10-Q 1 d10q.txt FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2002 OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________ to __________ Commission File Number: 1-1511 FEDERAL-MOGUL CORPORATION (Exact name of Registrant as specified in its charter) Michigan 38-0533580 (State or other jurisdiction of (IRS employer incorporation or organization) identification number) 26555 Northwestern Highway, Southfield, Michigan 48034 (Address of principal executive offices) (Zip Code) (248) 354-7700 (Registrant's telephone number, including area code) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes X No ___ --- As of July 31, 2002, there were 82,383,257 outstanding shares of the registrant's $5.00 stated value common stock. FORWARD-LOOKING STATEMENTS Certain statements contained or incorporated in this Quarterly Report on Form 10-Q which are not statements of historical fact constitute "Forward-Looking Statements" within the meaning of the Private Securities Litigation Reform Act of 1995 (the "Reform Act"). Such statements are made in good faith by Federal-Mogul (the "Company") pursuant to the "Safe Harbor" provisions of the Reform Act. Forward-looking statements include, without limitation, financial projections, estimates and statements regarding plans, objectives and expectations of the Company and its management, as well as the Company's views regarding industry and economic conditions and trends. Forward-looking statements include, without limitation, plans to implement restructuring initiatives relating to manufacturing and warehouse facilities, plans to address issues related to financing of the Company's business operations, statements regarding industry conditions, and statements regarding the scope and effect of asbestos liabilities and any plan(s) of reorganization and scheme(s) of arrangement associated with the Company's filing for Chapter 11 in the U.S. and Administration in the U.K. Forward-looking statements may involve known and unknown risks, uncertainties and other factors, which may cause the actual results, performance, experience or achievements of the Company to differ materially from any future results, performance, experience or achievements expressed or implied by such forward-looking statements. Such risks, uncertainties and other factors include, without limitation, fluctuation in demand and pricing for both original equipment and replacement components in the automotive, heavy-duty vehicular and industrial markets, the effect of certain global and regional economic conditions, the ability of the Company to control operating and other costs, legal proceedings and claims (including environmental and asbestos matters) involving the Company, changes in the Company's relationships with customers and suppliers, the effect of the Chapter 11 voluntary reorganization filing by the Company and its wholly owned U.S. subsidiaries and filings of certain of the Company's U.K. subsidiaries for Chapter 11 and Administration, legislative risks and uncertainties, and other factors, some of which are beyond the Company's control. 2 PART I - FINANCIAL INFORMATION Item 1. Financial Statements FEDERAL-MOGUL CORPORATION AND SUBSIDIARIES Condensed Consolidated Statements of Operations (Unaudited) (Millions of Dollars, Except Per Share Amounts)
Three Months Ended Six Months Ended June 30 June 30 ------- ------- 2002 2001 2002 2001 ---- ---- ---- ---- Net sales ...................................................... $ 1,442.3 $ 1,425.4 $ 2,788.4 $ 2,876.1 Cost of products sold .......................................... 1,151.0 1,126.4 2,235.8 2,273.8 --------- --------- --------- --------- Gross margin ................................................ 291.3 299.0 552.6 602.3 Selling, general and administrative expenses ................... 213.4 203.6 426.8 431.2 Amortization of goodwill and other intangible assets ........... 3.5 29.8 7.1 60.2 Restructuring charges .......................................... 1.5 2.1 11.0 31.9 Adjustment of assets held for sale and other long-lived assets to fair value ......................................... 2.6 0.1 2.6 0.7 Interest expense, net .......................................... 29.9 81.2 60.2 163.8 Chapter 11 and Administration related reorganization expenses ..................................................... 18.5 -- 33.4 -- Gain on extinguishment of debt ................................. -- (25.1) -- (25.1) Other income, net .............................................. (14.8) (27.8) (13.8) (21.3) --------- --------- --------- --------- Earnings (loss) before income tax expense and cumulative effect of change in accounting principle .............................................. 36.7 35.1 25.3 (39.1) Income tax expense ............................................. 20.7 52.6 50.5 40.6 --------- --------- --------- --------- Earnings (loss) before cumulative effect of change in accounting principle ................................ 16.0 (17.5) (25.2) (79.7) Cumulative effect of change in accounting principle, net of applicable income tax benefit ......................... -- -- 1,428.4 -- --------- --------- --------- --------- Net Earnings (Loss) ................................. 16.0 (17.5) (1,453.6) (79.7) Preferred dividends ............................................ -- 0.4 -- 0.8 --------- --------- --------- --------- Net Earnings (Loss) Attributable to Common Shareholders ........ $ 16.0 $ (17.9) $(1,453.6) $ (80.5) ========= ========= ========= ========= Earnings (Loss) Per Common Share: Basic Earnings (Loss) Per Common Share before cumulative effect of change in accounting principle ................... $ 0.19 $ (0.25) $ (0.31) $ (1.14) ========= ========= ========= ========= Net Earnings (Loss) Per Common Share ......................... $ 0.19 $ (0.25) $ (17.65) $ (1.14) ========= ========= ========= ========= Diluted Earnings (Loss) Per Common Share before cumulative effect of change in accounting principle ................... $ 0.17 $ (0.25) $ (0.31) $ (1.14) ========= ========= ========= ========= Net Earnings (Loss) Per Common Share ......................... $ 0.17 $ (0.25) $ (17.65) $ (1.14) ========= ========= ========= =========
See accompanying notes. 3 FEDERAL-MOGUL CORPORATION AND SUBSIDIARIES Condensed Consolidated Balance Sheets (Millions of Dollars)
(Unaudited) June 30 December 31 2002 2001 ----------- ----------- ASSETS Cash and equivalents ............................................................... $ 350.5 $ 346.9 Accounts receivable ................................................................ 1,103.4 944.8 Inventories ........................................................................ 786.7 721.9 Deferred taxes ..................................................................... 62.0 55.4 Other current assets ............................................................... 171.0 177.6 ----------- ----------- Total Current Assets .......................................................... 2,473.6 2,246.6 Property, plant and equipment, net ................................................. 2,217.4 2,163.7 Goodwill ........................................................................... 1,454.5 2,738.9 Other intangible assets, net ....................................................... 457.1 624.7 Asbestos-related insurance recoverable ............................................. 751.8 723.2 Other noncurrent assets ............................................................ 550.0 556.1 ----------- ----------- Total Assets .................................................................. $ 7,904.4 $ 9,053.2 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) Short-term debt, including current portion of long-term debt ....................... $ 17.4 $ 24.9 Accounts payable ................................................................... 351.6 299.5 Accrued compensation ............................................................... 237.8 193.9 Restructuring and rationalization reserves ......................................... 78.6 81.1 Other accrued liabilities .......................................................... 460.9 382.9 ----------- ----------- Total Current Liabilities ..................................................... 1,146.3 982.3 Long-term debt ..................................................................... 259.9 266.7 Postemployment benefits ............................................................ 847.3 819.8 Other accrued liabilities .......................................................... 237.5 258.5 Minority interest in consolidated subsidiaries ..................................... 47.2 50.3 Liabilities subject to compromise .................................................. 6,250.4 6,256.6 Shareholders' Equity (Deficit): Series C ESOP preferred stock ................................................... 28.0 28.0 Common stock .................................................................... 411.9 411.9 Additional paid-in capital ...................................................... 1,845.1 1,844.6 Accumulated deficit ............................................................. (2,568.6) (1,115.0) Accumulated other comprehensive loss ............................................ (600.4) (750.1) Other ........................................................................... (0.2) (0.4) ----------- ----------- Total Shareholders' Equity (Deficit) .......................................... (884.2) 419.0 ----------- ----------- Total Liabilities and Shareholders' Equity (Deficit) .......................... $ 7,904.4 $ 9,053.2 =========== ===========
See accompanying notes. 4 FEDERAL-MOGUL CORPORATION AND SUBSIDIARIES Condensed Consolidated Statements of Cash Flows (Millions of Dollars)
(Unaudited) Six Months Ended June 30 ------- 2002 2001 ----------- --------- Cash Provided From (Used By) Operating Activities Net loss ............................................................................... $ (1,453.6) $ (79.7) Adjustments to reconcile net loss to net cash provided from (used by) operating activities: Cumulative effect of change in accounting principle .................................. 1,464.5 -- Depreciation and amortization ........................................................ 136.8 191.1 Gain on extinguishment of debt ....................................................... -- (25.1) Restructuring charges ................................................................ 11.0 31.9 Chapter 11 and Administration related reorganization expenses ........................ 33.4 -- Adjustment of assets held for sale and other long-lived assets to fair value ......... 2.6 0.7 Postemployment benefits .............................................................. 7.0 (0.4) (Increase) decrease in accounts receivable ........................................... (122.5) 11.4 (Increase) decrease in inventories ................................................... (48.2) 34.7 Increase in accounts payable ......................................................... 21.2 17.8 Changes in other assets and liabilities .............................................. 108.3 5.8 Payments against restructuring and rationalization reserves .......................... (17.8) (37.5) Payments for Chapter 11 and Administration related reorganization expenses ........... (36.2) -- Payments against asbestos liability, net of insurance receipts ....................... -- (170.7) ----------- --------- Net Cash Provided From (Used By) Operating Activities ............................. 106.5 (20.0) Cash Provided From (Used By) Investing Activities Expenditures for property, plant and equipment and other long-term assets .............. (127.2) (146.0) Proceeds from sale of property, plant and equipment .................................... -- 19.0 Proceeds from sales of businesses ...................................................... 21.8 160.2 ----------- --------- Net Cash Provided From (Used By) Investing Activities ............................. (105.4) 33.2 Cash Provided From (Used By) Financing Activities Proceeds from issuance of long-term debt ............................................... 1.5 346.8 Principal payments on long-term debt ................................................... (1.9) (135.5) Principal payments on DIP credit facility .............................................. (6.1) -- Decrease in short-term debt ............................................................ (7.5) (25.3) Fees paid for debt agreements .......................................................... -- (18.5) Repurchase of accounts receivable under securitization ................................. -- (129.6) Dividends .............................................................................. -- (1.5) Other .................................................................................. -- 1.4 ----------- --------- Net Cash Provided From (Used By) Financing Activities ............................. (14.0) 37.8 ----------- --------- Effect of Foreign Currency Exchange Rate Fluctuations on Cash ..................... 16.5 (4.8) ----------- --------- Increase in Cash and Equivalents .................................................. 3.6 46.2 Cash and Equivalents at Beginning of Period ............................................... 346.9 107.2 ----------- --------- Cash and Equivalents at End of Period ..................................................... $ 350.5 $ 153.4 =========== =========
See accompanying notes. 5 Federal-Mogul Corporation and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited) June 30, 2002 1. BASIS OF PRESENTATION Interim Financial Statements The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States ("U.S. GAAP") for interim financial information and with instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the three and six month periods ended June 30, 2002 are not necessarily indicative of the results that may be expected for the year ended December 31, 2002. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2001. Certain items in the prior year's condensed consolidated financial statements have been reclassified to conform to the presentation used in 2002. New Accounting Pronouncements Accounting for Extraordinary Item: On April 30, 2002, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections." This pronouncement, among other things, requires certain gains and losses on the extinguishment of debt previously treated as extraordinary items to be classified as income or loss from continuing operations. As a result of the adoption of SFAS No. 145, the Company has reclassified the $25.1 million gain, before income tax expense of $8.8 million, on extinguishment of debt previously recorded as an extraordinary item to other expense and income tax expense, respectively, in its condensed consolidated statements of operations for the three and six months ended June 30, 2001. Accounting for Goodwill and Other Intangible Assets: On July 20, 2001, the FASB issued SFAS No. 141, "Business Combinations" and SFAS No. 142 "Goodwill and Other Intangible Assets". These pronouncements significantly change the accounting for business combinations, goodwill, and intangible assets. SFAS No. 141 eliminates the pooling-of-interests method of accounting for business combinations and further clarifies the criteria to recognize intangible assets separately from goodwill. The requirements of SFAS No. 141 are effective for any business combination accounted for by the purchase method that was completed after June 30, 2001. The Company has not made acquisitions since such time. Under SFAS No. 142 goodwill and indefinite lived intangible assets are no longer amortized but are reviewed for impairment annually (or more frequently if impairment indicators arise). Separable intangible assets that are not deemed to have an indefinite life will continue to be amortized over their useful lives. The amortization provisions of SFAS No. 142 apply to goodwill and intangible assets acquired after June 30, 2001. With respect to goodwill and intangible assets acquired prior to July 1, 2001, companies are required to adopt the pronouncement in their fiscal year beginning after December 15, 2001. The Company's adoption of SFAS No. 142 is further discussed in Note 11 to the condensed consolidated financial statements. Accounting for Certain Sales Incentives: In May 2000, the Emerging Issues Task Force ("EITF") issued EITF 00-14, "Accounting for Certain Sales Incentives", which changes the way companies must account for certain sales incentives offered to customers. The Company has adopted EITF 00-14, effective January 1, 2002. The adoption of EITF 00-14 required the reclassification of $2.2 million and $4.2 million, respectively, of expenditures previously recorded by the Company as selling, general, and administrative expenses to costs of products sold for the three and six month period ended June 30, 2001. 