UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Date of report (Date of earliest event reported): May 9, 2018
TENNECO INC.
(Exact Name of Registrant as Specified in Charter)
Delaware | 1-12387 | 76-0515284 | ||
(State or Other Jurisdiction of Incorporation) |
(Commission File Number) |
(IRS Employer Identification No.) |
500 NORTH FIELD DRIVE, LAKE FOREST, ILLINOIS |
60045 | |
(Address of Principal Executive Offices) | (Zip Code) |
Registrants telephone number, including area code: (847) 482-5000
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:
☐ | Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) |
☒ | Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) |
☐ | Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) |
☐ | Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) |
Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).
Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Explanatory Note
On April 10, 2018, Tenneco Inc., a Delaware corporation (the Company), announced that it entered into a Membership Interest Purchase Agreement by and among the Company, Federal-Mogul LLC, a Delaware limited liability company (Federal-Mogul), American Entertainment Properties Corp., a Delaware corporation, and Icahn Enterprises L.P., a Delaware limited partnership, regarding the proposed acquisition of Federal-Mogul by the Company (the Transaction). The purpose of this Current Report on Form 8-K is to file certain financial statements of Federal-Mogul, and certain pro forma financial statements, each of which is required to be included or incorporated by reference into the proxy statement on Schedule 14A relating to the Transaction and registration statements filed by the Company.
Additional Information and Where to Find It
In connection with the proposed transaction between the Company and Federal-Mogul, the Company intends to file relevant materials with the Securities and Exchange Commission (the SEC), including a preliminary proxy statement on Schedule 14A. Following the filing of the definitive proxy statement with the SEC, the Company will mail the definitive proxy statement and a proxy card to each stockholder entitled to vote at the special meeting relating to the proposed transaction. This current report on Form 8-K is not a substitute for the proxy statement or other document(s) that the Company may file with the SEC in connection with the proposed transaction. INVESTORS AND SECURITY HOLDERS OF THE COMPANY ARE URGED TO READ CAREFULLY THE PROXY STATEMENT (INCLUDING ANY AMENDMENTS OR SUPPLEMENTS THERETO) AND OTHER DOCUMENTS FILED WITH THE SEC WHEN THEY BECOME AVAILABLE BECAUSE THEY WILL CONTAIN IMPORTANT INFORMATION ABOUT THE COMPANY, FEDERAL-MOGUL AND THE PROPOSED TRANSACTION. Investors and security holders may obtain free copies of the proxy statement and other relevant materials (when they become available), and any and all documents filed by the Company with the SEC, may be obtained for free at the SECs website at www.sec.gov. In addition, stockholders may obtain free copies of the documents filed with the SEC by the Company via the Companys Investor Relations section of its website at investors.tenneco.com or by contacting Investor Relations by directing a request to the Company, Attention: Investor Relations, 500 North Field Drive in Lake Forest, Illinois, 60045 or by calling (847) 482-5162.
Certain Information Regarding Participants
The Company and its respective directors and executive officers may be deemed participants in the solicitation of proxies in connection with the proposed transaction. Information about the persons who may, under the rules of the SEC, be considered to be participants in the solicitation of the Companys stockholders in connection with the proposed transaction, and any interest they have in the proposed transaction, will be set forth in the definitive proxy statement when it is filed with the SEC. Additional information regarding these individuals is set forth in the Companys proxy statement for its 2018 Annual Meeting of Stockholders, which was filed with the SEC on April 4, 2018, and its Annual Report on Form 10-K for the fiscal year ended December 31, 2017, which was filed with the SEC on February 28, 2018. You may obtain these documents (when they become available) free of charge at the SECs web site at www.sec.gov and from Investor Relations at the Company.
No Offer or Solicitations
This document shall not constitute an offer to sell or the solicitation of an offer to buy any securities, nor shall there be any sale of securities in any jurisdiction in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such jurisdiction. No offering of securities shall be made except by means of a prospectus meeting the requirements of Section 10 of the U.S. Securities Act of 1933, as amended.
ITEM 9.01 | Financial Statements and Exhibits |
(a) Financial statements of businesses acquired.
(1) The audited consolidated balance sheets of Federal-Mogul as of December 31, 2017 and 2016 and the consolidated statements of operations, statements of comprehensive income (loss), statements of cash flows and statements of member interest and shareholders equity for each of the years ended December 31, 2017, 2016 and 2015 and the notes thereto are filed as Exhibit 99.1 hereto and incorporated by reference herein.
(b) Pro forma financial information.
The unaudited pro forma condensed combined balance sheet as of December 31, 2017 and unaudited pro forma condensed combined statement of income of the Company and Federal-Mogul for the fiscal year ended December 31, 2017 and the notes thereto are filed as Exhibit 99.2 hereto and incorporated by reference herein.
(d) Exhibits
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
TENNECO INC. | ||||||
Date: May 9, 2018 | By: | /s/ Brandon B. Smith | ||||
Brandon B. Smith | ||||||
Senior Vice President, General Counsel and Corporate Secretary |
Exhibit 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our report dated February 26, 2018 with respect to the consolidated financial statements of Federal-Mogul LLC for the year ended December 31, 2017, which are included in this Current Report of Tenneco Inc. on Form 8-K. We consent to the incorporation by reference of said report in the Registration Statements of Tenneco Inc. on Forms S-8 (File No. 333-17485, File No. 333-41535, File No. 333-33934, File No. 333-101973, File No. 333-113705, File No. 333-142475, File No. 333-159358 and File No. 333-192928).
/s/ Grant Thornton LLP
Southfield, Michigan
May 9, 2018
Exhibit 99.1
|
Grant Thornton LLP 27777 Franklin Road, Suite 800 Southfield, MI 48034-2366
T 248.262.1950 F 248.350.3581 www.GrantThornton.com |
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Federal-Mogul LLC
We have audited the accompanying consolidated financial statements of Federal-Mogul LLC (a Delaware company, fka Federal-Mogul Holdings LLC) and subsidiaries, which comprise the consolidated balance sheet as of December 31, 2017, and the related consolidated statements of operations, comprehensive income (loss), member interest and shareholders equity, and cash flows for the year then ended, and the related notes to the financial statements.
Managements responsibility for the financial statements
Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.
Auditors responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditors judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entitys preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entitys internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Federal-Mogul LLC and subsidiaries as of December 31, 2017, and the results of their operations and their cash flows for the year then ended in accordance with accounting principles generally accepted in the United States of America.
Other matter
We also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements of Federal-Mogul LLC as of December 31, 2016 and for each of the two years in the period ended December 31, 2016, and our report dated February 22, 2017 expressed an unqualified opinion on those financial statements.
/s/ Grant Thornton LLP
Southfield, Michigan
February 26, 2018
Grant Thornton LLP
U.S. member firm of Grant Thornton International Ltd
2
FEDERAL-MOGUL LLC
Consolidated Statements of Operations
(In millions, except per share amounts)
Year Ended December 31 | ||||||||||||
2017 | 2016 | 2015 | ||||||||||
Net sales |
$ | 7,879 | $ | 7,434 | $ | 7,419 | ||||||
Cost of products sold |
(6,702 | ) | (6,301 | ) | (6,345 | ) | ||||||
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Gross profit |
1,177 | 1,133 | 1,074 | |||||||||
Selling, general and administrative expenses |
(825 | ) | (815 | ) | (794 | ) | ||||||
Goodwill and intangible impairment expense, net (Note 11) |
(11 | ) | (6 | ) | (94 | ) | ||||||
Restructuring charges and asset impairments, net (Note 3) |
(37 | ) | (44 | ) | (121 | ) | ||||||
Amortization expense (Note 11) |
(58 | ) | (58 | ) | (59 | ) | ||||||
Other income (expense), net (Note 4) |
9 | 21 | (5 | ) | ||||||||
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Operating income (loss) |
255 | 231 | 1 | |||||||||
Interest expense, net |
(148 | ) | (145 | ) | (138 | ) | ||||||
Loss on debt extinguishment |
(4 | ) | | | ||||||||
Equity earnings of nonconsolidated affiliates, net of tax (Note 12) |
68 | 59 | 56 | |||||||||
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Income (loss) from continuing operations |
171 | 145 | (81 | ) | ||||||||
Income tax (expense) benefit (Note 16) |
190 | (55 | ) | (30 | ) | |||||||
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Income (loss) from continuing operations |
361 | 90 | (111 | ) | ||||||||
Gain (loss) from discontinued operations, net of tax |
| | 7 | |||||||||
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Net income (loss) |
361 | 90 | (104 | ) | ||||||||
Net (income) loss attributable to noncontrolling interests |
(11 | ) | (8 | ) | (6 | ) | ||||||
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Net income (loss) attributable to Federal-Mogul |
$ | 350 | $ | 82 | $ | (110 | ) | |||||
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Amounts attributable to Federal-Mogul: |
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Net income (loss) from continuing operations |
$ | 350 | $ | 82 | $ | (117 | ) | |||||
Gain (loss) from discontinued operations, net of tax |
| | 7 | |||||||||
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Net income (loss) |
$ | 350 | $ | 82 | $ | (110 | ) | |||||
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Net income (loss) per common share attributable to Federal-Mogul |
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Basic and diluted (Note 19): |
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Net income (loss) from continuing operations |
$ | 0.49 | $ | (0.71 | ) | |||||||
Gain (loss) from discontinued operations, net of tax |
| 0.04 | ||||||||||
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Net income (loss) |
$ | 0.49 | $ | (0.67 | ) | |||||||
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See accompanying notes to Consolidated Financial Statements.
3
FEDERAL-MOGUL LLC
Consolidated Statements of Comprehensive Income (Loss)
(In millions)
Year Ended December 31 | ||||||||||||
2017 | 2016 | 2015 | ||||||||||
Net income (loss) |
$ | 361 | $ | 90 | $ | (104 | ) | |||||
Other comprehensive income (loss), net of tax (Note 18) |
||||||||||||
Foreign currency translation adjustment, including net investment hedges |
116 | (145 | ) | (237 | ) | |||||||
Cash flow hedging |
(1 | ) | 3 | | ||||||||
Pension and postretirement benefit plans |
46 | 30 | 56 | |||||||||
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Other comprehensive income (loss), net of tax |
161 | (112 | ) | (181 | ) | |||||||
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Comprehensive income (loss) |
522 | (22 | ) | (285 | ) | |||||||
Comprehensive (income) loss attributable to noncontrolling interests |
(23 | ) | (10 | ) | (1 | ) | ||||||
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Comprehensive income (loss) attributable to Federal-Mogul |
$ | 499 | $ | (32 | ) | $ | (286 | ) | ||||
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See accompanying notes to Consolidated Financial Statements.
4
FEDERAL-MOGUL LLC
Consolidated Balance Sheets
(In millions, except share amounts)
December 31 | ||||||||
2017 | 2016 | |||||||
ASSETS |
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Current assets: |
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Cash and cash equivalents |
$ | 319 | $ | 300 | ||||
Accounts receivable, net |
1,294 | 1,238 | ||||||
Inventories, net (Note 9) |
1,456 | 1,321 | ||||||
Prepaid expenses and other current assets |
208 | 186 | ||||||
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Total current assets |
3,277 | 3,045 | ||||||
Property, plant and equipment, net (Note 10) |
2,544 | 2,334 | ||||||
Goodwill and other indefinite-lived intangible assets (Note 11) |
913 | 901 | ||||||
Definite-lived intangible assets, net (Note 11) |
289 | 343 | ||||||
Investments in nonconsolidated affiliates (Note 12) |
324 | 270 | ||||||
Other noncurrent assets |
167 | 183 | ||||||
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TOTAL ASSETS |
$ | 7,514 | $ | 7,076 | ||||
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LIABILITIES, AND MEMBER INTEREST AND SHAREHOLDERS EQUITY |
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Current liabilities: |
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Short-term debt, including current portion of long-term debt (Note 13) |
$ | 126 | $ | 142 | ||||
Accounts payable |
1,020 | 885 | ||||||
Accrued liabilities (Note 14) |
506 | 554 | ||||||
Current portion of pension and other postretirement benefits liability (Note 15) |
38 | 37 | ||||||
Other current liabilities |
183 | 156 | ||||||
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Total current liabilities |
1,873 | 1,774 | ||||||
Long-term debt (Note 13) |
3,004 | 2,883 | ||||||
Pension and other postretirement benefits liability (Note 15) |
1,037 | 1,076 | ||||||
Long-term deferred income taxes (Note 16) |
119 | 366 | ||||||
Other accrued liabilities |
84 | 97 | ||||||
Member interest and shareholders equity: |
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Member interest |
2,884 | | ||||||
Preferred stock ($0.01 par value; 90,000,000 authorized shares; none issued as of December 31, 2016) |
| | ||||||
Common stock ($0.01 par value; 450,100,000 authorized shares; 170,636,151 issued shares and 169,040,651 outstanding shares as of December 31, 2016) |
| 2 | ||||||
Additional paid-in capital |
| 2,899 | ||||||
Accumulated deficit |
(364 | ) | (714 | ) | ||||
Accumulated other comprehensive income (loss) |
(1,283 | ) | (1,432 | ) | ||||
Treasury stock, at cost |
| (17 | ) | |||||
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Total Federal-Mogul member interest and shareholders equity |
1,237 | 738 | ||||||
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Noncontrolling interests |
160 | 142 | ||||||
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Total member interest and shareholders equity |
1,397 | 880 | ||||||
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TOTAL LIABILITIES, AND MEMBER INTEREST AND SHAREHOLDERS EQUITY |
$ | 7,514 | $ | 7,076 | ||||
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See accompanying notes to Consolidated Financial Statements.
5
FEDERAL-MOGUL LLC
Consolidated Statements of Cash Flows
(In millions)
Year Ended December 31 | ||||||||||||
2017 | 2016 | 2015 | ||||||||||
Cash Provided From (Used By) Operating Activities |
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Net income (loss) |
$ | 361 | $ | 90 | $ | (104 | ) | |||||
Adjustments to reconcile net income (loss) to net cash provided from (used by) operating activities: |
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Depreciation and amortization |
398 | 375 | 341 | |||||||||
Goodwill and intangible impairment expense, net |
11 | 6 | 94 | |||||||||
Restructuring charges and asset impairments, net |
37 | 44 | 121 | |||||||||
Payments against restructuring liabilities |
(39 | ) | (50 | ) | (58 | ) | ||||||
Change in pension and postretirement benefit plans |
(39 | ) | (31 | ) | (68 | ) | ||||||
Equity earnings of nonconsolidated affiliates |
(68 | ) | (59 | ) | (56 | ) | ||||||
Cash dividends received from nonconsolidated affiliates |
39 | 77 | 11 | |||||||||
Loss on sale of investment in nonconsolidated affiliate |
2 | | 11 | |||||||||
Loss on extinguishment of debt |
4 | | | |||||||||
Uncertain tax positions |
(18 | ) | | | ||||||||
Deferred tax expense (benefit) |
(227 | ) | (28 | ) | (17 | ) | ||||||
Operating cash flows from discontinued operations |
| | (7 | ) | ||||||||
Gain from sale of business |
(3 | ) | | | ||||||||
Gain from sales of property, plant and equipment |
(7 | ) | (7 | ) | (4 | ) | ||||||
Unrealized foreign currency transactions losses (gains) |
(2 | ) | | | ||||||||
Changes in operating assets and liabilities: |
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Accounts receivable, net |
15 | 111 | (10 | ) | ||||||||
Inventories, net |
(60 | ) | 5 | (172 | ) | |||||||
Accounts payable |
79 | 7 | 18 | |||||||||
Other assets and liabilities |
(67 | ) | 6 | (62 | ) | |||||||
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Net cash provided from (used by) Operating Activities |
416 | 546 | 38 | |||||||||
Cash Provided From (Used By) Investing Activities |
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Expenditures for property, plant, and equipment |
(393 | ) | (381 | ) | (440 | ) | ||||||
Payments to acquire businesses, net of cash acquired |
(8 | ) | (31 | ) | (360 | ) | ||||||
Capital investment in consolidated subsidiary from noncontrolling interest partner |
| 5 | | |||||||||
Transfer of cash balances upon dispositions of operations held for sale |
| (12 | ) | | ||||||||
Net proceeds associated with business dispositions |
13 | | 15 | |||||||||
Net proceeds from sales of property, plant, and equipment |
17 | 18 | 12 | |||||||||
Net proceeds from sale of shares in consolidated subsidiary |
| 2 | | |||||||||
Net proceeds from sale of investment in nonconsolidated affiliate |
1 | | | |||||||||
Capital investment in nonconsolidated affiliate |
| (1 | ) | (14 | ) | |||||||
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Net cash provided from (used by) Investing Activities |
(370 | ) | (400 | ) | (787 | ) | ||||||
Cash Provided From (Used By) Financing Activities |
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Proceeds from term loans and notes |
1,253 | 86 | | |||||||||
Principal payments on term loans |
(1,189 | ) | (115 | ) | (28 | ) | ||||||
Proceeds from borrowings on revolving lines of credit |
392 | 430 | 663 | |||||||||
Payments on revolving lines of credit |
(482 | ) | (419 | ) | (306 | ) | ||||||
Principal payments on capital leases |
(2 | ) | | | ||||||||
Debt issuance costs |
(7 | ) | | | ||||||||
Increase in other long-term debt |
| | 51 | |||||||||
Increase (decrease) in short-term debt |
| (2 | ) | (3 | ) | |||||||
Proceeds from equity rights offering, net of related fees |
| | 250 | |||||||||
Dividends to noncontrolling interest partners |
(5 | ) | | | ||||||||
Net proceeds (remittances) on servicing of factoring arrangements |
5 | | | |||||||||
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Net cash provided from (used by) Financing Activities |
(35 | ) | (20 | ) | 627 | |||||||
Effect of foreign currency exchange rate fluctuations on cash |
7 | (31 | ) | (4 | ) | |||||||
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Increase (decrease) in cash and cash equivalents |
$ | 18 | $ | 95 | $ | (126 | ) | |||||
Cash and cash equivalents at beginning of year |
300 | 194 | 332 | |||||||||
Change in cash and cash equivalents held for sale |
1 | 11 | (12 | ) | ||||||||
Increase (decrease) in cash and cash equivalents |
18 | 95 | (126 | ) | ||||||||
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Cash and cash equivalents at end of year |
$ | 319 | $ | 300 | $ | 194 | ||||||
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Supplementary Disclosures: |
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Non-cash financing and investing activities: |
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Accrued property and equipment additions |
$ | 60 | $ | 64 | $ | 61 | ||||||
Other cash flow information: |
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Cash paid for interest |
$ | 127 | $ | 139 | $ | 133 | ||||||
Cash paid for income taxes, net of refunds of $9 million in 2017, $7 million in 2016, and $11 million in 2015 |
$ | 70 | $ | 67 | $ | 44 |
See accompanying notes to Consolidated Financial Statements.
6
FEDERAL-MOGUL LLC
Consolidated Statements of Member Interest and Shareholders Equity
(In millions)
Common Stock |
Additional Paid-in Capital |
Accumulated Deficit |
Accumulated Other Comprehensive Income (Loss) |
Treasury Stock, at Cost |
Member Interest |
Noncontrolling Interests |
Total | |||||||||||||||||||||||||
Balance at December 31, 2014 |
$ | 2 | $ | 2,649 | $ | (686 | ) | $ | (1,142 | ) | $ | (17 | ) | $ | | $ | 103 | $ | 909 | |||||||||||||
Acquisitions |
| | | | | | 28 | 28 | ||||||||||||||||||||||||
Net income (loss) |
| | (110 | ) | | | | 6 | (104 | ) | ||||||||||||||||||||||
Other comprehensive loss, net of tax |
| | | (176 | ) | | | (5 | ) | (181 | ) | |||||||||||||||||||||
Equity rights offering |
| 250 | | | | | | 250 | ||||||||||||||||||||||||
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Balance at December 31, 2015 |
2 | 2,899 | (796 | ) | (1,318 | ) | (17 | ) | | 132 | 902 | |||||||||||||||||||||
Net income (loss) |
| | 82 | | | | 8 | 90 | ||||||||||||||||||||||||
Other comprehensive loss, net of tax |
| | | (114 | ) | | | 2 | (112 | ) | ||||||||||||||||||||||
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Balance at December 31, 2016 |
2 | 2,899 | (714 | ) | (1,432 | ) | (17 | ) | | 142 | 880 | |||||||||||||||||||||
Conversion to limited liability company |
(2 | ) | (2,899 | ) | | | 17 | 2,884 | | | ||||||||||||||||||||||
Net income (loss) |
| | 350 | | | | 11 | 361 | ||||||||||||||||||||||||
Other comprehensive loss, net of tax |
| | | 149 | | | 12 | 161 | ||||||||||||||||||||||||
Dividends paid to noncontrolling interest partners |
| | | | | | (5 | ) | (5 | ) | ||||||||||||||||||||||
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Balance at December 31, 2017 |
$ | | $ | | $ | (364 | ) | $ | (1,283 | ) | $ | | $ | 2,884 | $ | 160 | $ | 1,397 | ||||||||||||||
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See accompanying notes to Consolidated Financial Statements.
7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in millions, except per share amounts)
1. | DESCRIPTION OF BUSINESS |
Federal-Mogul LLC (the Company or Federal-Mogul) is a limited liability company formed under the laws of Delaware. Icahn Enterprises, L.P. (NASDAQ: IEP) (IEP) is a diversified holding company that indirectly owns 100% of the Companys outstanding LLC interest.
The Company is a global supplier of technology and innovation in vehicle and industrial products for fuel economy, emissions reduction, and safety systems. The Company serves the worlds foremost original equipment manufacturers (OEM) and servicers (OES, and together with OEM, OE) of automotive, light, medium and heavy-duty commercial vehicles, off-road, agricultural, marine, rail, aerospace, power generation and industrial equipment, as well as the worldwide aftermarket.
Spinoff: On January 15, 2016, the Company announced it terminated the previously announced spin-off of its Motorparts division. The Company will continue to operate with two separate, independent businesses with separate CEOs who will each report directly the Companys board of directors. The separate businesses more effectively serve their unique markets and allow each operating business to pursue its business strategy and more quickly react to its respective market conditions.
Merger Transaction: On September 6, 2016, the Company, American Entertainment Properties Corp., a Delaware corporation (AEP), our parent and a subsidiary of IEP, and IEH FM Holdings LLC, a Delaware limited liability company (Merger Sub) entered into an Agreement and Plan of Merger (the Merger Agreement) pursuant to which a wholly-owned subsidiary of IEP (Merger Sub) would be merged with and into the Federal-Mogul Holdings Corporation with Federal-Mogul Holdings Corporation surviving (the Merger). Pursuant to the Merger Agreement, and upon the terms and subject to the conditions thereof, Merger Sub commenced a cash tender offer to acquire, subject to the terms and conditions of the Merger Agreement, all of the issued and outstanding shares of Federal-Mogul Holdings Corporations common stock not already owned by IEP and its affiliates for $10.00 per share in cash. On January 23, 2017, the Merger was consummated and Federal-Mogul Holdings Corporation become an indirect wholly-owned subsidiary of IEP and the shares of its common stock ceased to be traded on the NASDAQ stock market.
Conversions: On February 13, 2017, Federal-Mogul Corporation was converted to a Delaware single member limited liability company and changed its name to Federal-Mogul LLC. On February 14, 2017, Federal-Mogul Holdings Corporation was converted to a Delaware single member limited liability company and changed its name to Federal-Mogul Holdings LLC.
Holding Company Merger: On March 29, 2017, Federal-Mogul Holdings LLC was merged with and into Federal-Mogul LLC with Federal-Mogul LLC surviving the merger.
2. | BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
Basis of Presentation
The audited Consolidated Financial Statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States (U.S. GAAP).
Summary of Significant Accounting Policies
Principles of consolidation: The Company consolidates into its financial statements the accounts of the Company, all wholly-owned subsidiaries, and any partially-owned subsidiary the Company has the ability to control. Control generally equates to ownership percentage, whereby investments more than 50% owned are consolidated, investments in affiliates of 50% or less but greater than 20% are accounted for using the equity method, and investments in affiliates of 20% or less are accounted for using the cost method. See Note 12, Investment in Nonconsolidated Affiliates, for discussion regarding the Companys subsidiaries that were subject to regulatory control.
The Company does not consolidate any entity for which it has a variable interest based solely on power to direct the activities and significant participation in the entitys expected results that would not otherwise be consolidated based on control through voting interests. Further, the Companys affiliates are businesses established and maintained in connection with the Companys operating strategy and are not special purpose entities. All intercompany transactions and balances have been eliminated.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Reclassifications: Certain reclassifications from the prior year presentation have been made to conform to the current year presentation.
