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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 September 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 November 4, 2002, there were 82,611,418 outstanding shares of the
registrant's $5.00 stated value common stock.
FEDERAL-MOGUL CORPORATION
Form 10-Q
For the Quarter Ended September 30, 2002
INDEX
Page No.
--------
Forward-Looking Statements .............................................................. 3
Part I - Financial Information
Item 1 - Condensed Consolidated Financial Statements
Condensed Consolidated Statements of Operations ................................. 4
Condensed Consolidated Balance Sheets ........................................... 5
Condensed Consolidated Statements of Cash Flows ................................. 6
Notes to the Condensed Consolidated Financial Statements ........................ 7
Item 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations ........................................................... 35
Item 3 - Quantitative and Qualitative Disclosures about Market Risk ................. 43
Item 4 - Disclosure Controls and Procedures ......................................... 43
Part II - Other Information
Item 1 - Legal Proceedings .......................................................... 44
Item 3 - Defaults Upon Senior Securities ............................................ 44
Item 6 - Exhibits and Reports on Form 8-K ........................................... 44
Signatures .............................................................................. 45
Certification of the Quarterly Report on Form 10-Q by the Company's Chief
Executive Officer ................................................................... 46
Certification of the Quarterly Report on Form 10-Q by the Company's Chief
Financial Officer ................................................................... 47
Exhibit 99.1 - Certification by the Company's Chief Executive Officer pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 .......................................................... 48
Exhibit 99.2 - Certification by the Company's Chief Financial Officer pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 .......................................................... 49
2
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"). Words such as "anticipate",
"expect", "intend", "plan", "believe", "seek" and "estimate" signify
forward-looking statements. Such statements are made in good faith by
Federal-Mogul Corporation (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 also include 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 of reorganization and scheme 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.
3
PART I - FINANCIAL INFORMATION
- ------------------------------
Item 1. Financial Statements
--------------------
FEDERAL-MOGUL CORPORATION
Condensed Consolidated Statements of Operations (Unaudited)
(Millions of Dollars, Except Per Share Amounts)
Three Months Ended Nine Months Ended
September 30 September 30
2002 2001 2002 2001
---- ---- ---- ----
Net sales .................................................... $1,345.2 $1,288.8 $ 4,133.6 $4,164.9
Cost of products sold ........................................ 1,095.5 1,052.2 3,331.3 3,326.0
-------- -------- --------- --------
Gross margin ............................................ 249.7 236.6 802.3 838.9
Selling, general and administrative expenses ................. 206.4 211.9 623.6 642.4
Amortization of goodwill and other intangible assets ......... 2.7 29.2 9.8 89.4
Restructuring charges ........................................ 17.0 6.1 28.0 38.0
Adjustment of assets held for sale and other long-lived
assets to fair value .................................... 24.6 496.6 27.2 497.3
Interest expense, net ........................................ 29.8 71.4 90.0 235.2
Chapter 11 and Administration related reorganization
expenses ................................................ 33.4 13.7 76.4 14.4
Gain on extinguishment of debt ............................... -- (47.1) -- (72.2)
Other (income) expense, net .................................. (0.2) 86.6 (14.0) 65.3
-------- -------- --------- --------
Loss before income tax expense and cumulative effect of (631.8) (670.9)
change in accounting principle ...................... (64.0) (38.7)
Income tax expense ........................................... 9.3 178.3 59.8 218.9
-------- -------- --------- --------
Loss before cumulative effect of change in accounting (810.1) (889.8)
principle ........................................... (73.3) (98.5)
Cumulative effect of change in accounting principle, net of
applicable income tax benefit ........................... -- -- 1,428.4 --
-------- -------- --------- ------
Net loss ................................................ (73.3) (810.1) (1,526.9) (889.8)
Preferred dividends .......................................... -- 0.5 -- 1.9
-------- -------- --------- --------
Net loss attributable to common shareholders ............ $ (73.3) $ (810.6) $(1,526.9) $ (891.7)
======== ======== ========= ========
Loss Per Common Share:
Basic and Diluted
Loss Per Common Share before cumulative effect of
change in accounting principle ...................... $ (0.89) $ (10.31) $ (1.19) $ (12.13)
======== ======== ========= ========
Net Loss Per Common Share ............................... $ (0.89) $ (10.31) $ (18.53) $ (12.13)
======== ======== ========= ========
See accompanying notes.
4
FEDERAL-MOGUL CORPORATION
Condensed Consolidated Balance Sheets
(Millions of Dollars)
(Unaudited)
September 30 December 31
2002 2001
---- ----
ASSETS
Cash and equivalents ........................................................... $ 339.3 $ 346.9
Accounts receivable ............................................................ 1,042.7 944.8
Inventories .................................................................... 792.5 721.9
Deferred taxes ................................................................. 68.9 55.4
Other current assets ........................................................... 189.5 177.6
--------- ---------
Total Current Assets ...................................................... 2,432.9 2,246.6
Property, plant and equipment, net ............................................. 2,196.9 2,163.7
Goodwill ....................................................................... 1,427.6 2,738.9
Other intangible assets, net ................................................... 483.2 624.7
Asbestos-related insurance recoverable ......................................... 763.1 723.2
Other noncurrent assets ........................................................ 505.6 556.1
--------- ---------
Total Assets .............................................................. $ 7,809.3 $ 9,053.2
========= =========
LIABILITIES AND SHAREHOLDERS' (DEFICIT) EQUITY
Short-term debt, including current portion of long-term debt ................... $ 27.8 $ 24.9
Accounts payable ............................................................... 319.1 299.5
Accrued compensation ........................................................... 243.5 193.9
Restructuring and rationalization reserves ..................................... 86.1 81.1
Other accrued liabilities ...................................................... 457.1 382.9
--------- ---------
Total Current Liabilities ................................................. 1,133.6 982.3
Long-term debt ................................................................. 254.3 266.7
Postemployment benefits ........................................................ 844.4 819.8
Other accrued liabilities ...................................................... 212.7 258.5
Minority interest in consolidated subsidiaries ................................. 46.2 50.3
Liabilities subject to compromise .............................................. 6,274.1 6,256.6
Shareholders' (Deficit) Equity:
Series C ESOP preferred stock ............................................. 28.0 28.0
Common stock .............................................................. 412.8 411.9
Additional paid-in capital ................................................ 1,853.3 1,844.6
Accumulated deficit ....................................................... (2,641.9) (1,115.0)
Accumulated other comprehensive loss ...................................... (608.0) (750.1)
Other ..................................................................... (0.2) (0.4)
--------- ---------
Total Shareholders' (Deficit) Equity .................................. (956.0) 419.0
--------- ---------
Total Liabilities and Shareholders' (Deficit) Equity .................. $ 7,809.3 $ 9,053.2
========= =========
See accompanying notes.
5
FEDERAL-MOGUL CORPORATION
Condensed Consolidated Statements of Cash Flows (Unaudited)
(Millions of Dollars)
Nine Months Ended
September 30
2002 2001
---- ----
Cash Provided From (Used By) Operating Activities
Net loss ........................................................................... $(1,526.9) $(889.8)
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 .................................................. 206.9 285.9
Gain on extinguishment of debt ................................................. -- (72.2)
Restructuring charges .......................................................... 28.0 38.0
Chapter 11 and Administration related reorganization expenses .................. 76.4 14.4
Adjustment of assets held for sale and other long-lived assets to fair value ... 27.2 497.3
(Gain) loss on sale of businesses .............................................. (4.7) 37.5
Postemployment benefits including pensions ..................................... 58.5 (1.5)
Change in deferred taxes ....................................................... (21.1) 264.2
(Increase) decrease in accounts receivable ..................................... (67.1) 71.4
(Increase) decrease in inventories ............................................. (60.9) 33.1
Increase (decrease) in accounts payable ........................................ 16.2 (35.3)
Change in other assets and liabilities ......................................... 76.5 (119.4)
Payments against restructuring and rationalization reserves .................... (27.0) (50.1)
Payments for Chapter 11 and Administration related reorganization expenses ..... (57.7) (14.4)
Payments against asbestos liability, net of insurance receipts ................. -- (219.2)
--------- -------
Net Cash Provided From (Used By) Operating Activities ..................... 188.8 (160.1)
Cash Provided From (Used By) Investing Activities
Expenditures for property, plant and equipment and other long-term assets .......... (228.1) (232.2)
Net proceeds from sale of property, plant and equipment ............................ -- 19.0
Net proceeds from sales of businesses .............................................. 25.5 241.8
Business acquisitions, net of cash acquired ........................................ -- (18.8)
--------- -------
Net Cash (Used By) Provided From Investing Activities ..................... (202.6) 9.8
Cash Provided From (Used By) Financing Activities
Proceeds from issuance of long-term debt ........................................... 2.5 666.4
Principal payments on long-term debt ............................................... (2.1) (171.8)
Principal payments on DIP credit facility .......................................... (10.0) --
Increase (decrease) in short-term debt ............................................. 3.3 (71.4)
Fees paid for debt agreements ...................................................... -- (18.5)
Repurchase of accounts receivable under securitization ............................. -- (89.6)
Dividends .......................................................................... -- (1.9)
Other .............................................................................. -- (9.0)
--------- -------
Net Cash (Used By) Provided From Financing Activities ..................... (6.3) 304.2
--------- -------
Effect of Foreign Currency Exchange Rate Fluctuations on Cash ............. 12.5 2.1
--------- -------
(Decrease) Increase in Cash and Equivalents ............................... (7.6) 156.0
Cash and Equivalents at Beginning of Period ........................................... 346.9 107.2
--------- -------
Cash and Equivalents at End of Period ................................................. $ 339.3 $ 263.2
========= =======
See accompanying notes.
