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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, 2001
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 (IRS Employer I.D. No.)
jurisdiction of
incorporation or
organization)
26555 Northwestern Highway 48034
Southfield, Michigan (Zip code)
(Address of principal
executive 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 New York Stock Exchange
to Purchase
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 $69.2 million as of March 21, 2002 based on the
reported last sale price as published for the New York Stock
Exchange--Composite Transactions for such date.
The Registrant had 82,383,257 shares of common stock outstanding as of March
21, 2002.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive Proxy Statement for its 2002 Annual
Meeting of Shareholders filed with the Securities and Exchange Commission
pursuant to Regulation 14A in April 2002, 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 "Reform Act"). Such statements are made in good faith by
Federal-Mogul Corporation (the "Company") pursuant to the "Safe Harbor"
provisions of the Reform Act.
Forward-looking statements include financial projections, estimates and
statements regarding plans, objectives and expectations of the Company and its
management, as well as the Company's views regarding industry and economic
conditions and trends. Forward looking statements include, without limitation,
plans to implement restructuring initiatives relating to manufacturing and
warehouse facilities, plans to address issues related to financing of the
Company's business operations, statements regarding industry conditions, and
statements regarding the scope and effect of asbestos liabilities and any
plan(s) of reorganization and schemes of arrangement associated with the
Company's Chapter 11 filing in the U.S. and Administration in the U.K.
Forward-looking statements may involve known and unknown risks,
uncertainties and other factors, which may cause the actual results,
performance, experience or achievements of the Company to differ materially
from any future results, performance, experience or achievements expressed or
implied by such forward-looking statements. Such risks, uncertainties and other
factors include, without limitation, fluctuation in demand for both original
equipment and replacement components in the automotive, heavy-duty vehicular
and industrial markets, the effect of certain global and regional economic
conditions, the ability of the Company to control operating and other costs,
legal proceedings and claims (including environmental and asbestos matters)
involving the Company, changes in the Company's relationships with customers
and suppliers, the effect of the Chapter 11 voluntary reorganization filing by
the Company and its wholly owned U.S. subsidiaries and filings of certain of
the Company's U.K. subsidiaries for Chapter 11 and Administration, legislative
risks and uncertainties, and other factors, some of which are beyond the
Company's control.
i
PART I
Item 1. Business
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 vehicles and industrial products. The Company also
manufactures and supplies its products to the aftermarket.
Proceedings Under Chapter 11 and Administration of the Bankruptcy Code
On October 1, 2001 (the "Petition Date"), the Company and all of its wholly
owned United States subsidiaries filed voluntary petitions for reorganization
(the "U.S. Restructuring") under Chapter 11 of the United States Bankruptcy
Code (the "Bankruptcy Code") in the United States Bankruptcy Court for the
District of Delaware (the "Bankruptcy Court"). Also on October 1, 2001, certain
of the Company's United Kingdom subsidiaries filed voluntary petitions for
reorganization under Chapter 11 of the Bankruptcy Code and petitions for
Administration (the "U.K. Restructuring") under the United Kingdom Insolvency
Act of 1986 (the "Act") in the High Court of Justice, Chancery division in
London, England (the "High Court"). The Company and its U.S. and U.K.
subsidiaries included in the U.S. Restructuring or the U.K. Restructuring are
herein referred to as the "Debtors". The U.S. Restructuring and U.K.
Restructuring are herein referred to as the "Restructuring Proceedings". The
Chapter 11 cases of the Debtors (collectively, the "Chapter 11 Cases") have
been consolidated for purposes of joint administration as In re: Federal-Mogul
Global Inc., T&N Limited, et al (Case No. 01-10578(SLR)). The Chapter 11 Cases
do not include any of the Company's non-U.S. subsidiaries outside of the U.K.
subsidiaries mentioned above. The Chapter 11 Cases are discussed in Note 1 to
the consolidated financial statements.
The Debtors filed for relief under Chapter 11 to address the growing demands
on the Company's cash flow resulting from its multi-billion dollar asbestos
liability. This liability is discussed in Note 16 to the consolidated financial
statements.
Overview
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. The Company intends to continue to provide value added,
differentiated products and services to the aftermarket, leveraging its
existing strong product brand portfolio.
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.
1
The following table sets forth the Company's net sales by reportable segment
and geographic region as a percentage of total net sales:
Year Ended December 31
---------------------
2001 2000 1999
---- ---- ----
Net Sales by Reportable Segment:
Powertrain................................... 30% 29% 27%
Sealing Systems and Systems Protection Group. 11% 11% 11%
Friction..................................... 6% 7% 7%
Aftermarket.................................. 44% 43% 43%
Other, including Corporate................... 7% 7% 7%
Divested Operations.......................... 2% 3% 5%
--- --- ---
100% 100% 100%
=== === ===
Year Ended December 31
---------------------
2001 2000 1999
---- ---- ----
Net Sales by Geographic Region:
United States................................ 57% 61% 61%
Canada....................................... 3% 2% 2%
Mexico....................................... 3% 3% 2%
--- --- ---
Total North America...................... 63% 66% 65%
United Kingdom............................... 8% 8% 8%
Germany...................................... 11% 14% 10%
France....................................... 6% 5% 5%
Italy........................................ 3% 3% 4%
Other Europe................................. 5% 1% 4%
--- --- ---
Total Europe............................. 33% 31% 31%
Rest of World................................ 4% 3% 4%
--- --- ---
100% 100% 100%
=== === ===
Reportable Segments
The Company's integrated operations are included in six reporting segments
generally corresponding to major product groups: Powertrain, Sealing Systems
and System Protection Group, Friction, Aftermarket, Other and Divested
Operations
Powertrain products are used primarily in automotive, light truck,
heavy-duty, industrial, marine, agricultural, power generation and small
air-cooled engine applications. The primary products of this reportable segment
include engine bearings, pistons, piston pins, rings, cylinder liners,
camshafts, sintered products, and connecting rods.
Sealing Systems and Systems Protection products are used in automotive,
light truck, heavy-duty, agricultural, off-highway, marine, railroad, high
performance and industrial applications. The primary products of this
reportable segment include dynamic seals, gaskets and systems protection
products, which consist of element resistant sleeving products.
Friction products are used in automotive and heavy-duty applications. The
primary products of this reportable segment unit include discs, pads and brake
shoes.
Aftermarket provides products from the above segments to the independent
automotive and heavy duty aftermarkets as well as the manufacturing operations
of North American brake, chassis, ignition, fuel and wipers.
2
Other includes the non-core businesses of lighting, European wipers &
ignition manufacturing, as well as Asia Pacific, South America and Corporate
functions.
Divested operations include the historical operating results of the
Company's divestitures as discussed in Note 3 to the consolidated financial
statements.
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 the Alliance Group,
Autozone, BMW, CarQuest, Caterpillar, Cummins, DaimlerChrysler, Fiat,
Ford/Jaguar/Volvo, General Motors, NAPA, Ozark, Peugeot/PSA, Renault and
Volkswagen/Audi. In 2001, no individual customer accounted for more than 5% of
the Company's net sales.
Original Equipment
The Company supplies OE manufacturers 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, systems protection sleeving products, 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 manufacturers 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 as well as
relationships with many Japanese 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 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; 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 $115.0
million in 2001, $128.0 million in 2000 and $128.0 million in 1999.
Recent Divestitures
During 2001, the Company completed the following divestitures of its
non-core businesses:
. In April 2001, the divestiture of its torque converter business ("TCI")
to Competition Cams, Inc. TCI remanufactures torque converters for
high-performance automotive aftermarket applications.
3
. In May 2001, the divestiture of its Champion aviation ignition products
division ("Aviation") to TransDigm Inc. Aviation provides products for
all major commercial, military and general aircraft applications.
. In July 2001, the divestiture of its industrial heavy wall bearing
operation in McConnelsville, Ohio, to Miba-Bearings--US, LLC, a
subsidiary of Miba AG, a major Austrian industrial bearing manufacturer.
. In August 2001, the divestiture of its subsidiary Federal-Mogul RPB Ltd.
("RPB") to Waukesha Bearings Corporation a subsidiary of Dover
Corporation. RPB manufactures industrial rotating plant bearing and
magnetic bearing business.
. In August 2001, the divestiture of the aftermarket operations of Blazer
Lighting Products ("Blazer") to Clean-Rite Products LLC, an automotive
aftermarket supplier. Blazer manufacturers exterior vehicle lighting
products.
. In August 2001, the divestiture of its Pontotoc, Mississippi, operation
to Union Spring and Manufacturing Corp. The operation will continue to
supply coil springs and metal stampings to the Company for sale to
automotive aftermarket customers under a long-term supply agreement.
. In August 2001, the Company restructured its equity positions in several
large industrial bearing manufacturing joint ventures with its partner,
Daido Metal Company Ltd. of Japan. The restructuring transactions
included the transfer of controlling interest in manufacturing
facilities.
. In September 2001, the divestiture of its Tri-Way machine tool business
in Windsor, Ontario, under terms of a management buyout.
In aggregate these businesses had 2000 net sales of $216.0 million and 1,370
employees. The Company received aggregated proceeds of $242.8 million. The
Company recognized an aggregated pre-tax loss of $36.3 million on these
divestitures. Such losses are included in "other expenses, net" in the
accompanying consolidated statements of operations.
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 2001, 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, 2001, the Company had approximately 49,000 full-time
employees, of which approximately 21,000 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
4
environmental control activities did not have a material impact on the
Company's financial position or results of operations in 2001 and are not
expected to have a material impact on the Company's financial position or
results of operations in 2002 or 2003.
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 2002 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. 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, 2001, are listed
below. All properties are owned in fee simple except where otherwise noted.
At December 31, 2001, the Company had 225 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. 79 67 35 181
Distribution.................... 9 12 5 26
Sales and Administration Offices 5 10 3 18
-- -- -- ---
Total........................... 93 89 43 225
== == == ===
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 material
facility is significantly underutilized, except for those being sold or closed
in the normal course of business.
5
Item 3. Legal Proceedings
Note 16 to the consolidated financial statements, entitled "Litigation and
Environmental Matters" is incorporated herein by reference.
On October 1, 2001 (the "Petition Date"), the Company and all of its wholly
owned United States subsidiaries filed voluntary petitions for reorganization
(the "U.S. Restructuring") under Chapter 11 of the United States Bankruptcy
Code (the "Bankruptcy Code") in the United States Bankruptcy Court for the
District of Delaware (the "Bankruptcy Court"). Also on October 1, 2001, certain
of the Company's United Kingdom subsidiaries filed voluntary petitions for
reorganization under Chapter 11 of the Bankruptcy Code and petitions for
Administration (the "U.K. Restructuring") under the United Kingdom Insolvency
Act of 1986 (the "Act") in the High Court of Justice, Chancery division in
London, England (the "High Court"). The Company and its U.S. and U.K.
subsidiaries included in the U.S. Restructuring and the U.K. Restructuring are
herein referred to as the "Debtors". The U.S. Restructuring and U.K.
Restructuring are herein referred to as the "Restructuring Proceedings". The
Chapter 11 cases of the Debtors (collectively, the "Chapter 11 Cases") have
been consolidated for purposes of joint administration as In re: Federal-Mogul
Global Inc., T&N Limited, et al (Case No. 01-10578(SLR)). The Chapter 11 Cases
do not include any of the Company's non-U.S. subsidiaries outside of the U.K.
subsidiaries mentioned above. The Chapter 11 Cases are discussed in Note 1 to
the consolidated financial statements.
The Debtors filed for relief under Chapter 11 to address the growing demands
on the Company's cash flow resulting from its multi-billion dollar asbestos
liability. This liability is discussed in Note 16 to the consolidated financial
statements.
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, 2002 was 75,000. 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:
2001 2000
----------- -------------
Quarter High Low High Low
------- ----- ----- ------ ------
First.. $5.44 $2.87 $20.19 $12.25
Second. $3.52 $1.69 $16.00 $ 9.44
Third.. $1.80 $0.65 $11.94 $ 5.25
Fourth. $1.48 $0.45 $ 5.88 $ 1.75
The closing price of the Company's common stock as reported on the New York
Stock Exchange-Composite Tape on March 21, 2002 was $0.84.
The Company was prohibited in 2001, under its Senior Credit Agreement and
its DIP Credit Facility, from paying dividends on its common stock, and
therefore did not declare any dividends in 2001. Quarterly dividends of $.0025
per common share were declared during each quarter of 2000. The Company does
not expect to declare a dividend in the foreseeable future.
6
Item 6. Selected Financial Data
The following table presents information from the Company's consolidated
financial statements for the five years ended December 31, 2001. 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".
2001 2000 1999 1998 1997
--------- --------- --------- --------- ---------
(Millions of Dollars, Except Per Share Amounts)
Consolidated Statement of Operations
Data
Net sales.............................. $ 5,457.0 $ 6,013.2 $ 6,487.5 $ 4,468.7 $ 1,806.6
Costs and expenses..................... (6,201.5)(1) (6,244.5)(5) (6,006.2)(7) (4,266.9)(8) (1,703.7)(9)
Chapter 11 and Administration related
reorganization expense................ (50.6) -- -- -- --
Other expense.......................... (59.0)(2) (31.0) (21.4) (16.3) (3.4)
Income tax expense..................... (219.5)(3) (19.2)(6) (180.9) (93.6) (27.5)
--------- --------- --------- --------- ---------
Earnings (loss) before extraordinary
items and cumulative effect of change
in accounting principle............... (1,073.7) (281.5) 279.0 91.9 72.0
Extraordinary items -- gain (loss) on
early retirement of debt, net of
applicable income tax benefits........ 72.2 -- (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).................... $(1,001.5) $ (281.5) $ 243.2 $ 53.7 $ 69.4
========= ========= ========= ========= =========
Common Share Summary (Diluted)
Average shares and equivalents
outstanding (in thousands)............ 75,598 70,573 84,206 53,748 41,854
Earnings (loss) per share:
Before extraordinary items and
cumulative effect of change in
accounting principle................ $ (14.23) $ (4.02) $ 3.59 $ 1.67 $ 1.67
Extraordinary items -- gain (loss) on
early retirement of debt, net of
applicable income tax benefits...... .96 -- (.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.......... $ (13.27) $ (4.02) $ 3.16 $ .96 $ 1.61
========= ========= ========= ========= =========
- -Dividends declared per share.......... .00 .01 $ .01 $ .13 $ .48
========= ========= ========= ========= =========
Consolidated Balance Sheet Data
Total assets........................... $ 9,053.2 $ 9,831.0 $ 9,945.2 $ 9,940.1 $ 1,802.1
Short-term debt (10)................... 24.9 147.8 190.8 211.0 28.6
Long-term debt......................... 266.7 3,559.7 3,020.0 3,130.7 273.1
Liabilities Subject to Compromise (4).. 6,256.6 -- -- -- --
Company-obligated mandatorily
redeemable preferred securities of
Subsidiary trust holding solely
convertible subordinated debentures of
the Company, subject to compromise.... -- 575.0 575.0 575.0 575.0
Shareholders' equity................... 419.0 1,550.2 2,075.2 1,986.2 369.3
Other Financial Information
Net cash provided from (used by)
operating activities.................. $ 35.8 $ (154.5) $ 562.4 $ 325.5 $ 215.7
Expenditures for property, plant,
equipment and other long- term assets. 313.8 315.5 395.2 228.5 49.7
Depreciation and amortization expense.. 373.7 374.4 354.9 228.0 51.5
Payments against asbestos liability,
net of insurance receipts............. (215.9) (351.4) (178.2) (89.2) --
- --------
(1) Includes a $38 million restructuring charge and a $545.1 million charge for
adjustments of assets held for sale and other long-lived assets to fair
value.