Use of estimates: The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported therein. Due to the inherent uncertainty involved in making estimates, actual results reported in future periods may be based upon amounts that differ from these estimates.
Cash and cash equivalents: The Company considers all highly liquid investments with maturities of 90 days or less from the date of purchase to be cash equivalents.
Concentrations of credit risk: Financial instruments, which potentially subject the Company to concentrations of credit risk, consist primarily of accounts receivable, cash investments, and derivative instruments. The Companys customer base includes virtually every significant global light and commercial vehicle manufacturer and a large number of distributors, installers and retailers of automotive aftermarket parts. The Companys credit evaluation process and the geographical dispersion of sales transactions help to mitigate credit risk concentration. No individual customer accounted for more than 10% of the Companys net sales for the years ended December 31, 2017, 2016, and 2015 or accounts receivable as of December 31, 2017 and 2016. The Company requires placement of cash in financial institutions evaluated as highly creditworthy. See Note 7, Derivatives and Hedging Activities for further discussion related to derivatives.
Divestitures: In connection with its strategic planning process, the Company assesses its operations for market position, product technology and capability, and profitability. Those businesses determined by management not to have a sustainable competitive advantage are considered non-core and may be considered for divestiture or other exit activities.
Trade accounts receivable and allowance for doubtful accounts: Trade accounts receivable is stated at net realizable value, which approximates fair value. The Company does not generally require collateral for its trade accounts receivable. Accounts receivable is reduced by an allowance for amounts that may become uncollectible in the future. This estimated allowance is based primarily on managements evaluation of specific balances as the balances become past due, the financial condition of its customers, and the Companys historical experience of write-offs. If uncollectible accounts are not reserved for through specific examination procedures, the Companys general policy is to reserve for uncollectible accounts based upon the aging categories of accounts receivable and whether amounts are due from an OE or aftermarket customer. Past due status is based upon the invoice date of the original amounts outstanding. Included in selling, general, and administrative (SG&A) expenses are bad debt expenses of $4 million, $5 million, and $13 million for the years ended December 31, 2017, 2016, and 2015. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. The Companys allowance for doubtful accounts was $18 million and $19 million as of December 31, 2017 and 2016.
Factoring of accounts receivable: The Company has subsidiaries in Brazil, Canada, France, Germany, Italy, and the U.S. which are party to accounts receivable factoring and securitization facilities. Amounts factored under these facilities consist of the following:
As of December 31 | ||||||||
2017 | 2016 | |||||||
Gross accounts receivable factored |
$ | 641 | $ | 487 | ||||
Gross accounts receivable factored, qualifying as sales |
$ | 635 | $ | 485 | ||||
Undrawn cash on factored accounts receivable |
$ | | $ | |
Proceeds from the factoring of accounts receivable qualifying as sales and expenses associated with the factoring of accounts receivable are as follows:
Year Ended December 31 | ||||||||||||
2017 | 2016 | 2015 | ||||||||||
Proceeds from factoring qualifying as sales |
$ | 1,834 | $ | 1,616 | $ | 1,550 | ||||||
Financing charges(a) |
$ | (15 | ) | $ | (12 | ) | $ | (9 | ) |
(a) | Recorded in the consolidated statements of operations within Other income (expense), net. |
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Accounts receivables factored but not qualifying as a sale were pledged as collateral and accounted for as secured borrowings and recorded in the consolidated balance sheets within Accounts receivable, net and Short-term debt, including the current portion of long-term debt.
Where the Company receives a fee to service and monitor these transferred receivables, such fees are sufficient to offset the costs and as such, a servicing asset or liability is not recorded as a result of such activities.
Inventories: The Company values inventory at the lower of cost or net realizable value, with cost determined on a first-in, first-out (FIFO) basis. Cost of inventory includes direct materials, labor, and applicable manufacturing overhead costs. The value of inventories are reduced for excess and obsolescence based on managements review of on-hand inventories compared to historical and estimated future sales and usage. Inventory held at consignment locations is included in finished goods inventory as the Company retains full title and rights to the product.
Long-lived assets: Long-lived assets such as property, plant, and equipment, and definite-lived intangible assets are recorded at cost or fair value established at acquisition unless the expected future use of the assets indicate a lower value is appropriate. Long-lived asset groups are evaluated for impairment when impairment indicators exist. If the carrying value of a long-lived asset group is impaired, an impairment charge is recorded for the amount by which the carrying value of the long-lived asset group exceeds its fair value. Depreciation and amortization are computed principally by the straight-line method for financial reporting purposes.
Goodwill: Goodwill is determined as the excess of fair value over amounts attributable to specific tangible and intangible assets. Goodwill is reviewed for impairment annually as of October 1, or more frequently, if impairment indicators exist. An impairment exists when a reporting units carrying value exceeds its fair value. When performing the goodwill impairment testing, a reporting units fair value is based on valuation techniques using the best available information, primarily discounted cash flows projections, guideline transaction multiples, and multiples of current and future earnings. The impairment charge is the excess of the goodwill carrying value over the implied fair value of goodwill.
Trademarks and brand names: Trademarks and brand names are stated at fair value established at acquisition or cost. These indefinite-lived intangible assets are reviewed for impairment annually as of October 1, or more frequently, if impairment indicators exist. An impairment exists when a trademark or brand names carrying value exceeds its fair value. The fair values of these assets are based upon the prospective stream of hypothetical after-tax royalty cost savings discounted at rates that reflect the rates of return appropriate for these intangible assets. The impairment charge is the excess of the assets carrying value over its fair value.
Pension and other postretirement benefit plan obligations: The cost of benefits provided by defined benefit pension and postretirement plans is recorded in the period employees provide service. Future pension expense for certain significant funded benefit plans is calculated using an expected return on plan asset methodology. The market-related value of plan assets is fair value. Actuarial gains and losses are accumulated and amortized into net income once they exceed a corridor, which is 10% of the projected benefit obligation, over the expected future working lifetime or life expectancy of the plan participants.
The discount rate assumption is established at the measurement date. In the U.S., the Company uses a cash flow matching approach that uses projected cash flows matched to spot rates along a high quality corporate yield curve to determine the present value of cash flows to calculate a single equivalent discount rate. The benefit obligation for pension plans in Belgium, France, and Germany represents 90% of the non-U.S. pension benefit obligation at December 31, 2017. The discount rates for these plans are determined using a cash flow matching approach similar to the U.S. approach.
Investments with registered investment companies, common and preferred stocks, and certain government debt securities are valued at the closing price reported on the active market on which the securities are traded.
Corporate debt securities are valued by third-party pricing sources using the multi-dimensional relational model using instruments with similar characteristics.
Hedge funds and the collective trusts are valued at net asset value (NAV) per share which are provided by the respective investment sponsors or investment advisers.
Revenue recognition: The Company records sales when products are shipped and the risks and rewards of ownership have transferred to the customer, the sales price is fixed and determinable, and the collectability of revenue is reasonably assured. Accruals for sales returns and other allowances are provided at point of sale based upon past experience. Adjustments to such returns and allowances are made as new information becomes available.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Rebates: The Company accrues for rebates pursuant to specific arrangements with certain customers, primarily in the aftermarket. Rebates generally provide for price reductions based upon the achievement of specified purchase volumes and are recorded as a reduction of sales as earned by such customers.
Sales and sales related taxes: The Company collects and remits taxes assessed by various governmental authorities that are both imposed on and concurrent with revenue-producing transactions with its customers. These taxes may include, but are not limited to sales, use, value-added, and some excise taxes. The collection of these taxes is reported on a net basis (excluded from revenues).
Shipping and handling costs: The Company recognizes shipping and handling costs as incurred as a component of Cost of products sold in the consolidated statements of operations.
Engineering and tooling costs: Pre-production tooling and engineering costs the Company will not own and will be used in producing products under long-term supply arrangements are expensed as incurred unless the supply arrangement provides the Company with the noncancelable right to use the tools, or the reimbursement of such costs is agreed to by the customer. Pre-production tooling costs owned by the Company are capitalized as part of machinery and equipment, and are depreciated over the shorter of the tools expected life or the duration of the related program.
Research and development: The Company expenses research and development (R&D) costs as incurred. R&D expense, including product engineering and validation costs, was $195 million, $192 million, and $189 million for the years ended December 31, 2017, 2016, and 2015. R&D expense is recorded in the consolidated statements of operations within Selling, general and administrative expenses.
Advertising costs: Advertising and promotion expenses are expensed as incurred and were $55 million, $57 million, and $48 million for the years ended December 31, 2017, 2016, and 2015. Advertising and promotion expenses are recorded in the consolidated statements of operations within Selling, general and administrative expenses.
Restructuring: Restructuring is comprised of two types of costs: employee costs (principally termination benefits) and facility closure costs. Termination benefits are recorded when it is probable employees will be entitled to benefits and the amounts can be reasonably estimated. Estimates of termination benefits are based on the frequency of past termination benefits, the similarity of benefits under the current plan and prior plans, and the existence of statutory required minimum benefits. Termination benefits for one-time termination benefits are recorded dependent upon future service requirements. Facility closure and other costs are recorded when the liability is incurred.
Foreign currency translation: Exchange adjustments related to foreign currency transactions and translation adjustments for foreign subsidiaries whose functional currency is the U.S. dollar are reflected in the consolidated statements of operations. Translation adjustments of foreign subsidiaries for which the local currency is the functional currency are reflected in the consolidated balance sheets as a component of Accumulated other comprehensive loss. The Company has not provided for deferred taxes on translation adjustments, other than for intercompany loans not designated as permanently reinvested, as the earnings of the subsidiaries are considered to be permanently reinvested.
Environmental liabilities: The Company recognizes environmental liabilities when a loss is probable and reasonably estimable. Such liabilities are generally not subject to insurance coverage. Engineering and legal specialists within the Company estimate each environmental obligation based on current law and existing technologies and are based primarily on the estimated cost of investigation and remediation required, and the likelihood other potentially responsible parties will be able to fulfill their commitments at the sites where the Company may be jointly and severally liable with such parties. The Company regularly evaluates and revises its estimates for environmental obligations based on expenditures and the availability of additional information.
Asset retirement obligations: The Company records asset retirement obligations (ARO) when liabilities are probable and amounts can be reasonably estimated. The Companys primary ARO activities relate to the removal of hazardous building materials at its facilities.
Derivative financial instruments: The Company uses commodity forward contracts to manage volatility of its underlying exposures. The Company recognizes all of its derivative instruments as either assets or liabilities at fair value. The accounting for changes in the fair value (i.e., gains or losses) of a derivative instrument depends on whether it has been designated, and is effective, as a hedge based on the type of hedging relationship. For those derivative instruments designated and qualify as hedging instruments, the Company must designate the hedging instrument as a fair value hedge, cash flow hedge or a hedge of a net investment in a foreign operation. Gains and
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
losses related to a hedge are either recognized in income immediately to offset the gain or loss on the hedged item or are deferred and reported as a component of accumulated other comprehensive loss and subsequently recognized in earnings when the hedged item affects earnings. The change in fair value of the ineffective portion of a derivative financial instrument, determined using the hypothetical derivative method, is recognized in earnings immediately. The gain or loss related to derivative financial instruments not designated as hedges are recognized immediately in earnings. Cash flows related to hedging activities are included in the operating section of the consolidated statements of cash flows. The Company does not hold or issue derivative financial instruments for trading or speculative purposes. The Companys objectives for holding derivatives are to minimize risks using the most effective and cost-efficient methods available.
Recently Issued Accounting Pronouncements
The FASB issued ASU No. 2014-09, Revenue from Contracts with Customers. This ASU clarifies the principles for recognizing revenue and provides a common revenue standard for U.S. GAAP and International Financial Reporting Standards and will require revenue to be recognized when promised goods or services are transferred to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. The Company will adopt this new guidance on January 1, 2018 using the modified retrospective application method, under which the cumulative effect is recognized in equity at the date of initial application.
Since the new standard will affect the Companys business processes, systems and controls, it has developed a comprehensive project plan to guide the implementation. This project plan includes analyzing the standards effect on the Companys customer contracts, comparing its historical accounting policies and practices to the requirements of the new standard, and identifying potential differences from applying the requirements of the new standard to its contracts. Once the Company adopts the new standard, it does not anticipate its internal control framework will materially change, but rather existing internal controls will be modified and augmented, as necessary.
The Company has reached conclusions on the key accounting assessments related to the new standard and expects to record initial adjustments related to three areas. First, certain costs associated with consideration payable to customers will be capitalized, which is expected to be between $3 million and $5 million and then the amount will be amortized as a reduction in revenue over the remaining contract life of the associated contracts (typically between 1-5 years). Second, the Company will record a balance sheet adjustment for product returns to reflect the value of the inventory to be returned. The adjustment is expected to be approximately $26 million. Finally, the Company has certain contracts for products with no alternative use for which it has a right to reasonable payment, resulting in the acceleration of certain revenues associated with these contracts. The Company has determined the effect of this adjustment to be immaterial to the financial statements and will not make an adjustment upon adoption.
The Company also expects to make additional disclosures related to the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers as required by the new standard.
In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. The updated guidance enhances the reporting model for financial instruments, which includes amendments to address aspects of recognition, measurement, presentation and disclosure. The amendments in the ASU are effective prospectively for fiscal years beginning after December 15, 2017, and interim periods therein, with early adoption not permitted. The Company expects the adoption of this guidance will not have a material effect on its financial statements.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), that replaces existing lease guidance. The new standard is intended to provide enhanced transparency and comparability by requiring lessees to record right-of-use assets and corresponding lease liabilities on the balance sheet. The new guidance will continue to classify leases as either finance or operating, with classification affecting the pattern of expense recognition in the statements of operations. The standard is effective for the Company beginning January 1, 2019, with early application permitted. The new standard is required to be applied with a modified retrospective approach to each prior reporting period presented with various optional practical expedients. The Company is evaluating the potential effects of this pronouncement on its financial statements.
In January 2017, the FASB issued ASU No. 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. This ASU removes the requirement to perform a hypothetical purchase price allocation to measure goodwill impairment. A goodwill impairment will now be the amount by which a reporting units carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. This standard is effective for annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2019, with early adoption permitted for interim or annual goodwill impairments tests performed on testing dates after January 1, 2017. The Company has adopted this ASU for goodwill impairment tests performed after January 1, 2017.
12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
In March 2017, the FASB issued Accounting Standards Update (ASU) No. 2017-07, Retirement Benefits (Topic 715). This
ASU requires entities to present the various components of net periodic benefit cost in the financial statements as either
operating or nonoperating expense elements. The service cost component will be the only component of net periodic benefit
cost included in operating expense. The standard is effective for the Company beginning January 1, 2018, with early
application permitted. The amount expected to be reclassified to nonoperating expense for the years ended December 31, 2017,
2016 and 2015 is $35 million, $41 million, and $30 million.
In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815). The amendments in this update better
align an entitys risk management activities and financial reporting for hedging relationships through changes to both the
designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results. This update
is effective for annual and interim periods beginning after December 15, 2018, which will require the Company to adopt these
provisions in the first quarter of fiscal 2019. The guidance will be applied retrospectively or prospectively, depending on the
area covered in this update. Early adoption is permitted. The Company expects the adoption of this guidance will not have a material effect on its financial statements.
3. | RESTRUCTURING CHARGES AND ASSET IMPAIRMENTS, NET |
The Companys restructuring activities are undertaken as necessary to execute managements strategy and streamline operations, consolidate and take advantage of available capacity and resources, and ultimately achieve productivity improvements and net cost reductions. Restructuring activities include efforts to integrate and rationalize the Companys businesses and to relocate operations to best cost locations.
The Companys restructuring charges consist primarily of employee costs (principally severance and/or termination benefits), facility closure and other costs, and asset impairments related to restructuring activities.
For the years ended December 31, 2017, 2016, and 2015, restructuring charges and asset impairments, net include the following:
Year Ended December 31 | ||||||||||||||||||||||||||||||||||||
2017 | 2016 | 2015 | ||||||||||||||||||||||||||||||||||
Powertrain | Motorparts | Total | Powertrain | Motorparts | Total | Powertrain | Motorparts | Total | ||||||||||||||||||||||||||||
Severance and other charges, net |
$ | (6 | ) | $ | (15 | ) | $ | (21 | ) | $ | (21 | ) | $ | (6 | ) | $ | (27 | ) | $ | (33 | ) | $ | (56 | ) | $ | (89 | ) | |||||||||
Asset impairments related to restructuring activities |
| | | | | | (1 | ) | (2 | ) | (3 | ) | ||||||||||||||||||||||||
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Total restructuring charges |
(6 | ) | (15 | ) | (21 | ) | (21 | ) | (6 | ) | (27 | ) | (34 | ) | (58 | ) | (92 | ) | ||||||||||||||||||
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Other non-restructuring asset impairments |
(9 | ) | (3 | ) | (12 | ) | | | | (16 | ) | (1 | ) | (17 | ) | |||||||||||||||||||||
Impairment of assets held for sale |
| (4 | ) | (4 | ) | | (17 | ) | (17 | ) | (12 | ) | | (12 | ) | |||||||||||||||||||||
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Total asset impairment charges |
(9 | ) | (7 | ) | (16 | ) | | (17 | ) | (17 | ) | (28 | ) | (1 | ) | (29 | ) | |||||||||||||||||||
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Total restructuring charges and asset impairments |
$ | (15 | ) | $ | (22 | ) | $ | (37 | ) | $ | (21 | ) | $ | (23 | ) | $ | (44 | ) | $ | (62 | ) | $ | (59 | ) | $ | (121 | ) | |||||||||
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Restructuring
Estimates of restructuring charges are based on information available at the time such charges are recorded. In certain countries where the Company operates, statutory requirements include involuntary termination benefits that extend several years into the future. Accordingly, severance payments continue well past the date of termination at many international locations. Thus, restructuring programs appear to be ongoing when terminations and other activities have been substantially completed. Facility closure costs are typically paid within the year of incurrence.
Restructuring opportunities include potential plant closures and employee headcount reductions in various countries and require consultation with various parties including, but not limited to, unions/works councils, local governments, and/or customers. The consultation process can take a significant amount of time and affect the final outcome and timing. The Companys policy is to record a provision for qualifying restructuring costs in accordance with the applicable accounting guidance when the outcome of such consultations becomes probable.
13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Management expects to finance its restructuring programs through cash generated from its ongoing operations or through cash available under its existing credit facilities, subject to the terms of applicable covenants. Management does not expect the execution of these programs will have an adverse effect on its liquidity position.
The following table is a summary of the Companys consolidated restructuring liabilities and related activity as of and for the years ended December 31, 2017, 2016, and 2015 by reporting segment:
Powertrain | Motorparts | Total Reporting Segments |
Corporate | Total Company |
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Balance at December 31, 2014 |
$ | 36 | $ | 16 | $ | 52 | $ | 1 | $ | 53 | ||||||||||
Provisions |
38 | 55 | 93 | | 93 | |||||||||||||||
Revisions to estimates |
(4 | ) | | (4 | ) | | (4 | ) | ||||||||||||
Payments |
(35 | ) | (22 | ) | (57 | ) | (1 | ) | (58 | ) | ||||||||||
Acquisition |
2 | | 2 | | 2 | |||||||||||||||
Foreign currency |
(4 | ) | (2 | ) | (6 | ) | | (6 | ) | |||||||||||
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Balance at December 31, 2015 |
33 | 47 | 80 | | 80 | |||||||||||||||
Provisions |
21 | 13 | 34 | | 34 | |||||||||||||||
Revisions to estimates |
| (7 | ) | (7 | ) | | (7 | ) | ||||||||||||
Payments |
(26 | ) | (24 | ) | (50 | ) | | (50 | ) | |||||||||||
Foreign currency |
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Balance at December 31, 2016 |
28 | 27 | 55 | | 55 | |||||||||||||||
Provisions |
7 | 18 | 25 | | 25 | |||||||||||||||
Revisions to estimates |
(1 | ) | (3 | ) | (4 | ) | | (4 | ) | |||||||||||
Payments |
(17 | ) | (22 | ) | (39 | ) | | (39 | ) | |||||||||||
Foreign currency |
3 | 1 | 4 | | 4 | |||||||||||||||
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Balance at December 31, 2017 |
$ | 20 | $ | 21 | $ | 41 | $ | | $ | 41 | ||||||||||
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14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
The following table provides a summary of the Companys consolidated restructuring liabilities and related activity for each type of exit cost as of and for the years ended December 31, 2017, 2016, and 2015:
Employee Costs |
Facility Closure and Other Costs |
Total | ||||||||||
Balance at December 31, 2014 |
$ | 51 | $ | 2 | $ | 53 | ||||||
Provisions |
85 | 8 | 93 | |||||||||
Revisions to estimates |
(4 | ) | | (4 | ) | |||||||
Payments |
(49 | ) | (9 | ) | (58 | ) | ||||||
Acquisitions |
2 | | 2 | |||||||||
Foreign currency |
(6 | ) | | (6 | ) | |||||||
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Balance at December 31, 2015 |
79 | 1 | 80 | |||||||||
Provisions |
30 | 4 | 34 | |||||||||
Revisions to estimates |
(7 | ) | | (7 | ) | |||||||
Payments |
(46 | ) | (4 | ) | (50 | ) | ||||||
Foreign currency |
(2 | ) | | (2 | ) | |||||||
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Balance at December 31, 2016 |
54 | 1 | 55 | |||||||||
Provisions |
24 | 1 | 25 | |||||||||
Revisions to estimates |
(4 | ) | | (4 | ) | |||||||
Payments |
(37 | ) | (2 | ) | (39 | ) | ||||||
Foreign currency |
4 | | 4 | |||||||||
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Balance at December 31, 2017 |
$ | 41 | $ | | $ | 41 | ||||||
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Restructuring charges and asset impairments for the year ended December 31, 2017 were comprised of $15 million related to the Powertrain segment and $22 million related to the Motorparts segment. The specific components of the restructuring and asset impairment charges by region and reporting segment are as follows:
December 31, 2017 | ||||||||||||||||||||||||||||
Severance Related Charges | Exit and Other Charges | Impairment Charges | Total | |||||||||||||||||||||||||
Powertrain | Motorparts | Powertrain | Motorparts | Powertrain | Motorparts | |||||||||||||||||||||||
EMEA |
$ | (3 | ) | $ | (6 | ) | $ | | $ | (1 | ) | $ | (9 | ) | $ | | $ | (19 | ) | |||||||||
North America |
| (7 | ) | | | | (3 | ) | (10 | ) | ||||||||||||||||||
ROW |
(3 | ) | (1 | ) | | | | (4 | ) | (8 | ) | |||||||||||||||||
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$ | (6 | ) | $ | (14 | ) | $ | | $ | (1 | ) | $ | (9 | ) | $ | (7 | ) | $ | (37 | ) | |||||||||
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Expenses for restructuring programs initiated during the year ended December 31, 2017 were aimed at optimizing the Companys cost structure. The Company expects to complete these programs in 2019 and the additional restructuring charges to complete such programs are not expected to be significant. For programs initiated in prior periods, the Company expects to complete these programs in 2018 and the additional restructuring charges to complete these programs are not expected to be significant.
15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Restructuring charges and asset impairments for the year ended December 31, 2016 were comprised of $21 million related to the Powertrain segment and $23 million related to the Motorparts segment. The specific components of the restructuring and asset impairment charges by region and reporting segment are as follows:
December 31, 2016 | ||||||||||||||||||||||||||||
Severance Related Charges | Exit and Other Charges | Impairment Charges | Total | |||||||||||||||||||||||||
Powertrain | Motorparts(a) | Powertrain | Motorparts | Powertrain | Motorparts | |||||||||||||||||||||||
EMEA |
$ | (16 | ) | $ | 1 | $ | (2 | ) | $ | (1 | ) | $ | | $ | (4 | ) | $ | (22 | ) | |||||||||
North America |
(2 | ) | (3 | ) | | (3 | ) | | (1 | ) | (9 | ) | ||||||||||||||||
ROW |
(1 | ) | | | | | (12 | ) | (13 | ) | ||||||||||||||||||
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$ | (19 | ) | $ | (2 | ) | $ | (2 | ) | $ | (4 | ) | $ | | $ | (17 | ) | $ | (44 | ) | |||||||||
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(a) | The EMEA region in the Motorparts segment recognized $6 million in severance related charges offset by a reduction in previously recorded estimates of $7 million during the year ended December 31, 2016. |
Restructuring charges and asset impairments for the year ended December 31, 2015 were comprised of $62 million related to the Powertrain segment and $59 million related to the Motorparts segment. The specific components of the restructuring and asset impairment charges by region and reporting segment are as follows:
December 31, 2015 | ||||||||||||||||||||||||||||
Severance Related Charges | Exit and Other Charges | Impairment Charges | Total | |||||||||||||||||||||||||
Powertrain | Motorparts | Powertrain | Motorparts | Powertrain | Motorparts | |||||||||||||||||||||||
EMEA |
$ | (27 | ) | $ | (45 | ) | $ | (3 | ) | $ | (1 | ) | $ | (20 | ) | $ | (2 | ) | $ | (98 | ) | |||||||
North America |
| (5 | ) | | (3 | ) | (1 | ) | | (9 | ) | |||||||||||||||||
ROW |
(2 | ) | (2 | ) | (1 | ) | | (8 | ) | (1 | ) | (14 | ) | |||||||||||||||
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$ | (29 | ) | $ | (52 | ) | $ | (4 | ) | $ | (4 | ) | $ | (29 | ) | $ | (3 | ) | $ | (121 | ) | ||||||||
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Due to the inherent uncertainty involved in estimating restructuring expenses, actual amounts paid for such activities may differ from amounts initially estimated. Accordingly, the Company reduced its liability previously recorded in 2017, 2016, and 2015 by $4 million, $7 million, and $4 million.