6
FEDERAL-MOGUL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 30, 2002
1. BASIS OF PRESENTATION
Interim Financial Statements
The accompanying unaudited condensed consolidated financial statements of
Federal-Mogul Corporation ("Federal-Mogul" or the "Company") 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 nine month periods ended September
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 2001 condensed consolidated financial statements have been
reclassified to conform to the presentation used in 2002.
New Accounting Pronouncements
Accounting for Costs Associated with Exit or Disposal Activities
In June 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 146, "Accounting for
Costs Associated with Exit or Disposal Activities." This pronouncement addresses
financial accounting and reporting for costs associated with an exit activity
(including restructuring) or with the disposal of long-lived assets and
supercedes Emerging Issues Task Force Issue No. 94-3. Under SFAS No. 146, a
liability is recorded for a cost associated with an exit activity when that
liability is incurred and can be measured at fair value. SFAS No. 146 requires
disclosure of information about exit and disposal activities, the related costs,
and changes in those costs in the notes to the interim and annual financial
statements that include the period in which an exit activity is initiated and in
any subsequent period until the activity is completed. SFAS No. 146 is effective
prospectively for exit and disposal activities initiated after December 31, 2002
with earlier adoption encouraged. SFAS No. 146 does not allow for the
restatement of previously issued financial statements and grandfathers the
accounting for liabilities previously recorded under Emerging Issues Task Force
Issue No. 94-3. The Company does not expect the adoption of SFAS No. 146 to have
a material impact on its financial statements.
Accounting for Extraordinary Items
In April 2002, the FASB issued 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 in 2002, the Company has reclassified the gain on
extinguishment of debt previously recorded as extraordinary to a gain from
continuing operations of $47.1 million and $72.2 million for the three and nine
month periods ended September 30, 2001, respectively, in the condensed
consolidated financial statements. The Company did not provide income tax
expense on these gains as the Company did not provide a tax benefit on its 2001
operating losses in the United States.
Accounting for Goodwill and Other Intangible Assets
In July 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
7
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 made one acquisition in 2001 subsequent to June
30, 2001 which was properly accounted for using the purchase method.
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 were required to adopt the
pronouncement in their fiscal year beginning after December 15, 2001.
Effective January 1, 2002, the Company adopted SFAS No. 142. The adoption
resulted in the discontinuance of amortization of goodwill and indefinite-lived
intangible assets. Furthermore, the adoption of SFAS No. 142 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, 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. As a result of this assessment, the Company recorded a 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
estimated fair value. The charge is presented as a cumulative effect of change
in accounting principle in the condensed consolidated statement of operations
for the nine-month period ended September 30, 2002. 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.
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 $1.9 million and $6.1 million, respectively, of
expenditures previously recorded by the Company as selling, general, and
administrative expenses to costs of products sold for the three and nine month
periods ended September 30, 2001.
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.
8
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 difficult to predict with a
high 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 committees, representing asbestos claimants, unsecured
creditors and equity security 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 creditors 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. On October 30, 2002, the Bankruptcy Court granted an additional
extension of the period of exclusivity to March 3, 2003. 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 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 administered
trusts established in compliance with Section 524(g) of the Bankruptcy Code.
Such plan 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.
9
The Company is unable to predict with a high degree of certainty 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. Various parties in the
Chapter 11 cases may challenge these arrangements, transactions, and
relationships, 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 and for general and commercial 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 security holders 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 restructuring proceedings. 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 $648.8 million as of September 30, 2002 due
to divestitures (see Note 6). 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.
At September 30, 2002, the Company had $339.9 million available to borrow
under its DIP credit facility and had outstanding borrowings and letters of
credit of $239.9 million and $13.9 million, respectively. 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 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, is 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
September 30, 2002, the Debtors' prepetition debt is classified under the
caption "Liabilities subject to compromise." This includes debt outstanding of
10
$1,905.3 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 $43.1 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 to the condensed consolidated
financial statements.
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 on October 1,
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 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. On October 4, 2002, the Debtors issued approximately 100,000
proof of claim forms to its current and prior employees, known creditors,
vendors and other parties with whom the Debtors have previously conducted
business. To the extent that recipients disagree with the claims as quantified
on these forms, the recipient may file discrepancies with the Court. Differences
between amounts recorded by the Debtors and claims filed by creditors will be
investigated and resolved as part of the Restructuring Proceedings. The
Bankruptcy Court will ultimately determine liability amounts that will be
allowed for these claims in the Chapter 11 cases. 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 and could result in a
material adjustment to the Company's financial statements. 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 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.
11
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 Nine Months
Ended Ended
September 30 September 30
2002 2002
---- ----
Net sales ......................................................................... $906.2 $ 2,837.8
Cost of products sold ............................................................. 759.0 2,352.9
------ ---------
Gross margin ................................................................. 147.2 484.9
Selling, general and administrative expenses ...................................... 139.1 421.2
Amortization of other intangible assets ........................................... 1.3 7.3
Restructuring charges ............................................................. 17.9 22.4
Adjustment of assets held for sale and other long-lived assets to fair value ...... 24.6 27.2
Interest expense, net ............................................................. 30.8 92.4
Chapter 11 and administration related reorganization expenses ..................... 33.4 76.4
Other income, net ................................................................. (45.4) (121.0)
------ ---------
Loss before income taxes, cumulative effect of change in accounting
principle and equity loss of non-Debtor subsidiaries ................ (54.5) (41.0)
Income tax (benefit) expense ...................................................... (1.2) 27.0
------ ---------
Loss before cumulative effect of change in accounting principle and
equity loss of non-Debtor subsidiaries .............................. (53.3) (68.0)
Cumulative effect of change in accounting principle, net of applicable income
tax benefit .................................................................. -- 1,100.7
----- ---------
Loss before equity loss of non-Debtor subsidiaries ................................ (53.3) (1,168.7)
Equity loss of non-Debtor subsidiaries ............................................ (20.0) (358.2)
------ ---------
Net loss ................................................................. $(73.3) $(1,526.9)
====== =========
12
Federal-Mogul Corporation
Debtors' Condensed Consolidated Balance Sheets
(Millions of Dollars)
(Unaudited)
September 30 December 31
2002 2001
---- ----
ASSETS
Cash and equivalents ............................................................ $ 133.5 $ 146.5
Accounts receivable ............................................................. 640.2 604.0
Accounts receivable, Non-Debtors ................................................ 179.4 150.5
Inventories ..................................................................... 482.0 440.4
Deferred taxes .................................................................. 50.6 37.0
Other current assets ............................................................ 108.1 114.7
-------- ---------
Total Current Assets ....................................................... 1,593.8 1,493.1
Property, plant and equipment, net .............................................. 1,195.7 1,235.2
Goodwill ........................................................................ 1,226.7 2,202.4
Other intangible assets, net .................................................... 471.0 600.3
Asbestos-related insurance recoverable .......................................... 763.1 723.2
Loans receivable and investments in Non-Debtors ................................. 4,465.3 4,510.0
Other noncurrent assets ......................................................... 208.2 438.0
-------- ---------
Total Assets ............................................................... $9,923.8 $11,202.2
======== =========
LIABILITIES AND SHAREHOLDERS' (DEFICIT) EQUITY
Accounts payable ................................................................ $ 281.7 $ 237.1
Accounts payable, Non-Debtors ................................................... 84.2 37.3
Other accrued liabilities ....................................................... 337.0 292.2
-------- ---------
Total Current Liabilities .................................................. 702.9 566.6
Long-term debt .................................................................. 240.0 250.0
Postemployment benefits ......................................................... 659.3 655.9
Other accrued liabilities ....................................................... 25.0 75.6
Liabilities subject to compromise ............................................... 9,252.6 9,235.1
Shareholders' (Deficit) Equity .................................................. (956.0) 419.0
-------- ---------
Total Liabilities and Shareholders' (Deficit) Equity ....................... $9,923.8 $11,202.2
======== =========
13
Federal-Mogul Corporation
Debtors' Condensed Consolidated Statement of Cash Flows (Unaudited)
(Millions of Dollars)
