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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2000
Commission File Number: 1-1511
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FEDERAL-MOGUL CORPORATION
(Exact name of Registrant as specified in its charter)
Michigan 38-0533580
(State or other jurisdiction of (IRS Employer I.D. No.)
incorporation or organization)
26555 Northwestern Highway
Southfield, Michigan 48034
(Address of principal executive (Zip code)
offices)
Registrant's telephone number including area code: (248) 354-7700
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
------------------- ---------------------
Common Stock and Rights to Purchase New York Stock Exchange
Preferred Shares
Securities registered pursuant to Section 12(g) of the Act: None.
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
The aggregate market value of the voting stock held by non-affiliates of
the Registrant was approximately $218.5 million as of March 21, 2001 based on
the reported last sale price as published for the New York Stock Exchange--
Composite Transactions for such date.
The Registrant had 70,619,319 shares of common stock outstanding as of
March 21, 2001.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive Proxy Statement for its 2000 Annual
Meeting of Shareholders filed with the Securities and Exchange Commission
pursuant to Regulation 14A in April 2001, are incorporated by reference in
Part III (Items 10, 11, 12 and 13) of this Report.
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FORWARD-LOOKING STATEMENTS
Certain statements contained or incorporated in this Annual Report on Form
10-K, which are not statements of historical fact constitute "Forward-Looking
Statements" within the meaning of the Private Securities Litigation Reform Act
of 1995 (The "Act"). Such statements are made in good faith by Federal-Mogul
pursuant to the "Safe Harbor" provisions of the Act.
Forward-looking statements include financial projections, estimates and
statements regarding plans, objectives and expectations of Federal-Mogul and
its management, including, without limitation, plans to implement the
previously announced restructuring initiatives relating to manufacturing and
warehouse facilities and the Company's six global initiatives (Aftermarket
Rationalization, Facility Rationalization, Shared Services, Constraint
Management, Supply Chain Management and Investment Strategy,), plans to
address the issues related to the conversion to the Euro, and the scope of the
effect of T&N, Abex and Wagner asbestos liabilities.
Forward-looking statements may involve known and unknown risks,
uncertainties and other factors, which may cause the actual results,
performance or achievements of Federal-Mogul to differ materially from any
future results, performance or achievements expressed or implied by such
forward-looking statements. Such risks, uncertainties and other factors
include, without limitation, fluctuation in demand for both original equipment
and replacement components in the automotive, heavy-duty vehicular and
industrial markets, as well as certain global and regional economic
conditions, including, without limitation, the effects of world wide currency
fluctuations, asbestos and other factors detailed herein and from time to time
in the documents incorporated by reference herein. Moreover, Federal-Mogul's
plans, objectives and intentions are subject to change based on these and
other factors, some of which are beyond Federal-Mogul's control.
i
PART I
Item 1. Business.
Overview
Federal-Mogul Corporation founded in 1899 and incorporated in Michigan in
1924 (referred to herein as "Federal-Mogul" or the "Company"), is an
automotive parts manufacturer providing innovative solutions and systems to
global customers in the automotive, small engine, heavy-duty and industrial
markets. The Company manufactures engine bearings, pistons, piston pins,
rings, cylinder liners, camshafts, sintered products, sealing systems, 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 and related parts to the
aftermarket.
The Company has pursued a growth strategy focusing on its core competencies
of manufacturing and engineering by concentrating efforts and resources on
core business segments that will provide long-term growth. Federal-Mogul has
made a commitment to expand its manufactured products to offer OE customers
systems and modules. The Company also intends to expand the global reach of
its manufacturing operations to follow the expansion of OE manufacturers into
South America, Eastern Europe and the Asian markets. The Company intends to
couple its expansion of OE business in new geographic markets with follow-on
aftermarket sales.
Federal-Mogul maintains technical centers in Europe and North America to
develop and provide advanced materials, products and manufacturing processes
for all of its manufacturing units.
The following table sets forth the Company's net sales by operating segment
and geographic region as a percentage of total net sales:
Year Ended
December 31,
--------------
2000 1999 1998
---- ---- ----
Net Sales by Operating Segment:
Americas/Asia Pacific.......................................... 67% 67% 59%
Europe/Africa.................................................. 33% 32% 38%
Divested Activities............................................ -- 1% 3%
---- ---- ----
100% 100% 100%
==== ==== ====
Year Ended
December 31,
--------------
2000 1999 1998
---- ---- ----
Net Sales by Geographic Region:
United States.................................................. 61% 61% 52%
Canada......................................................... 2% 2% 2%
Mexico......................................................... 3% 2% 3%
---- ---- ----
Total North America.......................................... 66% 65% 57%
---- ---- ----
United Kingdom................................................. 8% 8% 12%
Germany........................................................ 14% 10% 11%
France......................................................... 5% 5% 7%
Italy.......................................................... 3% 4% 4%
Other Europe................................................... 1% 4% 4%
---- ---- ----
Total Europe................................................. 31% 31% 38%
---- ---- ----
Rest of World.................................................... 3% 4% 5%
---- ---- ----
100% 100% 100%
==== ==== ====
1
Operating Segments
The Company's integrated operations are conducted under two operating
segments generally corresponding to geographic regions: Americas/Asia Pacific
and Europe/Africa.
The Americas/Asia Pacific segment includes the operations of North and
South America, Asia, Australia and India. The products within this segment
consist of: powertrain systems products which include engine bearings, large
bearings, pistons, piston pins, rings, cylinder liners, connecting rods,
camshafts and sintered products; sealing system products which include dynamic
seals and gaskets; visibility products which include lighting products and
wiper blades; system protection products; brake and friction products; chassis
products; ignition products; and fuel system components. These products are
marketed under the brand names Federal-Mogul(R), Champion(R), Anco(R),
Moog(R), Sealed Power(R), Wagner(R), Abex(R), Fel-Pro(R), National(R),
Mather(R), Blazer(R), Belden(R), Carter(R), Weyburn-Bartel(R), Sintertech(R),
Precision(R), PowerPath(R), STS(R), Redi-Seal(R), Redi-Sleeve(R),
Unipiston(R), Zanxx(R), Signal-Stat(R) and Bentley-Harris(R).
The Europe/Africa segment includes the operations of Europe and Africa. The
products within this segment consist of: power cylinder systems which include
engine bearings, large bearings, pistons, piston pins, rings, cylinder liners;
sintered and camshaft products which include valve components, transmission
components and camshafts components; sealing system products which include
dynamic seals and gaskets; visibility and ignition products which include
wiper blades and ignition components; and friction products. These products
are marketed under the brand names Federal-Mogul(R), Champion(R), Moog(R),
Nural(R), Glyco(R), AE(R), Goetze(R), Payen(R), Ferodo(R), Brico(R),
Sintertech(R) and Bentley-Harris(R).
Customers
The Company markets its products to many of the world's major OE
manufacturers. Federal-Mogul also manufactures and supplies its products and
related parts to aftermarket customers for each category of equipment
described above. Among Federal-Mogul's largest customers are Autozone, BMW,
Carquest, Caterpillar, Cummins, DaimlerChrysler, Fiat, Ford/Jaguar/Volvo,
General Motors, NAPA, Ozark, Peugeot/PSA, Renault and Volkswagen/Audi.
Original Equipment
The Company supplies OE customers with a wide variety of precision
engineered parts including engine bearings, large bearings, pistons, piston
pins, rings, cylinder liners, connecting rods, camshafts, sintered products
sealing systems, fuel systems, wipers, lighting, ignition, brake, friction and
chassis products. The Company manufactures essentially all of the products
that it sells to OE customers.
The Company's OE customers consist primarily of automotive and heavy-duty
vehicle customers as well as industrial equipment manufacturers, agricultural,
off-highway, marine, railroad, high performance and industrial applications.
The Company has well-established relationships with substantially all major
North American and European automotive OE manufacturers.
Aftermarket
Federal-Mogul's customers include independent warehouse distributors who
redistribute products to local parts suppliers called jobbers, industrial
bearing distributors, distributors of heavy-duty vehicular parts, engine
rebuilders and retail parts stores. The breadth of Federal-Mogul's product
lines together with the strength of its brand names and sales force, are
central to the Company's aftermarket operations.
Research and Development
The Company's expertise in engineering and research and development ensures
that the latest technologies, processes and materials are considered in
solving problems for customers and bringing new, innovative products
2
to market. Federal-Mogul provides its customers with real-time engineering
capabilities and design development in their home countries. Technological
activities are conducted at the Company's major research centers in Burscheid,
Germany; Plymouth, Michigan; Skokie, Illinois; Ann Arbor, Michigan; Toledo,
Ohio; Cawston, England; Bad Camberg, Germany and Wiesbaden, Germany. Each of
the Company's operating units is engaged in various engineering, research and
development efforts working closely with customers to develop custom solutions
unique to their needs. Total expenditures for research and development
activities were approximately $128 million in 2000, $128 million in 1999 and
$85 million in 1998.
Recent Divestitures
In 2000, the Company sold its OCS filter business, its minority interest in
a German OE operation, its Greek aftermarket operation, one of its US sintered
products operations and its India sintered products operation. In the
aggregate, these businesses had approximately $28.5 million in sales in 1999
and employed approximately 675 people. The total proceeds were $66.6 million.
The company did not record significant gains or losses on these transactions,
individually or in the aggregate.
Raw Materials and Suppliers
The Company purchases various raw materials for use in its manufacturing
processes. The principal raw materials purchased include steel, aluminum,
copper and nickel. In addition, the Company purchases parts manufactured by
other manufacturers for sale in the aftermarket. The Company has not
experienced any shortages of raw materials or finished parts and normally does
not carry inventories of raw materials or finished parts in excess of those
reasonably required to meet its production and shipping schedules. In 2000, no
outside supplier of the Company provided products that accounted for more than
5% of the Company's net sales.
Employee Relations
As of December 31, 2000, the Company had approximately 50,000 full-time
employees, of which approximately 23,000 were employed in the United States.
Various unions represent approximately 33% of the Company's United States
hourly employees and approximately 60% of the Company's foreign hourly
employees. Most of the Company's unionized manufacturing facilities have their
own contract with its own expiration date, and as a result, no contract
expiration date affects more than one facility. The Company believes its labor
relations to be good.
Environmental Regulations
The Company's operations, in common with those of industry generally, are
subject to numerous existing and proposed laws and governmental regulations
designed to protect the environment, particularly regarding plant wastes and
emissions and solid waste disposal. Capital expenditures for property, plant
and equipment for environmental control activities did not have a material
impact on the Company's financial position or results of operations in 2000
and are not expected to have a material impact on the Company's financial
position or results of operations in 2001 or 2002.
Backlog
The majority of the Company's products are not on a backlog status. They
are produced from readily available materials and have a relatively short
manufacturing cycle. For products supplied by outside suppliers, the Company
generally purchases products from more than one source. The Company expects to
be capable of handling the anticipated 2001 sales volumes.
Intellectual Property
The Company is committed to protecting its technology investments and
market share through an active and growing international patent portfolio. The
international patent portfolio is composed of a large number of foreign and
U.S. patents and pending patent applications that relate to a wide variety of
products and processes.
3
In the aggregate, the Company's international patent portfolio is of material
importance to its business. However, the Company does not consider any
international patent or group of international patents relating to a
particular product or process to be of material importance when judged from
the standpoint of the business as a whole.
Competition
The global vehicular parts business is highly competitive. The Company
competes with many of its customers that produce their own components as well
as with independent manufacturers and distributors of component parts in the
United States and abroad. In general, competition for such sales is based on
price, product quality, technology, delivery, customer service and the breadth
of products offered by a given supplier. The Company is meeting these
competitive challenges by more efficiently integrating its manufacturing and
distribution operations and expanding its product coverage within its core
businesses.
Item 2. Properties.
Federal-Mogul's world headquarters is located in Southfield, Michigan,
which is leased pursuant to a sale/leaseback arrangement. The principal
manufacturing and other physical properties of the Company at December 31,
2000, are listed below. All properties are owned in fee simple except where
otherwise noted.
At December 31, 2000, the Company had 295 manufacturing/technical centers,
distribution and sales and administration office facilities worldwide.
Approximately 26% of the facilities are leased, the majority of which are
distribution, sales and administration offices. The Company owns the remainder
of the facilities.
North Rest of
Type of Facility America Europe World Total
---------------- ------- ------ ------- -----
Manufacturing/Technical Centers.............. 85 98 35 218
Distribution................................. 16 23 7 46
Sales and Administration Offices............. 7 22 2 31
--- --- --- ---
Total...................................... 108 143 44 295
=== === === ===
The facilities range in size from approximately 1,700 square feet to
1,143,000 square feet. Management believes substantially all of the Company's
facilities are in good condition and that it has sufficient capacity to meet
its current and expected manufacturing and distribution needs. No facility is
materially underutilized, except for those being sold or closed in the normal
course of business.
Item 3. Legal Proceedings
ASBESTOS LIABILITY AND LEGAL PROCEEDINGS
T&N Asbestos Litigation
In the United States, the Company's United Kingdom subsidiary, T&N Ltd.,
and two United States subsidiaries (the "T&N Companies") are among many
defendants named in numerous court actions alleging personal injury resulting
from exposure to asbestos or asbestos-containing products. T&N Ltd. is also
subject to asbestos-disease litigation, to a lesser extent, in the United
Kingdom and France. Because of the slow onset of asbestos-related diseases,
management anticipates that similar claims will be made in the future. It is
not known how many claims may be made nor the expenditures which may
ultimately arise therefrom. In addition, there are a number of factors that
could impact the settlement costs into the future, including but not limited
to: changes in the legal environment; possible insolvency of co-defendants;
and establishment of an acceptable administrative (non-litigation) claims
resolution mechanism.
In the fourth quarter of 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
4
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 revised liability (approximately $1.6 billion) represents the
Company's estimate for claims currently pending and those which can be
reasonably estimated to be asserted in a future period. The Company believes
that these claims will be paid over the next 12 years. In arriving at the
revised liability for the T&N Companies, assumptions have been made regarding
the total number of claims anticipated to be received in the 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.
While management believes that the liability and receivable recorded are
appropriate for anticipated losses arising from asbestos-related claims
against the T&N Companies for the period covered, given the nature and
complexity of the factors affecting the estimated liability and potential
insurance recovery the actual liability and insurance recovery may differ. 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 for the period covered. In the event that such liabilities exceed the
amounts recorded by the Company or the remaining insurance coverage, the
Company's results of operations, business, liquidity and financial condition
could be materially adversely affected.
The ultimate liability for all pending and future claims is highly
uncertain due to the difficulty of forecasting the numerous variables that can
affect the liability. The Company does not believe it can reasonably determine
the ultimate liability as the level of uncertainty is too great to provide for
reasonable estimation of the number of future claims, the nature of such
claims and the cost to resolve them. As additional experience is gained
regarding claims or other new information becomes available regarding the
potential liability, the Company will reassess its potential liability and
revise the estimates as appropriate. Accordingly it is reasonably possible
that the ultimate losses from asbestos-related claims will be greater than
amounts recorded.
T&N Ltd. is a defendant in approximately 63,000 pending personal injury
claims as of December 31, 2000. During 2000, approximately 39,000 new claims
naming T&N Ltd. were received. The two United States subsidiaries are
defendants in approximately 111,000 pending personal injury claims as of
December 31, 2000. During 2000, approximately 41,000 new claims naming the two
United States subsidiaries were received.
A number of years ago, T&N Ltd. appointed the Center for Claims Resolution
("CCR") as exclusive representative in relation to all asbestos-related
personal injury claims made against the T&N Companies in the United States.
The CCR has provided to its member companies a litigation defense, claims-
handling and administration service in respect to United States asbestos-
related disease claims. Pursuant to the CCR Producer Agreement, T&N Ltd. was
entitled to appoint a representative as one of the five voting directors on
the CCR's Board of Directors. Also pursuant to that agreement, members of the
CCR contributed towards indemnity payments in each claim in which the member
is named. Contributions to such indemnity payments were calculated on a case
by case basis according to sharing agreements among the CCR's members.
Effective January 18, 2000, the two United States subsidiaries appointed a law
firm specializing in asbestos matters as their litigation defense, claims
handling and administrative service provider. Indemnity and defense
obligations incurred while members of the CCR are continuing to be honored.
This change was intended to create greater economic and defense efficiencies
for the two companies. The T&N Companies have entered into $250 million of
surety to meet CCR collateral requirements for past obligations. The surety
has a declining balance and is effective through February 24, 2004.
The membership of the CCR has decreased in the past year for both voluntary
and involuntary reasons. One instance involved the termination of a member by
the CCR board. That former member had refused to provide required surety for
agreed to settlements made while a member. The CCR has tried to recover the
funds owed; however, the former member has since filed for bankruptcy and
recovery is therefore uncertain. Another member has terminated its
participation due to its determination that, as a trust, it lacked sufficient
assets to commit to
5
any new settlements. This member has also asserted that it is entitled to
certain reimbursements which the CCR does not believe to be appropriate.
Additionally, a third member had filed for bankruptcy in December 2000. Any
additional cost to the remaining CCR members, net of the security provided, is
uncertain. The Company however has provided for its best estimate of the
impact of these events. The T&N Companies could experience an increase in
liability if there are any future negative developments in these areas.
Certain codefendant companies (both members and nonmembers of the CCR) have
recently filed for reorganization under Chapter 11 of the Federal Bankruptcy
Code. As a consequence, litigation against them (with some exceptions) has
been stayed or restricted. Due to the uncertainties involved, the long-term
effect of these proceedings on the Company's current and future exposure
cannot be determined.
In February 2001, the CCR and its members significantly amended its
indemnity naming and services agreement. The CCR indemnity naming formula has
been replaced with a provision that, for all claims settled on or after
February 1, 2001, CCR members would be directly responsible for payment of
their own indemnity obligations. The amendments will allow CCR members to
choose the services they wish to continue receiving from the CCR. T&N Ltd.
plans to continue with the CCR for claims handling and administrative
services. However, T&N Ltd. has appointed an outside law firm specializing in
asbestos matters to handle its litigation defense.
In 1996, T&N Ltd. purchased for the T&N Companies a (Pounds)500 million
layer of insurance which will be triggered should the aggregate costs of
claims filed after June 30, 1996, where the exposure occurred prior to that
date, exceed (Pounds)690 million. The Company now believes that the aggregate
cost of claims filed after June 30, 1996 will exceed the trigger point. The
Company believes based on its review of the insurance policy and its advice
from outside counsel, that it is probable that the T&N Companies will be
entitled to receive payment from the reinsurers for the cost of claims in
excess of the trigger point of the insurance. Based on this assessment, the
Company recorded an insurance recoverable asset under the T&N policy of $577
million in the fourth quarter of 2000. The Company has reviewed the financial
viability and legal obligations of the three reinsurance companies involved
and has concluded that there is little risk of the reinsurers not being able
to meet their obligation to pay, once the claims filed after June 30, 1996
exceed the (Pounds)690 million trigger point. The Company does not expect to
reach the trigger point of the insurance or begin to collect on this insurance
recoverable for the next several years. The US claims' costs applied against
this policy are converted at a fixed exchange rate of $1.69/(Pounds). As such,
if the market exchange rate is less then $1.69/(Pounds), the Company will
effectively have a discount from 100% recovery on claims made with the
insurance companies. At December 31, 2000, the $577 million insurance
recoverable asset is net of an exchange rate discount of $68 million.
The ultimate exposure of the T&N companies with respect to claims will
depend upon the extent to which the insurance described above will be
available to cover such claims, the amount paid for indemnity and defense,
changes in the legal environment and other factors.
Abex and Wagner Asbestos Litigation
Former businesses of Cooper Automotive, primarily Abex and Wagner, are
involved as defendants in numerous court actions in the United States alleging
personal injury from exposure to asbestos or asbestos-containing products,
mainly involving friction products. Abex is a defendant in approximately
23,000 pending claims as of December 31, 2000. During 2000, approximately
14,700 new claims naming this defendant were received. Wagner is a defendant
in approximately 17,300 claims as of December 31, 2000. During 2000,
approximately 6,700 new claims naming this defendant were received. In 1998,
the Company acquired the capital stock of a former Cooper Automotive entity
resulting in the assumption by a Company subsidiary of contractual liability,
under certain circumstances, for all claims pending and to be filed in the
future alleging exposure to certain Wagner automotive and industrial friction
products and for all claims filed after August 29, 1998, alleging exposure to
certain Abex (non-railroad and non-aircraft) friction products. In the fourth
quarter of 2000, the Company decreased its estimate of probable asbestos-
related liability by $127 million, which was accompanied by an approximately
equivalent reduction in the insurance recoverable asset. The revised estimate
of probable
6
asbestos-related liability principally resulted from a study performed by an
econometric firm that specializes in these types of matters. The revised
liability (approximately $253 million) represents the Company's estimate for
claims currently pending and those which can be reasonably estimated to be
asserted in a future period. The Company believes that these claims will be
paid over the next 12 years. In arriving at the revised liability for Abex and
Wagner, assumptions have been made regarding the number of claims anticipated
to be received in the future period, the typical cost of settlement (which is
sensitive to the alleged disease type and the jurisdiction in which the action
is being brought), the rate of receipt of claims, and the timing of
settlements.
While management believes that the liability and receivable recorded for
these claims are appropriate for anticipated losses arising from asbestos-
related claims against Abex and Wagner for the covered period, given the
nature and complexity of factors affecting the estimated liability and
potential insurance recovery the actual liability and insurance recovery may
differ. No assurance can be given that Abex and Wagner will not be subject to
material additional liabilities and significant additional litigation relating
to asbestos for the period covered. In the event that such liabilities exceed
the amounts recorded by the Company or the remaining insurance coverage, the
Company's results of operations, business, liquidity and financial condition
could be materially adversely affected.
The ultimate liability for all pending and future claims is highly
uncertain due to the difficulty of forecasting the numerous variables that can
affect the liability. The Company does not believe it can reasonably determine
the ultimate liability as the level of uncertainty is too great to provide for
reasonable estimation of the number of future claims, the nature of such
claims, and the cost to resolve them. As additional experience is gained
regarding claims or other new information becomes available regarding the
potential liability, the Company will reassess its potential liability and
revise the estimates as appropriate. Accordingly it is reasonably possible
that the ultimate losses from asbestos-related claims will be greater than
amounts recorded.
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 the post-August 1998 asbestos claims against
Abex has the benefit of that insurance. 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, barring unforeseen insolvencies of excess carriers or
other adverse events, should provide coverage for asbestos claims against
Abex. The Company believes that based on its review of the insurance policies,
the viability of the insurance carriers, and advice from outside legal
counsel, it is probable that Abex will receive payments for a substantial
majority of the cost of claims.
Wagner also maintained product liability insurance coverage for some of the
time that it manufactured products that contained asbestos. The subsidiary of
the Company that may be liable for asbestos claims against Wagner has the
benefit of that insurance. 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 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 Wagner will receive payment for a portion of the
cost of claims. Based on the probable conclusion of collection under the
insurance policies, the Company has recorded a $188 million insurance
recoverable asset related to the Abex and Wagner liability.
Federal-Mogul and Fel-Pro Asbestos Litigation
The Company also is sued in its own name as one of a large number of
defendants in a number of lawsuits brought by claimants alleging injury due to
exposure to asbestos. The Company's Fel-Pro subsidiary has also been named as
a defendant in a number of product liability cases involving asbestos,
primarily involving gasket or packing products. Fel-Pro is a defendant in
approximately 31,000 pending claims as of December 31, 2000.
7
During 2000, approximately 3,400 new claims were filed. Over 30,000 of these
claims have been transferred to a federal court where they reside subject to
removal back into the tort system only if certain medical and product
identification conditions are met. The Company is defending all such claims
vigorously and believes that it and Fel-Pro have substantial defenses to
liability and insurance coverage for defense and indemnity. While the outcome
of litigation cannot be predicted with certainty, management believes that
asbestos claims pending against the Company and Fel-Pro as of December 31,
2000, will not have a material effect on the Company's financial position.
Aggregate of Asbestos Liability and Insurance Recoverable Asset
The following is a summary of the asbestos liability and the insurance
recoverable asset for 2000 (in millions of dollars):
T&N Abex &
Companies Wagner Other Total
--------- ------- ----- --------
Liability:
Balance at December 31, 1999......... $1,104.2 $ 408.8 $ 2.3 $1,515.3
2000 provision adjustments......... 750.9 (127.2) 1.6 625.3
2000 payments...................... (323.8) (28.9) (1.0) (353.7)
Other.............................. 25.0 -- -- 25.0
-------- ------- ----- --------
Balance at December 31, 2000......... $1,556.3 $ 252.7 $ 2.9 $1,811.9
======== ======= ===== ========
Asset:
Balance at December 31, 1999......... $ -- $ 325.9 $ -- $ 325.9
2000 provision adjustments......... 576.7 (135.8) -- 440.9
2000 proceeds...................... -- (2.2) -- (2.2)
Other.............................. 6.5 -- -- 6.5
-------- ------- ----- --------
Balance at December 31, 2000......... $ 583.2 $ 187.9 $ -- $ 771.1
======== ======= ===== ========
As of December 31, 2000, the Company has provided an aggregated liability
for all of its subsidiaries and businesses with potential asbestos liability
of approximately $1.8 billion for claims currently pending and those which can
be reasonably expected to be asserted in a future period. The Company believes
that these claims will be paid over the next 12 years. Of this amount, the
Company expects to incur asbestos payments of approximately $350 million over
the next 12 months and has reflected this as a current liability. This
estimate is based in part on recent and historical claims experience, medical
information, the impact of changes in indemnity sharing within the CCR and the
current legal environment. The Company cannot reasonably estimate a liability
beyond the period encompassed in its estimates as the level of uncertainty is
too great to provide for reasonable estimation of the number of future claims,
the nature of such claims, or the cost to resolve them.
The Company believes that it is probable that its subsidiaries with
asbestos-related liabilities and related insurance policies, the T&N
Companies, Abex, Wagner and Fel-Pro will collect the recorded aggregated
insurance recoverable asset of $771 million.
Other
The Company is involved in various other legal actions and claims, directly
and through its subsidiaries. The Company has been named in a class action
lawsuit captioned In Re Federal-Mogul Corp. Securities Litigation, alleging
violations by the Company of various federal securities laws. The Company
believes that the claims contained in the suit are without merit and that it
has meritorious defenses against the claims. The Company will vigorously
defend itself against the suit and after taking into consideration legal
counsel's evaluation of such actions, is of the opinion that the outcomes are
not reasonably likely to have a material adverse effect on the Company's
financial position, operating results or cash flows.
8
For information respecting lawsuits concerning environmental matters to
which the Company is a party, see "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations--Litigation and
Environmental Matters".
There were no material legal proceedings terminated during the fourth
quarter of 2000, other than the Owens-Illinois matter.
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters.
The Company's common stock is listed on the New York Stock Exchange under
the trading symbol FMO. The approximate number of shareholders of record of
the Company's common stock at March 21, 2001 was 6,500. The following table
sets forth the high and low sales prices of the Company's common stock for
each calendar quarter as reported on the New York Stock Exchange-Composite
Tape for the last two years:
2000 1999
------------- -------------
Quarter High Low High Low
------- ------ ------ ------ ------
First......................................... $20.19 $12.25 $64.88 $40.63
Second........................................ $16.00 $ 9.44 $53.81 $41.94
Third......................................... $11.94 $ 5.25 $55.00 $23.38
Fourth........................................ $ 5.88 $ 1.75 $29.13 $17.56
The closing price of the Company's common stock as reported on the New York
Stock Exchange-Composite Tape on March 21 2001 was $3.11.
Quarterly dividends of $.0025 per common share were declared during each
quarter of 2000 and 1999. The Company is prohibited, under its new Senior
Credit Agreement, from paying dividends on its common stock, and therefore
will not be declaring a dividend in 2001.
9
Item 6. Selected Financial Data
The following table presents information from the Company's consolidated
financial statements for the five years ended December 31, 2000. This
information should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations", and "Financial
Statements and Supplemental Data".
2000 1999 1998 1997 1996
--------- --------- --------- --------- ---------
(Millions of Dollars, Except Per Share Amounts)
Consolidated Statement
of Operations Data
Net sales............... $ 6,013.2 $ 6,487.5 $ 4,468.7 $ 1,806.6 $ 2,032.7
Costs and expenses...... (6,244.5)(1) (6,006.2)(3) (4,266.9)(4) (1,703.7)(5) (2,258.0)(6)
Other expense........... (31.0) (21.4) (16.3) (3.4) (3.4)
Income tax (expense)
benefit................ (19.2)(2) (180.9) (93.6) (27.5) 22.4
Earnings (loss) before
extraordinary items and
cumulative effect of
change in accounting
principle.............. (281.5) 279.0 91.9 72.0 (206.3)
Extraordinary items --
loss on early
retirement of debt, net
of applicable income
tax benefits........... -- (23.1) (38.2) (2.6) --
Cumulative effect of
change in accounting
for costs of start-up
activities, net of
applicable income tax
benefit................ -- (12.7) -- -- --
--------- --------- --------- --------- ---------
Net earnings (loss)..... $ (281.5) $ 243.2 $ 53.7 $ 69.4 $ (206.3)
========= ========= ========= ========= =========
Common Share Summary
(Diluted)
Average shares and
equivalents outstanding
(in thousands)......... 70,573 84,206 53,748 41,854 34,659
Earnings (loss) per
share:
Before extraordinary
items and cumulative
effect of change in
accounting principle.. $ (4.02) $ 3.59 $ 1.67 $ 1.67 $ (6.20)
Extraordinary items --
loss on early
retirement of debt,
net of applicable
income tax benefits... -- (.28) (.71) (.06) --
Cumulative effect of
change in accounting
for costs of start-up
activities, net of
applicable income tax
benefit............... -- (.15) -- -- --
--------- --------- --------- --------- ---------
Net earnings (loss) per
share.................. $ (4.02) $ 3.16 $ .96 $ 1.61 $ (6.20)
========= ========= ========= ========= =========
Dividends declared per
share.................. $ .01 $ .01 $ .1275 $ .48 $ .48
========= ========= ========= ========= =========
Consolidated Balance
Sheet Data
Total assets............ $10,255.0 $ 9,945.2 $ 9,940.1 $ 1,802.1 $ 1,455.2
Short-term debt (7)..... 147.8 190.8 211.0 28.6 280.1
Long-term debt.......... 3,559.7 3,020.0 3,130.7 273.1 209.6
Company-obligated
mandatorily redeemable
preferred securities of
Subsidiary trust
holding solely
convertible
subordinated debentures
of the Company......... 575.0 575.0 575.0 575.0 --
Shareholders' equity.... 1,550.2 2,075.2 1,986.2 369.3 318.5
Other Financial
Information
Net cash provided from
(used by) operating
activities............. $ (154.5) $ 562.4 $ 325.5 $ 215.7 $ 149.0
Expenditures for
property, plant,
equipment and other
long-term assets....... 313.3 395.2 228.5 49.7 54.2
Depreciation and
amortization expense... 374.4 354.9 228.0 51.5 61.9
- ------------------
(1) Includes a $135.7 million restructuring charge, a $75.4 million charge for
adjustments of assets held for sale and other long-lived assets to fair
value and a $184.4 million charge related to asbestos.
(2) Includes a $60.0 million charge for providing deferred tax asset valuation
allowances.
(3) Includes a $46.9 million charge for integration costs and a $7.9 million
charge for adjustment of assets held for sale and other long-lived assets
to fair value.
(4) Includes a $7.3 million net restructuring charge, a $19.0 million net
charge for adjustment of assets held for sale and other long-lived assets
to fair value, an $18.6 million charge for purchased in-process research
and development, a $22.4 million charge for integration costs and a $13.3
million net gain related to the British pound currency option and forward
contract.
(5) Includes a $1.1 million net restructuring credit, a $2.4 million charge
for adjustment of assets held for sale and other long-lived assets to
fair value, a $1.6 million credit for reengineering and other related
charges, and a $10.5 million charge related to the British pound currency
option and forward contract.
(6) Includes a $57.6 million restructuring charge, a $151.3 million charge for
adjustment of assets held for sale and other long-lived assets to fair
value, and $11.4 million relating to reengineering and other related
charges.
(7) Includes current maturities of long-term debt (see Note 6 to the
Consolidated Financial Statements).
10
MANAGEMENT'S DISCUSSION AND ANALYSIS
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Overview
Federal-Mogul Corporation (the "Company") is an automotive parts
manufacturer providing innovative solutions and systems to global customers in
the automotive, small engine, heavy-duty and industrial markets. The Company
manufactures engine bearings, pistons, piston pins, rings, cylinder liners,
camshafts, sintered products, sealing systems, 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 and related parts to the aftermarket.
Results of Operations
Net Sales
Sales by operating segment were:
2000 1999 1998
------ ------ ------
(Millions of
Dollars)
Americas/Asia Pacific.................................. $4,057 $4,330 $2,629
Europe/Africa.......................................... 1,940 2,072 1,686
Divested Activities.................................... 16 86 154
------ ------ ------
Total................................................ $6,013 $6,488 $4,469
====== ====== ======
Americas/Asia Pacific
Sales decreased 6% from 1999 to 2000 primarily due to the continued
depression in the heavy-duty truck market and the machine tool business which
decreased sales 2%, and branch closures and consolidation in the aftermarket
which decreased sales by 3%. Net sales were also impacted by difficulties in
the first six months of 2000 with the Company's central warehouse system, the
elimination of year-end sales incentives, the loss of a major aftermarket
customer in mid-1999 and the effects of foreign exchange on South American,
Canadian and Mexican operations. These decreases were partially offset by net
new business recorded in 2000.
Sales increased 65% from 1998 to 1999 primarily due to the full year effect
of the 1998 acquisitions of Cooper Automotive, T&N and Fel-Pro, the 1999
acquisition of Crane Technologies and net new business recorded in 1999,
partially offset by lower aftermarket sales. Sales in the aftermarket were
impacted by an overall decrease in the engine parts market size due to
improved OE quality and the 1999 bankruptcy of a major customer in the North
American aftermarket.
Europe/Africa
Sales decreased 6% from 1999 to 2000 primarily due to the effects of
foreign exchange from European operations which decreased sales by 12% and the
Company's divestitures of its heat transfer and Bertolotti businesses in the
second and third quarter of 1999, respectively, and its OCS Filter business in
the second quarter of 2000 which decreased sales by 3%. These decreases were
partially offset by the full-year effect of the 1999 acquisition of the piston
division of Alcan Deutschland, GmbH (Alcan) and net new business recorded
during 2000.
Sales increased 23% from 1998 to 1999 primarily due to the full-year effect
of the 1998 acquisitions of T&N and Cooper Automotive, the 1999 acquisition of
Alcan and net new business recorded during 1999. These increases were
partially offset by aftermarket sales decreases.
11
MANAGEMENT'S DISCUSSION AND ANALYSIS -- Continued
Gross Margin
Gross margin as a percentage of net sales was 23.6% in 2000 compared to
27.4% in 1999. Management attributes the decrease from 1999 to 2000 to lower
sales volumes as mentioned above, changes in OE/aftermarket mix, the effects
of foreign exchange, and certain productivity and inflationary issues. OE
sales represented 56% of total sales in 1999 compared to 57% in 2000. Gross
margin was also impacted by adjustments for inventory and other product-
related items.
Gross margin as a percentage of net sales was 27.4% in 1999 compared to
26.4% in 1998. Management attributes this increase to cost controls and the
divestiture of under-performing assets, partially offset by productivity
issues in the camshafts operations.
Selling, General and Administrative Expense
Selling, general and administrative expenses ("SG&A") as a percentage of
net sales were 14.0% in 2000 compared to 13.1% in 1999. Management attributes
this increase to lower sales as discussed above, and the fact that the
majority of the Company's SG&A costs are fixed over the short term. As such
the Company was not able to reduce these costs on a level commensurate with
the sales volume decline. The Company also experienced increasing employee
benefit costs, remediation of environmental items and professional fees
related to special studies. While this percentage has increased, overall costs
have remained relatively flat.
Selling, general and administrative expenses as a percentage of net sales
decreased to 13.1% in 1999 compared to 14.3% in 1998. Management attributes
this decrease to the benefits of prior restructuring actions and the
realization of combined efficiencies from the T&N, Cooper Automotive and Fel-
Pro acquisitions.
Purchased In-Process Research and Development Charge
In connection with the T&N acquisition, the Company recognized an $18.6
million charge in the first quarter of 1998 associated with the estimated fair
value of purchased in-process research and development for which technological
feasibility had not been established and the in-process technology had no
future alternative uses.
Rationalization of Acquired Businesses
In connection with the T&N, Cooper Automotive and Fel-Pro acquisitions in
1998, the Company recognized $216.8 million as acquired liabilities related to
the rationalization and integration of acquired businesses. The
rationalization reserves provided for $180.0 million in relocation and
severance costs and $36.8 million in exit costs, and were recorded as a
component of goodwill in the purchase price allocation.
The components of the integration plan included closure of certain
manufacturing facilities worldwide; relocation of highly manual manufacturing
product lines to more suitable locations; consolidation of overlapping
manufacturing, technical and sales facilities and joint ventures;
consolidation of overlapping aftermarket warehouses; consolidation of
aftermarket marketing and customer support functions; and streamlining of
administrative, sales, marketing and product engineering staffs worldwide.
The Company paid $10.7 million and $72.2 million related to these
rationalization reserves in 2000 and 1999, respectively. Also during 1999, the
Company made adjustments to reduce the rationalization reserves, with an
offsetting amount to goodwill, of $47.9 million. These adjustments related to
the finalization of rationalization plans. As of December 31, 2000, remaining
rationalization reserves were $18.0 million, primarily relating to the closure
of several Powertrain Systems facilities in Europe and the consolidation of
aftermarket warehouses in Europe. These costs are expected to be paid in 2001.
12
MANAGEMENT'S DISCUSSION AND ANALYSIS -- Continued
Restructuring Charges (Credits)
In 2000, the Board of Directors of the Company approved, and the Company
has begun to implement, a global restructuring plan. The primary purposes of
this plan are to improve the Company's cost structure and reduce non-
productive assets. The significant activities that are part of the 2000 plan
are as follows:
Consolidation of European Operations: The Company has developed plans to
take advantage of opportunities to achieve synergies in and consolidate
activities of its European operations. As part of these plans, four of its
manufacturing facilities will be closed or consolidated, and the operations
that were being performed within these facilities will be moved to other
European locations. The Company will achieve a net reduction of approximately
1,350 employees, comprised of 1,800 reductions associated with facility
closings, offset by 450 new hires in new or expanded facilities.
Consolidation of North American and South American Operations: The Company
has implemented a plan to consolidate certain manufacturing, distribution and
administrative functions in North and South America. As a result of these
plans the Company will close or consolidate 36 facilities, and the operations
that were being performed within these facilities will be moved to other North
American and South American locations. The Company will achieve a net
reduction of approximately 1,500 employees, comprised of 2,950 reductions
associated with facility closings, offset by 1,450 new hires required for new
or expanded facilities.
In 2000, the Company recognized $135.7 million of restructuring charges
related to severance and exit costs. Employee severance costs of $105.8
million and exit costs of $29.9 million resulted from the planned closure of
certain North American aftermarket branch warehouses and distribution centers;
consolidation of the Company's heavy-wall bearings business; the closure of
Australian and Taiwanese sales, administrative, and distribution facilities;
the consolidation of certain administrative and human resource functions in
Europe; reorganization of the America's friction business; closure of one of
the Company's European R&D centers, consolidation of an administrative
facility at the Company's Ohio ignition facility and various other programs in
North America, South America and Europe. As part of the 2000 restructuring
plan approximately 1,400 employees were severed and 30 facilities were closed
or consolidated. In 2000, the Company paid $46.8 million for employee
severance costs and $4.2 million for exit costs against the 2000 reserves.
