recognized. Net sales relating to any particular shipment are based upon the amount invoiced for the shipped goods less estimated future rebate payments. These estimates are based upon our historical experience. Revisions to these estimates are recorded in the period in which the facts that give rise to the revision become known.

Additionally, we enter into formal and informal agreements with our customers that provide for sales discounts, marketing allowances, return allowances and performance incentives. Any discount, allowance or incentive is treated as a reduction to sales, based on estimates of the criteria that give rise to the discount, allowance or incentive, such as sales volume and marketing spending. We routinely review these criteria and our estimating process and make adjustments as facts and circumstances change. Historically, we have not found material differences between our estimates and actual results.

Product returns. Credits for parts returned due to manufacturing defects and parts returned because of customer excess quantities are estimated and recorded at the time of the related sales. These estimates are based on historical experience, current trends and other factors. Revisions to these estimates are recorded in the period in which the facts that give rise to the revision become known.

Impairment of intangible assets and tangible fixed assets. Our goodwill and other intangible assets with indefinite lives are held at historical cost. Our other intangible assets with finite lives and tangible fixed assets are held at historical cost, net of depreciation and amortization. We periodically evaluate the realizability of our intangible assets. We also perform a review of these intangible assets and tangible fixed assets if an indicator of impairment, such as an operating loss or a significant adverse change in the business or market place, exists. If we determine that the historical carrying value of any of these assets has been impaired, we record the amount of the impairment as a charge against income.

Tests for impairment involve management’s estimates of future cash flows. Such estimates require numerous assumptions including, but not limited to, assumptions regarding future economic and market conditions, competition, customer relations, pricing, raw material costs, production costs, selling, general and administrative costs, and income and other taxes. These estimates require judgment and are, by their nature, subjective.

Retirement benefits. Pension obligations are actuarially determined and are affected by assumptions including discount rate, life expectancy, annual compensation increases and the expected rate of return on plan assets. Changes in the discount rate, and differences between actual results and assumptions, will affect the amount of pension expense we recognize in future periods.

Postretirement health obligations are actuarially determined and are based on assumptions including discount rate, life expectancy and health care cost trends. Changes in the discount rate, and differences between actual results and assumptions, will affect the amount of expense we recognize in future periods. A one percent increase or decrease in the assumed health care cost trends would result in a $48,600 annual increase and a $42,000 annual decrease in postretirement health costs, respectively.

Insurance reserves. Our insurance for workers’ compensation, automobile, product and general liability include high deductibles for which the Company is responsible. Estimated losses for which the Company is responsible are recorded in accrued expenses. Estimates of such losses involve substantial uncertainties including litigation trends, the severity of reported claims, and incurred but not yet reported claims. External actuaries are used to assist us in estimating these losses.

Environmental expenditures. Our expenditures for environmental matters fall into two categories. The first category is routine compliance with applicable laws and regulations related to the protection of the environment. The costs of such compliance are based on actual charges and do not require significant estimates. The second category of expenditures is for matters related to investigation and remediation of contaminated sites. The impact of this type of expenditure requires significant estimates by management. The estimated cost of the ultimate outcome of these matters is included as a liability in the Company’s June 30, 2005 balance sheet. This estimate is based on all currently available information, including input from outside legal and environmental professionals, and numerous assumptions. Management believes that the ultimate outcome of these matters will not exceed the $3.1 million accrued at June 30, 2005 by a material amount, if at all. However, because all investigation and site analysis has not yet been completed and because of the inherent uncertainty in such environmental matters, there can be no assurance that the ultimate outcome of these matters will not be significantly different than our estimates.

Income taxes. The Company accounts for income taxes in accordance with SFAS No. 109, “Accounting for Income Taxes”. Accordingly, deferred tax assets and liabilities are recognized for the expected future tax consequences of the temporary differences between the book carrying amounts and the tax basis of assets and liabilities. These future tax consequences, as well as current tax expense, require estimates of taxable income for each of the tax jurisdictions in which the Company operates. Such estimates include estimates of the portion of income subject to tax and allowable deductions for each tax jurisdiction. In addition, when determining the carrying value of deferred tax assets, the Company must also estimate future taxable income.