Nine Months
Ended
September 30
2002
----
Cash Provided From (Used By) Operating Activities
Net loss .............................................................................. $(1,526.9)
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 ..................................................... 121.8
Restructuring charges ............................................................. 22.4
Chapter 11 and Administration related reorganization expenses ..................... 76.4
Adjustment of assets held for sale and other long-lived assets to fair value ...... 27.2
Equity loss of Non-Debtor subsidiaries ............................................ 358.2
Postemployment benefits ........................................................... 1.9
Changes in working capital, other assets, and other liabilities ................... (90.4)
Payments for Chapter 11 and Administration related reorganization expenses ........ (57.7)
Payments against restructuring and rationalization reserves ....................... (12.7)
---------
Net Cash Provided From Operating Activities .................................. 59.7
Cash Provided From (Used By) Investing Activities
Expenditures for property, plant and equipment and other long-term assets ............. (100.7)
Net Proceeds from sales of businesses ................................................. 25.5
---------
Net Cash Used By Investing Activities ........................................ (75.2)
Cash Provided From (Used By) Financing Activities
Principal payments on DIP credit facility ............................................. (10.0)
---------
Net Cash Used By Financing Activities ........................................ (10.0)
Effect of Foreign Currency Exchange Rate Fluctuations on Cash ................ 12.5
---------
Decrease in Cash and Equivalents ............................................. (13.0)
Cash and Equivalents at Beginning of Period ................................................ 146.5
---------
Cash and Equivalents at End of Period ...................................................... $ 133.5
=========
14
Liabilities subject to compromise are comprised of (in millions):
September 30, 2002 December 31, 2001
------------------ -----------------
Debt ............................................... $3,980.4 $3,971.4
Asbestos liabilities ............................... 1,562.1 1,550.2
Company-obligated mandatorily redeemable
preferred securities .......................... 439.9 449.5
Accounts payable ................................... 210.1 200.2
Interest payable ................................... 41.2 43.7
Environmental liabilities .......................... 22.8 23.3
Other liabilities .................................. 17.6 18.3
-------- --------
Subtotal ...................................... 6,274.1 6,256.6
Intercompany payables to Affiliates ................ 2,978.5 2,978.5
-------- --------
Liabilities subject to compromise .................. $9,252.6 $9,235.1
======== ========
Chapter 11 and Administration related reorganization expenses in the
condensed consolidated statements of operations for the three and nine-month
periods ended September 30, 2002 consist of legal, financial and advisory fees,
employee retention costs and other directly related internal costs as follows:
Three months ended Nine months ended
September 30, 2002 September 30, 2002
------------------ ------------------
Professional fees directly related to the filing ... $ 26.2 $ 59.6
Critical employee retention costs .................. 4.8 14.4
Other directly related costs ....................... 2.4 2.4
-------- --------
Total ......................................... $ 33.4 $ 76.4
======== ========
3. INCOME TAXES
For the nine months ended September 30, 2002, the Company recorded income
tax expense of $59.8 million on a loss of $38.7 million before income taxes and
cumulative effect of change in accounting principle, compared to an income tax
expense of $218.9 million on a loss of $670.9 million before income taxes in the
same period of 2001. For the nine month periods ended September 30, 2002 and
2001, the Company did not provide for a tax benefit on losses generated in the
United States due to the uncertainty of the realization of such benefits. Income
tax expense for the nine-month period ended September 30, 2002 resulted from an
increase to the valuation allowances related to the implementation of SFAS No.
142 and limitations on specific interest expense deductions in the U.K.
At September 30, 2002, the Company had deferred tax assets of $771.4
million, net of a valuation allowance of $539.9 million, and deferred tax
liabilities of $823.3 million. As of September 30, 2002, the Company has
adjusted its deferred tax and related valuation allowance accounts for the
implementation of SFAS 142, for the filing of its 2001 income tax returns, and
for its foreign subsidiaries. The Company has not re-evaluated its deferred tax
accounts for its United States locations as all U.S. net deferred tax assets are
fully reserved.
Net deferred tax assets/(liabilities) are as follows (in millions):
September 30, 2002 December 31, 2001
------------------ -----------------
Deferred tax assets ........................ $1,311.3 $1,297.2
Valuation allowance ........................ (539.9) (496.8)
-------- --------
Net deferred tax assets ............... 771.4 800.4
Deferred tax liabilities ................... (823.3) (867.8)
-------- --------
Net deferred tax liability ................. $ (51.9) $ (67.4)
======== ========
15
Deferred tax assets and liabilities are recorded in the consolidated balance
sheets as follows:
September 30, 2002 December 31, 2001
------------------ -----------------
Assets
Deferred taxes .......................... $ 68.9 $ 55.4
Other noncurrent assets ................. (35.4) 3.7
Liabilities
Other current accrued liabilities ....... (39.3) (30.0)
Other long-term accrued liabilities ..... (46.1) (96.5)
------ ------
$(51.9) $(67.4)
====== ======
4. OPERATIONS BY REPORTABLE SEGMENT
Segment information for the three and nine-month periods ended September
30, 2001 has been restated to reflect organizational changes implemented in
September 2001 and July 2002. The Company is a global manufacturer and
distributor 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 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 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 segment include disc pads
and brake shoes.
Aftermarket distributes products manufactured within the above segments, or
purchased, to the independent automotive and heavy-duty aftermarkets. The
segment also includes manufacturing operations for North American brake,
chassis, ignition, lighting, fuel and wiper products.
Other includes original equipment lighting operations, Asia Pacific and
other Corporate functions.
Divested Operations include the historical operating results of the
Company's divestitures (see Note 6).
The Company has aggregated certain 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 principally
on Operational EBIT. 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 extinguishments 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).
16
As noted in Footnote 1, The Company adopted SFAS No. 142 effective January
1, 2002. The pro-forma effect of SFAS No. 142 on reported earnings for the three
and nine month periods ended September 30, 2001 is shown in Footnote 11. The
Operational EBIT amounts for 2001 below have not been adjusted for the pro-forma
effects of the adoption of SFAS No. 142.
Net Sales Operational EBIT Net Sales Operational EBIT
--------- ---------------- --------- ----------------
Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
September 30 September 30 September 30 September 30
2002 2001 2002 2001 2002 2001 2002 2001
---- ---- ---- ---- ---- ---- ---- ----
Powertrain ................. $ 435.6 $ 378.4 $ 26.8 $ 13.1 $1,318.5 $ 1,249.3 $ 97.5 $ 97.5
Sealing Systems and
Systems Protection .... 158.1 151.8 11.1 7.5 489.3 484.7 43.0 36.2
Friction ................... 95.5 78.6 13.2 (0.2) 278.1 260.5 42.0 5.3
Aftermarket ................ 598.6 600.6 70.2 51.1 1,854.6 1,863.4 224.9 172.3
Other, including Corporate . 57.4 54.4 (83.5) (80.6) 177.1 163.2 (245.7) (219.3)
Divested Operations ........ -- 25.0 -- 2.2 16.0 143.8 2.0 16.5
-------- -------- ------ ------ -------- --------- ------- -------
Total ...................... $1,345.2 $1,288.8 $ 37.8 $ (6.9) $4,133.6 $ 4,164.9 $ 163.7 $ 108.5
======== ======== ====== ====== ======== ========= ======= =======
Three Months Nine Months
Ended Ended
September 30 September 30
2002 2001 2002 2001
---- ---- ---- ----
Reconciliation:
Total segments Operational EBIT ......................... $ 37.8 $ (6.9) $163.7 $ 108.5
Net interest and other financing costs .................. (24.9) (80.5) (75.5) (264.4)
Restructuring, impairment and other special charges ..... (41.6) (502.7) (55.2) (535.3)
Net (loss) gain on sale of businesses ................... (1.9) (75.1) 4.7 (37.5)
Chapter 11 and Administration related reorganization
expenses ............................................ (33.4) (13.7) (76.4) (14.4)
Gain on extinguishment of debt .......................... -- 47.1 -- 72.2
------ ------- ------ -------
Loss before income tax expense and cumulative effect of
change in accounting principle ...................... $(64.0) $(631.8) $(38.7) $(670.9)
====== ======= ====== =======
Total assets by reportable segment are as follows:
September 30, 2002 December 31, 2001
------------------ -----------------
Powertrain ....................... $1,695.3 $2,728.6
Sealing Systems and
Systems Protection .......... 1,175.2 1,031.8
Friction ......................... 316.9 398.9
Aftermarket ...................... 3,664.0 3,360.3
Other, including Corporate ....... 837.7 1,429.6
Divested Operations .............. 120.2 104.0
-------- --------
Total ............................ $7,809.3 $9,053.2
======== ========
17
5. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted loss
per share (in millions of dollars, except share and per share data):
Three Months Nine Months
Ended September 30 Ended September 30
2002 2001 2002 2001
---- ---- ---- ----
Numerator:
Net Loss ............................................... $(73.3) $(810.1) $(1,526.9) $(889.8)
Cumulative effect of change in accounting principle,
net of applicable tax benefit ........................ -- -- 1,428.4 --
------ ------- --------- -------
Loss before cumulative effect of change in accounting
principle .............................................. (73.3) (810.1) (98.5) (889.8)
Series C preferred dividend requirement ................ -- (0.5) -- (1.9)
------ ------- --------- -------
Numerator for basic and diluted loss per share - loss
attributable to common shareholders before cumulative
effect of change in accounting principle ............. $(73.3) $(810.6) $ (98.5) $(891.7)
====== ======= ========= =======
Numerator for basic and diluted loss per share ......... $(73.3) $(810.6) $(1,526.9) $(891.7)
====== ======= ========= =======
Denominator:
Denominator for basic and diluted loss per share -
weighted average shares .............................. 82.4 78.7 82.4 73.5
====== ======= ========= =======
Basic and diluted loss per share before cumulative effect of
change in accounting principle ......................... $(0.89) $(10.31) $ (1.19) $(12.13)
====== ======= ========= =======
Basic and diluted loss per share ............................ $(0.89) $(10.31) $ (18.53) $(12.13)
====== ======= ========= =======
As a result of the Restructuring Proceedings, the Company stopped accruing
and paying 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 $6.6 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
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 transactions. This transaction
is expected to be completed during the fourth quarter 2002.