Management anticipates an annualized EBIT benefit of $75 million as a result
of these actions beginning in 2002.
Also during 2000, the Company began implementing a program to focus on six
global initiatives aimed at improving the operation efficiency of the business
(the "SGI's"). The SGI's are grouped into six strategic actions: Aftermarket
Rationalization, Facility Rationalization, Shared Services, Constraint
Management, Supply Chain Management and Investment Strategy. Included in the
above restructuring charge were severance and exit costs of $19.4 million,
primarily related to the Aftermarket and Facility Rationalizations. During
2001 management expects to refine this program and may incur additional
restructuring charges. As such, the aggregate annualized EBIT benefits of
these actions have not been determined.
In 1999, the Company recognized $13.2 million of restructuring charges
related to severance and exit costs. Employee severance costs of $11.1 million
resulted from terminations in certain European operations of the Company,
employees at the Company's Milan, Michigan plant, and certain executive
severances. The severance costs were based on the estimated amounts that will
be paid to the affected employees pursuant to the Company's workforce
reduction policies and certain governmental regulations. Total headcount
reductions were approximately 250 employees. Exit costs of $2.1 million were
related to the closing of the Company's Milan plant and French bearing
operations. These actions were substantially completed in 2000. In 2000, the
Company paid $5.5 million for employee severance costs and $1.9 million for
exit costs against the 1999 reserves.
Also in 1999, the Company recognized $13.2 million of reversals of
restructuring charges recorded in previous years. These reversals resulted
primarily from lower than expected employee severance costs principally
associated with the reduction of the aftermarket sales force and consolidation
of certain operations in the Americas.
13
MANAGEMENT'S DISCUSSION AND ANALYSIS -- Continued
In 1998, as a result of the T&N, Cooper Automotive and Fel-Pro
acquisitions, the Company recognized $16.3 million of restructuring charges
related to restructuring the Company's operations in place prior to these
acquisitions. The restructuring charges were primarily for employee severance
costs, which resulted from planned terminations in various business operations
of the Company. In 2000, the Company paid $3.1 million in severance costs
against the 1998 reserves.
Also in 1998, the Company recognized restructuring credits of $9.0 million
for a reversal of charges recorded in previous years. The Company was able to
sell, rather than liquidate, its retail operations in Puerto Rico, causing
this reversal.
Adjustment of Assets Held for Sale and Other Long-Lived Assets to Fair Value
In 2000, the Company recorded a $75.4 million charge primarily associated
with the actions of the 2000 restructuring program. Included in this charge
are the write-down of assets to their fair value for the closure of
aftermarket branch warehouses and distribution centers, the Company's Ohio
administrative facility, a European R&D center and certain facilities
associated with the reorganization of the America's friction business.
In 1999, the Company sold its subsidiary, Bertolotti Pietro e Figli, S.r.l.
(Bertolotti), an Italian aftermarket operation. In 1998, the Company
recognized a $19.0 million charge primarily associated with their writedown of
Bertolotti's assets to their estimated fair value. In 1999, the Company
recognized an additional $7.9 million loss associated with the writedown of
Bertolotti's assets to their fair value resulting from the sale. Offsetting
the loss was a tax benefit of $7.9 million resulting from the sale.
Asbestos Charge
In 2000, the Company recorded a $184.4 million charge consisting of
approximately a $625.3 million increase in the Company's asbestos liability,
which was partially offset by a $440.9 million increase in the Company's
asbestos-related insurance recoverable. These charges and insurance recoveries
were primarily based on an actuarial study the Company commissioned during
2000 (see Litigation and Environmental Matters).
Integration Costs
The Company recognized $46.9 million and $22.4 million of integration costs
in 1999 and 1998, respectively, in connection with the acquisitions of T&N,
Cooper Automotive and Fel-Pro. These expenses included one-time items such as
brand integration, costs to pack and move productive inventory and fixed
assets from one location to another and costs to change the identity of
entities acquired. There were no integration costs in 2000.
Interest Expense
Interest expense increased $15.8 million in 2000 to $289.3 million. The
increase is primarily attributable to the full-year effect of the 1999 bond
issue and higher amounts outstanding on the Company's multi-currency revolver
during 2000.
Interest expense increased $69.5 million in 1999 to $273.5 million. The
increase is primarily attributable to the full-year effect of the issuance of
new debt to finance the acquisitions of Cooper Automotive and other
businesses, offset slightly by debt reductions from cash flow generated from
operations and the Company's increased accounts receivable securitizations.
Interest Income
Interest income remained flat from 1999 to 2000. Interest income decreased
$6.0 million in 1999 to $4.6 million. The decrease in interest income is due
to the Company using the proceeds of the Company-obligated mandatorily
redeemable preferred securities for the purchase of T&N and improved cash
management.
14
MANAGEMENT'S DISCUSSION AND ANALYSIS -- Continued
Net Gain on British Pound Forward Contract
In the fourth quarter of 1997, in anticipation of the then pending T&N
acquisition, the Company purchased a British pound currency option for $28.1
million with a notional amount of $2.5 billion. The cost of the option and its
change in fair value has been reflected in the results of operations in the
fourth quarter of 1997. At December 31, 1997, the Company had recognized a net
loss of $10.5 million on the transaction. In January 1998, the Company settled
the option and recognized an additional loss of $17.3 million.
In January 1998, in anticipation of the then pending T&N acquisition, the
Company entered into a forward contract to purchase (Pounds)1.5 billion for
approximately $2.45 billion. As a result of favorable fluctuations in the
British pound/United States dollar exchange rate during the contract period,
the Company recognized a $30.6 million gain.
The Company entered into the above transaction to serve as an economic
hedge for the purchase of T&N. However, this transaction did not qualify for
hedge accounting under US GAAP, and therefore is reflected in the consolidated
statement of operations caption "Net gain on British pound forward contract."
Income Taxes
The effective tax rates for 2000, 1999 and 1998 were (7.3)%, 39.3% and
50.5%, respectively. The effective tax rates differ from statutory rates due
to changes in valuation allowances, rate variances and changes for certain
state and foreign jurisdictions, and non-deductible goodwill. The Company
increased its valuation allowance by $60.0 million for foreign tax credits and
other deferred tax assets that it concluded will not be realized. Tax expense
differs from current income taxes payable due to timing differences, which for
the last three years were significantly affected by asbestos payments. The
Company expects that future income tax expense will be greater than current
income taxes payable primarily due to the effect of asbestos payments.
At December 31, 2000, the Company had deferred tax assets of $1,079.1
million, net of a valuation allowance of $219.6 million, and deferred tax
liabilities of $1,032.6 million. The Company evaluates the necessity for a
valuation allowance on deferred tax assets by taxing jurisdiction. In all
countries except the US and the UK, the deferred tax liabilities are greater
than the net deferred tax assets, and they generally reverse in similar
periods. In the US and UK, the Company has deferred tax assets of $1,100.2
million, net of related valuation allowances of $165.7 million and deferred
tax liabilities of approximately $943.4 million. The deferred tax assets in
the UK and US relate primarily to net operating loss carryforwards of $193
million, asbestos liabilities of $552 million and accruals for employee
benefits of $167 million. The net operating losses in the UK have no
expiration date, and the net operating losses in the US expire in various
amounts through 2020. In addition, the deferred taxes related to employee
benefits and asbestos become deductible as paid over the next 30 and 12 years,
respectively.
Realization of the deferred tax assets in the US and UK are dependent in
part upon the reversal of deferred tax liabilities but also on future taxable
income. Future taxable income is dependent upon a number of factors including,
but not limited to, sufficient levels of earnings before income taxes and the
amount and timing of asbestos payments. Based on consideration of historical
and future earnings before income taxes, the Company believes it is more
likely than not that the deferred tax assets, beyond those specifically
reserved, will be realized.
The Company will evaluate its deferred taxes and related valuation
allowances quarterly. If at any time the Company believes that current or
future taxable income will not support the basis for recognizing the benefit
of the deferred tax assets, valuation allowances will be provided accordingly.
Extraordinary Items
As a result of certain financing transactions (see Liquidity and Capital
Resources), the Company incurred extraordinary losses on the early retirement
of debt of $23.1 million and $38.2 million, net of related tax benefits of
$13.5 million and $19.9 million, in 1999 and 1998, respectively.
15
MANAGEMENT'S DISCUSSION AND ANALYSIS -- Continued
Cumulative Effect of Change in Accounting Principle
In 1998, the American Institute of Certified Public Accountants issued
Statement of Position (SOP) 98-5, Reporting the Costs of Start-Up Activities.
SOP 98-5 was effective January 1, 1999 and requires that start-up costs
capitalized prior to January 1, 1999 be written off and any future start-up
costs be expensed as incurred. The Company adopted SOP 98-5 on January 1, 1999
and subsequently wrote off, as a cumulative effect of change in accounting
principle, the unamortized balance of start-up costs totaling $12.7 million,
net of applicable income tax benefits of $6.8 million, in the quarter ended
March 31, 1999.
Effect of Accounting Pronouncements
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting
for Derivative Instruments and Hedging Activities", was issued by the
Financial Accounting Standards Board ("FASB") in June 1998. SFAS No. 133
requires that all derivative instruments be recorded on the balance sheet at
their fair value. In June 2000, the FASB issued SFAS No. 138, which amends and
clarifies certain guidance in SFAS No. 133. The Company has implemented the
appropriate systems and processes to adopt these statements effective January
1, 2001. Changes in the fair value of derivatives are recorded each period in
current earnings or other comprehensive income, depending on whether a
derivative is designated as part of a hedge transaction and, if it is, the
type of hedge transaction. For fair-value hedge transactions, the fair value
of the derivative instrument will generally be offset in the income statement
by changes in the hedged item's fair value. For cashflow hedge transactions,
the fair value of the derivative instrument will be reported in other
comprehensive income. The ineffective portion of all hedges will be recognized
in current-period earnings. The statements provide for the recognition of a
cumulative adjustment for an accounting change, as of the date of adoption.
The Company estimates that it will record a net-of-tax cumulative-effect-type
loss of approximately $350,000 in accumulated other comprehensive income to
recognize at fair value all derivative instruments that will be designated as
cashflow hedges. The adjustment to current earnings for fair value hedges is
not material. The adoption of this standard will also impact assets and
liabilities on the balance sheet.
In October 2000, the FASB issued SFAS No. 140, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities--a
Replacement of SFAS No. 125." This statement provides accounting and reporting
standards for transfers and servicing of financial assets and extinguishment
of liabilities. This statement is effective for accounts receivable
securitization programs entered into after March 2001. The Company's current
accounts receivable securitization program expires June 2001 and is not
required to comply with the new accounting provisions of SFAS No. 140. The
expanded disclosure requirements of SFAS No. 140 are provided in Note 7 of the
Consolidated Financial Statements.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements". SAB No. 101 provides guidance on applying generally accepted
accounting principles to the recognition, presentation and disclosure of
revenue in financial statements. The implementation of SAB No. 101 in the
fourth quarter of 2000 did not have a significant impact on the Company's
financial position or its results of operations and is not expected to have a
significant impact on an ongoing basis.
In November 2000, the Emerging Issues Task Force ("EITF") of the FASB
reached consensus on issue No. 00-14, Accounting for Certain Sales Incentives.
The EITF addresses the recognition, measurement and income statement
classification for sales incentives offered voluntarily by a vendor without
charge to customers that can be used in, or are exercisable by customers as a
result of a single transaction. EITF No. 00-14 is required to be applied
beginning April 1, 2001. The effect of the adoption has not been finalized,
however the Company believes that the adoption will not have a material impact
on its financial statements.
16
MANAGEMENT'S DISCUSSION AND ANALYSIS -- Continued
Liquidity and Capital Resources
Cash Flow Used by Operating Activities
Cash flow used by operating activities was $154.5 million in 2000. Among
the factors impacting operating cash flows were payments related to asbestos
of $351.4 million and restructuring and rationalization reserves of $72.2
million, a decrease in accounts payable of $175.4 million, and a decrease in
other current liabilities and assets of $114.4 million. These usages were
partially offset by decreases in accounts receivable and inventory of $38.1
million and $40.7 million, respectively.
Cash Flow Used by Investing Activities
Cash flow used by investing activities was $244.3 million in 2000. The
Company made capital expenditures of $313.3 million to implement process
improvements, increase manufacturing capacity, information technology and new
product introductions. These cash flows were offset by proceeds of $66.6
million from the divestiture of several businesses.
The Company anticipates that 2001 capital expenditures, exclusive of
acquisitions and investments in affiliates, will be approximately $365
million. The Company expects that funding for these expenditures will be from
operations and external sources as required.
Cash Flow Provided from Financing Activities
Cash flow provided from financing activities was $441.5 million in 2000,
primarily arising from proceeds of $689.0 million from the issuance of long-
term debt, offset by principal payments on long-term debt of $145.3 million
and a repurchase of accounts receivable under securitization of $62.1 million.
In June 2000, the Company entered into a new $420 million accounts
receivable securitization agreement replacing the existing $450 million
agreement. The facility's maturity date is June 28, 2001. In December 2000,
the Company modified certain provisions of the existing facility; however, the
amount and maturity remained the same.
In December 2000, the Company executed its fourth amended and restated
credit agreement, ("Senior Credit Agreements"). The Senior Credit Agreements
provide for an additional term loan of $150 million and a senior secured
revolving credit facility of $200 million. In addition to the pledge of
capital stock described below, the Company provided collateral in the form of
a pledge of its domestic inventories, domestic accounts receivable not
otherwise sold under securitizations, domestic plant, equipment and real
property, and its domestic intellectual property. This increased the Company's
borrowing limits under the Senior Credit Agreements to $2.1 billion. The
Company had $1.45 billion outstanding under these Senior Credit Agreements as
of December 31, 2000, which are due from 2001 to 2005 with an average interest
rate of 8.15%. In January 2001, the Company borrowed $150 million on its new
term loan. In March 2001, the Company amended its Senior Credit Agreement to
modify certain covenants.
The Company has pledged 100% of the capital stock of certain United States
subsidiaries, 65% of capital stock of certain foreign subsidiaries and certain
intercompany loans to secure the Senior Credit Agreements of the Company.
Certain of such pledges also extend to the Notes, Medium-Term Notes and Senior
Notes. In addition, certain subsidiaries of the Company have guaranteed the
senior debt (refer to Note 18, "Consolidating Condensed Financial Information
of Guarantor Subsidiaries").
The agreement relating to the facilities described above contains
restrictive covenants. The more significant of these covenants are
requirements for the maintenance of consolidated net worth; a consolidated
leverage ratio; cash flow coverage; limitations on the early retirement of
debt; additional borrowings; and payment of common
17
MANAGEMENT'S DISCUSSION AND ANALYSIS -- Continued
dividends. The agreement includes a provision which would result in all of the
unpaid principal and accrued interest of the facilities becoming due
immediately upon a change of control in ownership of the Company.
During 2000, the Company experienced a decline in the public credit ratings
of its bonds. As a result of the decline in its credit ratings, the Company
expects to incur substantially higher costs of financing for the foreseeable
future as compared to prior years should it attempt any capital market
activity.
The Company's ability to obtain cash adequate to fund its needs depends
generally on the results of its operations, restructuring initiatives, amounts
and timing of asbestos payments and the availability of financing. Management
believes that cash flow from operations, in conjunction with borrowings from
its existing credit agreements, will be sufficient to meet current debt
service requirements, fund capital expenditures in the future and meet its
asbestos obligations. In the long term, the Company believes that the benefits
from the recently announced restructuring and SGI programs and changes to its
asbestos strategy along with financing available under its Senior Credit
Agreements and any future credit agreements will 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. A significant increase
in such obligations or asbestos claims, could impair the Company's liquidity.
Asbestos Liability and Legal Proceedings
T&N Asbestos Litigation
In the United States, the Company's United Kingdom subsidiary, T&N Ltd.,
and two United States subsidiaries (the "T&N Companies") are among many
defendants named in numerous court actions alleging personal injury resulting
from exposure to asbestos or asbestos-containing products. T&N Ltd. is also
subject to asbestos-disease litigation, to a lesser extent, in the United
Kingdom and France. Because of the slow onset of asbestos-related diseases,
management anticipates that similar claims will be made in the future. It is
not known how many claims may be made nor the expenditures which may
ultimately arise therefrom. In addition, there are a number of factors that
could impact the settlement costs into the future, including but not limited
to: changes in the legal environment; possible insolvency of co-defendants;
and establishment of an acceptable administrative (non-litigation) claims
resolution mechanism.
In the fourth quarter of 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 revised liability (approximately $1.6 billion) represents the
Company's estimate for claims currently pending and those which can be
reasonably estimated to be asserted in a future period. The Company believes
that these claims will be paid over the next 12 years. In arriving at the
revised liability for the T&N Companies, assumptions have been made regarding
the total number of claims anticipated to be received in the 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.
While management believes that the liability and receivable recorded are
appropriate for anticipated losses arising from asbestos-related claims
against the T&N Companies for the period covered, given the nature and
complexity of the factors affecting the estimated liability and potential
insurance recovery the actual liability and insurance recovery may differ. 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 for the period covered. In
18
MANAGEMENT'S DISCUSSION AND ANALYSIS -- Continued
the event that such liabilities exceed the amounts recorded by the Company or
the remaining insurance coverage, the Company's results of operations,
business, liquidity and financial condition could be materially adversely
affected.
The ultimate liability for all pending and future claims is highly
uncertain due to the difficulty of forecasting the numerous variables that can
affect the liability. The Company does not believe it can reasonably determine
the ultimate liability as the level of uncertainty is too great to provide for
reasonable estimation of the number of future claims, the nature of such
claims and the cost to resolve them. As additional experience is gained
regarding claims or other new information becomes available regarding the
potential liability, the Company will reassess its potential liability and
revise the estimates as appropriate. Accordingly it is reasonably possible
that the ultimate losses from asbestos-related claims will be greater than
amounts recorded.
T&N Ltd. is a defendant in approximately 63,000 pending personal injury
claims as of December 31, 2000. During 2000, approximately 39,000 new claims
naming T&N Ltd. were received. The two United States subsidiaries are
defendants in approximately 111,000 pending personal injury claims as of
December 31, 2000. During 2000, approximately 41,000 new claims naming the two
United States subsidiaries were received.
A number of years ago, T&N Ltd. appointed the Center for Claims Resolution
("CCR") as exclusive representative in relation to all asbestos-related
personal injury claims made against the T&N Companies in the United States.
The CCR has provided to its member companies a litigation defense, claims-
handling and administration service in respect to United States asbestos-
related disease claims. Pursuant to the CCR Producer Agreement, T&N Ltd. was
entitled to appoint a representative as one of the five voting directors on
the CCR's Board of Directors. Also pursuant to that agreement, members of the
CCR contributed towards indemnity payments in each claim in which the member
is named. Contributions to such indemnity payments were calculated on a case
by case basis according to sharing agreements among the CCR's members.
Effective January 18, 2000, the two United States subsidiaries appointed a law
firm specializing in asbestos matters as their litigation defense, claims
handling and administrative service provider. Indemnity and defense
obligations incurred while members of the CCR are continuing to be honored.
This change was intended to create greater economic and defense efficiencies
for the two companies. The T&N Companies have entered into $250 million of
surety to meet CCR collateral requirements for past obligations. The surety
has a declining balance and is effective through February 24, 2004.
The membership of the CCR has decreased in the past year for both voluntary
and involuntary reasons. One instance involved the termination of a member by
the CCR board. That former member had refused to provide required surety for
agreed to settlements made while a member. The CCR has tried to recover the
funds owed; however, the former member has since filed for bankruptcy and
recovery is therefore uncertain. Another member has terminated its
participation due to its determination that, as a trust, it lacked sufficient
assets to commit to any new settlements. This member has also asserted that it
is entitled to certain reimbursements which the CCR does not believe to be
appropriate. Additionally, a third member had filed for bankruptcy in December
2000. Any additional cost to the remaining CCR members, net of the security
provided, is uncertain. The Company however has provided for its best estimate
of the impact of these events. The T&N Companies could experience an increase
in liability if there are any future negative developments in these areas.
Certain codefendant companies (both members and nonmembers of the CCR) have
recently filed for reorganization under Chapter 11 of the Federal Bankruptcy
Code. As a consequence, litigation against them (with some exceptions) has
been stayed or restricted. Due to the uncertainties involved, the long-term
effect of these proceedings on the Company's current and future exposure
cannot be determined.
In February 2001, the CCR and its members significantly amended its
indemnity naming and services agreement. The CCR indemnity naming formula has
been replaced with a provision that, for all claims settled on or after
February 1, 2001, CCR members would be directly responsible for payment of
their own indemnity
19
MANAGEMENT'S DISCUSSION AND ANALYSIS -- Continued
obligations. The amendments will allow CCR members to choose the services they
wish to continue receiving from the CCR. T&N Ltd. plans to continue with the
CCR for claims handling and administrative services. However, T&N Ltd. has
appointed an outside law firm specializing in asbestos matters to handle its
litigation defense.
In 1996, T&N Ltd. purchased for the T&N Companies a (Pounds)500 million
layer of insurance which will be triggered should the aggregate costs of
claims filed after June 30, 1996, where the exposure occurred prior to that
date, exceed (Pounds)690 million. The Company now believes that the aggregate
cost of claims filed after June 30, 1996 will exceed the trigger point. The
Company believes based on its review of the insurance policy and its advice
from outside counsel, that it is probable that the T&N Companies will be
entitled to receive payment from the reinsurers for the cost of claims in
excess of the trigger point of the insurance. Based on this assessment, the
Company recorded an insurance recoverable asset under the T&N policy of $577
million in the fourth quarter of 2000. The Company has reviewed the financial
viability and legal obligations of the three reinsurance companies involved
and has concluded that there is little risk of the reinsurers not being able
to meet their obligation to pay, once the claims filed after June 30, 1996
exceed the (Pounds)690 million trigger point. The Company does not expect to
reach the trigger point of the insurance or begin to collect on this insurance
recoverable for the next several years. The US claims' costs applied against
this policy are converted at a fixed exchange rate of $1.69/(Pounds). As such,
if the market exchange rate is less then $1.69/(Pounds), the Company will
effectively have a discount from 100% recovery on claims made with the
insurance companies. At December 31, 2000, the $577 million insurance
recoverable asset is net of an exchange rate discount of $68 million.
The ultimate exposure of the T&N companies with respect to claims will
depend upon the extent to which the insurance described above will be
available to cover such claims, the amount paid for indemnity and defense,
changes in the legal environment and other factors.
Abex and Wagner Asbestos Litigation
Former businesses of Cooper Automotive, primarily Abex and Wagner, are
involved as defendants in numerous court actions in the United States alleging
personal injury from exposure to asbestos or asbestos-containing products,
mainly involving friction products. Abex is a defendant in approximately
23,000 pending claims as of December 31, 2000. During 2000, approximately
14,700 new claims naming this defendant were received. Wagner is a defendant
in approximately 17,300 claims as of December 31, 2000. During 2000,
approximately 6,700 new claims naming this defendant were received. In 1998,
the Company acquired the capital stock of a former Cooper Automotive entity
resulting in the assumption by a Company subsidiary of contractual liability,
under certain circumstances, for all claims pending and to be filed in the
future alleging exposure to certain Wagner automotive and industrial friction
products and for all claims filed after August 29, 1998, alleging exposure to
certain Abex (non-railroad and non-aircraft) friction products. In the fourth
quarter of 2000, the Company decreased its estimate of probable asbestos-
related liability by $127 million, which was accompanied by an approximately
equivalent reduction in the insurance recoverable asset. The revised estimate
of probable asbestos-related liability principally resulted from a study
performed by an econometric firm that specializes in these types of matters.
The revised liability (approximately $253 million) represents the Company's
estimate for claims currently pending and those which can be reasonably
estimated to be asserted in a future period. The Company believes that these
claims will be paid over the next 12 years. In arriving at the revised
liability for Abex and Wagner, assumptions have been made regarding the number
of claims anticipated to be received in the future period, the typical cost of
settlement (which is sensitive to the alleged disease type and the
jurisdiction in which the action is being brought), the rate of receipt of
claims, and the timing of settlements.
While management believes that the liability and receivable recorded for
these claims are appropriate for anticipated losses arising from asbestos-
related claims against Abex and Wagner for the covered period, given the
nature and complexity of factors affecting the estimated liability and
potential insurance recovery the actual
20
MANAGEMENT'S DISCUSSION AND ANALYSIS -- Continued
liability and insurance recovery may differ. No assurance can be given that
Abex and Wagner will not be subject to material additional liabilities and
significant additional litigation relating to asbestos for the period covered.
In the event that such liabilities exceed the amounts recorded by the Company
or the remaining insurance coverage, the Company's results of operations,
business, liquidity and financial condition could be materially adversely
affected.
The ultimate liability for all pending and future claims is highly
uncertain due to the difficulty of forecasting the numerous variables that can
affect the liability. The Company does not believe it can reasonably determine
the ultimate liability as the level of uncertainty is too great to provide for
reasonable estimation of the number of future claims, the nature of such
claims, and the cost to resolve them. As additional experience is gained
regarding claims or other new information becomes available regarding the
potential liability, the Company will reassess its potential liability and
revise the estimates as appropriate. Accordingly it is reasonably possible
that the ultimate losses from asbestos-related claims will be greater than
amounts recorded.
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 the post-August 1998 asbestos claims against
Abex has the benefit of that insurance. 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, barring unforeseen insolvencies of excess carriers or
other adverse events, should provide coverage for asbestos claims against
Abex. The Company believes that based on its review of the insurance policies,
the viability of the insurance carriers, and advice from outside legal
counsel, it is probable that Abex will receive payments for a substantial
majority of the cost of claims.
Wagner also maintained product liability insurance coverage for some of the
time that it manufactured products that contained asbestos. The subsidiary of
the Company that may be liable for asbestos claims against Wagner has the
benefit of that insurance. 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 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 Wagner will receive payment for a portion of the
cost of claims. Based on the probable conclusion of collection under the
insurance policies, the Company has recorded a $188 million insurance
recoverable asset related to the Abex and Wagner liability.
Federal-Mogul and Fel-Pro Asbestos Litigation
The Company also is sued in its own name as one of a large number of
defendants in a number of lawsuits brought by claimants alleging injury due to
exposure to asbestos. The Company's Fel-Pro subsidiary has also been named as
a defendant in a number of product liability cases involving asbestos,
primarily involving gasket or packing products. Fel-Pro is a defendant in
approximately 31,000 pending claims as of December 31, 2000. During 2000,
approximately 3,400 new claims were filed. Over 30,000 of these claims have
been transferred to a federal court where they reside subject to removal back
into the tort system only if certain medical and product identification
conditions are met. The Company is defending all such claims vigorously and
believes that it and Fel-Pro have substantial defenses to liability and
insurance coverage for defense and indemnity. While the outcome of litigation
cannot be predicted with certainty, management believes that asbestos claims
pending against the Company and Fel-Pro as of December 31, 2000, will not have
a material effect on the Company's financial position.
21
MANAGEMENT'S DISCUSSION AND ANALYSIS -- Continued
Aggregate of Asbestos Liability and Insurance Recoverable Asset
The following is a summary of the asbestos liability and the insurance
recoverable asset for 2000 (in millions of dollars):
T&N Abex &
Companies Wagner Other Total
--------- ------- ----- --------
Liability:
Balance at December 31, 1999............... $1,104.2 $ 408.8 $ 2.3 $1,515.3
2000 provision adjustments............... 750.9 (127.2) 1.6 625.3
2000 payments............................ (323.8) (28.9) (1.0) (353.7)
Other.................................... 25.0 -- -- 25.0
-------- ------- ----- --------
Balance at December 31, 2000............... $1,556.3 $ 252.7 $ 2.9 $1,811.9
======== ======= ===== ========
Asset:
Balance at December 31, 1999............... $ -- $ 325.9 $ -- $ 325.9
2000 provision adjustments............... 576.7 (135.8) -- 440.9
2000 proceeds............................ -- (2.2) -- (2.2)
Other.................................... 6.5 -- -- 6.5
-------- ------- ----- --------
Balance at December 31, 2000............... $ 583.2 $ 187.9 $ -- $ 771.1
======== ======= ===== ========
As of December 31, 2000, the Company has provided an aggregated liability
for all of its subsidiaries and businesses with potential asbestos liability
of approximately $1.8 billion for claims currently pending and those which can
be reasonably expected to be asserted in a future period. The Company believes
that these claims will be paid over the next 12 years. Of this amount, the
Company expects to incur asbestos payments of approximately $350 million over
the next 12 months and has reflected this as a current liability. This
estimate is based in part on recent and historical claims experience, medical
information, the impact of changes in indemnity sharing within the CCR and the
current legal environment. The Company cannot reasonably estimate a liability
beyond the period encompassed in its estimates as the level of uncertainty is
too great to provide for reasonable estimation of the number of future claims,
the nature of such claims, or the cost to resolve them.
The Company believes that it is probable that its subsidiaries with
asbestos-related liabilities and related insurance policies, the T&N
Companies, Abex, Wagner and Fel-Pro will collect the recorded aggregated
insurance recoverable asset of $771 million.
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 federal or state environmental laws. These laws
require responsible parties to pay for cleaning up contamination resulting
from hazardous wastes which were discharged into the environment by them or by
others to which they sent such wastes for disposition. In addition, the
Company has been notified by the United States Environmental Protection Agency
and various state agencies that it may be a potentially responsible party
(PRP) under such law for the cost of cleaning up certain other hazardous waste
storage or disposal facilities pursuant to CERCLA and other federal and state
environmental laws. PRP designation requires the funding of site
investigations and subsequent remedial activities. At most of the sites that
are likely to be costliest to clean up, which are often current or former
commercial waste disposal facilities to which numerous companies sent 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,
22
MANAGEMENT'S DISCUSSION AND ANALYSIS -- Continued
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. 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 reserve was
approximately $67.9 million and $74.5 million at December 31, 2000 and 1999,
respectively. The 2000 decrease was primarily attributable to remediation
payments made during 2000. Management believes that such accruals will be
adequate to cover the Company's estimated liability for its exposure in
respect to such matters.
Market Risk
In the normal course of business, the Company is subject to market exposure
from changes in foreign exchange rates, interest rates and raw material
prices. To manage a portion of these inherent risks, the Company purchases
various derivative financial instruments and commodity futures contracts. The
Company does not hold or issue derivative financial instruments for trading
purposes.
Foreign Currency 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, South America, Asia, Europe and
Africa. As a result, the Company's financial results could be significantly
affected by factors such as changes in foreign currency exchange rates or weak
economic conditions in the foreign markets in which the Company distributes
its products. The Company's operating results are primarily exposed to changes
in exchange rates between the US 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 stockholders'
equity for the Company's foreign subsidiaries reporting in local currencies
and as a component of income for its foreign subsidiaries using the US dollar
as the functional currency. The Company's equity was reduced by $245.6 million
and $149.7 million during 2000 and 1999, respectively, primarily due to
cumulative translation adjustments resulting from the strong US dollar.
As of December 31, 2000 and 1999, the Company's net current assets (defined
as current assets less current liabilities) subject to foreign currency
translation risk were $356.0 million and $187.4 million, respectively. The
potential decrease in net current assets from a hypothetical 10% adverse
change in quoted foreign currency exchange rates would be approximately $35.6
million and $18.7 million respectively. The sensitivity analysis presented
assumes a parallel shift in foreign currency exchange rates. Exchange rates
rarely move in the same direction. This assumption may overstate the impact of
changing exchange rates on individual assets and liabilities denominated in a
foreign currency.
The Company manages certain aspects of its foreign currency activities and
larger transactions through the use of foreign currency options or forward
contracts. The Company generally tries to utilize natural hedges within its
foreign currency activities, including the matching of revenues and costs. The
unrealized gains and losses on the Company's foreign currency transactions
were immaterial at December 31, 2000 and 1999. All currency forward option
contracts will expire within the next twelve months.
23
MANAGEMENT'S DISCUSSION AND ANALYSIS -- Continued
Interest Rate Risk
The Company's variable interest expense is sensitive to changes in the
general level of United States interest rates. Most of the Company's interest
expense is fixed through long-term borrowings to mitigate the impact of such
potential exposure. The following table provides information about the
Company's financial instruments that are sensitive to changes in interest
rates. The table presents principal cash flows and related weighted-average
interest rates by expected maturity dates. Weighted-average variable rates are
based upon spot rate observations as of the reporting date.
Interest Rate Sensitivity
Principal Amount by Expected Maturity
As of December 31, 2000
(Millions of Dollars)
Fair Value
at
December 31,
2001 2002 2003 2004 2005 Thereafter Total 2000
----- ------ ------ ------ ------ ---------- -------- ------------
Liabilities
Long-term debt,
including current
portion
Fixed rate.............. $44.5 $ 5.5 $ 20.5 $250.6 $ 15.0 $1,875.0 $2,211.1 $ 531.7
Average interest rate... 7.70% 7.68% 7.68% 7.68% 7.67% 7.68% 7.68%
Variable rate........... $87.2 $132.5 $134.5 $940.9 $183.5 $ 1.7 $1,480.3 $1,480.3
Average interest rate... 8.13% 8.12% 8.14% 8.13% 8.68% 7.43% 8.20%
Interest Rate Sensitivity
Principal Amount by Expected Maturity
As of December 31, 1999
(Millions of Dollars)
Fair Value
at
December 31,
2000 2001 2002 2003 2004 Thereafter Total 1999
----- ------ ------ ------ ------ ---------- -------- ------------
Liabilities
Long-term debt,
including current
portion
Fixed rate.............. $33.0 $ 44.8 $ 5.8 $ 20.9 $250.5 $1,885.0 $2,240.0 $2,040.0
Average interest rate... 7.71% 7.70% 7.70% 7.68% 7.68% 7.69% 7.69%
Variable rate........... $57.8 $111.6 $118.7 $134.5 $261.5 $ 186.7 $ 870.8 $ 870.8
Average interest rate... 7.32% 7.37% 7.38% 7.37% 7.36% 7.43% 7.37%
Commodity Price Risk
The Company is dependent upon the supply of certain raw materials in the
production process and has entered into firm purchase commitments for copper,
aluminum alloy, high-grade aluminum, lead and nickel. The Company uses forward
contracts to hedge against the changes in certain specific commodity prices of
the purchase commitments outstanding. As of December 31, 2000, the net
unrealized losses for commodity contracts were immaterial.
24
Item 8. Financial Statements and Supplemental Data
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31,
----------------------------
2000 1999 1998
-------- -------- --------
(Millions of Dollars,
Except Per Share Amounts)
Net sales........................................ $6,013.2 $6,487.5 $4,468.7
Cost of products sold............................ 4,595.9 4,709.1 3,290.2
-------- -------- --------
Gross margin................................... 1,417.3 1,778.4 1,178.5
Selling, general and administrative expenses..... 844.6 848.9 640.8
Amortization of goodwill and other intangible
assets.......................................... 123.6 127.2 83.8
Purchased in-process research and development
charge.......................................... -- -- 18.6
Restructuring charges............................ 135.7 -- 7.3
Adjustment of assets held for sale and other
long-lived assets to fair value................. 75.4 7.9 19.0
Asbestos charge.................................. 184.4 -- --
Integration costs................................ -- 46.9 22.4
Interest expense................................. 289.3 273.5 204.0
Interest income.................................. (4.3) (4.6) (10.6)
International currency exchange (gains) losses... (0.1) (2.7) 4.7
Net gain on British pound forward contract....... -- -- (13.3)
Other expense, net............................... 31.0 21.4 16.3
-------- -------- --------
Earnings (loss) before income taxes,
extraordinary items and cumulative effect of
change in accounting principle.............. (262.3) 459.9 185.5
Income tax expense............................... 19.2 180.9 93.6
-------- -------- --------
Earnings (loss) before extraordinary items
and cumulative effect of change in
accounting principle........................ (281.5) 279.0 91.9
Extraordinary items--loss on early retirement of
debt, net of applicable income tax benefits..... -- 23.1 38.2
Cumulative effect of change in accounting for
costs of start-up activities, net of applicable
income tax benefit.............................. -- 12.7 --
-------- -------- --------
Net earnings (loss).......................... (281.5) 243.2 53.7
Preferred dividends, net of related tax benefit.. 2.0 2.4 3.6
-------- -------- --------
Net Earnings (Loss) Available for Common
Shareholders.................................... $ (283.5) $ 240.8 $ 50.1
======== ======== ========
Earnings (Loss) Per Common Share:
Basic
Earnings (loss) before extraordinary items and
cumulative effect of change in accounting
principle..................................... $ (4.02) $ 3.96 $ 1.84
Extraordinary items--loss on early retirement
of debt, net of applicable income tax
benefits...................................... -- (.34) (.80)
Cumulative effect of change in accounting for
costs of start-up activities, net of applicable
income tax benefit.............................. -- (.18) --
-------- -------- --------
Net Earnings (Loss) Available for Common
Shareholders................................ $ (4.02) $ 3.44 $ 1.04
======== ======== ========
Diluted
Earnings (loss) before extraordinary items and
cumulative effect of change in accounting
principle..................................... $ (4.02) $ 3.59 $ 1.67
Extraordinary items--loss on early retirement
of debt, net of applicable income tax
benefits...................................... -- (.28) (.71)
Cumulative effect of change in accounting for
costs of start-up activities, net of
applicable income tax benefit................. -- (.15) --
-------- -------- --------
Net Earnings (Loss) Available for Common
Shareholders................................ $ (4.02) $ 3.16 $ .96
======== ======== ========
See accompanying Notes to Consolidated Financial Statements.
25
CONSOLIDATED BALANCE SHEETS
December 31,
-------------------
2000 1999
--------- --------
(Millions of
Dollars)
ASSETS
Cash and equivalents...................................... $ 107.2 $ 64.5
Accounts receivable....................................... 512.8 514.6
Investment in accounts receivable securitization.......... 229.1 232.2
Inventories............................................... 808.6 883.6
Deferred taxes............................................ 284.0 128.1
Prepaid expenses and income tax benefits.................. 195.1 203.5
--------- --------
Total Current Assets.................................. 2,136.8 2,026.5
Property, plant and equipment, net........................ 2,388.8 2,503.7
Goodwill, net............................................. 3,303.1 3,547.8
Other intangible assets, net.............................. 746.4 796.3
Asbestos-related insurance recoverable.................... 771.1 325.9
Other noncurrent assets................................... 908.8 745.0
--------- --------
Total Assets.......................................... $10,255.0 $9,945.2
========= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Short-term debt, including current portion of long-term
debt..................................................... $ 147.8 $ 190.8
Accounts payable.......................................... 431.9 621.9
Accrued compensation...................................... 157.8 182.9
Restructuring and rationalization reserves................ 107.9 46.0
Current portion of asbestos liability..................... 350.0 180.0
Interest payable.......................................... 94.4 79.0
Other accrued liabilities................................. 414.0 482.0
--------- --------
Total Current Liabilities............................. 1,703.8 1,782.6
Long-term debt............................................ 3,559.7 3,020.0
Long-term portion of asbestos liability................... 1,461.9 1,335.3
Postemployment benefits................................... 637.6 661.9
Other accrued liabilities................................. 709.3 454.9
Minority interest in consolidated subsidiaries............ 57.5 40.3
Company-obligated mandatorily redeemable preferred
securities of subsidiary trustholding solely convertible
subordinated debentures of the Company(1)................ 575.0 575.0
Shareholders' Equity:
Series C ESOP preferred stock........................... 38.1 41.5
Common stock............................................ 352.5 352.1
Additional paid-in capital.............................. 1,778.6 1,782.4
Retained earnings (accumulated deficit)................. (113.5) 170.3
Unearned ESOP compensation.............................. -- (7.9)
Accumulated other comprehensive loss.................... (504.7) (262.1)
Other................................................... (0.8) (1.1)
--------- --------
Total Shareholders' Equity............................ 1,550.2 2,075.2
--------- --------
Total Liabilities and Shareholders' Equity............ $10,255.0 $9,945.2
========= ========
- ------------------
(1) The sole assets of the Trust are convertible subordinated debentures of
Federal-Mogul with an aggregate principal amount of $575.0 million, which
bear interest at a rate of 7% per annum and mature on December 1, 2027.