Results of Operations

The following table was derived from the Company’s unaudited condensed consolidated income statements for the three and six months ended June 30, 2005 and 2004. The amounts are presented in millions of dollars.


	Three Months ended June 30,						Six Months ended June 30,
	2005			2004			2005			2004
Net sales	$	269.3		$	274.0		$	514.8		$	530.8
Cost of sales		216.0			214.2			415.4			415.4

Gross profit		53.3			59.8			99.4			115.4

Operating expenses
Selling and warehousing		18.6			19.3			36.8			38.4
General and administrative		12.3			12.1			24.8			24.2
Amortization of intangible assets		1.6			1.9			3.1			3.7
Losses on abandonment of an operation		2.2			—			2.2			—

Operating income		18.6			26.5			32.5			49.1

Other income (expense)
Interest expense, net		(8.8	)		(9.0	)		(17.6	)		(18.6	)
Management fee expense		(0.5	)		(0.5	)		(1.0	)		(1.0	)
Miscellaneous, net		(0.1	)		—			(0.2	)		0.1


Income before income taxes		9.2			17.0			13.7			29.6
Income tax expense		4.8			6.8			6.6			11.8

Net income	$	4.4		$	10.2		$	7.1		$	17.8

Three Months Ended June 30, 2005 Compared with the Three Months Ended June 30, 2004

Net sales. Net sales decreased $4.7 million, or 1.7% from $274.0 million in the 2004 quarter to $269.3 million in the 2005 quarter. The net decrease was volume driven, with lower sales to the OEM, original equipment service, retail and traditional channels. Sales to the heavy duty channel increased.

Gross Profit. Results for the 2005 quarter included $1.4 million of non-recurring facilities consolidation and severance costs. Excluding these non-recurring charges, gross profit declined to $54.7 million in the second quarter of 2005 from $59.8 million in the 2004 quarter, and the gross margin percentage declined to 20.3% in the 2005 quarter from 21.8% in the second quarter of 2004.

Lower sales volume in the 2005 quarter contributed to the gross profit decline. The remaining decline in gross profit and the reduction in gross margin percentage were primarily due to the higher per-unit cost of manufacturing at lower production volumes, a shift in sales mix and an increase in steel costs, net of pass-through selling price increases. These higher costs were partially offset by lower insurance costs and manufacturing cost reductions. Savings due to improved procurement practices exceeded inflation-driven wage increases and higher freight, raw

material, and fuel costs caused by higher oil prices and general inflation.

Selling and warehousing expenses. Selling and warehousing expenses were $18.6 million for the 2005 quarter, $0.7 million lower than the 2004 quarter. This reduction was primarily due to cost savings from warehouse consolidations and lower employee-related insurance and bonus expenses. These savings were partially offset by inflation-driven salary increases. Selling and warehousing expenses were 6.9% of sales in the 2005 quarter and 7.1% in the 2004 quarter.

General and administrative expenses. General and administrative expenses were $12.3 million in the 2005 quarter, $0.2 million higher than the 2004 quarter. The increase was primarily due to inflation-driven salary increases and $0.4 million higher bad debt provisions, partially offset by lower employee-related insurance and bonus expenses. General and administrative expenses were 4.6% of sales in the 2005 quarter and 4.4% of sales in the 2004 quarter.

Losses on abandonment of an operation. See Note K to the condensed consolidated financial statements.

Interest expense, net. Net interest expense decreased $0.2 million from $9.0 million in 2004 to $8.8 million in 2005. The reduction of interest expense was attributable to lower debt levels, partially offset by higher interest rates.

Income tax expense. Income tax expense was lower in the 2005 quarter as a result of lower pre-tax income. Income tax expense as a percentage of income before taxes was 52.5% in the 2005 quarter compared to 39.9% in the 2004 quarter. The reason for this increase is explained in Note L to the condensed consolidated financial statements.

Net Income. Due to the factors described above, net income declined $5.8 million from $10.2 million in the 2004 quarter to $4.4 million in the 2005 quarter.

Six Months Ended June 30, 2005 Compared with the Six Months Ended June 30, 2004

Net sales. Net sales decreased $16.0 million, or 3.0%, from $530.8 million in the first half of 2004 to $514.8 million in the first half of 2005. The net decrease was volume driven, with lower sales to the original equipment services, retail and traditional channels. Sales to the heavy duty channel increased, and sales to the OEM channel were unchanged.