(2) Includes a $36.3 million loss on the divestiture of businesses.
(3) Includes charges of: $302.2 million related to deferred tax asset valuation
allowances; $82.6 million related to the effect of goodwill impairment; and
$60.1 million relating to the effect of divestitures.
(4) Liabilities subject to compromise includes the Debtors liabilities incurred
prior to the Petition Date at the expected amount of the allowed claims.
(5) 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.
(6) Includes a $63.5 million charge for providing deferred tax asset valuation
allowances.
(7) 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.
(8) 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.
(9) 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.
(10) Includes current maturities of long-term debt (see Note 6 to the
consolidated financial statements).
7
MANAGEMENT'S DISCUSSION AND ANALYSIS--Continued
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Overview
Federal-Mogul Corporation ("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, systems
protection sleeving products, fuel systems, wipers, lighting, ignition, brake,
friction and chassis products. The Company's principal customers include many
of the world's original equipment ("OE") manufacturers of such vehicles and
industrial products. The Company also manufactures and supplies its products to
the aftermarket.
Voluntary Reorganization Under Chapter 11 and Administration:
On October 1, 2001 (the "Petition Date"), the Company and all of its wholly
owned United States subsidiaries filed voluntary petitions for reorganization
(the "U.S. Restructuring") under Chapter 11 of the United States Bankruptcy
Code (the "Bankruptcy Code") in the United States Bankruptcy Court for the
District of Delaware (the "Bankruptcy Court"). Also on October 1, 2001, certain
of the Company's United Kingdom subsidiaries filed voluntary petitions for
reorganization under Chapter 11 of the Bankruptcy Code and petitions for
Administration (the "U.K. Restructuring") under the United Kingdom Insolvency
Act of 1986 (the "Act") in the High Court of Justice, Chancery division in
London, England (the "High Court"). The Company and its U.S. and U.K.
subsidiaries included in the U.S. Restructuring or the U.K. Restructuring are
herein referred to as the "Debtors". The U.S. Restructuring and U.K.
Restructuring are herein referred to as the "Restructuring Proceedings". The
Chapter 11 cases of the Debtors (collectively, the "Chapter 11 Cases") have
been consolidated for purposes of joint administration as In re: Federal-Mogul
Global Inc., T&N Limited, et al (Case No. 01-10578(SLR)). The Chapter 11 Cases
do not include any of the Company's non-U.S. subsidiaries outside of the U.K.
subsidiaries mentioned above.
The Restructuring Proceedings were made in response to a sharply increasing
number of asbestos-related claims. These claims are further discussed in Note
16 to the consolidated financial statements. Under the Restructuring
Proceedings, the Debtors expect to continue to operate their businesses as
debtors-in-possession under court protection from their creditors and
claimants, while using the Restructuring Proceedings process to develop and
implement a plan for addressing the asbestos-related claims against them.
Background of the Restructuring Proceedings:
In December 2000, the Company increased its estimate of asbestos-related
liability by $625.3 million and recorded a related insurance recoverable asset
of $440.9 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.
In January 2001, the Company implemented a new strategy for dealing with its
asbestos issue. The strategy had two features. First, the Company adopted a
trial list strategy, avoiding wherever possible mass settlements and only
paying individuals that were sick and where the Company or its subsidiaries'
products were the cause of the illness. The second aspect of the Company's
strategy was to pursue a legislative solution. The Company continues to work
with a coalition group to advance federal legislation that will: establish
medical criteria which will be used to differentiate the sick from the
non-sick; establish criteria to limit the consolidation of cases; and establish
venue requirements that provide that an individual's claim must be brought
where the individual lived or where they worked.
8
In the year preceding the Company's U.S. and U.K. Restructuring, five major
companies filed for Chapter 11 bankruptcy protection, most of which were major
defendants in many asbestos-related cases in which some of the Company's U.S.
and U.K. subsidiaries were also named. In the second quarter of 2001, the
Company disclosed that without a satisfactory legislative solution to the
asbestos litigation in the near term, the Company would need to consider
alternative ways to manage its asbestos issue. These adverse developments
continued during the third quarter of 2001. The Company's Board of Directors
concluded that a satisfactory legislative solution to the asbestos litigation
was not probable in the near term and that a federal court-supervised Chapter
11 filing would provide the best forum available to achieve predictability and
fairness in the claims settlement process. By filing under Chapter 11, the
Company expects to be able to both obtain a comprehensive resolution of the
claims against it and preserve the inherent value of its businesses.
Consequences of the Restructuring Proceedings:
As a consequence of the Restructuring Proceedings, all pending litigation
against the Debtors is generally stayed (subject to certain exceptions in the
case of governmental authorities) and no party may take any action to realize
its pre-petition claims except pursuant to order of the Bankruptcy Court or the
High Court. It is the Debtors' intention to address all of their pending and
future asbestos-related claims and all other pre-petition claims in a plan of
reorganization in the U.S. and scheme of arrangement in the U.K. However, it is
currently impossible to predict with any degree of certainty how the plan or
scheme will treat asbestos and other pre-petition claims or what impact any
plan or scheme may have on the shares of common stock of the Company. The
formulation and implementation of the plan or scheme could take a significant
period of time.
The Company's financial statements have been prepared in accordance with
American Institute of Certified Public Accountants ("AICPA") Statement of
Position 90-7 ("SOP 90-7"), "Financial Reporting by Entities in Reorganization
under the Bankruptcy Code" and on a going concern basis, which contemplates
continuity of operations, realization of assets and liquidation of liabilities
in the ordinary course of business during the Restructuring Proceedings.
However, as a result of the Restructuring Proceedings, such realization of
assets and liquidation of liabilities, without substantial adjustments and/or
changes of ownership, are subject to substantial doubt. Given this uncertainty,
there is substantial doubt about the ability of the Company to continue as a
going concern. While operating as debtors-in-possession, and subject to
Bankruptcy Court or High Court approval or otherwise as permitted in the
ordinary course of business, the Debtors, or some of them, may sell or
otherwise dispose of assets and liquidate or settle liabilities for some
amounts other than those reflected in the consolidated financial statements.
Further, a plan of reorganization could materially change the amounts and
classifications of assets and liabilities in the historical consolidated
financial statements. All of the Debtor's outstanding pre-petition debt is in
default. Accordingly, the accompanying consolidated balance sheet as of
December 31, 2001 reflects the classification of the Debtors' pre-petition debt
as a liability subject to compromise.
The appropriateness of using the going concern basis for its financial
statements is dependent upon, among other things, (i) the Company's ability to
comply with the terms of the debtor-in-possession ("DIP") credit facility and
any cash management order entered by the Bankruptcy Court in connection with
the Chapter 11 Cases; (ii) the ability of the Company to maintain adequate cash
on hand; (iii) the ability of the Company to generate cash from operations;
(iv) confirmation of a plan(s) of reorganization under the Bankruptcy Code or
the Act; and (v) the Company's ability to achieve profitability following such
confirmation.
The Debtors have received approval from the Bankruptcy Court to pay or
otherwise honor certain of their pre-petition obligations in the ordinary
course of business, including employee wages and benefits, customer programs,
shipping charges and a limited amount of claims of essential trade creditors.
In the U.S., two creditors' committees, representing asbestos claimants and
unsecured creditors have been appointed as official committees in the Chapter
11 Cases and, in accordance with the provisions of the Bankruptcy Code, will
have the right to be heard on all matters that come before the Bankruptcy
Court. The Company expects that the appointed committees, together with the now
appointed legal representative for the
9
MANAGEMENT'S DISCUSSION AND ANALYSIS--Continued
future asbestos claimants, will play important roles in the Restructuring
Proceedings. In the U.K., the Administrator has appointed a creditor's
committee, representing both asbestos claimants and general unsecured
creditors. The Company expects this committee to play an important role in the
negotiation of any scheme of arrangement.
As provided by the Bankruptcy Code, the Debtors initially had the exclusive
right to propose a plan of reorganization within 120 days following the
Petition Date with the Bankruptcy Court. The Debtors have asked the Bankruptcy
Court to extend the period of exclusivity to August 1, 2002, and the request
was granted. If the Debtors fail to file a plan of reorganization during such
period or any extension thereof, or if such plan of reorganization is not
accepted by the requisite numbers of creditors and equity holders entitled to
vote on the plan, other parties in interest in the Chapter 11 Cases may be
permitted to propose their own plan(s) of reorganization for the Debtors. As
provided by the Act, the Administrator will propose a scheme of arrangement,
with the High Court.
In connection with the Restructuring Proceedings, the Company entered into a
$675 million DIP credit facility to supplement liquidity and fund operations
during the reorganization process. The DIP credit facility expires in October,
2003 and bears interest at either alternate base rate ("ABR") plus 2.5
percentage points or a formula based on the London Inter-Bank Offered Rate
("LIBOR") plus 3.5 percentage points. The ABR is the greatest of either the
bank's prime rate or the base CD rate plus 1 percentage point or the Fed Funds
rate plus 1/2 percentage point.
On October 1, 2001, Federal-Mogul Funding Corporation ("FMFC") notified
BankOne and Wachovia Bank that an Amortization Event, as defined in the
accounts receivable securitization agreement, had occurred effective with the
U.S. Restructurings. As a result, transfers of receivables ceased and the
securitization facility was subsequently repaid with borrowings from the DIP
credit facility, as approved by the Bankruptcy Court in connection with the
termination of the facility.
As a result of the Restructuring Proceedings, the Company is in default to
its affiliate holder of its convertible junior subordinated debentures and is
no longer accruing interest expense or making interest payments on the
debentures. As a result, the affiliate no longer has the funds available to pay
distributions on the Company-Obligated Mandatorily Redeemable Preferred
Securities and stopped paying such distributions in October 2001. The affiliate
is in default on the Company Obligated Mandatorily Redeemable Preferred
Securities. The Company is a guarantor of its subsidiaries debentures, and has
classified these debentures as "Liabilities Subject to Compromise" in the
December 31, 2001 consolidated balance sheet.
Accounting Impact:
Pursuant to SOP 90-7, the Company's pre-petition liabilities that are
subject to compromise are reported separately on the consolidated balance sheet
at the expected amount of the allowed claims. Note 1, "Voluntary Reorganization
Under Chapter 11 and Administration", includes the detail of the Liabilities
Subject to Compromise as of December 31, 2001. Obligations of the Company's
subsidiaries not covered by the Restructuring Proceedings will remain
classified on the consolidated balance sheet based upon maturity dates or the
expected dates of payment. SOP 90-7 also requires separate reporting of certain
expenses, realized gains and losses, a portion of interest income and
provisions for losses related to the Restructuring Proceedings as
reorganization items. Accordingly, the Debtors recorded Chapter 11 and
Administration related reorganization expenses of $50.6 million for the year
ended December 31, 2001. Refer to Note 1, "Voluntary Reorganization Under
Chapter 11 and Administration", to the consolidated financial statements for
further information concerning the Restructuring Proceedings.
10
Critical Accounting Policies
The accompanying consolidated financial statements have been prepared in
conformity with accounting principles generally accepted in the United States.
When more than one accounting principle, or the method of its application, is
generally accepted, management selects the principle or method that is
appropriate in the specific circumstances. Application of these accounting
principles requires the Company's management to make estimates about the future
resolution of existing uncertainties; as a result, actual results could differ
from these estimates. In preparing these financial statements, management has
made its best estimates and judgments of the amounts and disclosures included
in the financial statements, giving due regard to materiality. The Company does
not believe there is a great likelihood that materially different amounts would
be reported under different conditions or using different assumptions
pertaining to the accounting policies described below.
Consolidation, Basis of Presentation and Certain Financial Instruments
The Company's consolidated financial statements include accounts of the
Company and all majority-owned subsidiaries and other controlled entities. The
Company does not have off-balance sheet arrangements, financings or other
relationships with unconsolidated entities or other persons, also known as
"special purpose entities" (SPEs). Transactions with equity affiliates are in
the ordinary course of business, are conducted on an arms-length basis, and are
not material to the Company's financial position, operating results or cash
flows.
The Company uses financial instruments to manage exposure to fluctuations in
foreign currencies and commodity prices. Financial instruments used by the
Company with third parties are straightforward, non-leveraged instruments at
arms length for which quoted market prices are readily available from a number
of independent services.
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. The SEC's Staff Accounting Bulletin ("SAB") No. 101,
"Revenue Recognition" provides guidance on the application of generally
accepted accounting principles to selected revenue recognition issues. The
Company has concluded its revenue recognition policy is appropriate and in
accordance with generally accepted accounting principles and SAB No. 101.
Allowance for Uncollectible Accounts Receivable
Accounts receivable have been reduced by an allowance for amounts that may
become uncollectible in the future. This estimated allowance is based primarily
on management's evaluation of the financial condition of the customer and
historical experience.
Inventories and Related Allowance for Obsolete and Excess Inventory
Inventories are valued at the lower of cost or market value and have been
reduced by an allowance for excess and obsolete inventories. The estimated
allowance is based on management's review of inventories on hand compared to
estimated future usage and sales.
Goodwill, Intangible and Other Long-Lived Assets
Property, plant and equipment, goodwill, intangible and certain other
long-lived assets are amortized over their useful lives. Useful lives are based
on management's estimates of the period that the asset will be useful to
Company.
Goodwill, intangible and other long-lived assets are reviewed by management
for impairment whenever events or changes in circumstances indicate the
carrying amounts may not be recoverable. If management
11
MANAGEMENT'S DISCUSSION AND ANALYSIS--Continued
believes impairment may exist, an assessment is performed. This assessment
consists of comparing the estimated undiscounted future cash flows with the
carrying amount of the long-lived assets. If the undiscounted future cash flows
are less than the carrying amounts of the long-lived assets, the Company
adjusts the carrying amount of the long-lived assets to their estimated fair
value. Fair value is determined by anticipated future cash flows discounted at
a rate commensurate with the risk involved.
Goodwill and other intangible assets totaled $3.4 billion at December 31,
2001 and represented 37% of total assets. The majority of these assets resulted
from the 1998 acquisitions of T&N Ltd., the automotive divisions of Cooper
Industries, Inc., and Fel-Pro, Inc. The Company has concluded that the
impairment charges recorded in 2001 were in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed of," and
appropriate in the circumstances.
In 2002, the Company will adopt SFAS No. 142, "Goodwill and Other Intangible
Assets", ("SFAS No. 142") which will result in the discontinuance of
amortization of goodwill and indefinite-lived intangible assets that were
recorded in connection with previous business combinations. SFAS No. 142 will
also require the Company to perform impairment tests of goodwill and indefinite
lived intangible assets on an annual basis (or more frequently if impairment
indicators exist).During 2002, the Company will complete the first of the
required impairment tests of goodwill and indefinite lived intangible assets.