Upon repayment of the subordinated debentures, the Company-obligated
mandatorily redeemable preferred securities of subsidiary trust will be
mandatorily redeemed.
See accompanying Notes to Consolidated Financial Statements.
26
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
-----------------------------
2000 1999 1998
------- --------- ---------
(Millions of Dollars)
Cash Provided From (Used By) Operating
Activities
Net earnings (loss)............................ $(281.5) $ 243.2 $ 53.7
Adjustments to reconcile net earnings (loss) to
net cash provided from (used by) operating
activities:
Depreciation and amortization................. 374.4 354.9 228.0
Purchased in-process research and development
charge....................................... -- -- 18.6
Restructuring charges......................... 135.7 -- 7.3
Adjustment of assets held for sale and other
long-lived assets to fair value.............. 75.4 7.9 19.0
Asbestos charge............................... 184.4 -- --
Loss on early retirement of debt.............. -- 36.6 58.1
Cumulative effect of change in accounting
principle.................................... -- 19.5 --
Vesting of restricted stock................... 0.8 1.4 0.7
Postemployment benefits....................... (9.1) (18.8) 10.9
(Increase) decrease in accounts receivable.... 38.1 (33.4) 37.5
Decrease in inventories....................... 40.7 117.2 55.9
Increase (decrease) in accounts payable....... (175.4) 149.7 5.4
Changes in other current liabilities and other
current assets............................... (114.4) (57.0) (2.4)
Payments against restructuring and
rationalization reserves..................... (72.2) (80.6) (78.0)
Payments against asbestos liability........... (351.4) (178.2) (89.2)
------- --------- ---------
Net Cash Provided From (Used By) Operating
Activities.................................. (154.5) 562.4 325.5
Cash Provided From (Used By) Investing
Activities
Expenditures for property, plant and equipment
and other long-term
assets, net................................... (313.3) (395.2) (228.5)
Proceeds from sales of businesses.............. 66.6 53.3 53.4
Proceeds from sale of options.................. -- -- 39.1
Business acquisitions, net of cash acquired.... -- (371.2) (4,225.2)
Other.......................................... 2.4 -- --
------- --------- ---------
Net Cash Used By Investing Activities........ (244.3) (713.1) (4,361.2)
Cash Provided From (Used By) Financing
Activities
Issuance of common stock....................... -- 1.2 1,382.2
Proceeds from issuance of long-term debt....... 689.0 2,123.0 6,197.5
Principal payments on long-term debt........... (145.3) (2,251.5) (3,927.6)
Increase (decrease) in short-term debt......... (25.9) (3.0) 0.5
Fees paid for debt issuance and other
securities.................................... (4.6) (25.5) (76.6)
Fees for early retirement of debt.............. -- -- (27.4)
Sale (repurchase) of accounts receivable under
securitization................................ (62.1) 304.3 42.6
Dividends...................................... (4.0) (4.3) (10.4)
Other.......................................... (5.6) (6.2) (9.3)
------- --------- ---------
Net Cash Provided From Financing Activities.. 441.5 138.0 3,571.5
------- --------- ---------
Increase (Decrease) in Cash and Equivalents.. 42.7 (12.7) (464.2)
Cash and equivalents at beginning of year....... 64.5 77.2 541.4
------- --------- ---------
Cash and Equivalents at End of Year.......... $ 107.2 $ 64.5 $ 77.2
======= ========= =========
See accompanying Notes to Consolidated Financial Statements.
27
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Series C Retained Accumulated
ESOP Series D & E Additional Earnings Unearned Other
Preferred Preferred Common Paid-In (Accumulated ESOP Comprehensive
Stock Stock Stock Capital Deficit) Compensation Loss Other Total
--------- ------------ ------ ---------- ------------ ------------ ------------- ----- --------
(Millions of Dollars)
Balance at January 1, 1998.. $49.0 -- $201.0 $ 332.6 $(123.6) $(21.8) $ (65.7) $(2.2) $ 369.3
Net earnings.......... 53.7 53.7
Currency translation.. (36.7) (36.7)
Other................. (3.6) (3.6)
--------
Total Comprehensive
Income.............. 13.4
Issuance of Series E
preferred stock...... $ 225.0 225.0
Issuance of stock..... (92.3) 135.8 1,338.4 (0.3) 1,381.6
Retirement of Series C
ESOP preferred
stock................ (4.6) (4.6)
Amortization of
unearned ESOP
compensation......... 6.7 6.7
Dividends............. (10.4) (10.4)
Preferred dividend tax
benefits............. 5.2 5.2
----- ------- ------ -------- ------- ------ ------- ----- --------
Balance at December 31, 1998.. 44.4 132.7 336.8 1,665.8 (69.9) (15.1) (106.0) (2.5) 1,986.2
Net earnings.......... 243.2 243.2
Currency translation.. (149.7) (149.7)
Other................. (6.4) (6.4)
--------
Total Comprehensive
Income.............. 87.1
Conversion of Series E
preferred stock...... (132.7) 15.2 117.5 --
Issuance of stock,
net.................. 0.1 (1.1) 1.4 0.4
Retirement of Series C
ESOP preferred
stock................ (2.9) (2.9)
Amortization of
unearned ESOP
compensation......... 7.2 7.2
Dividends............. (1.3) (3.0) (4.3)
Preferred dividend tax
benefits............. 1.5 1.5
----- ------- ------ -------- ------- ------ ------- ----- --------
Balance at December 31, 1999.. 41.5 -- 352.1 1,782.4 170.3 (7.9) (262.1) (1.1) 2,075.2
Net loss.............. (281.5) (281.5)
Currency translation.. (245.6) (245.6)
Other................. 3.0 3.0
--------
Total Comprehensive
Loss................ (524.1)
Issuance of stock,
net.................. 0.4 (0.7) 0.3 --
Retirement of Series C
ESOP Preferred
stock................ (3.4) (3.1) (6.5)
Amortization of
unearned ESOP
compensation......... 7.9 7.9
Dividends............. (4.0) (4.0)
Preferred dividend tax
benefits............. 1.7 1.7
----- ------- ------ -------- ------- ------ ------- ----- --------
Balance at December 31, 2000.. $38.1 $ -- $352.5 $1,778.6 $(113.5) $ -- $(504.7) $(0.8) $1,550.2
===== ======= ====== ======== ======= ====== ======= ===== ========
See accompanying Notes to Consolidated Financial Statements.
28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Accounting Policies
Organization: Federal-Mogul is an automotive parts manufacturer providing
innovative solutions and systems to global customers in the automotive, small
engine, heavy-duty and industrial markets. The Company manufactures engine
bearings, pistons, piston pins, rings, cylinder liners, camshafts, sintered
products, sealing systems, 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
and related parts to the aftermarket.
Principles of Consolidation: The consolidated financial statements include
the accounts of the Company and its majority-owned subsidiaries. Intercompany
accounts and transactions have been eliminated in consolidation.
Cash and Equivalents: The Company considers all highly liquid investments
with maturities of 90 days or less from the date of purchase to be cash
equivalents.
Inventories: Inventories are stated at the lower of cost or market. Cost
determined by the last-in, first-out (LIFO) method was used for 48% and 50% of
the inventory at December 31, 2000 and 1999, respectively. The remaining
inventories are recorded using the first-in, first-out (FIFO) method. If
inventories had been valued at current cost, amounts reported would have been
increased by $40.5 million and $30.6 million as of December 31, 2000 and 1999,
respectively.
Inventory quantity reductions resulting in liquidations of certain LIFO
inventory layers increased net earnings by $2.2 million, $3.2 million and $3.4
million ($.03, $.04 and $.06 per diluted share) in 2000, 1999 and 1998,
respectively.
At December 31, inventories consisted of the following:
2000 1999
---------- ----------
(Millions of Dollars)
Finished products................................. $ 545.8 $ 638.9
Work-in-process................................... 136.3 133.1
Raw materials..................................... 155.8 138.1
---------- ----------
837.9 910.1
Reserve for inventory valuation................... (29.3) (26.5)
---------- ----------
$ 808.6 $ 883.6
========== ==========
Goodwill and Other Intangible Assets: At December 31, goodwill and other
intangible assets, which result principally from acquisitions, consisted of
the following:
Estimated
Useful Life 2000 1999
----------- -------- --------
(Millions of
Dollars)
Goodwill.................................. 40 years $3,557.6 $3,725.7
Accumulated amortization.................. (254.5) (177.9)
-------- --------
Total Goodwill.......................... $3,303.1 $3,547.8
======== ========
Trademarks................................ 40 years $ 418.1 $ 415.7
Developed technology...................... 12-30 years 337.1 368.1
Assembled workforce....................... 15 years 71.8 76.9
Other..................................... 5-20 years 27.1 14.4
-------- --------
854.1 875.1
Accumulated amortization.................. (107.7) (78.8)
-------- --------
Total Other Intangible Assets........... $ 746.4 $ 796.3
======== ========
29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
Intangible assets are periodically reviewed for impairment indicators. If
impairment indicators exist, an assessment of undiscounted future cash flows
related to assets held for use or fair value for assets held for sale are
evaluated accordingly. Intangible assets are amortized on a straight-line
basis over their estimated useful lives. Impairment charges recorded in 2000,
1999 and 1998 related primarily to assets held for sale.
Revenue Recognition: The Company recognizes revenue, estimated returns from
product sales and related incentives when there is evidence of a sales
agreement, the delivery of goods has occurred, the sales price is fixed or
determinable and the collectibility of revenue is reasonably assured. The
Company generally records sales upon shipment of product to customers and
transfer of title under standard commercial terms.
Shipping and Handling Costs: The Company recognizes shipping and handling
costs as a component of cost of products sold in the statement of operations.
Recoverable Customer Engineering and Tooling: Pre-production tooling and
engineering costs that the Company will not own and that will be used in
producing products under long-term supply arrangements are expensed as
incurred unless the supply arrangement provides the Company the noncancelable
right to use the tools or the reimbursement of such costs is contractually
guaranteed by the customer. Pre-production tooling and engineering costs that
are owned by the Company are capitalized as part of machinery and equipment.
Research and Development and Advertising Costs: The Company expenses
research and development costs as incurred. Research and development expense
was $127.8 million, $128.0 million and $85.0 million for 2000, 1999 and 1998,
respectively.
Costs associated with advertising and promotion are expensed as incurred.
Advertising and promotion expense was $68.6 million, $59.8 million and $45.9
million for 2000, 1999 and 1998, respectively.
Currency Translation: Exchange adjustments related to international
currency transactions and translation adjustments for subsidiaries whose
functional currency is the United States dollar (principally those located in
highly inflationary economies) are reflected in the consolidated statements of
operations. Translation adjustments of international subsidiaries for which
the local currency is the functional currency are reflected in the
consolidated financial statements as a component of accumulated other
comprehensive income. Deferred taxes are not provided as the earnings of the
subsidiaries are considered to be permanently reinvested.
Environmental Liabilities: The Company recognizes environmental liabilities
when a loss is probable and reasonably estimable. Such liabilities are
generally not subject to insurance coverage. Engineering and legal specialists
within the Company, based on current law and existing technologies, estimate
each environmental obligation. Such estimates are based primarily upon the
estimated cost of investigation and remediation required and the likelihood
that other potentially responsible parties will be able to fulfill their
commitments at the sites where the Company may be jointly and severally liable
with such parties (refer to Note 16, "Litigation and Environmental Matters").
The Company regularly evaluates and revises its estimates for environmental
obligations based on expenditures against established reserves and the
availability of additional information.
Integration Costs: These are incremental direct costs associated with
integrating material acquisitions and include such one-time items as brand
integration, costs to pack and move productive inventory and fixed assets from
one location to another, and costs to change the identity of entities
acquired. Such costs are expensed as incurred.
Derivative Financial Instruments: The Company has used interest rate lock
agreements to synthetically manage the interest rate characteristics of
certain outstanding debt to a more desirable fixed rate basis or to limit the
Company's exposure to rising interest rates, and uses forward foreign exchange
contracts to minimize and
30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
lock the amount of currency payments for certain transactions that are
denominated in certain foreign currencies, and forward contracts to hedge
against the changes in certain specific commodity prices of the purchase
commitments outstanding (collectively "derivative contracts").
Interest rate differentials to be paid or received as a result of settled
interest rate lock agreements are accrued and recognized as an adjustment of
interest expense related to the designated debt. Recorded amounts related to
derivative contracts are included in other assets or liabilities. The fair
values of interest rate lock agreements and forward contracts are not
recognized in the financial statements. There were no interest rate locks
outstanding at December 31, 2000, 1999 or 1998.
Realized and unrealized gains or losses at the time of maturity,
termination, sale or repayment of a derivative contract or designated item are
recorded in a manner consistent with the original designation of the
derivative in view of the nature of the termination, sale or repayment
transaction. Amounts related to interest rate locks are deferred and amortized
as an adjustment to interest expense over the original period of interest
exposure, provided the designated liability continues to exist or is probable
of occurring. Realized and unrealized changes in fair value of derivatives
designated with items that no longer exist or are no longer probable of
occurring are recorded as a component of the gain or loss arising from the
disposition of the designated item.
Comprehensive Income: The Company displays comprehensive income in the
Consolidated Statements of Shareholders' Equity. At December 31, 2000, 1999
and 1998, accumulated other comprehensive loss consisted of $497.6 million,
$252.0 million and $102.3 million of foreign currency translation adjustments,
respectively, and $7.1 million, $10.1 million and $3.7 million of other
comprehensive loss, primarily minimum pension funding, net of tax,
respectively.
Use of Estimates: The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
Reclassifications: Certain items in the prior year financial statements
have been reclassified to conform with the presentation used in 2000.
Effect of Accounting Pronouncements: Statement of Financial Accounting
Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging
Activities", was issued by the Financial Accounting Standards Board ("FASB")
in June 1998. SFAS No. 133 requires that all derivative instruments be
recorded on the balance sheet at their fair value. In June 2000, the FASB
issued SFAS No. 138, which amends and clarifies certain guidance in SFAS No.
133. The Company has implemented the appropriate systems and processes to
adopt these statements effective January 1, 2001. Changes in the fair value of
derivatives are recorded each period in current earnings or other
comprehensive income, depending on whether a derivative is designated as part
of a hedge transaction and, if it is, the type of hedge transaction. For fair-
value hedge transactions, the fair value of the derivative instrument will
generally be offset in the income statement by changes in the hedged item's
fair value. For cashflow hedge transactions, the fair value of the derivative
instrument will be reported in other comprehensive income. The ineffective
portion of all hedges will be recognized in current-period earnings. The
statements provide for the recognition of a cumulative adjustment for an
accounting change, as of the date of adoption. The Company estimates that it
will record a net-of-tax cumulative-effect-type loss of approximately $350,000
in accumulated other comprehensive income to recognize at fair value all
derivative instruments that will be designated as cashflow hedges. The
adjustment to current earnings for fair value hedges is not material. The
adoption of this standard will also impact assets and liabilities on the
balance sheet.
In October 2000, the FASB issued SFAS No. 140, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities--a
Replacement of SFAS No. 125." This statement provides accounting and reporting
standards for transfers and servicing of financial assets and extinguishment
of liabilities.
31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
This statement is effective for accounts receivable securitization programs
entered into after March 2001. The Company's current accounts receivable
securitization program expires June 2001 and is not required to comply with
the new accounting provisions of SFAS No. 140. The expanded disclosure
requirements of SFAS No. 140 are provided in Note 7.
In November 2000, the Emerging Issues Task Force ("EITF") of the FASB
reached consensus on issue No. 00-14, Accounting for Certain Sales Incentives.
The EITF addresses the recognition, measurement and income statement
classification for sales incentives offered voluntarily by a vendor without
charge to customers that can be used in, or are exercisable by customers as a
result of a single transaction. EITF No. 00-14 is required to be applied
beginning April 1, 2001. The effect of the adoption has not been finalized,
however the, Company believes that the adoption will not have a material
impact on its financial statements.
2. Acquisitions of Businesses
1999 Acquisitions:
In May 1999, the Company completed its acquisition of the piston division
of Alcan Deutschland GmbH (Alcan) in Germany, a subsidiary of Alcan Aluminum
Ltd. in Canada. The division manufactures pistons for passenger cars and
commercial vehicles under the Nural brand name. The piston division employs
approximately 1,100 people with 1998 annual sales of approximately $150
million.
Also in January 1999, the Company completed its acquisition of certain
manufacturing operations of Crane Technologies, Inc. (Crane) to increase its
camshaft capacity. Its two plants, located in Orland, Indiana and Jackson,
Michigan, employ approximately 230 people with 1998 annual sales of
approximately $36 million.
1998 Acquisitions:
T&N:
In March 1998, the Company acquired T&N plc (T&N), a manufacturer of high
technology engineered automotive components and industrial materials, based in
Manchester, England for consideration (including direct costs of the
acquisition) of approximately $2.4 billion. The Company also assumed cash of
approximately $185 million and debt of approximately $745 million.
The Company recognized an $18.6 million charge in the first quarter of 1998
associated with the estimated fair value of purchased in-process research and
development for which technological feasibility had not been established and
the in-process technology had no future alternative uses.
Cooper Automotive
In October 1998, the Company acquired the automotive division of Cooper
Industries, Inc. (Cooper Automotive), headquartered in St. Louis, Missouri,
for initial consideration of approximately $1.9 billion. The Cooper Automotive
purchase agreement included a price adjustment based upon acquired net assets,
as defined in the agreement, under which the Company made additional cash
payments of $154.9 million in 1999. Cooper is a leading supplier of
aftermarket parts for repair and maintenance and serves OE automobile
manufacturers worldwide.
Fel-Pro
In February 1998, the Company acquired Fel-Pro, Incorporated and certain
affiliated entities which constitute the operating businesses of the Fel-Pro
group of companies (Fel-Pro), a privately-owned gasket manufacturer
headquartered in Skokie, Illinois, for a total consideration of approximately
$722 million, which
32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
included 1,030,326 shares of Federal-Mogul Series E Stock with an imputed
value of $225 million and approximately $497 million in cash. Fel-Pro is a
leading gasket manufacturer in the North American aftermarket and OE heavy-
duty market.
The 1999 and 1998 acquisitions have been accounted for as purchases and,
accordingly, the total consideration was allocated to the acquired assets and
assumed liabilities based on estimated fair values as of the acquisition
dates. The consolidated statements of operations for the years ended December
31, 1999 and 1998 include the operating results of the acquired businesses,
exclusive of the T&N Bearings Business and the Fel-Pro Chemical Business
(refer to "Divestiture of Acquired Businesses" below) from their respective
acquisition dates.
Rationalization of Acquired Businesses
In connection with the T&N, Cooper Automotive and Fel-Pro acquisitions in
1998 the Company recognized $216.8 million as acquired liabilities related to
the rationalization and integration of acquired businesses. The
rationalization reserves provided for $180.0 million in relocation and
severance costs and $36.8 million in exit costs, and were recorded as a
component of goodwill in the purchase price allocation.
The components of the integration plan included closure of certain
manufacturing facilities worldwide; relocation of highly manual manufacturing
product lines to more suitable locations; consolidation of overlapping
manufacturing, technical and sales facilities and joint ventures;
consolidation of overlapping aftermarket warehouses; consolidation of
aftermarket marketing and customer support functions; and streamlining of
administrative, sales, marketing and product engineering staffs worldwide.
The Company paid $10.7 million and $72.2 million related to these
rationalization reserves in 2000 and 1999, respectively. Also during 1999, the
Company made adjustments to reduce the rationalization reserves, with an
offsetting amount to goodwill, of $47.9 million. These adjustments related to
the finalization of rationalization plans. As of December 31, 2000, remaining
rationalization reserves were $18.0 million, primarily relating to the closure
of several Powertrain Systems facilities in Europe and the consolidation of
aftermarket warehouses in Europe. These costs are expected to be paid in 2001.
Divestitures of Acquired Businesses
In connection with securing regulatory approvals for the acquisition of
T&N, the Company executed an Agreement Containing Consent Order with the
Federal Trade Commission on February 27, 1998. Pursuant to this agreement, the
Company divested of the T&N Bearings Business and provided for independent
management of those assets pending such divestiture. The agreement stipulated
that the T&N Bearings Business be maintained as a viable, independent
competitor of the Company and that the Company not attempt to direct the
activities of, or exercise control over, the T&N Bearings Business or have
contact with the T&N Bearings Business outside of normal business activities.
In December 1998, the Company sold the T&N Bearings Business, consisting of
the Glacier Vandervell Bearings Group and the AE Clevite North American non-
bearing aftermarket engine hard parts business, to Dana Corporation for $430
million. These proceeds were subsequently used to pay down debt. Furthermore,
the Company realized additional net proceeds of approximately $13 million from
the collection of receivables of the business sold. Prior to the sale of the
T&N Bearings Business to Dana Corporation, a portion of the business was sold
for approximately $12 million in August 1998.
In July 1998, the Company sold the Fel-Pro Chemical Business to Loctite
Corporation, a part of Henkel KGaA, a global specialist in applied chemistry
headquartered in Dusseldorf, Germany, for $57 million.
33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
Operating results for the T&N Bearings and Fel-Pro Chemical Businesses
(which include interest expense of $30 million relating to the holding costs
of the businesses) have been excluded from the consolidated statement of
operations for the year ended December 31, 1998.
Pro Forma Results
The following unaudited pro forma financial information for the year ended
December 31, 1998 assumes the T&N, Cooper Automotive and Fel-Pro acquisitions
occurred as of January 1, 1998, after giving effect to certain adjustments,
including the amortization of intangible assets, interest expense on
acquisition debt, divestitures of the T&N Bearings Business and Fel-Pro
Chemical Business, 1998 equity offerings and income tax effects. The pro forma
results (in millions of dollars, except per share data) have been prepared for
comparative purposes only and are not necessarily indicative of the results of
operations which may occur in the future or that would have occurred had the
acquisitions of T&N, Cooper Automotive and Fel-Pro been consummated on the
date indicated, nor are they necessarily indicative of the Company's future
results of operations.
Unaudited Pro Forma Financial Information
(Millions of Dollars, Except Per Share Amounts)
For the Year
Ended
December 31,
1998
------------
Net sales.................................................... $6,444.1
Net earnings................................................. $ 152.0
Earnings per share........................................... $ 2.12
Earnings per share assuming dilution......................... $ 1.95
3. Sales of Businesses
In 2000, the Company sold its OCS filter business, its minority interest in
a German OE operation, its Greek aftermarket operation, one of its US sintered
products operations and its India sintered products operation. In the
aggregate these businesses had approximately $28.5 million in sales in 1999
and employed approximately 675 people. The total proceeds were $66.6 million.
The company did not record a significant gain or loss on these transactions,
individually or in the aggregate.
In 1999, the Company sold its subsidiary, Bertolotti Pietro e Figli, S.r.l.
(Bertolotti), an Italian aftermarket operation. In 1998, the Company
recognized a $19.0 million charge primarily associated with the writedown of
Bertolotti's assets to their estimated fair value. In 1999, the Company
recognized an additional $7.9 million loss associated with the writedown of
Bertolotti's assets to their fair value resulting from the sale. Offsetting
the loss was a tax benefit of $7.9 million resulting from the sale.
Also during 1999, the Company sold its South African heat transfer
business. The business had sales of approximately $56 million in 1998 in four
South African locations and employed approximately 1,200 people. The Company
did not realize a significant gain or loss on this transaction.
In February 1998, the Company divested its minority interest in G. Bruss
GmbH & Co. KG (Bruss), a German manufacturer of seals and gaskets. As part of
the divestiture agreement, the Company increased its ownership to 100% in its
Summerton, South Carolina gasket manufacturing plant. The Company received net
proceeds of approximately $46 million related to the divestiture agreement and
recognized a gain on the divestiture of $6.0 million. The gain on the
divestiture is included as a component of other expense.
34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
4. Restructuring Charges
In 2000, the Company recognized $135.7 million of restructuring charges
related to severance and exit costs. Employee severance costs of $105.8
million and exit costs of $29.9 million resulted from the planned closure of
certain North American aftermarket branch warehouses and distribution centers;
consolidation of the Company's heavy-wall bearings business; the closure of
certain Australian and Taiwanese sales, administrative and distribution
facilities; the consolidation of certain administrative and human resource
functions in Europe; reorganization of the America's friction business;
closure of one of the Company's European R&D centers, consolidation of an
administrative facility at the Company's Ohio ignition facility and various
other programs in North America, South America and Europe. Net employee
reductions are expected to be approximately 2,850 comprised of 4,750
reductions associated with facility closings offset by 1,900 new hires in new
or expanded facilities. As part of the 2000 restructuring plan approximately
1,400 employees were severed and 30 facilities were closed or consolidated.
In 2000, the Company recorded a $75.4 million charge primarily associated
with the actions of the 2000 restructuring program. Included in this charge is
a write-down of assets to their fair value for the closure of aftermarket
branch warehouses and distribution centers, the Company's Ohio administrative
facility, a European R&D center and certain facilities associated with the
reorganization of the America's friction business.
In 1999, the Company recognized $13.2 million of restructuring charges
related to severance and exit costs. Employee severance costs of $11.1 million
resulted from planned terminations in certain European operations of the
Company, employees at the Company's Milan, Michigan plant, and certain
executive severances. The severance costs were based on the estimated amounts
that will be paid to the affected employees pursuant to the Company's
workforce reduction policies and certain governmental regulations. Total
headcount reductions are expected to be approximately 250 employees. Exit
costs of $2.1 million were related to the closing of the Company's Milan plant
and French bearing operations. As of December 31, 2000, approximately 250
employees were severed in connection with the 1999 restructuring plan.
Also in 1999, the Company recognized $13.2 million of reversals of
restructuring charges recorded in previous years. These reversals resulted
primarily from lower than expected employee severance costs principally
associated with the reduction of the aftermarket sales force and consolidation
of certain operations in the Americas.
In 1998, as a result of the T&N, Cooper Automotive and Fel-Pro
acquisitions, the Company recognized $16.3 million of restructuring charges
related to restructuring the Company's operations in place prior to these
acquisitions. The restructuring charges were primarily for employee severance
costs, which resulted from terminations in various business operations of the
Company. The severance costs were based on the amounts paid to the affected
employees pursuant to the Company's workforce reduction policies and certain
foreign governmental regulations.
Also in 1998, the Company recognized restructuring credits of $9.0 million
for a reversal of charges recorded in previous years. The Company was able to
sell, rather than liquidate, its retail operations in Puerto Rico, causing
this reversal.
35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
The following is a summary of restructuring charges and related activity
for 2000, 1999 and 1998 (in millions of dollars):
Restructuring Provision
------------------------------------------------------------------
1995-1997 1998 1999 2000
--------------- --------------- --------------- ---------------
Severance Exit Severance Exit Severance Exit Severance Exit Total
--------- ----- --------- ----- --------- ----- --------- ----- ------
Balance of restructuring
reserves at January 1,
1998................... $22.2 $14.8 $ 37.0
1998 restructuring
charges............... -- -- $16.0 $ 0.3 16.3
Adjustment to
restructuring
reserves.............. (4.6) (4.4) -- -- (9.0)
----- ----- ----- ----- ------
1998 restructuring
charges (net).......... (4.6) (4.4) 16.0 0.3 7.3
Payments against
restructuring
reserves............... (7.2) (5.9) (3.3) -- (16.4)
----- ----- ----- ----- ------
Balance of restructuring
reserves at December
31, 1998............... 10.4 4.5 12.7 0.3 27.9
1999 restructuring
charges............... $11.1 $ 2.1 13.2
Adjustment to
restructuring
reserves.............. (4.0) (2.9) (6.1) (0.2) -- -- (13.2)
----- ----- ----- ----- ----- ----- ------
1999 restructuring
charges (net).......... (4.0) (2.9) (6.1) (0.2) 11.1 2.1 --
Payments and charges
against restructuring
Reserves............... (6.4) (1.6) (0.8) (0.1) (3.1) (0.2) (12.2)
----- ----- ----- ----- ----- ----- ------
Balance of restructuring
reserves at December
31, 1999............... -- -- 5.8 -- 8.0 1.9 15.7
2000 restructuring
charges................ $105.8 $29.9 135.7
Payments and charges
against restructuring
Reserves............... (3.1) (5.5) (1.9) (46.8) (4.2) (61.5)
----- ----- ----- ----- ----- ----- ------ ----- ------
Balance of restructuring
reserves at December
31, 2000............... $ -- $ -- $ 2.7 $ -- $ 2.5 $ -- $ 59.0 $25.7 $ 89.9
===== ===== ===== ===== ===== ===== ====== ===== ======
5. British Pound Forward Contract
In the fourth quarter of 1997, in anticipation of the then pending T&N
acquisition, the Company purchased a British pound currency option for $28.1
million with a notional amount of $2.5 billion. The cost of the option and its
change in fair value has been reflected in the results of operations in the
fourth quarter of 1997. At December 31, 1997, the Company had recognized a net
loss of $10.5 million on the transaction. In January 1998, the Company settled
the option and recognized an additional loss of $17.3 million.
In January 1998, in anticipation of the then pending T&N acquisition, the
Company entered into a forward contract to purchase (Pounds)1.5 billion for
approximately $2.45 billion. As a result of favorable fluctuations in the
British pound/United States dollar exchange rate during the contract period,
the Company recognized a $30.6 million gain.
The Company entered into the above transaction to serve as an economic
hedge for the purchase of T&N. However, this transaction did not qualify for
hedge accounting under US GAAP, and therefore is reflected in the consolidated
statement of operations caption "Net gain on British pound forward contract" .
36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
6. Debt
Long-term debt at December 31 consists of the following:
2000 1999
-------- --------
(Millions of
Dollars)
Senior Credit Agreements:
Term loans.............................................. $ 706.0 $ 750.0
Multi-currency revolving credit facility................ 744.5 65.0
Notes due 2004 -- 7.5%, issued in 1998.................... 249.7 249.6
Notes due 2006 -- 7.75%, issued in 1998................... 399.9 399.9
Notes due 2006 -- 7.375%, issued in 1999.................. 398.8 398.6
Notes due 2009 -- 7.5%, issued in 1999.................... 597.9 597.6
Notes due 2010 -- 7.875%, issued in 1998.................. 349.3 349.2
Medium-term notes -- due between 2001 and 2005, average
rate of 8.8%,
issued in 1994 and 1995.................................. 84.0 104.0
Senior notes -- due in 2007, rate of 8.8%, issued in
1997..................................................... 124.7 124.7
ESOP obligation, average rate of 7.19%.................... -- 7.9
Other..................................................... 36.6 64.3
-------- --------
3,691.4 3,110.8
Less current maturities included in short-term debt....... 131.7 90.8
-------- --------
$3,559.7 $3,020.0
======== ========
In December 2000, the Company executed its fourth amended and restated
credit agreement, ("Senior Credit Agreements"). The Senior Credit Agreements
provide for an additional term loan of $150 million and a senior secured
revolving credit facility of $200 million. In addition to the pledge of
capital stock described below, the Company provided collateral in the form of
a pledge of its domestic inventories, domestic accounts receivable not
otherwise sold under securitizations, domestic plant, equipment and real
property, and its domestic intellectual property. This increased the Company's
borrowing limits under the Senior Credit Agreements to $2.1 billion. The
Company had $1.45 billion outstanding under these Senior Credit Agreements as
of December 31, 2000, which are due from 2001 to 2005 with an average interest
rate of 8.15%. In January 2001, the Company borrowed $150 million on its new
term loan. In March 2001, the Company amended its Senior Credit Agreements to
modify certain covenants.
The Company has pledged 100% of the capital stock of certain United States
subsidiaries, 65% of capital stock of certain foreign subsidiaries and certain
intercompany loans to secure the Senior Credit Agreements of the Company.
Certain of such pledges also extend to the Notes, Medium-Term Notes and Senior
Notes. In addition, certain subsidiaries of the Company have guaranteed the
senior debt (refer to Note 18, "Consolidating Condensed Financial Information
of Guarantor Subsidiaries").
The agreement relating to the facilities described above contains
restrictive covenants. The more significant of these covenants are
requirements for the maintenance of consolidated net worth; a consolidated
leverage ratio; cash flow coverage; limitations on the early retirement of
debt; additional borrowings; and payment of common dividends. The agreement
includes a provision which would result in all of the unpaid principal and
accrued interest of the facilities becoming due immediately upon a change of
control in ownership of the Company.
In February 1999, the Company entered into a $1.75 billion senior credit
agreement at variable interest rates, which contained a $1.0 billion
multicurrency revolving credit facility and two term loan components. As a
result of these transactions, the Company recognized an extraordinary charge
in the first quarter of 1999 of approximately $14.6 million, net of tax,
related to the early extinguishment of debt. This financing arrangement was
subsequently replaced with the 2000 Senior Credit Agreements.
37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
In January 1999, the Company issued $1.0 billion of bonds with maturities
ranging from seven to ten years, a weighted average yield of 7.53% and a
weighted average coupon of 7.45%. Proceeds were used to repay borrowings under
the previous Senior Credit Agreements. As a result of this transaction, the
Company recognized an extraordinary charge in the first quarter of 1999 of
approximately $8.5 million, net of tax, related to early extinguishment of
debt.
The proceeds from the 2004, 2006 and 2010 notes were used to repay amounts
previously outstanding under the Senior Credit Agreements. Such repayments and
other repayments resulting from the proceeds of equity offerings (refer to
Note 9, "Capital Stock and Preferred Share Purchase Rights") and the early
retirement of private placement debt assumed in the T&N acquisition and
related make-whole payment resulted in the extraordinary loss on the early
retirement of debt in 1998 of $38.2 million, net of applicable income tax
benefits of $19.9 million.
The ESOP obligation represented the unpaid principal balance on an 11-year
loan entered into by the Company's ESOP in 1989. Proceeds of the loan were
used by the ESOP to purchase the Company's Series C ESOP preferred stock.
Company contributions and dividends on the preferred shares held by the ESOP
were used to meet semi-annual principal and interest obligations. The ESOP
obligation was paid off fully in November 2000.
The weighted average interest rate for the Company's short-term debt was
approximately 6.88% and 7.42% as of December 31, 2000 and 1999, respectively.
Aggregate maturities of long-term debt for each of the years following 2001
are, in millions: 2002 -- $138.0; 2003 -- $155.0; 2004 -- $1,191.5; 2005 --
$198.5; and thereafter $1,876.7.
Interest paid in 2000, 1999 and 1998 was $273.9 million, $240.3 million and
$173.4 million, respectively.
7. Financial Instruments
Foreign Exchange Risk and Commodity Price Management
The Company is subject to exposure to market risks from changes in foreign
exchange rates and raw material price fluctuations. Derivative financial
instruments are utilized by the Company to reduce those risks. Except for the
British pound forward contract discussed in Note 5, the Company does not hold
or issue derivative financial instruments for trading purposes.
As of December 31, 2000, the Company has foreign exchange forward contracts
principally for British pound exposures relating to the United States dollar
and for Euro exposures relating to the United States dollar. The Company also
has foreign exchange forward contracts for United States dollar exposure
relating to the Canadian dollar and the Japanese Yen and British pound
exposures relating to the Euro. At December 31, 2000, the unrealized gains or
losses relating to these contracts were not material.
The Company enters into copper, aluminum alloy, high grade aluminum, lead
and nickel contracts to hedge against the risk of price increases. These
contracts are expected to offset the effects of price changes on the firm
purchase commitments for copper, aluminum and nickel. Under the agreements,
the Company was committed to purchase approximately 4.8, 1.5, 1.9, 0.6 and 1.1
million pounds of copper, aluminum alloy, high-grade aluminum, lead, and
nickel respectively. The net unrealized gain on these firm purchase
commitments were not material.
Deferred gains and losses are included in other assets and liabilities and
recognized in operations when the future purchase, sale or payment (in the
case of the asbestos liability) occurs, or at the point in time when the
purchase, sale or payment is no longer expected to occur.
38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
Accounts Receivable Securitization
In June 2000, the Company entered into a new $420 million accounts
receivable securitization agreement
replacing the existing $450 million agreement. The facility's maturity date
is June 28, 2001. In December 2000, the Company modified certain provisions of
the existing facility; however the amount and maturity remained the same.
In July 1999, the Company entered into a new $450 million accounts
receivable securitization agreement replacing the existing $150 million
agreement. The facility matured on June 28, 2000. Net proceeds were used to
repay borrowings under the Senior Credit Agreements' multicurrency revolving
credit facility.
On an ongoing basis, the Company sells certain accounts receivable to
Federal-Mogul Funding Corporation (FMFC), a special purpose wholly-owned
subsidiary of the Company, which then sells such receivables, without
recourse, to a financial conduit. Amounts excluded from the balance sheets
under these arrangements were $348.1 million and $410.1 million at December
31, 2000 and 1999, respectively. The Company's retained interest in the
accounts receivable sold to FMFC is included in the consolidated balance sheet
caption "Investment in Accounts Receivable Securitization".
For the years ended December 31, 2000 and 1999, the Company, at the point
of sale, assumed a discount rate of 1.6% and .75%, respectively. The following
table summarizes the cash flow movements between the FMFC and the Company:
2000 1999
-------- --------
(Millions of
Dollars)
Proceeds from accounts receivable sales............. $3,773.8 $4,010.3
Servicing fees received............................. 3.8 3.2
Loss on sales of accounts receivable................ (58.8) (27.7)
Payments received on investment in accounts
receivable......................................... 251.9 252.6
Concentrations of Credit Risk
Financial instruments, which potentially subject the Company to
concentrations of credit risk, consist primarily of accounts receivable and
cash investments. The Company's customer base includes virtually every
significant global automotive manufacturer and a large number of distributors
and installers of automotive aftermarket parts. The Company's credit
evaluation process, reasonably short collection terms and the geographical
dispersion of sales transactions help to mitigate any concentration of credit
risk. The Company requires placement of investments in financial institutions
evaluated as highly creditworthy.
The Company does not generally require collateral for its trade accounts
receivable or those assets included in the investment in accounts receivable
securitization. The allowance for doubtful accounts of $66.5 million and $69.3
million at December 31, 2000 and 1999, respectively, is based upon the
expected collectibility of trade accounts receivable.
Fair Value of Financial Instruments
The carrying amounts of certain financial instruments such as cash and
equivalents, accounts receivable, investment in accounts receivable
securitization, accounts payable and short-term debt approximate their fair
values. The carrying amounts and estimated fair values of the Company's long-
term debt, including the current portion were $3,691.4 million and $2,012.0
million, respectively, at December 31, 2000. The carrying amounts and
estimated fair values of the Company's long-term debt, including the current
portion were $3,110.8 million and $2,910.8 million, respectively, at December
31, 1999. The fair value of the long-term debt is estimated using discounted
cash flow analysis and the Company's current incremental borrowing rates and
credit ratings for similar types of arrangements.
39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
8. Property, Plant and Equipment
Property, plant and equipment are stated at cost and include expenditures
that materially extend the useful lives of existing buildings, machinery and
equipment.