Gross Profit. Results for the first half of 2005 included $2.2 million of non-recurring facilities consolidation and severance costs. The first half of 2004 included a non-recurring $0.5 million charge due to the sale of inventory that was written-up from cost to market value as part of the allocation of the June 20, 2003 Acquisition purchase price.

Excluding these non-recurring charges, gross profit declined to $101.6 million in the first half of 2005 from $115.9 million in the first half of 2004, and the gross margin percentage declined to 19.7% in the first half of 2005 from 21.8% in the first half of 2004.

Lower sales volume in 2005 contributed significantly to the gross profit decline. The remaining decline in gross profit and the reduction in gross margin percentage were primarily due to the higher per-unit cost of manufacturing at lower production volumes, a shift in sales mix and an increase in steel costs, net of pass-through selling price increases. These higher costs were partially offset by lower insurance costs and manufacturing cost reductions. Savings due to improved procurement practices offset inflation-driven wage increases and higher freight, raw material, and fuel costs caused by higher oil prices and general inflation.

Selling and warehousing expenses. Selling and warehousing expenses were $36.8 million for the first half of 2005, $1.6 million lower than 2004. This reduction was primarily due to cost savings from warehouse consolidations and lower employee-related insurance and bonus expenses. These savings were partially offset by inflation-driven salary increases. Selling and warehousing expenses were 7.2% of sales in the first half of 2005 and 2004.

General and administrative expenses. General and administrative expenses were $24.8 million in the first half of 2005, $0.6 million higher than the comparable 2004 period. The increase was primarily due to inflation-driven salary increases and $0.5 million higher bad debt provisions, offset by lower employee-related insurance and bonus expenses. General and administrative expenses were 4.8% of sales in the first half of 2005 and 4.6% of sales in the first half of 2004.

Losses on abandonment of an operation. See Note K to the condensed consolidated financial statements.

Interest expense, net. Net interest expense decreased $1.0 million from $18.6 million in first half of 2004 to $17.6 million in 2005. The 2005 and 2004 amounts included $0.2 million and $0.6 million, respectively, of accelerated amortization of deferred financing costs associated with the voluntary prepayment of $15 million of debt in the second quarter of 2005 and $40 million of debt in the first quarter of 2004. Excluding the accelerated amortization, there was a $0.6 million reduction of interest expense, which was attributable to lower debt levels, partially offset by higher interest rates.

Income tax expense. Income tax expense was lower in the first half of 2005 compared to the same period in 2004 as a result of lower pre-tax income. Income tax expense as a percentage of income before taxes was 48.3% in the 2005 period compared to 40.0% in the 2004 period. The reason for this increase is explained in Note L to the condensed consolidated financial statements.

Net Income. Due to the factors described above, net income declined $10.7 million from $17.8 million in the first half of 2004 to $7.1 million in the first half of 2005.

Liquidity and Capital Resources

At June 30, 2005 and December 31, 2004, the Company had $8.8 million and $11.3 million of cash, respectively. Outstanding debt at June 30, 2005 and December 31, 2004, was $445.3 million and $458.2 million, respectively, as follows (in millions):


	June 30,			December 31,
	2005			2004
Short-term borrowings	$	0.8		$	1.3
Capitalized leases		0.1			0.3
Revolving credit facility		2.5			—
Term loan		217.0			232.0
Senior subordinated notes		230.0			230.0
Debt issuance costs		(5.1	)		(5.4	)

	$	445.3		$	458.2

In June 2005, the Company made a voluntary prepayment of $15 million of term loan borrowings. Because of this and previous voluntary prepayments, the Company does not have any required repayments of its senior credit facility term loans until December 2007. The Company’s $230 million senior subordinated notes are due in 2013. Below is a schedule of future debt payments as of June 30, 2005. The $3.3 million presented for 2005 includes $2.5 million of revolving credit borrowings that were repaid in early July 2005 and $0.8 million of routine short-term borrowings by our foreign operations. The amounts are presented in millions of dollars.