In July 2002, the Company completed its divestiture of its automotive
camshaft manufacturing plant in Jackson, Michigan, to Camshaft Machine Company,
a new company formed by the facility's current management. The Company also
entered into a three-year supply agreement with Camshaft Machine Company, under
which Federal-Mogul will continue to distribute aftermarket camshafts produced
at the Jackson facility through its extensive distribution network. The facility
generated net sales of $5.9 million in 2001. The sale did not result in a
material gain or loss.
In August 2002, the Company signed a letter of intent to explore the sale
of principally all of its original equipment lighting operations to Decoma
International Inc. The sale is subject to approval by the U.S. Bankruptcy Court
and to certain other conditions specified within the letter of intent. The
lighting operations had net sales of
18
$176.1 million in 2001. Based upon the various conditions that must be satisfied
before a transaction can be completed, the Company is unable to predict whether
the sale would result in a material gain or loss.
The Company is currently evaluating an offer for the purchase of its
European glow plug operations. The European glow plug operations had net sales
of approximately $28.5 million in 2001. Based upon the various conditions that
must be satisfied before a transaction can be completed, the Company is unable
to predict whether the sale would result in a material gain or loss.
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 and 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 September 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 in the United
States and the U.K. 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. 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 Company previously entered into $225 million of surety on behalf of the
T&N Companies 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 Company has sought
declaratory and injunctive relief in an adversary proceeding filed in the
Bankruptcy Court, in order to enjoin any post-petition payments to
19
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 September 30, 2002 for the Company's U.S. and U.K. subsidiaries.
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. (formerly T&N plc) purchased for itself and its then
defined global subsidiaries a (pound)500 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 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 million. At September
30, 2002, the recorded insurance recoverable was $593.2 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 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 September 30, 2002, the $593.2 million
insurance recoverable asset is net of an exchange rate discount of approximately
$45 million.
20
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 represent an immaterial number of claims. Notices of
complaints continue to be received post-petition and 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 (approximately $216 million as of September 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
21
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 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 is shared
with other companies 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. This coverage is
shared with other third-party companies. 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 materially 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. Notices of
complaints continue to be received post-petition and 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.
22
Aggregate of Asbestos Liability and Insurance Recoverable Asset
As of September 30, 2002, the Company has provided an aggregated
asbestos-related liability for all of its subsidiaries and businesses of $1.6
billion. Also as of September 30, 2002, the Company has recorded an insurance
recoverable asset of $763.1 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.
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 April 22, 2002, the Company received notice from the New York Stock
Exchange that its common stock would be delisted 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 that 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 $64.5 million and
$62.8 million at September 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, $22.8 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.
23
8. INVENTORIES
Inventories consisted of the following (in millions):
September 30, 2002 December 31, 2001
------------------ -----------------
Finished products ................ $ 547.3 $ 511.2
Work-in-process .................. 135.8 116.4
Raw materials .................... 170.1 144.1
--------- ---------
853.2 771.7
Reserves and allowances .......... (60.7) (49.8)
--------- ---------
$ 792.5 $ 721.9
========= =========
9. RESTRUCTURING AND RATIONALIZATION
During the first nine months of 2002, the Company recognized $28 million of
restructuring and rationalization charges, net of reversals of $11 million of
prior reserves, related to severance and exit costs of $19.7 million and $8.3
million, respectively. The charges related to announced manufacturing and
distribution site consolidations and closures in North America and Europe for
Lighting, Friction, Sealing Systems, Aftermarket 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 2,000 of which 1,050 have been terminated
as of September 30, 2002.
The following table sets forth the restructuring and rationalization
reserves for the nine months ended September 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 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 reserves .................... (9.2) -- (9.2)
------- ------- -------
Balance of reserves at June 30, 2002 ......... $ 68.1 $ 10.5 $ 78.6
======= ======= =======
Restructuring charges ........................ 20.3 0.5 20.8
Reversals .................................... (3.8) -- (3.8)
------- ------- -------
Net restructuring charges ............... 16.5 0.5 17.0
Effect of foreign exchange ................... (0.2) (0.1) (0.3)
Payments against reserves .................... (7.6) (1.6) (9.2)
------- ------- -------
Balance of reserves at September 30, 2002 .... $ 76.8 $ 9.3 $ 86.1
======= ======= =======
24
10. COMPREHENSIVE INCOME (LOSS)
Total comprehensive income (loss) is summarized as follows (in millions of
dollars):
Three Months Nine Months
Ended Ended
September 30 September 30
2002 2001 2002 2001
---- ---- ---- ----
Net loss ................................ $ (73.3) $ (810.1) $ (1,526.9) $ (889.8)
Other Comprehensive Income (Loss)
Foreign currency translation
adjustments ........................ (13.1) 113.8 142.1 (76.0)
Other, net of tax ....................... -- 0.7 -- 3.5
--------- --------- ---------- ----------
Total Comprehensive Loss ................ $ (86.4) $ (695.6) $ (1,384.8) $ (962.3)
========= ========= ========== ==========
11. GOODWILL AND OTHER INTANGIBLE ASSETS
The following table shows the pro-forma effect of SFAS No. 142 on the
Company's 2001 earnings (in millions of dollars, except per share amounts):
Three Months Nine Months
Ended Ended
September 30, 2001 September 30, 2001
------------------ ------------------
Reported Net Loss ....................... $ (810.1) $ (889.8)
Addback: Gooodwill amortization ......... 22.1 67.7
Addback: Indefinite-Lived Intangible Asset
amortization ....................... 3.5 11.0
------------- -------------
Adjusted Net Loss ....................... $ (784.5) $ (811.1)
============= =============
Basic and diluted loss per share:
Reported Net Loss ....................... $ (10.31) $ (12.13)
Gooodwill amortization .................. 0.28 0.92
Indefinite-Lived Intangible Asset
amortization ....................... 0.04 0.15
------------ ------------
Adjusted ................................ $ (9.99) $ (11.06)
============ ============
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 Piston Rings, Inc. Federal-Mogul Powertrain, Inc.
Federal-Mogul Global Properties Inc. Federal-Mogul Dutch Holdings Inc. Federal-Mogul Mystic, Inc.
Carter Automotive Company Federal-Mogul U.K. Holdings Inc. Felt Products Mfg. Co.
Federal-Mogul Worldwide Inc. F-M U.K. Holdings Limited Ferodo America, Inc.
Federal-Mogul Ignition Company Federal-Mogul Global Inc. McCord Sealing, Inc.
Federal-Mogul Products, Inc. T&N Industries, Inc.
The Company issued notes in 1999 and 1998 that are guaranteed by the
Guarantor Subsidiaries. The Guarantor Subsidiaries also guarantee the Company's
previously existing publicly registered Medium-term notes and Senior notes.