Although the Company has not completed its analysis of the initial impairment
test under this statement, initial assessments indicate that adoption will
require a substantial write-off of its $2.7 billion of net goodwill recorded at
December 31, 2001.
Pension Plans and Other Post-Retirement Benefit Plans
The measurement of liabilities related to pension plans and other
post-retirement benefit plans is based on management's assumptions related to
future events including interest rates, return on pension plan assets, rate of
compensation increases, and health care cost trend rates. Actual pension plan
asset performance will either reduce or increase unamortized pension losses at
the end of 2002, which ultimately affects net income.
Asbestos Liabilities and Asbestos-Related Insurance Recoverable
As discussed previously, the Company's United Kingdom subsidiary, T&N Ltd.,
and two United States subsidiaries ("T&N Companies") and two of the Company's
subsidiaries formerly owned by Cooper Industries, Inc., known as Abex and
Wagner, are among many defendants named in numerous court actions in the United
States alleging personal injury resulting from exposure to asbestos or
asbestos-related products. T&N Ltd. is also subject to asbestos-disease
litigation, to a lesser extent, in the United Kingdom and France. The recorded
liability at December 31, 2001 represents the Company's estimate, prior to the
Restructuring Proceedings, for claims currently pending and those which were
reasonably estimated to be asserted and paid through 2012. The Company did not
provide a liability for claims that may be paid subsequent to this period as it
could not reasonably estimate such claims. In estimating the asbestos liability
prior to the Restructuring Proceedings, the Company made assumptions regarding
the total number of claims anticipated to be received in a future period, the
typical cost of settlement, the rate of receipt of claims, the settlement
strategy in dealing with outstanding claims and the timing of settlements.
While the Company believes that the liability recorded was appropriate for
anticipated losses arising from asbestos-related claims through 2012, it is the
Company's view that, as a result of the Restructuring Proceedings, there is
even greater uncertainty in estimating the future asbestos liability for
pending and future claims.
T&N Ltd. purchased for itself and its then defined global subsidiaries a
(Pounds)500.0 million layer of insurance which will be triggered should the
aggregate costs of claims made or brought after June 30, 1996, where the
exposure occurred prior to that date, exceed (Pounds)690.0 million. During
2000, the Company concluded that the
12
aggregate cost of the claims filed after June 30, 1996 would exceed the trigger
point of certain asbestos policies and accordingly recorded an insurance
recoverable asset. The Company believes that based on its review of the
insurance policies and 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 the claims in excess of the trigger point of the insurance.
The ultimate realization of insurance proceeds is directly related to the
amount of related covered claims paid by the Company. If the ultimate asbestos
claims are higher than the recorded liability, the Company expects the ultimate
insurance recoverable to be higher than the recorded amount. If the ultimate
asbestos claims are lower than the recorded liability, the Company expects the
ultimate insurance recoverable to be lower than the recorded amount. While the
Restructuring Proceedings will impact the timing and amount of the asbestos
claims and the insurance recoverable, there has been no change to the recorded
amounts due to uncertainties created by the Restructuring Proceedings.
Accordingly, this asset could change significantly based upon events that occur
from the Restructuring Proceedings.
Environmental Liabilities
The Company recognizes 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. The Company regularly evaluates and
revises its estimates for environmental obligations based on expenditures
against established reserves and the availability of additional information.
Reorganization Under Chapter 11 and Administration
The consolidated financial statements have been prepared in accordance with
SOP 90-7 and on a going concern basis, which contemplates continuity of
operations, realization of assets, and liquidation of liabilities in the
ordinary course of business.
Results of Operations
Net Sales
Sales by reportable segment were:
2001 2000 1999
-------- -------- --------
(Millions of Dollars)
Powertrain............................ $1,639.9 $1,758.9 $1,766.4
Sealing Systems and Systems Protection 587.7 681.7 712.4
Friction.............................. 336.2 384.6 487.3
Aftermarket........................... 2,427.6 2,574.9 2,761.4
Other, including Corporate............ 367.7 431.8 426.2
Divested Operations................... 97.9 181.3 333.8
-------- -------- --------
Total.............................. $5,457.0 $6,013.2 $6,487.5
======== ======== ========
Powertrain
Sales decreased 7% to $1,639.9 million in 2001 versus 2000. The decrease was
the result of declining sales in both the automotive and heavy-duty original
equipment ("OE") markets. Additionally sales were negatively impacted by price
pressure from customers and foreign currency exchange primarily on the British
pound and the euro.
13
MANAGEMENT'S DISCUSSION AND ANALYSIS--Continued
Sales in 2000 were $1,758.9 million, essentially flat versus 1999. Sales,
before the effect of foreign currency exchange, increased due primarily to the
impact of a full year's sales from the 1999 acquisition of a German piston
manufacturer. This increase was offset by increased price pressure from
customers and the negative effect of foreign currency exchange.
Sealing Systems and System Protection
Sales decreased 14% to $587.7 million in 2001 versus 2000. The decrease was
the result of declining sales in both the automotive and heavy-duty OE markets,
price reductions, and the impact of certain European customer programs that
ended and have yet to be replaced with new programs.
Sales decreased 4% to $681.7 million in 2000 versus 1999. The decrease is
primarily due to the adverse impact of foreign currency exchange in addition to
increased pricing pressure from customers.
Friction
Sales decreased 13% to $336.2 million in 2001 versus 2000. The decrease is
due to lower sales volumes in the automotive and heavy-duty OE markets and
price reductions to OE customers. The decrease was offset slightly by net new
business in Europe.
Sales decreased 21% to $384.6 million in 2000 versus 1999. The decrease was
the result of a softening automotive market, price reductions to OE customers
and the loss of a significant aftermarket customer.
Aftermarket
Sales decreased 6% to $2,427.6 million in 2001 versus 2000. The decrease was
driven by increased customer consolidation, improved quality of OE parts and
general weakness in the aftermarket.
Sales decreased 7% to $2,574.9 million in 2000 versus 1999. The decrease was
the result of increased customer consolidation, improved quality of OE parts
and the beginnings of a weakness in the aftermarket. In addition, sales were
negatively impacted by rebate adjustments associated with the loss of a major
aftermarket customer.
Other
Other primarily includes sales from certain businesses including Lighting,
European wipers and ignition, as well as Asia Pacific, South America and other
Corporate functions.
Divested Operations
Divested operations include the partial year impact of sales recognized by
businesses divested in a particular year. Refer to Note 3 to the consolidated
financial statements for descriptions of businesses divested in the current
year.
Gross Margin
Gross margin as a percentage of net sales was 19.9% in 2001 compared to
23.6% in 2000. The decrease is attributed to lower sales volumes, increased
pension costs due to lower returns on the Company's pension assets, and
increased employee health and welfare costs. Gross margin has also been
impacted by the Company's cost reduction activities not keeping pace with the
lower sales volumes, customer price reductions, not realizing productivity
improvements necessary to offset inflation and an increase in provisions for
excess and obsolete inventory in 2001.
14
MANAGEMENT'S DISCUSSION AND ANALYSIS--Continued
Gross margin as a percentage of net sales was 23.6% in 2000 compared to
27.4% in 1999. This decrease is attributable to lower sales volumes, changes in
the mix of OE and aftermarket sales, and productivity not keeping pace with
inflation. OE sales represented 57% of total sales in 2000 and 1999. Gross
margin was also impacted by adjustments for inventory and other product-related
items.
Selling, General and Administrative Expense
Selling, general and administrative ("SG&A") expense as a percent of net
sales was 15.7% in 2001 compared to 14.0% in 2000. This increase is attributed
primarily to lower sales as mentioned above, increased employee health and
welfare costs, certain employee compensation programs, the effect of lower
actual returns on the Company's pension plan assets on year over year pension
expense and professional fees associated with its financing activities and
disposition of non-core businesses.
SG&A as a percentage of net sales was 14.0% in 2000 compared to 13.1% in
1999. This increase is attributable to increased employee health and welfare
costs, remediation of environmental items and lower sales volumes.
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 million in relocation and severance costs and $36.8
million in exit costs, and were recorded as a component of the purchase price.
The components of the rationalization and 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 $3.7 million and $10.7 million related to these
rationalization reserves in 2001 and 2000, respectively. Also during 2001 and
2000, the Company made adjustments to reduce the rationalization reserves, with
an offsetting amount to goodwill, of $2.0 million and $1.7 million,
respectively. These adjustments related to the finalization of rationalization
plans. As of December 31, 2001, remaining rationalization reserves were $12.8
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 2002.
Restructuring Charges (Credits)
During 2001, the Company recognized $38.0 million of restructuring charges
related to severance and exit costs. Severance costs of $36.0 million primarily
included the planned consolidation of the European friction business and the
January 2001 salaried employee reductions in North America and Europe. Total
employee reductions are expected to be approximately 1,000 of which 750 have
been terminated as of December 31, 2001. Exit costs of $2.0 million are
primarily comprised of planned consolidation of the European friction business.
In 2000, the Board of Directors of the Company approved, and the Company
began to implement, a global restructuring plan. The primary purposes of this
plan were to improve the Company's cost structure and reduce non-productive
assets. The significant activities that were 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,
15
MANAGEMENT'S DISCUSSION AND ANALYSIS--Continued
four of its manufacturing facilities were to be closed or consolidated, and the
operations that were being performed within these facilities were to 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 either sell, 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 $29.8 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. As of December 31, 2001, the Company paid $46.8 million for
employee severance costs and $4.2 million for exit costs against the 2000
reserves.
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 as of December 31, 2001.
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.
Adjustment of Assets Held for Sale and Other Long-Lived Assets to Fair Value
Concurrent with the Company's on-going planning process, the Company
performed an impairment assessment of its long-lived assets in accordance with
SFAS No. 121 "Accounting for the Impairment of Long-Lived Assets and Assets to
be Disposed of" during the third quarter of 2001. The Company's impending
Restructuring Proceedings and recent operating losses were indicators of
impairment as provided by SFAS No. 121. The Company determined that the
undiscounted cash flows of certain business within its Other and Powertrain
segments, were less than the carrying value of the long-lived assets of those
operating units. Accordingly, the Company adjusted the carrying value of those
assets to their fair value resulting in an impairment charge of $497.3 million.
Additionally, in the fourth quarter, the Company recorded an impairment charge
of $37.8 million for an insolvent business in the United Kingdom and $10.0 for
operations located in Argentina as a result of the current economic environment
in that country. The fair value was determined by anticipated future cash flows
discounted at a rate commensurate with the risk involved.
16
MANAGEMENT'S DISCUSSION AND ANALYSIS--Continued
The following is a summary of the impairment charge by long-lived asset (in
millions):
Goodwill..................... $259.7
Other intangible assets...... 74.3
Property, plant and equipment 211.1
------
$545.1
======
In 2000, the Company recorded a $75.4 million impairment charge primarily
associated with the actions of the 2000 restructuring program. Included in this
impairment 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.1.
(Bertolotti), an Italian aftermarket operation and recognized a $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 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
econometric study the Company commissioned during 2000 as discussed further in
Note 16 to the consolidated financial statements.
Integration Costs
The Company recognized $46.9 million of integration costs in 1999 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 or 2001.
Interest Expense
Interest expense, net, decreased $10.2 million in 2001 to $274.8 million.
This decrease is the result of not accruing or paying interest on certain
pre-petition debt. The effect of not accruing the contractual interest on the
pre-petition debt was $41.6 million. The reduction in interest expense, net,
was partially offset by higher average borrowings on the Company's credit
facilities during 2001 than in 2000.
Interest expense increased $15.8 million in 2000 to $298.3 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.
Chapter 11 and Administration Related Reorganization Expenses
In connection with the Restructuring Proceedings, the Company recognized
$50.6 million of Chapter 11 and Administration related reorganization expenses
in 2001. These expenses consisted of legal, financial and advisory fees.
17
MANAGEMENT'S DISCUSSION AND ANALYSIS--Continued
Other Expenses, net
Other expenses, net, increased from 2000 to 2001 by $28.1 million to $59.0
million. This increase is primarily attributable to losses on the divestitures
of non-core businesses in 2001 of $36.3 million. Other expenses, net, includes
such items as equity earnings (loss) in unconsolidated joint ventures, gain
(loss) on divestitures of business, discount on accounts receivable
securitization and amounts due to holders of the Company-Obligated Mandatorily
Redeemable Preferred Securities.
Income Taxes
For 2001, the Company recorded income tax expense of $219.5 million on a
loss before income taxes and extraordinary items of $854.2 million, compared to
income tax expense of $19.2 million on a loss before income taxes and
extraordinary items of $262.3 million in 2000. Income tax expense for 2001
results from the effects of the permanent difference between book and tax
goodwill related to divestitures and impairment charges, an increase in the
valuation allowance on deferred income tax assets in the U.S. and U.K., and
non-deductible goodwill amortization.
At December 31, 2001, the Company had deferred tax assets of $800.4 million,
net of a valuation allowance of $496.8 million, and deferred tax liabilities of
$867.8 million. The valuation allowance for deferred tax assets increased by
$277.2 million in 2001. In each country except the U.S. and the U.K., the
deferred tax liabilities are greater than the net deferred tax assets, and they
generally reverse in similar periods. The deferred tax assets in the U.S. and
U.K. relate primarily to net operating loss carryforwards, asbestos liabilities
and postemployment liabilities. The ultimate realization of net deferred income
tax assets in the U.S. and the U.K. is dependent upon future taxable income.
Management considers historical and projected future taxable income and tax
planning strategies by taxing jurisdiction in determining whether a valuation
allowance is necessary.
Due to the Company's Restructuring Proceedings that limit the implementation
of certain tax planning strategies, current adverse market conditions and
recent taxable losses in the U.S., the Company established a full valuation
allowance reserve in 2001 against the net U.S. deferred tax assets to the
extend that the losses cannot be carried back. The net operating losses in the
U.K. have no expiration date and the Company believes it is more likely than
not that the U.K. deferred tax assets, beyond those specifically reserved, will
be realized through a combination of the reversal of deferred tax liabilities
and future taxable income from operations.
Through the Petition Date, tax expense had historically differed from income
taxes currently payable due to timing differences most significantly related to
asbestos payments. As a result of the Restructuring Proceedings, the Company
does not expect to make payments for the settlement of asbestos claims in the
near term and as such, income taxes payable in the U.K. may increase. The
Company does not expect the effect of suspended asbestos payments to have a
significant effect on income taxes payable in the U.S. in the near term.
The Company evaluates its deferred taxes and related valuation allowance
quarterly. If the Company believes that changes in 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
In 2001, the Company completed a series of debt to equity exchanges of its
public bonds. As a result of these exchanges, the Company issued 9.6 million
shares in aggregate of its common stock to the holders of $76.5 million face
value of various notes. These exchanges resulted in a gain of $72.2 million.The
Company did not provide tax expense on these gains as the Company did not
provide a tax benefit on its 2001 operating losses in the U.S.
18
MANAGEMENT'S DISCUSSION AND ANALYSIS--Continued
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, net of related tax benefits of $13.5 million in 1999.