2005	$	3.3
2006		—
2007		0.6
2008		2.3
2009		107.7
Thereafter		336.5

	$	450.4

On June 16, 2005, we entered into an amendment to our senior credit facility which permits us to repurchase from time to time up to $75 million in aggregate principal amount of our senior subordinated notes. As of August 12, 2005, we had not repurchased any of the senior subordinated notes, although we may, under appropriate market conditions, do so in the future.

The Company’s significant debt service obligation is an important factor when assessing the Company’s liquidity and capital resources. At the June 30, 2005 debt level, annual interest expense, including amortization of deferred financing costs and debt issuance costs, is approximately $34.4 million at June 30, 2005 borrowing rates. An increase of 0.25% on our variable interest rate debt would increase the annual interest cost by $0.3 million.

Our primary source of liquidity is cash flow from operations and borrowings under our $75 million revolving credit facility. Borrowings under the revolving credit facility are available to fund the Company’s working capital requirements, capital expenditures and other general corporate purposes. In 2005, the Company expects to spend between $35 million and $40 million on additions to property, plant and equipment and on a new, fully integrated information technology system. Implementation of the new information technology system began in the third quarter of 2004. At June 30, 2005, $2.5 million of revolving credit borrowings were outstanding and $5.8 million of revolving credit borrowing capacity had been used to support outstanding letters of credit. This resulted in $66.7 million of unused borrowings capacity at June 30, 2005.

Our ability to make scheduled payments of principal or interest on, or to refinance, our indebtedness or to fund planned capital expenditures will depend on our ability to generate cash in the future. Such cash generation is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control.

Based on the current level of operations, the Company believes that cash flow from operations and available cash, together with available borrowings under its revolving credit facility, will be adequate to service debt, meet liquidity needs and fund planned capital expenditures for the next two years. For later years, the Company can give no assurance that its business will generate sufficient cash flow from operations, or that future borrowings will be available under its revolving credit facility in an amount sufficient to enable it to service its indebtedness or to fund other liquidity needs. Also, in the future, we may need to refinance all or a portion of the principal amount of the senior subordinated notes and/or senior credit facility borrowings, on or prior to maturity. If refinancing is necessary, there can be no assurance that we will be able to secure such financing on acceptable terms, or at all.

The Company’s credit agreement for its senior credit facility permits sales of and liens on receivables, which are being sold pursuant to factoring arrangements, subject to certain limitations. We intend to factor our receivables when it is economically beneficial to do so. We have established a factoring relationship with one of our customers, which has resulted in the sales of approximately $10.3 million of receivables during the first half of 2005 of which $5.2 million would otherwise have been outstanding at June 30, 2005. As the opportunities arise, we will evaluate other factoring arrangements, which if implemented, would increase the amount of receivables sold in the future.

Net cash provided by operating activities

Net cash provided by operating activities for the six months ended June 30, 2005 was $27.9 million. Profits, before deducting depreciation and amortization, generated $27.9 million of cash. Receivables increased due to higher sales in the second quarter of 2005 compared to the fourth quarter of 2004. This resulted in a $30.9 million net use of cash. The receivable change was partially offset by the favorable effects of a $4.7 million decrease in inventory and a $22.0 million increase in accounts payable. The increase in payables was due to extending payment timeframes with our suppliers and normal fluctuation in the timing of payments. Changes in all other assets and liabilities netted to a $5.7 million positive effect on cash. In September 2005, the Company expects to make $3.4 million of annual contributions to its pension plans.

Net cash used in investing activities

Historically, net cash used in investing activities has been for capital expenditures, offset by proceeds from the disposition of property, plant and equipment. Capital expenditures for the six months ended June 30, 2005 and 2004 were $18.9 million and $17.2 million, respectively. Approximately $1.7 and $7.8 million, respectively, of the 2005 and 2004 capital expenditures were related to the long-term capital investment plan to increase capacity and reduce cost at our filtration facilities. The 2005 amount included $6.4 million for the implementation of a new, fully integrated information technology system. It will support financial reporting and operations.

Recent Accounting Pronouncements

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Our exposure to market risk consists of foreign currency exchange rate fluctuations and changes in interest rates.