6 2. VOLUNTARY REORGANIZATION UNDER CHAPTER 11 AND ADMINISTRATION On October 1, 2001 (the "Petition Date"), Federal-Mogul Corporation ("Company" or "Federal-Mogul") and all of its wholly owned United States subsidiaries filed voluntary petitions for reorganization (the "U.S. Restructuring") under Chapter 11 of the United States Bankruptcy Code (the "Bankruptcy Code") in the United States Bankruptcy Court for the District of Delaware (the "Bankruptcy Court"). Also on October 1, 2001, certain of the Company's United Kingdom subsidiaries filed voluntary petitions for reorganization under Chapter 11 of the Bankruptcy Code and petitions for Administration (the "U.K. Restructuring") under the United Kingdom Insolvency Act of 1986 (the "Act") in the High Court of Justice, Chancery division in London, England (the "High Court"). The Company and its U.S. and U.K. subsidiaries included in the U.S. Restructuring and U.K. Restructuring are herein referred to as the "Debtors". The U.S. Restructuring and U.K. Restructuring are herein referred to as the "Restructuring Proceedings". The Chapter 11 cases of the Debtors (collectively, the "Chapter 11 Cases") have been consolidated for purposes of joint administration as In re: Federal-Mogul Global Inc., T&N Limited et. al (Case No. 01-10578(SLR)). The Chapter 11 Cases do not include any of the Company's non-U.S. subsidiaries outside of the U.K. subsidiaries mentioned above. The Restructuring Proceedings were undertaken to resolve the Company's asbestos-related litigation in a fair and equitable manner, to protect the long-term value of the Debtors' businesses and to maintain the Debtors' leadership positions in their markets. Consequences of the Restructuring Proceedings: The U.S. Debtors are operating their businesses as debtors-in-possession subject to the provisions of the Bankruptcy Code. The U.K. Debtors are continuing to manage their operations under the supervision of an Administrator approved by the High Court. All vendors will be paid for all goods furnished and services provided after the Petition Date. However, as a consequence of the Restructuring Proceedings, all pending litigation against the Debtors as of the Petition Date is stayed (subject to certain exceptions in the case of governmental authorities), and no party may take any action to pursue or collect pre-petition claims except pursuant to an order of the Bankruptcy Court or the High Court as applicable. It is the Debtors' intention to address all pending and future asbestos-related claims and all other pre-petition claims through a unified plan of reorganization under the Bankruptcy Code or scheme of arrangement under the Act. However, it is currently impossible to predict with any degree of certainty how a plan of reorganization or a scheme of arrangement will treat asbestos and other pre-petition claims and what impact the Restructuring Proceedings and any plan of reorganization or scheme of arrangement may have on the shares of the Company's common stock and preferred stock. The formulation and implementation of the plan of reorganization or scheme of arrangement could take a significant period of time. In the U.S., three creditors' committees, representing asbestos claimants, unsecured creditors and equity holders have been appointed as official committees in the Chapter 11 Cases and, in accordance with the provisions of the Bankruptcy Code, will have the right to be heard on all matters that come before the Bankruptcy Court. The Company expects that the appointed committees, together with the legal representative for the future asbestos claimants will play important roles in the Restructuring Proceedings. In the U.K., the Administrator has appointed a creditor's committee, representing both asbestos claimants and general unsecured creditors. The Company expects this committee to play an important role in the negotiation of any scheme of arrangement. As provided by the Bankruptcy Code, the Debtors initially had the exclusive right to propose a plan of reorganization within 120 days following the Petition Date with the Bankruptcy Court. The Debtors requested the Bankruptcy Court to extend the period of exclusivity to November 1, 2002, and the request was granted. If the Debtors fail to file a plan of reorganization during such period or any extension thereof, or if such plan of reorganization is not accepted by the requisite numbers of creditors and equity holders entitled to vote on the plan, other parties in interest in the Chapter 11 Cases may be permitted to propose their own plan(s) of reorganization for the Debtors. As provided by the Act, the Administrator will propose a scheme of arrangement to the High Court. The Company is unable to predict at this time what the treatment of creditors and equity security holders of the respective Debtors will be under any proposed plan(s) of reorganization or scheme(s) of arrangement. One alternative such plan(s) of reorganization may provide, among other things, that all present and future asbestos-related liabilities of the Debtors will be discharged and assumed and resolved by one or more independently 7 administered trusts established in compliance with Section 524(g) of the Bankruptcy Code. Such plan(s) may also provide for the issuance of an injunction by the Bankruptcy Court pursuant to Section 524(g) of the Bankruptcy Code that will enjoin actions against the reorganized Debtors alleging asbestos-related claims, which claims will be paid in whole or in part by one or more Section 524(g) trusts. Similar plans of reorganization have been confirmed in Chapter 11 cases of other companies involved in asbestos-related litigation. Section 524(g) of the Bankruptcy Code provides that, if certain specified conditions are satisfied, a court may issue a supplemental permanent injunction barring the assertion of asbestos-related claims against the reorganized company and channeling those claims to an independent trust. There are two possible types of U.K. schemes of arrangements. The first is under Section 425 of the Companies Act of 1985, which may involve a scheme for the reconstruction of the Company. If a majority in number representing three-fourths in value of the creditors or members or any class of them agree to the compromise or arrangement, it is binding if sanctioned by the High Court. Section 425 may be invoked where there is an Administration order in force in relation to the Company. The other possible type of scheme arises under Section 1 of the Insolvency Act of 1986 in relation to Company Voluntary Arrangements ("CVA"). If a majority in value representing more than three-fourths of the creditors agrees to the compromise or arrangement set out in the CVA proposal, it will be approved. The Company is unable to predict at this time what treatment will be accorded under any such plan(s) of reorganization to intercompany indebtedness, licenses, executory contracts, transfers of goods and services, and other intercompany arrangements, transactions and relationships that were entered into prior to the Petition Date. These arrangements, transactions, and relationships may be challenged by various parties in the Chapter 11 cases, and the outcome of those challenges, if any, may have an impact on the treatment of various claims under such plan(s) of reorganization. The Bankruptcy Court has set March 3, 2003 as a bar date for asbestos property damage claims. It is expected that a bar date will also be set in the future for general and commercial claims and asbestos personal injury claims. The Bankruptcy Court may confirm a plan of reorganization only upon making certain findings required by the Bankruptcy Code, and a plan may be confirmed over the dissent of non-accepting creditors and equity security holders if certain requirements of the Bankruptcy Code are met. The payment rights and other entitlements of pre-petition creditors and equity shareholders may be substantially altered by any plan(s) of reorganization confirmed in the Chapter 11 Cases. There is no assurance that there will be sufficient assets to satisfy the Debtors' pre-petition liabilities in whole or in part, and the pre-petition creditors of some Debtors may be treated differently than those of other Debtors. Pre-petition creditors may receive under the proposed plan(s) less than 100% of the face value of their claims, and the interests of the Company's equity security holders may be substantially diluted or cancelled in whole or in part. As noted above, it is not possible at this time to predict the outcome of the Chapter 11 cases, the terms and provisions of any plan(s) of reorganization, or the effect of the Chapter 11 reorganization process on the claims of the pre-petition creditors of the Debtors or the interests of the Company's equity security holders. Chapter 11 Financing: In connection with the Restructuring Proceedings, the Company entered into a $675 million debtor-in-possession ("DIP") credit facility to supplement liquidity and fund operations during the reorganization process. The DIP credit facility expires in October, 2003 and bears interest at either the alternate base rate ("ABR") plus 2.5 percentage points or a formula based on the London Inter-Bank Offered Rate ("LIBOR") plus 3.5 percentage points. The ABR is the greatest of either the bank's prime rate or the base CD rate plus 1 percentage point or the fed funds rate plus 1/2 percentage point. The $675 million commitment is reduced by a portion of the proceeds received from an asset sale or business unit divestiture. The total commitment under the DIP credit facility has been reduced to $659 million as of June 30, 2002 due to a first quarter divestiture (see Note 6). At June 30, 2002 the Company had $243.9 million outstanding and $347.8 million available to borrow under its DIP credit facility. Available borrowings under the DIP credit facility are impacted by the underlying collateral at any point in time, consisting of domestic fixed assets, accounts receivable and inventory. Further, any outstanding letters of credit reduce the amount available under the facility. The borrowings were used to pay off the Company's accounts receivable securitization facility during 2001 as a result of the facility being closed in conjunction with the 8 U.S. Restructuring. Financial Statement Presentation: The accompanying condensed consolidated financial statements have been prepared in accordance with AICPA Statement of Position 90-7 ("SOP 90-7"), "Financial Reporting by Entities in Reorganization under the Bankruptcy Code" and on a going concern basis, which contemplates continuity of operations, realization of assets and liquidation of liabilities in the ordinary course of business. However, as a result of the Restructuring Proceedings, such realization of assets and liquidation of liabilities, without substantial adjustments and/or changes of ownership, are highly uncertain. Given this uncertainty, there is substantial doubt about the ability of the Company to continue as a going concern. While operating as debtors-in-possession under the protection of Chapter 11 of the Bankruptcy Code and Administration under the Act, and subject to approval of the Bankruptcy Court, Administrator or the High Court or otherwise as permitted in the ordinary course of business, the Debtors, or some of them, may sell or otherwise dispose of assets and liquidate or settle liabilities for some amounts other than those reflected in the condensed consolidated financial statements. Further, a plan of reorganization or scheme of arrangement could materially change the amounts and classifications in the historical consolidated financial statements. Virtually all of the Company's pre-petition debt is in default. At June 30, 2002, the Debtors' pre-petition debt is classified under the caption "Liabilities Subject to Compromise." This includes debt outstanding of $1,902.2 million under the pre-petition Senior Credit Agreements and $2,118.2 million of other outstanding debt, primarily notes payable at various unsecured rates, less capitalized debt issuance fees of $45.5 million. The carrying value of the pre-petition debt will be adjusted once it has become an allowed claim by the Court to the extent the related carrying value differs from the amount of the allowed claim. Such adjustment may be material. As a result of the Restructuring Proceedings, the Company is in default to its affiliate holder of its convertible junior subordinated debentures and is no longer accruing interest expense or making interest payments on the debentures. As a result, the affiliate will no longer have the funds available to pay distributions on the Company-Obligated Mandatorily Redeemable Preferred Securities and stopped accruing and paying such distributions in October 2001. The affiliate is in default on the Company-Obligated Mandatorily Redeemable Preferred Securities. The Company is a guarantor on the outstanding debentures, and, as a result of the default, the Company has become a debtor to the holders of the debentures directly. This liability is a pre-petition liability. As a result, the Company has classified these securities as "Liabilities Subject to Compromise" in the June 30, 2002 consolidated condensed balance sheet. As reflected in the consolidated condensed financial statements, "Liabilities subject to compromise" refers to Debtors' liabilities incurred prior to the commencement of the Restructuring Proceedings. The amounts of the various liabilities that are subject to compromise are set forth below. These amounts represent the Company's estimate of known or potential pre-petition claims to be resolved in connection with the Restructuring Proceedings. Such claims remain subject to future adjustments. Future adjustments may result from (i) negotiations; (ii) actions of the Bankruptcy Court, High Court or Administrator; (iii) further developments with respect to disputed claims; (iv) rejection of executory contracts and unexpired leases; (v) the determination as to the value of any collateral securing claims; (vi) proofs of claim; or (vii) other events. Payment terms for these claims will be established in connection with the Restructuring Proceedings. Pursuant to the Bankruptcy Code, the Debtors have filed schedules with the Bankruptcy Court setting forth the assets and liabilities of the Debtors as of the Petition Date. Differences between amounts recorded by the Debtors and claims filed by creditors will be investigated and resolved as part of the Restructuring Proceedings. A March 3, 2003 bar date has been set for the filing of proofs of claim against the Debtors. The ultimate number and allowed amount of such claims are not yet known. The Debtors have received approval from the Bankruptcy Court to pay or otherwise honor certain of their pre-petition obligations, including employee wages, salaries, benefits and other employee obligations and from limited available funds, pre-petition claims of certain critical vendors, certain customer programs and warranty claims and certain other pre-petition claims. The appropriateness of using the going concern basis for its financial statements is dependent upon, among other things, (i) the Company's ability to comply with the terms of the DIP credit facility and any cash management order entered by the Bankruptcy Court in connection with the Chapter 11 Cases; (ii) the ability of the Company to maintain 9 adequate cash on hand; (iii) the ability of the Company to generate cash from operations; (iv) confirmation of a plan(s) of reorganization under the Bankruptcy Code; and (v) the Company's ability to achieve profitability following such confirmation. Debtors' Financial Statements: The condensed combined financial statements of the Debtors are presented below. These statements reflect the financial position, results of operations and cash flows of the combined Debtor subsidiaries, including certain amounts and activities between Debtors and non-debtor subsidiaries of the Company which are eliminated in the condensed consolidated financial statements. The Debtors' condensed combined balance sheets have been adjusted as previously reported to reflect the reclassification of 1) $1.0 billion from Loans Payable, Non-Debtors, to Liabilities subject to compromise at March 31, 2002 and December 31, 2001, and 2) a reduction of approximately $5.8 billion from Investment in Non-Debtor subsidiaries to Stockholders' Equity (Deficit) at December 31, 2001. These changes have no impact on the Debtors' condensed consolidated statements of operations or statements of cash flows as of or for the three months ended March 31, 2002 and the year ended December 31, 2001. These changes also have no impact on Federal-Mogul Corporation's consolidated statements of operations, balance sheets, or statements of cash flows as of or for the three months ended March 31, 2002 and the year ended December 31,2001. In addition, as required by SFAS No. 142, the March 31, 2002 condensed consolidated balance sheet has been restated to reflect the adoption of SFAS No. 142. The condensed combined financial statements of the Debtors are presented as follows: Federal-Mogul Corporation Debtors' Condensed Consolidated Statements of Operations (Unaudited) (Millions of Dollars)