Cumulative Effect of Change in Accounting Principle
In 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-5, "Reporting the Costs of Start-Up Activities" ("SOP
98-5"). 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
On July 20, 2001, the FASB issued SFAS No. 141, "Business Combinations" and
SFAS No. 142 "Goodwill and Other Intangible Assets". These pronouncements
significantly change the accounting for business combinations, goodwill, and
intangible assets. SFAS No. 141 eliminates the pooling-of-interests method of
accounting for business combinations and further clarifies the criteria to
recognize intangible assets separately from goodwill. The requirements of SFAS
No. 141 are effective for any business combination accounted for by the
purchase method that is completed after June 30, 2001. Under SFAS No. 142,
goodwill and indefinite lived intangible assets are no longer amortized but are
reviewed for impairment annually (or more frequently if impairment indicators
arise). Separable intangible assets that are not deemed to have an indefinite
life will continue to be amortized over their useful lives. The amortization
provisions of SFAS No. 142 apply to goodwill and intangible assets acquired
after June 30, 2001. With respect to goodwill and intangible assets acquired
prior to July 1, 2001, companies are required to adopt the pronouncement in
their fiscal year beginning after December 15, 2001.
In 2002, the Company will adopt the new rules on accounting for goodwill and
other intangible assets. Application of SFAS No. 142 will result in a decrease
to amortization expense. During the years ended December 31, 2001, 2000 and
1999, the Company recognized amortization expense of $115.3 million,
$123.5 million, and $127.2 million related primarily to goodwill and indefinite
lived intangible assets. During 2002, the Company will complete the first of
the required impairment tests of goodwill and indefinite lived intangible
assets. Although the Company has not completed its analysis of the effect of
the initial impairment test under this statement, initial assessments indicate
that adoption will require a substantial write-off of its $2.7 billion of net
goodwill recorded at December 31, 2001.
Liquidity and Capital Resources
Cash Flow Provided by Operating Activities
Cash flow provided by operating activities was $35.8 million in 2001. Cash
flow was impacted positively by the Restructuring Proceedings due to the
benefit realized as a result of staying accounts payable and asbestos claims
outstanding at the Petition Date. The primary uses of cash during 2001 were the
$215.9 million of asbestos payments and $62.0 million of restructuring and
rationalization payments. Changes in working capital provided $239.2 million of
positive cash flow as a result of a decrease in inventories of $40.2 million, a
decrease in accounts receivable of $116.4 million, and an increase in accounts
payable of $82.6 million.
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
19
MANAGEMENT'S DISCUSSION AND ANALYSIS--Continued
$72.2 million, a decrease in accounts payable of $175.4 million, and a decrease
in other current assets and liabilities 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 $70.8 million in 2001. Capital
expenditures amounted to $315.5 million and business acquisitions, net of cash
acquired, used $18.8 million. These outflows were offset by proceeds from the
sale of various businesses amounting to $242.8 million and proceeds from the
sale of fixed assets of $19.0 million.
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 2002 capital expenditures, exclusive of
acquisitions and investments in affiliates, will be approximately $365.0
million. The Company expects that funding for these expenditures will be from
cash on hand, cash provided from operations and external sources as required.
Cash Flow Provided from Financing Activities
Cash flow provided from financing activities was $274.7 million in 2001.
Cash flow provided primarily resulted from net borrowings in the amount of
$643.3 million, offset by the repurchase of accounts receivable under
securitization in the amount of $348.1 million in conjunction with the closure
of that facility.
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 repurchase of accounts receivable under securitization of $62.1
million.
To meet its liquidity needs over the next two years, the Company entered
into a DIP credit facility in the aggregate amount of $675 million, under which
it has borrowed $250.0 million as of December 31, 2001. The Company had $285.0
million available for borrowings at December 31, 2001. The DIP credit facility
has been approved by the Bankruptcy court as well as the various creditors'
committees. The DIP credit facility expires in October, 2003 and bears interest
at either alternate base rate ("ABR") plus 2.5 percentage points or a formula
based on the London Inter-Bank Offered Rate ("LIBOR") plus 3.5 percentage
points. The ABR is the greatest of either the bank's prime rate or the base CD
rate plus 1 percentage point or the fed funds rate plus 1/2 percentage point.
The Company provided collateral in the form of a pledge of its domestic
inventories, domestic accounts receivable, domestic plant, equipment and real
property, and its domestic intellectual property to the DIP lenders. The DIP
lenders received permission from the lenders of the Senior Credit Agreements to
have priority over their collateral interest.
The DIP credit facility contains restrictive covenants. The more significant
of these covenants include the maintenance of certain levels of EBITDA and
limitation on quarterly capital expenditures. Additional covenants include, but
are not limited to, limitations on the early retirement of debt, additional
borrowings, payment of dividends and the sale of assets or businesses.
20
MANAGEMENT'S DISCUSSION AND ANALYSIS--Continued
The Company has pledged 100% of the capital stock of certain U.S.
subsidiaries, 65% of capital stock of certain foreign subsidiaries and certain
intercompany loans to secure the Senior Credit Agreements of the Company.
Certain of such pledges also extend to the Notes, Medium-Term Notes and Senior
Notes of the Company. In addition, certain subsidiaries of the Company have
guaranteed the senior debt.
The Company has the following contractual obligation and commercial
commitments outstanding at December 31, 2001:
Less Liabilities
than 1 1-3 Subject to
Total year years Thereafter Compromise
Contractural Obligations -------- ------ ------ ---------- -----------
(Millions of dollars)
Long-term debt...... $4,242.6 $ 4.5 $266.7 $ -- $3,971.4
Operating leases.... 169.8 42.4 86.4 41.0 --
-------- ----- ------ ----- --------
Total.......... $4,412.4 $46.9 $353.1 $41.0 $3,971.4
======== ===== ====== ===== ========
Total Less Liabilities
Amounts than 1 Subject to
Committed year Compromise
Other Commercial Commitments --------- ------ -----------
Amount of Commitment Expiration per period
(Millions of dollars)
Line of credit......... $1,902.1 $20.4 $1,881.7
Letters of credit...... 80.5 -- 80.5
-------- ----- --------
Total............ $1,982.6 $ 0.4 $1,962.2
======== ===== ========
The Company's ability to obtain cash adequate to fund its needs depends
generally on the results of its operations, restructuring initiatives, the
Bankruptcy Court's approval of management's plans and the availability of
financing. Management believes that cash on hand and cash flow from operations,
in conjunction with borrowings from its DIP credit facility, will be sufficient
to fund capital expenditures and meet its post-petition operating obligations
in the short-term. In the long term, the Company believes that the benefits
from the previously announced restructuring programs and favorable resolution
of its asbestos liability through Chapter 11 will provide adequate long term
cash flows. However, there can be no assurance that such initiatives are
achievable in this regard or that the terms available for any future financing,
if required, would be available or favorable to the Company. Also, resolutions
of certain obligations, particularly asbestos obligations are impacted by
factors outside the Company's control.
At December 31, 2001 the Company was in compliance with all debt covenants
under its existing DIP credit facility. Based on current forecasts, the Company
expects to be in compliance throughout 2002. Changes in the business
environment, market factors, macroeconomic factors, or the Company's ability to
achieve its forecasts and other factors outside of the Company's control, could
adversely impact its ability to remain in compliance with debt covenants. If
the Company were to not be in compliance at a measurement date, the Company
would be required to renegotiate its facility. No assurance can be provided as
to the impact of such actions.
Asbestos Liability and Legal Proceedings
Note 16 to the consolidated financial statements, entitled "Litigation and
Environmental Matters", is incorporated herein by reference.
Item 7a. Qualitative and Quantitative Disclosures About 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
21
MANAGEMENT'S DISCUSSION AND ANALYSIS--Continued
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 U.S. dollar and European currencies.
As currency exchange rates change, translation of the statements of
operations of the Company's international businesses into United States dollars
affects year-over-year comparability of operating results. The Company does not
generally hedge operating translation risks because cash flows from
international operations are generally reinvested locally. Changes in foreign
currency exchange rates are generally reported as a component of stockholders'
equity for the Company's foreign subsidiaries reporting in local currencies and
as a component of income for its foreign subsidiaries using the U.S. dollar as
the functional currency. The Company's other comprehensive loss was increased
by $129.4 million and $245.6 million during 2001 and 2000, respectively, due to
cumulative translation adjustments resulting from changes in the U.S. dollar to
the euro, British pound and Argentine peso.
As of December 31, 2001 and 2000, the Company's net current assets (defined
as current assets less current liabilities) subject to foreign currency
translation risk were $612.0 million and $356.0 million, respectively. The
potential decrease in net current assets from a hypothetical 10% adverse change
in quoted foreign currency exchange rates would be approximately $61.2 million
and $35.6 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. No options or contracts were outstanding at
December 31, 2001.
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.
Commodity Price Risk
The Company is dependent upon the supply of certain raw materials in the
production process and has from time to time 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, 2001, there were no contracts outstanding.
22
Item 8. Financial Statements and Supplemental Data
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31
-----------------------------
2001 2000 1999
--------- -------- --------
(Millions of Dollars,
Except Per Share Amounts)
-----------------------------
Net sales.................................................................................... $ 5,457.0 $6,013.2 $6,487.5
Cost of products sold........................................................................ 4,372.9 4,595.9 4,709.1
--------- -------- --------
Gross margin............................................................................... 1,084.1 1,417.3 1,778.4
Selling, general and administrative expenses................................................. 855.5 844.6 848.9
Amortization of goodwill and other intangible assets......................................... 115.3 123.6 127.2
Restructuring charges........................................................................ 38.0 135.7 --
Adjustment of assets held for sale and other long-lived assets to fair value................. 545.1 75.4 7.9
Asbestos charge.............................................................................. -- 184.4 --
Integration costs............................................................................ -- -- 46.9
Interest expense, net........................................................................ 274.8 285.0 268.9
Chapter 11 and Administration related reorganization expenses................................ 50.6 -- --
Other expense, net........................................................................... 59.0 30.9 18.7
--------- -------- --------
Earnings (loss) before income taxes, extraordinary items and cumulative effect
of change in accounting principle.................................................... (854.2) (262.3) 459.9
Income tax expense........................................................................... 219.5 19.2 180.9
--------- -------- --------
Earnings (loss) before extraordinary items and cumulative effect of change in
accounting principle................................................................. (1,073.7) (281.5) 279.0
Extraordinary items--(gain) loss on early retirement of debt, net of applicable income tax
benefits.................................................................................... (72.2) -- 23.1
Cumulative effect of change in accounting for costs of start-up activities, net of applicable
income tax benefit.......................................................................... -- -- 12.7
--------- -------- --------
Net earnings (loss)................................................................... (1,001.5) (281.5) 243.2
Preferred dividends, net of related tax benefit.............................................. 1.9 2.0 2.4
--------- -------- --------
Net Earnings (Loss) Available for Common Shareholders........................................ $(1,003.4) $ (283.5) $ 240.8
========= ======== ========
Earnings (Loss) Per Common Share:
Basic
Earnings (loss) before extraordinary items and cumulative effect of change in
accounting principle.................................................................... $ (14.23) $ (4.02) $ 3.96
Extraordinary items--(gain) loss on early retirement of debt, net of applicableincome
tax benefits............................................................................ (.96) -- .34
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................................. $ (13.27) $ (4.02) $ 3.44
========= ======== ========
Diluted
Earnings (loss) before extraordinary items and cumulative effect of change in
accounting principle.................................................................... $ (14.23) $ (4.02) $ 3.59
Extraordinary items--(gain) loss on early retirement of debt, net of applicableincome
tax benefits............................................................................ (.96) -- .28
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................................. $ (13.27) $ (4.02) $ 3.16
========= ======== ========
See accompanying Notes to Consolidated Financial Statements.
23
CONSOLIDATED BALANCE SHEETS
December 31
--------------------
2001 2000
--------- --------
(Millions of Dollars)
ASSETS
Cash and equivalents....................................................... $ 346.9 $ 107.2
Accounts receivable........................................................ 944.8 512.8
Investment in accounts receivable securitization........................... -- 229.1
Inventories................................................................ 721.9 808.6
Deferred taxes............................................................. 55.4 171.6
Prepaid expenses and income tax benefits................................... 177.6 195.1
--------- --------
Total Current Assets................................................ 2,246.6 2,024.4
Property, plant and equipment, net......................................... 2,163.7 2,388.8
Goodwill, net.............................................................. 2,708.3 3,303.1
Other intangible assets, net............................................... 655.3 746.4
Asbestos-related insurance recoverable..................................... 723.2 771.1
Other noncurrent assets.................................................... 556.1 597.2
--------- --------
Total Assets........................................................ $ 9,053.2 $9,831.0
========= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Short-term debt, including current portion of long-term debt............... $ 24.9 $ 147.8
Accounts payable........................................................... 299.5 431.9
Accrued compensation....................................................... 193.9 157.8
Restructuring and rationalization reserves................................. 81.1 107.9
Current portion of asbestos liability...................................... -- 350.0
Other accrued liabilities.................................................. 382.9 503.7
--------- --------
Total Current Liabilities........................................... 982.3 1,699.1
Long-term debt............................................................. 266.7 3,559.7
Long-term portion of asbestos liability.................................... -- 1,461.9
Postemployment benefits.................................................... 819.8 637.6
Other accrued liabilities.................................................. 258.5 290.0
Minority interest in consolidated subsidiaries............................. 50.3 57.5
Liabilities subject to compromise.......................................... 6,256.6 --
Company-obligated mandatorily redeemable preferred securities of subsidiary
trustholding solely convertible subordinated debentures of the Company... -- 575.0
Shareholders' Equity:......................................................
Series C ESOP preferred stock........................................... 28.0 38.1
Common stock............................................................ 411.9 352.5
Additional paid-in capital.............................................. 1,844.6 1,778.6
Accumulated deficit..................................................... (1,115.0) (113.5)
Accumulated other comprehensive loss.................................... (750.1) (504.7)
Other................................................................... (0.4) (0.8)
--------- --------
Total Shareholders' Equity.......................................... 419.0 1,550.2
--------- --------
Total Liabilities and Shareholders' Equity.......................... $ 9,053.2 $9,831.0
========= ========
See accompanying Notes to Consolidated Financial Statements.
24
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31
-----------------------------
2001 2000 1999
--------- ------- ---------
(Millions of Dollars)
Cash Provided From (Used By) Operating Activities
Net earnings (loss)............................................................ $(1,001.5) $(281.5) $ 243.2
Adjustments to reconcile net earnings (loss) to net cash provided from (used
by) operating activities...................................................