Foreign Currency Exposure

Currency translation. As a result of international operating activities, we are exposed to risks associated with changes in foreign exchange rates, principally exchange rates between the U.S. dollar and the Mexican peso, Euro, Canadian dollar and British pound. The results of operations of our foreign subsidiaries are translated into U.S. dollars at the average exchange rates for each relevant period. This translation has no impact on our cash flow. However, as foreign exchange rates change, there are changes to the U.S. dollar equivalent of sales and expenses denominated in foreign currencies. During 2004, approximately 12% of our business was transacted in local currencies of foreign countries. While our international results of operations, as measured in U.S. dollars, are subject to foreign exchange fluctuations, we do not consider the related risk to be material to our financial condition or results of operations. If the exchange rate between the foreign currencies and the U.S. dollar were to decrease by 10%, our annual net income would have been lower by $0.3 million in 2004 due to the reduction in reported results from our foreign operations.

The balance sheets of foreign subsidiaries are translated into U.S. dollars at the closing exchange rates as of the relevant balance sheet date. Any adjustments resulting from the translation are recorded as other comprehensive income on our statement of shareholder’s equity. We manage this exposure primarily by balancing monetary assets and liabilities and maintaining cash positions only at levels necessary for operating purposes in those countries.

Currency transactions. Currency transaction exposure arises where actual sales and purchases are made by a business or company in a currency other than its own functional currency. The majority of our businesses source raw materials and sell their products within their local markets’ currencies and, therefore, have limited transaction exposure.

In the future, we expect to continue to monitor our transaction exposure to currency rate changes and enter into currency forward and option contracts to limit the exposure, as appropriate. Gains and losses on contracts are deferred until the transaction being hedged is finalized. As of June 30, 2005, we had one immaterial foreign currency contract outstanding. We do not engage in any speculative activities.

Interest Rate Risk

The Company was party to interest rate swap agreements, which expired in August 2005. These agreements effectively converted $118 million of variable rate debt to fixed rate debt for the two years ending August 2005. The variable component of the interest rate on borrowings under the senior credit facilities is based on LIBOR. Under the swap agreements, we paid 1.94%, and received the then current LIBOR, on $118 million.

On August 10, 2005, the Company entered into new interest rate swap agreements for $80 million. These agreements effectively convert $80 million of variable rate debt to fixed rate debt for the two years ending August 2007, and $40 million for the 12-month period ending August 2008. The variable component of the interest rate on borrowings under the senior credit facilities is based on LIBOR. Under the swap agreements, we will pay 4.4%, and will receive the then current LIBOR on $80 million through August 2007 and $40 million for the 12-month period ending August 2008.

We utilize, and we will continue to utilize, sensitivity analyses to assess the potential effect of our variable rate debt. If the variable interest rates were to increase by 0.25% per annum, the net impact would be a decrease of approximately $0.2 million on our annual net income and cash flow.

Treasury Policy

Our treasury policy seeks to ensure that adequate financial resources are available for the development of our businesses while managing our currency and interest rate risks. Our policy is to not engage in speculative transactions. Our policies with respect to the major areas of our treasury activity are set forth above.

Item 4. Controls and Procedures

The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Company’s Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

As required by SEC Rule 13a-15(b), the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and the Company’s Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of the end of the quarter covered by this report. Based on the foregoing, the Company’s Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the quarter covered by this report, the Company’s disclosure controls and procedures were effective at the reasonable assurance level.

There has been no change in the Company’s internal controls over financial reporting during the Company’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal controls over financial reporting.

PART II
OTHER INFORMATION

Item 1. Legal Proceedings

Not Applicable

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Not Applicable

Item 3. Default Upon Senior Securities

Not Applicable

Item 4. Submission of Matters to Vote of Security Holders

Not Applicable

Item 5. Other Information

Not Applicable

Item 6. Exhibits


		Exhibit 31.1		Certification of Periodic Report by the Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934.

		Exhibit 31.2		Certification of Periodic Report by the Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934.

		Exhibit 32		Certification of Periodic Report by the Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002.*

* This certificate is being furnished solely to accompany the report pursuant to 18 U.S.C. 1350 and is not being filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and is not to be incorporated by reference into any filing of the Company, whether made before or after the date hereof, regardless of any general incorporation language in such filing.


	UNITED COMPONENTS, INC.

Date: August 15, 2005	By:	/s/ Charles T. Dickson

	Name:	Charles T. Dickson
	Title:	Chief Financial Officer