Three Months Six Months Ended Ended June 30 June 30 2002 2002 ------------ ------------ Net sales .................................................................... $ 997.1 $ 1,931.6 Cost of products sold ........................................................ 817.7 1,589.5 ------- ------- Gross margin .............................................................. 179.4 342.1 Selling, general and administrative expenses ................................. 146.0 296.1 Amortization of other intangible assets ...................................... 3.1 6.0 Restructuring charges ........................................................ 4.0 4.5 Adjustment of assets held for sale and other long-lived assets to fair value ....................................................... 2.6 2.6 Interest expense, net ........................................................ 30.7 61.6 Chapter 11 and Administration related reorganization expenses ................................................................... 18.5 33.4 Other income, net ............................................................ (43.0) (75.6) ------- ------- Earnings before income taxes, cumulative effect of change in accounting principle and equity loss of Non-Debtor subsidiaries .................................... 17.5 13.5 Income tax expense ........................................................... 4.0 28.2 ------- ------- Earnings before cumulative effect of change in accounting principle and equity loss of Non-Debtor subsidiaries ............................................ 13.5 (14.7) Cumulative effect of change in accounting principle, net of applicable income tax benefit ........................................... -- 1,100.7 ------- ------- Income (Loss) before equity loss of Non-Debtor subsidiaries .................. 13.5 (1,115.4) ------- -------- Equity earnings (loss) of Non-Debtor subsidiaries ............................ 2.5 (338.2) ------- -------- Net Earnings (Loss) .................................................. $ 16.0 $(1,453.6) ======= =========
10 Federal-Mogul Corporation Debtors' Condensed Consolidated Balance Sheets (Millions of Dollars)
(Unaudited) (Unaudited) June 30 March 31 December 31 2002 2002 2001 ---- ---- ---- ASSETS Cash and equivalents ..................................................... $ 160.3 $ 118.0 $ 146.5 Accounts receivable ...................................................... 664.1 630.3 604.0 Accounts receivable, Non-Debtors ......................................... 173.1 180.1 150.5 Inventories .............................................................. 470.2 459.2 440.4 Deferred taxes ........................................................... 44.0 37.3 37.0 Other current assets ..................................................... 93.5 102.2 114.7 ---------- ---------- ----------- Total Current Assets ................................................ 1,605.2 1,527.1 1,493.1 Property, plant and equipment, net ....................................... 1,216.5 1,212.3 1,235.2 Goodwill, net ............................................................ 1,224.2 1,170.0 2,202.4 Other intangible assets, net ............................................. 469.3 460.8 600.3 Asbestos-related insurance recoverable ................................... 751.8 712.6 723.2 Loans receivable and investments in Non-Debtors .......................... 4,381.7 4,210.8 4,510.0 Other noncurrent assets .................................................. 339.6 427.4 438.0 ---------- ---------- ----------- Total Assets ........................................................ $ 9,988.3 $ 9,721.0 $ 11,202.2 ========== ========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) Accounts payable ......................................................... $ 297.8 $ 276.2 $ 237.1 Accounts payable, Non-Debtors ............................................ 57.5 52.4 37.3 Other accrued liabilities ................................................ 324.6 316.7 292.2 ---------- ---------- ----------- Total Current Liabilities ........................................... 679.9 645.3 566.6 Long-term debt ........................................................... 243.9 243.9 250.0 Postemployment benefits .................................................. 658.8 656.7 655.9 Other accrued liabilities ................................................ 61.2 61.4 75.6 Liabilities subject to compromise ........................................ 9,228.9 9,223.3 9,235.1 Shareholders' Equity (Deficit) ........................................... (884.4) (1,109.6) 419.0 ---------- ---------- ----------- Total Liabilities and Shareholders' Equity (Deficit) .................. $ 9,988.3 $ 9,721.0 $ 11,202.2 ========== ========== ===========
11 Federal-Mogul Corporation Debtors' Condensed Consolidated Statement of Cash Flows (Unaudited) (Millions of Dollars)
Six Months Ended June 30 2002 ------------ Cash Provided From (Used By)Operating Activities Net loss ............................................................................. $ (1,453.6) Adjustments to reconcile net loss to net cash provided from operating activities: Cumulative effect of change in accounting principle ................................ 1,139.5 Depreciation and amortization ...................................................... 80.3 Chapter 11 and Administration related reorganization expenses ...................... 33.4 Adjustment of assets held for sale and other long-lived assets to fair value ....... 2.6 Equity loss of Non-Debtor subsidiaries ............................................. 338.2 Postemployment benefits ............................................................ 1.9 Changes in working capital, other assets, and other liabilities .................... (58.1) Payments for Chapter 11 and Administration related reorganization expenses ......... (36.2) Payments against restructuring and rationalization reserves ........................ (9.6) ------------ Net Cash Provided From Operating Activities ..................................... 38.4 Cash Provided From (Used By) Investing Activities Expenditures for property, plant and equipment and other long-term assets ............ (56.8) Proceeds from sales of businesses .................................................... 21.8 ------------ Net Cash Used By Investing Activities ........................................... (35.0) Cash Provided From (Used By) Financing Activities Principal payments on DIP credit facility ............................................ (6.1) ------------ Net Cash Used By Financing Activities ........................................... (6.1) Effect of Foreign Currency Exchange Rate Fluctuations on Cash ................... 16.5 ----------- Increase in Cash and Equivalents ................................................ 13.8 Cash and Equivalents at Beginning of Period ............................................. 146.5 ------------ Cash and Equivalents at End of Period ................................................... $ 160.3 ============
12 Liabilities subject to compromise are comprised of (in millions):
June 30 March 31 December 31 2002 2002 2001 ---- ---- ---- Debt ........................... $ 3,975.0 $ 3,973.3 $ 3,971.4 Asbestos liabilities ........... 1,558.7 1,547.3 1,550.2 Company-obligated mandatorily redeemable preferred securities ........ 448.9 448.9 449.5 Accounts payable ............... 186.3 194.4 200.2 Interest payable ............... 41.2 41.2 43.7 Environmental liabilities ...... 22.8 23.0 23.3 Other accrued liabilities ...... 17.5 16.7 18.3 --------- --------- ----------- Subtotal .................... 6,250.4 6,244.8 6,256.6 Intercompany payables to Affiliates .................. 2,978.5 2,978.5 2,978.5 --------- --------- ----------- Liabilities subject to Compromise .................. $ 9,228.9 $ 9,223.3 $ 9,235.1 ========= ========= ===========
Chapter 11 and Administration related reorganization expenses in the condensed consolidated statements of operations for the three and six month period ending June 30, 2002 consist of legal, financial and advisory fees and other directly related internal costs. 3. TAXES For the six months ended June 30, 2002, the Company recorded income tax expense of $50.5 million on earnings of $25.3 million before income taxes and cumulative effect of change in accounting principle, compared to an income tax expense of $40.6 million on a loss of $39.1 million before income taxes in the same period of 2001. Income tax expense for the six months ended June 30, 2002 resulted primarily from the adjustments to the valuation allowances related to the implementation of SFAS No. 141 and 142, not providing a tax benefit for losses in the United States and from limitations on specific interest expense deductions in the U.K. 4. OPERATIONS BY REPORTABLE SEGMENT The segment information for the three and six months ended June 30, 2001 has been restated to reflect the Company's internal organization changes implemented in September 2001. The Company is a global manufacturer with six reportable segments: Powertrain; Sealing Systems and Systems Protection; Friction; Aftermarket; Other; and Divested Operations. Powertrain products are used primarily in automotive, light truck, heavy duty, industrial, marine, agricultural, power generation and small air-cooled engine applications. The primary products of this reportable segment include engine bearings, pistons, piston pins, rings, cylinder liners, camshafts, sintered products, and connecting rods. Sealing Systems and Systems Protection products are used in automotive, light truck, heavy duty, agricultural, off-highway, marine, railroad, high performance and industrial applications. The primary products of this reportable 13 segment include dynamic seals, gaskets and element resistant sleeving systems protection products. Friction products are used in automotive, heavy duty, railroad and industrial applications. The primary products of this reportable segment unit include discs, pads and brake shoes. Aftermarket provides products from the above segments to the independent automotive and heavy duty aftermarkets as well as the manufacturing operations of North American brake, chassis, ignition, fuel and wipers. Other includes the businesses of lighting, European wipers & ignition manufacturing, as well as Asia Pacific, South America and other Corporate functions. Divested Operations include the historical operating results of the Company's divestitures (see Note 6). 14 The Company has aggregated individual operating segments within its six reportable segments. The accounting policies of the segments are the same as that of the Company. The Company evaluates segment performance based on several factors, including Operational EBIT and major cash flow drivers. Operational EBIT is defined as earnings before interest, income taxes, cumulative effect of change in accounting principle and certain nonrecurring items such as restructuring and impairment charges, Chapter 11 and Administration related reorganization expenses, gains on extinguishment of debt and gains or losses on the sales of businesses. Operational EBIT for each segment is shown below, as it is most consistent with the corresponding condensed consolidated financial statements (in millions).
Net Sales Operational EBIT Net Sales Operational EBIT --------- ---------------- --------- ---------------- Three Months Three Months Six Months Six Months Ended June 30 Ended June 30 Ended June 30 Ended June 30 ------------- ------------- ------------- ------------- 2002 2001 2002 2001 2002 2001 2002 2001 ------ ------ ------ ------ ------ ------ ------ ------ Powertrain .................. $ 449.2 $ 414.0 $ 42.2 $ 37.1 $ 879.5 $ 863.4 $ 67.3 $ 84.1 Sealing Systems and Systems Protection ...... 158.3 156.5 15.9 12.1 306.7 311.2 24.3 20.9 Friction .................... 94.8 89.8 16.3 4.1 181.4 180.0 29.9 5.9 Aftermarket ................. 642.1 630.9 90.4 72.5 1,215.0 1,247.7 158.0 129.1 Other, including Corporate... 97.9 95.7 (76.2) (62.1) 192.6 188.0 (155.9) (132.5) Divested Operations ......... -- 38.5 -- 2.7 13.2 85.8 1.9 7.9 --------- --------- --------- --------- --------- --------- --------- --------- Total ....................... $ 1,442.3 $ 1,425.4 $ 88.6 $ 66.4 $ 2,788.4 $ 2,876.1 $ 125.5 $ 115.4 ========= ========= ========= ========= ========= ========= ========= =========
Three Months Six Months Ended June 30 Ended June 30 ------------- ------------- Reconciliation: 2002 2001 2002 2001 ------ ------ ------ ------ Total segments Operational EBIT ...................................... $ 88.6 $ 66.4 $ 125.5 $ 115.4 Net interest and other financing costs ............................... (29.3) (91.4) (60.0) (184.2) Restructuring, impairment and other special charges .................. (4.1) (2.2) (13.6) (32.6) Gain on sale of businesses ........................................... -- 37.2 6.8 37.2 Chapter 11 and Administration related reorganization expenses ........ (18.5) -- (33.4) -- Gain on extinguishment of debt ....................................... -- 25.1 -- 25.1 --------- --------- --------- -------- Earnings (loss) before income tax expense and cumulative effect of change in accounting principle ............................... $ 36.7 $ 35.1 $ 25.3 $ (39.1) ========= ========= ========= ========
Total assets by reportable segment are as follows: June 30, December 31, 2002 2001 --------- --------- Powertrain .................... $ 1,678.5 $ 2,728.6 Sealing Systems and Systems Protection ........ 1,094.8 1,031.8 Friction ...................... 314.6 398.9 Aftermarket ................... 3,465.1 3,360.3 Other, including Corporate .... 1,247.8 1,429.6 Divested Operations ........... 103.6 104.0 --------- --------- Total ......................... $ 7,904.4 $ 9,053.2 ========= ========= 15 5. EARNINGS PER SHARE The following table sets forth the computation of basic and diluted earnings (loss) per share (in millions of dollars, except per share data):
Three Months Six Months Ended June 30 Ended June 30 2002 2001 2002 2001 -------- -------- -------- -------- Numerator: Net Earnings (loss) ........................................................... $ 16.0 $ (17.5) $(1,453.6) $ (79.7) Cumulative effect of change in accounting principle, net of applicable tax benefit............................................................... -- -- 1,428.4 -- -------- --------- --------- -------- Earnings (loss) before cumulative effect of change in accounting principle .... 16.0 (17.5) (25.2) (79.7) Series C preferred dividend requirement ....................................... -- (0.4) -- (0.8) -------- --------- --------- -------- Numerator for basic and diluted earnings (loss) per share - loss attributable to common shareholders before effect of cumulative change in accounting principle............................................ $ 16.0 $ (17.9) $ (25.2) $ (80.5) ======== ========= ========= ======== Numerator for basic and diluted earnings (loss) per share ..................... $ 16.0 $ (17.9) $(1,453.6) $ (80.5) ======== ========= ========= ======== Denominator: Denominator for basic earnings (loss) per share - weighted average shares ................................................................... 82.4 71.2 82.4 70.9 ======== ========= ========= ======== Effect of diluted securities: Conversion of Series C preferred stock ................................... 0.9 -- -- -- Conversion of Company-obligated mandatorily redeemable securities .......................................................... 8.7 -- -- -- -------- --------- --------- -------- Dilutive potential common shares ............................................ 9.6 -- -- -- -------- --------- --------- -------- Denominator for dilutive earnings (loss) per share - adjusted weighted average shares and assumed conversions .............................. 92.0 71.2 82.4 70.9 ======== ========= ========= ======== Basic earnings (loss) per share before cumulative effect of change in accounting principle ........................................................ $ 0.19 $ (0.25) $ (0.31) $ (1.14) ======== ========= ========= ======== Basic earnings (loss) per share .................................................. $ 0.19 $ (0.25) $ (17.65) $ (1.14) ======== ========= ========= ======== Diluted earnings (loss) per share before cumulative effect of change in accounting principle ........................................................ $ 0.17 $ (0.25) $ (0.31) $ (1.14) ======== ========= ========= ======== Diluted earnings (loss) per share ................................................ $ 0.17 $ (0.25) $ (17.65) $ (1.14) ======== ========= ========= ========