25
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 September 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 pre-petition
liabilities, as shown below, were Liabilities subject to compromise as of
September 30, 2002:
Guarantor Non-Guarantor
Parent Subsidiaries Subsidiaries Consolidated
------ ------------ ------------ ------------
Accounts payable ................................ $ 61.3 $ 119.6 $ 29.2 $ 210.1
Other accrued liabilities ....................... 2.2 1.3 14.1 17.6
Environmental liabilities ....................... 22.2 -- 0.6 22.8
Interest payable ................................ 41.0 0.2 -- 41.2
Debt ............................................ 3,979.4 1.0 -- 3,980.4
Asbestos liabilities ............................ 1.4 239.8 1,320.9 1,562.1
Company-obligated mandatorily redeemable
preferred securities of subsidiary holding
solely convertible subordinated debentures
of the Company ............................... -- -- 439.9 439.9
---------- ---------- ---------- ----------
$ 4,107.5 $ 361.9 $ 1,804.7 $ 6,274.1
========== ========== ========== ==========
26
Federal-Mogul Corporation
Notes to Condensed Consolidated Financial Statements
Unaudited Consolidating Condensed Statement of Operations
Three Months Ended September 30, 2002
(Millions of Dollars)
(Unconsolidated)
---------------------------------------------------
Non-
Guarantor Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
------ ------------ ------------ ------------ ------------
Net sales ....................................... $ 291.2 $ 444.1 $ 765.6 $ (155.7) $ 1,345.2
Cost of products sold ........................... 232.9 362.5 655.8 (155.7) 1,095.5
-------- ---------- ---------- ---------- ----------
Gross margin ............................... 58.3 81.6 109.8 -- 249.7
Selling, general and administrative expenses .... 52.3 68.6 85.5 -- 206.4
Amortization of other intangible assets ......... 0.3 -- 2.4 -- 2.7
Restructuring charges ........................... -- 3.6 13.4 -- 17.0
Adjustment of assets held for sale and other
long-lived assets to fair value ............ -- 5.7 18.9 -- 24.6
Interest expense (income), net .................. 31.4 -- (1.6) -- 29.8
Chapter 11 and Administration related
reorganization expenses .................... 33.4 -- -- -- 33.4
Other expense (income), net ..................... 17.4 (27.2) 9.6 -- (0.2)
-------- ---------- ---------- ---------- ----------
Earnings (loss) before income taxes and
equity in earnings (loss) of subsidiaries .. (76.5) 30.9 (18.4) -- (64.0)
Income tax expense .............................. 0.4 0.5 8.4 -- 9.3
-------- ---------- ---------- ---------- ----------
Earnings (loss) before equity in earnings
(loss) of subsidiaries ..................... (76.9) 30.4 (26.8) -- (73.3)
Equity in earnings (loss) of subsidiaries ....... 3.6 (12.8) -- 9.2 --
-------- ----------- ---------- ---------- ----------
Net Earnings (Loss) ............................. $ (73.3) $ 17.6 $ (26.8) $ 9.2 $ (73.3)
======== ========== ========== ========== ==========
27
Federal-Mogul Corporation
Notes to Condensed Consolidated Financial Statements
Unaudited Consolidating Condensed Statement of Operations
Nine Months Ended September 30, 2002
(Millions of Dollars)
(Unconsolidated)
------------------------------------------------------
Non-
Guarantor Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
------ ------------ ------------ ------------ ------------
Net sales...................................... $ 945.2 $ 1,360.9 $ 2,318.6 $ (491.1) $ 4,133.6
Cost of products sold.......................... 760.0 1,096.4 1,966.0 (491.1) 3,331.3
---------- ---------- ---------- ---------- ----------
Gross margin.............................. 185.2 264.5 352.6 -- 802.3
Selling, general and administrative expenses... 167.3 199.3 257.0 -- 623.6
Amortization of other intangible assets........ 3.1 2.0 4.7 -- 9.8
Restructuring charges.......................... -- 7.7 20.3 -- 28.0
Adjustment of assets held for sale and other
long-lived assets to fair value........... -- 6.0 21.2 -- 27.2
Interest expense (income), net................. 94.3 -- (4.3) -- 90.0
Chapter 11 and Administration related
reorganization expenses................... 76.4 -- -- -- 76.4
Other (income) expense, net.................... (16.9) (87.3) 90.2 -- (14.0)
---------- ---------- ---------- ---------- ----------
Earnings (loss) before income taxes,
cumulative effect of change in
accounting principle and equity in
earnings (loss) of subsidiaries........... (139.0) 136.8 (36.5) -- (38.7)
Income tax expense............................. 1.1 24.2 34.5 -- 59.8
---------- ---------- ---------- ---------- ----------
Earnings (loss) before cumulative effect of
change in accounting principle and equity
in earnings (loss) of subsidiaries........ (140.1) 112.6 (71.0) -- (98.5)
Cumulative effect of change in accounting
principle, net of applicable income tax
benefit................................... (3.8) 432.8 999.4 -- 1,428.4
---------- ---------- ---------- ---------- ----------
Loss before equity earnings (loss)
of subsidiaries........................... (136.3) (320.2) (1,070.4) -- (1,526.9)
Equity in earnings (loss) of subsidiaries...... (1,390.6) (703.7) -- 2,094.3 --
---------- ---------- ---------- ---------- ----------
Net Earnings (Loss)............................ $ (1,526.9) $ (1,023.9) $ (1,070.4) $ 2,094.3 $ (1,526.9)
========== ========== ========== ========== ==========
28
Federal-Mogul Corporation
Notes to Condensed Consolidated Financial Statements
Unaudited Consolidating Condensed Statement of Operations
Three Months Ended September 30, 2001
(Millions of Dollars)
(Unconsolidated)
---------------------------------------------------
Non-
Guarantor Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
------ ------------ ------------ ------------ ------------
Net sales ....................................... $ 303.4 $ 432.3 $ 669.4 $ (116.3) $ 1,288.8
Cost of products sold ........................... 253.9 352.8 561.8 (116.3) 1,052.2
-------- ---------- ---------- ---------- ----------
Gross margin ............................... 49.5 79.5 107.6 -- 236.6
Selling, general and administrative expenses .... 79.3 52.7 79.9 -- 211.9
Amortization of goodwill and other intangible
assets ..................................... 5.0 11.0 13.2 -- 29.2
Restructuring charges ........................... -- 0.6 5.5 -- 6.1
Adjustment of assets held for sale and other
long-lived assets to fair value ............ -- 380.9 115.7 -- 496.6
Interest expense (income), net .................. 71.7 -- (0.3) -- 71.4
Chapter 11 and Administration related
reorganization expenses .................... 13.7 -- -- -- 13.7
Gain on early extinguishment of debt ............ (47.1) -- -- -- (47.1)
Other expense (income), net ..................... (13.4) 19.2 80.8 -- 86.6
-------- ---------- ---------- ---------- ----------
Loss before income taxes and equity in earnings
(loss) of subsidiaries ..................... (59.7) (384.9) (187.2) -- (631.8)
Income tax expense (benefit) .................... 143.0 34.0 1.3 -- 178.3
-------- ---------- ---------- ---------- ----------
Loss before equity in earnings (loss) of
subsidiaries ............................... (202.7) (418.9) (188.5) -- (810.1)
Equity in earnings (loss) of subsidiaries ....... (607.4) (11.7) -- 619.1 --
-------- ---------- ---------- ---------- ----------
Net Earnings (Loss) ............................. $ (810.1) $ (430.6) $ (188.5) $ 619.1 $ (810.1)
======== ========== ========== ========== ==========
29
Federal-Mogul Corporation
Notes to Condensed Consolidated Financial Statements
Unaudited Consolidating Condensed Statement of Operations
Nine Months Ended September 30, 2001
(Millions of Dollars)
(Unconsolidated)
---------------------------------------------------
Non-
Guarantor Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
------ ------------ ------------ ------------ ------------
Net sales ....................................... $ 972.4 $ 1,388.5 $ 2,211.0 $ (407.0) $ 4,164.9
Cost of products sold ........................... 804.2 1,120.5 1,808.3 (407.0) 3,326.0
-------- ---------- ---------- ---------- ----------
Gross margin ............................... 168.2 268.0 402.7 -- 838.9
Selling, general and administrative expenses .... 216.3 165.4 260.7 -- 642.4
Amortization of goodwill and other intangible
assets ..................................... 15.1 34.4 39.9 -- 89.4
Restructuring charges ........................... 14.5 2.7 20.8 -- 38.0
Adjustment of assets held for sale and other
long-lived assets to fair value ............ 0.6 380.9 115.8 -- 497.3
Interest expense, net ........................... 230.9 0.1 4.2 -- 235.2
Chapter 11 and Administration related
reorganization expenses .................... 14.4 -- -- -- 14.4
Gain on early extinguishment of debt ............ (72.2) -- -- -- (72.2)
Other expense (income), net ..................... 83.7 (60.4) 42.0 -- 65.3
-------- ---------- ---------- ---------- ----------
Loss before income taxes and equity in earnings
(loss) of subsidiaries ..................... (335.1) (255.1) (80.7) -- (670.9)
Income tax expense .............................. 96.5 101.8 20.6 -- 218.9
-------- ---------- ---------- ---------- ----------
Loss before equity in earnings (loss) of
subsidiaries ............................... (431.6) (356.9) (101.3) -- (889.8)
Equity in earnings (loss) of subsidiaries ....... (458.2) 65.0 -- 393.2 --
-------- ---------- ---------- ---------- ----------
Net Earnings (Loss) ............................. $ (889.8) $ (291.9) $ (101.3) $ 393.2 $ (889.8)
======== ========== ========== ========== ==========
30
Federal-Mogul Corporation
Notes to Condensed Consolidated Financial Statements
Unaudited Consolidating Condensed Balance Sheet
September 30, 2002
(Millions of Dollars)
(Unconsolidated)
---------------------------------------------------
Non-
Guarantor Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
------ ------------ ------------ ------------ ------------
ASSETS
Cash and equivalents ........................... $ 11.9 $ 0.3 $ 327.1 $ -- $ 339.3
Accounts receivable ............................ 190.6 353.1 499.0 -- 1,042.7
Inventories .................................... 67.4 354.3 370.8 -- 792.5
Deferred taxes ................................. 14.8 -- 54.1 -- 68.9
Other current assets ........................... 49.4 34.0 106.1 -- 189.5