Depreciation and amortization................................................ 373.7 374.4 354.9
Restructuring charges........................................................ 38.0 135.7 --
Chapter 11 and Administration related reorganization expenses................ 50.6 -- --
Adjustment of assets held for sale and other long-lived assets to fair value. 545.1 75.4 7.9
Asbestos charge.............................................................. -- 184.4 --
(Gain) loss on early retirement of debt...................................... (72.2) -- 36.6
Cumulative effect of change in accounting principle.......................... -- -- 19.5
Postemployment benefits...................................................... 8.8 (9.1) (18.8)
(Increase) decrease in accounts receivable................................... 116.4 38.1 (33.4)
Decrease in inventories...................................................... 40.2 40.7 117.2
Increase (decrease) in accounts payable...................................... 82.6 (175.4) 149.7
Changes in other current liabilities and other current assets................ 160.4 (113.6) (55.6)
Payments against restructuring and rationalization reserves.................. (62.0) (72.2) (80.6)
Payments for Chapter 11 and Administration related reorganization costs...... (28.4) -- --
Payments against asbestos liability, net of insurance receipts............... (215.9) (351.4) (178.2)
--------- ------- ---------
Net Cash Provided From (Used By) Operating Activities...................... 35.8 (154.5) 562.4
Cash Provided From (Used By) Investing Activities
Expenditures for property, plant and equipment and other long-term assets...... (313.8) (315.5) (395.2)
Proceeds from sale of property, plant and equipment............................ 19.0 2.2 --
Business acquisitions, net of cash acquired.................................... (18.8) -- (371.2)
Proceeds from sales of businesses.............................................. 242.8 66.6 53.3
Other.......................................................................... -- 2.4 --
--------- ------- ---------
Net Cash Used By Investing Activities...................................... (70.8) (244.3) (713.1)
Cash Provided From (Used By) Financing Activities
Proceeds from issuance of long-term debt....................................... 917.2 689.0 2,123.0
Principal payments on long-term debt........................................... (171.8) (145.3) (2,251.5)
Decrease in short-term debt.................................................... (64.1) (25.9) (3.0)
Fees paid for debt issuance and other securities............................... (38.0) (4.6) (25.5)
Sale (repurchase) of accounts receivable under securitization.................. (348.1) (62.1) 304.3
Dividends...................................................................... -- (4.0) (4.3)
Other.......................................................................... (20.5) (5.6) (5.0)
--------- ------- ---------
Net Cash Provided From Financing Activities................................ 274.7 441.5 138.0
--------- ------- ---------
Increase (Decrease) in Cash and Equivalents................................ 239.7 42.7 (12.7)
Cash and Equivalents at Beginning of Year....................................... 107.2 64.5 77.2
--------- ------- ---------
Cash and Equivalents at End of Year........................................ $ 346.9 $ 107.2 $ 64.5
========= ======= =========
See accompanying Notes to Consolidated Financial Statements.
25
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Series C Retained Accumulated
ESOP Series 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, 1999...... $ 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
Net loss........................ (1,001.5) (1,001.5)
Currency translation............ (129.4) (129.4)
Other........................... (116.0) (116.0)
---------
Total Comprehensive Loss...... (1,246.9)
Issuance of stock, net.......... 59.4 67.9 0.4 127.7
Retirement of Series C ESOP
Preferred stock................ (10.1) (10.1)
Dividends....................... (1.9) (1.9)
------ ------ ------ -------- --------- ------ ------- ----- ---------
Balance at December 31, 2001.... $ 28.0 $ -- $411.9 $1,844.6 $(1,115.0) $ -- $(750.1) $(0.4) $ 419.0
====== ====== ====== ======== ========= ====== ======= ===== =========
See accompanying Notes to Consolidated Financial Statements.
26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Voluntary Reorganization Under Chapter 11 and Administration
On October 1, 2001 (the "Petition Date"), Federal-Mogul Corporation
("Company" or "Federal Mogul") and all of its wholly owned United States
subsidiaries filed voluntary petitions for reorganization (the "U.S.
Restructuring") under Chapter 11 of the United States Bankruptcy Code (the
"Bankruptcy Code") in the United States Bankruptcy Court for the District of
Delaware (the "Bankruptcy Court"). Also on October 1, 2001, certain of the
Company's United Kingdom subsidiaries filed voluntary petitions for
reorganization under Chapter 11 of the Bankruptcy Code and petitions for
Administration (the "U.K. Restructuring") under the United Kingdom Insolvency
Act of 1986 (the "Act") in the High Court of Justice, Chancery division in
London, England (the "High Court"). The Company and its U.S. and U.K.
subsidiaries included in the U.S. Restructuring and U.K. Restructuring are
herein referred to as the "Debtors". The U.S. Restructuring and U.K.
Restructuring are herein referred to as the "Restructuring Proceedings". The
Chapter 11 cases of the Debtors (collectively, the "Chapter 11 Cases") have
been consolidated for purposes of joint administration as In re: Federal-Mogul
Global Inc., T&N Limited, et al (Case No. 01-10578(SLR)). The Chapter 11 Cases
do not include any of the Company's non-U.S. subsidiaries outside of the U.K.
subsidiaries mentioned above.
The Restructuring Proceedings were undertaken to resolve the Company's
asbestos-related litigation in a fair and equitable manner, to protect the
long-term value of the Debtors' businesses and to maintain the Debtors'
leadership positions in their markets.
Consequences of the Restructuring Proceedings:
The U.S. Debtors are operating their businesses as debtors-in-possession
subject to the provisions of the Bankruptcy Code. The U.K. Debtors are
continuing to manage their operations under the supervision of an Administrator
approved by the High Court. All vendors will be paid for all goods furnished
and services provided after the Petition Date. However, as a consequence of the
Restructuring Proceedings, all pending litigation against the Debtors as of the
Petition Date is stayed (subject to certain exceptions in the case of
governmental authorities), and no party may take any action to pursue or
collect pre-petition claims except pursuant to an order of the Bankruptcy Court
or the High Court as applicable. It is the Debtors' intention to address all
pending and future asbestos-related claims and all other pre-petition claims
through a unified plan of reorganization under the Bankruptcy Code or scheme of
arrangement under the Act. However, it is currently impossible to predict with
any degree of certainty how a plan of reorganization or a scheme of arrangement
will treat asbestos and other pre-petition claims and what impact the
Restructuring Proceedings and any plan of reorganization or scheme of
arrangement may have on the shares of the Company's common stock. The
formulation and implementation of the plan of reorganization or scheme of
arrangement could take a significant period of time.
In the U.S., two creditors' committees, representing asbestos claimants and
unsecured creditors have been appointed as official committees in the Chapter
11 Cases and, in accordance with the provisions of the Bankruptcy Code, will
have the right to be heard on all matters that come before the Bankruptcy
Court. The Company expects that the appointed committees, together with the now
appointed legal representative for the future asbestos claimants will play
important roles in the Restructuring Proceedings. In the U.K., the
Administrator has appointed a creditor's committee, representing both asbestos
claimants and general unsecured creditors. The Company expects this committee
to play an important role in the negotiation of any scheme of arrangement.
As provided by the Bankruptcy Code, the Debtors initially had the exclusive
right to propose a plan of reorganization within 120 days following the
Petition Date with the Bankruptcy Court. The Debtors have asked the Bankruptcy
Court to extend the period of exclusivity to August 1, 2002, and the request
was granted. If the Debtors fail to file a plan of reorganization during such
period or any extension thereof, or if such plan of reorganization is not
accepted by the requisite numbers of creditors and equity holders entitled to
vote on the
27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
plan, other parties in interest in the Chapter 11 Cases may be permitted to
propose their own plan(s) of reorganization for the Debtors. As provided by the
Act, the Administrator will propose a scheme of arrangement with the High Court.
The Company is unable to predict at this time what the treatment of
creditors and equity security holders of the respective Debtors will be under
any proposed plan(s) of reorganization or schemes of arrangement. One
alternative such plan(s) of reorganization may provide, among other things,
that all present and future asbestos-related liabilities of the Debtors will be
discharged and assumed and resolved by one or more independently administered
trusts established in compliance with Section 524(g) of the Bankruptcy Code.
Such plan(s) may also provide for the issuance of an injunction by the
Bankruptcy Court pursuant to Section 524(g) of the Bankruptcy Code that will
enjoin actions against the reorganized Debtors alleging asbestos-related
claims, which claims will be paid in whole or in part by one or more Section
524(g) trusts. Similar plans of reorganization have been confirmed in Chapter
11 cases of other companies involved in asbestos-related litigation. Section
524(g) of the Bankruptcy Code provides that, if certain specified conditions
are satisfied, a court may issue a supplemental permanent injunction barring
the assertion of asbestos-related claims against the reorganized company and
channeling those claims to an independent trust.
There are two possible types of U.K. schemes of arrangements. The first is
under Section 425 of the Companies Act of 1985, which may involve a scheme for
the reconstruction of the Company. If a majority in number representing
three-fourths in value of the creditors or members or any class of them agree
to the compromise or arrangement, it is binding if sanctioned by the High
Court. Section 425 may be invoked where there is an Administration order in
force in relation to the Company. The other possible type of scheme arises
under Section 1 of the Insolvency Act of 1986 in relation to Company Voluntary
Arrangements ("CVA"). If a majority in value representing more than
three-fourths of the creditors agrees to the compromise or arrangement set out
in the CVA proposal, it will be approved.
The Company is unable to predict at this time what treatment will be
accorded under any such plan(s) of reorganization to intercompany indebtedness,
licenses, executory contracts, transfers of goods and services, and other
intercompany arrangements, transactions and relationships that were entered
into prior to the Petition Date. These arrangements, transactions, and
relationships may be challenged by various parties in the Chapter 11 cases, and
the outcome of those challenges, if any, may have an impact on the treatment of
various claims under such plan(s) of reorganization.
The Bankruptcy Court may confirm a plan of reorganization only upon making
certain findings required by the Bankruptcy Code, and a plan may be confirmed
over the dissent of non-accepting creditors and equitysecurity holders if
certain requirements of the Bankruptcy Code are met. The payment rights and
other entitlements of pre-petition creditors and equity shareholders may be
substantially altered by any plan(s) of reorganization confirmed in the Chapter
11 Cases. There is no assurance that there will be sufficient assets to satisfy
the Debtors' pre-petition liabilities in whole or in part, and the pre-petition
creditors of some Debtors may be treated differently than those of other
Debtors. Pre-petition creditors may receive under the proposed plan(s) less
than 100% of the face value of their claims, and the interests of the Company's
equity security holders may be substantially diluted or cancelled in whole or
in part. As noted above, it is not possible at this time to predict the outcome
of the Chapter 11 cases, the terms and provisions of any plan(s) of
reorganization, or the effect of the Chapter 11 reorganization process on the
claims of the pre-petition creditors of the Debtors or the interests of the
Company's equity security holders.
Chapter 11 Financing:
In connection with the Restructuring Proceedings, the Company entered into a
$675 million debtor-in-possession ("DIP") credit facility to supplement
liquidity and fund operations during the reorganization process.
28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
The DIP credit facility expires in October, 2003 and bears interest at either
alternate base rate ("ABR") plus 2.5 percentage points or a formula based on
the London Inter-Bank Offered Rate ("LIBOR") plus 3.5 percentage points. The
ABR is the greatest of either the bank's prime rate or the base CD rate plus 1
percentage point or the fed funds rate plus 1/2 percentage point.
At December 31, 2001 the Company had $250.0 million outstanding and $285.0
million available to borrow under its DIP credit facility. The borrowings were
used to pay off the Company's accounts receivable securitization facility
because, as a result of the U.S. Restructuring, the Company was in default on
the securitization facility and negotiated to pay off such facility .
Financial Statement Presentation:
The accompanying consolidated financial statements have been prepared in
accordance with AICPA Statement of Position 90-7 ("SOP 90-7"), "Financial
Reporting by Entities in Reorganization under the Bankruptcy Code" and on a
going concern basis, which contemplates continuity of operations, realization
of assets and liquidation of liabilities in the ordinary course of business.
However, as a result of the Restructuring Proceedings, such realization of
assets and liquidation of liabilities, without substantial adjustments and/or
changes of ownership, are highly uncertain. Given this uncertainty, there is
substantial doubt about the ability of the Company to continue as a going
concern. While operating as debtors-in-possession under the protection of
Chapter 11 of the Bankruptcy Code and Administration under the Act, and subject
to approval of the Bankruptcy Court, Administrator or the High Court or
otherwise as permitted in the ordinary course of business, the Debtors, or some
of them, may sell or otherwise dispose of assets and liquidate or settle
liabilities for some amounts other than those reflected in the consolidated
financial statements. Further, a plan of reorganization or scheme of
arrangement could materially change the amounts and classifications in the
historical consolidated financial statements.
Virtually all of the Company's pre-petition debt is in default. At December
31, 2001, the Debtors' pre-petition debt is classified under the caption
"Liabilities Subject to Compromise." This includes debt outstanding of $1,901.9
million under the pre-petition Senior Credit Agreements and $2,119.0 million of
other outstanding debt, primarily notes payable at various unsecured rates,
less capitalized debt issuance fees of $49.5 million.
As a result of the Restructuring Proceedings, the Company is in default to
its affiliate holder of its convertible junior subordinated debentures and is
no longer accruing interest expense or making interest payments on the
debentures. As a result, the affiliate will no longer have the funds available
to pay distributions on the Company-Obligated Mandatorily Redeemable Preferred
Securities and stopped accruing and paying such distributions in October 2001.
The affiliate is in default on the Company-Obligated Mandatorily Redeemable
Preferred Securities. The Company is a guarantor on the outstanding debentures,
and, as a result of the default, the Company has become a debtor to the holders
of the debentures directly. This liability is a pre-petition liability. As a
result, the Company has classified these securities as Liabilities Subject to
Compromise in the December 31, 2001 consolidated balance sheet.
As reflected in the consolidated financial statements, "Liabilities Subject
to Compromise" refers to Debtors' liabilities incurred prior to the
commencement of the Restructuring Proceedings. The amounts of the various
liabilities that are subject to compromise are set forth below. These amounts
represent the Company's estimate of known or potential pre-petition claims to
be resolved in connection with the Restructuring Proceedings. Such claims
remain subject to future adjustments. Future adjustments may result from (i)
negotiations; (ii) actions of the Bankruptcy Court, High Court or
Administrator; (iii) further developments with respect to disputed claims; (iv)
rejection of executory contracts and unexpired leases; (v) the determination as
to the value of any collateral securing claims; (vi) proofs of claim; or (vii)
other events. Payment terms for these claims will be established in connection
with the Restructuring Proceedings.
29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
Pursuant to the Bankruptcy Code, the Debtors have filed schedules with the
Bankruptcy Court setting forth the assets and liabilities of the Debtors as of
the Petition Date. Differences between amounts recorded by the Debtors and
claims filed by creditors will be investigated and resolved as part of the
Restructuring Proceedings. No bar dates have been set for the filing of proofs
of claim against the Debtors. Accordingly, the ultimate number and allowed
amount of such claims are not presently known. The Debtors have received
approval from the Bankruptcy Court to pay or otherwise honor certain of their
pre-petition obligations, including employee wages, salaries, benefits and
other employee obligations and from limited available funds, pre-petition
claims of certain critical vendors, certain customer programs and warranty
claims and certain other pre-petition claims.
The appropriateness of using the going concern basis for its financial
statements is dependent upon, among other things, (i) the Company's ability to
comply with the terms of the DIP credit facility and any cash management order
entered by the Bankruptcy Court in connection with the Chapter 11 Cases; (ii)
the ability of the Company to maintain adequate cash on hand; (iii) the ability
of the Company to generate cash from operations; (iv) confirmation of a plan(s)
of reorganization under the Bankruptcy Code; and (v) the Company's ability to
achieve profitability following such confirmation.