As a result of the Restructuring Proceedings, the Company stopped accruing and paying its dividends on its Series C Preferred Stock. 6. DIVESTITURES During the first quarter of 2002 the Company completed the divestiture of its Signal-Stat Lighting Products business ("Signal-Stat") to Truck-Lite Co., Inc. Signal-Stat produces exterior lighting and power distribution products primarily for heavy duty and commercial vehicle markets. Signal-Stat had 2001 net sales of $53.0 million. The Company received aggregate proceeds of $20.9 million and recognized an aggregate gain of $6.8 million for this divestiture in the first quarter of 2002. The gain is included in "Other income, net" in the accompanying condensed consolidated statements of operations. In May 2002, the Company announced an agreement to sell certain United States camshaft operations to ASIMCO, an automotive components manufacturing company based in Beijing, China. The sale is subject to approval by the U.S. Bankruptcy Court and certain other conditions. The operations to be sold had combined net sales of approximately $80 million in 2001. The Company does not expect to record a material gain or loss on this transaction. 16 7. ASBESTOS LIABILITY AND LEGAL PROCEEDINGS T&N Companies Asbestos Litigation Background: The Company's U.K. subsidiary, T&N Ltd., and two U.S. subsidiaries (the "T&N Companies") are among many defendants named in numerous court actions in the U.S. alleging personal injury resulting from exposure to asbestos or asbestos-containing products. T&N Ltd. is also subject to asbestos-disease litigation, to a lesser extent, in the United Kingdom and France. As of the Petition Date, T&N Ltd. was a defendant in approximately 91,000 pending personal injury claims. The two United States subsidiaries were defendants in approximately 172,000 pending personal injury claims. Pre-petition claims that were in the pipeline that were received after the Petition Date continue to be entered into the claims system and represent an immaterial amount of claims. Notice of complaints continue to be received Post-Petition which are in violation of the Automatic Stay. Recorded Liability: In 2000, the Company increased its estimate of asbestos-related liability for the T&N Companies by $751 million and recorded a related insurance recoverable asset of $577 million. The revision in the estimate of probable asbestos-related liability principally resulted from a study performed by an econometric firm that specializes in these types of matters. The liability (approximately $1.3 billion at June 30, 2002) represented the Company's estimate prior to the Restructuring Proceedings for claims currently pending and those which were reasonably estimated to be asserted and paid through 2012. The Company did not provide a liability for claims that may be paid subsequent to this period as it could not reasonably estimate such claims. In estimating the liability prior to the Restructuring Proceedings, the Company made assumptions regarding the total number of claims anticipated to be received in a future period, the typical cost of settlement (which is sensitive to the industry in which the plaintiff claims exposure, the alleged disease type and the jurisdiction in which the action is being brought), the rate of receipt of claims, the settlement strategy in dealing with outstanding claims and the timing of settlements. As a result of the Restructuring Proceedings (see Note 2), all pending asbestos-related litigation against the Company is stayed (subject to certain exceptions in the case of governmental authorities), and no party may take any action to pursue or collect on such asbestos claims absent specific authorization of the Bankruptcy Court or the High Court. Since the Restructuring Proceedings, the Company has ceased making payments with respect to asbestos-related lawsuits. An asbestos creditors' committee has been appointed in the U.S. representing asbestos claimants with pending claims against the Company, and the Bankruptcy Court has appointed a legal representative for the interests of potential future asbestos claimants. In the U.K. a creditors' committee consisting in large part of representatives of asbestos claimants has been appointed. The Bankruptcy Court has set a bar date of March 3, 2003 for the filing of all asbestos-related property damage claims. Bar dates for personal injury claims or for commercial and general claims have not yet been set by the Bankruptcy Court. As part of the Restructuring Proceedings, it will be determined which asbestos claims should be allowed, or compensated, and the aggregate value of such claims. The Company's obligations with respect to present and future claims could be determined through litigation in Bankruptcy Court, the High Court of Justice, Chancery Division in London, England and/or through negotiations with each of the official committees appointed; that determination may provide the basis for a plan of reorganization or scheme of arrangement. The T&N Companies previously entered into $225 million of surety to meet certain collateral requirements for asbestos indemnity obligations associated with their prior membership in the Center for Claims Resolution ("CCR"). As a result of the filing, the T&N Companies have sought declaratory and injunctive relief in an adversary proceeding filed in the Bankruptcy Court, in order to enjoin any post-petition payments to asbestos claimants by the CCR and any post-petition draw by the CCR on $225 million in face amount of the surety bonds. CCR now seeks to draw on the surety bonds to fund past and future payments although the basis of such draw, its validity under the pre- petition bond terms, and whether such draw may be utilized to pay obligations of other CCR members are all disputed. Except for exchange rates, the Company has not adjusted its estimate of the asbestos liability since September 30, 2001. This liability is included in the consolidated balance sheet under the caption "Liabilities subject to compromise" at June 30, 2002 for the Company's U.S. and U.K. subsidiaries. 17 While the Company believes that the liability recorded was appropriate for anticipated losses arising from asbestos-related claims against the T&N Companies through 2012, it is the Company's view that, as a result of the Restructuring Proceedings, there is even greater uncertainty in estimating the future asbestos liability and related insurance recovery for pending and future claims. There are significant differences in the treatment of asbestos claims in a bankruptcy proceeding as compared to the tort litigation system. Among other things, it is uncertain at this time as to the number of asbestos-related claims that will be filed in the Restructuring Proceedings; the number of future claims that will be included in a plan of reorganization; how claims for punitive damages and claims by persons with no asbestos-related physical impairment will be treated and whether such claims will be allowed; and the impact that historical settlement values for asbestos claims may have on the estimation of asbestos liability in the bankruptcy proceeding. No assurance can be given that the T&N Companies will not be subject to material additional liabilities and significant additional litigation relating to asbestos matters through 2012 or thereafter. In the event that such liabilities exceed the amounts recorded by the Company or the remaining insurance coverage, the Company's results of operations and financial condition could be materially affected. Insurance Recoverable: In 1996, T&N Ltd. purchased for itself and its then defined global subsidiaries a (pound)500.0 million layer of insurance which will be triggered should the aggregate costs of claims made or brought after June 30, 1996, where the exposure occurred prior to that date, exceed (pound)690.0 million. During 2000, the Company concluded that the aggregate cost of the claims filed after June 30, 1996 would exceed the trigger point and accordingly recorded an insurance recoverable asset under the T&N policy of $577.0 million. At June 30, 2002 the recorded insurance recoverable was $581.9 million. The Company believes that based on its review of the insurance policies and advice from outside legal counsel that it is probable that the T&N Companies will be entitled to receive payment from the reinsurers for the cost of the claims in excess of the trigger point of the insurance. In December 2001, one of the three reinsurers filed suit in a London, England court to challenge the validity of its insurance contract with the T&N Companies. The Company believes that the suit is without merit and has responded accordingly. The ultimate realization of insurance proceeds is directly related to the amount of related covered claims paid by the Company. If the ultimate asbestos claims are higher than the recorded liability, the Company expects the ultimate insurance recoverable to be higher than the recorded amount, up to the cap of the insurance layer. If the ultimate asbestos claims are lower than the recorded liability, the Company expects the ultimate insurance recoverable to be lower than the recorded amount. While the Restructuring Proceedings will impact the timing and amount of the asbestos claims and the insurance recoverable, there has been no change to the recorded amounts since the Company initiated the Restructuring Proceedings. Accordingly, this asset could change significantly based upon events that occur from the Restructuring Proceedings. The Company has reviewed the financial viability and legal obligations of the three reinsurance companies involved and has concluded that currently there is little risk that the reinsurers will not be able to meet their obligation to pay, once the claims filed after June 30, 1996 exceed the (pound)690.0 million trigger point. The U.S. claims' costs applied against this policy are converted at a fixed exchange rate of $1.69/(pound). As such, if the market exchange rate is less then $1.69/(pound), the Company will effectively have a discount from 100% recovery on claims paid. At June 30, 2002, the $581.9 million insurance recoverable asset is net of an exchange rate discount of approximately $55.2 million. Abex and Wagner Asbestos Litigation Background: Two of the Company's businesses formerly owned by Cooper Industries, Inc. known as Abex and Wagner are involved as defendants in numerous court actions in the U.S. alleging personal injury from exposure to asbestos or asbestos-containing products. These claims mainly involve friction products. As of the Petition Date, Abex and Wagner were defendants in approximately 68,000 and 37,000 pending claims, respectively. Pre-petition claims that were in the pipeline that were received after the Petition Date continue to be entered into the claims system and 18 represent an immaterial amount of claims. Notice of complaints continue to be received Post-petition which are in violation of the Automatic Stay. The liability of the Company with respect to claims alleging exposure to Wagner products arises from the 1998 stock purchase from Cooper Industries of the corporate successor by merger to Wagner Electric Company; the purchased entity is now a wholly-owned subsidiary of the Company and one of the Debtors in the Restructuring Proceedings. As a consequence, all claims against the debtors, including asbestos- related claims, have been stayed. The liability of the Company with respect to claims alleging exposure to Abex products arises from a contractual liability entered into in 1994 by the predecessor to the Company whose stock the Company purchased in 1998. Pursuant to that contract, prior to the Restructuring Proceedings, the Company, through the relevant subsidiary, was liable for certain indemnity and defense payments incurred on behalf of an entity known as Pneumo Abex Corporation, the successor in interest to Abex Corporation. Effective as of the Petition Date, the Company has ceased making such payments and is currently considering whether to accept or reject the 1994 contractual liability. As mentioned above, as of the Petition Date, all pending asbestos litigation of Abex (as to the Company only) and Wagner is stayed (subject to certain exceptions in the case of governmental authorities), and no party may take any action to pursue or collect on such asbestos claims absent specific authorization of the Bankruptcy Court or the High Court. Recorded Liability: The liability ($216.6 million as of June 30, 2002) represented the Company's estimate prior to the Restructuring Proceedings for claims currently pending and those which were reasonably estimated to be asserted and paid through 2012. The Company did not provide a liability for claims that may be brought subsequent to this period as it could not reasonably estimate such claims. In estimating the liability prior to the Restructuring Proceedings, the Company made assumptions regarding the total number of claims anticipated to be received in a future period, the typical cost of settlement (which is sensitive to the industry in which the plaintiff claims exposure, the alleged disease type and the jurisdiction in which the action is being brought), the rate of receipt of claims, the settlement strategy in dealing with outstanding claims and the timing of settlements. As a result of the Restructuring Proceedings (see Note 2), all pending asbestos-related litigation is stayed as previously described for the T&N Companies. While the Company believes that the liability recorded was appropriate for anticipated losses arising from asbestos-related claims related to Abex and Wagner through 2012, it is the Company's view that, as a result of the Restructuring Proceedings, there is even greater uncertainty in estimating the future asbestos liability and related insurance recovery for pending and future claims. There are significant differences in the treatment of asbestos claims in a bankruptcy proceeding as compared to the tort litigation system. Among other things, it is uncertain at this time as to the number of asbestos-related claims that will be filed in the proceeding; the number of future claims that will be included in a plan of reorganization; how claims for punitive damages and claims by persons with no asbestos-related physical impairment will be treated and whether such claims will be allowed; and the impact historical settlement values for asbestos claims may have on the estimation of asbestos liability in the Restructuring Proceedings. No assurance can be given that the Company will not be subject to material additional liabilities and significant additional litigation relating to Abex and Wagner asbestos matters through 2012 or thereafter. In the event that such liabilities exceed the amounts recorded by the Company or the remaining insurance coverage, the Company's results of operations and financial condition could be materially affected. Insurance Recoverable: Abex maintained product liability insurance coverage for most of the time that it manufactured products that contained asbestos. The subsidiary of the Company that may be liable for certain indemnity and defense payments with respect to Abex has the benefit of that insurance up to the extent of that liability. Abex has been in litigation 19 since 1982 with the insurance carriers of its primary layer of liability concerning coverage for asbestos claims. Abex also has substantial excess layer liability insurance coverage that, barring unforeseen insolvencies of excess carriers or other adverse events, should provide coverage for asbestos claims against Abex. Wagner also maintained product liability insurance coverage for some of the time that it manufactured products that contained asbestos. The subsidiary of the Company that may be liable for asbestos claims against Wagner has the benefit of that insurance, subject to the rights of other potential insureds under the policies. Primary layer liability insurance coverage for asbestos claims against Wagner is the subject of an agreement with Wagner's solvent primary carriers. The agreement provides for partial reimbursement of indemnity and defense costs for Wagner asbestos claims until exhaustion of aggregate limits. Wagner also has substantial excess layer liability insurance coverage which, barring unforeseen insolvencies of excess carriers or other adverse events, should provide coverage for asbestos claims against Wagner. The ultimate realization of insurance proceeds is directly related to the amount of related covered claims paid by the Company. If the ultimate asbestos claims are higher than the recorded liability, the Company expects the ultimate insurance recoverable to be higher than the recorded amount. If the ultimate asbestos claims are lower than the recorded liability, the Company expects the ultimate insurance recoverable to be lower than the recorded amount. While the Restructuring Proceedings will impact the timing and amount of