See Note 6, Held for Sale and Discontinued Operations, for further details related to the $4 million impairment loss on assets held for sale.
See Note 8, Fair Value Measurements and Financial Instruments, for further details related to property, plant, and equipment fair value measurements.
4. | OTHER INCOME (EXPENSE), NET |
The specific components of other income (expense), net are as follows:
Year Ended December 31 |
||||||||||||
2017 | 2016 | 2015 | ||||||||||
Loss on sale of investment in nonconsolidated affiliate |
$ | (2 | ) | $ | | $ | (11 | ) | ||||
Gain on sale of business |
3 | | | |||||||||
Segmentation costs |
| | (4 | ) | ||||||||
Gain (loss) on sale of assets |
7 | 7 | 4 | |||||||||
Foreign currency transaction gain (loss) |
(12 | ) | 2 | (3 | ) | |||||||
Financing charges |
(15 | ) | (12 | ) | (9 | ) | ||||||
Third party royalty income |
9 | 7 | 6 | |||||||||
Other |
19 | 17 | 12 | |||||||||
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$ | 9 | $ | 21 | $ | (5 | ) | ||||||
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16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
In the year ended December 31, 2017, the other income (expense), net included the recognition of a $6 million gain related to the termination of a customer contract.
In the year ended December 31, 2016, the other income (expense), net included the recognition of a $9 million gain related to the sale of real estate made in a prior year. The gain and receipt of the proceeds was contingent upon the propertys redevelopment by the buyer.
In the year ended December 31, 2015, the Company recognized an $11 million loss on the disposition of an equity method investment.
5. | ACQUISITIONS |
Development Company Acquisition
In November 2017, the Company completed the acquisition of substantially all of the assets of a company based in the United Kingdom focused on developing powertrain and driveline electrification technologies to reduce emissions and improve efficiency, for a purchase price of $8 million. The Company recorded $8 million of in-process research and development resulting from the purchase, which was fully impaired upon acquisition. See Note 11, Goodwill and Other Intangible Assets.
Beck Arnley Acquisition
On December 1, 2016, the Company acquired the assets and liabilities of IEH BA LLC (Beck Arnley), an entity owned by a subsidiary of IEP. Beck Arnley is a provider of premium OE quality parts and fluids for foreign nameplate vehicles in North America and was acquired for a purchase price of $14 million, which included $7 million paid in cash on the date of acquisition and a $7 million non-interest bearing note maturing on June 1, 2018. This related party note payable is included in Short-term debt, including current portion of long-term debt on the balance sheet. Beck Arnleys products complement the foreign nameplate coverage of the Companys current aftermarket offerings, while adding several new product lines, including fluids, engine management, cooling, electrical parts, and electronic components. As this is a transaction of entities under common control, the net book value of assets acquired and liabilities assumed at the acquisition date was $14 million. See Note 22, Related Party Transactions.
Filters Business Acquisition
On May 26, 2016, the Company completed the acquisition of the assets of a filter manufacturing business in Mexico, which primarily serves the Mexican market, for a purchase price of $25 million, net of cash acquired. The estimated fair value of assets acquired and liabilities assumed at the acquisition date was approximately $25 million.
TRWs Engine Components Acquisition
On February 6, 2015, the Company completed the acquisition of TRWs valvetrain business. The business was acquired through a combination of asset and stock purchases for a purchase price of approximately $309 million. On July 7, 2015, the Company completed the purchase of certain additional business assets of the TRWs valvetrain business. The business was acquired through stock purchases for a base purchase price of approximately $56 million. The purchase included a $25 million noncontrolling interest related to a 66% stake in a majority owned entity that the Company consolidates in its financial statements. The acquisition was funded primarily from the Companys available revolving line of credit and was subject to certain customary closing and post-closing adjustments. The acquisition of TRWs valvetrain business adds a completely new product line to the Companys portfolio, strengthens the Companys position as a leading developer and supplier of core components for engines, and enhances the Companys ability to support its customers to improve fuel economy and reduce emissions.
During the years ended December 31, 2017, 2016, and 2015 the Company recorded less than $1 million, $1 million, and $4 million in acquisition related expenses, primarily legal and other professional fees, associated with these acquisitions.
6. | HELD FOR SALE AND DISCONTINUED OPERATIONS |
Held for Sale Operations
The Company classifies assets and liabilities as held for sale (disposal group) when management, having the authority to approve the action, commits to a plan to sell the disposal group, the sale is probable within one year, and the disposal group is available for immediate sale in its present condition. The Company also considers whether an active program to locate a buyer has been initiated, whether the disposal group is marketed actively for sale at a price that is reasonable in relation to its current fair value, and whether actions required to complete the plan indicate it is unlikely significant changes to the plan will be made or the plan will be withdrawn.
17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
In September 2017, the Company entered into an asset purchase agreement to sell certain assets and liabilities in its Powertrain
segment for a sale price of $13 million. The related disposal group had been classified as held for sale. The sale closed in December 2017, and the Company recognized a $3 million gain for the year ended December 31, 2017.
In December 2016, the Company entered into a stock and asset purchase agreement to sell certain assets and liabilities related to its wipers business in the Motorparts segment for a sale price of $8 million. The related assets and liabilities were classified as held for sale as of December 31, 2016. During the year ended December 31, 2017, the transaction did not close and the assets and liabilities are no longer classified as held for sale as of December 31, 2017.
In December 2016, the Company entered into an agreement to sell 80.1% of the shares of one of its subsidiaries in Brazil in the Motorparts segment for a sale price of one Brazilian real. The related assets and liabilities have been classified as held for sale as of December 31, 2017 and 2016. The sale closed in January, 2018.
The assets and liabilities classified as held for sale as of December 31, 2017 and 2016 were as follows:
December 31 | ||||||||
2017 | 2016 | |||||||
Assets |
||||||||
Cash and cash equivalents |
$ | | $ | 1 | ||||
Receivables |
4 | 4 | ||||||
Inventories |
3 | 5 | ||||||
Other current assets |
| 9 | ||||||
Long-lived assets |
2 | 8 | ||||||
Impairment on carrying value |
(9 | ) | (14 | ) | ||||
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Total assets held for sale |
$ | | $ | 13 | ||||
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Liabilities |
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Trade payables |
$ | 2 | $ | 3 | ||||
Accrued liabilities |
1 | 1 | ||||||
Other liabilities |
| 2 | ||||||
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Total liabilities held for sale |
$ | 3 | $ | 6 | ||||
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These held for sale assets and liabilities have been recorded in Prepaid expenses and other current assets and Other current
liabilities as of December 31, 2017 and 2016. As part of the held for sale assessment, the Company recorded impairment charges of $4 million, $17 million, and $12 million during the years ended December 31, 2017, 2016, and 2015. These have been included in Restructuring charges and asset impairments, net in the consolidated statements of operations.
Discontinued Operations
In connection with its strategic planning process, the Company assesses its operations for market position, product technology and capability, and profitability. Those businesses not core to the Companys long-term portfolio may be considered for divestiture or other exit activities.
During the year ended December 31, 2015, the Companys Motorparts segment recognized a $7 million adjustment (no income tax effect) which is included in Gain (loss) from discontinued operations, net of tax within the consolidated statement of operations.
18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
7. | DERIVATIVES AND HEDGING ACTIVITIES |
The Company is exposed to market risk, such as fluctuations in foreign currency exchange rates, commodity prices, and changes in interest rates, which may result in cash flow risks. To manage the volatility relating to these exposures, the Company aggregates the exposures on a consolidated basis to take advantage of natural offsets. For exposures not offset within its operations, the Company enters into various derivative transactions pursuant to its risk management policies, which prohibit holding or issuing derivative financial instruments for speculative purposes, and designation of derivative instruments is performed on a transaction basis to support hedge accounting. The changes in fair value of these hedging instruments are offset in part or in whole by corresponding changes in the fair value or cash flows of the underlying exposures being hedged. The Company assesses the initial and ongoing effectiveness of its hedging relationships in accordance with its documented policy.
Cash Flow Hedges - Commodity Price Risk
The Companys production processes are dependent upon the supply of certain raw materials that are exposed to price fluctuations on the open market. The primary purpose of the Companys commodity price forward contract activity is to manage the volatility associated with forecasted purchases for up to eighteen months in the future. The Company monitors its commodity price risk exposures regularly to maximize the overall effectiveness of its commodity forward contracts. Principal raw materials hedged include copper, nickel, tin, zinc, and aluminum. In certain instances within this program, foreign currency forwards may be used in order to obtain critical terms match for commodity exposure whereby the Company engages the use of foreign exchange contracts.
The Company has designated these contracts as cash flow hedging instruments. The Company records unrecognized gains and losses in other comprehensive income (loss) (OCI or OCL) and makes regular reclassifying adjustments into Cost of products sold within the consolidated statement of operations when amounts are recognized. The Company had derivatives outstanding with an equivalent notional amount of $20 million and $16 million as of December 31, 2017 and 2016. Substantially all of the commodity price hedge contracts mature within one year.
Net Investment Hedge Foreign Currency Borrowings
The Company has foreign currency denominated debt, 736 million of which was designated as a net investment hedge in certain foreign subsidiaries and affiliates of the Company. Changes to its carrying value are included in member interest in the foreign currency translation component of other comprehensive income (loss) and offset against the translation adjustment on the underlying net assets of those foreign subsidiaries and affiliates, which are also recorded in other comprehensive income (loss). The Companys debt instruments are discussed further in Note 13, Debt.
Hedging Instruments
The following table is a summary of the carrying value of derivative and non-derivative instruments designated as hedges as of December 31, 2017 and 2016:
Carrying Value | ||||||||||||
December 31 | ||||||||||||
Balance sheet location | 2017 | 2016 | ||||||||||
Commodity price hedge contracts designated as cash flow hedges |
Other current assets | $ | 1 | $ | 4 | |||||||
Foreign currency borrowings designated as net investment hedges |
Long-term debt | $ | 884 | $ | |
The following table represents the effects before reclassification into net income of derivative and non-derivative instruments designated as hedges in other comprehensive income (loss) as of December 31, 2017, 2016, and 2015:
Amount of gain (loss) recognized in accumulated OCI or OCL (effective portion) |
||||||||||||
December 31 | ||||||||||||
2017 | 2016 | 2015 | ||||||||||
Commodity price hedge contracts designated as cash flow hedges |
$ | 2 | $ | 2 | $ | (4 | ) | |||||
Foreign currency borrowings designated as net investment hedges |
$ | (85 | ) | $ | | $ | |
The Company estimates that $3 million of net derivative gains included in AOCI as of December 31, 2017 will be reclassified into earnings within the following 12 months. See Note 18, Changes in Accumulated Other Comprehensive Income (Loss) by Component, Net of Tax for amounts recognized in other comprehensive income (loss) and amounts reclassified out of other comprehensive income (loss) at December 31, 2017, 2016, and 2015 for these hedging instruments.
19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Foreign Currency Risk
The Company manufactures and sells its products in North America, South America, Asia, Europe, and Africa. As a result, the Companys financial results could be significantly affected by factors such as changes in foreign currency exchange rates or weak economic conditions in foreign markets in which the Company manufactures and sells its products. The Company generally tries to use natural hedges within its foreign currency activities, including the matching of revenues and costs, to minimize foreign currency risk. Where natural hedges are not in place, the Company considers managing certain aspects of its foreign currency activities and larger transactions through the use of foreign currency options or forward contracts. Principal currencies hedged have historically included the euro, British pound, Polish zloty, and Mexican Peso.
Concentrations of Credit Risk
Financial instruments including cash equivalents and derivative contracts expose the Company to counterparty credit risk for non-performance. The Companys counterparties for cash equivalents and derivative contracts are banks and financial institutions that meet the Companys requirement of high credit standing. The Companys counterparties for derivative contracts are substantial investment and commercial banks with significant experience using such derivatives. The Company manages its credit risk through policies requiring minimum credit standing and limiting credit exposure to any one counterparty and through monitoring counterparty credit risks. The Companys concentration of credit risk related to derivative contracts at December 31, 2017 and 2016 is not material.
Other
The Company presents its derivative positions and any related material collateral under master netting agreements on a net basis. For derivatives designated as cash flow hedges, changes in the time value are excluded from the assessment of hedge effectiveness. Unrealized gains and losses associated with ineffective hedges, determined using the hypothetical derivative method, are recognized in Other income (expense), net. Derivative gains and losses included in accumulated other comprehensive loss for effective hedges are reclassified into operations upon recognition of the hedged transaction. Derivative gains and losses associated with undesignated hedges are recognized in Other income (expense), net for outstanding hedges and Cost of products sold or Other income (expense), net upon hedge maturity.
8. | FAIR VALUE MEASUREMENTS AND FINANCIAL INSTRUMENTS |
A three-level valuation hierarchy is used for fair value measurements based upon observable and unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect market assumptions based on the best evidence available.
Level 1: | Quoted prices in active markets for identical instruments; | |
Level 2: |
Quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-derived valuations whose significant inputs are observable; and | |
Level 3: |
Unobservable inputs in which there is little or no market data, which require the reporting entity to develop assumptions based on the best evidence available. |
Items Measured at Fair Value on a Recurring Basis
Assets and (liabilities) remeasured and disclosed at fair value on a recurring basis at December 31, 2017 and 2016 are set forth in the table below:
December 31 | Measurement | |||||||||
2017 | 2016 | Approach | ||||||||
Commodity contracts |
$ | 1 | $ | 4 | Level 2 |
The Company calculates the fair value of its commodity contracts and foreign currency contracts using quoted commodity forward rates and quoted currency forward rates, to calculate forward values, and then discounts the forward values. The discount rates for all derivative contracts are based on quoted bank deposit rates.
The Companys impairments related to Goodwill are discussed further in Note 11, Goodwill and Other Intangible Assets.
20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Items Measured at Fair Value on a Nonrecurring Basis
In addition to items measured at fair value on a recurring basis, assets may be measured at fair value on a nonrecurring basis. These assets include, long-lived assets and intangible assets which may be written down to fair value as a result of impairment.
The Company has determined the fair value measurements related to each of these assets rely primarily on Company-specific inputs and the Companys assumptions about the use of the assets, as observable inputs are not available (Level 3). To determine the fair value of long-lived asset groups, the Company utilizes discounted cash flows expected to be generated by the long-lived asset group.
During the year ended December 31, 2017, the Company recorded an impairment charge in its Powertrain segment on a long-lived asset group of approximately $8 million as a result of an impairment analysis. The Company did not record an impairment charge related to a long-lived asset group during the year-ended December 31, 2016. During the year ended December 31, 2015, the Company recorded impairment charges of $20 million related to long-lived asset groups, which have been recorded within Restructuring charges and asset impairments, net in the consolidated statement of operations.
Financial Instruments not Carried at Fair Value
Estimated fair values of the Companys outstanding debt were:
December 31 | ||||||||||||||||||
2017 | 2016 | |||||||||||||||||
Carrying Value |
Fair Value |
Carrying Value |
Fair Value |
Measurement Approach | ||||||||||||||
Term loans (Tranche B and C) |
$ | 1,449 | $ | 1,467 | $ | 2,529 | $ | 2,512 | Level 2 | |||||||||
Secured notes |
$ | 1,272 | $ | 1,276 | Level 2 |
Fair value approximates carrying value for foreign debt as well as the U.S. revolver.
Fair market values are developed by the use of estimates obtained from brokers and other appropriate valuation techniques based on information available as of December 31, 2017 and 2016. The fair value estimates do not necessarily reflect the values the Company could realize in the current markets.
9. | INVENTORIES, NET |
Inventories, net consist of the following:
December 31 | ||||||||
2017 | 2016 | |||||||
Raw materials |
$ | 278 | $ | 239 | ||||
Work-in-process |
212 | 170 | ||||||
Finished products |
966 | 912 | ||||||
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$ | 1,456 | $ | 1,321 | |||||
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21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
10. | PROPERTY, PLANT AND EQUIPMENT, NET |
The following table summarizes the components of property, plant, and equipment, net:
December 31 | ||||||||||||
Useful Life | 2017 | 2016 | ||||||||||
Land |
| $ | 247 | $ | 237 | |||||||
Buildings and building improvements |
10 - 39 years | 647 | 563 | |||||||||
Machinery and equipment |
3 - 12 years | 3,739 | 3,200 | |||||||||
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4,633 | 4,000 | |||||||||||
Accumulated depreciation |
(2,089 | ) | (1,666 | ) | ||||||||
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$ | 2,544 | $ | 2,334 | |||||||||
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Depreciation expense for the years ended December 31, 2017, 2016, and 2015 was $339 million, $316 million, and $280 million.
The Company leases property, plant, and equipment used in its operations. Future minimum payments under non-cancelable operating leases with initial or remaining terms of more than one year are as follows:
2018 | 2019 | 2020 | 2021 | 2022 | 2023 and thereafter |
Total | ||||||||||||||||||||||
Future minimum payments (non-cancellable operating leases) |
$ | 64 | $ | 56 | $ | 50 | $ | 43 | $ | 35 | $ | 49 | $ | 297 |
Total rental expense under operating leases for the years ended December 31, 2017, 2016, and 2015 was $92 million, $84 million, and $84 million, exclusive of property taxes, insurance, and other occupancy costs generally payable by the Company.
11. | GOODWILL AND OTHER INTANGIBLE ASSETS |
At December 31, 2017 and 2016, goodwill consists of the following:
December 31, 2017 | ||||||||||||
Powertrain | Motorparts | Total | ||||||||||
Gross carrying amount, January 1 |
$ | 654 | $ | 809 | $ | 1,463 | ||||||
Foreign exchange |
15 | | 15 | |||||||||
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Gross carrying amount, December 31 |
$ | 669 | $ | 809 | $ | 1,478 | ||||||
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Accumulated impairment, January 1 |
$ | (142 | ) | $ | (648 | ) | $ | (790 | ) | |||
Impairment |
(3 | ) | | (3 | ) | |||||||
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Accumulated impairment, December 31 |
$ | (145 | ) | $ | (648 | ) | $ | (793 | ) | |||
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Net carrying value, December 31 |
$ | 524 | $ | 161 | $ | 685 | ||||||
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December 31, 2016 | ||||||||||||
Powertrain | Motorparts | Total | ||||||||||
Gross carrying amount, January 1 |
$ | 648 | $ | 809 | $ | 1,457 | ||||||
Acquisitions and purchase accounting adjustments |
6 | | 6 | |||||||||
Foreign exchange |
| | | |||||||||
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Gross carrying amount, December 31 |
$ | 654 | $ | 809 | $ | 1,463 | ||||||
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Accumulated impairment, January 1 |
$ | (136 | ) | $ | (648 | ) | $ | (784 | ) | |||
Impairment |
(6 | ) | | (6 | ) | |||||||
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Accumulated impairment, December 31 |
$ | (142 | ) | $ | (648 | ) | $ | (790 | ) | |||
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Net carrying value, December 31 |
$ | 512 | $ | 161 | $ | 673 | ||||||
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22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
At December 31, 2017 and 2016, intangible assets consist of the following:
December 31, 2017 | December 31, 2016 | |||||||||||||||||||||||
Gross Carrying Amount |
Accumulated Amortization |
Net Carrying Amount |
Gross Carrying Amount |
Accumulated Amortization |
Net Carrying Amount |
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Definite-lived intangible assets: |
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Developed technology |
$ | 139 | $ | (113 | ) | $ | 26 | $ | 138 | $ | (100 | ) | $ | 38 | ||||||||||
Customer relationships |
686 | (423 | ) | 263 | 682 | (377 | ) | 305 | ||||||||||||||||
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$ | 825 | $ | (536 | ) | $ | 289 | $ | 820 | $ | (477 | ) | $ | 343 | |||||||||||
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Indefinite-lived intangible assets: |
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Trademarks and brand names |
$ | 228 | $ | 228 |
The Companys recorded amortization expense associated with definite-lived intangible assets was:
Year Ended December 31 | ||||||||||||
2017 | 2016 | 2015 | ||||||||||
Amortization expense |
$ | 58 | $ | 58 | $ | 59 |
The Company utilizes the straight line method of amortization, recognized over the estimated useful lives of the assets. The Companys developed technology intangible assets have useful lives of between 9 and 15 years. The Companys customer relationships intangible assets have useful lives of between 2 and 24 years.
The Companys estimated future amortization expense for its definite-lived intangible assets is as follows:
2018 | 2019 | 2020 | 2021 | 2022 | 2023 and thereafter |
Total | ||||||||||||||||||||||
Expected amortization expense |
$ | 49 | $ | 49 | $ | 48 | $ | 48 | $ | 27 | $ | 68 | $ | 289 |
Goodwill
The Company conducts its assessment for goodwill impairments on October 1 of each year for all reporting units.
Powertrain
In September 2017, the Company entered into an asset purchase agreement to sell certain assets and liabilities in its Powertrain segment which triggered an interim goodwill impairment analysis. As a result of completing its analysis, the Company concluded $3 million of goodwill was impaired and recognized the impairment charge in the three months ended September 30, 2017. There were no additional goodwill impairment charges recorded in the year ended December 31, 2017 in the Powertrain segment based on the results of the annual goodwill impairment tests.
As a result of finalizing its 2015 annual impairment assessment during the six-months ended June 30, 2016, the Company recorded additional impairment charges of $6 million in the year ended December 31, 2016. Based on the results of the 2016 annual impairment assessment, there were no goodwill impairment charges in the year ended December 31, 2016 in the Powertrain segment.
Based on completion of a preliminary 2015 annual goodwill impairment test, the Company determined goodwill was impaired for three reporting units within the Powertrain segment, as the fair values decreased below their carrying values. The decreases in fair values during 2015 were driven by decreases in operating results for these reporting units. Based on the results of the preliminary annual goodwill impairment test, an estimate of goodwill impairment charges of $38 million was recorded in the year ended December 31, 2015 in the Powertrain segment. Due to the complexity of the second step goodwill impairment test, the Company did not finalize its assessment prior to filing its 2015 annual report.
Motorparts
Based on the results of the annual goodwill impairment tests, there were no goodwill impairment charges recorded in the years ended December 31, 2017 and 2016 in the Motorparts segment.
23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
As part of an interim goodwill impairment test as of September 30, 2015, the Company determined there were impairment indicators for one of its reporting units and conducted an impairment analysis. Decreases in operating results for certain reporting units as a result of the negative effect of exchange rates and negative economic conditions resulted in impairment indicators prior to the annual impairment assessment. Based on the results of the interim goodwill impairment tests, a goodwill impairment charge of $56 million was recorded in the year ended December 31, 2015 in the Motorparts segment.
Fair Value Measurements
When performing the goodwill impairment testing, a reporting units fair value is based on valuation techniques using the best available information, primarily discounted cash flows projections, which require the Company to make significant assumptions and estimates about the extent and timing of future cash flows, growth rates, market share, and discount rates that represent unobservable inputs into the valuation methodology. The cash flows are estimated over a significant future period of time, which makes those estimates and assumptions subject to a high degree of uncertainty. Where available and as appropriate, comparative market multiples and the quoted market price of our common stock are used to corroborate the results of the discounted cash flow method. Assumptions used in the discounted cash flow analysis that have the most significant effect on the estimated fair value of the Companys reporting units are the weighted average cost of capital and revenue growth-rates.
Other Intangible Assets
The Company performs its annual trademarks and brand names impairment analysis as of October 1, or more frequently, if impairment indicators exist. The fair values of these assets are based upon the prospective stream of hypothetical after-tax royalty cost savings discounted at rates that reflect the rates of return appropriate for these intangible assets.