Debtors' Financial Statements:
The condensed financial statements of the Debtors' are presented as follows:
Federal-Mogul Corporation
Debtors' Statement of Operations
Year Ended
December 31
2001
---------------------
(Millions of Dollars)
Net sales.............................................................................. $ 3,702.9
Cost of products sold.................................................................. 3,066.3
---------
Gross margin.......................................................................... 636.6
Selling, general and administrative expenses........................................... 577.7
Amortization of goodwill and other intangible assets................................... 95.5
Restructuring charges.................................................................. 18.4
Adjustment of assets held for sale and other long-lived assets to fair value........... 381.3
Interest expense....................................................................... 287.2
Chapter 11 and Administration related reorganization expenses.......................... 50.6
Other income, net...................................................................... (60.4)
---------
Loss before income taxes, extraordinary items and equity loss of Non-Debtor
subsidiaries.................................................................. (713.7)
Income tax expense..................................................................... 199.8
---------
Loss before extraordinary item and equity loss of Non-Debtor subsidaries........ (913.5)
Extraordinary items - gain on early retirement of debt................................. (72.2)
---------
Loss before equity loss of Non-Debtor subsidiaries.............................. (841.3)
Equity loss of Non-Debtor subsidiaries................................................. 160.2
---------
Net loss........................................................................ $(1,001.5)
=========
30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
Federal-Mogul Corporation
Debtors' Balance Sheet
December 31
2001
---------------------
(Millions of Dollars)
ASSETS
Cash and equivalents....................... $ 146.5
Accounts receivable........................ 604.0
Accounts receivable--Non-Debtors........... 153.3
Inventories................................ 440.4
Deferred taxes............................. 37.0
Prepaid expenses and income tax benefits... 114.7
---------
Total Current Assets.................... 1,495.9
Property, plant and equipment, net......... 1,235.2
Goodwill, net.............................. 2,202.4
Other intangible assets, net............... 600.3
Asbestos-related insurance recoverable..... 723.2
Investment in Non-Debtor subsidiaries...... 5,759.5
Loans receivable--Non-Debtors.............. 4,678.5
Other noncurrent assets.................... 487.0
---------
Total Assets............................ $17,182.0
=========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable........................... $ 237.1
Accounts payable--Non-Debtors.............. 38.5
Other accrued liabilities.................. 292.2
---------
Total Current Liabilities............... 567.8
Long-term debt............................. 250.0
Postemployment benefits.................... 655.9
Other accrued liabilities.................. 76.1
Loans payable--Non-Debtors................. 1,042.1
Liablities subject to compromise........... 8,294.1
Shareholders' Equity:
Series C ESOP Preferred stock............. 28.0
Common stock.............................. 411.9
Additional paid-in capital................ 1,844.6
Accumulated deficit....................... 4,758.2
Accumulated other comprehensive loss...... (746.3)
Other..................................... (0.4)
---------
Total Shareholders' Equity................. 6,296.0
---------
Total Liabilities and Shareholders' Equity $17,182.0
=========
31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
Federal-Mogul Corporation
Debtors' Statement of Cash Flows
Year Ended
December 31
2001
---------------------
(Millions of Dollars)
Cash Provided From (Used By) Operating Activities
Net loss.................................................................................. $(1,001.5)
Adjustments to reconcile net loss to net cash provided from (used by) operating activities
Depreciation and amortization........................................................... 253.1
Restructuring charges................................................................... 18.4
Chapter 11 and Administration related reorganization expenses........................... 50.6
Adjustment of assets held for sale and other long-lived assets to fair value............ 381.3
Gain on early retirement of debt........................................................ (72.2)
Equity loss of Non-Debtor subsidiaries.................................................. 160.2
Postemployment benefits................................................................. 8.8
Changes in working capital, other assets, and other liabilities......................... 158.3
Payments of Chapter 11 and Administration related reorganization expenses............... (28.4)
Payments against restructuring and rationalization reserves............................. (42.8)
Payments against asbestos liability, net of insurance receipts.......................... (215.9)
---------
Net Cash Used By Operating Activities................................................. (330.1)
Cash Provided From (Used By) Investing Activities
Expenditures for property, plant and equipment and other long-term assets................. (149.3)
Proceeds from sales of businesses......................................................... 241.9
---------
Net Cash Provided From Investing Activities........................................... 92.6
Cash Provided From (Used By) Financing Activities
Proceeds from issuance of long-term debt.................................................. 917.2
Principal payments on long-term debt...................................................... (171.8)
Decrease in short-term debt............................................................... (64.1)
Fees paid for debt issuance and other securities.......................................... (38.0)
Repurchase of accounts receivable under securitization.................................... (348.1)
---------
Net Cash Provided From Financing Activities........................................... 295.2
Increase in Cash and Equivalents...................................................... 57.7
Cash and Equivalents at Beginning of Year.................................................. 88.8
---------
Cash and Equivalents at End of Year................................................... 146.5
=========
32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
Liabilities subject to compromise at December 31, 2001 are comprised of (in
millions):
Debt......................................................... $3,971.4
Asbestos liabilities......................................... 1,550.2
Company-Obligated Mandatorily Redeemable Preferred Securities 449.5
Accounts payable............................................. 200.2
Interest payable............................................. 43.7
Environmental liabilities.................................... 23.3
Other accrued liabilities.................................... 18.3
--------
Subtotal..................................................... 6,256.6
Intercompany payables to affiliates.......................... 2,037.5
--------
Total........................................................ $8,294.1
========
Chapter 11 and Administration related reorganization expenses in the
consolidated statements of operations consist of legal, financial and advisory
fees for 2001.
2. Accounting Policies
Organization: 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, systems protection sleeving products, fuel systems,
wipers, lighting, ignition, brake, friction and chassis products. The Company's
principal customers include many of the world's original equipment ("OE")
manufacturers of such vehicles and industrial products. The Company also
manufactures and supplies its products 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 53% and 48% of
the inventory at December 31, 2001 and 2000, 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 $44.7 million and $40.5 million as of December 31, 2001 and 2000,
respectively. Inventories have also been reduced by an allowance for excess and
obsolete inventories based on management's review of inventories compared to
estimated future sales and usage.
Inventory quantity reductions resulting in liquidations of certain LIFO
inventory layers decreased net earnings by $4.1 million ($.05 per diluted
share) in 2001, and increased net earnings by $2.2 million and $3.2 million
($.03 and $.04 per diluted share) in 2000 and 1999, respectively.
At December 31, inventories consisted of the following:
2001 2000
------ ------
(Millions of Dollars)
Finished products.............. $511.2 $545.8
Work-in-process................ 116.4 136.3
Raw materials.................. 144.1 155.8
------ ------
771.7 837.9
Reserve for inventory valuation (49.8) (29.3)
------ ------
$721.9 $808.6
====== ======
33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
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 2001 2000
----------- -------- --------
(Millions of Dollars)
Goodwill................................... 40 years $3,009.1 $3,557.6
Accumulated amortization................... (300.8) (254.5)
-------- --------
Total Goodwill.......................... $2,708.3 $3,303.1
======== ========
Other Intangible Assets
Trademarks................................ 40 years $ 432.3 $ 418.1
Developed technology...................... 12-30 years 222.6 337.1
Assembled workforce....................... 15 years 40.4 71.8
Other..................................... 5-20 years 9.4 9.6
-------- --------
Subtotal................................ 704.7 836.6
Accumulated amortization................... (123.5) (107.7)
-------- --------
Total Other Amortized Intangible Assets. 581.2 728.9
Intangible Pension Asset................... 74.1 17.5
-------- --------
Total Other Intangible Assets........... $ 655.3 $ 746.4
======== ========
Changes to Goodwill and Other Amortized Intangible Assets are as follows:
Other Amortized
Goodwill Intangible Assets
-------- -----------------
(Millions of dollars)
December 31, 2000..... $3,303.1 $ 728.9
Impairment........... (259.7) (74.3)
Sale of Businesses... (156.2) (26.3)
Amortization......... (82.2) (33.1)
Translation and other (96.7) (14.0)
-------- -------
December 31, 2001..... $2,708.3 $ 581.2
======== =======
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.
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
34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
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 $115.1 million, $127.8 million and $128.0 million for 2001, 2000 and 1999,
respectively.
Costs associated with advertising and promotion are expensed as incurred.
Advertising and promotion expense was $56.2 million, $68.6 million and $59.8
million for 2001, 2000 and 1999, 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 on the translation adjustments 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: Integration costs 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 is exposed to market risks,
such as fluctuations in foreign currency risk and commodity price risk. To
manage the volatility relating to these exposures, the Company aggregates its
exposures on a consolidated basis to take advantage of natural offsets. For
exposures that are not offset within its operations, the Company enters into
various derivative transactions pursuant to its risk management policies.
Designation is performed on a transaction basis to support hedge accounting.
The changes in fair value of these hedging instruments are offset in part or in
whole by corresponding changes in the cash flows of the underlying exposures
being hedged. The Company assesses the initial and ongoing effectiveness of its
hedging relationships in accordance with its documented policy. The Company
does not hold or issue derivative financial instruments for trading purposes.
The Company's objectives for holding derivatives are to minimize the risks
using the most effective methods to eliminate or reduce the impacts of these
exposures.
Comprehensive Income: The Company displays comprehensive income in the
consolidated statements of shareholders' equity. At December 31, 2001, 2000 and
1999, accumulated other comprehensive loss consisted of $627.0 million, $497.6
million and $252.0 million of foreign currency translation, respectively, and
$123.1 million, $7.1 million and $10.1 million of other comprehensive loss,
primarily pension, net of tax, respectively.
Use of Estimates: The preparation of financial statements in conformity
with accounting principles generally accepted in the United States 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.
35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
Reclassifications: Certain items in the prior year financial statements
have been reclassified to conform with the presentation used in 2001.
Effect of Accounting Pronouncements: On July 20, 2001, the FASB issued
Statement of Financial Accounting Standards ("SFAS") No. 141, "Business
Combinations" and SFAS No. 142 "Goodwill and Other Intangible Assets". These
pronouncements significantly change the accounting for business combinations,
goodwill, and intangible assets. SFAS No. 141 eliminates the
pooling-of-interests method of accounting for business combinations and further
clarifies the criteria to recognize intangible assets separately from goodwill.
The requirements of SFAS No. 141 are effective for any business combination
accounted for by the purchase method that is completed after June 30, 2001. The
Company has not made acquisitions since such time. Under SFAS No. 142 goodwill
and indefinite lived intangible assets are no longer amortized but are reviewed
for impairment annually (or more frequently if impairment indicators arise).
Separable intangible assets that are not deemed to have an indefinite life will
continue to be amortized over their useful lives. The amortization provisions
of SFAS No. 142 apply to goodwill and intangible assets acquired after June 30,
2001. With respect to goodwill and intangible assets acquired prior to July 1,
2001, companies are required to adopt the pronouncement in their fiscal year
beginning after December 15, 2001.
In 2002, the Company will adopt SFAS No. 142, which will result in the
discontinuance of amortization of goodwill and indefinite-lived intangible
assets that were recorded in connection with previous business combinations.
SFAS No. 142 will also require the Company to perform impairment tests of
goodwill and indefinite lived intangible assets on an annual basis (or more
frequently if impairment indicators exist). During 2002, the Company will
complete the first of the required impairment tests of goodwill and indefinite
lived intangible assets. Although the Company has not completed its analysis of
the effect of the initial impairment test under this statement, initial
assessments indicate that adoption will require a substantial write-off of its
$2.7 billion of net goodwill recorded at December 31, 2001.
3. Sales of Businesses
During 2001, the Company completed the following divestitures of its
non-core businesses:
. In April 2001, the divestiture of its torque converter business ("TCI")
to Competition Cams, Inc. TCI remanufactures torque converters for
high-performance automotive aftermarket applications.
. In May 2001, the divestiture of its Champion aviation ignition products
division ("Aviation") to TransDigm Inc. Aviation provides products for
all major commercial, military and general aircraft applications.
. In July 2001, the divestiture of its industrial heavy wall bearing
operation in McConnelsville, Ohio, to Miba-Bearings--US, LLC, a
subsidiary of Miba AG, a major Austrian industrial bearing manufacturer.
. In August 2001, the divestiture of its subsidiary Federal-Mogul RPB Ltd.
("RPB") to Waukesha Bearings Corporation a subsidiary of Dover
Corporation. RPB manufactures industrial rotating plant bearings and
magnetic bearings.
. In August 2001, the divestiture of the aftermarket operations of Blazer
Lighting Products ("Blazer") to Clean-Rite Products LLC, an automotive
aftermarket supplier. Blazer manufactures exterior vehicle lighting
products.
. In August 2001, the divestiture of its Pontotoc, Mississippi, operation
to Union Spring and Manufacturing Corp. The leased plant and
manufacturing operation will continue to supply coil springs and metal
stampings to Federal-Mogul for sale to automotive aftermarket customers
under a long-term supply agreement.
36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
. In August 2001, the Company restructured its equity positions in several
large industrial bearing manufacturing joint ventures with its partner,
Daido Metal Company Ltd. of Japan. The restructuring transactions
included the transfer of controlling interest in manufacturing
facilities.
. In September 2001, the divestiture of its Tri-Way machine tool business
in Windsor, Ontario, under terms of a management buyout.
In aggregate these businesses had 2000 net sales of $216.0 million and 1,370
employees. The Company received aggregated proceeds of $242.8 million. The
Company recognized an aggregated pre-tax loss of $36.3 million on these
divestitures. Such losses are included in "other expense, net" in the
accompanying consolidated statements of operations.
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 and recognized a $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 $56.0 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.
4. Restructuring and Rationalization
During 2001, the Company recognized $38.0 million of restructuring charges
related to severance and exit costs. Severance costs of $36.0 million primarily
included the planned consolidation of the European friction business and the
January 2001 salaried employee reductions in North America and Europe. Total
employee reductions are expected to be approximately 1,000 of which 750 have
been terminated as of December 31, 2001. Exit costs of $2.0 million are
primarily comprised of planned consolidation of the European friction business.
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. As part of the 2000
restructuring plan approximately 1,400 employees have been severed and 30
facilities have been closed or consolidated
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. Exit costs of $2.1
million were related to the closing of the Company's Milan plant and French
bearing operations. Approximately 250 employees have been severed in connection
with the 1999 restructuring plan.
37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
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.
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 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 $3.7 million and $10.7 million related to these
rationalization reserves in 2001 and 2000, respectively. Also during 2001 and
2000, the Company made adjustments to reduce the rationalization reserves, with
an offsetting amount to goodwill, of $2.0 million, and $1.6 million,
respectively. As of December 31, 2001, remaining rationalization reserves were
$12.8 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 2002.