the asbestos claims and the insurance recoverable, there has been no change to the recorded amounts due to the uncertainties created by the Restructuring Proceedings. Accordingly, this asset could change significantly based upon events that occur from the Restructuring Proceedings. The Company believes that based on its review of the insurance policies, the financial viability of the insurance carriers, and advice from outside legal counsel, it is probable that Abex and Wagner will realize an insurance recoverable correlating with the respective liability. Federal-Mogul and Fel-Pro Asbestos Litigation Prior to the Restructuring Proceedings the Company was also sued in its own name as one of a large number of defendants in a number of lawsuits brought by claimants alleging injury from exposure to asbestos due to its ownership of certain assets involved in gasket making. As of the Petition Date, the Company was a defendant in approximately 61,500 pre-petition pending claims. Over 40,000 of these claims were transferred to a federal court, where prior to the Restructuring Proceedings they were pending. Pre-petition claims that were in the pipeline that were received after the Petition Date continue to be entered into the claims system and represent an immaterial amount of claims. Notice of complaints continue to be received post-petition which are in violation of the Automatic Stay. Prior to the Restructuring Proceedings the Company's Fel-Pro subsidiary also was named as a defendant in a number of product liability cases involving asbestos, primarily involving gasket or packing products. Fel-Pro was a defendant in approximately 34,000 pending claims as of the Petition Date. Over 32,000 of these claims were transferred to a federal court where, prior to the Restructuring Proceedings, they were pending. The Company was defending all such claims vigorously and believed that it and Fel-Pro had substantial defenses to liability and insurance coverage for defense and indemnity. All claims alleging exposure to the products of the Company and of Fel-Pro have been stayed as a result of the Restructuring Proceedings. Aggregate of Asbestos Liability and Insurance Recoverable Asset As of June 30, 2002, the Company has provided an aggregated asbestos-related liability for all of its subsidiaries and businesses of $1,558.7 million classified in the balance sheet under the caption liabilities subject to compromise. Also as of June 30, 2002, the Company has recorded an insurance recoverable asset of $751.8 million. The Company's estimate of asbestos-related liabilities for pending and expected future asbestos claims is subject to considerable uncertainty because such liabilities are influenced by numerous variables that are inherently difficult to predict. The Restructuring Proceedings significantly increase the inherent difficulties and uncertainties involved in estimating the number and cost of resolution of present and future asbestos-related claims against the Company and may have the effect of increasing the ultimate cost of the resolution of such claims. 20 Other The Company is involved in other legal actions and claims, directly and through its subsidiaries. After taking into consideration legal counsel's evaluation of such actions, management is of the opinion that the outcomes are not likely to have a material adverse effect on the Company's financial position, operating results, or cash flows. On Apri1 22, 2002, the Company received notice from the New York Stock Exchange (the "Exchange") that the Company's common stock would be delisted from the Exchange effective April 24, 2002. On April 24, 2002, the Company's common stock began trading on the NASD over-the-counter bulletin board market under the new ticker symbol "FDMLQ". Environmental Matters The Company is a defendant in lawsuits filed, or the recipient of administrative orders issued, in various jurisdictions pursuant to the Federal Comprehensive Environmental Response Compensation and Liability Act of 1980 ("CERCLA") or other similar national or state environmental laws. These laws require responsible parties to pay for cleaning up contamination resulting from hazardous substances which were discharged into the environment by them, or by others to whom they sent such substances for treatment or other disposition. In addition, the Company has been notified by the United States Environmental Protection Agency, other national environmental agencies, and various state agencies that it may be a potentially responsible party ("PRP") under such laws for the cost of cleaning up hazardous substances pursuant to CERCLA and other national and state environmental laws. PRP designation requires the funding of site investigations and subsequent remedial activities. At most of the sites that are likely to be costliest to clean up, which are often current or former commercial waste disposal facilities to which numerous companies sent waste, the Company's exposure is expected to be limited. Despite the joint and several liability which might be imposed on the Company under CERCLA and some of the other laws pertaining to these sites, the Company's share of the total waste has generally been small. The other companies, which also sent wastes, often numbering in the hundreds or more, generally include large, solvent publicly owned companies, and in most such situations the government agencies and courts have imposed liability in some reasonable relationship to contribution of waste. In addition, the Company has identified certain present and former properties at which it may be responsible for cleaning up environmental contamination, in some cases as a result of contractual commitments. The Company is actively seeking to resolve these matters. Although difficult to quantify based on the complexity of the issues, the Company has accrued the estimated cost associated with such matters based upon current available information from site investigations and consultants. The environmental reserves were approximately $64.0 million and $62.8 million at June 30, 2002 and December 31, 2001, respectively. The increase in the reserve resulted primarily from the addition of new sites, offset by remediation payments made during the period. Management believes that such accruals will be adequate to cover the Company's estimated liability for its exposure in respect to such matters. As a result of the Restructuring Proceedings, $22.9 million of this reserve has been reclassified to Liabilities subject to compromise in the consolidated balance sheet, and the Company is evaluating such classification for other sites. 8. INVENTORIES Inventories consisted of the following (in millions):
June 30 December 31 2002 2001 ------- ------- Finished products ........................................ $ 542.0 $ 511.2 Work-in-process .......................................... 137.3 116.4 Raw materials ............................................ 170.2 144.1 ------- ------- 849.5 771.7 Reserve for inventory valuation .......................... (62.8) (49.8) ------- ------- $ 786.7 $ 721.9 ======= =======
21 9. RESTRUCTURING AND RATIONALIZATION During the first six months of 2002, the Company recognized $11.0 million of restructuring charges, net of reversals of $7.2 million of prior reserves, related to severance and exit costs of $7.0 million and $4.0 million, respectively. The restructuring charges related to announced manufacturing site consolidations and closures in North America and Europe for Lighting, Friction, Sealing Systems and Powertrain. This amount also includes reversals of previous charges where the estimated liability was less than the existing reserve balance for a particular initiative. Total employee reductions are expected to be 1,300 of which 850 have been terminated as of June 30, 2002. The following table sets forth the restructuring and rationalization reserves for the six months ended June 30, 2002 (in millions of dollars):
Restructuring Rationalization Total ------------- --------------- ----- Balance of reserves at December 31, 2001 ................ $ 68.3 $ 12.8 $ 81.1 Restructuring charges ................................... 12.0 -- 12.0 Reversals ............................................... (2.5) -- (2.5) ------ ------ ------ Net restructuring charges .......................... 9.5 -- 9.5 Effect of foreign exchange .............................. (0.3) (0.3) (0.6) Payments against restructuring reserves ................. (6.5) (2.1) (8.6) ------ ------ ------ Balance of reserves at March 31, 2002 ................... $ 71.0 $ 10.4 $ 81.4 ====== ====== ====== Restructuring charges ................................... 6.2 -- 6.2 Reversals ............................................... (4.7) -- (4.7) ------ ------ ------ Net restructuring charges .......................... 1.5 -- 1.5 Effect of foreign exchange .............................. 4.8 0.1 4.9 Payments against restructuring reserves ................. (9.2) -- (9.2) ------ ------ ------ Balance of reserves at June 30, 2002 .................... 68.1 10.5 $ 78.6 ====== ====== ======
10. COMPREHENSIVE INCOME (LOSS) Total comprehensive income (loss) is summarized as follows (in millions of dollars):
Three Months Six Months Ended June 30 Ended June 30 ------------- ------------- 2002 2001 2002 2001 -------- -------- -------- -------- Net earnings (loss) ............................ $ 16.0 $ (17.5) $ (1,453.6) $ (79.7) Other Comprehensive Income (Loss) Foreign currency translation adjustments ... 224.8 (66.1) 149.7 (188.2) Other, net of tax .............................. -- 2.8 -- 1.8 -------- -------- -------- -------- Total Comprehensive Income (Loss) .............. $ 240.8 $ (80.8) $(1,303.9) $ (266.1) ======== ======== ========= =========
22 11. GOODWILL AND OTHER INTANGIBLE ASSETS - ADOPTION OF SFAS No. 142 As discussed in Note 1 to the condensed consolidated financial statements, effective January 1, 2002, the Company adopted SFAS No. 142. The adoption has resulted in the discontinuance of amortization of goodwill and indefinite-lived intangible assets. The adoption of SFAS No. 142 has also resulted in the reclassification of various intangible asset classes according to the measurability of their useful lives. During the second quarter of 2002, the Company, along with the assistance of an outside valuation firm, performed the impairment tests of its goodwill and indefinite-lived intangible assets required by SFAS No. 142. The Company's initial impairment test indicated that the carrying value of certain of its operating segments exceeded the corresponding fair values, which were determined by using discounted cash flows and market multiples. The implied fair value of goodwill in these operating segments was then determined through the allocation of the fair value to the underlying assets and liabilities. The performance of certain operating units and changes in market conditions were the primary reasons for the decrease in certain operating units' fair values that resulted in the impairment charge. The majority of this charge relates to the impairment of goodwill associated with the acquisitions of T&N, Plc. and Cooper Automotive. The Company recorded the non-cash charge of $1,428.4 million, net of applicable income tax benefit, to reduce the carrying value of its goodwill and indefinite-lived intangible assets to their fair value as required by SFAS No. 142. The tax impact related to the charge was $36.1 million and was limited to the benefit derived from the impairment of certain intangible assets other than goodwill. Additionally, the charge decreased other comprehensive income by approximately $32 million due primarily to changes in the Euro and British Pound during the first six months of 2002. The charge is presented as a cumulative effect of change in accounting principle in the condensed consolidated statement of operations for the six month period ended June 30, 2002. The majority of this charge relates to the impairment of goodwill associated with the acquisition of T&N, Plc. and Cooper Automotive. The Company will continue to perform an impairment review on an annual basis (or more frequently if impairment indicators arise). The first annual review will take place in the fourth quarter of 2002. A summary of the changes in the Company's goodwill and other intangible assets by business segment is as follows (in millions of dollars):
Goodwill --------------------------------------------------------- Balance at Balance at January 1, 2002 Other/(1)/ Impairments June 30, 2002 --------------- ----------- ----------- ------------- Powertrain .................................... $ 510.5 $ 9.7 $ (450.5) $ 69.7 Sealing Systems and System Protection ......... 586.7 10.2 -- 596.9 Friction ...................................... 338.9 0.4 (339.3) 0.0 Aftermarket ................................... 729.7 32.6 (154.1) 608.2 Other, including Corporate .................... 568.9 16.2 (409.7) 175.4 Divested Operations ........................... 4.2 0.1 -- 4.3 --------- -------- ----------- --------- Total ......................................... $ 2,738.9 $ 69.2 $ (1,353.6) $ 1,454.5 ========= ======== =========== ========= Other Intangible Assets/(2)/ --------------------------------------------------------- Balance at Balance at January 1, 2002 Other/(1)/ Impairments June 30, 2002 --------------- ----------- ----------- ------------- Powertrain .................................... $ 3.3 $ -- $ (3.3) $ -- Sealing Systems and System Protection ......... 5.2 0.4 -- 5.6 Friction ...................................... 42.6 -- (42.6) -- Aftermarket ................................... 139.0 1.6 (1.2) 139.4 Other, including Corporate .................... 81.4 0.5 (63.8) 18.1 Divested Operations ........................... -- -- -- -- --------- -------- ---------- --------- Total ......................................... $ 271.5 $ 2.5 $ (110.9) $ 163.1 ========= ======== ========== =========
________________________ /(1)/ Other reflects the effect of foreign currency exchange /(2)/ Other Intangible Assets is comprised of Trademarks. 24 At June 30, 2002 and December 31, 2001, goodwill and other intangible assets consists of the following (in millions of dollars):
June 30, 2002 December 31, 2001 --------------------------------------- ------------------------------------- Gross Net Gross Net Carrying Accumulated Carrying Carrying Accumulated Carrying Amount Amortization Amount Amount Amortization Amount ------ ------------ ------ ------ ------------ ------ Amortized Intangible Assets: Developed technology ....................... $ 245.6 $ (47.2) $ 198.4 $ 289.8 $ (44.4) $ 245.4 Other ...................................... 64.5 (43.0) 21.5 74.2 (40.5) 33.7 -------- -------- ------- -------- ------- ------- Total Amortized Intangible Assets ....... $ 310.1 $ (90.2) $ 219.9 $ 364.0 $ (84.9) $ 279.1 ======== ======== ======= ======== ======= ======= Unamortized Intangible Assets: Goodwill ................................... $1,454.5 $2,738.9 Trademarks ................................. 163.1 271.5 Intangible Pension Asset ................... 74.1 74.1 -------- -------- Total Unamortized Intangible Assets ..... $1,691.7 $3,084.5 ======== ========
The following table shows the pro-forma effect of SFAS No. 142 on the Company's earnings (in millions of dollars, except Per share amounts):
Three Months Ended Six Months Ended June June 30, 2001 30, 2001 ------------- -------- Reported Net Loss ..................................... $ (17.5) $ (79.7) Addback: Gooodwill amortization ................. 23.1 45.6 Addback: Indefinite-Lived Intangible Asset amortization ....................... 3.1 7.5 -------- --------- Adjusted Net Earnings (Loss) .......................... $ 8.7 $ (26.6) ======== ========= Basic and diluted earnings (loss) per share: Reported Net Loss ..................................... $ (0.25) $ (1.14) Gooodwill amortization ........................... 0.32 0.64 Indefinite-Lived Intangible Asset amortization ....................... 0.04 0.10 -------- -------- Adjusted .............................................. $ 0.11 $ (0.40) ======== =========
12. CONSOLIDATING CONDENSED FINANCIAL INFORMATION OF GUARANTOR SUBSIDIARIES Certain subsidiaries of the Company (as listed below, collectively the "Guarantor Subsidiaries") have guaranteed fully and unconditionally, on a joint and several basis, the obligation to pay principal and interest under the Company's Senior Credit Agreements. Federal-Mogul Venture Corporation Federal-Mogul Dutch Holdings Inc. Felt Products Mfg. Co. Federal-Mogul Global Properties Inc. Federal-Mogul UK Holdings Inc. Ferodo America, Inc. Carter Automotive Company F-M UK Holdings Limited McCord Sealing, Inc. Federal-Mogul Worldwide Inc. Federal-Mogul Global Inc. Federal-Mogul Ignition Company T&N Industries, Inc. Federal-Mogul Products, Inc. Federal-Mogul Powertrain, Inc. Federal-Mogul Piston Rings, Inc. Federal-Mogul Mystic, Inc.