Depreciation is computed principally by the straight-line method for
financial reporting purposes and by accelerated methods for income tax
purposes. Depreciation expense for the years ended December 31, 2000, 1999 and
1998, was $248.4 million, $221.4 million and $144.2 million, respectively.
At December 31, property, plant and equipment consisted of the following:
Estimated
Useful Life 2000 1999
----------- -------- --------
(Millions of
Dollars)
Land...................................... -- $ 121.8 $ 145.7
Buildings and building improvements....... 24-40 years 503.5 496.1
Machinery and equipment................... 3-12 years 2,442.2 2,402.9
-------- --------
3,067.5 3,044.7
Accumulated depreciation.................. (678.7) (541.0)
-------- --------
$2,388.8 $2,503.7
======== ========
Future minimum payments under noncancelable operating leases with initial
or remaining terms of more than one year are, in millions: 2001 -- $35.0; 2002
- -- $29.7; 2003 -- $23.1; 2004 -- $21.0, 2005 -- $19.5 and thereafter $52.0.
Total rental expense under operating leases for the years ended December
31, 2000, 1999 and 1998 was $54.0 million, $52.6 million and $46.5 million,
respectively, exclusive of property taxes, insurance and other occupancy costs
generally payable by the Company.
9. Capital Stock and Preferred Share Purchase Rights
The Company's articles of incorporation authorize the issuance of
260,000,000 shares of common stock, of which 70,619,319 shares, 70,422,525
shares and 67,233,216 shares were outstanding at December 31, 2000, 1999 and
1998, respectively.
In December 1998, the Company completed an equity offering of 14.1 million
shares of common stock. The net proceeds from the sale of the common stock of
$781.2 million were used to reduce the Senior Credit Agreements associated
with the acquisition of Cooper Automotive.
In June 1998, the Company issued 12.7 million shares of common stock,
including 2.1 million shares which were converted from Series E Stock. The net
proceeds from the sale of the common stock of $592 million were used to prepay
the entire outstanding principal amount under the Senior Subordinated Credit
Agreement and partially repay the Senior Credit Agreement.
In February 1998, in connection with the Fel-Pro acquisition, the Company
issued 1,030,326 shares Series E Stock with an imputed value of $225 million.
The shares of Series E Stock were exchangeable into shares of the Company's
common stock at a rate of five shares of common stock per share of Series E
Stock. In conjunction with the June 1998 common stock offering described
above, the Company converted 422,581 shares of Series E Stock into
approximately 2.1 million shares of common stock. On February 24, 1999, the
remaining 607,745 shares of the Company's Series E Stock were exchanged into
shares of the Company's common stock.
40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
The Series C ESOP Convertible Preferred Stock shares of stock are used to
fund a portion of the Company's matching contributions within the Salaried
Employees' Investment Program. The Series C ESOP preferred stock is
convertible into shares of the Company's common stock at a rate of two shares
of common stock for each share of preferred stock. The preferred shares have a
guaranteed price of $63.75/share. There were 597,691, 701,758 and 724,644
shares of Series C ESOP preferred stock outstanding at December 31, 2000, 1999
and 1998, respectively. The Series C ESOP preferred shares pay dividends at a
rate of 7.5%. The Company repurchased and retired 101,010, 28,549 and 38,295
Series C ESOP preferred shares valued at $6.5 million, $2.9 million and $4.6
million during 2000, 1999 and 1998, respectively. All of the repurchases
represent plan distributions or fund transfers for participants in the plan.
The charge to operations for the cost of the ESOP was $5.8 million in 2000,
$5.5 million in 1999 and $5.2 million in 1998. The Company made cash
contributions to the plan of $8.3 million in 2000, $8.2 million in 1999 and
$8.2 million in 1998, including preferred stock dividends of $3.1 million in
2000, $3.4 million in 1999 and $3.6 million in 1998. ESOP shares are released
as principal and interest on the debt is paid. The ESOP Trust used the
preferred dividends not allocated to employees to make principal and interest
payments on the debt which was repaid in 2000. Compensation expense is
measured based on the fair value of shares committed to be released to
employees. Dividends on ESOP shares are treated as a reduction of
shareholders' equity in the period declared. The number of allocated shares
and suspense shares held by the ESOP were 597,691 and none at December 31,
2000, 621,088 and 80,670 at December 31, 1999 and 563,995 and 160,649 at
December 31, 1998, respectively. There were no committed-to-be-released shares
at December 31, 2000, 1999 and 1998. Any repurchase of the ESOP shares is
strictly at the option of the Company.
The Company's common stock is subject to a Rights Agreement under which
each share has attached to it a Right to purchase one one-thousandth of a
share of a new series of Preferred Stock, at a price of $250 per Right. In the
event an entity acquires or attempts to acquire 10% (20% in the case of an
institutional investor) or more of the then outstanding shares, each Right
would entitle the holder to purchase a number of shares of common stock
pursuant to a formula contained in the Agreement. These Rights will expire on
April 30, 2009, but may be redeemed at a price of $.01 per Right at any time
prior to a public announcement that the above event has occurred. The Board
may amend the Rights at any time without shareholder approval.
10. Company-Obligated Mandatorily Redeemable Preferred Securities of
Subsidiary
Trust Holding Solely Convertible Subordinated Debentures of the Company
In December 1997, the Company's wholly owned financing trust ("Affiliate")
completed a $575 million private issue of 11.5 million shares of 7.0% Trust
Convertible Preferred Securities ("TCP Securities") with a liquidation value
of $50 per convertible security. The net proceeds from the TCP Securities were
used to purchase an equal amount of 7.0% Convertible Junior Subordinate
Debentures ("Debentures") of the Company. The TCP Securities represent an
undivided interest in the Affiliate's assets, with a liquidation preference of
$50 per security.
Distributions on the TCP Securities are cumulative and will be paid
quarterly in arrears at an annual rate of 7.0%, and are included in the
consolidated statements of operations as a component of "Other Expense, Net."
The Company has the option to defer payment of the distributions for an
extension period of up to 20 consecutive quarters if the Company is in
compliance with the terms of the TCP Securities.
The shares of the TCP Securities are convertible, at the option of the
holder, into the Company's common stock at an equivalent conversion price of
approximately $51.50 per share, subject to adjustment in certain events. The
TCP Securities and the Debentures became redeemable, at the option of the
Company, on or after December 6, 2000 at a redemption price, expressed as a
percentage of principal, which is added to accrued and unpaid interest. The
redemption price range is from 104.2% on December 6, 2000 to 100.0% after
December 1, 2007. All outstanding TCP Securities and Debentures are required
to be redeemed by December 1, 2027.
41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
11. Earnings Per Share
The following table sets forth the computation of basic and diluted earnings
per share (in millions, except per share data):
2000 1999 1998
-------- ------ -----
Numerator:
Net earnings (loss)................................. $ (281.5) $243.2 $53.7
Extraordinary items -- loss on early retirement of
debt, net of applicable tax benefits............... -- 23.1 38.2
Cumulative effect of change in accounting for costs
of start-up activities, net of applicable income
tax benefit........................................ -- 12.7 --
-------- ------ -----
Earnings (loss) before extraordinary items and
cumulative effect of change in accounting
principle.......................................... (281.5) 279.0 91.9
Series C preferred dividend requirement............. (2.0) (2.2) (2.3)
Series E preferred dividend requirement............. -- (0.2) (1.3)
-------- ------ -----
Numerator for basic earnings (loss) per share --
income available to common shareholders before
extraordinary items and cumulative effect of change
in accounting principle............................ $ (283.5) $276.6 $88.3
Effect of dilutive securities:
Series C preferred dividend requirement............ -- 2.2 2.3
Series E preferred dividend requirement............ -- 0.2 1.3
Minority interest -- preferred securities of an
affiliate......................................... -- 25.4 --
Additional required ESOP contribution.............. -- (2.2) (2.1)
-------- ------ -----
Numerator for diluted earnings (loss) per share --
income available to common shareholders after
assumed conversions, before extraordinary items and
cumulative of effect change in accounting
principle.......................................... $ (283.5) $302.2 $89.8
Numerator for basic earnings (loss) per share --
income available to common shareholders After
extraordinary items and cumulative effect of change
in accounting principle............................ $ (283.5) $240.8 $50.1
Numerator for diluted earnings (loss) per share --
income available to common Shareholders after
extraordinary items and cumulative effect of change
in accounting Principle............................ $ (283.5) $266.4 $51.6
Denominator:
Denominator for basic earnings per share -- weighted
average shares..................................... 70.5 69.8 48.1
Effect of dilutive securities:
Dilutive stock options outstanding................. -- 0.5 0.8
Nonvested stock.................................... -- 0.1 0.1
Conversion of Series C preferred stock............. -- 1.4 1.5
Conversion of Series E preferred stock............. -- 0.5 3.2
Conversion of Company-obligated mandatorily
redeemable preferred securities................... -- 11.2 --
Contingently issuable shares of common stock....... -- 0.7 --
-------- ------ -----
Dilutive potential common shares.................... -- 14.4 5.6
-------- ------ -----
Denominator for dilutive earnings per share --
adjusted weighted average shares and assumed
conversions........................................ 70.5 84.2 53.7
======== ====== =====
Basic earnings (loss) per share before extraordinary
items and cumulative effect of change in accounting
principle............................................ $ (4.02) $ 3.96 $1.84
======== ====== =====
Basic earnings (loss) per share after extraordinary
items and cumulative effect of change in accounting
principle............................................ $ (4.02) $ 3.44 $1.04
======== ====== =====
Diluted earnings (loss) per share before extraordinary
items and cumulative effect of change in accounting
principle............................................ $ (4.02) $ 3.59 $1.67
======== ====== =====
Diluted earnings (loss) per share after extraordinary
items and cumulative effect of change in accounting
principle............................................ $ (4.02) $ 3.16 $ .96
======== ====== =====
42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
For additional disclosures regarding the Series C and Series E preferred
stock, the employee stock options and non-vested stock shares, refer to Note
9, "Capital Stock and Preferred Share Purchase Rights", and Note 12,
"Incentive Stock Plans".
12. Incentive Stock Plans
The Company's shareholders adopted stock option plans in 1976 and 1984 and
performance incentive stock plans in 1989 and 1997. These plans provide
generally for awarding restricted shares or granting options to purchase
shares of the Company's common stock. Restricted shares entitle employees to
all the rights of common stock shareholders, subject to certain transfer
restrictions and to forfeiture in the event that the conditions for their
vesting are not met. Options entitle employees to purchase shares at an
exercise price not less than 100% of the fair market value on the grant date
and expire after a five- or ten-year period as determined by the Board of
Directors.
Under the plans, awards vest from six months to five years after their date
of grant, as determined by the Board of Directors at the time of grant. At
December 31, 2000, there were 1,215,689 shares available for future grants
under the plans.
The total compensation cost that has been charged to operations for vesting
of restricted stock awards was $0.8 million, $1.4 million and $0.7 million in
2000, 1999 and 1998, respectively.
The Company has elected to follow Accounting Principles Board Opinion No.
25, Accounting for Stock Issued to Employees (APB 25), and related
interpretations in accounting for its employee stock awards. Accordingly, no
compensation cost has been recognized for its stock option grants, as the
exercise price of the Company's employee stock options equals the underlying
stock price on the date of grant. Had compensation cost for the Company's
stock-based compensation plans been determined based on the fair value at the
grant dates for awards under those plans consistent with the method of
Statement of Financial Accounting Standards No. 123 (SFAS 123) Accounting for
Stock Based Compensation, the Company's net earnings, in millions, and
earnings per share would have been adjusted to the pro forma amounts indicated
below:
2000 1999 1998
-------- ------ -----
(Millions of Dollars,
Except
Per Share Amounts)
Net earnings (loss) as reported................... $ (281.5) $243.2 $53.7
Pro forma......................................... $ (296.4) $230.3 $48.3
Basic earnings (loss) per share as reported....... $ (4.02) $ 3.44 $1.04
Pro forma......................................... $ (4.24) $ 3.27 $ .93
Diluted earnings (loss) per share as reported..... $ (4.02) $ 3.16 $ .96
Pro forma......................................... $ (4.24) $ 3.01 $ .86
Pro forma information regarding net income and earnings per share is
required by SFAS 123 as if the Company had accounted for its employee stock
options under the fair value method. The fair value for options is estimated
at the date of grant using a Black-Scholes option pricing model with the
following weighted-average assumptions for 2000, 1999 and 1998, respectively:
risk-free interest rates of 5.0%, 6.2% and 6.2%; dividend yields of 0.03%,
0.03% and 0.2%; volatility factors of the expected market price of the
Company's common stock of 75.2%, 48.0% and 30.1% and a weighted-average
expected life of the option of five years. The fair value of nonvested stock
awards is equal to the market price of the stock on the date of the grant.
The weighted-average fair value and the total number (in millions) of
options granted was $7.13, $16.81 and $22.36, and 0.3, 2.7 and 1.1 for 2000,
1999 and 1998 respectively. The weighted-average fair value and total number
(in millions) of nonvested stock awards granted was $11.56 and $53.52 and 0.1
and 0.1 for 2000
43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
and 1998, respectively. There were no stock awards granted in 1999. All
options and stock awards that are not vested at December 31, 2000, vest solely
on employees rendering additional service.
The following table summarizes the activity relating to the Company's
incentive stock plans:
Weighted-
Number of Average
Shares Price
------------- ---------
(In Millions)
Outstanding at January 1, 1998.................... 2.2 $26.46
Options/stock granted........................... 1.2 57.94
Options exercised/stock vested.................. (0.5) 21.85
Options/stock lapsed or canceled................ (0.1) 31.49
---- ------
Outstanding at December 31, 1998.................. 2.8 $40.50
Options granted................................. 2.7 33.85
Options exercised/stock vested.................. (0.1) 25.98
Options/stock lapsed or canceled................ (0.3) 41.86
---- ------
Outstanding at December 31, 1999.................. 5.1 $37.14
Options/stock granted........................... 0.4 10.58
Options/stock lapsed or canceled................ (1.2) 33.47
---- ------
Outstanding at December 31, 2000.................. 4.3 $35.61
==== ======
Options exercisable at December 31, 2000........ 1.5 $37.55
==== ======
Options exercisable at December 31, 1999........ 0.9 $31.04
==== ======
Options exercisable at December 31, 1998........ 0.6 $30.11
==== ======
The following is a summary of the range of exercise prices for stock
options that are outstanding and the amount of nonvested stock awards at
December 31, 2000:
Weighted-Average
----------------
Outstanding Options Remaining
Range Awards Exercisable Price Life
----- ----------- ----------- ------ ---------
(In Millions)
Options:
$1.97 - $14.56................. 0.4 -- $10.46 5.0 years
$14.57 - $26.50................ 1.4 0.5 $20.94 2.9 years
$26.51 - $47.25................ 1.7 0.5 $43.33 2.5 years
$47.26 - $70.69................ 0.7 0.5 $58.84 3.0 years
Nonvested stock................ 0.1 --
--- ---
Total........................ 4.3 1.5
=== ===
13. Postemployment Benefits
The Company sponsors several defined benefit pension plans (Pension
Benefits) and health care and life insurance benefits (Other Benefits) for
certain employees and retirees around the world. The Company funds the Pension
Benefits based on the funding requirements of federal and international laws
and regulations in advance of benefit payments and the Other Benefits as
benefits are provided to the employees.
44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
Components of net periodic benefit cost for the year ended December 31:
United States Plans International Plans
------------------------------------------- -------------------------
Pension Benefits Other Benefits Pension Benefits
---------------------- ------------------- -------------------------
2000 1999 1998 2000 1999 1998 2000 1999 1998
------ ------ ------ ----- ----- ----- ------- ------- -------
(Millions of Dollars)
Service cost............ $ 29.7 $ 26.4 $ 16.4 $ 3.1 $ 4.7 $ 4.4 $ 21.9 $ 26.8 $ 26.7
Interest cost........... 54.7 51.0 29.9 33.3 31.0 19.2 116.9 112.0 100.7
Expected return on plan
assets................. (85.4) (79.8) (48.1) -- -- -- (166.6) (144.8) (123.6)
Net amortization and
deferral............... (6.1) (3.0) (4.3) (1.1) (2.7) (0.6) (2.6) 9.2 --
Settlement and
curtailment
loss (gains)........... 0.6 0.1 1.6 -- (12.5) -- (0.4) (3.1) --
------ ------ ------ ----- ----- ----- ------- ------- -------
Net periodic (benefit)
cost................... $ (6.5) $ (5.3) $ (4.5) $35.3 $20.5 $23.0 $ (30.8) $ 0.1 $ 3.8
====== ====== ====== ===== ===== ===== ======= ======= =======
Change in benefit obligation:
International
United States Plans Plans
------------------------------ ------------------
Pension Other
Benefits Benefits Pension Benefits
-------------- -------------- ------------------
2000 1999 2000 1999 2000 1999
------ ------ ------ ------ -------- --------
(Millions of Dollars)
Benefit obligation at
beginning of year......... $728.9 $718.8 $424.9 $468.9 $2,060.2 $2,099.3
Service cost............... 29.7 26.4 3.1 4.7 21.9 26.8
Interest cost.............. 54.7 51.0 33.3 31.0 116.9 112.0
Acquisitions/divestitures.. -- -- -- 2.9 -- (0.2)
Employee contributions..... -- -- -- -- 6.6 9.3
Benefits paid.............. (60.9) (60.2) (39.0) (39.6) (137.5) (139.9)
Plan amendments............ 13.9 24.7 -- -- -- --
Actuarial (gains) and
losses and changes in
actuarial Assumptions..... (20.4) (31.8) 32.1 (28.5) (47.6) 19.8
Settlements and
curtailments.............. (1.2) -- -- (12.5) (0.4) (3.3)
Prior service cost......... -- -- -- (2.0) -- --
Currency translation
adjustment................ -- -- -- -- (154.6) (63.6)
------ ------ ------ ------ -------- --------
Benefit obligation at end
of year................... $744.7 $728.9 $454.4 $424.9 $1,865.5 $2,060.2
====== ====== ====== ====== ======== ========
45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
Change in plan assets:
International
United States Plans Plans
-------------------------------------- ------------------
Pension Benefits Other Benefits Pension Benefits
------------------ ------------------ ------------------
2000 1999 2000 1999 2000 1999
-------- -------- -------- -------- -------- --------
(Millions of Dollars)
Fair value of plan
assets at beginning of
year................... $ 805.6 $ 775.4 $ -- $ -- $2,185.0 $2,034.5
Actual return on plan
assets................. 99.6 83.9 -- -- 186.0 325.3
Company contributions... 10.7 6.5 -- -- 16.2 19.1
Benefits paid........... (60.9) (60.2) -- -- (137.5) (139.9)
Settlements and
curtailments........... (2.5) -- -- -- -- --
Currency translation
adjustment............. -- -- -- -- (165.7) (54.0)
-------- -------- -------- -------- -------- --------
Fair value of plan
assets at end of year.. $ 852.5 $ 805.6 $ -- $ -- $2,084.0 $2,185.0
======== ======== ======== ======== ======== ========
Funded status of the
plan................... $ 107.8 $ 76.7 $ (454.4) $ (424.9) $ 218.5 $ 124.8
Unrecognized net asset
at transition.......... 0.1 0.3 -- -- -- --
Unrecognized net
actuarial (gain) loss.. (83.4) (60.9) 13.2 (19.5) (115.1) (46.3)
Unrecognized prior
service cost........... 48.7 40.0 (1.8) (2.4) -- --
-------- -------- -------- -------- -------- --------
Prepaid (accrued)
benefit cost........... $ 73.2 $ 56.1 $ (443.0) $ (446.8) $ 103.4 $ 78.5
======== ======== ======== ======== ======== ========
Weighted-average assumptions as of December 31:
International
United States Plans Plans
-------------------------------------- ------------------
Pension Benefits Other Benefits Pension Benefits
------------------ ------------------ ------------------
2000 1999 2000 1999 2000 1999
-------- -------- -------- -------- -------- --------
(Millions of Dollars)
Discount rate........... 8% 7.75% 8% 7.75% 6.75% 6.25-6.5%
Expected return on plan
assets................. 10% 10% -- -- 8.5% 6.5-8.5%
Rate of compensation
increase............... 5% 4-4.75% -- -- 2.5-4.4% 3-4.4%
Amounts applicable to the Company's pension plans with accumulated benefit
obligations in excess of plan assets are as follows:
United States International
Plans Plans
-------------- -----------------
2000 1999 2000 1999
------ ------ -------- -------
(Millions of Dollars)
Projected benefit obligation.......... $ 28.6 $362.8 $ 154.5 $ 157.4
Accumulated benefit obligation........ 25.0 359.1 151.3 156.9
Fair value of plan assets............. -- 336.8 0.3 0.2
Amounts recognized in the balance sheet consist of:
Pension
Benefits Other Benefits
-------------- -----------------
2000 1999 2000 1999
------ ------ -------- -------
(Millions of Dollars)
Prepaid (accrued) benefit cost........ $176.6 $134.6 $ (443.0) $(446.8)
Accrued benefit liability............. (22.2) (20.5) -- --
Intangible asset...................... 17.5 7.2 -- --
Minimum pension liability............. 3.1 10.1 -- --
------ ------ -------- -------
Net amount recognized................. $175.0 $131.4 $ (443.0) $(446.8)
====== ====== ======== =======
46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
At December 31, 2000, the assumed annual health care cost trend used in
measuring the APBO approximated 7.7%, declining to 7.5% in 2001 and to an
ultimate annual rate of 5.5% estimated to be achieved in 2011. Increasing the
assumed cost trend rate by 1% each year would have increased the APBO by
approximately 9.7% and 9.5% at December 31, 2000 and 1999, respectively.
Aggregate service and interest costs would have increased by approximately
10.2%, 10.4% and 13.3% for 2000, 1999 and 1998, respectively.
During 2000, the Company consolidated all domestic qualified defined
benefit plans into one plan, the Federal Mogul Corporation Pension Plan. As a
result, the consolidated plan assets exceed the accumulated benefit obligation
for qualified plans, all future pension obligations will be provided through
the assets of this plan.
During 1999, the Company curtailed retiree healthcare benefits for
approximately 4,000 employees. As a result, the Company reduced its
postretirement liability and recognized a one-time benefit of approximately
$8.0 million, net of applicable taxes.
14. Income Taxes
Under the liability method, deferred tax assets and liabilities are
determined based on differences between financial reporting and tax bases of
assets and liabilities and are measured using the enacted tax rates and laws
that will be in effect when the differences are expected to reverse. The
components of earnings (loss) before income taxes, extraordinary items and
cumulative effect of change in accounting principle consisted of the
following:
2000 1999 1998
-------- ------ ------
(Millions of Dollars)
Domestic........................................ $ (125.6) $237.8 $ 86.6
International................................... (136.7) 222.1 98.9
-------- ------ ------
$ (262.3) $459.9 $185.5
======== ====== ======
Significant components of the provision for income taxes (tax benefit) are
as follows:
2000 1999 1998
-------- ------ ------
(Millions of Dollars)
Current:
Federal....................................... $ -- $ 49.3 $(12.1)
State and local............................... 8.5 11.6 10.0
International................................. 14.9 45.7 65.4
-------- ------ ------
Total current............................... 23.4 106.6 63.3
Deferred:
Federal....................................... 19.6 29.2 33.0
State and local............................... (1.1) (2.1) 2.1
International................................. (22.7) 47.2 (4.8)
-------- ------ ------
Total deferred.............................. (4.2) 74.3 30.3
-------- ------ ------
$ 19.2 $180.9 $ 93.6
======== ====== ======
47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
The reconciliation of income taxes computed at the United States federal
statutory tax rate to income tax expense is:
2000 1999 1998
------- ------ ------
(Millions of Dollars)
Income taxes at United States statutory rate...... $ (91.8) $161.0 $ 64.9
Tax effect from:
State income taxes.............................. 7.4 9.5 7.9
Foreign tax rate changes........................ (18.7) -- --
Foreign operations, net of foreign tax credits.. 29.3 6.4 5.6
Goodwill amortization........................... 28.6 28.1 19.7
Valuation allowance, foreign tax credit......... 38.4 (13.0) --
Valuation allowance, other...................... 25.1 (8.4) --
Purchased in-process research and development... -- -- 6.5
Sale of international retail/wholesale
operations..................................... -- (4.7) (11.5)
Tax credits and other........................... 0.9 2.0 0.5
------- ------ ------
$ 19.2 $180.9 $ 93.6
======= ====== ======
The following table summarizes the Company's total provision for income
taxes/(tax benefit) by component:
2000 1999 1998
------- ------ ------
(Millions of Dollars)
Income tax expense................................ $ 19.2 $180.9 $ 93.6
Extraordinary items and cumulative effect of
change in accounting principle................... -- (20.3) (19.8)
T&N Bearings divestiture.......................... -- -- 56.1
Allocated to equity:
Currency translation............................ (12.9) -- 15.3
Preferred dividends............................. (1.0) (1.2) (1.2)
Incentive stock plans........................... -- (0.3) (3.9)
Investment securities........................... 0.5 (0.1) --
Pension......................................... (4.7) (4.5) 0.2
------- ------ ------
$ 1.1 $154.5 $140.3
======= ====== ======
48
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
Significant components of the Company's deferred tax assets and liabilities
as of December 31 are as follows:
2000 1999
--------- -------
(Millions of
Dollars)
Deferred tax assets:
Asbestos............................................. $ 551.7 $ 522.9
Tax credits.......................................... 137.7 140.0
Postemployment benefits.............................. 166.6 178.2
Net operating loss carryforwards of international
subsidiaries........................................ 247.1 103.0
Other temporary differences.......................... 195.6 158.9
--------- -------
Total deferred tax assets.......................... 1,298.7 1,103.0
Valuation allowance for deferred tax assets............ (219.6) (156.1)
--------- -------
Net deferred tax assets.............................. 1,079.1 946.9
Deferred tax liabilities:
Fixed asset basis differences........................ (306.8) (351.1)
Intangible asset basis differences................... (268.1) (289.5)
Asbestos insurance................................... (255.1) (123.8)
Deferred gains....................................... (118.8) (130.0)
Pensions............................................. (83.8) (33.3)
--------- -------
Total deferred tax liabilities..................... (1,032.6) (927.7)
--------- -------
$ 46.5 $ 19.2
========= =======
Deferred tax assets and liabilities are recorded in the consolidated
balance sheets as follows:
2000 1999
---------- ----------
(Millions of Dollars)
Assets:
Deferred tax asset.............................. $ 284.0 $ 128.1
Other noncurrent assets......................... 322.4 174.2
Liabilities:
Other current accrued liabilities............... (5.8) (24.3)
Other long-term accrued liabilities............. (554.1) (258.8)
---------- ----------
$ 46.5 $ 19.2
========== ==========
Income taxes paid in 2000, 1999 and 1998 were $46.0 million, $87.5 million
and $34.7 million, respectively.
The 2000 provision includes the estimated U.S. federal income tax effects
of retained earnings of subsidiaries expected to be distributed to the
Company. No provision was made with respect to $546 million of undistributed
earnings at December 31, 2000, since these earnings are considered by the
Company to be permanently reinvested. Upon distribution of these earnings, the
Company would be subject to United States income taxes and foreign withholding
taxes. Determining the unrecognized deferred tax liability on the distribution
of these earnings is not practicable as such liability, if any, is dependent
on circumstances existing when remittance occurs.
At December 31, 2000, the Company has $411 million in net operating loss
carryforwards in the United Kingdom with no expiration date or valuation
allowance. Also, the Company has $180 million of additional foreign net
operating loss carryforwards with a full valuation allowance and various
expiration dates. Included in
49
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
the previous amounts are $157 million of net operating loss carryforwards
acquired with the purchases of T&N, Cooper Automotive and Fel-Pro. A valuation
allowance was recorded on $84 million of these purchased net operating loss
carryforwards, and to the extent such benefits are ever realized, such
benefits will be recorded as a reduction of goodwill.
15. Operations By Industry Segment and Geographic Area
The segment information has been restated to reflect the internal
reorganization changes in 2000. The Company is a global manufacturer with two
reportable segments: Americas/Asia Pacific, which includes the operations of
North and South America, Asia and Australia; and Europe/Africa, which includes
the operations of Europe and Africa. Divested Activities include the
historical operating results and assets of certain divested operations in
South Africa, Italy, the UK, the US and India. Each segment manufactures and
distributes products in the following product groups: powertrain systems;
sealing systems, visibility and system protection products; and brake,
chassis, ignition and fuel products. The Company has not aggregated individual
product segments within these reportable segments. The accounting policies of
the segments are the same as described in Note 1 "Summary of Accounting
Policies."
The accounting policies of the business segments are consistent with those
described in the summary of significant accounting policies. The Company
evaluates segment performance based on several factors, including both
Operational EBIT and Economic Value Added (EVA). Operational EBIT is defined
as earnings before interest, income taxes, extraordinary items and certain
nonrecurring items such as certain acquisition-related adjustments and
integration costs associated with new acquisitions. Operational EBIT for each
segment is shown below, as it is most consistent with the measurement
principles used in measuring the corresponding amounts in the consolidated
financial statements.
Operational
Net Sales EBIT
-------------------- --------------
2000 1999 1998 2000 1999 1998
------ ------ ------ ---- ---- ----
(Millions of Dollars)
Americas/Asia Pacific.................... $4,057 $4,330 $2,629 $341 $607 $327
Europe/Africa............................ 1,940 2,072 1,686 117 220 170
Divested Activities...................... 16 86 154 1 8 5
------ ------ ------ ---- ---- ----
Total.................................. $6,013 $6,488 $4,469 $459 $835 $502
====== ====== ====== ==== ==== ====
2000 1999 1998
----- ----- -----
(Millions of
Dollars)
Reconciliation:
Total segments operational EBIT....................... $ 459 $ 835 $ 502
Net interest and other financing costs................ (326) (309) (233)
Restructuring, impairment and other special charges... (395) (8) (20)
Acquisition-related costs............................. -- (58) (63)
----- ----- -----
Earnings (loss) before income taxes, extraordinary
items and cumulative effect of change in accounting
principle.......................................... $(262) $ 460 $ 186
===== ===== =====
50
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
Depreciation
Capital and
Total Assets Expenditures Amortization
-------------- -------------- --------------
2000 1999 2000 1999 1998 2000 1999 1998
------- ------ ---- ---- ---- ---- ---- ----
(Millions of Dollars)
Americas/Asia Pacific........... $ 6,397 $6,701 $182 $259 $109 $225 $191 $131
Europe/Africa................... 3,858 3,226 131 135 118 149 163 96
Divested Activities............. -- 18 -- 1 2 -- 1 1
------- ------ ---- ---- ---- ---- ---- ----
Total......................... $10,255 $9,945 $313 $395 $229 $374 $355 $228
======= ====== ==== ==== ==== ==== ==== ====
The following table shows net sales by external customer and product group:
Net Sales
--------------------
2000 1999 1998
------ ------ ------
(Millions of
Dollars)
Powertrain Systems.................................... $2,330 $2,459 $2,107
Sealing Systems, Visibility and Systems Protection
Products............................................. 1,776 1,876 1,252
Brake, Chassis, Ignition and Fuel Products............ 1,907 2,153 1,110
------ ------ ------
Total............................................... $6,013 $6,488 $4,469
====== ====== ======
Original Equipment.................................... $3,449 $3,627 $2,407
Aftermarket........................................... 2,564 2,861 2,062
------ ------ ------
Total............................................... $6,013 $6,488 $4,469
====== ====== ======
The following table shows geographic information as of December 31:
Net Property,
Plant and
Net Sales Equipment
-------------------- -------------
2000 1999 1998 2000 1999
------ ------ ------ ------ ------
United States.......................... $3,685 $3,922 $2,345 $1,231 $1,492
United Kingdom......................... 501 533 516 324 305
Germany................................ 812 630 478 366 344
France................................. 272 303 327 117 79
Other.................................. 743 1,100 803 351 284
------ ------ ------ ------ ------
Total................................ $6,013 $6,488 $4,469 $2,389 $2,504
====== ====== ====== ====== ======
16. Litigation and Environmental Matters
ASBESTOS LIABILITY AND LEGAL PROCEEDINGS
T&N Asbestos Litigation
In the United States, the Company's United Kingdom subsidiary, T&N Ltd.,
and two United States subsidiaries (the "T&N Companies") are among many
defendants named in numerous court actions alleging personal injury resulting
from exposure to asbestos or asbestos-containing products. T&N Ltd. is also
subject to asbestos-disease litigation, to a lesser extent, in the United
Kingdom and France. Because of the slow onset of asbestos-related diseases,
management anticipates that similar claims will be made in the future. It is
not known how many claims may be made nor the expenditures which may
ultimately arise therefrom. In addition, there are a number of factors that
could impact the settlement costs into the future, including but not limited
to: changes in the legal environment; possible insolvency of co-defendants;
and establishment of an acceptable administrative (non-litigation) claims
resolution mechanism.
51
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
In the fourth quarter of 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 revised liability (approximately $1.6 billion) represents the
Company's estimate for claims currently pending and those which can be
reasonably estimated to be asserted in a future period. The Company believes
that these claims will be paid over the next 12 years. In arriving at the
revised liability for the T&N Companies, assumptions have been made regarding
the total number of claims anticipated to be received in the 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.
While management believes that the liability and receivable recorded are
appropriate for anticipated losses arising from asbestos-related claims
against the T&N Companies for the period covered, given the nature and
complexity of the factors affecting the estimated liability and potential
insurance recovery the actual liability and insurance recovery may differ. 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 for the period covered. In the event that such liabilities exceed the
amounts recorded by the Company or the remaining insurance coverage, the
Company's results of operations, business, liquidity and financial condition
could be materially adversely affected.
The ultimate liability for all pending and future claims is highly
uncertain due to the difficulty of forecasting the numerous variables that can
affect the liability. The Company does not believe it can reasonably determine
the ultimate liability as the level of uncertainty is too great to provide for
reasonable estimation of the number of future claims, the nature of such
claims and the cost to resolve them. As additional experience is gained
regarding claims or other new information becomes available regarding the
potential liability, the Company will reassess its potential liability and
revise the estimates as appropriate. Accordingly it is reasonably possible
that the ultimate losses from asbestos-related claims will be greater than
amounts recorded.
T&N Ltd. is a defendant in approximately 63,000 pending personal injury
claims as of December 31, 2000. During 2000, approximately 39,000 new claims
naming T&N Ltd. were received. The two United States subsidiaries are
defendants in approximately 111,000 pending personal injury claims as of
December 31, 2000. During 2000, approximately 41,000 new claims naming the two
United States subsidiaries were received.
A number of years ago, T&N Ltd. appointed the Center for Claims Resolution
("CCR") as exclusive representative in relation to all asbestos-related
personal injury claims made against the T&N Companies in the United States.
The CCR has provided to its member companies a litigation defense, claims-
handling and administration service in respect to United States asbestos-
related disease claims. Pursuant to the CCR Producer Agreement, T&N Ltd. was
entitled to appoint a representative as one of the five voting directors on
the CCR's Board of Directors. Also pursuant to that agreement, members of the
CCR contributed towards indemnity payments in each claim in which the member
is named. Contributions to such indemnity payments were calculated on a case
by case basis according to sharing agreements among the CCR's members.
Effective January 18, 2000, the two United States subsidiaries appointed a law
firm specializing in asbestos matters as their litigation defense, claims
handling and administrative service provider. Indemnity and defense
obligations incurred while members of the CCR are continuing to be honored.
This change was intended to create greater economic and defense efficiencies
for the two companies. The T&N Companies have entered into $250 million of
surety to meet CCR collateral requirements for past obligations. The surety
has a declining balance and is effective through February 24, 2004.
The membership of the CCR has decreased in the past year for both voluntary
and involuntary reasons. One instance involved the termination of a member by
the CCR board. That former member had refused to provide
52
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
required surety for agreed to settlements made while a member. The CCR has
tried to recover the funds owed; however, the former member has since filed
for bankruptcy and recovery is therefore uncertain. Another member has
terminated its participation due to its determination that, as a trust, it
lacked sufficient assets to commit to any new settlements. This member has
also asserted that it is entitled to certain reimbursements which the CCR does
not believe to be appropriate. Additionally, a third member had filed for
bankruptcy in December 2000. Any additional cost to the remaining CCR members,
net of the security provided, is uncertain. The Company however has provided
for its best estimate of the impact of these events. The T&N Companies could
experience an increase in liability if there are any future negative
developments in these areas.
Certain codefendant companies (both members and nonmembers of the CCR) have
recently filed for reorganization under Chapter 11 of the Federal Bankruptcy
Code. As a consequence, litigation against them (with some exceptions) has
been stayed or restricted. Due to the uncertainties involved, the long-term
effect of these proceedings on the Company's current and future exposure
cannot be determined.
In February 2001, the CCR and its members significantly amended its
indemnity naming and services agreement. The CCR indemnity naming formula has
been replaced with a provision that, for all claims settled on or after
February 1, 2001, CCR members would be directly responsible for payment of
their own indemnity obligations. The amendments will allow CCR members to
choose the services they wish to continue receiving from the CCR. T&N Ltd.
plans to continue with the CCR for claims handling and administrative
services. However, T&N Ltd. has appointed an outside law firm specializing in
asbestos matters to handle its litigation defense.
In 1996, T&N Ltd. purchased for the T&N Companies a (Pounds)500 million
layer of insurance which will be triggered should the aggregate costs of
claims filed after June 30, 1996, where the exposure occurred prior to that
date, exceed (Pounds)690 million. The Company now believes that the aggregate
cost of claims filed after June 30, 1996 will exceed the trigger point. The
Company believes based on its review of the insurance policy and its advice
from outside counsel, that it is probable that the T&N Companies will be
entitled to receive payment from the reinsurers for the cost of claims in
excess of the trigger point of the insurance. Based on this assessment, the
Company recorded an insurance recoverable asset under the T&N policy of $577
million in the fourth quarter of 2000. The Company has reviewed the financial
viability and legal obligations of the three reinsurance companies involved
and has concluded that there is little risk of the reinsurers not being able
to meet their obligation to pay, once the claims filed after June 30, 1996
exceed the (Pounds)690 million trigger point. The Company does not expect to
reach the trigger point of the insurance or begin to collect on this insurance
recoverable for the next several years. The US claims' costs applied against
this policy are converted at a fixed exchange rate of $1.69/(Pounds). As such,
if the market exchange rate is less then $1.69/(Pounds), the Company will
effectively have a discount from 100% recovery on claims made with the
insurance companies. At December 31, 2000, the $577 million insurance
recoverable asset is net of an exchange rate discount of $68 million.
The ultimate exposure of the T&N companies with respect to claims will
depend upon the extent to which the insurance described above will be
available to cover such claims, the amount paid for indemnity and defense,
changes in the legal environment and other factors.
Abex and Wagner Asbestos Litigation
Former businesses of Cooper Automotive, primarily Abex and Wagner, are
involved as defendants in numerous court actions in the United States alleging
personal injury from exposure to asbestos or asbestos-containing products,
mainly involving friction products. Abex is a defendant in approximately
23,000 pending claims as of December 31, 2000. During 2000, approximately
14,700 new claims naming this defendant were received. Wagner is a defendant
in approximately 17,300 claims as of December 31, 2000. During 2000,
approximately 6,700 new claims naming this defendant were received. In 1998,
the Company acquired the capital stock of a former Cooper Automotive entity
resulting in the assumption by a Company subsidiary of contractual
53
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
liability, under certain circumstances, for all claims pending and to be filed
in the future alleging exposure to certain Wagner automotive and industrial
friction products and for all claims filed after August 29, 1998, alleging
exposure to certain Abex (non-railroad and non-aircraft) friction products. In
the fourth quarter of 2000, the Company decreased its estimate of probable
asbestos-related liability by $127 million, which was accompanied by an
approximately equivalent reduction in the insurance recoverable asset. The
revised estimate of probable asbestos-related liability principally resulted
from a study performed by an econometric firm that specializes in these types
of matters. The revised liability (approximately $253 million) represents the
Company's estimate for claims currently pending and those which can be
reasonably estimated to be asserted in a future period. The Company believes
that these claims will be paid over the next 12 years. In arriving at the
revised liability for Abex and Wagner, assumptions have been made regarding
the number of claims anticipated to be received in the future period, the
typical cost of settlement (which is sensitive to the alleged disease type and
the jurisdiction in which the action is being brought), the rate of receipt of
claims, and the timing of settlements.