The Company had no trademark and brand name impairments from the October 1, 2017, 2016, and 2015 impairment analyses.
In November 2017, the Company acquired a clean-technology research and development company focused on developing powertrain and driveline electrification technologies to reduce emissions and improve efficiency. As part of the acquisition, the Company recorded in-process research and development of $8 million which was impaired and recognized as an impairment charge during the year ended December 31, 2017.
12. | INVESTMENT IN NONCONSOLIDATED AFFILIATES |
The Company maintains investments in several nonconsolidated affiliates, which are primarily located in China, Korea, Turkey, India, and the U.S. With the exception of the deconsolidated business discussed below, the Company generally equates control to ownership percentage whereby investments more than 50% owned are consolidated.
As of December 31, 2017 and 2016, the Companys investment in affiliates was $324 million and $270 million, respectively.
24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
The Companys beneficial ownership in affiliates accounted for under the equity method is as follows:
As of December 31, | ||||||||||||
2017 | 2016 | 2015 | ||||||||||
Anqing TP Goetze Piston Ring Company Limited (China) |
35.7 | % | 35.7 | % | 35.7 | % | ||||||
Dongsuh Federal-Mogul Limited (Korea) |
50.0 | % | 50.0 | % | 50.0 | % | ||||||
Federal-Mogul Motorparts Otomotiv A.S (Turkey) |
50.0 | % | ||||||||||
Federal-Mogul Powertrain Otomotiv A.S (Turkey) |
50.0 | % | 50.0 | % | 50.0 | % | ||||||
Federal-Mogul Dis Ticaret A.S. (Turkey) |
50.0 | % | 50.0 | % | 50.0 | % | ||||||
Federal-Mogul Izmit Piston ve Pim Uretim Tesisleri A.S. (Turkey) |
43.0 | % | 43.0 | % | 43.0 | % | ||||||
Federal-Mogul TP Liners Inc. (U.S.) |
46.0 | % | 46.0 | % | 46.0 | % | ||||||
KB Autosys Co, Ltd. (Korea) |
33.6 | % | 33.6 | % | 33.6 | % | ||||||
Federal-Mogul TP Liner Europe Otomotiv Limited Sirketi (Turkey) |
25.0 | % | 25.0 | % | 25.0 | % | ||||||
Farloc Argentina S.A.I.C. Y F. (Argentina) |
23.9 | % | 23.9 | % | 23.9 | % | ||||||
Frenos Hidraulicos Automotrices S.A. de C.V. (Mexico) |
49.0 | % | 49.0 | % | 49.0 | % | ||||||
VTD Vakuum Technik Dresden (Germany) (a) |
100.0 | % | 100.0 | % | 30.0 | % | ||||||
Anqing TP Powder Metallurgy Co., Ltd (China) |
20.0 | % | 20.0 | % | 20.0 | % | ||||||
Federal-Mogul CAIEC Automotive Technology (China) (b) |
45.0 | % | 45.0 | % |
(a) | On April 1, 2016 the Company acquired the remaining 70% interest in VTD Vakuum Technik Dresden (Germany) for a purchase price of $2 million. The prior affiliate has been accounted for as a consolidated subsidiary since its acquisition. |
(b) | On December 1, 2017 Federal-Mogul CAIEC Automotive Technology (China) ceased operations and the Company recognized an impairment charge on the investment which has been included in Note 3, Restructuring Charges and Asset Impairments. |
In January 2015, Federal-Mogul Piston Segman ve Gomlek Uretim Tesisleri A.S was dissolved to form two separate joint ventures, Federal-Mogul Motorparts Otomotiv A.S and Federal-Mogul Powertrain Otomotiv A.S. The Company retained a 50% noncontrolling interest in the new joint ventures. In July of 2016, Federal-Mogul Motorparts Otomotiv A.S merged with Federal-Mogul Powertrain Otomotiv A.S with the surviving entity being Federal-Mogul Powertrain Otomotiv A.S. This entity, along with Federal-Mogul Izmit Piston ve Pim Uretim Tesisleri A.S. and Federal-Mogul Dis Ticaret A.S., are collectively referred to herein as the Turkey JVs.
As part of the regulatory approval related to the 2014 acquisition of the Honeywell brake component business, the Company committed to divest, or procure the divestiture of the commercial and light vehicle brake pads business relating to the OEM market in the European Economic Area. As such, the Company deconsolidated these subsidiaries and accounted for them as equity method investments until disposition, which have not been included in the table above. The disposition was completed in the first quarter of 2015. As a result, the Company recognized an $11 million loss on disposal recorded in the line item Other income (expense), net in the consolidated statements of operations.
The following table represents amounts reflected in the Companys financial statements related to nonconsolidated affiliates:
Year Ended December 31 | ||||||||||||
2017 | 2016 | 2015 | ||||||||||
Equity earnings of nonconsolidated affiliates, net of tax |
$ | 68 | $ | 59 | $ | 56 | ||||||
Cash dividends received from nonconsolidated affiliates |
$ | 39 | $ | 77 | $ | 11 |
At December 31, 2017 and 2016, the carrying amount of our investments in the Turkey JVs exceeded our share of the underlying net assets by $38 million and $35 million. These differences primarily relate to goodwill and other intangible assets.
25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
The following tables present summarized aggregated financial information of the Companys nonconsolidated affiliates as of and for the year ended December 31, 2017:
Turkey JVs | Anqing TP Goetze |
Other | Total | |||||||||||||
Statements of Operations |
||||||||||||||||
Sales |
$ | 372 | $ | 163 | $ | 482 | $ | 1,017 | ||||||||
Gross profit |
$ | 90 | $ | 51 | $ | 105 | $ | 246 | ||||||||
Income from continuing operations |
$ | 83 | $ | 57 | $ | 68 | $ | 208 | ||||||||
Net income |
$ | 68 | $ | 51 | $ | 59 | $ | 178 | ||||||||
Turkey JVs | Anqing TP Goetze |
Other | Total | |||||||||||||
Balance Sheets |
||||||||||||||||
Current assets |
$ | 186 | $ | 155 | $ | 230 | $ | 571 | ||||||||
Noncurrent assets |
$ | 241 | $ | 135 | $ | 210 | $ | 586 | ||||||||
Current liabilities |
$ | 81 | $ | 53 | $ | 123 | $ | 257 | ||||||||
Noncurrent liabilities |
$ | 73 | $ | | $ | 23 | $ | 96 |
The following tables present summarized aggregated financial information of the Companys nonconsolidated affiliates as of and for the year ended December 31, 2016:
Turkey JVs | Anqing TP Goetze |
Other | Total | |||||||||||||
Statements of Operations |
||||||||||||||||
Sales |
$ | 354 | $ | 156 | $ | 459 | $ | 969 | ||||||||
Gross profit |
$ | 79 | $ | 49 | $ | 98 | $ | 226 | ||||||||
Income from continuing operations |
$ | 64 | $ | 48 | $ | 60 | $ | 172 | ||||||||
Net income |
$ | 55 | $ | 48 | $ | 55 | $ | 158 | ||||||||
Turkey JVs | Anqing TP Goetze |
Other | Total | |||||||||||||
Balance Sheets |
||||||||||||||||
Current assets |
$ | 216 | $ | 107 | $ | 213 | $ | 536 | ||||||||
Noncurrent assets |
$ | 220 | $ | 128 | $ | 173 | $ | 521 | ||||||||
Current liabilities |
$ | 114 | $ | 47 | $ | 101 | $ | 262 | ||||||||
Noncurrent liabilities |
$ | 80 | $ | | $ | 38 | $ | 118 |
The following table presents summarized aggregated financial information of the Companys nonconsolidated affiliates as of and for the year ended December 31, 2015:
Turkey JVs | Anqing TP Goetze |
Other | Total | |||||||||||||
Statements of Operations |
||||||||||||||||
Sales |
$ | 327 | $ | 164 | $ | 396 | $ | 887 | ||||||||
Gross profit |
$ | 74 | $ | 51 | $ | 53 | $ | 178 | ||||||||
Income from continuing operations |
$ | 63 | $ | 52 | $ | 29 | $ | 144 | ||||||||
Net income |
$ | 52 | $ | 52 | $ | 29 | $ | 133 |
26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
The Company does not hold a controlling interest in the Turkey JVs. The Turkey JVs were established for the purpose of manufacturing and marketing automotive parts, including pistons, piston rings, piston pins, and cylinder liners to OE and aftermarket customers. Purchases from the Turkey JVs for the years ended December 31, 2017, 2016, and 2015 were $225 million, $173 million, and $144 million. Sales to the Turkey JVs for the years ended December 31, 2017, 2016, and 2015 were $70 million, $65 million, and $56 million. The Company had a net accounts payable balance with the Turkey JVs of $2 million as of December 31, 2017 and a net accounts receivable balance of $3 million as of December 31, 2016.
13. | DEBT |
The following is a summary of debt outstanding as of December 31, 2017 and 2016:
December 31 | ||||||||
2017 | 2016 | |||||||
Loans under facilities: |
||||||||
Revolver |
$ | 250 | $ | 345 | ||||
Tranche B term loan |
| 684 | ||||||
Tranche C term loan |
1,455 | 1,857 | ||||||
Secured Notes: |
||||||||
4.875% Euro Fixed Rate Notes |
498 | | ||||||
Euro Floating Rate Notes |
360 | | ||||||
5.000% Euro Fixed Rate Notes |
420 | | ||||||
Debt discount |
(4 | ) | (6 | ) | ||||
Debt issuance fees |
(9 | ) | (7 | ) | ||||
Other debt, primarily foreign instruments |
160 | 152 | ||||||
|
|
|
|
|||||
3,130 | 3,025 | |||||||
Less: Short-term debt, including current maturities of long-term debt |
(126 | ) | (142 | ) | ||||
|
|
|
|
|||||
Total long-term debt |
$ | 3,004 | $ | 2,883 | ||||
|
|
|
|
The Company has a revolving line of credit in the U.S. (Revolver), which provides for (i) aggregate availability of $600 million (ii) a maturity date of December 6, 2018, subject to certain limited exceptions, and (iii) additional availability under the Companys borrowing base. Advances under the Revolver generally bear interest at a variable rate per annum equal to (i) the Alternate Base Rate (as defined in the agreement) plus an adjustable margin of 0.50% to 1.00% based on the average monthly availability or (ii) the Adjusted LIBOR Rate (as defined in the agreement) plus a margin of 1.50% to 2.00% based on the average monthly availability. An unused commitment fee of 0.375% is also payable under the terms of the Revolver.
On April 15, 2014, the Company entered into a tranche B term loan facility (the Tranche B Facility) and a tranche C term loan facility (the Tranche C Facility, and together with the Tranche B Facility, the Term Facilities). In connection with the Term Facilities and Revolver, the Company incurred original issue discount of $11 million and debt issuance costs of $12 million. The discount and debt issuance costs are being amortized to interest expense, net over 48 to 84 months.
The Term Facilities, among other things, (i) provides for aggregate commitments under the Tranche B Facility of $700 million with a maturity date of April 15, 2018, (ii) provides for aggregate commitments under the Tranche C Facility of $1.9 billion with a maturity date of April 15, 2021, (iii) increases the interest rates applicable to the Facilities as described below, (iv) provides that for all outstanding letters of credit there is a corresponding decrease in borrowings available under the Revolver, (v) provides that in the event that as of a particular determination date more than $700 million aggregate principal amount of existing term loans and certain related refinancing indebtedness will become due within 91 days of such determination date, the Revolver will mature on such determination date, (vi) provides for additional incremental indebtedness, secured on a pari passu basis, of an unlimited amount of additional indebtedness if the Company meets a financial covenant incurrence test, and (vii) amends certain other restrictive covenants.
Borrowings under the Tranche B Facility generally bear interest at a variable rate per annum equal to (i) the Alternate Base Rate plus a margin of 2.00% or (ii) the Adjusted LIBOR Rate plus a margin of 3.00%, subject, in each case, to a floor of 1.00%. Borrowings under the Tranche C Facility generally bear interest at a variable rate per annum equal to (i) the Alternate Base Rate plus a margin of 2.75% or (ii) the Adjusted LIBOR Rate plus a margin of 3.75%, subject, in each case, to a minimum rate of 1.00% plus the applicable margin.
27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
The obligations of the Company under the Revolver and Term Facilities credit agreement are guaranteed by substantially all of the domestic subsidiaries and certain foreign subsidiaries of the Company, and are secured by substantially all personal property and certain real property of the Company and such guarantors, subject to certain limitations. The liens granted to secure these obligations and certain cash management and hedging obligations have first priority. As such, the Companys availability is limited by borrowing base conditions.
The Revolver and Term Facilities credit agreement also contains certain affirmative and negative covenants and events of default, including, subject to certain exceptions, restrictions on incurring additional indebtedness, mandatory prepayment provisions associated with specified asset sales and dispositions, and limitations on: i) investments; ii) certain acquisitions, mergers or consolidations; iii) sale and leaseback transactions; iv) certain transactions with affiliates; and v) dividends and other payments in respect of capital stock. The Company was in compliance with all debt covenants as of December 31, 2017 and 2016.
On June 29, 2017, the Company issued an aggregate principal amount of 350 million 5.000% Euro Fixed Rate Notes due 2024. Interest on the 5.000% Euro Fixed Rate Notes will accrue at a rate of 5.000% per annum and will be payable on January 15 and July 15 of each year, commencing on January 15, 2018. The 5.000% Euro Fixed Rate Notes were issued without a discount and will rank equally in right of payment to all existing and future senior secured indebtedness. In connection with the issuance of the notes, the Company capitalized debt issuance costs of $2 million which are being amortized to interest expense, net under the interest method over 84 months.
Proceeds from the issuance of the 5.000% Euro Fixed Rate Notes were $395 million which were used to repay a portion of the Tranche C term loan in the amount of $393 million, including accrued interest, and pay $2 million of fees and expenses related to the issuance of the 5.000% Euro Fixed Rate Notes.
On March 30, 2017, the Company issued an aggregate principal amount of 415 million 4.875% Euro Fixed Rate Notes due 2022 and an aggregate principal amount of 300 million Euro Floating Rate Notes due 2024. Interest on the 4.875% Euro Fixed Rate Notes will accrue at a rate of 4.875% per annum and will be payable on April 15 and October 15 of each year, commencing on October 15, 2017. Interest on the Euro Floating Rate Notes will accrue at the three-month EURIBOR rate (with 0% floor) plus 4.875% per annum and will be payable on January 15, April 15, July 15 and October 15, commencing July 15, 2017. The 4.875% Euro Fixed Rate Notes and Euro Floating Rate Notes were issued without a discount and will rank equally in right of payment to all existing and future senior secured indebtedness. In connection with the issuance of the notes, the Company capitalized debt issuance costs of $5 million which are being amortized to interest expense under the interest method over 60 to 84 months.
Proceeds from the issuance of the 4.875% Euro Fixed Rate Notes and the Euro Floating Rate Notes were $776 million which were used to repay the Tranche B term loan in the amount of $684 million, including accrued interest, repay $85 million of the outstanding balance on the Revolver, and pay $5 million of fees and expenses related to the issuance of the notes. An entity related to the Companys parent, IEP, acted as an intermediary in transferring the net proceeds to the Company and in the repayment of the Tranche B term loan. No related party income or expense was recorded as a result of facilitating this transaction.
The Company recognized a $4 million loss on extinguishment of debt during the year ended December 31, 2017 for the write-off of prior debt issuance costs and original issue discounts related to the Tranche B and C term loans.
The Company has designated a portion of the Euro Notes as a net investment hedge of its European operations. As such, the fluctuations in foreign currency exchange rates on the value of the notes is recorded to cumulative translation adjustment. See Note 7, Derivatives and Hedging Activities.
The Euro Notes were issued under indentures dated March 30, 2017, and June 29, 2017, which contain customary events of defaults and covenants relating to, among other things, the incurrence of debt, affiliate transactions, liens and restricted payments.
On February 23, 2018, the Company extended its Revolver, which provides for (i) aggregate availability of $625 million, (ii) a maturity date of February 23, 2023, subject to certain limited exceptions, and (iii) additional availability under the Companys borrowing base. Advances under the Revolver generally bear interest at a variable rate per annum equal to (i) the Alternate Base Rate (as defined in the agreement) plus an adjustable margin of 0.25% to 0.75% based on the average monthly availability or (ii) the Adjusted LIBOR Rate (as defined in the agreement) plus a margin of 1.25% to 1.75% based on the average monthly availability. An unused commitment fee of 0.25% is also payable under the terms of the Revolver.
28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
The total availability under credit facilities was $386 million and $273 million as of December 31, 2017 and 2016. The Company had $38 million and $45 million of letters of credit outstanding as of December 31, 2017 and 2016. Availability under the Companys Revolver was limited by borrowing base conditions as of December 31, 2016.
Interest expense associated with the amortization of the debt issuance costs recognized in the Companys consolidated statements of operations, consists of the following:
Year Ended December 31 | ||||||||||||
2017 | 2016 | 2015 | ||||||||||
Amortization of debt issuance fees |
$ | 3 | $ | 3 | $ | 3 | ||||||
Amortization of original issue discount |
1 | 2 | 2 | |||||||||
|
|
|
|
|
|
|||||||
$ | 4 | $ | 5 | $ | 5 | |||||||
|
|
|
|
|
|
The Company has the following contractual debt obligations outstanding at December 31, 2017:
2018 | 2019 | 2020 | 2021 | 2022 | 2023 and thereafter |
Total | ||||||||||||||||||||||
Contractual debt obligations outstanding |
$ | 126 | $ | 9 | $ | 9 | $ | 1,463 | $ | 506 | $ | 1,030 | $ | 3,143 |
The weighted average cash interest rates for short-term borrowings were approximately 4.5% and 4.4% as of December 31, 2017 and 2016. Interest paid on debt for the years ended December 31, 2017, 2016, and 2015 was $127 million, $139 million, and $133 million.
14. | ACCRUED LIABILITIES |
Accrued liabilities consist of the following:
December 31 | ||||||||
2017 | 2016 | |||||||
Accrued compensation |
$ | 214 | $ | 179 | ||||
Accrued rebates |
149 | 159 | ||||||
Restructuring liabilities |
23 | 55 | ||||||
Non-income tax payable |
23 | 42 | ||||||
Alleged defective products |
10 | 18 | ||||||
Accrued professional services |
26 | 27 | ||||||
Accrued income taxes |
22 | 32 | ||||||
Accrued product returns |
29 | 25 | ||||||
Accrued warranty |
10 | 17 | ||||||
|
|
|
|
|||||
$ | 506 | $ | 554 | |||||
|
|
|
|
29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
15. | PENSION AND OTHER POSTRETIREMENT BENEFITS |
Defined Contribution Pension Plans
The Company maintains certain defined contribution pension plans for eligible employees. Effective January 1, 2013, the Company amended its U.S. defined contribution plan to allow for an enhanced company match and company provided age-based contributions for eligible U.S. salaried and non-union hourly employees. The total expenses attributable to the Companys defined contribution savings plan were $46 million, $43 million, and $45 million for the years ended December 31, 2017, 2016, and 2015.
Defined Benefit Plans
The Company sponsors defined benefit pension plans, and health care and life insurance benefits for certain employees and retirees around the world. There is also an unfunded nonqualified pension plan primarily covering U.S. executives.
The funding policy for qualified defined benefit pension plans is to contribute the minimum required by applicable laws and regulations or to directly pay benefit payments where appropriate. At December 31, 2017, all legal funding requirements had been met. The Company expects to contribute $31 million to its U.S. qualified plans, $1 million to its U.S. non-qualified plans, $32 million to its non-U.S. pension plans, and $23 million to its other postretirement plans in 2018.
Other Benefits
The Company also provides benefits to former or inactive employees paid after employment but before retirement. The liabilities for such U.S. and European postemployment benefits were $67 million and $60 million at December 31, 2017 and 2016.
30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
The measurement date for all defined benefit plans is December 31. The following provides a reconciliation of the plans benefit obligations, plan assets, funded status and recognition in the consolidated balance sheets:
Pension Benefits | Other Postretirement | |||||||||||||||||||||||
U.S. Plans | Non-U.S. Plans | Benefits | ||||||||||||||||||||||
2017 | 2016 | 2017 | 2016 | 2017 | 2016 | |||||||||||||||||||
Change in benefit obligation: |
||||||||||||||||||||||||
Benefit obligation, beginning of year |
$ | 1,167 | $ | 1,221 | $ | 510 | $ | 487 | $ | 295 | $ | 323 | ||||||||||||
Service cost |
2 | 3 | 15 | 14 | | | ||||||||||||||||||
Interest cost |
44 | 49 | 11 | 13 | 12 | 14 | ||||||||||||||||||
Benefits paid |
(73 | ) | (98 | ) | (22 | ) | (21 | ) | (23 | ) | (24 | ) | ||||||||||||
Medicare subsidies received |
| | | | 2 | 2 | ||||||||||||||||||
Curtailments |
| | | (1 | ) | | | |||||||||||||||||
Settlements |
| | (1 | ) | (4 | ) | | | ||||||||||||||||
Actuarial losses (gains) |
41 | (8 | ) | (17 | ) | 39 | (1 | ) | (21 | ) | ||||||||||||||
Business combinations |
| | 1 | | | | ||||||||||||||||||
Currency translation |
| | 68 | (17 | ) | 1 | 1 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Benefit obligation, end of year |
$ | 1,181 | $ | 1,167 | $ | 565 | $ | 510 | $ | 286 | $ | 295 | ||||||||||||
|
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|
|
|
|
|
|
|
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|
|
|||||||||||||
Change in plan assets: |
||||||||||||||||||||||||
Fair value of plan assets, beginning of year |
$ | 856 | $ | 870 | $ | 63 | $ | 57 | $ | | $ | | ||||||||||||
Actual return on plan assets |
116 | 45 | 3 | 3 | | | ||||||||||||||||||
Settlements |
| | (1 | ) | (4 | ) | | | ||||||||||||||||
Company contributions |
44 | 39 | 30 | 30 | 21 | 22 | ||||||||||||||||||
Benefits paid |
(73 | ) | (98 | ) | (22 | ) | (21 | ) | (23 | ) | (24 | ) | ||||||||||||
Business combinations |
| | | 1 | | | ||||||||||||||||||
Medicare subsidies received |
| | | | 2 | 2 | ||||||||||||||||||
Currency translation |
| | 8 | (3 | ) | | | |||||||||||||||||
|
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|
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|
|
|
|
|||||||||||||
Fair value of plan assets, end of year |
$ | 943 | $ | 856 | $ | 81 | $ | 63 | $ | | $ | | ||||||||||||
|
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|
|
|
|
|
|
|
|||||||||||||
Funded status of the plan |
$ | (238 | ) | $ | (311 | ) | $ | (484 | ) | $ | (447 | ) | $ | (286 | ) | $ | (295 | ) | ||||||
|
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|
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|
|||||||||||||
Amounts recognized in the consolidated balance sheets: |
||||||||||||||||||||||||
Current liabilities |
$ | (1 | ) | $ | (1 | ) | $ | (15 | ) | $ | (13 | ) | $ | (22 | ) | $ | (23 | ) | ||||||
Noncurrent liabilities(a) |
(237 | ) | (310 | ) | (469 | ) | (434 | ) | (264 | ) | (272 | ) | ||||||||||||
|
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|
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|
|||||||||||||
Net amount recognized |
$ | (238 | ) | $ | (311 | ) | $ | (484 | ) | $ | (447 | ) | $ | (286 | ) | $ | (295 | ) | ||||||
|
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|
|||||||||||||
Amounts recognized in accumulated other comprehensive loss, inclusive of tax effects: |
||||||||||||||||||||||||
Net actuarial loss (gain) |
$ | 393 | $ | 435 | $ | 87 | $ | 93 | $ | 32 | $ | 34 | ||||||||||||
Prior service cost (credit) |
| | 1 | 1 | (2 | ) | (6 | ) | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total |
$ | 393 | $ | 435 | $ | 88 | $ | 94 | $ | 30 | $ | 28 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
(a) | The Pension and other postretirement benefits line in the consolidated balance sheet includes $67 million and $60 million of postemployment benefits which are not included in the table above. |
Information for defined benefit plans with projected benefit obligations in excess of plan assets:
Pension Benefits | Other Postretirement | |||||||||||||||||||||||
U.S. Plans | Non-U.S. Plans | Benefits | ||||||||||||||||||||||
2017 | 2016 | 2017 | 2016 | 2017 | 2016 | |||||||||||||||||||
Projected benefit obligation |
$ | 1,181 | $ | 1,167 | $ | 565 | $ | 509 | $ | 286 | $ | 295 | ||||||||||||
Fair value of plan assets |
$ | 943 | $ | 856 | $ | 81 | $ | 62 | $ | | $ | |
31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Information for pension plans with accumulated benefit obligations in excess of plan assets:
Pension Benefits | ||||||||||||||||
U.S. Plans | Non-U.S. Plans | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Projected benefit obligation |
$ | 1,181 | $ | 1,167 | $ | 548 | $ | 494 | ||||||||
Accumulated benefit obligation |
$ | 1,181 | $ | 1,167 | $ | 510 | $ | 459 | ||||||||
Fair value of plan assets |
$ | 943 | $ | 856 | $ | 66 | $ | 50 |
The accumulated benefit obligation for all pension plans is $1,702 million and $1,636 million as of December 31, 2017 and 2016.