25 The Company issued notes in 1999 and 1998, which are guaranteed by the Guarantor Subsidiaries. The Guarantor Subsidiaries also guarantee the Company's previously existing publicly registered Medium-term notes and Senior notes. T&N Industries, Inc. and Federal-Mogul Powertrain, Inc. are wholly owned subsidiaries of the Company and were acquired with the acquisition of T&N, plc. These subsidiaries became guarantors as a result of the Company's Fourth Amended and Restated Senior Credit Agreement dated December 29, 2000. In lieu of providing separate unaudited financial statements for the Guarantor Subsidiaries, the Company has included the accompanying unaudited consolidating condensed financial statements based on the Company's understanding of the Securities and Exchange Commission's interpretation and application of Rule 3-10 of the Securities and Exchange Commission's Regulation S-X and Staff Accounting Bulletin 53. Management does not believe that separate financial statements of the Guarantor Subsidiaries are material to investors. Therefore, separate financial statements and other disclosures concerning the Guarantor Subsidiaries are not presented. The consolidating condensed financial information of the Guarantor subsidiaries as of June 30, 2001 and for the period then ended has been restated to include Federal-Mogul Mystic, Inc., Felt Products Mfg. Co., Ferodo America, Inc., and McCord Sealing, Inc. As a result of the Restructuring Proceedings (see Note 2 "Voluntary Reorganization Under Chapter 11 and Administration") certain of the liabilities, as shown below, were Liabilities subject to compromise as of the Petition date:
Guarantor Non-Guarantor Parent Subsidiaries Subsidiaries Consolidated ---------- ------------ --------------- -------------- Accounts payable .............................. $ 39.8 $ 118.0 $ 28.5 $ 186.3 Other accrued liabilities ..................... 2.2 1.4 13.9 17.5 Environmental liabilities ..................... 22.2 -- 0.6 22.8 Interest payable .............................. 41.0 0.2 -- 41.2 Debt .......................................... 3,973.9 1.1 -- 3,975.0 Asbestos liabilities .......................... 1.4 239.8 1,317.5 1,558.7 Company-obligated mandatorily redeemable preferred securities of subsidiary holding solely convertible subordinated debentures of the Company ................... -- -- 448.9 448.9 -------- --------- --------- --------- $4,080.5 $ 360.5 $ 1,809.4 $ 6,250.4 ======== ========= ========= =========
26 Federal-Mogul Corporation Notes to Condensed Consolidated Financial Statements Unaudited Consolidating Condensed Statement of Operations Three Months Ended June 30, 2002 (Millions of Dollars)
(Unconsolidated) ---------------------------------------- Non- Guarantor Guarantor Parent Subsidiaries Subsidiaries Eliminations Consolidated ---------- --------------- ---------------- ---------------- -------------- Net sales ......................................... $ 339.0 $ 472.5 $ 807.6 $ (176.8) $ 1,442.3 Cost of products sold ............................. 270.9 378.9 678.0 (176.8) 1,151.0 --------- -------- --------- ----------- ----------- Gross margin ................................. 68.1 93.6 129.6 -- 291.3 Selling, general and administrative expenses ...... 59.7 67.6 86.1 -- 213.4 Amortization of other intangible assets ........... 1.4 1.0 1.1 -- 3.5 Restructuring charges ............................. -- 4.1 (2.6) -- 1.5 Adjustment of assets held for sale and other long-lived assets to fair value ................... -- 0.3 2.3 -- 2.6 Interest expense, net ............................. 31.4 -- (1.5) -- 29.9 Chapter 11 and Administration related reorganization expenses ................... 18.5 -- -- -- 18.5 Other (income) expense, net ....................... (14.3) (28.1) 27.6 -- (14.8) --------- -------- --------- ----------- ----------- Earnings (loss) before income taxes and equity in earnings (loss) of subsidiaries .................. (28.6) 48.7 16.6 -- 36.7 --------- -------- --------- ----------- ----------- Income tax expense ................................ 0.7 0.4 19.6 -- 20.7 --------- -------- --------- ----------- ----------- Earnings (loss) before equity in earnings (loss) of subsidiaries ................................... (29.3) 48.3 (3.0) -- 16.0 --------- -------- --------- ----------- ----------- Equity in earnings (loss) of subsidiaries ......... 45.3 26.8 -- (72.1) -- --------- -------- --------- ----------- ----------- Net Earnings (Loss) ............................... $ 16.0 $ 75.1 $ (3.0) $ (72.1) $ 16.0 ========= ======== ========= =========== ===========
27 Federal-Mogul Corporation Notes to Condensed Consolidated Financial Statements Unaudited Consolidating Condensed Statement of Operations Six Months Ended June 30, 2002 (Millions of Dollars)
(Unconsolidated) ---------------------------------------- Non- Guarantor Guarantor Parent Subsidiaries Subsidiaries Eliminations Consolidated ---------- -------------- -------------- -------------- -------------- Net sales ........................................ $ 654.0 $ 916.8 $ 1,553.0 $ (335.4) $ 2,788.4 Cost of products sold ............................ 527.1 733.9 1,310.2 (335.4) 2,235.8 --------- --------- --------- --------- --------- Gross margin ................................ 126.9 182.9 242.8 -- 552.6 Selling, general and administrative expenses ..... 124.6 130.7 171.5 -- 426.8 Amortization of other intangible assets .......... 2.8 2.0 2.3 -- 7.1 Restructuring charges ............................ -- 4.1 6.9 -- 11.0 Adjustment of assets held for sale and other long-lived assets to fair value ................ -- 0.3 2.3 -- 2.6 Interest expense, net ............................ 62.9 -- (2.7) -- 60.2 Chapter 11 and Administration related reorganization expenses ..................... 33.4 -- -- -- 33.4 Other (income) expense, net ...................... (34.3) (60.1) 80.6 -- (13.8) --------- --------- --------- --------- --------- Earnings (loss) before income taxes, cumulative effect of change in accounting principle and equity in earnings (losses) of subsidiaries ................................ (62.5) 105.9 (18.1) -- 25.3 --------- --------- --------- --------- --------- Income tax expense ............................... 0.7 23.7 26.1 -- 50.5 --------- --------- --------- --------- --------- Earnings (loss) before cumulative effect of change in accounting principle and equity in earnings (loss) of subsidiaries .............. (63.2) 82.2 (44.2) -- (25.2) Cumulative effect of change in accounting principle net of applicable income tax benefit.. (63.7) 448.5 1,043.6 -- 1,428.4 Earnings (loss) before equity earnings (loss) of subsidiaries ................................ 0.5 (366.3) (1,087.8) -- (1,453.6) --------- --------- --------- --------- --------- Equity in earnings (loss) of subsidiaries ........ (1,454.1) (690.9) -- 2,145.0 -- --------- --------- --------- --------- --------- Net Earnings (Loss) .............................. $(1,453.6) $(1,057.2) $(1,087.8) $ 2,145.0 $(1,453.6) ========= ========= ========= ========= =========
28 Federal-Mogul Corporation Notes to Condensed Consolidated Financial Statements Unaudited Consolidating Condensed Statement of Operations Three Months Ended June 30, 2001 (Millions of Dollars)
(Unconsolidated) -------------------------------------- Non- Guarantor Guarantor Parent Subsidiaries Subsidiaries Eliminations Consolidated --------- ------------ ------------ ------------ ------------ Net sales ......................................... $ 335.0 $ 479.2 $ 825.4 $ (214.2) $ 1,425.4 Cost of products sold ............................. 273.1 377.8 689.7 (214.2) 1,126.4 ------- ------- ------- --------- --------- Gross margin ................................. 61.9 101.4 135.7 -- 299.0 Selling, general and administrative expenses ...... 63.1 56.0 84.5 -- 203.6 Amortization of goodwill and other intangible assets .......................................... 5.0 11.6 13.2 -- 29.8 Restructuring charges ............................. -- 2.1 -- -- 2.1 Adjustment of assets held for sale and other long-lived assets to fair value ................. -- -- 0.1 -- 0.1 Gain on early extinguishment of debt .............. (25.1) -- -- -- (25.1) Interest expense, net ............................. 78.8 -- 2.4 -- 81.2 Other income, net ................................. 8.7 (60.6) 24.1 -- (27.8) ------- ------- ------- --------- --------- Earnings (loss) before income taxes and equity in earnings (loss) of subsidiaries ................. (68.6) 92.3 11.4 -- 35.1 ------- ------- ------- --------- --------- Income tax expense (benefit) ...................... (13.4) 61.8 4.2 -- 52.6 ------- ------- ------- --------- --------- Earnings (loss) before equity in earnings (loss) of subsidiaries ................................. (55.2) 30.5 7.2 -- (17.5) ------- ------- ------- --------- --------- Equity in earnings (loss) of subsidiaries ......... 37.7 46.7 -- (84.4) -- ------- ------- ------- --------- --------- Net Earnings (Loss) ............................... (17.5) $ 77.2 $ 7.2 $ (84.4) $ (17.5) ======= ======= ======= ========= =========
29 Federal-Mogul Corporation Notes to Condensed Consolidated Financial Statements Unaudited Consolidating Condensed Statement of Operations Six Months Ended June 30, 2001 (Millions of Dollars)
(Unconsolidated) -------------------------------------- Non- Guarantor Guarantor Parent Subsidiaries Subsidiaries Eliminations Consolidated -------- ------------ ------------ ------------ ------------ Net sales ............................................. $ 669.0 $ 956.2 $ 1,541.6 $ (290.7) $ 2,876.1 Cost of products sold ................................. 550.3 767.7 1,246.5 (290.7) 2,273.8 -------- ------------ ------------ ------------ ------------ Gross margin ..................................... 118.7 188.5 295.1 -- 602.3 Selling, general and administrative expenses .......... 137.0 112.7 181.5 -- 431.2 Amortization of goodwill and other intangible assets .. 10.1 23.4 26.7 -- 60.2 Restructuring charge .................................. 14.5 2.1 15.3 -- 31.9 Adjustment of assets held for sale and other long-lived assets to fair value ....................... 0.6 -- 0.1 -- 0.7 Gain on early extinguishment of debt .................. (25.1) -- -- (25.1) Interest expense, net ................................. 159.2 0.1 4.5 -- 163.8 Other (income) expense, net ........................... 97.8 (79.6) (39.5) -- (21.3) -------- ------------ ------------ ------------ ------------ Earnings (loss) before income taxes and equity in earnings (loss) of subsidiaries ...................... (275.4) 129.8 106.5 -- (39.1) -------- ------------ ------------ ------------ ------------ Income tax expense (benefit) .......................... (46.5) 67.8 19.3 -- 40.6 -------- ------------ ------------ ------------ ------------ Earnings (loss) before equity in earnings (loss) of subsidiaries ....................................... (228.9) 62.0 87.2 -- (79.7) -------- ------------ ------------ ------------ ------------ Equity in earnings (loss) of subsidiaries ............. 149.2 76.7 -- (225.9) -- -------- ------------ ------------ ------------ ------------ Net Earnings (Loss) ................................... $ (79.7) $ 138.7 $ 87.2 $ (225.9) $ (79.7) ======== ============ ============ ============ ============
30 Federal-Mogul Corporation Notes to Condensed Consolidated Financial Statements Unaudited Consolidating Condensed Balance Sheet June 30, 2002 (Millions of Dollars)
(Unconsolidated) ---------------------------------------- Non- Guarantor Guarantor Parent Subsidiaries Subsidiaries Eliminations Consolidated ------------------------ ------------- ------------ ------------ ASSETS Cash and equivalents ............................... $ 42.4 $ 3.0 $ 305.1 $ -- $ 350.5 Accounts receivable ................................ 566.5 -- 536.9 -- 1,103.4 Inventories ........................................ 62.5 346.5 377.7 -- 786.7 Deferred taxes ..................................... 25.8 -- 36.2 -- 62.0 Other current assets ............................... 24.9 35.5 110.6 -- 171.0 ---------- ---------- ---------- ----------- --------- Total Current Assets .......................... 722.1 385.0 1,366.5 -- 2,473.6 Property, plant and equipment ...................... 244.4 697.4 1,275.6 -- 2,217.4 Goodwill ........................................... 547.5 539.4 367.6 -- 1,454.5 Other intangible assets ............................ 61.7 237.3 158.1 -- 457.1 Investment in subsidiaries ......................... 6,362.2 2,789.1 -- (9,151.3) -- Intercompany accounts, net ......................... (3,621.4) 2,575.7 1,045.7 -- -- Asbestos-related insurance recoverable ............. -- 171.9 579.9 -- 751.8 Other noncurrent assets ............................ 94.6 41.5 413.9 -- 550.0 ---------- ---------- ---------- ----------- --------- Total Assets .................................. $ 4,411.1 $ 7,437.3 $ 5,207.3 $ (9,151.3) $ 7,904.4 ========== ========== ========== =========== ========= LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) Short-term debt, including current portion of Long-term debt .................................. $ -- $ 1.0 $ 16.4 $ -- $ 17.4 Accounts payable ................................... 70.2 73.7 207.7 -- 351.6 Accrued compensation ............................... 76.4 28.4 133.0 -- 237.8 Restructuring and rationalization reserves ......... 15.0 15.8 47.8 -- 78.6 Other accrued liabilities .......................... 81.1 138.6 241.2 -- 460.9 ---------- ---------- ---------- ----------- --------- Total Current Liabilities ..................... 242.7 257.5 646.1 -- 1,146.3 Long-term debt ..................................... 243.9 -- 16.0 -- 259.9 Postemployment benefits ............................ 637.1 0.2 210.0 -- 847.3 Other accrued liabilities .......................... 72.3 0.5 164.7 -- 237.5 Minority interest in consolidated subsidiaries ..... 18.8 28.4 -- -- 47.2 Liabilities subject to compromise .................. 4,080.5 360.5 1,809.4 -- 6,250.4 Shareholders' Equity (Deficit) ..................... (884.2) 6,790.2 2,361.1 (9,151.3) (884.2) ---------- ---------- ---------- ----------- --------- Total Liabilities and Shareholders' Equity (Deficit) ................................ $ 4,411.1 $ 7,437.3 $ 5,207.3 $ (9,151.3) $ 7,904.4 ========== ========== ========== =========== =========
31 Federal-Mogul Corporation Notes to Condensed Consolidated Financial Statements Unaudited Consolidating Condensed Balance Sheet December 31, 2001 (Millions of Dollars)
(Unconsolidated) --------------------------------------- Non- Guarantor Guarantor Parent Subsidiaries Subsidiaries Eliminations Consolidated ---------- ------------- ------------ ------------- ------------ ASSETS Cash and equivalents ................................ $ 74.0 $ 3.5 $ 269.4 $ -- $ 346.9 Accounts receivable ................................. 522.5 -- 422.3 -- 944.8 Inventories ......................................... 76.8 303.2 341.9 -- 721.9 Deferred taxes ...................................... 16.0 -- 39.4 -- 55.4 Other current assets................................. 47.1 42.5 88.0 -- 177.6 ---------- --------- -------- ---------- --------- Total Current Assets ........................... 736.4 349.2 1,161.0 -- 2,246.6 Property, plant and equipment ....................... 263.6 702.5 1,197.6 -- 2,163.7 Goodwill ............................................ 563.6 935.1 1,240.2 -- 2,738.9 Other intangible assets ............................. 91.9 289.9 242.9 -- 624.7 Investment in subsidiaries .......................... 6,366.8 2,839.9 -- (9,206.7) -- Intercompany accounts, net .......................... (2,400.5) 2,277.2 123.3 -- -- Asbestos-related insurance recoverable .............. -- 162.7 560.5 -- 723.2 Other noncurrent assets ............................. 130.4 44.8 380.9 -- 556.1 ---------- --------- -------- ---------- --------- Total Assets ................................... $ 5,752.2 $ 7,601.3 $4,906.4 $ (9,206.7) $ 9,053.2 ========== ========= ======== ========== ========= LIABILITIES AND SHAREHOLDERS' EQUITY Short-term debt, including current portion of Long-term debt ................................... $ -- $ 0.5 $ 24.4 $ -- $ 24.9 Accounts payable .................................... 61.6 50.4 187.5 -- 299.5 Accrued compensation ................................ 63.4 24.1 106.4 -- 193.9 Restructuring and rationalization reserves .......... 25.3 13.8 42.0 -- 81.1 Other accrued liabilities ........................... 85.0 130.1 167.8 -- 382.9 ---------- --------- -------- ---------- --------- Total Current Liabilities ...................... 235.3 218.9 528.1 -- 982.3 Long-term debt ...................................... 250.0 -- 16.7 -- 266.7 Postemployment benefits ............................. 655.1 0.1 164.6 -- 819.8 Other accrued liabilities ........................... 87.8 0.5 170.2 -- 258.5 Minority interest in consolidated subsidiaries ...... 22.1 28.2 -- -- 50.3 Liabilities subject to compromise ................... 4,082.9 358.2 1,815.5 -- 6,256.6 Shareholders' Equity ................................ 419.0 6,995.4 2,211.3 (9,206.7) 419.0 ---------- --------- -------- ---------- --------- Total Liabilities and Shareholders' Equity ..... $ 5,752.2 $ 7,601.3 $4,906.4 $ (9,206.7) $ 9,053.2 ========== ========= ======== ========== =========