---------- ---------- ---------- ---------- ----------
Total Current Assets ........................ 334.1 741.7 1,357.1 -- 2,432.9
Property, plant and equipment .................. 247.2 697.2 1,252.5 -- 2,196.9
Goodwill ....................................... 555.3 539.2 333.1 -- 1,427.6
Other intangible assets ........................ 59.4 238.3 185.5 -- 483.2
Investment in subsidiaries...................... 6,390.8 2,782.0 -- (9,172.8) --
Intercompany accounts, net ..................... (3,323.7) 2,187.7 1,136.0 -- --
Asbestos-related insurance recoverable ......... -- 171.9 591.2 -- 763.1
Other noncurrent assets ........................ 91.2 40.5 373.9 -- 505.6
---------- ---------- ---------- ---------- ----------
Total Assets ................................ $ 4,354.3 $ 7,398.5 $ 5,229.3 $ (9,172.8) $ 7,809.3
========== ========== ========== ========== ==========
LIABILITIES AND SHAREHOLDERS'
EQUITY (DEFICIT)
Short-term debt, including current portion of
Long-term debt ............................. $ -- $ 1.2 $ 26.6 $ -- $ 27.8
Accounts payable .............................. 47.7 73.8 197.6 -- 319.1
Accrued compensation .......................... 83.4 27.9 132.2 -- 243.5
Restructuring and rationalization reserves .... 20.4 17.6 48.1 -- 86.1
Other accrued liabilities ..................... 61.7 135.6 259.8 -- 457.1
---------- ---------- ---------- ---------- ----------
Total Current Liabilities .................. 213.2 256.1 664.3 -- 1,133.6
Long-term debt ................................ 240.0 -- 14.3 -- 254.3
Postemployment benefits ....................... 637.2 0.2 207.0 -- 844.4
Other accrued liabilities ..................... 89.6 0.8 122.3 -- 212.7
Minority interest in consolidated
subsidiaries................................ 22.8 23.4 -- 46.2
Liabilities subject to compromise ............. 4,107.5 362.0 1,804.6 -- 6,274.1
Shareholders' Equity (Deficit) ................ (956.0) 6,756.0 2,416.8 (9,172.8) (956.0)
---------- ---------- ---------- ---------- ----------
Total Liabilities and Shareholders'
Equity (Deficit) ..................... $ 4,354.3 $ 7,398.5 $ 5,229.3 $ (9,172.8) $ 7,809.3
========== ========== ========== ========== ==========
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.............................. 179.1 343.4 422.3 -- 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 ......................... 393.0 692.6 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 ...................... (2,057.1) 1,933.8 123.3 -- --
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 (DEFICIT)
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 (Deficit)................... 419.0 6,995.4 2,211.3 (9,206.7) 419.0
--------- ---------- ---------- ---------- ----------
Total Liabilities and
Shareholders' Equity (Deficit) ........... $ 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
Nine Months Ended September 30, 2002
(Millions of Dollars)
(Unconsolidated)
----------------------------------------------------
Non-
Guarantor Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
------ ------------ ------------ ------------ ------------
Net Cash Provided From (Used By)
Operating Activities ....................... $ (38.4) $ 166.9 $ 60.3 $ -- $ 188.8
Cash Provided From (Used By) Investing
Activities:
Expenditures for property, plant and
Equipment and other long-term assets ....... (23.6) (61.6) (142.9) -- (228.1)
Net proceeds from sales of businesses ........... 5.9 6.0 13.6 -- 25.5
-------- ---------- ---------- ---------- ----------
Net Cash Used By Investing Activities ...... (17.7) (55.6) (129.3) -- (202.6)
Cash Provided From (Used By) Financing
Activities:
Proceeds from the issuance of
long-term debt ............................. -- -- 2.5 -- 2.5
Principal payments on long-term debt ............ -- -- (2.1) -- (2.1)
Principal payments on DIP credit facility ....... (10.0) -- -- -- (10.0)
Increase (decrease) in short-term debt .......... -- 0.7 2.6 -- 3.3
Change in intercompany accounts ................. (8.5) (115.2) 123.7 -- --
-------- ---------- ---------- ---------- --------
Net Cash Provided From (Used By)
Financing Activities ................... (18.5) (114.5) 126.7 -- (6.3)
Effect of Foreign Currency Exchange
on Cash ................................ 12.5 -- -- -- 12.5
-------- ---------- ---------- ---------- ----------
Net Increase (Decrease) in Cash
and Equivalents ........................ $ (62.1) $ (3.2) $ 57.7 $ -- $ (7.6)
======== ========== ========== ========== ==========
33
Federal-Mogul Corporation
Notes to Condensed Consolidated Financial Statements
Unaudited Consolidating Condensed Statement of Cash Flows
Nine Months Ended September 30, 2001
(Millions of Dollars)
(Unconsolidated)
----------------------------------------------------
Non-
Guarantor Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
------ ------------ ------------ ------------ ------------
Net Cash Provided From (Used By) Operating
Activities ................................. $ (118.6) $ (49.7) $ 8.2 $ -- $ (160.1)
Cash Provided From (Used By) Investing
Activities:
Expenditures for property, plant and equipment
and other long-term assets ................. (32.5) (63.1) (136.6) -- (232.2)
Net proceeds from sale of property, plant and
equipment .................................. -- 9.4 9.6 -- 19.0
Net proceeds from sales of businesses ........... 5.2 209.0 27.6 -- 241.8
Business acquisitions, net of cash acquired ..... -- -- (18.8) -- (18.8)
-------- ---------- ---------- ---------- ----------
Net Cash Provided From (Used By)
Investing Activities .................... (27.3) 155.3 (118.2) -- 9.8
Cash Provided From (Used By) Financing
Activities:
Proceeds from issuance of long-term debt ........ 666.4 -- -- -- 666.4
Principal payments on long-term debt ............ (163.7) -- (8.1) -- (171.8)
Increase (decrease) in short-term debt .......... (71.9) (6.5) 7.0 -- (71.4)
Fees paid for debt issuance and
other securities ........................... (18.5) -- -- -- (18.5)
Change in intercompany accounts ................. (294.2) (92.9) 387.1 -- --
Sale of accounts receivable under
securitization ............................. (89.6) -- -- -- (89.6)
Dividends ....................................... (1.9) -- -- -- (1.9)
Other ........................................... (9.0) -- -- -- (9.0)
-------- ---------- ---------- ---------- ----------
Net Cash Provided From (Used By) Financing
Activities ............................. 17.6 (99.4) 386.0 -- 304.2
Effect of Foreign Currency Exchange Rate
Fluctuations on Cash ................... 2.1 -- -- -- 2.1
-------- ---------- ---------- ---------- ----------
Net Increase (Decrease) in Cash and
Equivalents ............................ $ (126.2) $ 6.2 $ 276.0 $ -- $ 156.0
======== ========== ========== ========== ==========
34
Exhibit 99.2
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
-------------------------------------------------
OVERVIEW
Federal-Mogul Corporation (the "Company" or "Federal-Mogul") is a vehicular
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 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, 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
estimated 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' estimated 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 a 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 estimated 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. 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.
35
CONTINUING OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 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
September 30, 2002 and 2001 were as follows (in millions of dollars):
2002 2001 Change
--------- --------- ---------
Powertrain ..................... $ 435.6 $ 378.4 $ 57.2
Sealing Systems and
Systems Protection ........ 158.1 151.8 6.3
Friction ....................... 95.5 78.6 16.9
Aftermarket .................... 598.6 600.6 (2.0)
Other, including Corporate ..... 57.4 54.4 3.0
Divested Operations ............ -- 25.0 (25.0)
--------- --------- ---------
Total .......................... $ 1,345.2 $ 1,288.8 $ 56.4
========= ========= =========
Gross Margin
Consolidated gross margin by reportable segment for the three-months ended
September 30, 2002 and 2001 was as follows (in millions of dollars):
2002 2001 Change
--------- --------- ---------
Powertrain ..................... $ 61.3 $ 47.5 $ 13.8
Sealing Systems and
Systems Protection ........ 29.8 30.2 (0.4)
Friction ....................... 23.8 13.1 10.7
Aftermarket .................... 130.8 134.7 (3.9)
Other, including Corporate ..... 4.0 7.9 (3.9)
Divested Operations ............ -- 3.2 (3.2)
--------- --------- ---------
Total .......................... $ 249.7 $ 236.6 $ 13.1
========= ========= =========
Powertrain
Net sales for the third quarter of 2002 were $435.6 million compared to
$378.4 million in the same quarter of 2001. Increased OE sales volumes,
particularly in North America, accounted for approximately $31 million of this
increase. Favorable foreign currency of approximately $18 million more than
offset the impact of customer price reductions. Sales volume from the
acquisition of a Polish piston manufacturer concluded during the third quarter
of 2001 principally accounted for the remainder of the increase in sales.
Gross margin was $61.3 million, or 14.1% of sales, for the third quarter of
2002 compared to $47.5 million, or 12.6% of sales, for the same quarter in 2001.
Increased OE sales volume and favorable product mix contributed approximately
$8 million of gross margin. Productivity programs, materials sourcing reductions
and favorable foreign currency more than offset the impact of customer price
reductions.
36
Sealing Systems and Systems Protection
Net sales for the third quarter of 2002 were $158.1 million compared to
$151.8 million in the same quarter of 2001. Favorable OE sales volumes accounted
for approximately $4 million of the increase. Favorable foreign currency more
than offset customer price reductions.
Gross margin was $29.8 million, or 18.8% of sales, for the third
quarter of 2002 compared to $30.2 million, or 19.9% of sales, for the same
quarter in 2001. Adverse product mix more than offset the gross margin
contribution from increased sales volumes. While materials sourcing improvements
provided approximately $2 million in gross margin, other productivity programs
did not keep pace with inflation and customer price reductions.