The following table summarizes the components of net periodic benefit cost (credit) along with the assumptions used to determine the benefit obligations for the years ended December 31:
Pension Benefits | Other Postretirement | |||||||||||||||||||||||||||||||||||
U.S. Plans | Non-U.S. Plans | Benefits | ||||||||||||||||||||||||||||||||||
2017 | 2016 | 2015 | 2017 | 2016 | 2015 | 2017 | 2016 | 2015 | ||||||||||||||||||||||||||||
Components of expense |
||||||||||||||||||||||||||||||||||||
Service cost |
$ | 2 | $ | 3 | $ | 3 | $ | 15 | $ | 14 | $ | 16 | $ | | $ | | $ | | ||||||||||||||||||
Interest cost |
44 | 49 | 48 | 11 | 13 | 10 | 12 | 14 | 13 | |||||||||||||||||||||||||||
Expected return on plan assets |
(47 | ) | (48 | ) | (59 | ) | (2 | ) | (2 | ) | (2 | ) | | | | |||||||||||||||||||||
Amortization of actuarial losses |
13 | 12 | 10 | 8 | 5 | 11 | | 2 | 5 | |||||||||||||||||||||||||||
Amortization of prior service credit |
| | | | | | (4 | ) | (4 | ) | (4 | ) | ||||||||||||||||||||||||
Settlement loss (gain) |
| | | | 1 | | | | | |||||||||||||||||||||||||||
Curtailment gain |
| | | | (1 | ) | (2 | ) | | | | |||||||||||||||||||||||||
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Net periodic cost (credit) |
$ | 12 | $ | 16 | $ | 2 | $ | 32 | $ | 30 | $ | 33 | $ | 8 | $ | 12 | $ | 14 | ||||||||||||||||||
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Weighted-average assumptions used to determine benefit obligations |
||||||||||||||||||||||||||||||||||||
Discount rate |
3.50 | % | 3.90 | % | 4.15 | % | 2.26 | % | 2.03 | % | 2.72 | % | 3.68 | % | 3.98 | % | 4.18 | % | ||||||||||||||||||
Rate of compensation increase |
n/a | n/a | n/a | 2.97 | % | 2.96 | % | 3.19 | % | n/a | n/a | n/a | ||||||||||||||||||||||||
Weighted-average assumptions used to determine net expense |
||||||||||||||||||||||||||||||||||||
Discount rate |
3.90 | % | 4.15 | % | 3.85 | % | 2.03 | % | 2.72 | % | 1.77 | % | 3.98 | % | 4.18 | % | 3.84 | % | ||||||||||||||||||
Expected rate of return on plan assets |
5.55 | % | 5.65 | % | 6.55 | % | 3.05 | % | 3.22 | % | 3.52 | % | n/a | n/a | n/a | |||||||||||||||||||||
Rate of compensation increase |
n/a | n/a | n/a | 2.96 | % | 3.19 | % | 3.16 | % | n/a | n/a | n/a |
Estimated amounts to be amortized from accumulated other comprehensive loss into net periodic benefit cost in the year ending December 31, 2018 based on December 31, 2017 plan measurements are $14 million, consisting primarily of amortization of the net actuarial loss in the U.S. pension plans.
Long-term Rate of Return
The Companys expected return on assets is established annually through analysis of anticipated future long-term investment performance for the plan based upon the asset allocation strategy and is primarily a long-term prospective rate.
An analysis was performed in December 2017 resulting in changes to the expected long-term rate of return on assets. The weighted-average long-term rate of return on assets for the U.S. pension plans decreased from 5.55% at December 31, 2016 to 5.50% at December 31, 2017. The expected long-term rate of return on plan assets used in determining pension expense for non-U.S. plans is determined in a similar manner to the U.S. plans and increased from 3.05% at December 31, 2016 to 3.26% at December 31, 2017.
32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Health Care Trend
The assumed health care and drug cost trend rates used to measure next years postretirement healthcare benefits are as follows:
Other Postretirement Benefits |
||||||||
2017 | 2016 | |||||||
Initial health care cost trend rate |
6.41 | % | 6.69 | % | ||||
Ultimate health care cost trend rate |
5.00 | % | 5.00 | % | ||||
Year ultimate health care cost trend rate reached |
2022 | 2022 |
The assumed health care cost trend rate has a significant effect on the amounts reported for Other Postretirement Benefits plans. The following table illustrates the sensitivity to a change in the assumed health care cost trend rate:
Total Service and Interest Cost |
APBO | |||||||
100 basis point (bp) increase in health care cost trend rate |
$ | 1 | $ | 23 | ||||
100 bp decrease in health care cost trend rate |
$ | (1 | ) | $ | (20 | ) |
Projected benefit payments from the plans are estimated as follows:
Pension Benefits | Other Postretirement Benefits |
|||||||||||
U.S. | Non-U.S. Plans | |||||||||||
2018 |
$ | 85 | $ | 25 | $ | 23 | ||||||
2019 |
$ | 85 | $ | 27 | $ | 22 | ||||||
2020 |
$ | 86 | $ | 27 | $ | 22 | ||||||
2021 |
$ | 87 | $ | 27 | $ | 22 | ||||||
2022 |
$ | 87 | $ | 29 | $ | 21 | ||||||
Years 2023-2027 |
$ | 379 | $ | 151 | $ | 96 |
Plan Assets
Certain pension plans sponsored by the Company invest in a diversified portfolio consisting of an array of asset classes that attempts to maximize returns while minimizing volatility. These asset classes include developed market equities, emerging market equities, private equity, global high quality and high yield fixed income, real estate, and absolute return strategies.
U.S. Plan
As of December 31, 2017, plan assets were comprised of 65% equity investments, 23% fixed income investments, and 12% in other investments which include hedge funds. Approximately 57% of the U.S. plan assets were invested in actively managed investment funds. The Companys investment strategy includes a target asset allocation of 50% equity investments, 25% fixed income investments and 25% in other investment types including hedge funds.
The U.S. investment strategy mitigates risk by incorporating diversification across appropriate asset classes to meet the plans objectives. It is intended to reduce risk, provide long-term financial stability for the plan, and maintain funded levels that meet long-term plan obligations while preserving sufficient liquidity for near-term benefit payments. Risk assumed is considered appropriate for the return anticipated and consistent with the diversification of plan assets.
Non-U.S. Plans
The insurance contracts guarantee a minimum rate of return. The Company has no input into the investment strategy of the assets underlying the contracts, but they are typically heavily invested in active bond markets and are highly regulated by local law.
The majority of the assets of the non-U.S. plans are invested through insurance contracts. The target asset allocation for the non-U.S. pension plans is 67% insurance contracts, 31% debt investments and 2% equity investments.
33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
The following table presents the Companys defined benefit plan assets measured at fair value by asset class:
December 31, 2017 | December 31, 2016 | |||||||||||||||||||||||||||||||
Total | Level 1 | Level 2 | Level 3 | Total | Level 1 | Level 2 | Level 3 | |||||||||||||||||||||||||
U.S. Plans: |
||||||||||||||||||||||||||||||||
Cash |
$ | 35 | $ | 35 | $ | | $ | | $ | 30 | $ | 30 | $ | | $ | | ||||||||||||||||
Investments with registered investment companies: |
||||||||||||||||||||||||||||||||
Equity securities |
393 | 393 | | | 346 | 346 | | | ||||||||||||||||||||||||
Fixed income securities |
163 | 163 | | | 154 | 154 | | | ||||||||||||||||||||||||
Real estate and other |
46 | 46 | | | 41 | 41 | | | ||||||||||||||||||||||||
Equity securities |
223 | 223 | | | 204 | 204 | | | ||||||||||||||||||||||||
Debt securities: |
||||||||||||||||||||||||||||||||
Corporate and other |
22 | | 22 | | 21 | | 21 | | ||||||||||||||||||||||||
Government |
32 | 11 | 21 | | 28 | 11 | 17 | | ||||||||||||||||||||||||
Hedge funds |
29 | | | 29 | 32 | | | 32 | ||||||||||||||||||||||||
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$ | 943 | $ | 871 | $ | 43 | $ | 29 | $ | 856 | $ | 786 | $ | 38 | $ | 32 | |||||||||||||||||
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Non-U.S. Plans: |
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Insurance contracts |
$ | 54 | $ | | $ | | $ | 54 | $ | 42 | $ | | $ | | $ | 42 | ||||||||||||||||
Investments with registered investment companies: |
||||||||||||||||||||||||||||||||
Fixed income securities |
25 | 25 | | | 19 | 19 | | | ||||||||||||||||||||||||
Equity securities |
2 | 2 | | | 2 | 2 | | | ||||||||||||||||||||||||
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$ | 81 | $ | 27 | $ | | $ | 54 | $ | 63 | $ | 21 | $ | | $ | 42 | |||||||||||||||||
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The following tables summarize the activity for the U.S. plan assets classified in level 3:
Balance at December 31, 2016 |
Net Realized/ Unrealized Gains (Loss) |
Purchases, and Settlements, Net |
Sales, Net |
Transfers Into (Out) of Level 3 |
Foreign Currency Exchange Rate Movements |
Balance at December 31, 2017 |
||||||||||||||||||||||
Hedge funds and other |
$ | 32 | $ | 3 | $ | 12 | $ | (18 | ) | $ | | $ | | $ | 29 | |||||||||||||
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|||||||||||||||
Balance at December 31, 2015 |
Net Realized/ Unrealized Gains (Loss) |
Purchases, and Settlements, Net |
Sales, Net |
Transfers Into (Out) of Level 3 |
Foreign Currency Exchange Rate Movements |
Balance at December 31, 2016 |
||||||||||||||||||||||
Hedge funds and other |
$ | 86 | $ | | $ | 48 | $ | (102 | ) | $ | | $ | | $ | 32 | |||||||||||||
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|
The following tables summarize the activity for the non-U.S. plan assets classified in level 3:
Balance at December 31, 2016 |
Net Realized/ Unrealized Gains (Loss) |
Purchases, and Settlements, Net |
Sales, Net |
Transfers Into (Out) of Level 3 |
Foreign Currency Exchange Rate Movements |
Balance at December 31, 2017 |
||||||||||||||||||||||
Insurance contracts |
$ | 42 | $ | 2 | $ | 6 | $ | (2 | ) | $ | | $ | 6 | $ | 54 | |||||||||||||
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|||||||||||||||
Balance at December 31, 2015 |
Net Realized/ Unrealized Gains (Loss) |
Purchases, and Settlements, Net |
Sales, Net |
Transfers Into (Out) of Level 3 |
Foreign Currency Exchange Rate Movements |
Balance at December 31, 2016 |
||||||||||||||||||||||
Insurance contracts |
$ | 40 | $ | 2 | $ | 3 | $ | (2 | ) | $ | | $ | (1 | ) | $ | 42 | ||||||||||||
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34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
16. | INCOME TAXES |
Under the liability method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse.
The components of (loss) income from continuing operations before income taxes consist of the following:
Year Ended December 31 | ||||||||||||
2017 | 2016 | 2015 | ||||||||||
Domestic |
$ | (20 | ) | $ | (51 | ) | $ | (89 | ) | |||
International |
191 | 196 | 8 | |||||||||
|
|
|
|
|
|
|||||||
Total |
$ | 171 | $ | 145 | $ | (81 | ) | |||||
|
|
|
|
|
|
Significant components of the (expense) benefit for income taxes are as follows:
Year Ended December 31 | ||||||||||||
2017 | 2016 | 2015 | ||||||||||
Current: |
||||||||||||
Federal, state and local |
$ | 1 | $ | | $ | | ||||||
International |
(38 | ) | (83 | ) | (47 | ) | ||||||
|
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|
|
|
|||||||
Total current |
(37 | ) | (83 | ) | (47 | ) | ||||||
Deferred: |
||||||||||||
Federal, state and local |
254 | (1 | ) | | ||||||||
International |
(27 | ) | 29 | 17 | ||||||||
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|
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Total deferred |
227 | 28 | 17 | |||||||||
|
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|
|
|
|
|||||||
$ | 190 | $ | (55 | ) | $ | (30 | ) | |||||
|
|
|
|
|
|
The reconciliation of income taxes computed at the U.S. federal statutory tax rate to income tax (expense) benefit is:
Year Ended December 31 | ||||||||||||
2017 | 2016 | 2015 | ||||||||||
Income tax (expense) benefit at U.S. statutory rate |
$ | (60 | ) | $ | (51 | ) | $ | 28 | ||||
Tax effect from: |
||||||||||||
Goodwill impairment |
(1 | ) | (1 | ) | (31 | ) | ||||||
U.S. income inclusions from foreign subsidiaries |
(9 | ) | (7 | ) | (10 | ) | ||||||
Nonconsolidated foreign affiliates |
23 | 19 | 17 | |||||||||
Tax holidays and incentives |
5 | 8 | 10 | |||||||||
Foreign rate variance |
19 | 21 | 9 | |||||||||
U.S. tax reform, net of valuation allowance |
259 | | | |||||||||
Uncertain tax positions and assessments |
22 | (8 | ) | 5 | ||||||||
Valuation allowances |
(36 | ) | (9 | ) | (46 | ) | ||||||
Withholding taxes |
(9 | ) | (11 | ) | (7 | ) | ||||||
Other |
(23 | ) | (16 | ) | (5 | ) | ||||||
|
|
|
|
|
|
|||||||
Income tax (expense) benefit |
$ | 190 | $ | (55 | ) | $ | (30 | ) | ||||
|
|
|
|
|
|
35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
The significant components of the Companys deferred tax assets and liabilities are as follows:
December 31 | ||||||||
2017 | 2016 | |||||||
Deferred tax assets |
||||||||
Net operating loss carryforwards |
$ | 792 | $ | 1,002 | ||||
Pension and postretirement benefits |
216 | 312 | ||||||
Reorganization costs |
3 | 7 | ||||||
Inventory |
58 | 62 | ||||||
Other temporary differences |
132 | 107 | ||||||
Tax credits and capital loss carryforwards |
92 | 94 | ||||||
|
|
|
|
|||||
Total deferred tax assets |
1,293 | 1,584 | ||||||
Valuation allowances for deferred tax assets |
(919 | ) | (1,286 | ) | ||||
|
|
|
|
|||||
Net deferred tax assets |
374 | 298 | ||||||
Deferred tax liabilities |
||||||||
Investment in U.S. subsidiaries |
(184 | ) | (307 | ) | ||||
Intangible assets |
(103 | ) | (138 | ) | ||||
Fixed assets |
(102 | ) | (98 | ) | ||||
|
|
|
|
|||||
Total deferred tax liabilities |
(389 | ) | (543 | ) | ||||
|
|
|
|
|||||
$ | (15 | ) | $ | (245 | ) | |||
|
|
|
|
Deferred tax assets and liabilities are recorded in the consolidated balance sheets as follows:
December 31 | ||||||||
2017 | 2016 | |||||||
Assets: |
||||||||
Other noncurrent assets |
$ | 104 | $ | 121 | ||||
Liabilities: |
||||||||
Deferred income taxes |
(119 | ) | (366 | ) | ||||
|
|
|
|
|||||
$ | (15 | ) | $ | (245 | ) | |||
|
|
|
|
The Company continues to maintain a valuation allowance related to a net deferred tax assets in multiple jurisdictions. As of December 31, 2017, the Company had valuation allowances of $811 million related to tax loss and credit carryforwards. The current and future provision for income taxes may be significantly affected by changes to valuation allowances in certain countries. These allowances will be maintained until it is more likely than not the deferred tax assets will be realized. The future provision for income taxes will include no tax benefit with respect to losses incurred and no tax expense with respect to income generated in these countries until the respective valuation allowance is eliminated.
At December 31, 2017, the Company had a deferred tax asset before valuation allowance of $884 million for tax loss carryforwards and tax credits, including: $458 million in the U.S. with expiration dates from 2018 through 2035; $130 million in the United Kingdom with no expiration date; and $296 million in other jurisdictions with various expiration dates.
The Company has also concluded there is a more than remote possibility the existing valuation allowances of up to $1 million as of December 31, 2017 could be released within the next 12 months. If releases of such valuation allowances occur, they may have a significant effect on results of operations in the quarter in which it is deemed appropriate to release the reserve. Income taxes paid, net of income tax refunds received, were $70 million, $67 million and $44 million for the years ended December 31, 2017, 2016 and 2015.
On December 22, 2017, The Tax Cuts and Jobs Act (the Tax Legislation) was enacted in the United States, significantly revising certain U.S. corporate income tax provisions; including, among other items, a reduction of the U.S. corporate rate from 35% to 21%, the imposition of a deemed repatriation tax on unremitted foreign earnings to facilitate a shift from a world-wide tax system to a territorial system, the creation of new anti-deferral provisions and new limitations on certain deductions. As a
36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
result of the enactment of the Tax Legislation, the Company estimates a one-time increase to net income of approximately $259 million net of valuation allowance in the fourth quarter of 2017, primarily related to the impact of the rate reduction on the Companys deferred tax positions and changes to net operating loss carry forward rules. In periods following the enactment, the Company does not currently anticipate significant revisions to the amounts recorded. However, under the guidance of Staff Accounting Bulletin No. 118 issued December 22, 2017, we will account for the income tax effects of any additional guidance associated with the Tax Legislation under the measurement period approach.
Taxes are provided for estimated U.S. and non-U.S. income taxes which may be incurred on the reversal of our basis differences not deemed to be indefinitely reinvested. Taxes have not been provided on undistributed earnings in foreign subsidiaries which are deemed indefinitely reinvested of $784 million at December 31, 2017. If at some future date these earnings cease to be permanently reinvested, the Company may be subject to foreign income and withholding taxes upon repatriation of such amounts. Quantification of the deferred tax liability, if any, associated with indefinitely reinvested earnings is not practicable.
At December 31, 2017, 2016 and 2015, the Company had total unrecognized tax benefits of $92 million, $42 million and $37 million. Of these totals, $(5) million, $33 million and $29 million, represent the amounts of unrecognized tax benefits that, if recognized, would affect the effective income tax rates. The total unrecognized tax benefits differ from the amounts which would affect the effective tax rates primarily due to the effect of valuation allowances.
A summary of the changes in the gross amount of unrecognized tax benefits for the years ended December 31, 2017, 2016 and 2015 are shown below:
Year Ended December 31 | ||||||||||||
2017 | 2016 | 2015 | ||||||||||
Change in unrecognized tax benefits |
||||||||||||
Balance at January 1 |
$ | 42 | $ | 37 | $ | 50 | ||||||
Additions based on tax positions related to the current year |
7 | 2 | 6 | |||||||||
Additions for tax positions of prior years |
59 | 6 | 6 | |||||||||
Decreases for tax positions of prior years |
(8 | ) | (1 | ) | (10 | ) | ||||||
Decreases for statute of limitations expiration |
(1 | ) | (1 | ) | (4 | ) | ||||||
Settlements |
(11 | ) | | (6 | ) | |||||||
Effect of currency translation |
4 | (1 | ) | (5 | ) | |||||||
|
|
|
|
|
|
|||||||
Balance at December 31 |
$ | 92 | $ | 42 | $ | 37 | ||||||
|
|
|
|
|
|
The Company classifies tax-related penalties and net interest as income tax expense. As of December 31, 2017, 2016 and 2015, the Company recorded $4 million, $7 million and $7 million in liabilities for tax-related net interest and penalties on its consolidated balance sheet. The Company recorded income tax (expense) benefit related to a net change in its liability for interest and penalties of $3 million, $0 million, and $(5) million for the years ended December 31, 2017, 2016 and 2015.
The Company operates in multiple jurisdictions throughout the world. The Company is no longer subject to U.S. federal tax examinations for years before 2014 or state and local for years before 2009, with limited exceptions. Furthermore, the Company is no longer subject to income tax examinations in major foreign tax jurisdictions for years prior to 2005. The income tax returns of foreign subsidiaries in various tax jurisdictions are currently under examination.
The Company believes that it is reasonably possible that its unrecognized tax benefits in multiple jurisdictions, which primarily relate to transfer pricing, corporate reorganization and various other matters, may decrease by approximately $5 million in the next 12 months due to audit settlements or statute expirations, of which approximately $2 million, if recognized, could affect the effective tax rate.
On July 11, 2013, Federal-Mogul Corporation became part of the IEP affiliated group of corporations as defined in Section 1504 of the Internal Revenue Code of 1986 (the Code), as amended, of which AEP is the common parent. The Company subsequently entered into a Tax Allocation Agreement (the Tax Allocation Agreement) with AEP. Pursuant to the Tax Allocation Agreement, AEP and the Company have agreed to the allocation of certain income tax items. The Company will join AEP in the filing of AEPs federal consolidated return and certain state consolidated returns. In those jurisdictions where the Company is filing consolidated returns with AEP, the Company will pay to AEP any tax it would have owed had it continued to file separately. Effective January 23, 2017, AEP will no longer be obligated to the Company for reductions to the consolidated groups tax liability as a result of including the Company in its consolidated group.
37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
On February 14, 2017, Federal-Mogul Holdings Corporation was converted to a Delaware single member limited liability company with the resulting entity being named Federal-Mogul Holdings LLC. On March 29, 2017, Federal-Mogul Holdings LLC was merged with and into Federal-Mogul LLC with Federal-Mogul LLC surviving the merger. As a result of the conversion, the Company is treated as a disregarded entity for U.S. income tax purposes and no U.S. income tax will be allocated to the Company. IEP will succeed to the Companys U.S. deferred tax assets and liabilities as the sole member of the Company. However, for purposes of preparing its financial statements, the Company will continue to use a separate return methodology in determining income taxes prospectively.
17. | COMMITMENTS AND CONTINGENCIES |
Environmental Matters
The Company is a defendant in lawsuits filed, or the recipient of administrative orders issued or demand letters received, in various jurisdictions pursuant to the Federal Comprehensive Environmental Response Compensation and Liability Act of 1980 (CERCLA) or other similar national, provincial or state environmental remedial laws. These laws provide that responsible parties may be liable to pay for remediating contamination resulting from hazardous substances that were discharged into the environment by them, by prior owners or occupants of property they currently own or operate, or by others to whom they sent such substances for treatment or other disposition at third party locations. The Company has been notified by the U.S. Environmental Protection Agency, other national environmental agencies, and various provincial and state agencies that it may be a potentially responsible party (PRP) under such laws for the cost of remediating hazardous substances pursuant to CERCLA and other national and state or provincial environmental laws. PRP designation typically requires the funding of site investigations and subsequent remedial activities.
Many of the sites that are likely to be the costliest to remediate are often current or former commercial waste disposal facilities to which numerous companies sent wastes. Despite the potential joint and several liability which might be imposed on the Company under CERCLA and some of the other laws pertaining to these sites, the Companys share of the total waste sent to these sites has generally been small. The Company believes its exposure for liability at these sites is limited.
On a global basis, the Company has also identified certain other present and former properties at which it may be responsible for cleaning up or addressing environmental contamination, in some cases as a result of contractual commitments and/or federal or state environmental laws. The Company is actively seeking to resolve these actual and potential statutory, regulatory, and contractual obligations. Although difficult to quantify based on the complexity of the issues, the Company has accrued amounts corresponding to its best estimate of the costs associated with such regulatory and contractual obligations on the basis of available information from site investigations and the professional judgment of consultants.
Total environmental liabilities, determined on an undiscounted basis are included in the consolidated balance sheets as follows:
December 31 | ||||||||
2017 | 2016 | |||||||
Other current liabilities |
$ | 7 | $ | 6 | ||||
Other accrued liabilities (noncurrent) |
9 | 10 | ||||||
|
|
|
|
|||||
$ | 16 | $ | 16 | |||||
|
|
|
|
Management believes recorded environmental liabilities will be adequate to cover the Companys estimated liability for its exposure in respect to such matters. In the event such liabilities were to significantly exceed the amounts recorded by the Company, the Companys results of operations and financial condition could be materially affected. At December 31, 2017, management estimates additional losses above and beyond managements best estimate of required remediation costs could range up to $24 million.