32 Federal-Mogul Corporation Notes to Condensed Consolidated Financial Statements Unaudited Consolidating Condensed Statement of Cash Flows Six Months Ended June 30, 2002 (Millions of Dollars)
(Unconsolidated) --------------------------------------- Guarantor Non-Guarantor Parent Subsidiaries Subsidiaries Eliminations Consolidated ---------- ------------ ------------ ------------ ------------ Net Cash Provided From (Used By) Operating Activities ......................... $ 60.4 $ 113.4 $ (67.3) $ -- $ 106.5 Cash Provided From (Used By) Investing Activities: Expenditures for property, plant and Equipment and other long-term assets ........ (13.6) (33.8) (79.8) -- (127.2) Proceeds from sales of businesses ............... 5.9 6.0 9.9 -- 21.8 -------- -------- -------- -------- -------- Net Cash Used By Investing Activities .................. (7.7) (27.8) (69.9) -- (105.4) Cash Provided From (Used By) Financing Activities: Proceeds from the issuance of long-term debt .... -- -- 1.5 -- 1.5 Principal payments on long-term debt ............ -- -- (1.9) -- (1.9) Principal payments on DIP credit facility ....... (6.1) -- -- -- (6.1) Increase (decrease) in short-term debt -- 0.5 (8.0) -- (7.5) Change in intercompany accounts ................. (94.7) (86.6) 181.3 -- -- -------- -------- -------- -------- -------- Net Cash Provided From (Used By) Financing Activities .................... (100.8) (86.1) 172.9 -- (14.0) -------- -------- -------- -------- -------- Effect of Foreign Currency Exchange Rate Fluctuations on Cash..................... (3.0) -- 19.5 -- 16.5 -------- -------- -------- -------- -------- Net Increase (Decrease) in Cash and Equivalents ......................... $ (51.1) $ (0.5) $ 55.2 $ -- $ 3.6 ======== ======== ======== ======== ========
33 Federal-Mogul Corporation Notes to Condensed Consolidated Financial Statements Unaudited Consolidating Condensed Statement of Cash Flows Six Months Ended June 30, 2001 (Millions of Dollars)
(Unconsolidated) --------------------------------------- Guarantor Non-Guarantor ---------- -------------- Parent Subsidiaries Subsidiaries Eliminations Consolidated --------- ------------ ------------ ------------ ------------ Net Cash Provided From (Used By) Operating Activities ............................ $ (70.0) $ 48.0 $ 2.0 $ -- $ (20.0) Cash Provided From (Used By) Investing Activities: Expenditures for property, plant and equipment and other long-term assets .................... (21.7) (66.9) (57.4) -- (146.0) Proceeds from sale of property, plant and equipment ..................................... -- 9.4 9.6 -- 19.0 Proceeds from sales of businesses ................... 5.2 155.0 -- -- 160.2 -------- -------- -------- ------- -------- Net Cash Provided From (Used By) Investing Activities ................................. (16.5) 97.5 (47.8) -- 33.2 Cash Provided From (Used By) Financing Activities: Proceeds from issuance of long-term debt ............ 346.8 -- -- -- 346.8 Principal payments on long-term debt ................ (125.6) (3.2) (6.7) -- (135.5) Increase (decrease) in short-term debt .............. (28.5) (1.3) 4.5 -- (25.3) Fees paid for debt issuance and other securities .... (18.5) -- -- -- (18.5) Change in intercompany accounts ..................... (67.2) (132.3) 199.5 -- -- Sale of accounts receivable under securitization .... (129.6) -- -- -- (129.6) Dividends ........................................... (1.5) -- -- -- (1.5) Other ............................................... 1.4 -- -- -- 1.4 -------- -------- -------- ------- -------- Net Cash Provided From (Used By) Financing Activities ....................... (22.7) (136.8) 197.3 -- 37.8 -------- -------- -------- ------- -------- Effect of Foreign Currency Exchange Rate Fluctuations on Cash ....................... -- -- (4.8) -- (4.8) -------- -------- -------- ------- -------- Net Increase (Decrease) in Cash and Equivalents ................................ $ (109.2) $ 8.7 $ 146.7 $ -- $ 46.2 ======== ======== ======== ======= ========
34 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations OVERVIEW: Federal-Mogul Corporation (the "Company" or "Federal-Mogul") is an automotive parts manufacturer providing innovative solutions and systems to global customers in the automotive, small engine, heavy-duty and industrial markets. The Company manufactures engine bearings, pistons, piston pins, rings, cylinder liners, camshafts, sintered products, sealing systems, systems protection sleeving products, fuel systems, wipers, lighting, ignition, brake, friction and chassis products. The Company's principal customers include many of the world's original equipment ("OE") manufacturers of such vehicles and industrial products. The Company also manufactures and supplies its products to the aftermarket. VOLUNTARY BANKRUPTCY FILING: On October 1, 2001 (the "Petition Date"), Federal-Mogul Corporation and all of its wholly owned United States subsidiaries filed voluntary petitions for reorganization (the "U.S. Restructuring") under Chapter 11 of the United States Bankruptcy Code (the "Bankruptcy Code") in the United States Bankruptcy Court for the District of Delaware (the "Bankruptcy Court"). Also on October 1, 2001, certain of the Company's United Kingdom subsidiaries filed voluntary petitions for reorganization under Chapter 11 of the Bankruptcy Code and petitions for Administration (the "U.K. Restructuring") under the United Kingdom Insolvency Act of 1986 (the "Act") in the High Court of Justice, Chancery division in London, England (the "High Court"). The Company and its U.S. and U.K. subsidiaries included in the U.S. Restructuring and U.K. Restructuring are herein referred to as the "Debtors". The U.S. Restructuring and U.K. Restructuring are herein referred to as the "Restructuring Proceedings". The Chapter 11 cases of the Debtors (collectively, the "Chapter 11 Cases") have been consolidated for purposes of joint administration as In re: Federal-Mogul Global Inc., T&N Limited, et al (Case No. 01-10578(SLR)). The Chapter 11 Cases do not include any of the Company's non-U.S. subsidiaries outside of the U.K. subsidiaries mentioned above. The Chapter 11 Cases are discussed in Note 2 to the condensed consolidated financial statements. The Debtors filed for relief under Chapter 11 to address the growing demands on the Company's cash flow resulting from its multi-billion dollar asbestos liability. This liability is discussed in Note 7 to the condensed consolidated financial statements. CUMULATIVE EFFECT OF ACCOUNTING CHANGE - SFAS NO. 142 As discussed in Note 11 to the condensed consolidated financial statements, effective January 1, 2002, the Company adopted SFAS No. 142. The adoption has resulted in the discontinuance of amortization of goodwill and indefinite-lived intangible assets. The adoption of SFAS No. 142 has also resulted in the reclassification of various intangible asset classes according to the measurability of their useful lives. During the second quarter of 2002, the Company, along with the assistance of an outside valuation firm, performed the impairment tests of its goodwill and indefinite-lived intangible assets required by SFAS No. 142. The Company's initial impairment test indicated that the carrying value of certain of its operating segments exceeded the corresponding fair values, which were determined by using discounted cash flows and market multiples. The implied fair value of goodwill in these operating segments was then determined through the allocation of the fair value to the underlying assets and liabilities. The performance of certain operating units and charges in market conditions were the primary reasons for the decrease in certain operating units' fair values that resulted in the impairment charge. The majority of this charge relates to the impairment of goodwill associated with the acquisitions of T&N, Plc. and Cooper Automative. The Company recorded the non-cash charge of $1,428.4 million, net of applicable income tax benefit, to reduce the carrying value of its goodwill and indefinite-lived intangible assets to their fair value as required by SFAS No. 142. The tax impact related to the charge was $36.1 million and was limited to the benefit derived from the impairment of certain intangible assets other than goodwill. Additionally, the charge decreased other comprehensive income by approximately $32 million due primarily to changes in the Euro and British Pound during the first six months of 2002. The charge is presented as a cumulative effect of change in accounting principle in the condensed 35 consolidated statement of operations for the six month period ended June 30, 2002. The majority of this charge relates to the impairment of goodwill associated with the acquisitions of T&N, Plc. and Cooper Automotive. The Company will continue to perform an impairment review on an annual basis (or more frequently if impairment indicators arise). The first annual review will take place in the fourth quarter of 2002. CONTINUING OPERATIONS THREE MONTHS ENDED JUNE 30, 2002 COMPARED TO THREE MONTHS ENDED JUNE 30, 2001 RESULTS OF OPERATIONS The following Management's Discussion and Analysis of financial condition and results of operations ("MD&A") should be read in conjunction with the MD&A included in the Company's Annual Report on Form 10-K for the year ended December 31, 2001. Net Sales: Consolidated net sales by reportable segment for the three-months ended June 30, 2002 and 2001 were as follows (in millions of dollars):
2002 2001 Change -------- -------- -------- Powertrain .................. $ 449.2 $ 414.0 $ 35.2 Sealing Systems and Systems Protection ...... 158.3 156.5 1.8 Friction .................... 94.8 89.8 5.0 Aftermarket ................. 642.1 630.9 11.2 Other, including Corporate .. 97.9 95.7 2.2 Divested Operations ......... -- 38.5 (38.5) -------- -------- -------- Total ....................... $1,442.3 $1,425.4 $ 16.9 ======== ======== ========
Gross Margin: Consolidated gross margin by reportable segment for the three-months ended June 30, 2002 and 2001 was (in millions of dollars):
2002 2001 Change -------- -------- -------- Powertrain ................... $ 72.0 $ 74.3 $ (2.3) Sealing Systems and Systems Protection ....... 33.5 36.8 (3.3) Friction ..................... 27.7 18.3 9.4 Aftermarket .................. 149.8 145.4 4.4 Other, including Corporate ... 8.3 16.6 (8.3) Divested Operations .......... -- 7.6 (7.6) -------- -------- -------- Total ........................ $ 291.3 $ 299.0 $ (7.7) ======== ======== ========
Powertrain: Net sales for the second quarter of 2002 were $449.2 million compared to $414.0 million in the same quarter of 2001. The sales increase is primarily attributable to increased OE automotive and heavy duty sales volumes in North America and Europe, additional sales volume from the acquisition of a Polish piston manufacturer concluded in the third quarter of 2001 and favorable foreign currency effects. Customer price reductions offset these favorable volume trends. Gross margin was 16.0% of sales for the second quarter of 2002 compared to 17.9% for the same quarter in 2001. Although productivity and materials sourcing programs exceeded base material and labor inflation, margin was adversely impacted by customer price reductions, product warranty accruals and incremental, on-going production costs associated with new product launches in mid 2001. 36 Sealing Systems and Systems Protection: Net sales for the second quarter of 2002 were $158.3 million compared to $156.5 million in the same quarter of 2001. Sealing Systems accounted for the increase primarily due to North American OE automotive and heavy duty volumes. System Protection sales volumes were essentially flat versus the same period last year. Customer price reductions were offset by the impact of favorable foreign currency effects. Gross margin was 21.2% for the second quarter of 2002 compared to 23.5% for the same quarter in 2001. The decrease is primarily attributable to productivity actions not keeping pace with inflation and customer pricing reductions. Friction: Net sales for the second quarter of 2002 were $94.8 million compared to $89.8 million in the same quarter of 2001. While North America OE sales volumes were flat, Europe OE sales volumes outpaced the prior year. The increase is primarily attributable to increased automotive and commercial vehicle production and aftermarket demand. Customer price reductions were offset by the impact of favorable foreign currency effects. Gross margin was 29.2% for the second quarter of 2002 compared to 20.4% for the same quarter of 2001. Offsetting the impact of customer pricing and base inflation, was significant productivity improvements in the North American operations following extensive restructuring efforts undertaken in 2001. In addition, the success of an aftermarket product launch in mid 2001 has resulted in significantly increased shipments to the Aftermarket. Aftermarket: Net sales for the second quarter of 2002 were $642.1 million compared to $630.9 million in the same quarter of 2001. North America and Europe represent 81% and 19%, respectively, of second quarter 2002 sales. Adjusting for the sales impact of the Signal-Stat divestiture completed in the first quarter of 2002 of approximately $10 million, North America and Europe sales volumes increased over the same quarter. This increase is attributable to improvements in product availability in both regions and the success of a new North American aftermarket friction product introduced in mid 2001. Sales were slightly improved by favorable foreign currency effects. Gross margin was 23.3% for the second quarter of 2002, compared to 23.0% for the same quarter in 2001. The increase is attributable to customer price and productivity improvements partially offset by base inflation and unfavorable geographic and product mix. Other: Other primarily includes sales from certain businesses including Lighting, European wipers and ignition, as well as Asia Pacific, South America and other costs of Corporate functions. Net sales for the second quarter of 2002 were $97.9 million compared to $95.7 million in the same quarter of 2001. This increase is primarily attributable to increased Lighting sales related to the full production of certain OE programs launched in 2001. Negative foreign currency effects in South America and customer price reductions in Lighting and Asia Pacific offset this increase. Gross margin was 8.5% for the second quarter of 2002 as compared to 17.3% for the same quarter in 2001. The decrease is primarily attributable to increased employee health and welfare costs and the effect of lower actuarial returns on the Company's pension plan assets included in Corporate. These increases were partially offset by the elimination of Company 401(k) matching contributions and other spending reductions. Selling, General and Administrative Expenses: Selling, general and administrative expenses as a percent of net sales increased to 14.8% for the second quarter of 2002 as compared to 14.3% for the same quarter of 2001. Year over year inflationary pressures from increasing employee health and welfare costs, certain employee incentive and retention programs related to the Restructuring Proceedings, and the effect of lower actuarial returns on the Company's pension plan assets were partially offset by the elimination of Company 401(k) matching contributions and other spending reductions. 37 Interest Expense, net: Interest expense, net was $29.9 million in the second quarter of 2002 compared to $81.2 million for the same quarter of 2001. This decrease is a result of not accruing or paying interest on certain pre-petition debt and lower interest costs. The effect of not accruing the contractual interest on pre-petition debt was $39.5 million in the quarter. Income Tax Expense: For the three months ended June 30, 2002, the Company recorded income tax expense of $20.7 million on earnings of $36.7 million before income taxes and cumulative effect of change in accounting principle, compared to income tax expense of $52.6 million on earnings of $35.1 million before income taxes and extraordinary items in the same period of 2001. Income tax expense for the three months ended June 30, 2002, resulted primarily from not providing a tax benefit for current losses in the United States and from specific interest expense deductions in the U.K. Amortization Expense: During the three months ended June 30, 2002, and 2001, respectively, the Company recognized amortization expense of $3.5 million and $29.8 million, respectively. Amortization expense for the three months ended June 30, 2002 related primarily to developed technologies and other amortized intangible assets. Excluded from amortization expense in the second quarter of 2002 was expense related to goodwill and trademarks which are no longer subject to amortization under Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets". SIX MONTHS ENDED JUNE 30, 2002 COMPARED TO SIX MONTHS ENDED JUNE 30, 2001 RESULTS OF OPERATIONS Net Sales: Consolidated net sales by reportable segment for the six months ended June 30, 2002 and 2001 were as follows (in millions of dollars):