While management believes that the liability and receivable recorded for
these claims are appropriate for anticipated losses arising from asbestos-
related claims against Abex and Wagner for the covered period, given the
nature and complexity of factors affecting the estimated liability and
potential insurance recovery the actual liability and insurance recovery may
differ. No assurance can be given that Abex and Wagner will not be subject to
material additional liabilities and significant additional litigation relating
to asbestos for the period covered. In the event that such liabilities exceed
the amounts recorded by the Company or the remaining insurance coverage, the
Company's results of operations, business, liquidity and financial condition
could be materially adversely affected.
The ultimate liability for all pending and future claims is highly
uncertain due to the difficulty of forecasting the numerous variables that can
affect the liability. The Company does not believe it can reasonably determine
the ultimate liability as the level of uncertainty is too great to provide for
reasonable estimation of the number of future claims, the nature of such
claims, and the cost to resolve them. As additional experience is gained
regarding claims or other new information becomes available regarding the
potential liability, the Company will reassess its potential liability and
revise the estimates as appropriate. Accordingly it is reasonably possible
that the ultimate losses from asbestos-related claims will be greater than
amounts recorded.
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 the post-August 1998 asbestos claims against
Abex has the benefit of that insurance. 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, barring unforeseen insolvencies of excess carriers or
other adverse events, should provide coverage for asbestos claims against
Abex. The Company believes that based on its review of the insurance policies,
the viability of the insurance carriers, and advice from outside legal
counsel, it is probable that Abex will receive payments for a substantial
majority of the cost of claims.
Wagner also maintained product liability insurance coverage for some of the
time that it manufactured products that contained asbestos. The subsidiary of
the Company that may be liable for asbestos claims against Wagner has the
benefit of that insurance. 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 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 Wagner will receive payment for a portion of the
cost of claims. Based on the probable conclusion of collection under the
insurance policies, the Company has recorded a $188 million insurance
recoverable asset related to the Abex and Wagner liability.
54
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
Federal-Mogul and Fel-Pro Asbestos Litigation
The Company also is sued in its own name as one of a large number of
defendants in a number of lawsuits brought by claimants alleging injury due to
exposure to asbestos. The Company's Fel-Pro subsidiary has also been named as
a defendant in a number of product liability cases involving asbestos,
primarily involving gasket or packing products. Fel-Pro is a defendant in
approximately 31,000 pending claims as of December 31, 2000. During 2000,
approximately 3,400 new claims were filed. Over 30,000 of these claims have
been transferred to a federal court where they reside subject to removal back
into the tort system only if certain medical and product identification
conditions are met. The Company is defending all such claims vigorously and
believes that it and Fel-Pro have substantial defenses to liability and
insurance coverage for defense and indemnity. While the outcome of litigation
cannot be predicted with certainty, management believes that asbestos claims
pending against the Company and Fel-Pro as of December 31, 2000, will not have
a material effect on the Company's financial position.
Aggregate of Asbestos Liability and Insurance Recoverable Asset
The following is a summary of the asbestos liability and the insurance
recoverable asset for 2000 (in millions of dollars):
T&N Abex &
Companies Wagner Other Total
--------- ------- ----- --------
Liability:
Balance at December 31, 1999.......... $1,104.2 $ 408.8 $ 2.3 $1,515.3
2000 provision adjustments.......... 750.9 (127.2) 1.6 625.3
2000 payments....................... (323.8) (28.9) (1.0) (353.7)
Other............................... 25.0 -- -- 25.0
-------- ------- ----- --------
Balance at December 31, 2000.......... $1,556.3 $ 252.7 $ 2.9 $1,811.9
======== ======= ===== ========
Asset:
Balance at December 31, 1999.......... $ -- $ 325.9 $ -- $ 325.9
2000 provision adjustments.......... 576.7 (135.8) -- 440.9
2000 proceeds....................... -- (2.2) -- (2.2)
Other............................... 6.5 -- -- 6.5
-------- ------- ----- --------
Balance at December 31, 2000.......... $ 583.2 $ 187.9 $ -- $ 771.1
======== ======= ===== ========
As of December 31, 2000, the Company has provided an aggregated liability
for all of its subsidiaries and businesses with potential asbestos liability
of approximately $1.8 billion for claims currently pending and those which can
be reasonably expected to be asserted in a future period. The Company believes
that these claims will be paid over the next 12 years. Of this amount, the
Company expects to incur asbestos payments of approximately $350 million over
the next 12 months and has reflected this as a current liability. This
estimate is based in part on recent and historical claims experience, medical
information, the impact of changes in indemnity sharing within the CCR and the
current legal environment. The Company cannot reasonably estimate a liability
beyond the period encompassed in its estimates as the level of uncertainty is
too great to provide for reasonable estimation of the number of future claims,
the nature of such claims, or the cost to resolve them.
The Company believes that it is probable that its subsidiaries with
asbestos-related liabilities and related insurance policies, the T&N
Companies, Abex, Wagner and Fel-Pro will collect the recorded aggregated
insurance recoverable asset of $771 million.
55
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
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 federal or state environmental laws. These laws
require responsible parties to pay for cleaning up contamination resulting
from hazardous wastes which were discharged into the environment by them or by
others to which they sent such wastes for disposition. In addition, the
Company has been notified by the United States Environmental Protection Agency
and various state agencies that it may be a potentially responsible party
(PRP) under such law for the cost of cleaning up certain other hazardous waste
storage or disposal facilities pursuant to CERCLA and other federal and state
environmental laws. PRP designation requires the funding of site
investigations and subsequent remedial activities. At most of the sites that
are likely to be costliest to clean up, which are often current or former
commercial waste disposal facilities to which numerous companies sent 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. 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 reserve was approximately $67.9 million and $74.5 million at
December 31, 2000 and 1999, respectively. The 2000 decrease was primarily
attributable to remediation payments made during 2000. Management believes
that such accruals will be adequate to cover the Company's estimated liability
for its exposure in respect to such matters.
56
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
17. Quarterly Financial Data (Unaudited)
First(1) Second Third(2) Fourth(3) Year
-------- --------- -------- --------- --------
(Millions of Dollars, Except Per Share
Amounts)
Year ended December 31, 2000:
Net sales................... $1,643.7 $1,593.2 $1,427.9 $1,348.4 $6,013.2
Gross margin................ 433.3 410.4 338.7 234.9 1,417.3
Net earnings (loss)......... 13.9 49.9 (7.6) (337.7) (281.5)
Diluted earnings (loss) per
share...................... .18 .65 (.12) (4.80) (4.02)
Stock price
High........................ $ 20.19 $ 16.00 $ 11.94 $ 5.88
Low......................... $ 12.25 $ 9.44 $ 5.25 $ 1.75
Dividend per share.......... $ .0025 $ .0025 $ .0025 $ .0025
First(4) Second(5) Third(6) Fourth(7) Year
-------- --------- -------- --------- --------
(Millions of Dollars, Except Per Share
Amounts)
Year ended December 31, 1999:
Net sales................... $1,642.2 $1,687.1 $1,583.9 $1,574.3 $6,487.5
Gross margin................ 449.5 482.6 441.2 405.1 1,778.4
Earnings before
extraordinary items and
cumulative effect of change
in accounting principle.... 61.4 87.3 70.1 60.2 279.0
Extraordinary items -- loss
on early retirement of
debt, net of applicable
income tax benefit......... 23.1 -- -- -- 23.1
Cumulative effect of change
in accounting for costs of
start-up activities, net of
applicable income tax
benefit.................... 12.7 -- -- -- 12.7
Net earnings................ 25.6 87.3 70.1 60.2 243.2
Diluted earnings per share.. .38 1.11 .91 .79 3.16
Stock price
High........................ $ 64.88 $ 53.81 $ 55.00 $ 29.13
Low......................... $ 40.63 $ 41.94 $ 23.38 $ 17.56
Dividend per share.......... $ .0025 $ .0025 $ .0025 $ .0025
- ------------------
(1) Includes a $68.7 million charge for restructuring and a $10.0 million
charge for adjustment of assets held for sale and other long-lived assets
to fair value.
(2) Includes an $8.6 million charge for restructuring and a $4.6 million
charge for adjustment of assets held for sale and other long-lived assets
to fair value.
(3) Includes a $58.4 million charge for restructuring, a $60.8 million charge
for adjustments of assets held for sale and other long-lived assets to
fair value, a $184.4 million charge related to asbestos and a $60.0
million charge for certain deferred tax valuation allowances.
(4) Includes $10.1 million of integration costs.
(5) Includes $13.3 million of integration costs.
(6) Includes $13.2 million of integration costs and a $7.9 million charge for
adjustment of assets held for sale and other long-lived assets to fair
value.
(7) Includes $10.3 million of integration costs.
57
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
18. Consolidating Condensed Financial Information of Guarantor Subsidiaries
Certain subsidiaries of the Company (as listed below, collectively the
"Guarantor Subsidiaries") have guaranteed fully and unconditionally, on a
joint and several basis, the obligation to pay principal and interest under
the Company's Senior Credit Agreements.
Federal-Mogul Venture Corporation Federal-Mogul Dutch Holdings Inc.
Federal-Mogul Global Properties Federal-Mogul UK Holdings Inc.
Inc. F-M UK Holdings Limited
Carter Automotive Company Federal-Mogul Global Inc.
Federal-Mogul Worldwide Inc. T&N Industries, Inc.
Federal-Mogul Ignition Company Federal-Mogul Powertrain
Federal-Mogul Products, Inc.
Federal-Mogul Aviation, Inc.
The Company issued notes in 1999 and 1998 which are guaranteed by the
Guarantor Subsidiaries. The Guarantor Subsidiaries also guarantee the
Company's previously existing publicly registered Medium-term notes and Senior
notes.
T&N Industries, Inc. and Federal-Mogul Powertrain, Inc. are wholly owned
subsidiaries of the Company and were incorporated in 1998 with the acquisition
of T&N. These subsidiaries became guarantors as a result of the Company's
fourth amended and restated Senior Credit Agreement (Note 6). The 1999 and
1998 statements have been restated to include the entities since their
acquisition date within the Guarantor Subsidiaries.
In lieu of providing separate audited financial statements for the
Guarantor Subsidiaries, the Company has included the accompanying audited
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.
58
FEDERAL-MOGUL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS
December 31, 2000
(Millions of Dollars)
(Unconsolidated)
------------------------------------
Guarantor Non-Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
-------- ------------ ------------- ------------ ------------
Net sales............... $1,428.2 $2,188.9 $3,046.1 $(650.0) $6,013.2
Cost of products sold... 1,120.0 1,695.9 2,430.0 (650.0) 4,595.9
-------- -------- -------- ------- --------
Gross margin.......... 308.2 493.0 616.1 -- 1,417.3
Selling, general and
administrative
expenses............... 268.6 289.3 286.7 -- 844.6
Amortization of goodwill
and other intangible
assets................. 20.3 47.4 55.9 -- 123.6
Restructuring charge.... 44.7 28.3 62.7 -- 135.7
Adjustment of assets
held for sale and other
long-lived assets to
fair value............. 24.1 35.5 15.8 -- 75.4
Asbestos charge......... 1.6 (19.8) 202.6 -- 184.4
Interest expense, net... 278.9 40.7 (34.6) -- 285.0
International currency
exchange (gains)
losses................. 0.4 0.2 (0.7) -- (0.1)
Other expense (income),
net.................... 96.9 (145.3) 79.4 -- 31.0
-------- -------- -------- ------- --------
Earnings (loss) before
income taxes......... (427.3) 216.7 (51.7) -- (262.3)
Income tax expense
(benefit).............. (158.1) 145.5 31.8 -- 19.2
-------- -------- -------- ------- --------
Net earnings (loss)
before equity in
earnings (loss) of
subsidiaries......... (269.2) 71.2 (83.5) -- (281.5)
Equity in earnings
(loss) of
subsidiaries........... (12.3) 55.1 -- (42.8) --
-------- -------- -------- ------- --------
Net Earnings (loss)..... $ (281.5) $ 126.3 $ (83.5) $ (42.8) $ (281.5)
======== ======== ======== ======= ========
59
FEDERAL-MOGUL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS
December 31, 1999
(Millions of Dollars)
(Unconsolidated)
------------------------------------
Guarantor Non-Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
-------- ------------ ------------- ------------ ------------
Net sales............... $1,540.3 $2,197.2 $3,195.1 $(445.1) $6,487.5
Cost of products sold... 1,099.8 1,626.5 2,427.9 (445.1) 4,709.1
-------- -------- -------- ------- --------
Gross margin.......... 440.5 570.7 767.2 -- 1,778.4
Selling, general and
administrative
expenses............... 331.7 252.6 264.6 -- 848.9
Amortization of goodwill
and other intangible
assets................. 6.7 50.9 69.6 -- 127.2
Adjustment of assets
held for sale and other
long-lived assets to
fair value............. 7.9 -- -- -- 7.9
Integration costs....... 18.1 8.3 20.5 -- 46.9
Interest expense, net... 258.9 0.1 9.9 -- 268.9
International currency
exchange (gains)
losses................. (0.1) (0.2) (2.4) -- (2.7)
Other expense (income),
net.................... 52.3 (152.7) 121.8 -- 21.4
-------- -------- -------- ------- --------
Earnings (loss) before
income taxes,
extraordinary items
and cumulative effect
of change in
accounting
principle............ (235.0) 411.7 283.2 -- 459.9
Income tax expense
(benefit).............. (87.0) 152.3 115.6 -- 180.9
-------- -------- -------- ------- --------
Earnings (loss) before
extraordinary items
and cumulative effect
of change in
accounting
principle............ (148.0) 259.4 167.6 -- 279.0
Extraordinary item --
loss on early
retirement of debt, net
of applicable income
tax benefit............ 23.1 -- -- -- 23.1
Cumulative effect of
change in accounting
for costs of start-up
activities, net of
applicable income tax.. 12.7 -- -- -- 12.7
-------- -------- -------- ------- --------
Net earnings (loss)
before equity in
earnings (loss) of
subsidiaries......... (183.8) 259.4 167.6 -- 243.2
Equity in earnings
(loss) of
subsidiaries........... 427.0 269.5 -- (696.5) --
-------- -------- -------- ------- --------
Net Earnings............ $ 243.2 $ 528.9 $ 167.6 $(696.5) $ 243.2
======== ======== ======== ======= ========
60
FEDERAL-MOGUL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS
December 31, 1998
(Millions of Dollars)
(Unconsolidated)
------------------------------------
Guarantor Non-Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
-------- ------------ ------------- ------------ ------------
Net sales............... $1,285.7 $ 923.8 $2,409.8 $(150.6) $4,468.7
Cost of products sold... 907.8 683.9 1,849.1 (150.6) 3,290.2
-------- ------- -------- ------- --------
Gross margin.......... 377.9 239.9 560.7 -- 1,178.5
Selling, general and
administrative
expenses............... 293.9 121.9 225.0 -- 640.8
Amortization of goodwill
and other intangible
assets................. 21.5 19.6 42.7 -- 83.8
Purchased in-process
research and
development charge..... -- -- 18.6 -- 18.6
Restructuring charge.... 7.3 -- -- -- 7.3
Adjustment of assets
held for sale and other
long-lived assets to
fair value............. 19.0 -- -- -- 19.0
Integration costs....... 5.5 -- 16.9 -- 22.4
Interest expense, net... 154.2 (106.8) 146.0 -- 193.4
International currency
exchange losses........ 1.0 5.9 (2.2) -- 4.7
Net gain on British
pound currency option
and forward contract... (13.3) -- -- -- (13.3)
Other expense (income),
net.................... (1.4) (19.2) 36.9 -- 16.3
-------- ------- -------- ------- --------
Earnings (loss) before
income taxes and
extraordinary items.. (109.8) 218.5 76.8 -- 185.5
Income tax expense...... 20.6 80.8 (7.8) -- 93.6
-------- ------- -------- ------- --------
Net earnings (loss)
before extraordinary
item................. (130.4) 137.7 84.6 -- 91.9
Extraordinary items --
loss on early
retirement of debt, net
of applicable income
tax benefits........... 19.3 -- 18.9 -- 38.2
-------- ------- -------- ------- --------
Net earnings (loss)
before equity in
earnings (loss) of
subsidiaries (149.7) 137.7 65.7 -- 53.7
Equity in earnings
(loss) of
subsidiaries........... 203.4 82.9 -- (286.3) --
-------- ------- -------- ------- --------
Net Earnings............ $ 53.7 $ 220.6 $ 65.7 $(286.3) $ 53.7
======== ======= ======== ======= ========
61
FEDERAL-MOGUL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATING CONDENSED BALANCE SHEET
December 31, 2000
(Millions of Dollars)
(Unconsolidated)
-------------------------------------
Guarantor Non-Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
--------- ------------ ------------- ------------ ------------
ASSETS
Cash and equivalents.... $ 148.3 $ 10.9 $ (52.0) $ -- $ 107.2
Accounts receivable..... 22.4 -- 490.4 -- 512.8
Investment in accounts
receivable
securitization......... -- -- 229.1 -- 229.1
Inventories............. 137.9 299.2 371.5 -- 808.6
Deferred taxes.......... 196.7 -- 87.3 -- 284.0
Prepaid expenses and
income tax benefits.... 49.4 53.0 92.7 -- 195.1
--------- -------- -------- --------- ---------
Total Current Assets.. 554.7 363.1 1,219.0 -- 2,136.8
Property, plant and
equipment.............. 270.4 887.2 1,231.2 -- 2,388.8
Goodwill................ 584.5 1,256.7 1,461.9 -- 3,303.1
Other intangible
assets................. 39.8 406.2 300.4 -- 746.4
Investment in
subsidiaries........... 6,186.0 2,871.6 -- (9,057.6) --
Intercompany accounts,
net.................... (1,591.5) 1,787.5 (196.0) -- --
Asbestos-related
insurance recoverable.. -- 194.4 576.7 -- 771.1
Other noncurrent
assets................. 213.6 187.5 507.7 -- 908.8
--------- -------- -------- --------- ---------
Total Assets.......... $ 6,257.5 $7,954.2 $5,100.9 $(9,057.6) $10,255.0
========= ======== ======== ========= =========
LIABILITIES
Short-term debt,
including current
portion of long-term
debt................... $ 124.4 $ 3.0 $ 20.4 $ -- $ 147.8
Accounts payable........ 78.0 145.0 208.9 -- 431.9
Accrued compensation.... 31.8 27.6 98.4 -- 157.8
Restructuring and
rationalization
reserves............... 12.6 27.1 68.2 -- 107.9
Current portion of
asbestos liability..... -- -- 350.0 -- 350.0
Interest payable........ 92.9 0.3 1.2 -- 94.4
Other accrued
liabilities............ 34.8 73.9 305.3 -- 414.0
--------- -------- -------- --------- ---------
Total Current
Liabilities.......... 374.5 276.9 1,052.4 -- 1,703.8
Long-term debt.......... 3,534.0 7.6 18.1 -- 3,559.7
Long-term portion of
asbestos liability..... -- 606.4 855.5 -- 1,461.9
Postemployment
benefits............... 470.1 -- 167.5 -- 637.6
Other accrued
liabilities............ 273.4 -- 435.9 -- 709.3
Minority interest in
consolidated
subsidiaries........... 55.3 2.2 -- -- 57.5
Company-obligated
mandatorily redeemable
preferred securities of
subsidiary holding
solely convertible
subordinated debentures
of the Company......... -- -- 575.0 -- 575.0
Shareholders' Equity.... 1,550.2 7,061.1 1,996.5 (9,057.6) 1,550.2
--------- -------- -------- --------- ---------
Total Liabilities and
Shareholders'
Equity............... $ 6,257.5 $7,954.2 $5,100.9 $(9,057.6) $10,255.0
========= ======== ======== ========= =========
62
FEDERAL-MOGUL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATING CONDENSED BALANCE SHEET
December 31, 1999
(Millions of Dollars)
(Unconsolidated)
-------------------------------------
Guarantor Non-Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
--------- ------------ ------------- ------------ ------------
ASSETS
Cash and equivalents.... $ 54.1 $ 4.7 $ 5.7 $ -- $ 64.5
Accounts receivable..... 18.1 3.0 493.5 -- 514.6
Investment in accounts
receivable
securitization......... -- -- 232.2 -- 232.2
Inventories............. 187.9 302.0 393.7 -- 883.6
Deferred taxes.......... 40.0 74.7 13.4 -- 128.1
Prepaid expenses and
income tax benefits.... 60.8 37.0 105.7 -- 203.5
--------- -------- -------- --------- --------
Total Current Assets.. 360.9 421.4 1,244.2 -- 2,026.5
Property, plant and
equipment.............. 292.9 937.4 1,273.4 -- 2,503.7
Goodwill................ 558.4 1,242.3 1,747.1 -- 3,547.8
Other intangible
assets................. 38.4 427.1 330.8 -- 796.3
Investment in
subsidiaries........... 6,167.0 2,076.6 -- (8,243.6) --
Intercompany accounts,
net.................... (1,752.6) 2,077.7 (325.1) -- --
Asbestos-related
insurance recoverable.. -- 325.9 -- -- 325.9
Other noncurrent
assets................. 233.2 51.0 460.8 -- 745.0
--------- -------- -------- --------- --------
Total Assets.......... $ 5,898.2 $7,559.4 $4,731.2 $(8,243.6) $9,945.2
========= ======== ======== ========= ========
LIABILITIES
Short-term debt,
including current
portion of long-term
debt................... $ 127.7 $ 3.0 $ 60.1 $ -- $ 190.8
Accounts payable........ 152.8 206.2 262.9 -- 621.9
Accrued compensation.... 46.3 40.5 96.1 -- 182.9
Restructuring and
rationalization
reserves............... -- -- 46.0 -- 46.0
Current portion of
asbestos liability..... -- -- 180.0 -- 180.0
Interest payable........ 78.1 0.4 0.5 -- 79.0
Other accrued
liabilities............ 89.8 93.8 298.4 -- 482.0
--------- -------- -------- --------- --------
Total Current
Liabilities.......... 494.7 343.9 944.0 -- 1,782.6
Long-term debt.......... 2,977.0 12.0 31.0 -- 3,020.0
Long-term portion of
asbestos liability..... -- 780.4 554.9 -- 1,335.3
Postemployment
benefits............... 188.0 -- 473.9 -- 661.9
Other accrued
liabilities............ 157.2 140.4 157.3 -- 454.9
Minority interest in
consolidated
subsidiaries........... 6.1 -- 34.2 -- 40.3
Company-obligated
mandatorily redeemable
preferred securities of
subsidiary holding
solely convertible
subordinated debentures
of the Company......... -- -- 575.0 -- 575.0
Shareholders' Equity.... 2,075.2 6,282.7 1,960.9 (8,243.6) 2,075.2
--------- -------- -------- --------- --------
Total Liabilities and
Shareholders'
Equity............... $ 5,898.2 $7,559.4 $4,731.2 $(8,243.6) $9,945.2
========= ======== ======== ========= ========
63
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
December 31, 2000
(Millions of Dollars)
(Unconsolidated)
-----------------------------------
Guarantor Non-Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
------- ------------ ------------- ------------ ------------
Net Cash Provided From
(Used By)
Operating Activities... $(154.9) $(58.5) $ 58.9 $ -- $(154.5)
Expenditures for
property, plant and
equipment and other
long-term assets....... (34.9) (109.7) (168.7) -- (313.3)
Proceeds from sale of
business investments... 0.8 -- 65.8 -- 66.6
Other................... -- -- 2.4 -- 2.4
------- ------ ------ ------- -------
Net Cash Used By
Investing
Activities........... (34.1) (109.7) (100.5) -- (244.3)
Proceeds from issuance
of long-term debt...... 689.0 -- -- -- 689.0
Principal payments on
long-term debt......... (132.0) (4.4) (8.9) -- (145.3)
Increase (decrease) in
short-term debt........ (3.3) -- (22.6) -- (25.9)
Fees paid for debt
issuance and other
securities............. (4.6) -- -- -- (4.6)
Change in intercompany
accounts............... (201.1) 178.8 22.3 -- --
Sale of accounts
receivable under
securitization......... (62.1) -- -- -- (62.1)
Dividends............... (4.0) -- -- -- (4.0)
Other................... 1.3 -- (6.9) -- (5.6)
------- ------ ------ ------- -------
Net Cash Provided From
(Used By) Financing
Activities........... 283.2 174.4 (16.1) -- 441.5
------- ------ ------ ------- -------
Net Increase
(Decrease) in Cash... $ 94.2 $ 6.2 $(57.7) $ -- $ 42.7
======= ====== ====== ======= =======
64
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
December 31, 1999
(Millions of Dollars)
(Unconsolidated)
-------------------------------------
Guarantor Non-Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
--------- ------------ ------------- ------------ ------------
Net Cash Provided From
(Used By) Operating
Activities............. $ (254.3) $ 395.9 $ 420.8 $ -- $ 562.4
Expenditures for
property, plant and
equipment and other
long-term assets....... (55.8) (164.0) (175.4) -- (395.2)
Proceeds from sale of
business investments... 3.9 -- 49.4 -- 53.3
Business acquisitions,
net of cash acquired... (97.0) (27.1) (247.1) -- (371.2)
--------- ------- ------- -------- ---------
Net Cash Used By
Investing
Activities........... (148.9) (191.1) (373.1) -- (713.1)
Issuance of common
stock.................. 1.2 -- -- -- 1.2
Proceeds from issuance
of long-term debt...... 2,123.0 -- -- -- 2,123.0
Principal payments on
long-term debt......... (2,223.2) (7.8) (20.5) -- (2,251.5)
Increase (decrease) in
short-term debt........ 44.2 (11.7) (35.5) -- (3.0)
Fees paid for debt
issuance and other
securities............. (25.5) -- -- -- (25.5)
Change in intercompany
accounts............... 216.1 (187.0) (29.1) -- --
Sale of accounts
receivable under
securitization......... 304.3 -- -- -- 304.3
Dividends............... (4.3) -- -- -- (4.3)
Other................... (3.8) -- (2.4) -- (6.2)
--------- ------- ------- -------- ---------
Net Cash Provided From
(Used By) Financing
Activities........... 432.0 (206.5) (87.5) -- 138.0
--------- ------- ------- -------- ---------
Net Increase
(Decrease) in Cash... $ 28.8 $ (1.7) $ (39.8) $ -- $ (12.7)
========= ======= ======= ======== =========
65
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
December 31, 1998
(Millions of Dollars)
(Unconsolidated)
-------------------------------------
Guarantor Non-Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
--------- ------------ ------------- ------------ ------------
Net Cash Provided From
Operating Activities... $ 131.5 $ 156.0 $ 38.0 $ -- $ 325.5
Expenditures for
property, plant and
equipment and other
long-term assets....... (37.4) (128.7) (62.4) -- (228.5)
Proceeds from sale of
business investments... 3.8 -- 49.6 -- 53.4
Proceeds from sale of
options................ -- -- 39.1 -- 39.1
Business acquisitions,
net of cash acquired... (2,369.7) -- (1,855.5) -- (4,225.2)
--------- --------- --------- --------- ---------
Net Cash Used By
Investing
Activities........... (2,403.3) (128.7) (1,829.2) -- (4,361.2)
Issuance of common
stock.................. 1,382.2 -- -- -- 1,382.2
Proceeds from issuance
of long-term debt...... 6,197.5 -- -- -- 6,197.5
Principal payments on
long-term debt......... (3,678.7) (0.3) (248.6) -- (3,927.6)
Increase (decrease) in
short-term debt........ 73.9 10.5 (83.9) -- 0.5
Fees paid for debt
issuance and other
securities............. (76.6) -- -- -- (76.6)
Fees for early
retirement of debt..... -- -- (27.4) -- (27.4)
Change in intercompany
accounts............... 16.4 (1,604.9) 1,588.5 -- --
Contributions paid to
affiliates............. (2,150.1) (565.4) -- 2,715.5 --
Contributions received
from affiliates........ -- 2,150.1 565.4 (2,715.5) --
Sale of accounts
receivable under
securitization......... 42.6 -- -- -- 42.6
Dividends............... (10.4) -- -- -- (10.4)
Other................... (4.6) 0.5 (5.2) -- (9.3)
--------- --------- --------- --------- ---------
Net Cash Provided From
(Used By) Financing
Activities........... 1,792.2 (9.5) 1,788.8 -- 3,571.5
--------- --------- --------- --------- ---------
Net Increase
(Decrease) in Cash... $ (479.6) $ 17.8 $ (2.4) $ -- $ (464.2)
========= ========= ========= ========= =========
66
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL REPORTING
To Our Shareholders:
The management of Federal-Mogul has the responsibility for preparing the
accompanying financial statements and for their integrity and objectivity. The
financial statements were prepared in accordance with generally accepted
accounting principles generally accepted in the United States and include
amounts based on the best estimates and judgments of management. Management
also prepared the other financial information in this report and is
responsible for its accuracy and consistency with the financial statements.
Federal-Mogul has retained independent auditors, ratified by election by the
shareholders, to audit the financial statements.
Federal-Mogul maintains internal accounting control systems which are
adequate to provide reasonable assurance that assets are safeguarded from loss
or unauthorized use and which produce records adequate for preparation of
financial information. The systems controls and compliance are reviewed by a
program of internal audits. There are limits inherent in all systems of
internal accounting control based on the recognition that the cost of such a
system not exceed the benefits derived. We believe Federal-Mogul's system
provides this appropriate balance.
The Audit Committee of the Board of Directors, comprised of three outside
directors, performs an oversight role related to financial reporting. The
Committee periodically meets jointly and separately with the independent
auditors, internal auditors and management to review their activities and
reports and to take any action appropriate to their findings. At all times,
the independent auditors have the opportunity to meet with the Audit
Committee, without management representatives present, to discuss matters
related to their audit.
/s/ Frank E. Macher
Frank E. Macher
Chief Executive Officer
/s/ Charles G. McClure
Charles G. McClure
Chief Operating Officer and President
/s/ G. Michael Lynch
G. Michael Lynch
Executive Vice President and Chief Financial Officer
67
REPORT OF INDEPENDENT AUDITORS
To the Shareholders and Board of Directors, Federal-Mogul Corporation:
We have audited the accompanying consolidated balance sheets of Federal-
Mogul Corporation and subsidiaries as of December 31, 2000 and 1999, and the
related consolidated statements of operations, shareholders' equity, and cash
flows for each of the three years in the period ended December 31, 2000. Our
audits also included the financial statement schedule listed in the Index at
Item 14(a). These financial statements and schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Federal-Mogul Corporation and subsidiaries at December 31, 2000 and 1999,
and the consolidated results of their operations and their cash flows for each
of the three years in the period ended December 31, 2000, in conformity with
accounting principles generally accepted in the United States. Also, in our
opinion, the related financial statement schedule, when considered in relation
to the basic financial statements, taken as a whole, presents fairly in all
material respects the information set forth therein.
/s/ Ernst & Young LLP
Detroit, Michigan
February 1, 2001
except for Note 6 as to which
the date is March 22, 2001
68
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None
PART III
Item 10. Directors and Executive Officers of the Registrant.
The information required by this item will appear (a) under the caption
"Election of Directors" in the Company's definitive Proxy Statement dated
April 2001 relating to its 2001 Annual Meeting of Shareholders (the "2001
Proxy Statement") (except for the information appearing under the caption
"Compensation of Directors"), which information is incorporated herein by
reference; (b) under the caption "Section 16(a) Beneficial Ownership Reporting
Compliance" in the 2000 Proxy Statement, which information is incorporated
herein by reference; and (c) under the caption "Executive Officers of the
Company" at the end of Part I of this Annual Report.
Item 11. Executive Compensation.
The information required by this item will appear under the caption
"Executive Compensation" in the 2001 Proxy Statement (excluding the
information appearing under the caption "Compensation Committee Report on
Executive Compensation") and under the caption "Compensation of Directors" in
the 2001 Proxy Statement, and is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information required by this item will appear under the caption
"Information on Securities -- Directors' and Officers' Ownership of Stock" and
"Ownership of Stock by Principal Owners" in the 2001 Proxy Statement and is
incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions.
The information required by this item will appear under the caption
"Certain Related Transactions" in the 2001 Proxy Statement and is incorporated
herein by reference.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) The following documents are filed as part of this report:
1. Financial Statements: Financial statements filed as part of this
Annual Report on Form 10-K are listed under Part II, Item 8 hereof.
2. Financial Statement Schedules:
Schedule II -- Valuation and Qualifying Accounts
Financial Statements and Schedules Omitted:
Schedules other than those listed above are omitted because they
are not required or applicable under instructions contained in
Regulation S-X or because the information called for is shown in the
financial statements and notes thereto.
69
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
FEDERAL-MOGUL CORPORATION AND SUBSIDIARIES
(Millions of Dollars)
Column A Column B Column C Column D Column E
- ------------------------- ---------- ------------------- ------------ ---------
Additions
-------------------
Charged Charged to
Balance at to Costs Other Balance
Beginning and Accounts-- Deductions-- at End
Description of Period Expenses Describe Describe of Period
- ------------------------- ---------- -------- ---------- ------------ ---------
Year Ended December 31,
2000:
Valuation allowance for
trade receivable...... $ 69.3 0.7 -- 3.5(4) $ 66.5
Reserve for inventory
valuation............. 26.5 5.8 -- 3.0(1) 29.3
Valuation allowance for
deferred tax assets... 156.1 63.5 -- 219.6
Year Ended December 31,
1999:
Valuation allowance for
trade receivable...... 60.4 5.2 $ 5.1(3) 1.4(4) 69.3
Reserve for inventory
valuation............. 24.9 1.6 26.5
Valuation allowance for
deferred tax assets... 181.1 (2.5) 22.5(2) 156.1
Year Ended December 31,
1998:
Valuation allowance for
trade receivable...... 18.7 7.6 34.1(3) -- 60.4
Reserve for inventory
valuation............. 15.1 1.6 8.2(3) -- 24.9
Valuation allowance for
deferred tax assets... 44.4 3.9 132.8(5) -- 181.1
- ------------------
(1) Decrease due to $3.0 million of obsolete inventory.
(2) Decrease due to a $21.4 million reduction of the valuation reserve which
was reversed to the statement of operations and a $1.1 million
utilization of pre-acquisition net operating loss carryforwards the
effect of which reduces goodwill.
(3) Amounts related to the acquisition of businesses.
(4) Uncollectable accounts charged off net of recoveries.
(5) Increase due to purchased foreign net operating loss carryforwards.
70
3. Exhibits:
The Company will furnish upon request any of the following exhibits upon
payment of the Company's reasonable expenses for furnishing such exhibit.
2.1 Purchase and Sale Agreement between Cooper Industries, Inc. and
Federal-Mogul Corporation, dated August 17, 1998. (Incorporated
by reference to Exhibit 2.1 to the Company's Current Report on
Form 8-K filed October 26, 1998.)
3.1 The Company's Restated Articles of Incorporation. (Incorporated
by reference to Exhibit 3.1 to the Company's Annual Report on
Form 10-K for the year ended December 31, 1999. (the "1999 10-
K")
* 3.2 The Company's Bylaws, as amended.
4.1 Rights Agreement dated as of February 24, 1999, between the
Company and The Bank of New York, as Rights Agent.
(Incorporated by reference to Exhibit 4 to the Company's
Current Report on Form 8-K filed February 25, 1999.)
4.2 Purchase Agreement for 10,000,000 Trust Convertible Preferred
Securities of Federal-Mogul Financing Trust, dated as of
November 24, 1997. (Incorporated by reference to Exhibit 4.6 to
the Company's 1997 10-K.)
4.3 Registration Rights Agreement, dated as of December 1, 1997, by
and among the Company, Federal-Mogul Financing Trust and Morgan
Stanley & Co. Inc. as Initial Purchaser. (Incorporated by
reference to Exhibit 4.7 to the Company's 1997 10-K.)
4.4 Indenture between Federal-Mogul Corporation and The Bank of New
York, dated as of December 1, 1997, with respect to the
Subordinated Debentures. (Incorporated by reference to Exhibit
4.8 to the Company's 1997 10-K.)
4.5 First Supplemental Indenture dated as of December 1, 1999 to
the Indenture between Federal-Mogul Corporation and The Bank of
New York, dated as of December 1, 1997, with respect to the
Subordinated Debentures. (Incorporated by reference to Exhibit
4.9 to the Company's 1997 10-K.)
4.6 Indenture among Federal-Mogul Corporation and The Bank of New
York, dated as of January 20, 1999. (Incorporated by reference
to Exhibit 4.8 to the Company's 1998 10-K.)
4.7 First Supplemental Indenture dated as of December 29, 2000 to
the Indenture dated as of January 20, 1999 among Federal-Mogul
Corporation, certain subsidiaries as guarantors and The Bank of
New York, as trustee. (Incorporated by reference to Exhibit 4.3
to the Company's January 17, 2001 8-K.)
4.8 Indenture among Federal-Mogul Corporation and Continental Bank,
dated as of August 12, 1994. (Incorporated by reference to
Exhibit 4.14 to the Company's Current Report on Form 8-K filed
August 19, 1994.)
* 4.9 First Supplemental Indenture dated as of July 8, 1998 to the
Indenture dated as of August 12, 1994 among Federal-Mogul
Corporation, certain subsidiaries as guarantors, and U.S. Bank
Trust National Association (as successor to Continental Bank),
as trustee.
* 4.10 Second Supplemental Indenture dated as of October 9, 1998 to
the Indenture dated as of August 12, 1994 among Federal-Mogul
Corporation, certain subsidiaries as guarantors, and U.S. Bank
Trust National Association (as successor to Continental Bank),
as trustee.
4.11 Third Supplemental Indenture dated as of December 29, 2000 to
the Indenture dated as of August 12, 1994 among Federal-Mogul
Corporation, certain subsidiaries as guarantors, and U.S. Bank
Trust National Association (as successor to Continental Bank),
as trustee.
71
(Incorporated by reference to Exhibit 4.1 to the Company's Current
Report on Form 8-K filed January 17, 2001. (the "January 17, 2001
8-K")
4.12 Indenture among Federal-Mogul Corporation and The Bank of New
York, dated as of June 29, 1998. (Incorporated by reference to
Exhibit 4.8 to the Company's 1999 10-K.)
4.13 First Supplemental Indenture dated as of June 30, 1998 to the
Indenture dated as of June 29, 1998 among Federal-Mogul
Corporation and The Bank of New York. (Incorporated by reference
to Exhibit 4.9 to the Company's 1999 10-K.)
* 4.14 Second Supplemental Indenture dated as of July 21, 1998 to the
Indenture dated as of June 29, 1998 among Federal-Mogul
Corporation and The Bank of New York.
* 4.15 Third Supplemental Indenture dated as of October 9, 1998 to the
Indenture dated as of June 29, 1998 among Federal-Mogul
Corporation and The Bank of New York
4.16 Fourth Supplemental Indenture dated as of December 29, 2000 to
the Indenture dated as of June 29, 1998 among Federal-Mogul
Corporation, certain subsidiaries as guarantors and The Bank of
New York, as trustee. (Incorporated by reference to Exhibit 4.2
to the Company's January 17, 2001 8-K.)