Friction
Net sales for the third quarter of 2002 were $95.5 million compared to
$78.6 million in the same quarter of 2001. Favorable OE sales volumes accounted
for approximately $15 million of this increase. Favorable foreign currency more
than offset the impact of customer price reductions.
Gross margin was $23.8 million, or 24.9% of sales, for the third
quarter of 2002 compared to $13.1 million, or 16.7% of sales, for the same
quarter of 2001. The sales volume increase, net of adverse product mix,
contributed approximately $4 million in gross margin. Offsetting the impact of
customer price reductions was net productivity improvements of approximately $5
million following extensive restructuring efforts in North American operations
in 2001. Favorable foreign currency also contributed to the increase in gross
margin.
Aftermarket
Net sales for the third quarter of 2002 were $598.6 million compared to
$600.6 million in the same quarter of 2001. Adverse sales conditions primarily
attributable to the continuing decline in industry replacement trends were
mostly offset by improved product availability in North America and Europe, the
success of a new North American friction product introduced in 2001, and the
impact of favorable foreign currency.
Gross margin was $130.8 million, or 21.9% of sales, for the third
quarter of 2002 compared to $134.7 million, or 22.4% of sales, for the same
quarter of 2001. Lower sales volumes and adverse product mix experienced in
certain product lines that are extremely sensitive to weather conditions
resulted in a combined reduction in gross margin of approximately $13 million.
Offsetting these volume trends were productivity programs and other cost
reductions approximating $9 million.
Other
Other primarily includes the original equipment lighting business, Asia
Pacific and other Corporate functions. Net sales for the third quarter of 2002
were $57.4 million compared to $54.4 million in the same quarter of 2001. Asia
Pacific experienced increased sales volumes while lighting sales volumes were
flat.
Gross margin was $4.0 million, or 7.0% of sales, for the third quarter
of 2002 as compared to $7.9 million, or 14.5% of sales, for the same quarter in
2001. The decrease is primarily attributable to increased employee health and
welfare costs and the effects of lower than expected returns on the Company's
pension plan assets included in Corporate functions. These cost increases were
partially offset by materials sourcing in lighting and Asia Pacific operations,
productivity in excess of inflation in both our Asia Pacific and lighting
operations, the elimination of Company 401(k) matching contributions, and other
spending reductions.
Selling, General and Administrative Expenses
Selling, general and administrative expenses were $206.4 million, or
15.3% of total sales, for the third quarter of 2002 as compared to $211.9
million, or 16.4% of total sales, for the same quarter of 2001. Corporate cost
reduction initiatives and the elimination of Company 401(k) matching
contributions more than offset rising employee health and welfare costs and the
effect of lower than expected returns on the Company's pension plan assets.
37
Interest Expense, net
Interest expense, net was $29.8 million in the third quarter of 2002
compared to $71.4 million for the same quarter of 2001. This decrease is
primarily a result of not accruing or paying interest on certain pre-petition
debt due to the Restructuring Proceedings and lower interest rates on
post-petition borrowings. The effect of not accruing the contractual interest on
pre-petition debt was $43.6 million in the quarter. The decrease was partially
offset by interest expense related to the debtor-in-possession credit facility
(the "DIP credit facility").
Income Tax Expense
For the three months ended September 30, 2002, the Company recorded income
tax expense of $9.3 million on a net loss of $64.0 million before income taxes
and cumulative effect of change in accounting principle, compared to income tax
expense of $178.3 million on a net loss of $631.8 million before income taxes
and extraordinary items in the same period of 2001. The Company did not provide
for a tax benefit on losses generated in the United States due to the
uncertainty of the realization of such benefits. Income tax expense for the
period resulted from an increase to the valuation allowances related to the
implementation of SFAS No. 142 and limitations on specific interest expense
deductions in the U.K.
Amortization Expense
During the three months ended September 30, 2002 and 2001, the Company
recognized amortization expense of $2.7 million and $29.2 million, respectively.
Amortization expense for the three months ended September 30, 2002 related
primarily to developed technologies and other amortizable intangible assets.
Excluded from amortization expense in this period was expense related to
goodwill and trademarks that are no longer subject to amortization under SFAS
No. 142, "Goodwill and Other Intangible Assets".
Restructuring Charges
During the three months ended September 30, 2002 and 2001, the Company
recorded net restructuring charges of $17.0 million and $6.1 million
respectively. Charges for 2002 largely relate to the announced closure of two
U.S. facilities and one European facility. Charges for 2001 largely relate to
severance costs at one European facility.
Chapter 11 and Administration Related Reorganization Expenses
During the three months ended September 30, 2002 and 2001, the Company
recorded Chapter 11 and administration related reorganization expenses of $33.4
million and $13.7 million respectively. Chapter 11 and administration related
reorganization expenses consist of legal, financial and advisory fees, employee
retention costs and other directly related internal costs. These expenses
fluctuate largely based upon the necessity for professional services by
third-party vendors in connection with the Restructuring Proceedings.
Other Income and Expense
During the three month period ended September 30, 2002, the Company
recognized $0.2 million of other income compared with other expense of $86.6
million for the same period in 2001. The decrease is primarily attributable to
an aggregate pre-tax loss on divestitures in 2002 of $1.9 compared with $75.1
million in 2001.
38
NINE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 2001
RESULTS OF OPERATIONS
Net Sales
Consolidated net sales by reportable segment for the nine months ended
September 30, 2002 and 2001 were as follows (in millions of dollars):
2002 2001 Change
-------- -------- ------
Powertrain ................... $1,318.5 $1,249.3 $ 69.2
Sealing Systems and
Systems Protection ......... 489.3 484.7 4.6
Friction ..................... 278.1 260.5 17.6
Aftermarket .................. 1,854.6 1,863.4 (8.8)
Other, including Corporate ... 177.1 163.2 13.9
Divested Operations .......... 16.0 143.8 (127.8)
-------- -------- ------
Total $4,133.6 $4,164.9 $(31.3)
======== ======== ======
Gross Margin
Consolidated gross margin by reportable segment for the nine months
ended September 30, 2002 and 2001 was as follows (in millions of dollars):
2002 2001 Change
-------- -------- ------
Powertrain ................... $205.9 $211.3 $ (5.4)
Sealing Systems and
Systems Protection ......... 98.4 110.1 (11.7)
Friction ..................... 76.0 46.5 29.5
Aftermarket .................. 411.1 413.2 (2.1)
Other, including Corporate ... 6.9 27.1 (20.2)
Divested Operations .......... 4.0 30.7 (26.7)
------ ------ -----
Total $802.3 $838.9 $(36.6)
====== ====== ======
Powertrain
Net sales for the first nine months of 2002 were $1,318.5 million compared
to $1,249.3 million in the same period of 2001. Increased OE sales volumes,
particularly in North America, accounted for approximately $47 million of this
increase. Favorable foreign currency of approximately $11 million and sales
volume of approximately $17 from the acquisition of a Polish piston manufacturer
concluded during the third quarter of 2001 more than offset the impact of
customer price reductions.
Gross margin was $205.9 million, or 15.6% of sales, for the first nine
months of 2002 compared to $211.3 million, or 16.9% of sales, for the same
period in 2001. The OE sales volume increase contributed approximately $4
million to gross margin, while the gross margin impact of the piston acquisition
was negligible. Productivity improvements and materials sourcing of
approximately $12 million combined, and favorable foreign currency were more
than offset by customer price reductions.
Sealing Systems and Systems Protection
Net sales for the first nine months of 2002 were $489.3 million compared
to $484.7 million in the same period of 2001. Favorable OE sales volumes
accounted for approximately $5 million of the increase. Customer price
reductions offset the impact of favorable foreign currency.
39
Gross margin was $98.4 million, or 20.1% of sales, for the first nine
months of 2002 compared to $110.1 million, or 22.7% of sales, for the same
quarter in 2001. Adverse product mix and customer price reductions more than
offset the impact of increased sales volumes. Similar to the third quarter,
materials sourcing improvements were favorable, approximating $5 million, while
other productivity programs did not keep pace with inflation and customer price
reductions.
Friction
Net sales for the first nine months of 2002 were $278.1 million compared to
$260.5 million in the same period of 2001. Original equipment sales volumes
accounted for approximately $19 million of this increase. Customer price
reductions more than offset the impact of favorable foreign currency.
Gross margin was $76.0 million, or 27.3% of sales for the first nine months
of 2002 compared to $46.5 million, or 17.9% of sales, for the same period of
2001. While increased sales volumes provided approximately $4 million in gross
margin, similar to the third quarter, net productivity improvements of
approximately $24 million were the largest contributor to the increase in gross
margin. The majority of these improvements originated in North American
operations following extensive restructuring efforts in 2001.
Aftermarket
Net sales for the first nine months of 2002 were $1,854.6 million compared
to $1,863.4 million in the same period of 2001. Adverse sales conditions
primarily attributable to the continuing decline in industry replacement trends
were mostly offset by improved product availability in North America and Europe,
the success of a new North American friction product introduced in 2001, and
improved customer pricing.