Asset Retirement Obligations
The Companys primary ARO activities relate to the removal of hazardous building materials at its facilities. The Company records an ARO at fair value upon initial recognition when the amount is probable and can be reasonably estimated. ARO fair values are determined based on the Companys determination of what a third party would charge to perform the remediation activities, generally using a present value technique.
38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
The Company maintains ARO liabilities in the consolidated balance sheets as follows:
December 31 | ||||||||
2017 | 2016 | |||||||
Other current liabilities |
$ | | $ | 1 | ||||
Other accrued liabilities (noncurrent) |
15 | 14 | ||||||
|
|
|
|
|||||
$ | 15 | $ | 15 | |||||
|
|
|
|
The following is a rollforward of the Companys ARO liability for the years ended December 31, 2017 and 2016:
Balance at December 31, 2015 |
$ | 16 | ||
Liabilities incurred |
(2 | ) | ||
Liabilities settled/adjustments |
1 | |||
Balance at December 31, 2016 |
15 | |||
Liabilities settled/adjustments |
(1 | ) | ||
Foreign currency |
1 | |||
|
|
|||
Balance at December 31, 2017 |
$ | 15 | ||
|
|
Affiliate Pension Obligations
As a result of the 100% ownership interest in the Company by Mr. Icahns affiliates, the Company is subject to the pension liabilities of all entities in which Mr. Icahn has a direct or indirect ownership interest of at least 80%. One such entity, ACF Industries LLC (ACF), is the sponsor of several pension plans. All the minimum funding requirements of the Internal Revenue Code of 1986 and the Employee Retirement Income Security Act of 1974 (ERISA), as amended, for these plans have been met as of December 31, 2017. If the ACF plans were voluntarily terminated, they would be underfunded by approximately $88 million as of December 31, 2017. These results are based on the most recent information provided by the plans actuaries. These liabilities could increase or decrease, depending on a number of factors, including future changes in benefits, investment returns, and the assumptions used to calculate the liability. As members of the controlled group, the Company would be liable for any failure of ACF to make ongoing pension contributions or to pay the unfunded liabilities upon a termination of the pension plans of ACF. In addition, other entities now or in the future within the controlled group in which the Company is included may have pension plan obligations that are, or may become, underfunded and the Company would be liable for any failure of such entities to make ongoing pension contributions or to pay the unfunded liabilities upon termination of such plans. Further, the failure to pay these pension obligations when due may result in the creation of liens in favor of the pension plan or the Pension Benefit Guaranty Corporation (PBGC) against the assets of each member of the controlled group.
The current underfunded status of the pension plans of ACF requires it to notify the PBGC of certain reportable events such as if the Company ceases to be a member of the ACF controlled group, or the Company makes certain extraordinary dividends or stock redemptions. The obligation to report could cause the Company to seek to delay or reconsider the occurrence of such reportable events.
IEP and IEH FM Holdings LLC have undertaken to indemnify the Company for any and all liability imposed upon the Company pursuant to ERISA resulting from the Company being considered a member of a controlled group within the meaning of ERISA § 4001(a)(14) of which American Entertainment Properties Corporation is a member, except with respect to the liability in respect to any employee benefit plan, as defined by ERISA § 3(3), maintained by the Company. IEP and IEH FM Holdings LLC are not required to maintain any specific net worth and there can be no guarantee IEP and IEH FM Holdings LLC will be able to fund their indemnification obligations to the Company.
Other Matters
On March 3, 2017, certain purported former stockholders of Federal-Mogul Holdings Corporation (FMHC) filed a petition in the Delaware Court of Chancery seeking an appraisal of the value of common stock they claim to have held at the time of the January 23, 2017 merger of IEH FM Holdings, LLC into FMHC. IEH FM Holdings, LLC was a wholly owned subsidiary of American Entertainment Properties Corp. and a subsidiary of Icahn Enterprises L.P. Federal-Mogul Holdings LLC, f/k/a FMHC, filed an answer to the petition on March 28, 2017. A second petition for appraisal was filed by purported former stockholders of FMHC on May 1, 2017. The two cases were consolidated on May 10, 2017 and the consolidated action is styled: In re Appraisal of Federal-Mogul Holdings LLC, C.A. No. 2017-0158-AGB. Discovery is ongoing and a trial date has not yet been set. The Company believes that it has a meritorious defense and intends to vigorously defend the matter.
39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
On September 29, 2016, September 30, 2016, October 12, 2016 and October 19, 2016, respectively, four putative class actions, captioned Skybo v. Ninivaggi et al., C.A. No. 12790, Lemanchek v. Ninivaggi et al., C.A. No. 12791, Raul v. Ninivaggi et al., C.A. No. 12821 and Mercado v. Ninivaggi et al., C.A. No. 12837, were filed in the Court of Chancery of the State of Delaware against the Board of Directors of the Company (the Board) and Icahn Enterprises, Icahn Enterprises Holdings, certain of their affiliates and Icahn Enterprises Board of Directors (the Icahn Defendants), and, in the case of Raul, the Company. The complaints allege that, among other things, the Board breached its fiduciary duties by approving the proposed Merger Agreement, that the Icahn Defendants breached their fiduciary duties to the minority stockholders of the Company and/or aided and abetted the Boards breaches of its fiduciary duties, as well as alleging certain material misstatements and omissions in the Schedule 14D-9 filed by the Company. The complaints allege that, among other things, the then-Offer Price was inadequate and, together with that the Merger Agreement, was the result of a flawed and unfair sales process and conflicts of interest of the Board and the special committee of independent directors (the Special Committee), alleging that the Special Committee and the Companys management lacked independence from the Icahn Defendants. In addition, the complaints allege that the Merger Agreement contains certain allegedly preclusive deal protection provisions, including a no-solicitation provision, an information rights provision and a matching rights provision. Among other things, the complaints sought to enjoin the transactions contemplated by the Merger Agreement, as well as award costs and disbursements, including reasonable attorneys and experts fees. The Raul and Mercado complaints further seek to rescind the transaction or award rescissory damages, or (in the case of Raul) award a quasi-appraisal remedy in the event that the transaction was consummated, as well as award money damages. On October 28, 2016, all four actions were consolidated under the caption In re Federal-Mogul Holdings, Inc. Stockholder Litigation, C.A. No. 12790-CB (the Delaware Action). On March 6, 2017, plaintiffs filed a consolidated amended complaint that does not name the Company as a defendant. Among other things, the consolidated amended complaint also adds allegations regarding the commencement and extension of the Offer, the increase in the Offer price, the closing of the transaction, the Companys subsequent performance and public statements, Mr. Ninivaggis post-merger employment with Icahn Enterprises and the independence of the chairman of the Special Committee. The defendants have moved to dismiss the amended complaint discovery was stayed pending determination of that motion. In lieu of proceeding with the October 12, 2017 hearing on the defendants motion to dismiss, the plaintiffs in the Delaware Action dismissed the Delaware Action, without prejudice as to the named plaintiffs.
On October 5, 2016, a putative class action captioned Sanders v. Federal-Mogul Holdings Corporation et al., C.A. No. 16-155387 was filed in the Circuit Court for Oakland County of the State of Michigan against the Company, the Board and the Icahn Defendants (the Michigan Action). The complaint alleges, among other things, that the Board breached its fiduciary duties and that the Company and the Icahn Defendants aided and abetted the Boards breaches of its fiduciary duties, as well as alleging certain material misstatements and omissions in the Schedule 14D-9. The complaint alleges that, among other things, the then-Offer Price was unfair and the result of an unfair sales process that included conflicts of interest. In addition, the complaint alleges that the Merger Agreement contains certain allegedly preclusive deal protection provisions, including a no-solicitation provision, an information rights provision and a matching rights provision. Among other things, the complaint sought to enjoin the transactions contemplated by the Merger Agreement, or, in the event that the transactions were consummated, rescind the transactions or award rescissory damages, as well as award money damages and costs, including reasonable attorneys and experts fees. On March 6, 2017, the plaintiffs filed an amended complaint which, among other things, dropped the Company as a defendant. The amended complaint also: named certain additional Icahn-affiliated individuals and entities as defendants; deleted various allegations relating to process and purported disclosure deficiencies; added allegations regarding the commencement and extension of the Offer, the increase in the Offer price, the closing of the transaction, the Companys subsequent performance and public statements, Mr. Ninivaggis post-merger employment with Icahn Enterprises, and the independence of certain directors; and eliminated the request for injunctive relief given the consummation of the transaction. On April 4, 2017 the Court entered a stipulated order staying the Michigan Action pending final determination of the Delaware Action. On October 16, 2017, the plaintiffs in the Michigan Action dismissed the Michigan Action, without prejudice as to the named plaintiffs.
On April 25, 2014, a group of plaintiffs brought an action against Federal-Mogul Products, Inc. (F-M Products), a wholly-owned subsidiary of the Company, alleging injuries and damages associated with the discharge of chlorinated hydrocarbons by the former owner of a facility located in Kentucky. Since 1998, when F-M Products acquired the facility, it has been cooperating with the applicable regulatory agencies on remediating the prior discharges pursuant to an order entered into by the facilitys former owner. The Company does not currently believe the outcome of this litigation will have a material effect on its consolidated financial position, results of operations or cash flows.
In addition, the Company is involved in other legal actions and claims, directly, and through its subsidiaries. Management does not believe the outcomes of these other actions or claims are likely to have a material adverse effect on the Companys consolidated financial position, results of operations or cash flows.
40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
18. | CHANGES IN ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) BY COMPONENT, NET OF TAX |
The following represents the Companys changes in accumulated other comprehensive income (loss), net of tax by component for the years ended December 31, 2017, 2016, and 2015:
Year Ended December 31 | ||||||||||||
2017 | 2016 | 2015 | ||||||||||
Foreign currency translation adjustments and other |
||||||||||||
Balance at beginning of period |
$ | (861 | ) | $ | (714 | ) | $ | (482 | ) | |||
Other comprehensive income (loss) before reclassification adjustment, net of tax |
104 | (146 | ) | (232 | ) | |||||||
Reclassification from other comprehensive income (loss) |
| (1 | ) | | ||||||||
|
|
|
|
|
|
|||||||
Other comprehensive loss, net of tax |
104 | (147 | ) | (232 | ) | |||||||
|
|
|
|
|
|
|||||||
Balance at end of period |
$ | (757 | ) | $ | (861 | ) | $ | (714 | ) | |||
|
|
|
|
|
|
|||||||
Pension and postretirement benefits |
||||||||||||
Balance at beginning of period |
$ | (557 | ) | $ | (587 | ) | $ | (643 | ) | |||
Other comprehensive income (loss) before reclassifications |
29 | 15 | 34 | |||||||||
Reclassification from other comprehensive income (loss)(a) |
17 | 15 | 22 | |||||||||
|
|
|
|
|
|
|||||||
Other comprehensive income (loss), net of tax |
46 | 30 | 56 | |||||||||
|
|
|
|
|
|
|||||||
Balance at end of period |
$ | (511 | ) | $ | (557 | ) | $ | (587 | ) | |||
|
|
|
|
|
|
|||||||
Cash flow hedge instruments |
||||||||||||
Balance at beginning of period |
$ | (14 | ) | $ | (17 | ) | $ | (17 | ) | |||
Other comprehensive income (loss) before reclassifications |
2 | 2 | (4 | ) | ||||||||
Reclassification from other comprehensive income (loss)(b) |
(3 | ) | 1 | 4 | ||||||||
|
|
|
|
|
|
|||||||
Other comprehensive income (loss), net of tax |
(1 | ) | 3 | | ||||||||
|
|
|
|
|
|
|||||||
Balance at end of period |
$ | (15 | ) | $ | (14 | ) | $ | (17 | ) | |||
|
|
|
|
|
|
|||||||
Other comprehensive income (loss) attributable to noncontrolling interests, net of tax(b) |
$ | 12 | $ | 2 | $ | (5 | ) |
(a) | Includes amortization of prior service costs/credits and actuarial gains/losses which are included in cost of products sold, and selling, general, and administrative. |
(b) | Mainly consists of foreign currency translation adjustments; refer to Note 2, Basis of Presentation and Summary of Significant Accounting Policies. |
41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
19. | INCOME (LOSS) PER COMMON SHARE |
The following table sets forth the computation of basic and diluted income (loss) per common share:
Year Ended December 31 | ||||||||
2016 | 2015 | |||||||
Amounts attributable to Federal-Mogul: |
||||||||
Net income (loss) from continuing operations |
$ | 82 | $ | (117 | ) | |||
Gain (loss) from discontinued operations, net of tax |
| 7 | ||||||
|
|
|
|
|||||
Net income (loss) |
$ | 82 | $ | (110 | ) | |||
|
|
|
|
|||||
Weighted average shares outstanding, basic and diluted (in millions) |
169.0 | 164.7 | ||||||
Net income (loss) per share attributable to Federal-Mogul basic and diluted: |
||||||||
Net income (loss) from continuing operations |
$ | 0.49 | $ | (0.71 | ) | |||
Gain (loss) from discontinued operations, net of tax |
| 0.04 | ||||||
|
|
|
|
|||||
Net (loss) income |
$ | 0.49 | $ | (0.67 | ) | |||
|
|
|
|
20. | OPERATIONS BY REPORTING SEGMENT |
The Company operates with two end-customer focused business segments. The Powertrain segment focuses on original equipment powertrain products for automotive, heavy duty, and industrial applications. The Motorparts segment sells and distributes a broad portfolio of products in the global aftermarket, while also serving OEMs with products including braking, wipers, and a limited range of chassis components. This organizational model allows for a strong product line focus benefitting both OE and aftermarket customers and enables the Company to be responsive to customers needs for superior products and to promote greater identification with its premium brands. Additionally, this organizational model enhances management focus to capitalize on opportunities for organic or acquisition growth, profit improvement, resource utilization, and business model optimization in line with the unique requirements of the two different customer bases. Reporting units are components of the Companys reporting segments (which are also its operating segments) and generally align with specific product groups for Powertrain and regions for Motorparts for which segment managers regularly review operating results.
Management utilizes Operational EBITDA as the key performance measure of segment profitability and uses the measure in its financial and operational decision making processes, for internal reporting, and for planning and forecasting purposes to effectively allocate resources. Operational EBITDA is defined as EBITDA (earnings before interest, taxes, depreciation, and amortization), as adjusted for additional amounts. Examples of these adjustments include impairment charges related to goodwill, other long-lived assets, and investments; restructuring charges; certain gains or losses on the settlement/extinguishment of obligations; and receivable financing charges. During 2015, the Company modified its definition of Operational EBITDA to adjust for financing charges related to certain receivable financing programs. Comparable periods have been adjusted to conform to this definition.
Operational EBITDA presents a performance measure exclusive of capital structure and the method by which net assets were acquired, disposed of, or financed. Management believes this measure provides additional transparency into its core operations and is most reflective of the operational profitability or loss of the Companys operating segments and reporting units. The measure also allows management and investors to view operating trends, perform analytical comparisons, and benchmark performance between periods and among operating segments.
Operational EBITDA should not be considered a substitute for results prepared in accordance with U.S. GAAP and should not be considered an alternative to net income, which is the most directly comparable financial measure to Operational EBITDA that is in accordance with U.S. GAAP. Operational EBITDA, as determined and measured by the Company, should not be compared to similarly titled measures reported by other companies.
42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Net sales:
Year Ended December 31 | ||||||||||||
2017 | 2016 | 2015 | ||||||||||
Powertrain |
$ | 4,792 | $ | 4,463 | $ | 4,450 | ||||||
Motorparts |
3,341 | 3,215 | 3,253 | |||||||||
Inter-segment eliminations |
(254 | ) | (244 | ) | (284 | ) | ||||||
|
|
|
|
|
|
|||||||
Total |
$ | 7,879 | $ | 7,434 | $ | 7,419 | ||||||
|
|
|
|
|
|
|||||||
Inter-segment eliminations attributable to sales from Powertrain to Motorparts |
$ | 218 | $ | 211 | $ | 252 | ||||||
Inter-segment eliminations attributable to sales from Motorparts to Powertrain |
$ | 36 | $ | 33 | $ | 32 |
Cost of products sold:
Year Ended December 31 | ||||||||||||
2017 | 2016 | 2015 | ||||||||||
Powertrain |
$ | (4,223 | ) | $ | (3,929 | ) | $ | (3,913 | ) | |||
Motorparts |
(2,733 | ) | (2,616 | ) | (2,716 | ) | ||||||
Inter-segment eliminations |
254 | 244 | 284 | |||||||||
|
|
|
|
|
|
|||||||
Total |
$ | (6,702 | ) | $ | (6,301 | ) | $ | (6,345 | ) | |||
|
|
|
|
|
|
Gross profit:
Year Ended December 31 | ||||||||||||
2017 | 2016 | 2015 | ||||||||||
Powertrain |
$ | 569 | $ | 534 | $ | 537 | ||||||
Motorparts |
608 | 599 | 537 | |||||||||
|
|
|
|
|
|
|||||||
Total |
$ | 1,177 | $ | 1,133 | $ | 1,074 | ||||||
|
|
|
|
|
|
43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Operational EBITDA and the reconciliation to net income (loss) is as follows:
Year Ended December 31 | ||||||||||||
2017 | 2016 | 2015 | ||||||||||
Powertrain |
$ | 515 | $ | 473 | $ | 428 | ||||||
Motorparts |
285 | 271 | 216 | |||||||||
|
|
|
|
|
|
|||||||
Total Operational EBITDA |
$ | 800 | $ | 744 | $ | 644 | ||||||
Items required to reconcile Operational EBITDA to EBITDA: |
||||||||||||
Restructuring charges and asset impairments (a) |
$ | (37 | ) | $ | (44 | ) | $ | (121 | ) | |||
Goodwill and intangible impairment expense, net |
(11 | ) | (6 | ) | (94 | ) | ||||||
Loss on debt extinguishment |
(4 | ) | | | ||||||||
Loss on sale of investment in nonconsolidated affiliate |
(2 | ) | | (11 | ) | |||||||
Gain on sale of business |
3 | | | |||||||||
Financing charges |
(15 | ) | (12 | ) | (9 | ) | ||||||
Discontinued operations |
| | 7 | |||||||||
Transaction related costs |
(7 | ) | (5 | ) | (6 | ) | ||||||
Segmentation costs |
| | (4 | ) | ||||||||
Other (b) |
(10 | ) | (12 | ) | (1 | ) | ||||||
|
|
|
|
|
|
|||||||
EBITDA |
$ | 717 | $ | 665 | $ | 405 | ||||||
Items required to reconcile EBITDA to net income (loss): |
||||||||||||
Depreciation and amortization |
$ | (398 | ) | $ | (375 | ) | $ | (341 | ) | |||
Interest expense, net |
(148 | ) | (145 | ) | (138 | ) | ||||||
Income tax (expense) benefit |
190 | (55 | ) | (30 | ) | |||||||
|
|
|
|
|
|
|||||||
Net income (loss) |
$ | 361 | $ | 90 | $ | (104 | ) | |||||
|
|
|
|
|
|
Year Ended December 31 |
||||||||||||
2017 | 2016 | 2015 | ||||||||||
Footnotes: |
||||||||||||
(a) Restructuring charges and asset impairments, net: |
||||||||||||
Restructuring charges related to severance and other charges, net |
$ | (21 | ) | $ | (27 | ) | $ | (89 | ) | |||
Asset impairments, including impairments related to restructuring activities |
(16 | ) | (17 | ) | (32 | ) | ||||||
|
|
|
|
|
|
|||||||
Total Restructuring charges |
$ | (37 | ) | $ | (44 | ) | $ | (121 | ) | |||
(b) Other reconciling items: |
||||||||||||
Non-service cost components associated with U.S. based funded pension plans |
$ | (10 | ) | $ | (13 | ) | $ | 1 | ||||
Other |
| 1 | (2 | ) | ||||||||
|
|
|
|
|
|
|||||||
$ | (10 | ) | $ | (12 | ) | $ | (1 | ) | ||||
|
|
|
|
|
|
Total assets, capital expenditures, and depreciation and amortization information by reporting segment is as set forth in the table below.
Total Assets | Capital Expenditures | Depreciation and Amortization |
||||||||||||||||||||||||||||||
December 31 | Year Ended December 31 | Year Ended December 31 | ||||||||||||||||||||||||||||||
2017 | 2016 | 2017 | 2016 | 2015 | 2017 | 2016 | 2015 | |||||||||||||||||||||||||
Powertrain |
$ | 4,466 | $ | 3,956 | $ | 273 | $ | 262 | $ | 301 | $ | 255 | $ | 233 | $ | 208 | ||||||||||||||||
Motorparts |
2,812 | 2,919 | 120 | 116 | 131 | 140 | 133 | 119 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Total Reporting Segment |
7,278 | 6,875 | 393 | 378 | 432 | 395 | 366 | 327 | ||||||||||||||||||||||||
Corporate |
236 | 201 | | 3 | 8 | 3 | 9 | 14 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Total |
$ | 7,514 | $ | 7,076 | $ | 393 | $ | 381 | $ | 440 | $ | 398 | $ | 375 | $ | 341 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
The following table shows geographic information:
Net Sales | Net PPE | |||||||||||||||||||
Year Ended December 31 | December 31 | |||||||||||||||||||
2017 | 2016 | 2015 | 2017 | 2016 | ||||||||||||||||
U.S. |
$ | 2,867 | $ | 2,757 | $ | 2,803 | $ | 673 | $ | 693 | ||||||||||
Germany |
1,502 | 1,444 | 1,469 | 511 | 458 | |||||||||||||||
China |
603 | 530 | 467 | 305 | 263 | |||||||||||||||
Mexico |
485 | 456 | 422 | 179 | 158 | |||||||||||||||
France |
397 | 378 | 399 | 68 | 62 | |||||||||||||||
Italy |
275 | 275 | 262 | 67 | 57 | |||||||||||||||
Belgium |
279 | 254 | 257 | 27 | 22 | |||||||||||||||
United Kingdom |
204 | 201 | 218 | 66 | 63 | |||||||||||||||
India |
252 | 219 | 210 | 151 | 138 | |||||||||||||||
Other |
1,015 | 920 | 912 | 497 | 420 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
$ | 7,879 | $ | 7,434 | $ | 7,419 | $ | 2,544 | $ | 2,334 | |||||||||||
|
|
|
|
|
|
|
|
|
|
The following table shows nonconsolidated affiliates information:
Equity Earnings of Nonconsolidated Affiliates, Net of Tax |
Investments In Nonconsolidated Affiliates |
|||||||||||||||||||
Year Ended December 31 | Year Ended December 31 | |||||||||||||||||||
2017 | 2016 | 2015 | 2017 | 2016 | ||||||||||||||||
Powertrain |
$ | 57 | $ | 47 | $ | 43 | $ | 284 | $ | 232 | ||||||||||
Motorparts |
11 | 12 | 13 | 40 | 38 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total |
$ | 68 | $ | 59 | $ | 56 | $ | 324 | $ | 270 | ||||||||||
|
|
|
|
|
|
|
|
|
|
21. | SUBSEQUENT EVENTS |
The Company has evaluated subsequent events through February 26, 2018, the date the financial statements were available to be issued, and has concluded no material transactions occurred through that date requiring disclosure or adjustment to the consolidated financial statements other than as disclosed in Note 13, Debt.
22. | RELATED PARTY TRANSACTIONS |
Insight Portfolio Group, LLC (Insight) is an entity formed and controlled by Mr. Icahn in order to maximize the potential buying power of a group of entities with which Mr. Icahn has a relationship in negotiating with a wide range of suppliers of goods, services, and tangible and intangible property at negotiated rates. The Company acquired a minority equity interest in Insight and agreed to pay a portion of Insights operating expenses beginning in 2013. In addition to the minority equity interest held by the Company, certain subsidiaries of IEP and other entities with which Mr. Icahn has a relationship also acquired equity interests in Insight and also agreed to pay certain operating expenses.
The Companys payments to Insight were less than $0.5 million for the years ended December 31, 2017, 2016, and 2015.
On June 1, 2015, a subsidiary of IEP completed an acquisition of substantially all of the assets of Uni-Select USA, Inc. and Beck Arnley Worldparts, Inc. comprising the U.S. automotive parts distribution of Uni-Select Inc (Uni-Select). Subsequent to the acquisition, Uni-Select changed its name to Auto Plus. Auto Plus is operated independently from the Company and all transactions are approved by the independent directors of the Company. In connection with the acquisition, Mr. Icahn resigned from the Companys board of directors and our then-Co-Chief Executive Officer, Daniel A. Ninivaggi resigned from the board of directors of IEP. Mr. Ninivaggi subsequently left his officer and director positions with the Company to become Chief Executive Officer of Icahn Automotive Group LLC.