10.1 Federal-Mogul Corporation 1997 Amended and Restated Long-Term
Incentive Plan, as adopted by the Shareholders of the Company on
May 20, 1998. (Incorporated by reference to the Company's 1998
Definitive Proxy Statement on Form 14A.)
10.2 Amended and Restated Deferred Compensation Plan for Corporate
Directors. (Incorporated by reference to Exhibit 10.7 to the
Company's Annual Report on Form 10-K for the year ended December
31, 1990 (the "1990 10-K".)
10.3 Supplemental Executive Retirement Plan, as amended.
(Incorporated by reference to Exhibit 10.10 to the Company's
1992 10-K.)
10.4 Description of Umbrella Excess Liability Insurance for the
Senior Management Team. (Incorporated by reference to Exhibit
10.11 to the Company's 1990 10-K.)
10.5 Federal-Mogul Corporation Non-Employee Director Stock Plan.
(Incorporated by reference to Exhibit 4 to the Company's
Registration Statement on Form S-8 (Registration No. 33-54301.)
10.6 Amended and Restated Declaration of Trust of Federal-Mogul
Financing Trust, dated as of December 1, 1997. (Incorporated by
reference to Exhibit 10.34 to the Company's 1997 10-K.)
10.7 Common Securities Guarantee Agreement, dated as of December 1,
1997, among the Company and Federal-Mogul Financing Trust.
(Incorporated by reference to Exhibit 10.35 to the Company's
1997 10-K.)
10.8 Fourth Amended and Restated Credit Agreement dated as of
December 29, 2000 among the Company, certain foreign
subsidiaries, certain banks and other financial institutions and
The Chase Manhattan Bank, as administrative agent. (Incorporated
by reference to Exhibit 10.1 to the Company's January 17, 2001
8-K.)
10.9 Amended and Restated Domestic Subsidiary Guarantee dated as of
December 29, 2000 by certain subsidiaries of the Company in
favor of The Chase Manhattan Bank, as administrative agent.
(Incorporated by reference to Exhibit 10.2 to the Company's
January 17, 2001 8-K.)
10.10 Guarantee by F-M UK Holding Limited in favor of The Chase
Manhattan Bank, as administrative agent. (Incorporated by
reference to Exhibit 10.3 to the Company's January 17, 2001 8-
K.)
72
10.11 Trust Agreement dated as of December 29, 2000 among the
Company, certain subsidiaries and Wilmington Trust Company, as
trustee. (Incorporated by reference to Exhibit 10.4 to the
Company's January 17, 2001 8-K.)
10.12 Second Amended and Restated Trust Agreement dated as of
December 29, 2000 among the Company, certain subsidiaries and
First Union National Bank, as trustee. (Incorporated by
reference to Exhibit 10.5 to the Company's January 17, 2001 8-
K.)
10.13 Second Amended and Restated Trust Agreement dated as of
December 29, 2000 among the Company, certain subsidiaries and
ABN AMRO Trust Company (Jersey) Limited, as trustee,
(Incorporated by reference to Exhibit 10.6 to the Company's
January 17, 2001 8-K.)
10.14 Second Amended and Restated Domestic Pledge Agreement among the
Company and certain subsidiaries in favor of First Union
National Bank, as trustee. (Incorporated by reference to
Exhibit 10.7 to the Company's January 17, 2001 8-K.)
10.15 Security Agreement dated as of December 29, 2000 by the Company
and certain subsidiaries in favor of Wilmington Trust Company,
as trustee. (Incorporated by reference to Exhibit 10.8 to the
Company's January 17, 2001 8-K.)
10.16 Form of Mortgage or Deed of Trust prepared for execution by the
Company or any applicable subsidiaries. (Incorporated by
reference to Exhibit 10.9 to the Company's January17, 2001
8-K.)
10.17 Contract of Indemnity dated as of December 29, 2000 by the
Company and certain subsidiaries with respect to a surety bond
issued by Travelers Casualty & Surety Company of America.
(Incorporated by reference to Exhibit 10.10 to the Company's
January 17, 2001 8-K.)
10.18 Contract of Indemnity dated as of December 29, 2000 by the
Company and certain subsidiaries with respect to a surety bond
issued by Travelers Casualty & Surety Company of America.
(Incorporated by reference to Exhibit 10.11 to the Company's
January17, 2001 8-K.)
10.19 Contract of Indemnity dated as of December 29, 2000 by the
Company and certain subsidiaries with respect to a surety bond
issued by SAFECO Insurance Company of America. (Incorporated by
reference to Exhibit 10.12 to the Company's January 17, 2001 8-
K.)
10.20 Contract of Indemnity dated as of December 29, 2000 by the
Company and certain subsidiaries with respect to a surety bond
issued by National Fire Insurance Company of Hartford and
Continental Casualty Company. (Incorporated by reference to
Exhibit 10.13 to the Company's January 17, 2001 8-K.)
*10.21 Fifth Amended and Restated Receivables Sale and Contribution
Agreement, dated as of February 16, 2001, among the Company and
Federal-Mogul Funding Corporation.
*10.22 Sixth Amended and Restated Receivables Interest Purchase
Agreement, dated as of February 16, 2001, in the amount of
$450,000,000 among the Company, Federal-Mogul Funding
Corporation, Falcon Asset Securitization Corporation and
International Securitization Corporation.
10.23 Federal-Mogul Supplemental Key Executive Pension Plan dated
January 1, 1999. (Incorporated by reference to Exhibit 10.11 to
the Company's 1999 10-K.)
*10.24 Employment Agreement dated as of January 10, 2001 and amended
as of January 31, 2001, between the Company and Frank Macher.
73
*10.25 Change of Control Agreement dated January 10, 2001, between the
Company and Frank Macher.
*10.26 Employment Agreement dated as of January 10, 2001 and amended
as of January 31, 2001, between the Company and Charles
McClure.
*10.27 Change of Control Agreement dated January 10, 2001, between the
Company and Charles McClure.
*10.28 Severance Agreement between the Company and Richard A. Snell,
dated September 21, 2000.
*21 Subsidiaries of the Registrant.
*23.1 Consent of Ernst & Young LLP.
*24 Powers of Attorney.
- ------------------
* Filed Herewith
(b) Reports on Form 8-K:
On December 4, 2000 the Company filed a Current Report on Form 8-K to
report the settlement of the litigation initiated against the Company by
Owens-Illinois, Inc.
(c) Separate financial statements of affiliates whose securities are
pledged as collateral.
1) Financial statements of Federal-Mogul Products, Inc. and
subsidiaries (formerly owned by Cooper Industries and the Moog
Automotive division of Cooper Industries, Inc., its predecessor)
including consolidated balance sheets as of December 31, 2000 and
1999, and the related statements of operations and comprehensive
income and cash flows for the years ended December 31, 2000, 1999,
the periods January 1, 1998 through October 9, 1998 and October 10,
1998 through December 31, 1998.
2) Financial statements of Federal-Mogul Ignition Company and
subsidiaries (and the Cooper Automotive division of Cooper
Industries, Inc., its predecessor) including consolidated balance
sheets as of December 31, 2000 and 1999, and the related statements
of operations and comprehensive income and cash flows for the years
ended December 31, 2000 and 1999, the periods January 1, 1998
through October 9, 1998, and October 10, 1998 through December 31,
1998.
3) Financial statements of Federal-Mogul Aviation, Inc. (and Champion
Aviation, Inc. a division of Cooper Industries, Inc., its
predecessor) including consolidated balance sheets as of December
31, 2000 and 1999, and the related statements of operations and
comprehensive income and cash flows for the years ended December
31, 2000, 1999 and the periods January 1, 1998 through October 9,
1998, and October 10, 1998 through December 31, 1998.
4) Financial statements of T&N Industries, Inc. and subsidiaries (and
AE Goetze, Inc., its predecessor) including consolidated balance
sheets as of December 31, 2000 and 1999, and the related statements
of operations and comprehensive income and cash flows for the years
ended December 31, 2000, 1999 and the periods January 1, 1998
through March 5, 1998, and March 6, 1998 through December 31, 1998.
5) Financial statements of Federal-Mogul Powertrain, Inc. and
subsidiaries (and the AE Clevite Inc., its predecessor) including
consolidated balance sheets as of December 31, 2000 and 1999, and
the related statements of operations and comprehensive income and
cash flows for the years ended December 31, 2000, 1999 and for the
periods January 1, 1998 through March 5, 1998, and March 6, 1998
through December 31, 1998.
74
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Federal-Mogul Corporation
We have audited the accompanying consolidated balance sheets of Federal-
Mogul Products, Inc. and subsidiaries as of December 31, 2000 and 1999, and
the related consolidated statements of operations and comprehensive income and
cash flows for the years then ended, the period from October 10, 1998 through
December 31, 1998 and for and the Moog Automotive Division of Cooper
Industries (the Predecessor) for the period from January 1, 1998 through
October 9, 1998. These financial statements are the responsibility of the
respective Company's management. Our responsibility is to express an opinion
on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Federal-Mogul
Products, Inc. and subsidiaries at December 31, 2000 and 1999, and the
consolidated results of their operations and their cash flows for the years
then ended, the period from October 10, 1998 through December 31, 1998 and for
the Predecessor for the period from January 1, 1998 through October 9, 1998,
in conformity with accounting principles generally accepted in the United
States.
/s/ Ernst & Young LLP
Detroit, Michigan
February 1, 2001
75
FEDERAL-MOGUL PRODUCTS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(Millions of Dollars)
Predecessor
-----------
Period from Period from
October 10, January 1,
Year Ended 1998 1998
December 31, through through
-------------- December 31, October 9,
2000 1999 1998 1998
------ ------ ------------ -----------
Net sales............................ $649.8 $724.2 $170.2 $666.7
Cost of products sold................ 485.0 521.6 120.1 458.8
Selling, general and administrative
expenses............................ 102.7 119.5 28.5 106.4
Amortization expense................. 16.1 16.0 2.9 11.9
Restructuring charge................. 17.8 -- -- --
Adjustment of assets held for sale to
fair value.......................... 30.8 -- -- --
Asbestos charge...................... 8.5 -- -- --
Integration costs.................... -- 3.5 -- --
Other expense, net................... 8.3 11.7 1.9 1.6
Interest expense..................... 20.0 20.1 15.1 --
------ ------ ------ ------
Earnings (loss) before income
taxes............................. (39.4) 31.8 1.7 88.0
Income taxes......................... (11.6) 15.1 1.0 38.4
------ ------ ------ ------
Net earnings (loss).............. (27.8) 16.7 0.7 49.6
Components of Comprehensive Income
(Loss):
Minimum pension liability, net of
tax............................... -- (4.2) -- --
Translation adjustments............ 7.8 -- (0.8) (1.6)
------ ------ ------ ------
Comprehensive Income (Loss)...... $(20.0) $ 12.5 $ (0.1) $ 48.0
====== ====== ====== ======
See accompanying Notes to Consolidated Financial Statements.
76
FEDERAL-MOGUL PRODUCTS, INC.
CONSOLIDATED BALANCE SHEETS
(Millions of Dollars)
December 31,
-----------------
2000 1999
-------- --------
ASSETS
Inventories.................................................. $ 156.6 $ 161.2
Other........................................................ 16.2 19.8
-------- --------
Total Current Assets..................................... 172.8 181.0
Property, plant and equipment, net........................... 249.4 254.0
Goodwill, net................................................ 418.0 412.5
Other intangibles, net....................................... 133.9 140.9
Asbestos-related insurance recoverable....................... 187.9 325.9
Other assets................................................. 27.5 47.9
-------- --------
Total Assets............................................. $1,189.5 $1,362.2
======== ========
LIABILITIES AND NET PARENT INVESTMENT
Accounts payable............................................. $ 73.6 $ 67.6
Accrued liabilities.......................................... 51.3 60.8
-------- --------
Total Current Liabilities................................ 124.9 128.4
Long-term portion of asbestos liability...................... 252.7 408.8
Other long-term liabilities.................................. 45.9 3.3
Net Parent Investment:
Accumulated other comprehensive income..................... 2.8 (5.0)
Intercompany transactions.................................. 763.2 826.7
-------- --------
Net Parent Investment.................................... 766.0 821.7
-------- --------
Total Liabilities and Net Parent Investment.............. $1,189.5 $1,362.2
======== ========
See accompanying Notes to Consolidated Financial Statements.
77
FEDERAL-MOGUL PRODUCTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Millions of Dollars)
Predecessor
-----------
Period from Period from
October 10, January 1,
Year Ended 1998 1998
December 31, through through
-------------- December 31, October 9,
2000 1999 1998 1998
------ ------ ------------ -----------
Cash flows from operating activities:
Net earnings (loss)................ $(27.8) $ 16.7 $ 0.7 $ 49.6
Adjustments to reconcile to net cash
provided by (used in) operating
activities:
Depreciation and amortization...... 41.7 41.0 10.1 29.8
Restructuring charge............... 17.8 -- -- --
Adjustment of assets held for sale
and other long-lived assets to
fair value........................ 30.8 -- -- --
Asbestos charge.................... 8.5 -- -- --
Changes in assets and liabilities:
Accounts receivable.............. -- -- 16.7 (43.2)
Inventories...................... 1.9 48.3 31.0 (18.7)
Accounts payable................. (3.2) (40.5) (12.2) (28.6)
Other assets and liabilities..... (16.9) (72.0) 0.5 (9.5)
------ ------ ------ ------
Net cash provided by (used in)
operating activities.......... 52.8 (6.5) 46.8 (20.6)
Cash flows from investing activities:
Capital expenditures, net.......... (34.3) (34.3) -- (13.0)
------ ------ ------ ------
Net cash used in investing
activities.................... (34.3) (34.3) -- (13.0)
Cash flows from financing activities:
Repayments of long-term debt....... -- (0.8) (0.3) (2.4)
Transfers from (to) parent......... (18.5) 33.9 (40.6) 37.8
------ ------ ------ ------
Net cash provided by (used in)
financing activities.......... (18.5) 33.1 (40.9) 35.4
------ ------ ------ ------
Increase (decrease) in cash.......... -- (7.7) 5.9 1.8
Cash, beginning of period...... -- 7.7 1.8 --
------ ------ ------ ------
Cash, end of period............ $ -- $ -- $ 7.7 $ 1.8
====== ====== ====== ======
See accompanying Notes to Consolidated Financial Statements.
78
FEDERAL-MOGUL PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1: Basis of Presentation
The accompanying financial statements reflect the consolidated assets,
liabilities and operations of Federal-Mogul Products, Inc. and its
subsidiaries ("Products"). Products is a wholly owned subsidiary of Federal-
Mogul Corporation ("Federal-Mogul"). Products' predecessor was previously
known as the Moog Automotive Division of Cooper Industries, Inc., hereafter
also referred to as "Predecessor". Federal-Mogul purchased the automotive
divisions of Cooper, including Products, on October 9, 1998 for approximately
$2.0 billion of which approximately $1.1 billion is attributable to Products.
Products operates with financial and operational staff on a decentralized
basis. Federal-Mogul provides certain centralized services for employee
benefits administration, cash management, risk management, legal services,
public relations, tax reporting and internal and external audit. Federal-Mogul
bills Products for all such direct expenses incurred on its behalf. General
expenses that are not directly attributable to the operations of Products have
been allocated based on management's estimates, primarily driven by sales.
Management believes that this allocation method is reasonable.
The accompanying consolidated financial statements are presented as if
Products had existed as an entity separate from its parent during the period
presented and include the assets, liabilities, revenues and expenses that are
directly related to Products' operations. Since the date of Federal-Mogul's
acquisition of Products, the financial statements include the push-down of
fair value adjustments to assets and liabilities, including goodwill, other
intangible assets and property, plant and equipment and their related
amortization and depreciation adjustments.
Products' separate debt and related interest expense have been included in
the consolidated financial statements. Because Products is fully integrated
into its parent's cash management system, all of their cash requirements are
provided by its parent and any excess cash generated by Products is
transferred to its parent.
Note 2: Summary of Significant Accounting Policies
Principles of Consolidation: The consolidated financial statements include
the accounts of Products, and its subsidiaries. Intercompany accounts and
transactions have been eliminated in consolidation.
Use of Estimates: The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
Inventories: Inventories are stated at the lower of cost or market. Prior
to Federal-Mogul's acquisition of Products, cost was determined using the
first-in, first-out ("FIFO") method. Subsequent to Federal-Mogul's acquisition
of Products, cost is determined using the last-in, first-out method ("LIFO")
for approximately 94% and 88% of the inventory at December 31, 2000 and 1999,
respectively. The remaining inventories are recorded using FIFO. If
inventories had been valued at current cost, amounts reported would have been
increased by $5.3 million as of December 31, 2000. LIFO approximated cost at
December 31, 1999.
At December 31, inventories consisted of the following:
2000 1999
------ ------
(Millions of
Dollars)
Raw materials............................................... $ 33.0 $ 30.4
Work-in-process............................................. 14.6 14.3
Finished goods.............................................. 109.0 116.5
------ ------
$156.6 $161.2
====== ======
79
FEDERAL-MOGUL PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Property, Plant and Equipment: Property, plant and equipment are stated at
Federal-Mogul's cost. Depreciation is computed over the estimated useful lives
of the related assets using primarily the straight-line method. This method is
applied to assets, which in general have the following lives: buildings--10 to
40 years and machinery and equipment--3 to 12 years. At December 31, property,
plant and equipment consisted of the following:
2000 1999
------ ------
(Millions of
Dollars)
Property, plant and equipment:
Land and land improvements.............................. $ 8.5 $ 11.4
Buildings............................................... 74.1 82.8
Machinery and equipment................................. 224.5 192.0
------ ------
307.1 286.2
Accumulated depreciation................................ (57.7) (32.2)
------ ------
$249.4 $254.0
====== ======
Total rental expense under operating leases for the years ended December
31, 2000, 1999 and 1998 was $3.6 million, $4.8 million and $1.1 million,
respectively, exclusive of property taxes, insurance and other occupancy costs
generally payable by Products.
Goodwill and Other Intangible Assets: At December 31, goodwill and other
intangible assets, which result principally from acquisitions, consisted of
the following:
Estimated
Useful Life 2000 1999
----------- ------ ------
(Millions of
Dollars)
Goodwill...................................... 40 years $442.5 $422.5
Accumulated amortization...................... (24.5) (10.0)
------ ------
418.0 412.5
Trademarks.................................... 40 years 64.7 66.2
Developed technology.......................... 12-30 years 65.9 67.4
Assembled workforce........................... 15 years 12.4 13.3
Other......................................... 20 years 2.8 2.9
------ ------
145.8 149.8
Accumulated amortization...................... (11.9) (8.9)
------ ------
133.9 140.9
------ ------
Net Intangible Assets....................... $551.9 $553.4
====== ======
Intangible assets are periodically reviewed for indicators of impairment.
If indicators of impairment exist, an assessment of undiscounted future cash
flows related to assets held for use or fair value for assets held for sale
are evaluated accordingly. Intangible assets are amortized on a straight-line
basis over their estimated useful lives. The 2000 impairment charge related to
property, plant and equipment. There were no impairment charges in 1999.
Revenue Recognition: Products recognizes revenue, estimated returns from
product sales and related incentives when there is evidence of a sales
agreement, the delivery of goods has occurred, the sales price is fixed or
determinable and the collectibility of revenue is reasonably assured. Products
generally records sales upon shipment of product to customers and transfer of
title under standard commercial terms.
80
FEDERAL-MOGUL PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Recoverable Customer Engineering and Tooling: Pre-production tooling and
engineering costs that Products will not own and that will be used in
producing products under long-term supply arrangements are expensed as
incurred unless the supply arrangement provides Products the noncancelable
right to use the tools or the reimbursement of such costs is contractually
guaranteed by the customer. Pre-production tooling and engineering costs that
are owned by Products are capitalized as part of machinery and equipment.
Shipping and Handling Costs: Products recognizes shipping and handling
costs as a component of cost of products sold in the statement of operations.
Net Parent Investment: The Net Parent Investment account reflects the
balance of Products' historical earnings, intercompany amounts, income taxes
accrued and deferred, postemployment liabilities, other transactions between
Products and Federal-Mogul, foreign currency translations and equity pension
adjustments.
Currency Translation: Exchange adjustments related to international
currency transactions are reflected in the consolidated statements of
operations. Translation adjustments of Canadian subsidiaries for which the
Canadian dollar is the functional currency are reflected in the consolidated
financial statements as a component of accumulated other comprehensive income.
Fair Value of Financial Instruments: The carrying amounts of certain
financial instruments such as accounts payable approximate their fair value.
Reclassifications: Certain items in the prior year financial statements
have been reclassified to conform with the presentation used in 2000.
Effect of Accounting Pronouncements: Statement of Financial Accounting
Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging
Activities", was issued by the Financial Accounting Standards Board in June
1998. SFAS No. 133 requires that all derivative instruments be recorded on the
balance sheet at their fair value. In June 2000, the FASB issued SFAS No. 138,
which amends and clarifies certain guidance in SFAS No. 133. Products has
implemented the appropriate systems and processes to adopt these statements
effective January 1, 2001. Changes in the fair value of derivatives are
recorded each period in current earnings or other comprehensive income,
depending on whether a derivative is designated as part of a hedge transaction
and, if it is, the type of hedge transaction. For fair-value hedge
transactions the fair value of the derivative instrument will generally be
offset in the income statement by changes in the hedged item's fair value. For
cashflow hedge transactions, the fair value of the derivative instrument will
be reported in other comprehensive income. The ineffective portion of all
hedges will be recognized in current-period earnings. The statements provide
for the recognition of a cumulative adjustment for an accounting change, as of
the date of adoption. The adoption of this FASB will not have a material
impact on the financial position or the operating results of Products.
In November 2000, the Emerging Issues Task Force ("EITF") of the FASB
reached consensus on issue No. 00-14, Accounting for Certain Sales Incentives.
The EITF addresses the recognition, measurement, and income statement
classification for sales incentives offered voluntarily by a vendor without
charge to customers that can be used in, or exercisable by a customers a
result of a single transaction. The EITF is required to be applied beginning
April 1, 2001. The effect of the adoption has not been finalized, however
Products believes that the adoption will not have a material impact on its
financial statements.
Note 3: Acquisitions
In November 2000, certain assets and liabilities were transferred to
Products from another Federal-Mogul subsidiary, for an aggregate cost of $45.9
million, which approximated book value, in exchange for a note payable to the
subsidiary (see Note 6).
Note 4: Restructuring Charges
In 2000, Products recognized a $17.8 million restructuring charge related
to severance and exit costs. Employee severance costs of $13.9 million and
exit costs of $3.9 million resulted primarily from the planned
81
FEDERAL-MOGUL PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
reorganization of the America's friction business. Net employee reductions are
expected to be approximately 400 comprised of 1,200 reductions associated with
facility closings offset by 800 new hires in new or expanded facilities. As of
December 31, 2000 no facilities had been closed and no employees had been
severed. Products expects to substantially complete this program in 2001.
Also in 2000, Products recorded a $30.8 million charge for long-lived
assets held for sale to fair value primarily associated with the actions of
the 2000 restructuring program. Included in this charge is the write down of
assets to their fair value for the closure of certain facilities associated
with the reorganization of the America's friction business.
Note 5: Commitments and Contingencies
Asbestos Litigation
Current businesses of Products, primarily Abex and Wagner, are involved as
defendants in numerous court actions in the United States alleging personal
injury from exposure to asbestos or asbestos-containing products, mainly
involving friction products. Abex is a defendant in approximately 23,000
pending claims as of December 31, 2000. During 2000, approximately 14,700 new
claims naming this defendant were received. Wagner is a defendant in
approximately 17,300 claims as of December 31, 2000. During 2000,
approximately 6,700 new claims naming this defendant were received. In 1998,
Federal-Mogul acquired the capital stock of a former Cooper Automotive entity
resulting in the assumption by Products of contractual liability, under
certain circumstances, for all claims pending and to be filed in the future
alleging exposure to certain Wagner automotive and industrial friction
products and for all claims filed after August 29, 1998, alleging exposure to
certain Abex (non-railroad and non-aircraft) friction products. In the fourth
quarter of 2000, Products decreased its estimate of probable asbestos-related
liability by $127 million, which was accompanied by an approximately
equivalent reduction in the insurance recoverable asset. The revised estimate
of probable asbestos-related liability principally resulted from a study
performed by an econometric firm that specializes in these types of matters.
The revised liability (approximately $253 million) represents Products'
estimate for claims currently pending and those which can be reasonably
estimated to be asserted in a future period. Products believes that these
claims will be paid over the next 12 years. In arriving at the revised
liability for Abex and Wagner, assumptions have been made regarding the number
of claims anticipated to be received in the future period, the typical cost of
settlement (which is sensitive to the alleged disease type and the
jurisdiction in which the action is being brought), the rate of receipt of
claims, and the timing of settlements.
While management believes that the liability and receivable recorded for
these claims are appropriate for anticipated losses arising from asbestos-
related claims against Abex and Wagner for the covered period, given the
nature and complexity of factors affecting the estimated liability and
potential insurance recovery the actual liability and insurance recovery may
differ. No assurance can be given that Abex and Wagner will not be subject to
material additional liabilities and significant additional litigation relating
to asbestos for the period covered. In the event that such liabilities exceed
the amounts recorded by Products or the remaining insurance coverage,
Products' results of operations, business, liquidity and financial condition
could be materially adversely affected.
The ultimate liability for all pending and future claims is highly
uncertain due to the difficulty of forecasting the numerous variables that can
affect the liability. Products does not believe it can reasonably determine
the ultimate liability as the level of uncertainty is too great to provide for
reasonable estimation of the number of future claims, the nature of such
claims, and the cost to resolve them. As additional experience is gained
regarding claims or other new information becomes available regarding the
potential liability, Products will reassess its potential liability and revise
the estimates as appropriate. Accordingly it is reasonably possible that the
ultimate losses from asbestos-related claims will be greater than amounts
recorded.
Abex maintained product liability insurance coverage for most of the time
that it manufactured products that contained asbestos. Products has the
benefit of that insurance. 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
82
FEDERAL-MOGUL PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
substantial excess layer liability insurance coverage that, barring unforeseen
insolvencies of excess carriers or other adverse events, should provide
coverage for asbestos claims against Abex. Products believes that based on its
review of the insurance policies, the viability of the insurance carriers, and
advice from outside legal counsel, it is probable that Abex will receive
payments for a substantial majority of the cost of claims.
Wagner also maintained product liability insurance coverage for some of the
time that it manufactured products that contained asbestos. Products has the
benefit of that insurance. 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.
Products 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 Wagner will receive payment for a portion of the
cost of claims. Based on the probable conclusion of collection under the
insurance policies, Products has recorded a $188 million insurance recoverable
asset related to the Abex and Wagner liability.
Environmental Liabilities
At December 31, 2000, Products had accruals of $5.1 million with respect to
potential environmental liabilities, including $3.9 million classified as a
long-term liability, based on Products' current estimate of the most likely
amount of losses that it believes will be incurred.
Environmental remediation costs are accrued based on estimates of known
environmental remediation exposures. Such accruals are adjusted as information
develops or circumstances change.
Products has not discounted its environmental liability. While
environmental liability accruals involve estimates that can have wide ranges
of potential liability, Products has taken a proactive approach and has
managed the costs in these areas over the years. Products does not believe
that the nature of their products, production processes, or materials or other
factors involved in the manufacturing process subject Products to unusual
risks or exposures for environmental liability. Products' greatest exposure to
inaccuracy in their estimates is with respect to the constantly changing
definitions of what constitutes an environmental liability or an acceptable
level of cleanup.
Note 6: Long-Term Debt and Other Financing Arrangements
Products' cash and indebtedness is managed by Federal-Mogul. The majority
of the cash provided by or used by a particular division, including Products,
is provided through this consolidated cash and debt management system. As a
result, the amount of domestic cash or debt historically related to Products
is not determinable. For purposes of Products' historical financial
statements, identifiable debt was allocated to Products during each year with
all of Products' positive or negative cash flows being treated as cash
transferred to or from its parent. The specifically identifiable industrial
revenue bonds (the "IRB") and specifically identifiable international debt was
assigned to Products.
Products has inter-company loans with Federal-Mogul in the amount of $278.9
million, which is included in the net parent investment balance for all years
presented. In 2000, 1999 and 1998, Federal-Mogul charged interest on the
inter-company loans based on the stated rate of 6.9%.
In November 2000 Products issued a note payable to another subsidiary of
Federal-Mogul for the transfer of certain assets and liabilities (see Note 3),
in the amount of $45.9 million. Interest on this note is calculated at the
stated rate of 6.154%. This note is included in Products balance sheet under
the caption "Other Long-Term Liabilities".
83
FEDERAL-MOGUL PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For purposes of Products' historical financial statements, interest expense
has been computed using the actual interest rate with respect to the IRB and
Canadian short-term borrowings. Total interest related to long-term debt and
short-term debt paid during 1999 and 1998 was $0.1 million and $0.5 million,
respectively. There were no borrowings outstanding in 2000.
Federal-Mogul has pledged 100% of Products' capital stock and also provided
collateral in the form of a pledge of inventories, property, plant and
equipment, real property and intellectual properties to secure certain
outstanding debt of Federal-Mogul. In addition, Products has guaranteed fully
and unconditionally, on a joint and several basis, the obligation to pay
principal and interest under Federal-Mogul's Senior Credit Agreement and its
publicly registered debt. Such pledges and guarantees have also been made by
other subsidiaries of Federal-Mogul.
Products participates in Federal-Mogul's accounts receivable securitization
program. On an ongoing basis, Products sells certain accounts receivable to
Federal-Mogul Funding Corporation ("FMFC"), a wholly owned subsidiary of
Federal-Mogul, which then sells such receivables, without recourse, to a
financial conduit. The transfers of these receivables are charged to the Net
Parent Investment account. Products does not retain any interest in these
receivables and the receivables are sold to FMFC at their carrying value.
Note 7: Net Parent Investment
Changes in net parent investment were as follows:
(Million
of Dollars)
Balance at January 1, 1998.................................. $852.4
Comprehensive income for the period January 1, 1999
through
October 9, 1998.......................................... 48.0
Intercompany transactions, net............................ 53.1
------
Balance at October 9, 1998.................................. $953.5
======
Federal-Mogul initial investment in Products................ $833.2
Comprehensive loss for the period October 10, 1998 through
December 31, 1998........................................ (0.1)
Intercompany transactions, net............................ (22.6)
------
Balance at December 31, 1998................................ 810.5
Comprehensive income...................................... 12.5
Intercompany transactions, net............................ (1.3)
------
Balance at December 31, 1999................................ 821.7
Comprehensive loss........................................ (20.0)
Intercompany transactions, net............................ (35.7)
------
Balance at December 31, 2000................................ $766.0
======
The Company includes accumulated other comprehensive income in net parent
investment. At December 31, 2000 accumulated other comprehensive income
included $7.0 million of foreign currency translation adjustments and $(4.2)
million of minimum pension funding. At December 31, 1999 accumulated other
comprehensive income included $(0.8) million of foreign currency translation
adjustments and $(4.2) million of minimum pension funding.
Note 8: Income Taxes
Products files a consolidated return with Federal-Mogul for U.S. federal
income tax purposes. Federal income tax expense is calculated on a separate-
return basis for financial reporting purposes.
84
FEDERAL-MOGUL PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Period Period
October 10, January 1,
1998 1998
through through
December 31, October 9,
2000 1999 1998 1998
------ ----- ------------ ----------
(Millions of Dollars)
Components of income tax expense
(benefit):
Current....................... $(15.0) $18.6 $1.0 $55.3
Deferred...................... 3.4 (3.5) -- (16.9)
------ ----- ---- -----
Income tax expense (benefit).. $(11.6) $15.1 $1.0 $38.4
====== ===== ==== =====
A reconciliation between the statutory federal income tax rate and the
effective tax rate is as follows:
Period Period
October 10, January 1,
1998 1998
through through
December 31, October 9,
2000 1999 1998 1998
---- ---- ------------ ----------
U.S. Federal statutory rate.......... (35)% 35% 35% 35%
State and local taxes................ -- 4 4 4
Nondeductible goodwill............... 6 8 24 5
Foreign / other...................... -- -- (6) --
--- --- --- ---
Effective tax rate................... (29)% 47% 57% 44%
=== === === ===
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the related amounts used for income tax purposes. Significant
components of the Company's net deferred tax asset are non-deductible accruals
and amortization and depreciation timing differences.
2000 1999
---------- ----------
(Millions of Dollars)
Current deferred tax assets...................... $ 61.2 $ 75.5
Long-term deferred tax liabilities............... (85.3) (102.2)
---------- ----------
Net deferred tax liabilities..................... $ (24.1) $ (26.7)
========== ==========
As Products files a consolidated tax return with Federal-Mogul, the net
deferred tax liability at December 31, 2000 and 1999 is a component of the net
parent investment.
Note 9: Pension Plans
In 1998, prior to Federal-Mogul's acquisition of Products, the various
pension plans of Products were merged into one plan of Cooper. As such, the
related pension liabilities were recorded to net parent investment. This plan
was assumed by Federal-Mogul in its acquisition of the automotive divisions of
Cooper. This plan was required to be fully funded by Cooper prior to the
acquisition by Federal-Mogul. During 2000, the company consolidated all
domestic qualified defined benefit plans into one plan, the Federal-Mogul
Corporation Pension Plan.
For the year ended December 31, 2000, the charge to Products from Federal-
Mogul was approximately $0.7 million. For the year ended December 31, 1999,
the credit to Products from Federal-Mogul was approximately $1.0 million.
During the period January 1, 1998 to October 9, 1998, the expense charged to
Products by Cooper was $2.2 million. During the period October 10, 1998 to
December 31, 1998, the credit to Products from Federal-Mogul was approximately
$0.4 million.
85
FEDERAL-MOGUL PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The fully funded aggregated projected benefit obligation of $716.1 million
was based upon a discount rate of 8%, and the fair value of the plan's assets
was $852.5 million at December 31, 2000. Company contributions for 2000 and
1999 were $6.8 million and $0.5 million.
Note 10: Postretirement Benefits Other Than Pensions
As part of Cooper and subsequently Federal-Mogul, benefits provided to
employees of Products under various postretirement plans other than pensions,
all of which are unfunded, include retiree medical care, dental care,
prescription drugs and life insurance, with medical care accounting for
approximately 94% of the total. The majority of participants under such plans
are retirees. The expense related to such plans approximated $1.8 million,
$2.5 million, $1.7 million and $0.6 million, for 2000, 1999, the period
January 1, 1998 to October 9, 1998, and the period October 10, 1998 to
December 31, 1998, respectively. The unfunded projected benefit obligation of
these plans aggregated approximately $34.6 million at December 31, 2000 based
upon a discount rate of 7.75%.
Note 11: Concentrations of Credit Risk and Other
Products grants credit to their customers, which are primarily in the
automotive industry. Credit risk with respect to trade receivables is
generally diversified due to the large number of entities comprising Products'
customer base and their dispersion across many different countries. Products
performs periodic credit evaluations of their customers and generally does not
require collateral.
Products operates in a single business segment. Products manufactures and
distributes brake friction materials and other products for use by the
automotive aftermarket and in automobile assemblies. In addition, Products
manufactures and distributes suspension, steering drive-line and brake system
components and material for the automotive aftermarket. No single customer
accounted for 10% or more of revenues in 2000, 1999 or 1998. All revenues and
assets of Products reside in North America, principally in the United States.
86
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Federal-Mogul Corporation
We have audited the accompanying consolidated balance sheets of Federal-
Mogul Ignition Company and subsidiaries as of as of December 31, 2000 and
1999, and the related consolidated statements of operations and comprehensive
income and cash flows for the years then ended, the period from October 10,
1998 through December 31, 1998 and for the Cooper Automotive Division of
Cooper Industries (the Predecessor) for the period from January 1, 1998
through October 9, 1998. These financial statements are the responsibility of
the respective Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Federal-Mogul
Ignition Company and subsidiaries at December 31, 2000 and 1999, and the
consolidated results of their operations and their cash flows for the years
then ended, the period from October 10, 1998 through December 31, 1998 and for
the Predecessor for the period from January 1, 1998 through October 9, 1998,
in conformity with accounting principles generally accepted in the United
States.
/s/ Ernst & Young LLP
Detroit, Michigan
February 1, 2001
87
FEDERAL-MOGUL IGNITION COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(Millions of Dollars)
Predecessor
-----------
Period from Period from
October 10, January 1,
Year Ended 1998 1998
December 31, through through
-------------- December 31, October 9,
2000 1999 1998 1998
------ ------ ------------ -----------
Net sales:
Trade.............................. $846.5 $963.8 $233.1 $782.8
Affiliate.......................... 74.8 -- -- --
------ ------ ------ ------
Total net sales.................. 921.3 963.8 233.1 782.8
Cost of products sold................ 701.2 687.6 169.1 589.7
Selling, general and administrative
expenses............................ 141.6 124.8 40.1 100.6
Amortization expense................. 20.0 18.6 4.4 13.7
Integration costs.................... -- 5.0 -- --
Restructuring charge................. 15.9 -- -- --
Adjustment of assets held for sale
fair value.......................... 4.9 -- -- --
Other expense, net................... 1.2 15.9 2.8 15.4
Interest expense..................... 32.9 34.3 15.1 1.5
------ ------ ------ ------
Earnings before income taxes....... 3.6 77.6 1.6 61.9
Income taxes......................... 5.9 33.7 1.0 26.8
------ ------ ------ ------
Net earnings (loss).............. (2.3) 43.9 0.6 35.1
Components of comprehensive income
(loss):
Minimum pension liability, net of
tax............................... -- (4.1) -- --
Translation adjustments............ 15.7 (13.0) (2.4) 6.0
------ ------ ------ ------
Comprehensive Income (Loss)...... $ 13.4 $ 26.8 $ (1.8) $ 41.1
====== ====== ====== ======
See accompanying Notes to Consolidated Financial Statements
88
FEDERAL-MOGUL IGNITION COMPANY
CONSOLIDATED BALANCE SHEETS
(Millions of Dollars)
December 31,
------------------
2000 1999
-------- --------
ASSETS
Cash........................................................ $ 32.4 $ 3.3
Accounts receivable......................................... 36.3 49.5
Inventories................................................. 161.7 166.8
Other....................................................... 48.4 41.2
-------- --------
Total Current Assets.................................... 278.8 260.8
Property, plant and equipment, net.......................... 345.0 363.9
Goodwill, net............................................... 368.9 388.3
Other intangibles, net...................................... 249.1 260.9
Other assets................................................ 28.0 48.2
-------- --------
Total Assets............................................ $1,269.8 $1,322.1
======== ========
LIABILITIES AND NET PARENT INVESTMENT
Short-term debt............................................. $ -- $ 6.0
Accounts payable............................................ 73.8 84.4
Accrued compensation........................................ 15.9 7.3
Restructuring and rationalization reserves.................. 11.4 10.2
Accrued rebates and customer incentives..................... 8.6 12.4
Other accrued liabilities................................... 15.6 42.5
-------- --------
Total Current Liabilities............................... 125.3 162.8
Other long-term liabilities................................. 14.4 17.0
Net Parent Investment:
Accumulated other comprehensive income.................... (3.8) (19.5)
Intercompany transactions................................. 1,133.9 1,161.8
-------- --------
Net Parent Investment................................... 1,130.1 1,142.3
-------- --------
Total Liabilities and Net Parent Investment............. $1,269.8 $1,322.1
======== ========
See accompanying Notes to Consolidated Financial Statements.