The following is a summary of restructuring and rationalization charges and
related activity for 2001, 2000 and 1999 (in millions of dollars):
Restructuring Rationalization
--------------- ---------------
Severance Exit Severance Exit Total
--------- ----- --------- ----- ------
Balance of reserves at January 1, 1999................ $ 23.1 $ 4.8 $124.6 $26.4 $178.9
1999 provision..................................... 11.1 2.1 -- -- 13.2
Adjustment to reserves............................. (10.1) (3.1) (39.8) (8.1) (61.1)
------ ----- ------ ----- ------
1999 charges (net).................................... 1.0 (1.0) (39.8) (8.1) (47.9)
Payments and charges against reserves................. (10.3) (1.9) (69.6) (3.2) (85.0)
------ ----- ------ ----- ------
Balance of reserves at December 31, 1999.............. 13.8 1.9 15.2 15.1 46.0
2000 provision........................................ 105.8 29.9 -- -- 135.7
Payments and charges against reserves................. (55.4) (6.1) (12.2) (0.1) (73.8)
------ ----- ------ ----- ------
Balance of reserves at December 31, 2000.............. 64.2 25.7 3.0 15.0 107.9
2001 provision........................................ 36.0 2.0 -- -- 38.0
------ ----- ------ ----- ------
Payments and charges against restructuring reserves... (51.6) (8.0) -- (5.2) (64.8)
------ ----- ------ ----- ------
Balance of restructuring reserves at December 31, 2001 $ 48.6 $19.7 $ 3.0 $ 9.8 $ 81.1
====== ===== ====== ===== ======
5. Adjustment of Assets to Fair Value
Concurrent with the Company's on-going planning process, the Company
performed an impairment assessment of its long-lived assets in accordance with
SFAS No. 121 "Accounting for the Impairment of Long-Lived Assets and Assets to
be Disposed of" during the third quarter of 2001. The Company's impending
38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
Restructuring Proceedings and recent operating losses were indicators of
impairment as provided by SFAS No. 121. The Company determined that the
undiscounted cash flows of certain of its non-core operating units, from its
Other and Powertrain segments, were less than the carrying value of the
long-lived assets of those operating units. Accordingly, the Company adjusted
the carrying value of those assets to their fair value resulting in an
impairment charge of $497.3 million. Additionally, in the fourth quarter, the
Company recorded an impairment charge of $37.8 million for an insolvent
business unit in the United Kingdom and $10.0 million for operations located in
Argentina as a result of the current economic development in that country. The
fair value was determined by anticipated future cash flows discounted at a rate
commensurate with the risk involved. The following is a summary of the
impairment charge by long-lived asset (in millions):
Goodwill..................... $259.7
Other intangible assets...... 74.3
Property, plant and equipment 211.1
------
$545.1
======
In 2000, the Company recorded a $75.4 million impairment charge primarily
associated with the actions of the 2000 restructuring program. Included in this
impairment 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.
6. Debt
Long-term debt at December 31 consists of the following:
2001 2000
------ --------
(Millions of Dollars)
DIP Credit Facility.................................................. $250.0 $ --
Senior Credit Agreements:
Term loans........................................................ -- 706.0
Multi-currency revolving credit facility.......................... -- 744.5
Notes due 2004 -- 7.5%, issued in 1998............................... -- 249.7
Notes due 2006 -- 7.75%, issued in 1998.............................. -- 399.9
Notes due 2006 -- 7.375%, issued in 1999............................. -- 398.8
Notes due 2009 -- 7.5%, issued in 1999............................... -- 597.9
Notes due 2010 -- 7.875%, issued in 1998............................. -- 349.3
Medium-term notes -- due between 2002 and 2005, average rate of 8.8%,
issued in 1994 and 1995............................................ -- 84.0
Senior notes -- due in 2007, rate of 8.8%, issued in 1997............ -- 124.7
Other................................................................ 41.6 36.6
------ --------
291.6 3,691.4
Less current maturities included in short-term debt.................. 4.5 131.7
------ --------
$287.1 $3,559.7
====== ========
39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
Due to the Restructuring Proceedings (see Note 1), pre-petition long-term
debt of the Debtors has been reclassified to the caption Liabilities Subject to
Compromise on the consolidated balance sheet. For comparative purposes, the
amounts have been included in the table above. The following is the Long-Term
Debt included in Liabilities Subject to Compromise at December 31, 2001 (in
millions):
Senior Credit Agreements:
Term loans........................................................ $ 788.5
Multi-currency revolving credit facility.......................... 1,113.4
Notes due 2004 -- 7.5%, issued in 1998............................... 239.8
Notes due 2006 -- 7.75%, issued in 1998.............................. 391.9
Notes due 2006 -- 7.375%, issued in 1999............................. 394.0
Notes due 2009 -- 7.5%, issued in 1999............................... 562.2
Notes due 2010 -- 7.875%, issued in 1998............................. 340.4
Medium-term notes -- due between 2002 and 2005, average rate of 8.8%,
issued in 1994 and 1995............................................ 84.0
Senior notes -- due in 2007, rate of 8.8%, issued in 1997............ 103.3
Other................................................................ 3.4
--------
4,020.9
Less: debt issuance fees............................................. (49.5)
--------
Total debt included in Liabilities Subject to Compromise............. $3,971.4
========
The Company entered into a DIP credit facility in the aggregate amount of
$675.0 million, under which it has borrowed $250 million as of December 31,
2001. The Company had $285 million available to borrow under the DIP credit
facility at December 31, 2001. The DIP credit facility expires in October, 2003
and bears interest at either alternate base rate ("ABR") plus 2.5 percentage
points or a formula based on the London Inter-Bank Offered Rate ("LIBOR") plus
3.5 percentage points. The ABR is the greatest of either Chase's prime rate or
the base CD rate plus 1 percentage point or the fed funds rate plus 1/2
percentage point.
The Company provided collateral in the form of a pledge of its domestic
inventories, domestic accounts receivable, domestic plant, equipment and real
property, and its domestic intellectual property to the DIP lenders. The DIP
lenders received permission from the lenders of the Senior Credit Agreements to
have priority over their collateral interest.
The DIP credit facility contains restrictive covenants. The more significant
of these covenants include the maintenance of certain levels of EBITDA and
limitation on quarterly capital expenditures. Additional covenants include, but
are not limited to, limitations on the early retirement of debt, additional
borrowings, payment of dividends and the sale of assets or businesses.
In accordance with SOP 90-7, the Company stopped recording interest expense
on its outstanding Notes, Medium-term notes, and Senior notes effective October
1, 2001. The Company's contractual interest not accrued or paid in 2001 was
$41.6 million. The Company continues to accrue and pay the contractual interest
on the Senior Credit Agreement in the month incurred in the amount of $9.3
million.
Additionally, the Company has agreed to pay, with the approval of the
Bankruptcy Court, $10.0 million annually to the holders of the Company's bonds.
The amount is paid quarterly in equal installments during the time in which the
plan of reorganization is being developed. Amounts paid under this arrangement
will be credited against any final settlement when the plan of reorganization
is approved.
40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
At December 31, 2001, the Company had approximately $80.5 million of letters
of credit available under the terms of its DIP credit facility. To the extent
such letters of credit are utilized, there is a corresponding decrease in
borrowings available under the DIP credit facility.
During 2001, the Company completed a series of debt to equity exchanges of
its public bonds. As a result of these exchanges, the Company issued 9.6
million shares in aggregate of its common stock to the holders of $89.5 million
face value of various notes. These exchanges resulted in an extraordinary gain
of $72.2 million. The Company did not provide tax expense on these gains due as
the Company did not provide a tax benefit on its 2001 operating losses in the
U.S.
In December 2000, the Company executed its fourth amended and restated
credit agreement, ("Senior Credit Agreements"). In addition to the pledge of
capital stock described below, the Company provided collateral in the form of a
grant of a security interest in its domestic inventories, domestic accounts
receivable not otherwise sold under securitizations, domestic plant, equipment
and real property, and its domestic intellectual property.
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").
In February 1999, the Company entered into a $1.75 billion senior credit
agreement at variable interest rates, which contained a $1 billion multi
currency 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.
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 weighted average interest rate for the Company's short-term debt was
approximately 6.04% and 6.88% as of December 31, 2001 and 2000, respectively.
Interest paid in 2001, 2000 and 1999 was $328.0 million, $273.9 million and
$240.3 million, respectively.
7. Financial Instruments
Foreign Currency Risk
Certain forecasted transactions and recorded transactions and assets and
liabilities are exposed to foreign currency risk. The Company monitors its
foreign currency exposures daily to maximize the overall effectiveness of its
foreign currency hedge positions. Principal currencies hedged include the Euro,
British pound, Japanese yen and Canadian dollar. Options used to hedge a
portion of forecasted transactions, for up to twelve months in the future, are
designated as cash flow hedging instruments. Options and forwards used to hedge
certain booked transactions and assets and liabilities are not designated as
hedging instruments under SFAS 133 as they are natural hedges. The effect of
changes in the fair value of these hedges and the underlying exposures are
recognized in earnings each period. These hedges were highly effective and
their impact on earnings was not significant during 2001. The Company did not
have any outstanding foreign currency derivatives as of December 31, 2001.
41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
Commodity Price Risk
The Company is dependent upon the supply of certain raw materials in its
production processes; these raw materials are exposed to price fluctuations on
the open market. The primary purpose of the Company's commodity price hedging
activities is to manage the volatility associated with these forecasted
purchases. The Company monitors its commodity price risk exposures periodically
to maximize the overall effectiveness of its commodity forward contracts.
Principal raw materials hedged include copper, nickel, lead, high-grade
aluminum and aluminum alloy. Forward contracts used to hedge raw materials for
up to eighteen months in the future are designated as cash flow hedging
instruments. These instruments are intended to offset the effect of changes in
raw materials prices on forecasted purchases. The Company did not have any
outstanding commodity hedges as of December 31, 2001.
Other
For options designated either as fair value or cash flow hedges, changes in
the time value are excluded from the assessment of hedge effectiveness. Hedge
ineffectiveness, determined in accordance with SFAS 133, did not have a
material effect on operations for 2001. No fair value hedges or cash flow
hedges were re-designated or discontinued during 2001.
For 2001, other expense, net included a $0.2 million net gain comprised of
$6.8 million of net losses and $7.0 million of net gains on fair value of
derivatives not designated as hedging instruments.
Derivative gains and losses included in OCI are reclassified into operations
at the time forecasted transactions are recognized. During 2001 derivative
losses of $1.0 million were reclassified to cost of goods sold. As a result of
the Restructuring Proceedings the Company's forward contracts were canceled and
the Company recorded $0.8 million as a Chapter 11 and Administration related
expense in October 2001.
Accounts Receivable Securitization
Through September 30, 2001, the Company sold certain accounts receivable to
Federal-Mogul Funding Corporation ("FMFC"), a special purpose wholly-owned
subsidiary of the Company, which then sold such receivables, without recourse,
to a financial conduit owned by BankOne and Wachovia Bank. Amounts excluded
from the consolidated balance sheets under these arrangements were $348.1
million at December 31, 2000. The Company's retained interest in the accounts
receivable sold to FMFC is included in the consolidated balance sheet at
December 31, 2000 under the caption "Investment in Accounts Receivable
Securitization".
On October 1, 2001, FMFC notified BankOne and Wachovia Bank that an
Amortization Event, as defined in the accounts receivable securitization
agreement, had occurred effective with the U.S. Restructurings. As a result,
transfers of receivables ceased and the securitization facility was
subsequently repaid with borrowing from the DIP credit facility as approved by
the Bankruptcy Court. At December 31, 2001, there was no such accounts
receivable securitization program.
For the years ended December 31, 2001 and 2000, the Company, at the point of
sale, assumed a discount rate of 1.6%. The following table summarizes the cash
flow movements between FMFC and the Company:
2001 2000
-------- --------
(Millions of Dollars)
Proceeds from accounts receivable sales............... $2,359.2 $3,773.8
Servicing fees received............................... 3.7 3.8
Loss on sales of accounts receivable.................. (37.5) (58.8)
Payments received on investment in accounts receivable 260.0 251.9
42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
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 cash 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 $61.3 million and $66.5
million at December 31, 2001 and 2000, respectively, is based upon the expected
collectability of trade accounts receivable.
Fair Value of Financial Instruments
At December 31, 2001 and 2000, the carrying amounts of certain financial
instruments such as cash and equivalents, accounts receivable, accounts
payable, and borrowings under the DIP credit facility approximate their fair
values. The fair value of financial instruments included in Liabilities subject
to compromise are highly uncertain as a result of the Restructuring Proceedings.
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, 2001, 2000 and
1999, was $248.5 million, $248.4 million and $221.4 million, respectively.
At December 31, property, plant and equipment consisted of the following:
Estimated
Useful Life 2001 2000
----------- -------- --------
(Millions of Dollars)
Land............................... -- $ 115.8 $ 121.8
Buildings and building improvements 24-40 years 492.3 503.5
Machinery and equipment............ 3-12 years 2,325.4 2,442.2
-------- --------
2,933.5 3,067.5
Accumulated depreciation........... (769.8) (678.7)
-------- --------
$2,163.7 $2,388.8
======== ========
Future minimum payments under noncancelable operating leases with initial or
remaining terms of more than one year are, in millions: 2002 -- $42.4; 2003 --
$34.8; 2004 -- $30.6; 2005 -- $21.0, 2006 -- $16.0 and thereafter $25.0.
Total rental expense under operating leases for the years ended December 31,
2001, 2000 and 1999 was $48.2 million, $54.0 million and $52.6 million,
respectively, exclusive of property taxes, insurance and other occupancy costs
generally payable by the Company.
43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
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 82,369,934 shares, 70,619,319
shares and 70,422,525 shares were outstanding at December 31, 2001, 2000 and
1999, respectively.
The Series C ESOP Convertible Preferred Stock shares of stock were 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 439,937, 597,691 and 701,758 shares of Series
C ESOP preferred stock outstanding at December 31, 2001, 2000 and 1999,
respectively. The Series C ESOP preferred shares paid dividends at a rate of
7.5% until 2001. As a result of the Restructuring Proceedings, the payment of
dividends was stopped. The Company repurchased and retired 157,751, 101,010 and
28,549 Series C ESOP preferred shares valued at $10.1 million, $6.5 million and
$2.9 million during 2001, 2000 and 1999, 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
and $5.5 million in 1999. No charge was made in 2001. The Company made cash
contributions to the plan of $8.3 million in 2000 and $8.2 million in 1999,
including preferred stock dividends of $3.1 million in 2000 and $3.4 million in
1999. No cash contributions were made to the plan in 2001. 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 439,937 and none at December 31, 2001, 597,691 and none at
December 31, 2000 and 621,088 and 80,670 at December 31, 1999, respectively.
There were no committed-to-be-released shares at December 31, 2001, 2000 and
1999. 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
Agreement at any time without shareholder approval.
On October 4, 2001, in connection with the Restructuring Proceedings, the
Company received notice from the New York Stock Exchange (the "Exchange") that
it was in violation of the Exchange's minimum trading price listing criteria.
The Company has been granted six months to correct the violation or the
Exchange could initiate delisting proceedings against the Company. The Company
cannot provide any assurance whether its stock price will comply with the
Exchange's listing criteria. In the event the Company's shares are delisted
from the Exchange, the Company anticipates that shares would continue to trade
in the NASD over-the-counter bulletin board market.