2002 2001 Change -------- -------- -------- Powertrain ................... $ 879.5 $ 863.4 $ 16.1 Sealing Systems and Systems Protection ....... 306.7 311.2 (4.5) Friction ..................... 181.4 180.0 1.4 Aftermarket .................. 1,215.0 1,247.7 (32.7) Other, including Corporate ... 192.6 188.0 4.6 Divested Operations .......... 13.2 85.8 (72.6) -------- -------- -------- Total ........................ $ 2,788.4 $ 2,876.1 $ (87.7) ========= ========= ========
Gross Margin: Consolidated gross margin by reportable segment for the six months ended June 30, 2002 and 2001 was (in millions of dollars):
2002 2001 Change -------- -------- -------- Powertrain ................... $ 141.3 $ 161.5 $ (20.2) Sealing Systems and Systems Protection ....... 60.0 71.6 (11.6) Friction ..................... 52.1 33.4 18.7 Aftermarket .................. 275.5 284.0 (8.5) Other, including Corporate ... 19.7 32.6 (12.9)
38 Divested Operations ...... 4.0 19.2 (15.2) -------- -------- -------- Total .................... $ 552.6 $ 602.3 $ (49.7) ======== ======== ========
Powertrain: Net sales for the first six months of 2002 were $879.5 million compared to $863.4 million in the same period of 2001. North American OE sales volumes were the major increase over the prior period. Sales volumes in Europe were lower than the prior period, despite additional sales volumes from the acquisition of a Polish piston manufacturer in the third quarter of 2001. Customer price reductions and unfavorable foreign currency effects offset these favorable volume trends. Gross margin was 16.1% of sales for the first six months of 2002 compared to 18.7% for the same period in 2001. Although productivity and materials sourcing programs exceeded base material and labor inflation, margin was adversely impacted by customer price reductions, product warranty accruals and incremental, on-going production costs associated with new product launches in mid 2001. Sealing Systems and Systems Protection: Net sales for the first six months of 2002 were $306.7 million compared to $311.2 million in the same period of 2001. Sealing Systems, primarily Europe sales volumes, accounted for the decrease while Systems Protection was above prior year volumes. Customer price reductions and negative foreign currency effects also contributed to the decrease. Gross margin was 19.6% for the second quarter of 2002 compared to 23.0% for the same quarter in 2001. The decrease is primarily attributable to productivity actions not keeping pace with inflation and customer pricing reductions. Friction: Net sales for the first six months of 2002 were $181.4 million compared to $180.0 million in the same period of 2001. Similar to the second quarter, Europe OE sales volumes were the primary contributor to the increase. Gross margin was 28.7% for the first six months of 2002 compared to 18.6% for the same period of 2001. Offsetting the impact of customer pricing and base inflation, was significant productivity improvement in the North America operations following extensive restructuring efforts undertaken in 2001. In addition, the success of a recent Aftermarket new product launch has resulted in significantly increased shipments to the Aftermarket. Aftermarket: Net sales for the first six months of 2002 were $1,215.0 million compared to $1,247.7 million in the same period of 2001. Divestitures and unfavorable foreign currency effects accounted for a significant portion of the decrease in sales volumes. In addition, as certain product line replacement trends are extremely sensitive to weather conditions, North America sales volumes were adversely impacted in the first quarter due to mild weather conditions experienced. The first quarter decline was offset in the second quarter of 2002 by increased sales volumes in both North America and Europe. Gross margin was 22.7% for the first six months of 2002 compared to 22.8% for the same period in 2001. Although productivity improvements exceeded base inflation, this net productivity improvement was more than offset by unfavorable product line and geographic mix shifts. Other: Other primarily includes sales from certain businesses including Lighting, European wipers and ignition, as well as Asia Pacific, South America and other costs of Corporate functions. Net sales for the first six months of 2002 were 39 $192.6 million compared to $188.0 million in the same period of 2001. This increase is primarily attributable to increased lighting sales related to the full production of certain OE product launches in 2001 of approximately $17 million. The increase in Lighting was offset by negative foreign currency exchange in South America and Asia Pacific. Gross margin was 10.2% for the first six months of 2002 as compared to 17.3% for the same period in 2001. The decrease is primarily attributable to increased employee health and welfare costs and the effect of lower actuarial returns on the Company's pension assets included in Corporate. The increases were partially offset by the elimination of Company 401(k) matching contributions and other reductions. Selling, General and Administrative Expenses: Selling, general and administrative expenses as a percent of net sales increased to 15.3% for the first six months of 2002 as compared to 15.0% for the same period of 2001. Year over year inflationary pressures from increasing employee health and welfare costs, certain employee incentive and retention programs related to the Restructuring Proceedings and the effect of lower actuarial returns on the Company's pension plan assets, were partially offset by the elimination of Company 401(k) matching contributions and other spending reductions. Interest Expense, net: Interest expense, net was $60.2 million in the first six months of 2002 compared to $163.8 million for the same period of 2001. This decrease is a result of not accruing or paying interest on certain pre-petition debt and lower interest costs. The effect of not accruing the contractual interest on pre-petition debt was $75.1 million in the period. Income Tax Expense: For the six months ended June 30, 2002, the Company recorded income tax expense of $50.5 million on earnings of $25.3 million before income taxes and cumulative effect of accounting change, compared to income tax expense of $40.6 million on a loss of $39.1 million before income taxes in the same period of 2001. Income tax expense for the six months ended June 30, 2002, resulted primarily from the adjustments to the valuation allowances related to the implementation of SFAS No. 141 and 142 not providing a tax benefit for current losses in the United States and from specific interest expense deductions in the U.K. Amortization Expense: During the six months ended June 30, 2002, and 2001, respectively, the Company recognized amortization expense of $7.1 million and $60.2 million, respectively. Amortization expense for the six months ended June 30, 2002 related primarily to developed technologies and other amortized intangible assets. Excluded from amortization expense in the first six months of 2002 was expense related to goodwill and trademarks which are no longer subject to amortization under Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets". LITIGATION & ENVIRONMENTAL CONTINGENCIES For a summary of material contingencies as a result of those lawsuits, refer to Note 7 of the condensed consolidated financial statements, "Asbestos Liability and Legal Proceedings". 40 LIQUIDITY AND CAPITAL RESOURCES Cash Flow Provided From Operating Activities Cash flow provided from operating activities was $106.5 million for the first six months of 2002. Among the factors impacting operating cash flows were operating earnings offset by working capital movements and timing issues on various accounts. Operating cash was also positively impacted by not making asbestos payments due to the Restructuring Proceedings. Asbestos payments in the first six months of 2001 amounted to $170.7 million. Cash Flow Used By Investing Activities: Cash flow used by investing activities was $105.4 million in the first six months of 2002. Investing cash flows were comprised of capital expenditures of $127.2 million made for property, plant and equipment to implement process improvements, increase manufacturing capacity and production, and introduce new products, offset by proceeds from the sales of businesses of $21.8 million. The majority of these proceeds relate to the first quarter sale of its Signal-Stat Lighting Products division. Based on current forecasts, the Company anticipates that 2002 capital expenditures, exclusive of acquisitions and investments in affiliates, will be approximately $365.0 million. This spending level is dependent upon specific capital expenditure projects meeting the Company's operating and financial objectives. The company continues to scrutinize all appropriation approvals to minimize expenditures consistent with new business opportunities and economic conditions. The Company expects that funding for these expenditures will be from cash on hand, cash provided from operations and external sources as required. Cash Flow Used By Financing Activities: Cash flow used by financing activities was $14.0 million for the first six months of 2002 primarily resulting from repayments of certain international debt and a required repayment on its debtor-in-possession credit facility ("DIP credit facility") due to proceeds received from a divested business. To meet its liquidity needs over the next two years, the Company entered into a DIP credit facility in the aggregate amount of $675 million, under which it has borrowed $243.9 million as of June 30, 2002. At June 30, 2002 the Company had $347.8 million available for borrowings Available borrowings under the DIP facility are impacted by the underlying collateral at any point in time, consisting of domestic fixed assets, accounts receivable and inventory. Further, any outstanding letters of credit reduce the amount available under the facility. The DIP credit facility has been approved by the Bankruptcy court as well as various creditors' committees. The DIP credit facility expires in October, 2003 and bears interest at either alternate base rate ("ABR") plus 2.5 percentage points or a formula based on the London Inter-Bank Offered Rate ("LIBOR") plus 3.5 percentage points. The ABR is the greatest of either the bank's prime rate or the base CD rate plus 1 percentage point or the fed funds rate plus 1/2 percentage point. The Company provided collateral in the form of a pledge of its domestic inventories, domestic accounts receivable, domestic plant, equipment and real property, and its domestic intellectual property to the DIP lenders. The DIP lenders received permission from the lenders of the Senior Credit Agreements to have priority over their collateral interest. The DIP credit facility contains restrictive covenants. The more significant of these covenants include the maintenance of certain levels of EBITDA and limitation on quarterly capital expenditures. Additional covenants include, but are not limited to, limitations on the early retirement of debt, additional borrowings, payment of dividends and the sale of assets or businesses. The Company has pledged 100% of the capital stock of certain U.S. subsidiaries, 65% of capital stock of certain foreign subsidiaries and certain intercompany loans to secure the Senior Credit Agreements of the Company. Certain of such pledges also extend to the Notes, Medium-Term Notes and Senior Notes of the Company. In addition, certain subsidiaries of the Company have guaranteed the senior debt. 41 The Company's ability to obtain cash adequate to fund its needs depends generally on the results of its operations, restructuring initiatives, the Bankruptcy Court's approval of management's plans and the availability of financing. Management believes that cash on hand and cash flow from operations, in conjunction with borrowings available from its DIP credit facility, will be sufficient to fund capital expenditures and meet its post-petition operating obligations in the short-term. In the long term, the Company believes that the benefits from the previously announced restructuring programs and favorable resolution of its asbestos liabilities through Chapter 11 and Administration should provide adequate long-term cash flows. However, there can be no assurance in this regard or that the terms available for any future financing, if required, would be favorable to the Company. Also, certain obligations, particularly asbestos obligations, can be impacted by factors outside the Company's control. At June 30, 2002, the Company was in compliance with all debt covenants under its existing DIP credit facility. Based on current forecasts, the Company expects to be in compliance throughout 2002. Changes in the business environment, market factors, macroeconomic factors, and the Company's ability to achieve its forecasts and other factors outside of the Company's control, could adversely impact its ability to remain in compliance with debt covenants. If the Company were to not be in compliance at a measurement date, the Company would be required to renegotiate its facility. No assurance can be provided as to the impact of such actions. 42 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is subject to the risk of changes in foreign currency exchange rates due to its operations in foreign jurisdictions. The Company manufactures and sells its products in North America, Europe, South America, Africa and Asia. As a result, the Company's financial results could be significantly affected by factors such as changes in foreign currency exchange rates or weak economic conditions in the foreign markets in which the Company distributes its products. The Company's operating results are primarily exposed to changes in exchange rates between the U.S. dollar and European currencies. As currency exchange rates change, translation of the statements of operations of the Company's international businesses into United States dollars affects year-over-year comparability of operating results. The Company does not generally hedge operating translation risks because cash flows from international operations are generally reinvested locally. Changes in foreign currency exchange rates are generally reported as a component of shareholders' equity for the Company's foreign subsidiaries reporting in local currencies and as a component of income for its foreign subsidiaries using the US dollar as the functional currency. The Company's equity was increased by $149.7 million during the six months ended June 30, 2002, primarily due to cumulative translation adjustments resulting from changes in the U.S. dollar to the Euro and the British Pound. 43 PART II - OTHER INFORMATION Item 1. Legal Proceedings (a) Contingencies. Note 7 to the Consolidated Condensed Financial Statements, "Asbestos Liability and Legal Proceedings", that is included in Part I of this report, is incorporated herein by reference. Item 3. Defaults Upon Senior Securities Virtually all of the Company's pre-petition debt is in default due to the Filing. See Note 2 "Voluntary Reorganization Under Chapter 11 and Administration" to the Company's condensed consolidated financial statements. The Company-Obligated Mandatorily Redeemable Preferred Securities are in default due to the Filing. See Note 2 "Voluntary Reorganization Under Chapter 11 and Administration" to the Company's condensed consolidated financial statements. Item 4. Submission of Matters to a Vote of Security Holders The Company held its Annual Meeting of Shareholders on May 15, 2002, at which time the shareholders considered and voted on (i) the election of eight directors, (ii) the appointment of Ernst & Young LLP as its independent accountants for 2002. The eight directors were incumbents, and all nominees were reelected. The following table sets forth the number of votes "For" and "Withheld" with respect to each nominee:
Nominee Votes For Votes Withheld John J. Fannon 69,401,978 5,173,865 Paul S. Lewis 69,829,064 4,746,779 Frank E. Macher 70,698,769 3,877,074 Charles G. McClure 70,719,446 3,856,397 Robert S. Miller, Jr. 69,351,418 5,224,425 John C. Pope 69,565,476 5,010,367 Jane L. Warner 70,618,682 3,957,161 Geoffrey H. Whalen 70,128,348 4,447,495
The appointment of Ernst & Young LLP as independent accountants was approved, with 72,335,873 votes cast For, 1,496,632 votes cast Against and 743,338 Abstentions. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits: None (b) Reports on Form 8-K: (1) On July 29, 2002, the Company filed a Current Report on Form 8-K to announce the resignation of Jane L. Warner from the Company's Board of Directors. (2) On February 25, 2002, the Company filed a Current Report on Form 8-K to announce the appointment of Jane L. Warner to the Company's Board of Directors. 44 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, thereunto duly authorized. FEDERAL-MOGUL CORPORATION By: /s/ G. Michael Lynch --------------------- G. Michael Lynch Executive Vice President and Chief Financial Officer, Principal Financial Officer By: /s/ William G. Quigley III --------------------------- William G. Quigley III Vice President and Controller, Chief Accounting Officer Dated: August 12, 2002 45