45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
On February 3, 2016, a subsidiary of IEP acquired a majority of the outstanding shares of Pep Boys - Manny, Moe & Jack (Pep Boys), a leading aftermarket provider of automotive service, tires, parts and accessories across the U.S. and Puerto Rico. On February 4, 2016, the acquisition of the remaining outstanding shares of Pep Boys was completed. Pep Boys is operated independently from the Company and transactions with Pep Boys are approved by the Companys audit committee in accordance with the Companys policy regarding related party transactions.
The following table is a summary of net sales to Auto Plus and Pep Boys for the years ended December 31, 2017, 2016, and 2015:
December 31 | ||||||||||||
2017 | 2016 | 2015 | ||||||||||
Net sales: |
||||||||||||
Auto Plus |
$ | 73 | $ | 54 | $ | 27 | ||||||
Pep Boys |
$ | 93 | $ | 39 | n/a |
The following table is a summary of amounts due to and from Auto Plus and Pep Boys as of December 31, 2017 and 2016:
December 31 | ||||||||
2017 | 2016 | |||||||
Accounts receivable: |
||||||||
Auto Plus |
$ | 26 | $ | 14 | ||||
Pep Boys |
$ | 41 | $ | 31 | ||||
Trade accruals: |
||||||||
Auto Plus |
$ | 5 | $ | 3 | ||||
Pep Boys |
$ | 7 | $ | 6 | ||||
Other provisions: |
||||||||
Auto Plus |
$ | 2 | $ | | ||||
Pep Boys |
$ | 5 | $ | | ||||
Other receivables: |
||||||||
Auto Plus |
$ | 1 | $ | | ||||
Pep Boys |
$ | 1 | $ | |
The Company had royalty income from Pep Boys of $2 million for the year ended December 31, 2017 and charged $1 million to Auto Plus during the year ended December 31, 2017.
PSC Metals, Inc. (PSC Metals) is a wholly-owned subsidiary of IEP. The Companys scrap sales to PSC Metals were $2 million, $2 million, and less than $1 million for the years ended December 31, 2017, 2016, and 2015.
On December 1, 2016, the Company acquired the assets and liabilities of Beck Arnley, an entity owned by a subsidiary of IEP. The purchase price was $14 million and included a $7 million non-interest bearing note maturing on June 1, 2018. The full balance of the note was outstanding as of December 31, 2017 and 2016.
IEP has a 28% ownership interest in Hertz Global Holdings, Inc. (Hertz). The Companys purchases from Hertz were $2 million for the year ended December 31, 2017.
46
Exhibit 99.2
Unaudited Pro Forma Condensed Combined Financial Information
On April 10, 2018, Tenneco Inc., a Delaware corporation (the Company or Tenneco), entered into a Membership Interest Purchase Agreement (the Transaction Agreement) by and among the Company, Federal-Mogul LLC, a Delaware limited liability company (Federal-Mogul), American Entertainment Properties Corp., a Delaware corporation (the Seller), and Icahn Enterprises L.P., a Delaware limited partnership (IEP), regarding the proposed acquisition of Federal-Mogul by the Company (the Transaction).
The unaudited pro forma condensed combined financial information is presented to illustrate the estimated effects of the Transaction and the other activities contemplated by the Transaction Agreement based on the historical financial position and results of operations of Tenneco and Federal-Mogul. The unaudited pro forma condensed combined financial information is presented as follows:
| The unaudited pro forma condensed combined balance sheet as of December 31, 2017, prepared based on (i) the historical audited consolidated balance sheet of Tenneco as of December 31, 2017 and (ii) the historical audited consolidated balance sheet of Federal-Mogul as of December 31, 2017. |
| The unaudited pro forma condensed combined statement of income for the year ended December 31, 2017 prepared based on (i) the historical audited consolidated statement of income of Tenneco for the year ended December 31, 2017 and (ii) the historical audited consolidated statement of operations of Federal-Mogul for the year ended December 31, 2017. |
The Transaction will be accounted for using the acquisition method of accounting in accordance with Accounting Standards
Codification (ASC) 805, Business Combinations, (ASC 805) with Tenneco being designated as the accounting acquirer of Federal-Mogul. The unaudited pro forma condensed combined financial information set forth below primarily gives effect to the following:
| the alignment of accounting policies and financial statement classifications of Federal-Mogul to those of Tenneco; |
| application of the acquisition method of accounting in connection with the Transaction; |
| new credit facilities in connection with the Transaction consisting of term loans and a revolving credit facility, the proceeds of which will be used to finance the cash consideration portion of the purchase price and repay a portion of the Companys existing senior credit facilities and certain senior facilities at Federal-Mogul; |
| issuance of 29,444,846 shares of Tenneco Common Stock to the Seller in connection with the Transaction; and |
| transaction costs in connection with the Transaction and related financing. |
The unaudited pro forma condensed combined financial information has been presented for informational purposes only and is not necessarily indicative of what the combined companys financial position or results of operations actually would have been had the Transaction been completed as of the dates indicated. In addition, the unaudited pro forma condensed combined financial information does not purport to project the future financial position or operating results of the combined company. The accompanying unaudited pro forma condensed combined statements of income do not include any pro forma adjustments to reflect expected cost savings or restructuring actions which may be achievable or the impact of any non-recurring activity and one-time transaction related costs.
The unaudited pro forma condensed combined financial information has been prepared using the acquisition method of accounting under existing United States generally accepted accounting principles (U.S. GAAP), which are subject to change. Tenneco will be deemed the acquirer for accounting purposes and Federal-Mogul will be treated as the acquiree, based on a number of factors considered at the time of preparation of this filing, such as the legal form of the transaction, relative size (assets, revenues, or earnings), terms of the exchange, relative voting rights in the combined company after the business combination, etc. The acquisition accounting is dependent upon certain valuations and other studies that have yet to progress to a stage where there is sufficient information for a definitive measurement. Tenneco intends to complete the valuations and other studies upon completion of the Transaction and will finalize the purchase price allocation as soon as practicable within the measurement period, but in no event later than one year following the closing date of the Transaction. The assets and liabilities of Federal-Mogul have been measured based on various preliminary estimates using assumptions that Tenneco believes are reasonable, based on information that is currently available. In addition, the Transaction has not yet received all necessary approvals from governmental authorities (see Note 1). Under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and other relevant laws and regulations, before the closing of the Transaction, there are significant limitations regarding what Tenneco can learn about Federal-Mogul. Accordingly, the pro forma adjustments are preliminary and have been made solely for the purpose of providing pro forma condensed combined financial information prepared in accordance with the rules and regulations of the Securities and Exchange Commission (SEC). Differences between these preliminary estimates and the final acquisition accounting will occur, and these differences could have a material impact on the accompanying unaudited pro forma condensed combined financial information and the combined companys future results of operations and financial position.
The unaudited pro forma condensed combined financial information has been compiled in a manner consistent with the accounting policies adopted by Tenneco in all material aspects. Upon completion of the Transaction, Tenneco will perform a detailed review of Federal-Moguls accounting policies. As a result of that review, Tenneco may identify additional differences between the accounting policies of the two companies that, when conformed, could have a material impact on the financial statements of the combined company.
1
Additionally, certain financial information of Federal-Mogul as presented in its historical financial statements has been reclassified to conform to the historical presentation in Tennecos financial statements for purposes of preparation of the unaudited pro forma condensed combined financial information (see Note 9). Transactions between Tenneco and Federal-Mogul during the periods presented in the unaudited pro forma condensed combined financial information were not significant.
The unaudited pro forma condensed combined financial information gives effect to the Transaction, as if the Transaction had been completed on January 1, 2017, for statement of income purposes, and on December 31, 2017, for balance sheet purposes. This unaudited pro forma condensed combined financial information was derived from and should be read in conjunction with separate audited financial statements of Tenneco as of and for the year ended December 31, 2017 and the related notes included in Tennecos Annual Report on Form 10-K for the year ended December 31, 2017 that Tenneco filed with the SEC on February 28, 2018, and Federal-Moguls December 31, 2017 audited financial statements and related notes included in this Current Report on Form 8-K.
2
Tenneco Inc.
Unaudited Pro Forma Condensed Combined Balance Sheet
As of December 31, 2017
(in millions)
Tenneco Inc. | (Note 9) Federal-Mogul |
Pro Forma Adjustments |
Note | Pro Forma Combined |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
$ | 318 | $ | 319 | $ | 146 | 6A | $ | 783 | |||||||||||
Receivables, net |
1,321 | 1,294 | | 2,615 | ||||||||||||||||
Inventories |
869 | 1,456 | 201 | 6B | 2,526 | |||||||||||||||
Prepayments and other |
291 | 208 | | 499 | ||||||||||||||||
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Total current assets |
2,799 | 3,277 | 347 | 6,423 | ||||||||||||||||
Long-term receivables, net |
9 | | | 9 | ||||||||||||||||
Goodwill |
49 | 685 | (231 | ) | 6D | 503 | ||||||||||||||
Intangibles, net |
22 | 517 | 364 | 6E | 903 | |||||||||||||||
Deferred income taxes |
204 | | | 6I | 204 | |||||||||||||||
Investments in non-consolidated affiliates |
| 324 | | 324 | ||||||||||||||||
Other |
144 | 167 | | 311 | ||||||||||||||||
Property, plant, and equipment, net |
1,615 | 2,544 | 565 | 6C | 4,724 | |||||||||||||||
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Total assets |
$ | 4,842 | $ | 7,514 | $ | 1,045 | $ | 13,401 | ||||||||||||
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LIABILITIES AND STOCKHOLDERS EQUITY |
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Current liabilities: |
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Short-term debt (including current maturities of long-term debt) |
$ | 83 | $ | 126 | $ | 74 | 6F | $ | 283 | |||||||||||
Accounts payable |
1,705 | 1,020 | | 2,725 | ||||||||||||||||
Accrued taxes |
45 | 22 | | 67 | ||||||||||||||||
Accrued interest |
14 | 24 | | 38 | ||||||||||||||||
Accrued liabilities |
287 | 484 | | 771 | ||||||||||||||||
Other |
132 | 197 | | 329 | ||||||||||||||||
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Total current liabilities |
2,266 | 1,873 | 74 | 4,213 | ||||||||||||||||
Long-term debt |
1,358 | 3,004 | 915 | 6G | 5,277 | |||||||||||||||
Deferred income taxes |
11 | 119 | | 6I | 130 | |||||||||||||||
Pension and postretirement benefits |
268 | 1,037 | | 1,305 | ||||||||||||||||
Deferred credits and other liabilities |
155 | 84 | | 239 | ||||||||||||||||
Commitments and contingencies |
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Total liabilities |
4,058 | 6,117 | 989 | 11,164 | ||||||||||||||||
Redeemable noncontrolling interests |
42 | | | 42 | ||||||||||||||||
Stockholders equity: |
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Common stock |
1 | | | 1 | ||||||||||||||||
Premium on common stock and other capital surplus |
3,112 | 2,884 | (1,561 | ) | 6H | 4,435 | ||||||||||||||
Accumulated other comprehensive loss |
(541 | ) | (1,283 | ) | 1,283 | 6H | (541 | ) | ||||||||||||
Accumulated deficit |
(946 | ) | (364 | ) | 334 | 6H | (976 | ) | ||||||||||||
Shares held as treasury stock, at cost |
(930 | ) | | | (930 | ) | ||||||||||||||
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Total stockholders equity |
738 | 1,237 | 56 | 2,031 | ||||||||||||||||
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Noncontrolling interests |
46 | 160 | | 206 | ||||||||||||||||
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Total liabilities and stockholders equity |
$ | 4,842 | $ | 7,514 | $ | 1,045 | $ | 13,401 | ||||||||||||
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3
Tenneco Inc.
Unaudited Pro Forma Condensed Combined Statement of Income
For the Year Ended December 31, 2017
(in millions, except for per share data)
Tenneco Inc. | (Note 9) Federal-Mogul |
Pro Forma Adjustments |
Note | Pro Forma Combined |
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Revenues |
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Net sales and operating revenues |
$ | 9,274 | $ | 7,879 | $ | | $ | 17,153 | ||||||||||||
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Costs and expenses |
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Cost of sales (exclusive of depreciation and amortization shown below) |
7,812 | 6,438 | | 14,250 | ||||||||||||||||
Goodwill impairment charge |
11 | 3 | | 14 | ||||||||||||||||
Engineering, research, and development |
158 | 203 | | 361 | ||||||||||||||||
Selling, general, and administrative |
648 | 591 | | 1,239 | ||||||||||||||||
Depreciation and amortization of other intangibles |
224 | 398 | (95 | ) | 7A | 527 | ||||||||||||||
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8,853 | 7,633 | (95 | ) | | 16,391 | |||||||||||||||
Other income (expense) |
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Loss on sale of receivables |
(5 | ) | (15 | ) | | (20 | ) | |||||||||||||
Equity earnings of nonconsolidated affiliates, net of tax |
| 68 | | 68 | ||||||||||||||||
Other income |
1 | 20 | | 21 | ||||||||||||||||
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(4 | ) | 73 | | | 69 | |||||||||||||||
Earnings before interest expense, income taxes and noncontrolling interests |
417 | 319 | 95 | 831 | ||||||||||||||||
Interest expense |
73 | 148 | 25 | 7B | 246 | |||||||||||||||
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Earnings before income taxes and noncontrolling interests |
344 | 171 | 70 | 585 | ||||||||||||||||
Income tax expense (benefit) |
70 | (190 | ) | 24 | 7C | (96 | ) | |||||||||||||
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Net income |
274 | 361 | 46 | 681 | ||||||||||||||||
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Less: net income attributable to noncontrolling interests |
67 | 11 | | 78 | ||||||||||||||||
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Net income attributable to Tenneco Inc. |
$ | 207 | $ | 350 | $ | 46 | $ | 603 | ||||||||||||
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Earnings per share |
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Weighted average shares of common stock outstanding |
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Basic |
52,796,184 | | 29,444,846 | 8 | 82,241,030 | |||||||||||||||
Diluted |
53,026,911 | | 29,444,846 | 8 | 82,471,757 | |||||||||||||||
Basic earnings per share of common stock |
3.93 | | | 7.33 | ||||||||||||||||
Diluted earnings per share of common stock |
3.91 | | | 7.31 |
4
Note 1. Description of the Transaction
Transaction Agreement
On April 10, 2018, Tenneco Inc., a Delaware corporation (the Company or Tenneco) , entered into a Membership Interest Purchase Agreement (the Transaction Agreement) by and among the Company, Federal-Mogul LLC, a Delaware limited liability company, (Federal-Mogul), American Entertainment Properties Corp., a Delaware corporation (the Seller), and Icahn Enterprises L.P., a Delaware limited partnership (IEP), pursuant to which the Company will acquire Federal-Mogul (the Transaction).
Subject to the terms and conditions of the Transaction Agreement, the Company will (i) pay to the Seller an aggregate amount in cash equal to $800.0 million (the Cash Consideration) and (ii) issue and deliver to the Seller an aggregate of 29,444,846 shares (the Stock Consideration) of common stock, par value $0.01, of the Company (Common Stock), which shall be comprised of: (a) a number of shares of Common Stock (to be reclassified as Class A Voting Common Stock, par value $0.01, of the Company at the closing of the Transaction (Class A Common Stock)) equal to 9.9% of the aggregate number of shares of Class A Common Stock issued and outstanding as of immediately following the closing of the Transaction (such number of shares of Class A Common Stock, the Class A Common Stock Amount), and (b) a number of shares of a newly created Class B Non-Voting Common Stock, par value $0.01 (Class B Common Stock), equal to (1) the Stock Consideration, minus (2) the Class A Common Stock Amount.
Until the date that is 10 business days prior to the anticipated closing date of the Transaction, the Company may elect to conduct an offering of Common Stock in order to raise funds to increase the Cash Consideration and decrease the Stock Consideration by selling up to 7,315,490 shares of Common Stock in accordance with the terms of the Transaction Agreement.
The completion of the Transaction is subject to certain customary closing conditions, including:
| approval by a majority of the total votes cast on the proposal to approve the issuance of the Stock Consideration at a special meeting of the Companys stockholders; |
| the absence of any outstanding order enacted, promulgated, issued, entered, amended or enforced in the United States or the European Union enjoining or otherwise prohibiting the consummation of the transactions contemplated by the Transaction Agreement; |
| expiration or termination of any waiting periods (and any extensions thereof) under the U.S. Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and receipt of certain other required antitrust approvals; |
| the filing of an amended and restated certificate of incorporation of the Company with the Secretary of State for the State of Delaware; and |
| approval for the listing of the Class A Common Stock on the NYSE, subject to official notice of issuance. |
Each partys obligation to consummate the Transaction is also subject to certain additional closing conditions, including (i) the accuracy of the other partys representations and warranties contained in the Transaction Agreement (subject to certain materiality qualifiers) and (ii) the other partys compliance in all material respects with its covenants and agreements contained in the Transaction Agreement.
Debt Commitment Letters
In connection with the Transaction, the Company has entered into a debt commitment letter, pursuant to which JPMorgan Chase Bank, N.A. and Barclays Bank PLC have committed to provide an aggregate amount of $4.9 billion of debt financing, consisting of a $1.0 billion Term Loan A, a $2.4 billion Term Loan B and a $1.5 billion revolving credit facility, which will finance the Cash Consideration portion of the purchase price, replace the Companys existing senior credit facilities and certain senior facilities at Federal-Mogul and repay a portion of existing Tenneco and Federal-Mogul debt. The proceeds will also be used to pay the fees, expenses and costs related to the Transaction. The Company does not expect to borrow under the revolving credit facility in connection with the Transaction. The Term Loan A and revolving credit facility will mature on the fifth anniversary of closing, and the Term Loan B will mature on the seventh anniversary of closing. The new credit facilities will be secured on a senior basis by substantially all assets of the Company on a pari passu basis with Federal-Moguls existing secured notes, and will be guaranteed by certain material domestic subsidiaries. The commitment to provide financing is subject to specified limited conditions, such as applicable bankruptcy, reorganization, moratorium and similar laws affecting creditors rights and remedies generally.
5
Note 2. Basis of Pro Forma Presentation
The accompanying unaudited pro forma condensed combined financial information has been prepared in accordance with Article 11 of Regulation S-X and has been derived from the audited financial statements of Tenneco and Federal-Mogul. The financial information has been adjusted in the accompanying unaudited pro forma condensed combined financial information to give effect to pro forma events that are (1) directly attributable to the Transaction, (2) factually supportable and (3) with respect to the unaudited pro forma condensed combined statement of income, expected to have a continuing impact on the combined results of operations of the Company.
The unaudited pro forma condensed combined financial information was prepared using the acquisition method of accounting in accordance with ASC 805, which requires, among other things, that assets acquired and liabilities assumed in a business combination be recognized at their fair values as of the acquisition date. The acquisition method of accounting, in accordance with ASC 805, uses the fair value concepts defined in ASC 820, Fair Value Measurement (ASC 820).
ASC 820 defines fair value, establishes the framework for measuring fair value for any asset acquired or liability assumed under U.S. GAAP, expands disclosures about fair value measurements, and specifies a hierarchy of valuation techniques based on the nature of the inputs used to develop the fair value measurements. Fair value is defined in ASC 820 as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. This is an exit price concept for the valuation of an asset or liability. Market participants are assumed to be buyers or sellers in the most advantageous market for the asset or liability. Fair value measurement for an asset assumes the highest and best use by these market participants, and as a result, assets may be required to be recorded which are not intended to be used or sold. Additionally, the fair value may not reflect managements intended use for those assets.
Fair value measurements can be highly subjective and it is possible the application of reasonable judgment could develop different assumptions resulting in a range of alternative estimates using the same facts and circumstances.
Fair value estimates were determined based on preliminary discussions between Tenneco and Federal-Mogul management, due diligence efforts, and information available in public filings. The allocation of the aggregate transaction consideration used in the preliminary unaudited pro forma condensed combined financial information is based on preliminary estimates. The estimates and assumptions are subject to change as of the effective time of the closing of the Transaction. The final determination of the allocation of the aggregate transaction consideration will be based on the actual tangible and intangible assets and the liabilities of Federal-Mogul at the effective time of the Transaction (see Note 5).
Federal-Moguls assets acquired and liabilities assumed will be recorded at their fair value at the transaction date. ASC 805 establishes that the consideration transferred shall be measured at the closing date of the Transaction at the then-current market price. This particular requirement will likely result in a per share equity component that is different from the amount assumed in this unaudited pro forma condensed combined financial information. The purchase consideration for Tennecos acquisition of Federal-Mogul under the acquisition method will be based on the share price of Tenneco common stock on the closing date of the Transaction multiplied by the estimated fully diluted shares of Tenneco common stock. The preliminary purchase price allocation assumes a Tenneco common stock price of $44.92, the price at market close on May 3, 2018. Under the Transaction Agreement, until the date that is 10 business days prior to the anticipated closing date of the Transaction, Tenneco may elect to conduct an offering of common stock in order to raise funds to increase the Cash Consideration by up to $400 million and decrease the Stock Consideration by selling up to 7,315,490 shares of common stock.
The unaudited pro forma condensed combined financial information is presented solely for informational purposes and is not necessarily indicative of the combined results of operations or financial position that might have been achieved for the periods or dates indicated, nor is it necessarily indicative of the future results of the combined company. The unaudited pro forma condensed combined financial information has not been adjusted to give effect to certain expected financial benefits of the Transaction, such as tax savings, cost synergies or revenue synergies, or the anticipated costs to achieve these benefits, including the cost of integration activities. Also, the unaudited pro forma condensed combined financial information does not reflect possible adjustments related to restructuring or integration activities that have yet to be determined or transaction or other costs following the combination that are not expected to have a continuing impact on the business of the combined company. Further, one-time transaction-related expenses anticipated to be incurred prior to, or concurrent with, the closing of the Transaction are not included in the unaudited pro forma condensed combined statement of income. As of December 31, 2017, such Transaction expenses were determined to not be significant. Management has identified $30 million of Transaction-related expenses primarily related to deal advisory fees. Transaction-related expenses will be further refined as more information becomes available.
Certain amounts from the historical financial statements of Federal-Mogul were reclassified to conform their presentation to that of Tenneco (see Note 9).
Note 3: Accounting Policies
Tenneco has completed a preliminary review of significant accounting policies for purposes of the unaudited pro forma condensed combined financial information. No material differences in accounting policies were identified. Review of such accounting policies will continue and policy differences may be identified at a later date and may be deemed material at that time.
6
Note 4: Estimated Transaction Consideration
The estimated consideration is calculated as follows (in millions, except for share data):
Tenneco shares issued for purchase of Federal-Mogul |
29,444,846 | |||
Tenneco share price at May 3, 2018 market close |
$ | 44.92 | ||
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Fair value of equity portion of the merger consideration |
$ | 1,323 | ||
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Estimated Fair Value |
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Stock Consideration |
$ | 1,323 | ||
Cash Consideration |
800 | |||
Assumed Federal-Mogul debt: |
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Revolver |
250 | |||
Term Loan C Facility |
1,455 | |||
Senior Secured Notes due 2022 |
498 | |||
Senior Secured Floating Rate Notes due 2024 |
360 | |||
Senior Secured Notes due 2024 |
420 | |||
Other debt |
160 | |||
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Total Consideration |
$ | 5,266 | ||
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The estimate of consideration expected to be transferred reflected in this unaudited pro forma condensed combined financial information does not purport to represent what the actual consideration transferred will be when the Transaction is completed. For purposes of these unaudited pro forma condensed combined financial statements, the market price of Tenneco common stock based on the May 3, 2018 market close of $44.92 was used to calculate the estimate of consideration expected to be transferred. However, the fair value of equity securities issued as the consideration transferred will be measured using the market price of Tenneco common stock on the closing date. Under the Transaction Agreement, until the date that is 10 business days prior to the anticipated closing date of the Transaction, Tenneco may elect to conduct an offering of common stock in order to raise funds to increase the Cash Consideration by up to $400 million and decrease the Stock Consideration by selling up to 7,315,490 shares of common stock.
A 5% increase or decrease in Tennecos share price would result in a $66 million increase or decrease in the total consideration, which would be reflected in these unaudited pro forma condensed combined financial statements as an increase or decrease to goodwill. As the Senior Secured Debt of Federal-Mogul to be assumed by the Company in the Transaction is denominated in Euro, a significant movement in the foreign currency exchange rate could also impact the purchase price. The actual purchase price will fluctuate until the closing of the Transaction.