89
FEDERAL-MOGUL IGNITION COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Millions of Dollars)
Predecessor
-----------
Period from Period from
October 10, January 1,
Year Ended 1998 1998
December 31, through through
-------------- December 31, October 9,
2000 1999 1998 1998
------ ------ ------------ -----------
Cash flows from operating activities:
Net earnings (loss)................ $ (2.3) $ 43.9 $ 0.6 $ 35.1
Adjustments to reconcile to net cash
provided by (used in) operating
activities:
Depreciation and amortization...... 57.8 52.5 13.5 45.5
Restructuring charge............... 15.9 -- -- --
Adjustment of assets held for sale
to fair value..................... 4.9 -- -- 1.0
Changes in assets and liabilities:
Accounts receivable.............. 13.2 (10.8) (1.1) 12.4
Inventories...................... 5.1 46.2 4.8 (27.1)
Accounts payable................. (10.6) (6.4) 29.1 (9.3)
Other assets and liabilities..... 5.9 (33.3) (47.1) (0.8)
------ ------ ------ ------
Net cash provided by (used in)
operating activities.......... 89.9 92.1 (0.2) 56.8
Cash flows from investing activities:
Cash paid for acquired businesses.. -- (1.9) -- (8.5)
Capital expenditures, net.......... (45.4) (30.1) (6.2) (29.4)
------ ------ ------ ------
Net cash used in investing
activities.................... (45.4) (32.0) (6.2) (37.9)
Cash flows from financing activities:
Net short-term repayments.......... (6.0) -- (2.4) (33.1)
Borrowings (repayments) of long-
term debt......................... -- (10.8) (0.1) 0.3
Transfers from (to) parent......... (9.4) (59.1) (23.8) 58.2
------ ------ ------ ------
Net cash provided by (used in)
financing activities.......... (15.4) (69.9) (26.3) 25.4
------ ------ ------ ------
Increase (decrease) in cash.......... 29.1 (9.8) (32.7) 44.3
Cash beginning of period....... 3.3 13.1 45.8 1.5
------ ------ ------ ------
Cash end of period............. $ 32.4 $ 3.3 $ 13.1 $ 45.8
====== ====== ====== ======
See accompanying Notes to Consolidated Financial Statements.
90
FEDERAL-MOGUL IGNITION COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note 1: Basis of Presentation
The accompanying financial statements reflect the consolidated assets,
liabilities and operations of Federal-Mogul Ignition Company and its
subsidiaries ("Ignition"). Ignition is a wholly owned subsidiary of Federal-
Mogul Corporation ("Federal-Mogul"). Ignition's predecessor was previously
known as the Cooper Automotive Division of Cooper Industries, Inc. hereafter
also referred to as the "Predecessor". Federal-Mogul purchased the automotive
divisions of Cooper, including Ignition, on October 9, 1998 for approximately
$2.0 billion, of which approximately $986.0 million was attributable to
Ignition.
Ignition operates with financial and operations staff on a decentralized
basis. Federal-Mogul provides (and Cooper had provided) certain centralized
services for employee benefits administration, cash management, risk
management, legal services, public relations, domestic tax reporting and
internal and external audit. Federal-Mogul bills Ignition for all such direct
expenses incurred on its behalf. General expenses that are not directly
attributable to the operations of Ignition have been allocated based on
management's estimates, primarily driven by sales. Management believes that
this allocation method is reasonable.
The accompanying consolidated financial statements are presented as if
Ignition had existed as an entity separate from its parent during the period
presented and include the assets, liabilities, revenues and expenses that are
directly related to Ignition's operations. Since the date of Federal-Mogul's
acquisition of Ignition, the financial statements include the push-down of
fair value adjustments to assets and liabilities, including goodwill, other
intangible assets and property, plant and equipment and their related
amortization and depreciation adjustments.
Ignition's separate debt and related interest expense have been included in
the consolidated financial statements. Because Ignition is fully integrated
into its parent's cash management system, all of their domestic cash
requirements are provided by its parent and any excess cash generated by
Ignition is transferred to the parent.
Note 2: Summary of Significant Accounting Policies
Principles of Consolidation: The consolidated financial statements include
the accounts of Ignition, and its subsidiaries. Intercompany accounts and
transactions have been eliminated in consolidation.
Use of Estimates: The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and the accompanying notes. Actual results could differ from those
estimates.
Inventories: Inventories are carried at cost or, if lower, net realizable
value. Prior to Federal-Mogul's acquisition of Ignition, cost was determined
using the first-in, first-out ("FIFO") method. Subsequent to Federal-Mogul's
acquisition of Ignition, cost is determined using the last-in, first-out
method ("LIFO") for approximately 72% and 62% of the inventory at December 31,
2000 and 1999, respectively. The remaining inventories are recorded using
FIFO. If inventories had been valued at current cost amounts reported would
have been decreased by $2.7 million, as of December 31, 1999. LIFO
approximated cost at December 31, 2000. At December 31, inventories consisted
of the following:
2000 1999
------ ------
(Millions of
Dollars)
Raw materials............................................. $ 43.3 $ 35.7
Work-in-process........................................... 42.0 38.8
Finished goods............................................ 80.4 92.3
------ ------
165.7 166.8
Reserve for inventory valuation........................... (4.0) --
------ ------
$161.7 $166.8
====== ======
91
FEDERAL-MOGUL IGNITION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Property, Plant and Equipment: Property, plant and equipment are stated at
Federal-Mogul's cost. Depreciation is provided over the estimated useful lives
of the related assets using primarily the straight-line method. This method is
applied to assets, which in general have the following lives: buildings--10 to
40 years; and machinery and equipment--3 to 12 years. At December 31,
property, plant and equipment consisted of the following:
2000 1999
------ ------
(Millions of
Dollars)
Property, plant and equipment:
Land and land improvements.............................. $ 5.6 $ 12.1
Buildings............................................... 79.2 89.4
Machinery and equipment................................. 330.5 305.4
------ ------
415.3 406.9
Accumulated depreciation................................ (70.3) (43.0)
------ ------
$345.0 $363.9
====== ======
Total rental expense under operating leases for the years ended December
31, 2000, 1999 and 1998 was $1.7 million, $3.2 million and $5.4 million,
respectively, exclusive of property taxes, insurance and other occupancy costs
generally payable by Ignition.
Goodwill and Other Intangible Assets: At December 31, goodwill and other
intangible assets, which result principally from acquisitions, consisted of
the following:
Estimated
Useful Life 2000 1999
----------- ------ ------
(Millions of
Dollars)
Goodwill...................................... 40 years $390.4 $399.5
Accumulated amortization...................... (21.5) (11.2)
------ ------
368.9 388.3
Trademarks.................................... 40 years 180.2 181.5
Developed technology.......................... 12-30 years 67.7 68.2
Assembled workforce........................... 15 years 18.8 20.2
Other......................................... 20 years 2.7 2.8
------ ------
269.4 272.7
Accumulated amortization...................... (20.3) (11.8)
------ ------
249.1 260.9
------ ------
Net Intangible Assets....................... $618.0 $649.2
====== ======
Intangible assets are periodically reviewed for impairment indicators. If
impairment indicators exist, an assessment of undiscounted future cash flows
related to assets held for use or fair value for assets held for sale are
evaluated accordingly. Intangible assets are amortized on a straight-line
basis over their estimated useful lives. Impairment charges recorded in 2000
related primarily to assets held for sale.
Net Parent Investment: The Net Parent Investment account reflects the
balance of Ignition's historical earnings, intercompany amounts, income taxes
accrued and deferred, postemployment liabilities, other transactions between
Ignition and Federal-Mogul, foreign currency translations and equity pension
adjustments.
92
FEDERAL-MOGUL IGNITION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Revenue Recognition: Ignition recognizes revenue, estimated returns from
product sales and related incentives when there is evidence of a sales
agreement, the delivery of goods has occurred, the sales price is fixed or
determinable and the collectibility of revenue is reasonably assured. Ignition
generally records sales upon shipment of product to customers and transfer of
title under standard commercial terms. Affiliate sales are transferred at
cost.
Recoverable Customer Engineering and Tooling: Pre-production tooling and
engineering costs that Ignition will not own and that will be used in
producing products under long-term supply arrangements are expensed as
incurred unless the supply arrangement provides Ignition the noncancelable
right to use the tools or the reimbursement of such costs is contractually
guaranteed by the customer. Pre-production tooling and engineering costs that
are owned by Ignition are capitalized as part of machinery and equipment.
Shipping and Handling Costs: Ignition recognizes shipping and handling
costs as a component of cost of products sold in the statement of operations.
Currency Translation: Exchange adjustments related to international
currency transactions and translation adjustments for subsidiaries whose
functional currency is the United States dollar (principally those located in
highly inflationary economies) are reflected in the consolidated statements of
operations. Translation adjustments of foreign subsidiaries for which the
United States dollar is not the functional currency are reflected in the
consolidated financial statements as a component of accumulated other
comprehensive income.
Reclassifications: Certain items in the prior year financial statements
have been reclassified to conform with the presentation used in 2000.
Fair Value of Financial Instruments: The carrying amounts of certain
financial instruments such as cash, accounts receivable, accounts payable and
debt approximate their fair values.
Effect of Accounting Pronouncements: Statement of Financial Accounting
Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging
Activities", was issued by the Financial Accounting Standards Board in June
1998. SFAS No. 133 requires that all derivative instruments be recorded on the
balance sheet at their fair value. In June 2000, the FASB issued SFAS No. 138,
which amends and clarifies certain guidance in SFAS No. 133. Ignition has
implemented the appropriate systems and processes to adopt these statements
effective January 1, 2001. Changes in the fair value of derivatives are
recorded each period in current earnings or other comprehensive income,
depending on whether a derivative is designated as part of a hedge transaction
and, if it is, the type of hedge transaction. For fair-value hedge
transactions the fair value of the derivative instrument will generally be
offset in the income statement by changes in the hedged item's fair value. For
cash-flow hedge transactions, the fair value of the derivative instrument will
be reported in other comprehensive income. The ineffective portion of all
hedges will be recognized in current-period earnings. The statements provide
for the recognition of a cumulative adjustment for an accounting change, as of
the date of adoption. The adoption of this FASB will not have a material
impact on the financial position or the operating results of Ignition.
In November 2000, the Emerging Issues Task Force ("EITF") of the FASB
reached consensus on issue No. 00-14, Accounting for Certain Sales Incentives.
The EITF addresses the recognition, measurement, and income statement
classification for sales incentives offered voluntarily by a vendor without
charge to customers that can be used in, or exercisable by a customers a
result of a single transaction. The EITF is required to be applied beginning
April 1, 2001. The effect of the adoption has not been finalized, however
Ignition believes that the adoption will not have a material impact on its
financial statements.
Derivative Financial Instruments: On a recurring basis, foreign currency
forward exchange contracts and commodity contracts are entered into to reduce
risks of adverse changes in foreign exchange rates and commodity prices. All
contracts are hedges of actual or anticipated transactions with the gain or
loss on the contract recognized in the same period and in the same category of
income or expense as the underlying hedged
93
FEDERAL-MOGUL IGNITION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
transaction. Ignition did not enter into speculative derivative transactions
or hedges of anticipated transactions unless there is a high probability the
transactions will occur. Due to the short term of contracts and a restrictive
policy, contract terminations or anticipated transactions that do not occur
are rare and insignificant events that are accounted for through income in the
period they occur.
Note 3: Acquisitions
Ignition completed one acquisition in 1999, which had an aggregate cost of
$1.9 million, with $1.3 million of goodwill recorded. Ignition completed one
acquisition in 1998, which had an aggregate cost of $8.5 million, with $5.5 of
goodwill recorded. The operations of these businesses were not significant on
a pro forma basis to historical operations of Ignition. The acquisitions have
been accounted for as purchases and the results of the acquisitions are
included in the consolidated statements of operations since the respective
acquisition dates.
Note 4: Restructuring
In 2000, Ignition recognized a $15.9 million restructuring charge related
to severance and exit costs. Employee severance costs of $10.4 million and
exit costs of $5.5 million resulted from the planned closure of Australian and
Taiwanese sales, administrative, and distribution facilities; consolidation of
an administrative facility at Ignition's Ohio facility; consolidation of
Ignition's Americas wiper and lighting businesses; and various other programs
in Europe. Net employee reductions are expected to be approximately 165
comprised of 565 reductions associated with facility closings offset by 400
new hires in new or expanded facilities. As of December 31, 2000 180 employees
had been severed. Ignition expects to substantially complete these actions in
2001.
Also in 2000, Ignition recorded a $4.9 million charge for long-lived assets
held for sale to fair value primarily associated with the planned closure of
Australian and Taiwanese sales, administrative, and distribution facilities;
and consolidation of an administrative facility at Ignition's Ohio facility
Note 5: Commitments and Contingencies
At December 31, 2000, Ignition had accruals of $11.8 million with respect
to potential environmental liabilities, including $5.4 million classified as a
long-term liability, based on Ignition's current estimate of the most likely
amount of losses that it believes will be incurred.
Environmental remediation costs are accrued based on estimates of known
environmental remediation exposures. Such accruals are adjusted as information
develops or circumstances change. The environmental liability accrual includes
$3.8 million related to sites owned by Ignition and $8.0 million for retained
environmental liabilities related to sites previously owned by Ignition and
third-party sites where Ignition was a contributor. Third-party sites usually
involve multiple contributors where Ignition's liability will be determined
based on an estimate of Ignition's proportionate responsibility for the total
cleanup. The amounts actually accrued for such sites are based on these
estimates as well as an assessment of the financial capacity of the other
potentially responsible parties.
Ignition has not discounted its environmental liability. While the
environmental liability involves estimates that can have wide ranges of
potential liability, Ignition has taken a proactive approach and has managed
environmental costs over the years. Ignition does not believe that the nature
of their products, production processes, materials or other factors involved
in the manufacturing process is subject to unusual risks or exposures for
environmental liability. Ignition's greatest exposure to inaccuracy in their
estimates is with respect to the constantly changing definitions of what
constitutes an environmental liability or an acceptable level of cleanup.
94
FEDERAL-MOGUL IGNITION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 6: Long-Term Debt and Other Financing Arrangements
Ignition's cash and indebtedness is managed by Federal-Mogul. The majority
of the cash provided by or used by a particular division, including
Ignition's, is provided through this consolidated cash and debt management
system. As a result, the amount of domestic cash or debt historically related
to Ignition is not determinable. For purposes of Ignition's historical
financial statements, identifiable debt was allocated to Ignition during each
year with all of Ignition's positive or negative cash flows being treated as
cash transferred to or from its parent.
Ignition has an intercompany loan with Federal-Mogul in the amount of
$508.0 million, which is included in the net parent investment balance at
December 31, 2000 and 1999. In 2000, 1999 and 1998, Federal-Mogul charged
interest on the intercompany loan based on the stated rate of 6.8%.
For purposes of Ignition's historical financial statements, interest
expense has been computed using the actual interest rate with respect to
international short-term borrowings. Total interest related to short-term debt
paid during 2000, 1999 and 1998 was $1.0 million, $0.8 million and $1.5
million, respectively.
Federal-Mogul has pledged 100% of Ignition's capital stock and also
provided collateral in the form of a pledge of inventories, property, plant
and equipment, real property and intellectual properties to secure certain
outstanding debt of Federal-Mogul. In addition, Ignition has guaranteed fully
and unconditionally, on a joint and several basis, the obligation to pay
principal and interest under Federal-Mogul's Senior Credit Agreement and its
publicly registered debt. Such pledges and guarantees have also been made by
other subsidiaries of Federal-Mogul.
Ignition participates in Federal-Mogul's accounts receivable securitization
program. On an ongoing basis, Ignition's domestic sells certain accounts
receivable to Federal-Mogul Funding Corporation ("FMFC"), a wholly owned
subsidiary of Federal-Mogul, which then sells such receivables, without
recourse, to a financial conduit. The transfers of these receivables are
charged to the net parent investment account. Ignition does not retain any
interest in these receivables and the accounts receivable are sold to FMFC at
their carrying value.
Note 7: Net Parent Investment
Changes in net parent investment were as follows:
(Millions
of Dollars)
Balance at January 1, 1998.................................. $1,097.1
Comprehensive income for the period January 1, 1998
through October 9, 1998.................................. 41.1
Intercompany transactions, net............................ 95.6
--------
Balance at October 9, 1998.................................. $1,233.8
========
Federal-Mogul initial investment in Ignition................ $1,462.2
Comprehensive loss for the period October 10, 1998 through
December 31, 1998........................................ (1.8)
Intercompany transactions, net............................ (52.2)
--------
Balance at December 31, 1998................................ 1,408.2
Comprehensive income...................................... 26.8
Intercompany transactions, net............................ (292.7)
--------
Balance at December 31, 1999................................ 1,142.3
Comprehensive income...................................... 13.4
Intercompany transactions, net............................ (25.6)
--------
Balance at December 31, 2000................................ $1,130.1
========
95
FEDERAL-MOGUL IGNITION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company includes accumulated other comprehensive income in Net Parent
Investment. At December 31, 2000 accumulated other comprehensive income
included $0.3 million of foreign currency translation adjustments and $(4.1)
million of minimum pension funding. At December 31, 1999 accumulated other
comprehensive income included $(15.4) million of foreign currency translation
adjustments and $(4.1) million of minimum pension funding.
Note 8: Income Taxes
Ignition files a consolidated return with its parent for U.S. federal
income tax purposes. Federal income tax expense is calculated on a separate-
return basis for financial reporting purposes.
Period Period
Year ended October 10, January 1,
December 1998 1998
31, through through
------------ December 31, October 9,
2000 1999 1998 1998
----- ----- ------------ ----------
(Millions of Dollars)
Components of income tax expense
(benefit):
Current........................ $ 8.7 $37.7 $1.0 $ 43.8
Deferred....................... (2.8) (4.0) -- (17.0)
----- ----- ---- ------
Income tax expense............. $ 5.9 $33.7 $1.0 $ 26.8
===== ===== ==== ======
Period Period
October 10, January 1,
Year ended 1998 1998
December 31, through through
--------------- December 31, October 9,
2000 1999 1998 1998
------ ------ ------------ ----------
Effective tax rate
reconciliation:
U.S. Federal statutory
rate...................... 35% 35% 35% 35%
State and local taxes...... 4 4 4 4
Nondeductible goodwill..... 75 5 50 8
Foreign / other............ 50 (1) (26) (4)
------ ------ --- ---
Effective tax rate......... 164% 43% 63% 43%
====== ====== === ===
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the related amounts used for income tax purposes. Significant
components of the Ignition net deferred tax asset are non-deductible accruals
and amortization and depreciation timing differences.
2000 1999
----------- ----------
(Millions of Dollars)
Current deferred tax assets..................... $ 40.2 $ 35.6
Long term deferred tax liabilities.............. (100.8) (92.2)
----------- ----------
Net deferred tax liabilities.................... $ (60.6) $ (56.6)
=========== ==========
As Ignition files a consolidated tax return with Federal-Mogul, the net
deferred tax asset at December 31, 1999 and 1998 is a component of the net
parent investment.
96
FEDERAL-MOGUL IGNITION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 9: Pension Plans
In 1998, prior to Federal-Mogul's acquisition of Ignition, the various
pension plans of Ignition were merged into one plan of Cooper. As such, the
related pension liabilities were recorded to net parent investment. This plan
was assumed by Federal-Mogul in its acquisition of the automotive divisions of
Cooper. This plan was required to be fully funded by Cooper prior to the
acquisition by Federal-Mogul. In 2000, the company consolidated all domestic
qualified defined benefit plans into one plan, the Federal Mogul Corporation
Pension Plan.
The credit to Ignition, as at December 31, 2000 was approximately $0.3
million. The credit to Ignition for the year ended December 31, 1999 was
approximately $2.8 million. The expense charged to Ignition by Cooper during
the period January 1, 1998 to October 9, 1998 was $7.3 million. The credit to
Ignition from Federal-Mogul for the period October 10, 1998 to December 31,
1998 was $0.5 million.
The fully funded aggregated projected benefit obligation of such domestic
and international plans of $721.8 million and $61.5 million was based upon a
discount rate of 8% and 6.75%. The fair value of the plan's assets at December
31, 2000 was $852.5 million and $68.5 million for domestic and international
plans, respectively. Company contributions for 2000 were $7.5 million and $1.8
million for domestic and international plans, respectively.
Note 10: Postretirement Benefits Other Than Pensions
As part of Cooper and subsequently Federal-Mogul, benefits provided to
employees of Ignition under various postretirement plans other than pensions,
all of which are unfunded, include retiree medical care, dental care,
prescription drugs and life insurance, with medical care accounting for
approximately 94% of the total. The majority of participants under such plans
are retirees. The expense related to such plans approximated $11.5 million,
$11.8 million, $4.4 million, and $2.8 million for 2000, 1999, the period
January 1, 1998 to October 9, 1998 and the period October 10, 1998 to December
31, 1998, respectively. The unfunded projected benefit obligation of these
plans aggregated approximately $163.3 million at December 31, 2000, based upon
a discount rate of 7.75%
Note 11: Concentrations of Credit Risk and Other
Ignition grants credit to their customers, which are primarily in the
automotive industry. Credit risk with respect to trade receivables is
generally diversified due to the large number of entities comprising
Ignition's customer base and their dispersion across many different countries.
Ignition performs periodic credit evaluations of their customers and generally
does not require collateral.
Ignition operates in a single business segment. Ignition manufactures and
distributes spark plugs, wipe blades, lamps, and other products for use by the
automotive aftermarket and in automobile assemblies. No single customer
accounted for 10% or more of revenues in 2000, 1999 or 1998. Net sales to
customers outside the United States, principally to European customers, were
19%, 20%, and 25% of the total net sales for the years ended December 31,
2000, 1999 and 1998 respectively.
Note 12: Subsequent Event
In 2001, Ignition elected to hold one of its wholly owned subsidiary for
sale. The subsidiary had net sales of $68.6 million for the year ended
December 31, 2000 and total assets of $113.7 million as of December 31, 2000.
Net of tax, Ignition does not expect the gain or loss on the sale to be
material.
97
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Federal-Mogul Corporation:
We have audited the accompanying balance sheets of Federal-Mogul Aviation,
Inc. as of December 31, 2000 and 1999 and the related statements of operations
and cash flows for the years then ended, the period from October 10, 1998
through December 31, 1998 and for the Aviation Division of the Cooper
Automotive Division of Cooper Industries (the Predecessor) for the period from
January 1, 1998 through October 9, 1998. These financial statements are the
responsibility of the respective Company's management. Our responsibility is
to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Federal-Mogul Aviation,
Inc. at December 31, 2000 and 1999 and the results of its operations and its
cash flows for the years then ended, the period from October 10, 1998 through
December 31, 1998 and for the Predecessor for the period from January 1, 1998
through October 9, 1998, in conformity with accounting principles generally
accepted in the United States.
/s/ Ernst & Young LLP
Detroit, Michigan
March 1, 2001
98
FEDERAL-MOGUL AVIATION, INC.
STATEMENTS OF OPERATIONS
(thousands of dollars)
Year Ended
December 31, Predecessor
--------------- -----------
October 10- January 1-
December 31, October 9,
2000 1999 1998 1998
------- ------- ------------ -----------
Net sales............................ $68,616 $64,584 $13,628 $47,034
Cost of products sold................ 41,392 38,977 8,641 30,298
Selling, general and administrative
expenses............................ 7,146 7,228 1,380 5,446
Amortization expense................. 2,219 2,092 289 309
Other expense, net................... 1,986 1,858 1,618 12
------- ------- ------- -------
Earnings before income taxes....... 15,873 14,429 1,700 10,969
Income taxes......................... 6,875 6,278 776 4,314
------- ------- ------- -------
Net Earnings....................... $ 8,998 $ 8,151 $ 924 $ 6,655
======= ======= ======= =======
See accompanying Notes to Financial Statements.
99
FEDERAL-MOGUL AVIATION, INC.
BALANCE SHEETS
(thousands of dollars)
December 31,
-----------------
2000 1999
-------- --------
ASSETS
Cash........................................................ $ 1 $ 1
Other receivables........................................... 25 378
Inventories................................................. 10,805 11,454
Perishable tooling and supplies............................. 1,942 1,710
-------- --------
Total current assets...................................... 12,773 13,543
Property, plant and equipment, less accumulated
depreciation............................................... 18,223 19,073
Goodwill, less accumulated amortization..................... 81,938 84,097
Other intangibles, less accumulated amortization............ 759 818
Other assets................................................ 6 51
-------- --------
Total Assets.............................................. $113,699 $117,582
======== ========
LIABILITIES AND NET PARENT INVESTMENT
Accounts payable............................................ $ 1,743 $ 4,598
Accrued compensation........................................ 90 125
Other accrued liabilities................................... 751 1,517
-------- --------
Total current liabilities................................. 2,584 6,240
Net parent investment....................................... 111,115 111,342
-------- --------
Total Liabilities and Net Parent Investment............... $113,699 $117,582
======== ========
See accompanying Notes to Financial Statements.
100
FEDERAL-MOGUL AVIATION, INC.
STATEMENTS OF CASH FLOWS
(thousands of dollars)
Year Ended
December 31, Predecessor
----------------- -----------
October 10 January 1
through through
December 31, October 9,
2000 1999 1998 1998
------- -------- ------------ -----------
Cash flows from operating
activities:
Net Earnings.................... $ 8,998 $ 8,151 $ 924 $ 6,655
Adjustments to reconcile to net
cash provided by operating
activities:
Depreciation expense............ 1,509 1,286 519 2,122
Amortization expense............ 2,219 2,092 289 309
Changes in assets and
liabilities:
Other receivables............. 353 (378) 600 (1,618)
Inventories................... 649 5,120 300 (4,883)
Accounts payable and accrued
liabilities.................. (3,621) 660 (795) (1,624)
Other assets and liabilities,
net.......................... (3) 523 -- 23
------- -------- ------- -------
Net cash provided by
operating activities....... 10,104 17,454 1,837 984
Cash flows from investing
activities:
Capital expenditures............ (879) (799) (275) (420)
Cash flows from financing
activities:
Net inter-company activity with
parent......................... (9,225) (16,655) (1,562) (564)
------- -------- ------- -------
Change in cash.................... -- -- -- --
Cash at beginning of
period..................... 1 1 1 1
------- -------- ------- -------
Cash at end of period....... $ 1 $ 1 $ 1 $ 1
======= ======== ======= =======
See accompanying Notes to Financial Statements.
101
FEDERAL-MOGUL AVIATION, INC.
NOTES TO FINANCIAL STATEMENTS
Note 1: Basis of Presentation
The accompanying financial statements reflect the assets, liabilities and
operations of Federal-Mogul Aviation, Inc. ("Aviation"). Aviation is a wholly
owned subsidiary of Federal-Mogul Corporation ("Federal-Mogul"). Aviation was
previously an operating unit included in the Cooper Automotive Division of
Cooper Industries, Inc. ("Cooper"). Federal-Mogul purchased the automotive
divisions of Cooper, including Aviation, on October 9, 1998
Aviation operates with complete financial and operations staff on a
decentralized basis. Its parent provides certain centralized services for
employee benefits administration, cash management, risk management, legal
services, public relations, domestic tax reporting and internal and external
audit. Its parent bills Aviation for all direct costs incurred on behalf of
Aviation. General corporate, accounting, tax, legal and other administrative
costs that are not directly attributable to the operations of Aviation have
been allocated to Aviation in the accompanying financial statements.
The accompanying financial statements are presented as if Aviation had
existed as an entity separate from its parent during the period presented and
include the assets, liabilities, revenues and expenses that are directly
related to Aviation's operations. Since the date of Federal-Mogul's
acquisition of Aviation, the financial statements include the push-down of
fair value adjustments to assets and liabilities, including goodwill, other
intangible assets and property, plant and equipment and their related
amortization and depreciation adjustments.
Because Aviation is fully integrated into its parent's worldwide cash
management system, all of their cash requirements are provided by its parent
and any excess cash generated by Aviation is transferred to its parent.
Aviation participates in Federal-Mogul's accounts receivable securitization
program. On an ongoing basis, Aviation sells certain accounts receivable to
Federal-Mogul Funding Corporation ("FMFC"), a wholly owned subsidiary of
Federal-Mogul, which then sells such receivables, without recourse, to a
financial conduit. The transfers of these receivables are charged to the net
parent investment account. Aviation does not retain any interest in these
receivables and the accounts receivable are sold at carrying value.
Note 2: Summary of Significant Accounting Policies
Use of Estimates: The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Inventories: Inventories are carried at cost or, if lower, net realizable
value. Prior to Federal-Mogul's acquisition of Aviation, cost was determined
using the first-in, first-out ("FIFO") method. Subsequent to Federal-Mogul's
acquisition of Aviation, cost was determined using the last-in, first-out
("LIFO") method, which approximated FIFO for all years presented.
At December 31, inventories consisted of the following (in thousands):
2000 1999
------- -------
Raw materials............................................. $ 3,382 $ 3,067
Work-in-process........................................... 6,136 6,795
Finished goods............................................ 1,287 1,592
------- -------
Net inventories....................................... $10,805 $11,454
======= =======
102
FEDERAL-MOGUL AVIATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Revenue Recognition: Aviation recognizes revenues and the related customer
incentives when there is evidence of a sales agreement, the delivery of the
goods has occurred, the sales price is fixed or determinable and the ability
to collect the revenue is reasonably assured. Aviation generally records
revenue upon shipment of product to the customer, which coincides with the
transfer of title under standard commercial terms.
Research and Development Costs: Aviation expenses research and development
costs when incurred. Research and development costs were $1.6 million and $1.9
million for the years ended December 31, 2000 and 1999 and $1.4 million and
$0.4 million for the period from January 1, 1998 through October 9, 1998 and
October 10, 1998 through December 31, 1998, respectively.
Property, Plant and Equipment: Property, plant and equipment are stated at
Federal-Mogul's cost. Depreciation is provided over the estimated useful lives
of the related assets using the straight-line method, which in general are
depreciated over the following lives: buildings--10 to 40 years and machinery
and equipment-- 3 to 20 years.
At December 31, property, plant and equipment consisted of the following
(in thousands):
2000 1999
------- -------
Property, plant and equipment:
Land.................................................. $ 110 $ 110
Buildings............................................. 9,288 8,656
Machinery and equipment............................... 11,270 11,390
Construction-in-progress.............................. 869 722
------- -------
21,537 20,878
Accumulated depreciation.............................. (3,314) (1,805)
------- -------
$18,223 $19,073
======= =======
Goodwill and Other Intangible Assets: At December 31, goodwill and other
intangible assets, which resulted from Federal-Mogul's acquisition of
Aviation, consisted of the following (in thousands):
Estimated
Useful Life 2000 1999
----------- ------- -------
Goodwill.................................... 40 years $86,406 $86,406
Accumulated amortization.................... (4,468) (2,309)
------- -------
Net goodwill................................ $81,938 $84,097
======= =======
Assembled workforce......................... 15 years $ 891 $ 891
Accumulated amortization.................... (132) (73)
------- -------
Net assembled workforce..................... $ 759 $ 818
======= =======
Intangible assets are periodically reviewed for impairment indicators. If
impairment indicators exist, an assessment of undiscounted future cash flows
related to assets held for use or fair value for assets held for sale are
evaluated accordingly. Intangible assets are amortized on a straight-line
basis over their estimated useful lives.
Net Parent Investment: The Net Parent Investment account includes
Aviation's historical earnings, intercompany amounts, income taxes deferred
and payable, postemployment benefit liabilities and other transactions between
Aviation and its parent.
Fair Value of Financial Instruments: The carrying amounts of certain
financial instruments such as other receivables and accounts payable
approximate their fair value for all years presented.
103
FEDERAL-MOGUL AVIATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 3: Net Parent Investment
Changes in net parent investment during the three years ended December 31,
were as follows (in thousands):
Balance at January 1, 1998...................................... $ 42,904
Net inter-company transactions with parent.................... (1,927)
Net income for period from January 1, 1998 to October 9,
1998......................................................... 6,655
--------
Balance at October 9, 1998...................................... $ 47,632
========
Federal-Mogul's initial investment in Aviation.................. $ 81,979
Net inter-company transactions with parent.................... 1,290
Net income for period from October 10, 1998 to December 31,
1998......................................................... 924
--------
Balance at December 31, 1998.................................... 84,193
Net inter-company transactions with parent.................... 18,998
Net income.................................................... 8,151
--------
Balance at December 31, 1999.................................... 111,342
Net inter-company transactions with parent.................... (9,225)
Net income.................................................... 8,998
--------
Balance at December 31, 2000.................................... $111,115
========
Intercompany transactions are principally cash transfers and non-cash
charges between Aviation and its parent.
Aviation has an inter-company loan with Federal-Mogul in the amount of
$30.5 million, which is included in the net parent investment balance at
December 31, 2000, 1999 and 1998. In 2000, 1999 and 1998 Federal-Mogul charged
interest on this balance based on the stated rate of 6.9%.
Federal-Mogul has pledged 100% of Aviation's capital stock and also
provided collateral in the form of a pledge of inventories, property, plant
and equipment, real property and intellectual properties to secure certain
outstanding debt of Federal-Mogul. In addition, Aviation has guaranteed fully
and unconditionally, on a joint and several basis, the obligation to pay
principal and interest under Federal-Mogul's Senior Credit Agreements and its
publicly traded registered debt. Such pledges and guarantees have also been
made by certain other subsidiaries of Federal-Mogul.
Note 4: Income Taxes
Aviation files a consolidated return with its parent for U.S. federal
income tax purposes. Federal income tax expense is calculated on a separate-
return basis for financial reporting purposes. A reconciliation between
Aviation's statutory federal income tax rate and its effective tax rate is
summarized below:
Period from Period from
January 1, October 10,
Year ended 1998 1998
December 31, through through
--------------- October 9, December 31,
2000 1999 1998 1998
------ ------ ----------- ------------
Effective tax rate
reconciliation:
U.S. Federal statutory
rate..................... 35% 35% 35% 35%
Non-deductible goodwill... 5 6 8 1
State and Local Taxes..... 3 3 3 3
------ ------ --- ---
Effective Tax Rate........ 43% 44% 46% 39%
====== ====== === ===
Deferred taxes and income taxes payable are a component of the net
investment in parent.
104
FEDERAL-MOGUL AVIATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 5: Pension Plans
In 1998, prior to Federal-Mogul's acquisition of Aviation, the various
pension plans of Aviation were merged into one plan of Cooper. As such, the
related pension liabilities were recorded to net parent investment. This plan
was assumed by Federal-Mogul in its acquisition of the automotive divisions of
Cooper. This plan was required to be fully funded by Cooper prior to the
acquisition by Federal-Mogul. In 2000, Federal-Mogul consolidated all domestic
qualified defined benefit plans into one plan, the Federal Mogul Corporation
Pension Plan.
The expense charged to Aviation was $0.2 million and $0.2 million for the
years ended December 31, 2000 and 1999 and $0.3 million for the period from
January 1, 1998 through October 8, 1998. There was no expense recorded for the
period from October 9, 1998 through December 31, 1998.
At December 31, 2000 and 1999, the plan's projected benefit obligation was
$721.8 million and $345.6 million based on discount rates of 8% and 7.75%, and
the fair value of plan assets were $852.5 million and $327.0 million,
respectively.
Note 6: Concentration of Credit Risk and Other
Aviation grants credit to their customers, which are primarily in the
aerospace industry. Credit risk with respect to trade receivables is generally
diversified due to the large number of entities comprising Aviation's customer
base. Aviation performs periodic credit evaluations of their customers and
generally do not require collateral.
Aviation operates in a single business segment, manufacturing primarily
engine ignition systems and related parts for the aerospace industry. Aviation
manufactures and distributes these products for use in the aerospace
aftermarket and original equipment segments of the industry. Two distributors
accounted for approximately 25% and 12%, 27% and 10%, and 31% and 11% of net
sales for the years ended December 31, 2000, 1999 and 1998, respectively. No
other customer accounted for 10% or more of revenues in 2000, 1999 or 1998.
All of Aviation's operations are conducted in the United States. Net sales to
customers outside the United States, principally to European customers, were
22%, 20%, and 22% of the total net sales for the years ended December 31,
2000, 1999 and 1998 respectively.
Note 7: Subsequent Event
In 2001, Federal-Mogul elected to hold Aviation for sale.
105
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Federal-Mogul Corporation
We have audited the accompanying consolidated balance sheets of T&N
Industries, Inc. and subsidiaries as of December 31, 2000 and 1999 and the
related consolidated statements of operations and cash flows for the years
then ended and the period from March 6, 1998 through December 31, 1998. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of T&N
Industries, Inc. and subsidiaries at December 31, 2000 and 1999, and the
consolidated results of their operations and their cash flows for the years
then ended and for the period from March 6, 1998 through December 31, 1998 in
conformity with accounting principles generally accepted in the United States.
/s/ Ernst & Young LLP
Detroit, Michigan
March 22, 2001
106
T&N INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Millions of Dollars)
Period from
March 6,
Year ended 1998
December 31, through
-------------- December 31,
2000 1999 1998
------ ------ ------------
Net sales:
Trade........................................... $827.1 $845.2 $593.1
Affiliate....................................... 30.3 33.9 12.5
------ ------ ------
Total net sales............................... 857.4 879.1 605.6
Cost of products sold............................. 702.7 692.9 462.8
Selling, general and administrative expenses...... 77.9 70.4 62.3
Amortization expense.............................. 17.4 16.0 12.4
Asbestos insurance recoverable, net............... (28.3) -- --
Restructuring charges............................. 1.7 -- --
Other (income) expense, net....................... (0.9) (0.3) 5.0
Interest expense.................................. 40.8 40.9 33.3
------ ------ ------
Earnings before income taxes.................... 46.1 59.2 29.8
Income taxes...................................... 24.1 28.6 16.0
------ ------ ------
Net Earnings.................................. $ 22.0 $ 30.6 $ 13.8
====== ====== ======
See accompanying Notes to Consolidated Financial Statements.
107
T&N INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
(Millions of Dollars)
December 31,
-----------------
2000 1999
-------- --------
ASSETS
Cash........................................................ $ 2.8 $ 0.7
Accounts receivable......................................... 8.2 15.7
Inventories................................................. 42.9 44.0
Other....................................................... 8.7 7.1
-------- --------
Total Current Assets...................................... 62.6 67.5
Property, plant and equipment, net.......................... 430.3 440.8
Goodwill, net............................................... 567.8 559.0
Other intangible assets, net................................ 28.8 31.2
Other assets................................................ 68.8 13.3
-------- --------
Total Assets.............................................. $1,158.3 $1,111.8
======== ========
LIABILITIES AND NET PARENT INVESTMENT
Accounts payable............................................ $ 42.3 $ 93.5
Accrued compensation........................................ 17.4 24.0
Short-term debt, including current maturities of long-term
debt....................................................... 3.0 2.3
Other accrued liabilities................................... 25.8 26.0
-------- --------
Total Current Liabilities................................. 88.5 145.8
Long-term debt.............................................. 7.4 12.0
Asbestos liability.......................................... 353.7 371.5
Minority interest in consolidated subsidiaries.............. 8.8 6.1
Net Parent Investment....................................... 699.9 576.4
-------- --------
Total Liabilities and Net Parent Investment............... $1,158.3 $1,111.8
======== ========
See accompanying Notes to Consolidated Financial Statements.