Gross margin was $411.1 million, or 22.2% of sales, for the first nine
months of 2002 compared to $413.2 million, or 22.2% of sales, in the same period
of 2001. Improved customer pricing, productivity programs and other cost
reductions in excess of inflation offset the impact of reduced sales volumes.
Other
Other primarily includes OE lighting business as well as Asia Pacific and
other Corporate functions. Net sales for the first nine months of 2002 were
$177.1 million compared to $163.2 million in the same period of 2001. The
increase in net sales is primarily attributable to a significant new product
launch and increased OE sales volumes in the lighting operations, partially
offset by OE customer price reductions and foreign currency.
Gross margin was $6.9 million, or 3.9% of sales, for the first nine months
of 2002 as compared to $27.1 million, or 16.6% of sales, for the same period in
2001. Rising employee health and welfare costs and the effect of lower than
expected returns on the Company's pension plan assets included in Corporate
functions was approximately $24 million. These costs were partially offset by
productivity improvements in lighting operations, the elimination of company
401(k) matching contributions and other spending reductions.
Selling, General and Administrative Expenses
Selling, general and administrative expenses were $623.6 million, or 15.1%
of total sales, for the first nine months of 2002 as compared to $642.4 million,
or 15.4% of total sales, for the same period of 2001. Corporate cost reduction
initiatives and the elimination of Company 401(k) matching contributions more
than offset rising employee health and welfare costs and the effect of lower
than expected returns on the Company's pension plan assets.
Interest Expense, net
Interest expense, net was $90.0 million in the first nine months of 2002
compared to $235.2 million for the same period of 2001. The decrease resulted
from not accruing or paying interest on certain pre-petition debt due to the
Restructuring Proceedings and lower interest rates on outstanding post-petition
borrowings. The effect of not
40
accruing the contractual interest on pre-petition debt was $118.7 million in the
period. The decrease was partially offset by interest expense related to the DIP
credit facility.
Income Tax Expense
Income tax expense for the nine months ended September 30, 2002, was $59.8
million on a loss of $38.7 million before income taxes and cumulative effect of
accounting change, compared to income tax expense of $218.9 million on a loss of
$670.9 million before income taxes in the same period of 2001. For the nine
month period ended September 30, 2002, the Company did not provide for a tax
benefit on losses generated in the United States due to the uncertainty of the
realization of such benefits. Income tax expense for the nine-month period ended
September 30, 2002 resulted from an increase to the valuation allowances related
to the implementation of SFAS No. 142 and limitations on specific interest
expense deductions in the U.K.
Amortization Expense
During the nine month periods ended September 30, 2002, and 2001, the
Company recognized amortization expense of $9.8 million and $89.4 million,
respectively. Amortization expense for 2002 related primarily to developed
technologies and other amortizable intangible assets. Expense related to
goodwill and trademarks was excluded from amortization expense in this period
due to the adoption of Statement of Financial Accounting Standards ("SFAS") No.
142, "Goodwill and Other Intangible Assets".
Restructuring Charges
During the nine month periods ended September 30, 2002 and 2001, the
Company recorded net restructuring charges of $28.0 million and $38.0 million,
respectively. Charges for 2002 principally relate to the announced closure of
two U.S. facilities and one European facility, and the relocation of certain
production capacity from a facility in the U.K. to a facility in the Czech
Republic. Charges for 2001 principally relate to a company-wide staff reduction
program and closure costs at one European facility.
Chapter 11 and Administration Related Reorganization Expenses
During the nine months ended September 30, 2002 and 2001, the Company
recorded Chapter 11 and administration related reorganization expenses of $76.4
million and $14.4 million, respectively. Chapter 11 and administration related
reorganization expenses consist of legal, financial and advisory fees, employee
retention costs and other directly related internal costs. These expenses
fluctuate largely based upon the necessity of professional services provided by
third-party vendors in connection with the Restructuring Proceedings.
Other Income and Expense
During the nine month period ended September 30, 2002, the Company
recognized $14.0 million of other income compared with other expense of $65.3
million for the same period in 2001. The decrease is primarily attributable to
the inclusion of an aggregate pre-tax gain on divestitures for 2002 of $4.7
compared with an aggregate loss on divestitures of $37.5 million in 2001.
LITIGATION & ENVIRONMENTAL CONTINGENCIES
For a summary of material litigation and environmental contingencies, refer
to Note 7 of the condensed consolidated financial statements, "Asbestos
Liability and Legal Proceedings".
41
LIQUIDITY AND CAPITAL RESOURCES
Cash Flow Provided From Operating Activities
Cash flow provided from operating activities was $188.8 million for the
first nine months of 2002. Among the factors impacting operating cash flows were
positive operational EBIT offset by working capital movements and timing issues
on various accounts. 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. Operating cash
was also positively impacted by the staying of asbestos payments and certain
interest on pre-petition debt and notes due to the Restructuring Proceedings.
Cash Flow Used By Investing Activities
Cash flow used by investing activities was $202.6 million in the first nine
months of 2002. Investing cash flows were comprised of capital expenditures of
$228.1 million made for property, plant and equipment to implement process
improvements, increase manufacturing capacity and production, and introduce new
products, offset by net proceeds from the sales of businesses of $25.5 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
approach $350 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 requests 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 $6.3 million for the first nine
months of 2002 primarily resulting from repayments of certain international debt
and a required repayment on the DIP credit facility due to proceeds received
from a divested business.
To meet its liquidity needs, the Company entered into a DIP credit facility
in the aggregate amount of $675 million, under which it has borrowed $239.9
million and has $13.9 million outstanding on letters of credit as of
September 30, 2002. At September 30, 2002 the Company had $339.9 million
available for borrowings. 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 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 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 Company intends on renegotiating its DIP credit facility
upon its expiration.
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
earnings before interest, taxes, depreciation and amortization 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.
42
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.
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 the 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 September 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 through the expiration of the facility.
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.
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 manufactures and
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 U.S. dollar as
the functional currency. The Company's equity was increased by $141.9 million
during the nine months ended September 30, 2002, primarily due to cumulative
translation adjustments resulting from changes in the U.S. dollar to the Euro
and the British Pound.
ITEM 4. DISCLOSURE CONTROLS AND PROCEDURES
Within the 90 days prior to the date of this report, the Company carried
out an evaluation, under the supervision and with the participation of the
Company's management, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures pursuant to Rule 13a-15 of the
Securities Exchange Act of 1934. Based upon that evaluation, the Company's Chief
Executive Officer and Chief Financial Officer concluded that the Company's
disclosure controls and procedures are effective in timely alerting them to
material information relating to the Company required to be disclosed in the
Company's periodic SEC reports. There have been no significant changes in the
Company's internal controls or in other factors which could significantly affect
internal controls subsequent to the date the Company carried out its evaluation.
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 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits:
99.1 Certification by the Company's Chief Executive Officer
pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
99.2 Certification by the Company's Chief Financial Officer
pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K:
(1) On September 24, 2002, the Company filed a Current
Report on Form 8-K to announce the appointment of
Shirley D. Peterson to the Company's Board of
Directors.
(2) On August 14, 2002, the Company filed a Current Report
on Form 8-K certifying its Quarterly Report on Form
10-Q for the period ending June 30, 2002 pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
(3) On August 14, 2002, the Company filed a Current Report
on Form 8-K certifying its Covered Reports pursuant to
Commission Order No. 4-460, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
(4) 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.
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: November 7, 2002
45
CERTIFICATIONS
I, Frank E. Macher, the Chief Executive Officer of Federal-Mogul Corporation
(the "Company"), certify that:
1. I have reviewed this quarterly report on Form 10-Q of Federal-Mogul
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 7, 2002
By: /s/ Frank E. Macher
------------------------
Frank E. Macher
Chief Executive Officer
46
I, G. Michael Lynch, the Chief Financial Officer of Federal-Mogul Corporation
(the "Company"), certify that:
1. I have reviewed this quarterly report on Form 10-Q of Federal-Mogul
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 7, 2002
By: /s/ G. Michael Lynch
------------------------
G. Michael Lynch
Chief Financial Officer
47
Exhibit 99.1
CERTIFICATION
Pursuant to 18 United States Code (S) 1350
The Undersigned hereby certifies that to his knowledge the quarterly report of
Federal-Mogul Corporation (the "Company") filed with the Securities and Exchange
Commission on the date hereof fully complies with the requirements of section
13(a) or 15(d) of the Securities Exchange Act of 1934 and that the information
contained in such report fairly presents, in all material respects, the
financial condition and results of operations of the Company.
Date: November 7, 2002
By: /s/ Frank E. Macher
-----------------------
Frank E. Macher
Chief Executive Officer
48
Exhibit 99.2
CERTIFICATION
Pursuant to 18 United States Code (S) 1350
The Undersigned hereby certifies that to his knowledge the quarterly report of
Federal-Mogul Corporation (the "Company") filed with the Securities and Exchange
Commission on the date hereof fully complies with the requirements of section
13(a) or 15(d) of the Securities Exchange Act of 1934 and that the information
contained in such report fairly presents, in all material respects, the
financial condition and results of operations of the Company.
Date: November 7, 2002
By: /s/ G. Michael Lynch
------------------------
G. Michael Lynch
Chief Financial Officer
49