7
Note 5: Purchase Accounting Adjustments
The following is a preliminary estimate of the assets to be acquired and the liabilities to be assumed by Tenneco in the Transaction, reconciled to estimated transaction consideration (in millions):
Amounts as of Acquisition Date |
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Book value of net assets acquired at December 31, 2017 |
$ | 1,397 | ||
Adjusted for: |
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Noncontrolling interests |
(160 | ) | ||
Elimination of existing goodwill and intangible assets |
(1,202 | ) | ||
Assumed debt (1) |
3,143 | |||
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Adjusted book value of net assets acquired |
3,178 | |||
Adjustments to: |
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Inventories |
201 | |||
Property, plant and equipment |
565 | |||
Other intangible assets |
881 | |||
Capitalized loan costs and original issue discount (OID) |
(13 | ) | ||
Goodwill |
454 | |||
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Estimate of consideration expected to be transferred |
$ | 5,266 | ||
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(1) | The debt presented on the Federal-Mogul consolidated balance sheet is net of $13 million of capitalized loan costs and OID, written off within the adjustment to capitalized loan costs and OID on the table above. |
Note 6: Balance Sheet Adjustments
The following represents an explanation of the various adjustments to the unaudited pro forma condensed combined balance sheet.
A Cash and cash equivalents (in millions):
Cash paid by Tenneco to Seller |
$ | (800 | ) | |
Repayment of Federal-Mogul debt (1) |
(1,705 | ) | ||
Repayment of Tenneco debt (1) |
(634 | ) | ||
Cash paid for financing fees (1) |
(85 | ) | ||
Cash paid for Transaction expenses (2) |
(30 | ) | ||
Proceeds from new Tenneco debt issuance (1) |
3,400 | |||
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Total pro forma adjustment to cash and cash equivalents |
$ | 146 | ||
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(1) | Refer to Note 6G. |
(2) | Refer to Note 2. |
BInventories
Represents an adjustment of $201 million to increase the carrying value of Federal-Moguls inventories, for the preliminary estimated fair value, which is based on the expected selling price of inventory to customers and adjusted for related costs of disposal and a reasonable profit allowance for the post-acquisition selling effort. The fair value adjustment to inventories is expected to be recognized in the combined companys statement of income within twelve months following the consummation of the Transaction.
CProperty, plant and equipment
Represents the adjustment in carrying value of Federal-Moguls property, plant and equipment from its recorded net book value to its preliminary estimated fair value. The estimated fair value is expected to be depreciated over the estimated useful lives, generally on a straight-line basis. The preliminary amounts assigned to property, plant and equipment are as follows (in millions):
8
Estimated Life(1) | Federal-Mogul Historical Carrying Amount |
Fair Value Adjustment |
Estimated Fair Value |
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Land |
N/A | $ | 247 | $ | 127 | $ | 374 | |||||||
Buildings and building improvements |
10-40 years | 414 | 69 | 483 | ||||||||||
Machinery and equipment |
3-15 years | 1,564 | 369 | 1,933 | ||||||||||
Capitalized software |
3-5 years | 36 | | 36 | ||||||||||
Construction in progress |
N/A | 283 | | 283 | ||||||||||
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Total property, plant and equipment |
$ | 2,544 | $ | 565 | $ | 3,109 | ||||||||
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(1) | Represents preliminary estimated life of assets to be acquired. |
The final determination of fair value of property, plant and equipment, as well as estimated useful lives, remains subject to change. The finalization may have a material impact on the valuation of property, plant and equipment and the purchase price allocation, which is expected to be finalized subsequent to the closing of the Transaction.
The preliminary estimate of fair value of Federal-Moguls property, plant and equipment was determined using a depreciated replacement cost method, which is a form of the cost approach, using currently available information, such as Federal-Moguls balance sheet and fixed asset registers. This method applies asset class specific inflationary/deflationary factors to the original capitalized cost of the assets being valued. The inflationary/deflationary factors used were derived from published sources. The estimated cost was then adjusted for physical depreciation calculated on a straight-line basis, considering the economic useful life and physical age of the assets being valued, for all asset classes.
The estimated useful lives used to calculate the physical depreciation reflect the weighted average remaining utility of each asset group based upon the relationship of preliminary value to replacement cost while considering each asset groups estimated total economic life. The estimate of fair value and estimated useful lives is preliminary and subject to change once Tenneco has sufficient information as to the specific types, nature, age, condition, and location of Federal-Moguls property, plant and equipment.
DGoodwill
Goodwill represents the excess of the purchase price over the preliminary fair value of the underlying net tangible and identifiable intangible assets net of liabilities. Goodwill acquired in the Transaction is estimated to be $454 million and Federal-Moguls historical goodwill of $685 million is eliminated, for a net adjustment of $231 million. The estimated goodwill to be recognized is attributable primarily to expected synergies, expanded market opportunities, and other benefits that Tenneco believes will result from combining its operations with the operations of Federal-Mogul. The goodwill created in the Transaction is not expected to be deductible for tax purposes and is subject to material revision as the purchase price allocation is completed (see Note 5).
EIntangible assets
Represents adjustments to record the preliminary estimated fair value of intangibles of approximately $881 million, which is an increase of $364 million over Federal-Moguls historical book value of intangibles of $517 million prior to the Transaction.
Identified intangibles assets expected to be acquired consist of the following (in millions):
Estimated Life(1) |
Estimated Fair Value |
|||||
Technology |
6-8 years | $ | 150 | |||
Customer relationships |
3-16 years | 292 | ||||
Trade names |
Indefinite | 439 | ||||
|
|
|||||
Estimated fair value of identified intangible assets |
$ | 881 | ||||
|
|
(1) | Represents preliminary estimated life of assets to be acquired. |
9
The fair value estimate for all identifiable intangible assets is preliminary and is based on assumptions that market participants would use in pricing an asset, based on the most advantageous market for the asset (i.e., its highest and best use). This preliminary fair value estimate could include assets that are not intended to be used, may be sold, or are intended to be used in a manner other than their best use. The final determination of fair value of intangible assets, as well as estimated useful lives, remains subject to change. The finalization may have a material impact on the valuation of intangible assets and the purchase price allocation, which is expected to be finalized subsequent to the Transaction.
FShort-term debt and current portion of long-term debt
Represents the increase in Tennecos outstanding short-term debt of $74 million for the issuance of debt in connection with the Transaction (see Note 7B for interest expense).
GLong-term debt (in millions):
Estimated | ||||
Amounts as of | ||||
Acquisition Date | ||||
New Tenneco debt issuance |
||||
Term Loan A (LIBOR plus 2%, due 2023) |
$ | 1,000 | ||
Term Loan B (LIBOR plus 2.25%, due 2025) |
2,400 | |||
Revolver (LIBOR plus 2%, due 2023) |
| |||
|
|
|||
Total new Tenneco debt issuance |
3,400 | |||
Repayment of Federal-Mogul debt |
||||
Revolver (LIBOR plus 2%, due 2018) |
(250 | ) | ||
Term Loan C (LIBOR plus 3.75%, due 2021) |
(1,455 | ) | ||
|
|
|||
Total repayment of Federal-Mogul debt |
(1,705 | ) | ||
Repayment of Tenneco debt |
||||
Revolver (LIBOR plus 1.75%, due 2022) |
(244 | ) | ||
Term Loan A (LIBOR plus 1.75%, due 2022) |
(390 | ) | ||
|
|
|||
Total repayment of Tenneco debt |
(634 | ) | ||
Removal of Federal-Mogul capitalized loan costs and OID |
13 | |||
Addition of capitalized financing fees relating to new Tenneco debt |
(85 | ) | ||
Less: current portion of new Tenneco debt issuance |
(74 | ) | ||
|
|
|||
Total pro forma adjustments to long-term debt |
$ | 915 | ||
|
|
HTotal shareholders equity
Represents the elimination of Federal-Mogul capital, accumulated deficit, and accumulated other comprehensive loss, as well as the following adjustments to reflect the capital structure of the combined company (in millions):
Estimated | ||||
Amounts as of | ||||
Acquisition Date | ||||
Issuance of new Tenneco shares to Seller (1) |
||||
Common stock |
$ | | ||
Premium on common stock and other capital surplus |
1,323 | |||
Elimination of historical Federal-Mogul premium on common stock and other capital surplus capital (2) |
(2,884 | ) | ||
|
|
|||
Premium on common stock and other capital surplus |
(1,561 | ) | ||
Elimination of historical Federal-Mogul accumulated deficit (3) |
364 | |||
Estimate of Transaction expenses (4) |
(30 | ) | ||
|
|
|||
Accumulated deficit |
334 | |||
Elimination of historical Federal-Mogul accumulated other comprehensive loss (5) |
1,283 | |||
|
|
|||
Total adjustments to stockholders equity |
$ | 56 | ||
|
|
(1) | Represents the issuance of 29,444,846 shares of $0.01 par value common stock. (See Note 4.) |
(2) | Represents the reduction to premium on common stock and other capital surplus capital related to the elimination of Federal-Moguls historical equity. |
(3) | Represents the reduction to accumulated deficit related to the elimination of Federal-Moguls historical equity. |
(4) | Refer to Note 2. |
(5) | Represents the reduction to accumulated other comprehensive loss related to the elimination of Federal-Moguls historical equity. |
10
IIncome Taxes
For US federal tax purposes, the Transaction is structured to be an asset acquisition for the US assets of Federal-Mogul and, principally, an acquisition of the stock of Federal-Moguls foreign operations. The valuation relating to the purchase accounting is preliminary, however, and therefore the impact on the deferred tax assets and liabilities cannot be reasonably estimated at this time since the purchase price allocation has not been made on a jurisdictional basis and therefore not included in this pro forma condensed combined balance sheet. Adjustments to establish or remove deferred tax assets and liabilities as well as the recognition of additional deferred tax assets and liabilities upon detailed analysis of the acquired assets and assumed liabilities may occur in conjunction with the finalization of the purchase accounting, and these items could be material.
Note 7: Statement of Income Adjustments
The following represents an explanation of the various adjustments to the unaudited pro forma condensed combined statement of income.
ADepreciation and amortization of other intangibles
Represents estimated depreciation and amortization expense related to the pro forma adjustment to property, plant, and equipment (see Note 6C) and intangible assets (see Note 6E). Pro forma depreciation and amortization has been estimated on a preliminary basis as follows (in millions):
Fiscal Year Ended 12/31/17 |
||||
Estimated depreciation for acquired property, plant and equipment |
$ | 260 | ||
Estimated amortization for acquired definite-lived intangibles assets |
43 | |||
Historical Federal-Mogul depreciation expense |
(340 | ) | ||
Historical Federal-Mogul definite-lived intangible amortization expense |
(58 | ) | ||
|
|
|||
Total pro forma adjustment to depreciation and amortization of other intangibles |
$ | (95 | ) | |
|
|
The estimated depreciation expense was calculated using weighted average useful lives of 29 years for building and building improvements, 8 years for machinery and equipment, and 5 years for capitalized software.
For each $100 million increase or decrease in the fair value of building and building improvements, the depreciation expense would increase or decrease by $3 million. If the useful life for building and building improvements were to increase or decrease by 1 year, the depreciation expense will decrease or increase by $1 million.
For each $100 million increase or decrease in the fair value of machinery and equipment, the depreciation expense would increase or decrease by $12 million. If the useful life for machinery and equipment increases or decreases by 1 year, the depreciation expense will decrease or increase by $26 million.
For each $10 million increase or decrease in the fair value of capitalized software, the depreciation expense would increase or decrease by $2 million. If the useful life for capitalized software increases or decreases by 1 year, the depreciation expense will decrease or increase by $1 million.
The estimated amortization expense was calculated using weighted average useful lives of 7 years for technology, and 15 years for customer relationships
For each $100 million increase or decrease in the fair value of technology, the amortization expense would increase or decrease by $15 million. If the useful life for technology increases or decreases by 1 year, the amortization expense will decrease or increase by $3 million.
11
For each $100 million increase or decrease in the fair value of customer relationships, the amortization expense would increase or decrease by $5 million. If the useful life for customer relationships increases or decreases by 1 year, the amortization expense will decrease or increase by $3 million.
BInterest expense
The increase in interest expense is comprised of the following (in millions):
Fiscal Year Ended 12/31/17 |
||||
Removal of interest expense relating to repaid Federal-Mogul debt |
||||
Revolver (LIBOR plus 2%, due 2018) |
$ | (9 | ) | |
Term Loan C (LIBOR plus 3.75%, due 2021) |
(71 | ) | ||
|
|
|||
Total removal of interest expense relating to repaid Federal-Mogul debt |
(80 | ) | ||
Removal of interest expense relating to old Tenneco debt |
||||
Revolver (LIBOR plus 1.75%, due 2022) |
(10 | ) | ||
Term Loan A (LIBOR plus 1.75%, due 2022) |
(11 | ) | ||
|
|
|||
Total removal of interest expense relating to old Tenneco debt |
(21 | ) | ||
Addition of interest expense relating to new Tenneco debt |
||||
Term Loan A (LIBOR plus 2%, due 2023) |
31 | |||
Term Loan B (LIBOR plus 2.25%, due 2025) |
81 | |||
|
|
|||
Total addition of interest expense relating to new Tenneco debt |
112 | |||
Addition of amortization of capitalized financing fees relating to new debt |
||||
Revolver (LIBOR plus 2%, due 2023) |
3 | |||
Term Loan A (LIBOR plus 2%, due 2023) |
2 | |||
Term Loan B (LIBOR plus 2.25%, due 2025) |
8 | |||
|
|
|||
Total addition of amortization of capitalized financing fees relating to new debt |
13 | |||
Removal of amortization of capitalized loan costs and OID relating to Federal-Mogul debt |
(4 | ) | ||
Addition of interest expense relating to new Tenneco unused revolver |
5 | |||
|
|
|||
Total interest expense adjustment |
$ | 25 | ||
|
|
The interest rates used for the new Tenneco debt for purposes of the pro forma condensed combined financial information are based on the rates reflected in the debt commitment letter related to the debt financing for the Transaction (See Note 2). The interest rates for the Term Loan A and Term Loan B are assumed to be 3.14% and 3.39%, respectively. A 1/8 percent increase or decrease in the interest rates assumed above would result in an aggregate increase or decrease to interest expense of $4 million for the year ended December 31, 2017.
CIncome taxes
Represents the income tax effect for unaudited pro forma condensed combined statement of income adjustments related to the Transaction using statutory tax rates in each jurisdiction, less any applicable valuation allowances for the fiscal year ended December 31, 2017. Because the adjustments contained in this unaudited pro forma condensed combined financial information are based on estimates, the effective tax rate will likely vary from the effective rate in periods subsequent to the Transaction. Additionally, certain adjustments reflect transactions that will occur within legal entities located in jurisdictions which are subject to valuation allowances and a tax benefit is not expected to be realized on a more likely than not basis.
Represents the tax impact of the pro forma adjustments on the income statement of $24 million at the estimated combined statutory rate of 35%. The effective tax rate of the combined company could be significantly different (either higher or lower) depending on post-Transaction activities and impact due to U.S. tax reform.
12
Note 8: Earnings per Share
The unaudited pro forma average number of basic weighted average shares outstanding is calculated as follows:
Fiscal Year Ended 12/31/17 |
||||
Tenneco weighted average shares outstanding |
52,796,184 | |||
Tenneco shares issued to Seller |
29,444,846 | |||
|
|
|||
Total pro forma basic weighted average shares outstanding |
82,241,030 | |||
|
|
The unaudited pro forma average number of diluted weighted average shares outstanding is calculated by adding the effect of dilutive securities to the unaudited pro forma average number of basic weighted average shares outstanding. The dilutive effects of these share-based awards were computed using the treasury stock method.
Fiscal Year Ended 12/31/17 |
||||
Pro forma basic weighted average shares outstanding |
82,241,030 | |||
Dilutive impact of Tenneco awards outstanding |
230,727 | |||
|
|
|||
Adjusted diluted weighted average shares outstanding |
82,471,757 | |||
|
|
13
Note 9: Reclassifications
Tenneco has completed a preliminary review of the financial statement presentation of Federal-Mogul for purposes of the unaudited pro forma condensed combined financial information. During this review, the following financial statement reclassifications were performed in order to align the presentation of Federal-Moguls financial information with that of Tenneco:
Federal-Mogul Presentation December 31, 2017 |
Presentation Reclassifications |
Tenneco Inc. Presentation December 31, 2017 | ||||||||||||||
Assets: |
Assets: | |||||||||||||||
Current assets: |
Current assets: | |||||||||||||||
Cash and cash equivalents |
$ | 319 | | $ | 319 | Cash and cash equivalents | ||||||||||
Accounts receivable, net |
1,294 | | 1,294 | Receivables, net | ||||||||||||
Inventories, net |
1,456 | | 1,456 | Inventories | ||||||||||||
Prepaid expenses and other current assets |
208 | | 208 | Prepayments and other | ||||||||||||
|
|
|
|
|
|
|||||||||||
Total current assets |
3,277 | | 3,277 | Total current assets | ||||||||||||
Property, plant, and equipment, net |
2,544 | | 2,544 | Property, plant, and equipment, net | ||||||||||||
Goodwill and other indefinite-lived intangible assets |
913 | (913 | ) | a, b | | |||||||||||
Definite-lived intangible assets, net |
289 | (289 | ) | c | | |||||||||||
685 | a | 685 | Goodwill | |||||||||||||
517 | b, c | 517 | Intangibles, net | |||||||||||||
Investments in nonconsolidated affiliates |
324 | | 324 | Investments in non-consolidated affiliates | ||||||||||||
Other noncurrent assets |
167 | | 167 | Other | ||||||||||||
| | Long-term receivables, net | ||||||||||||||
| | Deferred income taxes | ||||||||||||||
|
|
|
|
|
|
|||||||||||
Total assets: |
$ | 7,514 | | $ | 7,514 | Total assets: | ||||||||||
|
|
|
|
|
|
|||||||||||
Liabilities, and member interest and shareholders equity |
Liabilities and stockholders equity | |||||||||||||||
Current liabilities: |
Current liabilities: | |||||||||||||||
Short-term debt, including current portion of long-term debt |
$ | 126 | | $ | 126 | Short-term debt | ||||||||||
Accounts payable |
1,020 | | 1,020 | Accounts payable | ||||||||||||
Accrued liabilities |
506 | (22 | ) | d | 484 | Accrued liabilities | ||||||||||
| 22 | d | 22 | Accrued taxes | ||||||||||||
Current portion of pension and other postretirement benefits liability |
38 | (38 | ) | e | | |||||||||||
Other current liabilities |
183 | 14 | e, f | 197 | Other | |||||||||||
24 | f | 24 | Accrued interest | |||||||||||||
|
|
|
|
|
|
|||||||||||
Total current liabilities |
1,873 | | 1,873 | Total current liabilities | ||||||||||||
Long-term debt |
3,004 | | 3,004 | Long-term debt | ||||||||||||
Pension and other postretirement benefits liability |
1,037 | | 1,037 | Pension and postretirement benefits | ||||||||||||
Long-term deferred income taxes |
119 | | 119 | Deferred income taxes | ||||||||||||
Other accrued liabilities |
84 | | 84 | Deferred credits and other liabilities | ||||||||||||
Member interest and shareholders equity |
Stockholders equity | |||||||||||||||
Member interest |
2,884 | (2,884 | ) | g | | |||||||||||
2,884 | g | 2,884 | Premium on common stock and other capital surplus | |||||||||||||
Preferred stock |
| | | |||||||||||||
Common stock |
| | | Common stock | ||||||||||||
Accumulated deficit |
(364 | ) | | (364 | ) | Accumulated deficit | ||||||||||
Accumulated other comprehensive income (loss) |
(1,283 | ) | | (1,283 | ) | Accumulated other comprehensive | ||||||||||
Treasury stock, at cost |
| | | Shares held as treasury stock, at cost | ||||||||||||
|
|
|
|
|
|
|||||||||||
Total Federal-Mogul member interest and shareholders equity |
1,237 | | 1,237 | Total stockholders equity | ||||||||||||
|
|
|
|
|
|
|||||||||||
Noncontrolling interests |
160 | | 160 | Noncontrolling interests | ||||||||||||
|
|
|
|
|
|
|||||||||||
Total member interest and shareholders equity |
1,397 | | 1,397 | Total stockholders equity | ||||||||||||
|
|
|
|
|
|
|||||||||||
Total liabilities, and member interest and shareholders equity |
$ | 7,514 | | $ | 7,514 | Total liabilities and stockholders equity | ||||||||||
|
|
|
|
|
|
Presentation reclassification notes:
a) | Reclassification of $685 million from Goodwill and other indefinite-lived intangible assets to Goodwill. |
b) | Reclassification of $228 million of indefinite-lived intangible assets from Goodwill and other indefinite-lived intangible assets to Intangibles, net. |
c) | Reclassification of $289 million from Definite-lived intangible assets, net to Intangibles, net. |
d) | Reclassification from Accrued liabilities to Accrued taxes |
e) | Reclassification of $38 million from Current portion of pension and other postretirement benefits liability to Other. |
f) | Reclassification of $24 million from Other current liabilities to Accrued interest |
g) | Reclassification from Member interest to Premium on common stock and other capital surplus |
14
Note 9: Reclassifications (Continued)
Federal-Mogul Presentation December 31, 2017 |
Presentation Reclassifications |
Tenneco Inc. Presentation December 31, 2017 | ||||||||||||||
Net sales |
$ | 7,879 | $ | | $ | 7,879 | Net sales and operating revenues | |||||||||
Costs and expenses: |
Costs and expenses: | |||||||||||||||
Cost of products sold |
6,702 | (264 | ) | a, f | 6,438 | Cost of sales (exclusive of depreciation and amortization shown below) | ||||||||||
Amortization expense |
58 | (58 | ) | b | | |||||||||||
398 | a, b | 398 | Depreciation and amortization of other intangibles | |||||||||||||
Selling, general and administrative expenses |
825 | (234 | ) | a, c | 591 | Selling, general, and administrative | ||||||||||
203 | c, d | 203 | Engineering, research, and development | |||||||||||||
Goodwill and intangible impairment expense, net |
11 | (11 | ) | d, e | | |||||||||||
3 | e | 3 | Goodwill impairment charge | |||||||||||||
Restructuring charges and asset impairments, net |
37 | (37 | ) | f | | |||||||||||
Other (income) expense, net |
(9 | ) | 9 | g, h | | |||||||||||
|
|
|
|
|
|
|||||||||||
Other income (expense): |
Other income (expense): | |||||||||||||||
Loss on debt extinguishment |
(4 | ) | 4 | h |
| |||||||||||
Equity earnings of nonconsolidated affiliates, net of tax |
68 | | 68 | Equity earnings of nonconsolidated affiliates, net of tax | ||||||||||||
(15 | ) | g |
(15 | ) | Loss on sale of receivables | |||||||||||
20 | g, h | 20 | Other income | |||||||||||||
|
|
|
|
|
|
|||||||||||
Income from continuing operations |
319 | | 319 | Earnings before interest expense, income taxes and noncontrolling interests | ||||||||||||
Interest expense |
148 | | 148 | Interest expense | ||||||||||||
|
|
|
|
|
|
|||||||||||
Earnings before income taxes and noncontrolling interests: |
171 | | 171 | Earnings before income taxes and noncontrolling interests: | ||||||||||||
Income tax benefit |
(190 | ) | | (190 | ) | Income tax expense (benefit) | ||||||||||
Gain from discontinued operations, net of tax |
| | ||||||||||||||
|
|
|
|
|
|
|||||||||||
Net income |
361 | | 361 | Net income | ||||||||||||
Net income attributable to noncontrolling interests |
11 | | 11 | Less: net income attributable to noncontrolling interests | ||||||||||||
|
|
|
|
|
|
|||||||||||
Net income attributable to Federal-Mogul |
$ | 350 | $ | | $ 350 | Net income attributable to Tenneco | ||||||||||
|
|
|
|
|
|
Presentation reclassification notes:
a) | Reclassification of depreciation from Cost of products sold and Selling, general and administrative expenses of $301 and $39, respectively, to Depreciation and amortization of other intangibles. |
b) | Reclassification from Amortization expense to Depreciation and amortization of other intangibles. |
c) | Reclassification of $195 million from Selling, general and administrative to Engineering, research, and development. |
d) | Reclassification of $8 million of in-process R&D from Goodwill and intangible impairment, net, to Engineering, research, and development. |
e) | Reclassification of goodwill impairment from Goodwill and intangible impairment expense, net, to Goodwill impairment charge. |
f) | Reclassification of $37 million from Restructuring and asset impairment charges to Cost of sales. |
g) | Reclassification of $15 million from Other (income) expense, net to Loss on sale of receivables. |
h) | Reclassification of $24 million of income from Other (income) expense, net and $4 million of Loss on debt extinguishment to Other income. |
15
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