108
T&N INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Millions of Dollars)
Period from
March 6,
Year ended 1998
December 31, through
--------------- December 31,
2000 1999 1998
------ ------- ------------
Cash flows from operating activities:
Net earnings................................... $ 22.0 $ 30.6 $ 13.8
Adjustments to reconcile to net cash provided by
(used in)
operating activities:
Depreciation and amortization.................. 57.1 53.7 36.8
Asbestos insurance recoverable, net............ (28.3) -- --
Changes in assets and liabilities:
Accounts receivable.......................... (9.5) 5.6 6.1
Inventories.................................. (4.6) 11.0 (10.1)
Accounts payable and accrued liabilities..... (50.3) 53.5 8.6
Other assets and liabilities, net............ (37.8) (29.5) (17.0)
------ ------- -------
Net cash provided by (used in) operating
activities................................ (51.4) 124.9 38.2
Cash flows from investing activities:
Business acquisitions, net of cash acquired.... -- (25.2) --
Capital expenditures, net...................... (53.9) (99.6) (121.1)
------ ------- -------
Net cash used in investing activities...... (53.9) (124.8) (121.1)
Cash flows from financing activities:
Repayments of long-term debt................... (3.9) (5.8) --
Transfers from (to) parent..................... 111.3 4.4 80.1
------ ------- -------
Net cash provided by (used in) financing
activities................................ 107.4 (1.4) 80.1
------ ------- -------
Increase in cash................................. 2.1 (1.3) (2.8)
Cash, beginning of period.................. 0.7 2.0 4.8
------ ------- -------
Cash, end of period........................ $ 2.8 $ 0.7 $ 2.0
====== ======= =======
See accompanying Notes to Consolidated Financial Statements.
109
T&N INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1: Basis of Presentation
The accompanying financial statements reflect the consolidated assets,
liabilities and operations of T&N Industries, Inc. and its subsidiaries
("T&N"). T&N is a wholly owned subsidiary of Federal-Mogul Corporation
("'Federal-Mogul"). Federal-Mogul purchased T&N plc. including T&N, on March
6, 1998 for approximately $2.4 billion of which approximately $666.1 million
is attributable to T&N. The period from March 6, 1998 through December 31,
1998 is hereafter referred to as "1998".
T&N operates with financial and operational staff on a decentralized basis.
Federal-Mogul provides certain centralized services for employee benefits
administration, cash management, risk management, legal services, public
relations, domestic tax reporting and internal and external audit. Federal-
Mogul bills T&N for all such direct expenses incurred on its behalf. General
expenses that are not directly attributable to the operations of T&N have been
allocated based on management's estimates, primarily driven by sales.
Management believes that this allocation method is reasonable.
The accompanying consolidated financial statements are presented as if T&N
had existed as an entity separate from its parent during the period presented
and includes the assets, liabilities, revenues and expenses that are directly
related to T&N's operations. Since the date of Federal-Mogul's acquisition of
T&N, the financial statements include the push-down of fair value adjustments
to assets and liabilities, including goodwill, other intangible assets and
property, plant and equipment and their related amortization and depreciation
adjustments.
T&N's separate debt and related interest expense have been included in the
consolidated financial statements. Because T&N is fully integrated into its
parent's cash management system, all of their cash requirements are provided
by its parent and any excess cash generated by T&N is transferred to its
parent.
Note 2: Summary of Significant Accounting Policies
Principles of Consolidation: The consolidated financial statements include
the accounts of T&N, and its subsidiaries. Intercompany accounts and
transactions have been eliminated in consolidation.
Use of Estimates: The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and the accompanying notes. Actual results could differ from those
estimates.
Inventories: Inventories are stated at the lower of cost or market. Cost is
determined using the first-in, first-out method. At December 31, inventories
consisted of the following:
2000 1999
---------- ----------
(Millions of Dollars)
Raw materials..................................... $ 14.0 $ 16.5
Work-in-process................................... 15.5 14.4
Finished goods.................................... 15.5 15.6
---------- ----------
45.0 46.5
Reserve for valuation of inventory................ (2.1) (2.5)
---------- ----------
$42.9 $ 44.0
========== ==========
Property, Plant and Equipment: Property, plant and equipment are stated at
Federal-Mogul's cost. Depreciation is computed over the estimated useful lives
of the related assets using primarily the straight-line method. This method is
applied to assets which in general have the following lives: buildings--10 to
40 years
110
T&N INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
and machinery and equipment--3 to 12 years. At December 31, property, plant
and equipment consisted of the following:
2000 1999
------ ------
(Millions of
Dollars)
Property, plant and equipment:
Land and land improvements.............................. $ 3.8 $ 3.7
Buildings............................................... 73.4 82.8
Machinery and equipment................................. 451.3 414.6
------ ------
528.5 501.1
Accumulated depreciation................................ (98.2) (60.3)
------ ------
$430.3 $440.8
====== ======
Total rental expense under operating leases for 2000, 1999 and 1998 was
approximately $2.4 million, $1.2 million and $2.4 million, respectively,
exclusive of property taxes, insurance and other occupancy costs generally
payable by T&N.
Goodwill and Other Intangible Assets: At December 31, goodwill and other
intangible assets, which result principally from acquisitions, consisted of
the following:
Estimated
Useful Life 2000 1999
----------- ---------- ----------
(Millions of Dollars)
Goodwill.............................. 40 years $ 610.8 $ 589.2
Accumulated amortization.............. (43.0) (30.2)
---------- ----------
567.8 559.0
Trademarks............................ 40 years 14.3 14.3
Developed technology.................. 12-30 years 6.6 6.6
Assembled workforce................... 15 years 10.8 12.2
---------- ----------
31.7 33.1
Accumulated amortization.............. (2.9) (1.9)
---------- ----------
28.8 31.2
---------- ----------
Net Intangible Assets............... $ 596.6 $590.2
========== ==========
Intangible assets are periodically reviewed for impairment indicators. If
impairment indicators exist, an assessment of undiscounted future cash flows
related to assets held for use or fair value for assets held for sale are
evaluated accordingly. There were no impairment charges during 2000 or 1999.
Intangible assets are amortized on a straight-line basis over their estimated
useful lives.
Research and Development Costs: T&N expenses research and development costs
as incurred. Research and development expense was approximately $6.7 million,
$6.8 million and $12.0 million for 2000, 1999 and 1998, respectively.
Net Parent Investment: The Net Parent Investment account reflects the
balance of T&N historical earnings, intercompany debt (including the amounts
recoverable under the T&N Ltd. asbestos insurance policy), income taxes
accrued and deferred, postemployment liabilities, other transactions between
T&N and Federal-Mogul and equity pension adjustments.
111
T&N INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Revenue Recognition: T&N recognizes revenue, estimated returns from product
sales and related incentives when there is evidence of a sales agreement, the
delivery of goods has occurred, the sales price is fixed or determinable and
the collectibility of revenue is reasonably assured. T&N generally records
sales upon shipment of product to customers and transfer of title under
standard commercial terms. Affiliate sales are transferred at cost.
Shipping and Handling Costs: T&N recognizes shipping and handling costs as
a component of cost of products sold in the statement of operations.
Recoverable Customer Engineering and Tooling: Pre-production tooling and
engineering costs that T&N will not own and that will be used in producing
products under long-term supply arrangements are expensed as incurred unless
the supply arrangement provides T&N the noncancelable right to use the tools
or the reimbursement of such costs is contractually guaranteed by the
customer. Third party pre-production tooling and engineering costs that are
owned by T&N are capitalized as part of machinery and equipment.
Fair Value of Financial Instruments: The carrying amounts of certain
financial instruments such as cash, accounts receivable and accounts payable
approximate their fair value.
Effect of Accounting Pronouncements: Statement of Financial Accounting
Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging
Activities", was issued by the Financial Accounting Standards Board in June
1998. SFAS No. 133 requires that all derivative instruments be recorded on the
balance sheet at their fair value. In June 2000, the FASB issued SFAS No. 138,
which amends and clarifies certain guidance in SFAS No. 133. The Company has
implemented the appropriate systems and processes to adopt these statements
effective January 1, 2001. Changes in the fair value of derivatives are
recorded each period in current earnings or other comprehensive income,
depending on whether a derivative is designated as part of a hedge transaction
and, if it is, the type of hedge transaction. For fair-value hedge
transactions the fair value of the derivative instrument will generally be
offset in the income statement by changes in the hedged item's fair value. For
cash flow hedge transactions, the fair value of the derivative instrument will
be reported in other comprehensive income. The ineffective portion of all
hedges will be recognized in current-period earnings. The statements provide
for the recognition of a cumulative adjustment for an accounting change, as of
the date of adoption. The adoption of this FASB will not have a material
impact on the financial position or the operating results of T&N.
Note 3: Business Sales and Acquisition
In November 2000, T&N transferred certain assets and liabilities to another
Federal-Mogul subsidiary, for an aggregate price of $45.9 million, which
approximated book value, for which T&N received a note receivable in the
amount of $45.9 million (see Note 4).
In January 1999, T&N completed its acquisition of certain manufacturing
operations of Crane Technologies, Inc. ("Crane"). Crane's two plants, located
in Orland, Indiana and Jackson, Michigan, employ approximately 230 people with
1998 annual sales of approximately $36 million. T&N accounted for the Crane
acquisition as a purchase and recorded $12.2 million of goodwill as a result
of the acquisition. The results of operations of Crane are included in the
consolidated statement of operations since the date of the acquisition.
Note 4: Long-Term Debt and Other Financing Arrangements
T&N's cash and indebtedness is managed by Federal-Mogul. The majority of
the cash provided by or used by a particular division, including T&N, is
provided through this consolidated cash and debt management system.
112
T&N INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
As a result, the amount of cash or debt historically related to T&N is not
determinable. For purposes of T&N' historical financial statements,
identifiable debt was allocated to T&N during each year with all of T&N'
positive or negative cash flows being treated as cash transferred to or from
T&N. The specifically identifiable industrial revenue bonds (the "IRB") and
specifically identifiable international debt was assigned to T&N.
Federal-Mogul has allocated T&N a portion of the interest it incurred on
the financing of T&N. Federal-Mogul allocated T&N $40.0 million of interest in
2000, 1999 and $33.3 million in 1998. Interest was calculated by allocating a
portion of the amount Federal-Mogul borrowed to purchase T&N plc., Federal-
Mogul allocated $666.1 million of the debt to T&N and calculated interest at a
rate of 6%.
In November 2000 T&N received a note receivable from another subsidiary of
Federal-Mogul in exchange for the sale of certain assets and assume certain
liabilities (see Note 3), in the amount of $45.9 million. Interest on this
note is calculated at the stated rate of 6.154%. This note is included in
T&N's balance sheet under the caption "Other Long-Term Assets".
Federal-Mogul has pledged 100% of T&N's capital stock and also provided
collateral in the form of a pledge of inventories, property, plant and
equipment, real property and intellectual properties to secure certain
outstanding debt of Federal-Mogul. In addition, T&N has guaranteed fully and
unconditionally, on a joint and several basis, the obligation to pay principal
and interest under Federal-Mogul's Senior Credit Agreement and its publicly
registered debt. Such pledges and guarantees have also been made by other
subsidiaries of Federal-Mogul.
T&N participates in Federal-Mogul's accounts receivable securitization
program. On an ongoing basis, T&N sells certain accounts receivable to
Federal-Mogul Funding Corporation ("FMFC"), a wholly owned subsidiary of
Federal-Mogul, which then sells such receivables, without recourse, to a
financial conduit. The transfers of these receivables are charged to the Net
Parent Investment account. T&N does not retain any interest in these
receivables and the accounts receivable are sold to FMFC at their carrying
value.
Note 5: Commitments and Contingencies
Asbestos Litigation
Two of T&N's subsidiaries are among many defendants named in numerous court
actions alleging personal injury resulting from exposure to asbestos or
asbestos-containing products (the "Subsidiaries"). Because of the slow onset
of asbestos-related diseases, management anticipates that similar claims will
be made in the future. It is not known how many claims may be made nor the
expenditures which may ultimately arise therefrom. In addition, there are a
number of factors that could impact the settlement costs into the future,
including but not limited to: changes in the legal environment; possible
insolvency of co-defendants; and establishment of an acceptable administrative
(non-litigation) claims resolution mechanism.
In the fourth quarter of 2000, T&N increased its estimate of asbestos-
related liability for the Subsidiaries by $115.9 million and recorded a
related insurance recoverable asset of $144.2 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 revised liability (approximately $353.7 million) represents T&N's
estimate for claims currently pending and those which can be reasonably
estimated to be asserted in a future period. T&N believes that these claims
will be paid over the next 12 years. In arriving at the revised liability
assumptions have been made regarding the total number of claims anticipated to
be received in the 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.
113
T&N INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
While management believes that the liability and receivable recorded are
appropriate for anticipated losses arising from asbestos-related claims
against the Subsidiaries for the period covered, given the nature and
complexity of the factors affecting the estimated liability and potential
insurance recovery the actual liability and insurance recovery may differ. No
assurance can be given that the Subsidiaries will not be subject to material
additional liabilities and significant additional litigation relating to
asbestos for the period covered. In the event that such liabilities exceed the
amounts recorded by T&N or the remaining insurance coverage, T&N's results of
operations, business, liquidity and financial condition could be materially
adversely affected.
The ultimate liability for all pending and future claims is highly
uncertain due to the difficulty of forecasting the numerous variables that can
affect the liability. T&N does not believe it can reasonably determine the
ultimate liability as the level of uncertainty is too great to provide for
reasonable estimation of the number of future claims, the nature of such
claims and the cost to resolve them. As additional experience is gained
regarding claims or other new information becomes available regarding the
potential liability, T&N will reassess its potential liability and revise the
estimates as appropriate. Accordingly it is reasonably possible that the
ultimate losses from asbestos-related claims will be greater than amounts
recorded.
The Subsidiaries are defendants in approximately 111,000 pending personal
injury claims as of December 31, 2000. During 2000, approximately 41,000 new
claims naming the Subsidiaries were received.
A number of years ago, T&N Ltd. appointed the Center for Claims Resolution
("CCR") as exclusive representative in relation to all asbestos-related
personal injury claims made against the Subsidiaries. The CCR has provided to
its member companies a litigation defense, claims-handling and administration
service in respect to United States asbestos-related disease claims. Pursuant
to the CCR Producer Agreement, T&N Ltd. was entitled to appoint a
representative as one of the five voting directors on the CCR's Board of
Directors. Also pursuant to that agreement, members of the CCR contributed
towards indemnity payments in each claim in which the member is named.
Contributions to such indemnity payments were calculated on a case by case
basis according to sharing agreements among the CCR's members. Effective
January 18, 2000, the Subsidiaries appointed a law firm specializing in
asbestos matters as their litigation defense, claims handling and
administrative service provider. Indemnity and defense obligations incurred
while members of the CCR are continuing to be honored. This change was
intended to create greater economic and defense efficiencies for the two
companies.
In 1996, T&N Ltd. purchased a (Pounds)500 million layer of insurance which
will be triggered should the aggregate costs of claims filed against it and
the Subsidiaries after June 30, 1996, where the exposure occurred prior to
that date, exceed (Pounds)690 million. T&N Ltd. has allocated approximately
25% of the anticipated insurance recoveries from the aggregate liability of
T&N Ltd. and its Subsidiaries. T&N Ltd. now believes that the aggregate cost
of claims filed after June 30, 1996 will exceed the trigger point. T&N Ltd.
believes based on its review of the insurance policy and its advice from
outside counsel, that it is probable that it will be entitled to receive
payment from the reinsurers for the cost of claims in excess of the trigger
point of the insurance. Based on this assessment and the allocation agreement,
T&N Ltd. recorded an insurance recoverable asset under the policy of
$144.2 million in the fourth quarter of 2000. T&N has reviewed the financial
viability and legal obligations of the three reinsurance companies involved
and has concluded that there is little risk of the reinsurers not being able
to meet their obligation to pay, once the claims filed after June 30, 1996
exceed the (Pounds)690 million trigger point. T&N, Ltd. does not expect to
reach the trigger point of the insurance or begin to collect on this insurance
recoverable for the next several years. The US claims' costs applied against
this policy are converted at a fixed exchange rate of $1.69/(Pounds). As such,
if the market exchange rate is less then $1.69/(Pounds), T&N, Ltd. will
effectively have a discount from 100% recovery on claims made with the
insurance companies.
The ultimate exposure of the Subsidiaries with respect to claims will
depend upon the extent to which the insurance described above will be
available to cover such claims, the amount paid for indemnity and defense,
changes in the legal environment and other factors.
114
T&N INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 6: Net Parent Investment
Changes in net parent investment were as follows:
(Million
of Dollars)
Federal-Mogul initial investment in T&N........................ $ 666.1
Net earnings for the period March 6, 1998 through December
31, 1998.................................................... 13.8
Intercompany transactions, net............................... 59.2
-------
Balance at December 31, 1998................................... 739.1
Net earnings income.......................................... 30.6
Intercompany transactions, net............................... (193.3)
-------
Balance at December 31, 1999................................... 576.4
Net earnings income.......................................... 22.0
Intercompany transactions, net............................... 101.5
-------
Balance at December 31, 2000................................... $ 699.9
=======
Note 7: Income Taxes
T&N files a consolidated return with Federal-Mogul for U.S. federal income
tax purposes. Federal income tax expense is calculated on a separate-return
basis for financial reporting purposes.
2000 1999 1998
----- ----- -----
(Millions of
Dollars)
Components of income tax expense (benefit):
Current............................................. $ -- $ 8.2 $ 4.5
Deferred............................................ 24.1 20.4 11.5
----- ----- -----
Income tax expense.................................. $24.1 $28.6 $16.0
===== ===== =====
A reconciliation between the statutory federal income tax rate and the
effective tax rate is as follows:
2000 1999 1998
---- ---- ----
U.S. Federal statutory rate............................. 35% 35% 35%
State and local taxes................................... 5 3 3
Nondeductible goodwill.................................. 12 10 16
--- --- ---
Effective tax rate...................................... 52% 48% 54%
=== === ===
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the related amounts used for income tax purposes. Significant
components of the Company's net deferred tax asset are non-deductible
accruals, intangible assets and depreciation timing differences.
2000 1999
---------- -----------
(Millions of Dollars)
Current deferred tax assets...................... $ 11.1 $ 11.1
Long-term deferred tax assets.................... 65.4 89.1
---------- -----------
Net deferred assets.............................. $ 76.5 $ 100.2
========== ===========
As T&N files a consolidated tax return with Federal-Mogul, the net deferred
tax liability at December 31, 2000 and 1999 is a component of the net parent
investment.
115
T&N INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 8: Pension Plans
In 1998, the various pension plans of T&N plc. were assumed by Federal-
Mogul in its acquisition. In 2000, Federal-Mogul consolidated all domestic
qualified defined benefit plans into one plan, the Federal Mogul Corporation
Pension Plan.
The pension charge allocated to T&N, in 2000 was approximately $3.6
million. For the year ended December 31, 1999, the credit to T&N from Federal-
Mogul was approximately $2.1 million. The expense charged to T&N in 1998 was
approximately $4.4 million.
The fully funded aggregated projected benefit obligation of such domestic
plans of $719.2 million was based upon a discount rate of 8%. The fair value
of the plan's assets at December 31, 2000 was $852.5 million. Company
contributions for 2000 were $6.9 million.
Note 9: Postretirement Benefits Other Than Pensions
As part of T&N plc. and subsequently Federal-Mogul, benefits provided to
employees of T&N under various postretirement plans other than pensions, all
of which are unfunded, include retiree medical care, dental care, prescription
drugs and life insurance, with medical care accounting for approximately 95%
of the total. The majority of participants under such plans are retirees. The
expense related to such plans approximated $6.2 million, $3.8 million and $3.9
million for 2000, 1999 and 1998, respectively. The unfunded projected benefit
obligation of these plans aggregated approximately $59.7 million at December
31, 2000, based upon a discount rate of 7.75%
Note 10: Concentrations of Credit Risk and Other
T&N grants credit to their customers, which are primarily in the automotive
industry. Credit risk with respect to trade receivables is generally
diversified due to the large number of entities comprising T&N' customer base
and their dispersion across many different countries. T&N performs periodic
credit evaluations of their customers and generally does not require
collateral.
T&N operates in a single business segment, Americas/Asia Pacific. T&N
manufactures and distributes pistons, piston pins, rings, cylinder liners,
camshafts, engine bearings, sintered products and sealing systems. No single
customer accounted for 10% or more of revenues in 2000, 1999 or 1998. All
revenues and assets of T&N reside in the United States.
116
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Federal-Mogul Corporation
We have audited the accompanying consolidated balance sheets of Federal-
Mogul Powertrain, Inc. and subsidiaries as of December 31, 2000 and 1999 and
the related consolidated statements of operations, and cash flows for the
years then ended and for the period from March 6, 1998 through December 31,
1998. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Federal-Mogul
Powertrain, Inc. and subsidiaries at December 31, 2000 and 1999 and the
consolidated results of their operations and their cash flows for the years
then ended and for the period from March 5, 1998 through December 31, 1998, in
conformity with accounting principles generally accepted in the United States.
/s/ Ernst & Young LLP
Detroit, Michigan
March 22, 2001
117
FEDERAL-MOGUL POWERTRAIN, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Millions of Dollars)
Period from
March 6,
Year ended 1998
December 31, through
------------- December 31,
2000 1999 1998
---- ------ ------------
Net sales:
Third party sales................................. $770.4 $766.0 $525.7
Affiliate sales................................... 30.3 33.9 12.5
------ ------ ------
Total net sales................................. 800.7 799.9 538.2
Cost of products sold............................... 652.9 623.1 403.8
Selling, general and administrative expenses........ 68.7 62.3 53.7
Amortization expense................................ 13.3 13.5 10.4
Restructuring charges............................... 1.7 -- --
Interest expense.................................... 40.6 40.9 33.4
Other expense, net.................................. 9.1 4.7 6.4
------ ------ ------
Earnings before income taxes...................... 14.4 55.4 30.5
Income taxes........................................ 10.5 26.2 15.5
------ ------ ------
Net Earnings.................................. $ 3.9 $ 29.2 $ 15.0
====== ====== ======
See accompanying Notes to Consolidated Financial Statements.
118
FEDERAL-MOGUL POWERTRAIN, INC.
CONSOLIDATED BALANCE SHEETS
(Millions of Dollars)
December 31,
-------------
2000 1999
------ ------
ASSETS
Accounts receivable............................................. $ 2.6 $ 9.0
Inventories..................................................... 41.3 41.0
Other........................................................... 5.8 4.5
------ ------
Total Current Assets.......................................... 49.7 54.5
Property, plant and equipment, net.............................. 416.8 400.9
Goodwill, net................................................... 453.5 463.6
Other intangible assets, net.................................... 15.6 16.5
Other assets.................................................... 16.3 12.5
------ ------
Total Assets.................................................. $951.9 $948.0
====== ======
LIABILITIES AND NET PARENT INVESTMENT
Accounts payable................................................ $ 40.6 $ 81.0
Accrued compensation............................................ 17.3 23.4
Short-term debt, including current maturities of long-term
debt........................................................... 3.0 2.3
Other accrued liabilities....................................... 21.8 19.7
------ ------
Total Current Liabilities..................................... 82.7 126.4
Long-term debt.................................................. 4.4 9.0
Minority interest in consolidated subsidiaries.................. 5.7 1.7
Net Parent Investment........................................... 859.1 810.9
------ ------
Total Liabilities and Net Parent Investment................... $951.9 $948.0
====== ======
See accompanying Notes to Consolidated Financial Statements.
119
FEDERAL-MOGUL POWERTRAIN, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Millions of Dollars)
Period from
March 6,
Year ended 1998
December 31, through
--------------- December 31,
2000 1999 1998
------ ------- ------------
Cash flows from operating activities:
Net earnings................................... $ 3.9 $ 29.2 $ 15.0
Adjustments to reconcile to net cash provided by
(used in)
operating activities:
Depreciation and amortization.................. 49.6 48.0 32.3
Changes in assets and liabilities:
Accounts receivable.......................... 6.4 2.0 9.3
Inventories.................................. (0.3) 5.1 (4.7)
Accounts payable and accrued liabilities..... (40.4) 28.6 2.1
Other assets and liabilities, net............ (7.0) (6.9) (0.6)
------ ------- ------
Net cash provided by (used in) operating
activities................................ 12.2 106.0 53.4
Cash flows from investing activities:
Business acquisition, net of cash acquired..... -- (25.2) --
Capital expenditures, net...................... (52.6) (91.5) (95.2)
------ ------- ------
Net cash used in investing activities...... (52.6) (116.7) (95.2)
Cash flows from financing activities:
Repayments of long-term debt................... (3.9) (4.6) (1.1)
Transfers from (to) parent..................... 44.3 15.0 43.2
------ ------- ------
Net cash provided by (used in) financing
activities................................ 40.4 10.4 42.1
------ ------- ------
Increase in cash................................. -- (0.3) 0.3
Cash, beginning of period.................. -- 0.3 --
------ ------- ------
Cash, end of period........................ $ -- $ -- $ 0.3
====== ======= ======
See accompanying Notes to Consolidated Financial Statements.
120
FEDERAL-MOGUL POWERTRAIN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1: Basis of Presentation
The accompanying financial statements reflect the consolidated assets,
liabilities and operations of Federal-Mogul Powertrain, Inc. and its
subsidiaries ("Powertrain"). Powertrain is a wholly owned subsidiary of T&N
Industries Inc., which is a wholly owned subsidiary of Federal-Mogul
Corporation ("Federal-Mogul"). Federal-Mogul purchased T&N plc., including
Powertrain, on March 6, 1998 for approximately $2.4 billion of which
approximately $870.8 million is attributable to Powertrain. The period from
March 6, 1998 through December 31, 1998 is hereafter referred to as "1998".
Powertrain operates with financial and operational staff on a decentralized
basis. Federal-Mogul provides certain centralized services for employee
benefits administration, cash management, risk management, legal services,
public relations, domestic tax reporting and internal and external audit.
Federal-Mogul bills Powertrain for all such direct expenses incurred on its
behalf. General expenses that are not directly attributable to the operations
of Powertrain have been allocated based on management's estimates, primarily
driven by sales. Management believes that this allocation method is
reasonable.
The accompanying consolidated financial statements are presented as if
Powertrain had existed as an entity separate from its parent during the period
presented and include the assets, liabilities, revenues and expenses that are
directly related to Powertrain's operations. Since the date of Federal-Mogul's
acquisition of Powertrain, the financial statements include the push-down of
fair value adjustments to assets and liabilities, including goodwill, other
intangible assets and property, plant and equipment and their related
amortization and depreciation adjustments.
Powertrain's separate debt and related interest expense have been included
in the consolidated financial statements. Because Powertrain is fully
integrated into its parent's cash management system, all of their cash
requirements are provided by its parent and any excess cash generated by
Powertrain is transferred to its parent.
Note 2: Summary of Significant Accounting Policies
Principles of Consolidation: The consolidated financial statements include
the accounts of Powertrain, and its subsidiaries. Intercompany accounts and
transactions have been eliminated in consolidation.
Use of Estimates: The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and the accompanying notes. Actual results could differ from those
estimates.
Inventories: Inventories are stated at the lower of cost or market. Cost is
determined using the first-in, first-out method. At December 31, inventories
consisted of the following:
2000 1999
---------- ----------
(Millions of Dollars)
Raw materials..................................... $ 13.1 $ 14.2
Work-in-process................................... 15.2 14.2
Finished goods.................................... 15.1 14.5
---------- ----------
43.4 42.9
Reserve for valuation of inventory................ (2.1) (1.9)
---------- ----------
$41.3 $ 41.0
========== ==========
Property, Plant and Equipment: Property, plant and equipment are stated at
Federal-Mogul's cost. Depreciation is computed over the estimated useful lives
of the related assets using primarily the straight-line
121
FEDERAL-MOGUL POWERTRAIN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
method. This method is applied to assets which in general have the following
lives: buildings--10 to 40 years and machinery and equipment--3 to 12 years.
At December 31, property, plant and equipment consisted of the following:
2000 1999
------ ------
(Millions of
Dollars)
Property, plant and equipment:
Land and land improvements.............................. $ 3.8 $ 3.5
Buildings............................................... 72.8 75.8
Machinery and equipment................................. 431.1 376.2
------ ------
507.7 455.5
Accumulated depreciation................................ (90.9) (54.6)
------ ------
$416.8 $400.9
====== ======
Total rental expense under operating leases for the years ended December
31, 2000, 1999 and 1998 was approximately $2.4 million, $1.2 million and $2.4
million, respectively, exclusive of property taxes, insurance and other
occupancy costs generally payable by Powertrain.
Goodwill and Other Intangible Assets: At December 31, goodwill and other
intangible assets, which result principally from acquisitions, consisted of
the following:
Estimated
Useful Life 2000 1999
----------- ------ ------
(Millions of
Dollars)
Goodwill...................................... 40 years $489.3 $485.1
Accumulated amortization...................... (35.8) (21.5)
------ ------
453.5 463.6
Trademarks.................................... 40 years 1.2 1.2
Developed technology.......................... 12-30 years 6.6 6.6
Assembled workforce........................... 15 years 10.4 10.4
------ ------
18.2 18.2
Accumulated amortization...................... (2.6) (1.7)
------ ------
15.6 16.5
------ ------
Net Intangible Assets....................... $469.1 $480.1
====== ======
Intangible assets are periodically reviewed for impairment indicators. If
impairment indicators exist, an assessment of undiscounted future cash flows
related to assets held for use or fair value for assets held for sale are
evaluated accordingly. There were no impairment charges during 2000 or 1999.
Intangible assets are amortized on a straight-line basis over their estimated
useful lives.
Research and Development Costs: Powertrain expenses research and
development costs as incurred. Research and development expense was
approximately $4.5 million, $3.9 million and $8.6 million for 2000, 1999 and
1998, respectively.
Net Parent Investment: The Net Parent Investment account reflects the
balance of Powertrain historical earnings, intercompany debt, income taxes
accrued and deferred, postemployment liabilities, other transactions between
Powertrain and Federal-Mogul, foreign currency translations and equity pension
adjustments.
122
FEDERAL-MOGUL POWERTRAIN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Revenue Recognition: Powertrain recognizes revenue, estimated returns from
product sales and related incentives when there is evidence of a sales
agreement, the delivery of goods has occurred, the sales price is fixed or
determinable and the collectibility of revenue is reasonably assured.
Powertrain generally records sales upon shipment of product to customers and
transfer of title under standard commercial terms. Affiliate sales are
transferred at cost.
Shipping and Handling Costs: Powertrain recognizes shipping and handling
costs as a component of cost of products sold in the statement of operations.
Recoverable Customer Engineering and Tooling: Pre-production tooling and
engineering costs that Powertrain will not own and that will be used in
producing products under long-term supply arrangements are expensed as
incurred unless the supply arrangement provides Powertain the noncancelable
right to use the tools or the reimbursement of such costs is contractually
guaranteed by the customer. Third-party pre-production tooling and engineering
costs that are owned by Powertrain are capitalized as part of machinery and
equipment.
Fair Value of Financial Instruments: The carrying amounts of certain
financial instruments such as cash, accounts receivable and accounts payable
approximate their fair value.
Effect of Accounting Pronouncements: Statement of Financial Accounting
Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging
Activities", was issued by the Financial Accounting Standards Board in June
1998. SFAS No. 133 requires that all derivative instruments be recorded on the
balance sheet at their fair value. In June 2000, the FASB issued SFAS No. 138,
which amends and clarifies certain guidance in SFAS No. 133. The Company has
implemented the appropriate systems and processes to adopt these statements
effective January 1, 2001. Changes in the fair value of derivatives are
recorded each period in current earnings or other comprehensive income,
depending on whether a derivative is designated as part of a hedge transaction
and, if it is, the type of hedge transaction. For fair-value hedge
transactions the fair value of the derivative instrument will generally be
offset in the income statement by changes in the hedged item's fair value. For
cash-flow hedge transactions, the fair value of the derivative instrument will
be reported in other comprehensive income. The ineffective portion of all
hedges will be recognized in current-period earnings. The statements provide
for the recognition of a cumulative adjustment for an accounting change, as of
the date of adoption. The adoption of this FASB will not have a material
impact on the financial position or the operating results of Powertrain.
Note 3: Acquisitions
In January 1999, Powertrain completed its acquisition of certain
manufacturing operations of Crane Technologies, Inc. ("Crane"). Crane's two
plants, located in Orland, Indiana and Jackson, Michigan, employ approximately
230 people with 1998 annual sales of approximately $36 million. Crane was
accounted for as a purchase, Powertrain recorded $12.2 million of goodwill as
a result of the acquisition. The results of operations of Crane are included
in the consolidated statement of operations since the date of the acquisition.
Note 4: Long-Term Debt and Other Financing Arrangements
Powertrain's cash and indebtedness is managed on a worldwide basis by
Federal-Mogul. The majority of the cash provided by or used by a particular
division, including Powertrain, is provided through this consolidated cash and
debt management system. As a result, the amount of cash or debt historically
related to Powertrain is not determinable. For purposes of Powertrain'
historical financial statements, identifiable debt was allocated to Powertrain
during each year with all of Powertrain' positive or negative cash flows being
treated as cash transferred to or from T&N.
Federal-Mogul has allocated Powertrain a portion of the interest it
incurred on the financing of T&N, plc. Federal-Mogul allocated Powertrain
$40.0 million of interest in 2000, 1999 and $33.3 million in 1998. Interest
was calculated by allocating a portion of the amount Federal-Mogul borrowed to
purchase T&N plc., Federal-Mogul allocated $666.1 million of the debt to
Powertrain and calculated interest at a rate of 6%.
123
FEDERAL-MOGUL POWERTRAIN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Federal-Mogul has pledged 100% of Powertrain's capital stock and also
provided collateral in the form of a pledge of inventories, property, plant
and equipment, real property and intellectual properties to secure certain
outstanding debt of Federal-Mogul. In addition, Powertrain has guaranteed
fully and unconditionally, on a joint and several basis, the obligation to pay
principal and interest under Federal-Mogul's Senior Credit Agreement and its
publicly registered debt. Such pledges and guarantees have also been made by
other subsidiaries of Federal-Mogul.
Powertrain participates in Federal-Mogul's accounts receivable
securitization program. On an ongoing basis, Powertrain sells certain accounts
receivable to Federal-Mogul Funding Corporation ("FMFC"), a wholly owned
subsidiary of Federal-Mogul, which then sells such receivables, without
recourse, to a financial conduit. The transfers of these receivables are
charged to the Net Parent Investment account. Powertrain does not retain any
interest in these receivables and the accounts receivable are sold to FMFC at
their carrying value.
Note 5: Net Parent Investment
Changes in net parent investment were as follows:
(Million
of Dollars)
Federal-Mogul initial investment in Powertrain.............. $870.8
Net earnings for the period March 6, 1998 through December
31, 1998................................................. 15.0
Intercompany transactions, net.............................. (59.1)
------
Balance at December 31, 1998................................ 826.7
Net earnings income....................................... 29.2
Intercompany transactions, net............................ (45.0)
------
Balance at December 31, 1999................................ 810.9
Net earnings income....................................... 3.9
Intercompany transactions, net............................ 44.3
------
Balance at December 31, 2000................................ $859.1
======
Note 6: Income Taxes
Powertrain files a consolidated return with Federal-Mogul for U.S. federal
income tax purposes. Federal income tax expense is calculated on a separate-
return basis for financial reporting purposes.
2000 1999 1998
----- ----- -----
(Millions of
Dollars)
Components of income tax expense (benefit):
Current............................................. $ 9.8 $25.9 $14.4
Deferred............................................ 0.7 0.3 1.1
----- ----- -----
Income tax expense.................................. $10.5 $26.2 $15.5
===== ===== =====
A reconciliation between the statutory federal income tax rate and the
effective tax rate is as follows:
2000 1999 1998
---- ---- ----
(Millions of
Dollars)
U.S. Federal statutory rate............................. 35% 35% 35%
State and local taxes................................... 3 3 3
Nondeductible goodwill.................................. 35 9 13
--- --- ---
Effective tax rate...................................... 73% 47% 51%
=== === ===
124
FEDERAL-MOGUL POWERTRAIN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the related amounts used for income tax purposes. Significant
components of the Company's net deferred tax asset are non-deductible
accruals, intangible assets and depreciation timing differences.
2000 1999
------ ------
(Millions of
Dollars)
Current deferred tax assets.............................. $ 5.1 $ 19.6
Long-term deferred tax liabilities....................... (37.9) (51.2)
------ ------
Net deferred liabilities................................. $(32.8) $(31.6)
====== ======
As Powertrain files a consolidated tax return with Federal-Mogul, the net
deferred tax liability at December 31, 2000 and 1999 is a component of the net
parent investment.
Note 7: Pension Plans
In 1998, the various pension plans of Federal-Mogul Powertrain were assumed
by Federal-Mogul in the acquisition of T&N Plc. In 2000, Federal-Mogul
consolidated all domestic qualified defined benefit plans into one plan, the
Federal Mogul Corporation Pension Plan.
The pension charge allocated to Powertrain, as at December 31, 2000 was
approximately $3.1 million. For the year ended December 31, 1999, the credit
to Powertrain from Federal-Mogul was approximately $2.1 million. The charge to
Powertrain from Federal-Mogul for 1998 was approximately $4.4 million.
The fully funded aggregated projected benefit obligation of such domestic
plans of $716.1 million was based upon a discount rate of 8%. The fair value
of the plan's assets at December 31, 2000 was $852.5 million for domestic
plans. Company contributions for 2000 were $6.9 million.
Note 8: Postretirement Benefits Other Than Pensions
As part of T&N Plc. and subsequently Federal-Mogul, benefits provided to
employees of Powertrain under various postretirement plans other than
pensions, all of which are unfunded, include retiree medical care, dental
care, prescriptions and life insurance, with medical care accounting for
approximately 95% of the total. The majority of participants under such plans
are retirees. The expense related to such plans approximated $6.2 million,
$3.8 million and $3.9 million for 2000, 1999 and 1998, respectively. The
unfunded projected benefit obligation of these plans aggregated approximately
$59.7 million at December 31, 2000, based upon a discount rate of 7.75%
Note 9: Concentrations of Credit Risk and Other
Powertrain grants credit to their customers, which are primarily in the
automotive industry. Credit risk with respect to trade receivables is
generally diversified due to the large number of entities comprising
Powertrain customer base and their dispersion across many different countries.
Powertrain performs periodic credit evaluations of their customers and
generally does not require collateral.
Powertrain operates in a single business segment, Americas/Asia Pacific.
Powertrain manufactures and distributes pistons, piston pins, rings, cylinder
liners, camshafts, engine bearings, sintered products and sealing systems. No
single customer accounted for 10% or more of revenues in 2000, 1999 or 1998.
All revenues and assets of Powertrain reside in the United States.
125
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
/s/ G. Michael Lynch
By __________________________________
G. Michael Lynch
Executive Vice President
and Chief Financial Officer
Pursuant to the requirements of the Securities Act of 1934, this Report has
been signed by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
Signature Title
--------- -----
/s/ Frank E. Macher Chief Executive Officer
___________________________________________
Frank E. Macher
President and Chief Operating
/s/ Charles G. McClure Officer
___________________________________________
Charles G. McClure
* Director
___________________________________________
John J. Fannon
* Director
___________________________________________
Roderick M. Hills
* Director
___________________________________________
Paul Scott Lewis
* Director
___________________________________________
Robert S. Miller, Jr.
* Director
___________________________________________
John C. Pope
* Director
___________________________________________
Sir Geoffrey Whalen C.B.E.
/s/ James J. Zamoyski
*By _________________________________
James J. Zamoyski
Attorney-in-fact
Dated: March 23, 2001
126