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
44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
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 are due 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 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. In 2001, the holders of the TCP Securities
redeemed 2,186,602 shares into 2,122,972 shares of common stock. The effect was
an increase to common stock of approximately $10.6 million and an increase to
paid in capital of approximately $96.4 million.
As a result of the Restructuring Proceedings, the Company is in default to
its affiliate holder of its convertible junior subordinated debentures and is
no longer accruing interest expense or making interest payments on the
debentures. As a result, the affiliate no longer has the funds available to pay
distributions on the Company-Obligated Mandatorily Redeemable Preferred
Securities and stopped paying such distributions in October 2001. The affiliate
is in default on the the Company-Obligated Mandatorily Redeemable Preferred
Securities. The Company is a guarantor of its subsidiaries debentures, and has
classified these debentures as Liabilities Subject to Compromise in the
December 31, 2001 consolidated balance sheet.
45
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):
2001 2000 1999
--------- ------- ------
Numerator:
Net earnings (loss)............................................................. $(1,001.5) $(281.5) $243.2
Extraordinary items -- (gain) loss on early retirement of debt, net of
applicable tax benefits....................................................... (72.2) -- 23.1
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....................................................... (1,073.7) (281.5) 279.0
Series C preferred dividend requirement......................................... (1.9) (2.0) (2.2)
Series E preferred dividend requirement......................................... -- -- (0.2)
--------- ------- ------
Numerator for basic earnings (loss) per share -- income available to
common shareholders before extraordinary items and cumulative effect of
change in accounting principle................................................ $(1,075.6) $(283.5) $276.6
Effect of dilutive securities:..................................................
Series C preferred dividend requirement..................................... -- -- 2.2
Series E preferred dividend requirement..................................... -- -- 0.2
Minority interest -- preferred securities of an affiliate................... -- -- 25.4
Additional required ESOP contribution....................................... -- -- (2.2)
--------- ------- ------
Numerator for diluted earnings (loss) per share -- income available to
common shareholders after assumed conversions, before extraordinary
items and cumulative effect of change in accounting principle................. $(1,075.6) $(283.5) $302.2
Numerator for basic earnings (loss) per share -- income available to
common shareholders after extraordinary items and cumulative effect of
change in accounting principle................................................ $(1,075.6) $(283.5) $240.8
Numerator for diluted earnings (loss) per share -- income available to
common shareholders after extraordinary items and cumulative effect of
change in accounting principle................................................ $(1,075.6) $(283.5) $266.4
Denominator:
Denominator for basic earnings per share -- weighted average shares............. 75.6 70.5 69.8
Effect of dilutive securities:..................................................
Dilutive stock options outstanding.......................................... -- -- 0.5
Nonvested stock............................................................. -- -- 0.1
Conversion of Series C preferred stock...................................... -- -- 1.4
Conversion of Series E preferred stock...................................... -- -- 0.5
Conversion of Company-obligated mandatorily redeemable preferred
securities................................................................ -- -- 11.2
Contingently issuable shares of common stock................................ -- -- 0.7
--------- ------- ------
Dilutive potential common shares................................................ -- -- 14.4
--------- ------- ------
Denominator for dilutive earnings per share -- adjusted weighted average
shares and assumed conversions................................................ 75.6 70.5 84.2
--------- ------- ------
Basic earnings (loss) per share before extraordinary items and cumulative effect
of change in accounting principle................................................ $ (14.23) $ (4.02) $ 3.96
========= ======= ======
Basic earnings (loss) per share after extraordinary items and cumulative effect of
change in accounting principle................................................... $ (13.27) $ (4.02) $ 3.44
========= ======= ======
Diluted earnings (loss) per share before extraordinary items and cumulative effect
of change in accounting principle................................................ $ (14.23) $ (4.02) $ 3.59
========= ======= ======
Diluted earnings (loss) per share after extraordinary items and cumulative effect
of change in accounting principle................................................ $ (13.27) $ (4.02) $ 3.16
========= ======= ======
46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
The effect of the assumed conversion of the Preferred Stock was not
considered in 2001 or 2000 as its effect was anti-dilutive to the loss per
share.
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, 2001, there were 1,011,239 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 $0.4 million, $0.8 million and $1.4 million in
2001, 2000 and 1999, 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 SFAS No.
123 "Accounting for Stock Based Compensation", the Company's net earnings
(loss), in millions, and earnings (loss) per share would have been adjusted to
the pro forma amounts indicated below:
2001 2000 1999
--------- ------- ------
(Millions of Dollars, Except
Per Share Amounts)
Net earnings (loss) as reported.............. $(1,001.5) $(281.5) $243.2
Pro forma.................................... $(1,014.8) $(296.4) $230.3
Basic earnings (loss) per share as reported.. $ (13.27) $ (4.02) $ 3.44
Pro forma.................................... $ (13.44) $ (4.24) $ 3.27
Diluted earnings (loss) per share as reported $ (13.27) $ (4.02) $ 3.16
Pro forma.................................... $ (13.44) $ (4.24) $ 3.01
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 2001, 2000 and 1999, respectively: risk-free
interest rates of 5.5%, 5.0% and 6.2%; dividend yields of 0.00%, 0.03% and
0.03%; volatility factors of the expected market price of the Company's common
stock of 113.0%, 75.2% and 48.0% 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 $2.71, $7.13 and $16.81, and 0.3, 0.3 and 2.7 for 2001,
2000 and 1999 respectively. The weighted-average fair value and total
47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
number (in millions) of nonvested stock awards granted was $11.56 and 0.1 for
2000. There were no stock awards granted in 2001 and 1999. All options and
stock awards that are not vested at December 31, 2001, 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, 1999.............. 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 granted.......................... 0.3 3.18
Options/stock lapsed or canceled......... (0.2) 22.33
---- ------
Outstanding at December 31, 2001............ 4.4 $35.61
==== ======
Options exercisable at December 31, 2001. 2.4 $36.02
==== ======
Options exercisable at December 31, 2000. 1.5 $37.55
==== ======
Options exercisable at December 31, 1999. 0.9 $31.04
==== ======
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,
2001:
Weighted-Average
----------------
Outstanding Options Remaining
Range Awards Exercisable Price Life
----- ----------- ----------- ------ ---------
(In Millions)
Options:
$0.65 - $14.56.. 0.7 0.2 $ 6.77 4.5 years
$14.57 - $26.50. 1.3 0.8 $20.86 2.1 years
$26.51 - $47.25. 1.7 1.0 $43.58 1.6 years
$47.26 - $70.69. 0.7 0.4 $58.84 2.0 years
--- ---
Total....... 4.4 2.4
=== ===
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.
48
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
---------------------- ------------------- -------------------------
2001 2000 1999 2001 2000 1999 2001 2000 1999
------ ------ ------ ----- ----- ------ ------- ------- -------
(Millions of Dollars)
Service cost................... $ 24.9 $ 29.7 $ 26.4 $ 2.7 $ 3.1 $ 4.7 $ 21.3 $ 21.9 $ 26.8
Interest cost.................. 56.8 54.7 51.0 34.7 33.3 31.0 116.9 116.9 112.0
Expected return on plan assets. (75.9) (85.4) (79.8) -- -- -- (151.8) (166.6) (144.8)
Net amortization and deferral.. 2.6 (6.1) (3.0) 0.1 (1.1) (2.7) 5.7 (2.6) 9.2
Settlement and curtailment loss
(gain)....................... 1.5 0.6 0.1 -- -- (12.5) -- (0.4) (3.1)
------ ------ ------ ----- ----- ------ ------- ------- -------
Net periodic (benefit) cost.... $ 9.9 $ (6.5) $ (5.3) $37.5 $35.3 $ 20.5 $ (7.9) $ (30.8) $ 0.1
====== ====== ====== ===== ===== ====== ======= ======= =======
United States Plans International Plans
Change in benefit obligation: ------------------------------- ------------------
Pension Benefits Other Benefits Pension Benefits
--------------- -------------- ------------------
2001 2000 2001 2000 2001 2000
------ ------ ------ ------ -------- --------
(Millions of Dollars)
Benefit obligation at beginning of year................. $744.7 $728.9 $454.4 $424.9 $1,865.5 $2,060.2
Service cost............................................ 24.9 29.7 2.7 3.1 21.3 21.9
Interest cost........................................... 56.8 54.7 34.7 33.3 116.9 116.9
Employee contributions.................................. -- -- -- -- 6.2 6.6
Benefits paid........................................... (63.4) (60.9) (38.2) (39.0) (109.1) (137.5)
Plan amendments......................................... 38.9 13.9 -- -- -- --
Actuarial (gains) and losses and changes in actuarial
assumptions........................................... 19.2 (20.4) 23.2 32.1 (12.1) (47.6)
Settlements and curtailments............................ (2.3) (1.2) -- -- -- (0.4)
Currency translation adjustment......................... -- -- -- -- (54.1) (154.6)
------ ------ ------ ------ -------- --------
Benefit obligation at end of year....................... $818.8 $744.7 $476.8 $454.4 $1,834.6 $1,865.5
====== ====== ====== ====== ======== ========
United States Plans International Plans
Change in plan assets: --------------------------------- ------------------
Pension Benefits Other Benefits Pension Benefits
--------------- ---------------- ------------------
2001 2000 2001 2000 2001 2000
------- ------ ------- ------- -------- --------
(Millions of Dollars)
Fair value of plan assets at beginning of year... $ 852.5 $805.6 $ -- $ -- $2,084.0 $2,185.0
Actual return on plan assets..................... (104.4) 99.6 -- -- (306.0) 186.0
Company contributions............................ 1.8 10.7 -- -- 19.1 16.2
Benefits paid.................................... (63.4) (60.9) -- -- (100.9) (137.5)
Settlements and curtailments..................... (0.4) (2.5) -- -- -- --
Currency translation adjustment.................. -- -- -- -- (56.7) (165.7)
------- ------ ------- ------- -------- --------
Fair value of plan assets at end of year......... $ 686.1 $852.5 $ -- $ -- $1,639.5 $2,084.0
======= ====== ======= ======= ======== ========
Funded status of the plan........................ $(132.7) $107.8 $(476.8) $(454.4) $ (195.1) $ 218.5
Unrecognized net asset at transition............. -- 0.1 -- -- -- --
Unrecognized net actuarial (gain) loss........... 119.4 (83.4) 35.1 13.2 328.6 (115.1)
Unrecognized prior service cost.................. 78.4 48.7 (1.3) (1.8) -- --
------- ------ ------- ------- -------- --------
Prepaid (accrued) benefit cost................... $ 65.1 $ 73.2 $(443.0) $(443.0) $ 133.5 $ 103.4
======= ====== ======= ======= ======== ========
49
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
Weighted-average assumptions as of December 31:
United States Plans International Plans
---------------------------- ------------------
Pension Benefits Other Benefits Pension Benefits
--------------- ----------- ------------------
2001 2000 2001 2000 2001 2000
---- ---- ---- ---- ---- ----
(Millions of Dollars)
Discount rate................. 7.5% 8% 7.5% 8% 6% 6.75%
Expected return on plan assets 10% 10% -- -- 7.5% 8.5 %
Rate of compensation increase. 3% 5% -- -- 2.5% 2.5%
Amounts applicable to the Company's pension plans with accumulated benefit
obligations in excess of plan assets are as follows:
United States
Plans International Plans
------------- -------------------
2001 2000 2001 2000
------ ----- ------ ------
(Millions of Dollars)
Projected benefit obligation.. $818.8 $28.6 $230.8 $154.5
Accumulated benefit obligation 800.9 25.0 222.1 151.3
Fair value of plan assets..... 686.1 -- 66.1 0.3
Amounts recognized in the balance sheet consist of:
Pension Benefits Other Benefits
--------------- ----------------
2001 2000 2001 2000
------- ------ ------- -------
(Millions of Dollars)
Prepaid (accrued) benefit cost $ 198.6 $176.6 $(443.0) $(443.0)
Additional minimum liability.. (205.9) (22.2) -- --
Intangible asset.............. 74.1 17.5 -- --
Other comprehensive loss...... 124.0 3.1 -- --
------- ------ ------- -------
Net amount recognized......... $ 190.8 $175.0 $(443.0) $(443.0)
======= ====== ======= =======
At December 31, 2001, the assumed annual health care cost trend used in
measuring the ABO approximated 7.5%, declining to 7.3% in 2002 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 ABO by
approximately 9.6% and 9.7% at December 31, 2001 and 2000, respectively.
Aggregate service and interest costs would have increased by approximately
10.2%, 10.2% and 10.4% for 2001, 2000 and 1999, respectively.
During 2000, the Company consolidated all domestic qualified defined benefit
plans into one plan, the Federal Mogul Corporation Pension Plan. The
consolidated plan assets exceed the accumulated benefit obligation for
qualified plans. Future pension obligations may 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
million, net of applicable taxes.
50
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
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:
2001 2000 1999
------- ------- ------
(Millions of Dollars)
Domestic..... $(347.5) $(125.6) $237.8
International (506.7) (136.7) 222.1
------- ------- ------
$(854.2) $(262.3) $459.9
======= ======= ======
Significant components of the provision for income taxes (tax benefit) are
as follows:
2001 2000 1999
------ ------ ------
(Millions of Dollars)
Current:
Federal................ $(14.6) $ -- $ 49.3
State and local........ 6.6 8.5 11.6
International.......... 41.4 14.9 45.7
------ ------ ------
Total current...... 33.4 23.4 106.6
Deferred:
Federal................ 148.5 19.6 29.2
State and local........ 1.8 (1.1) (2.1)
International.......... 35.8 (22.7) 47.2
------ ------ ------
Total deferred..... 186.1 (4.2) 74.3
------ ------ ------
$219.5 $ 19.2 $180.9
====== ====== ======
The reconciliation of income taxes computed at the United States federal
statutory tax rate to income tax expense is:
2001 2000 1999
------- ------ ------
(Millions of Dollars)
Income taxes (benefits) at United States statutory rate $(299.0) $(91.8) $161.0
Tax effect from:
State income taxes.................................. 5.5 7.4 9.5
Foreign tax rate changes............................ -- (18.7) --
Foreign operations.................................. 45.6 29.3 6.4
Goodwill amortization............................... 25.7 28.6 28.1
Goodwill Impairment................................. 82.6 -- --
Divestitures........................................ 60.1 -- (4.7)
Valuation allowance................................. 302.2 63.5 (21.4)
Tax credits and other............................... (3.2) 0.9 2.0
------- ------ ------
$ 219.5 $ 19.2 $180.9
======= ====== ======
51
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
The following table summarizes the Company's total provision for income
taxes/(tax benefit) by component:
2001 2000 1999
------ ------ ------
(Millions of Dollars)
Income tax expense............................................... $219.5 $ 19.2 $180.9
Extraordinary items and cumulative effect of change in accounting
principle...................................................... 25.3 -- (20.3)
Valuation allowance reduction................................. (25.3) -- --
Allocated to equity:
Currency translation.......................................... 2.7 (12.9) --
Preferred dividends........................................... -- (1.0) (1.2)
Incentive stock plans......................................... -- -- (0.3)
TCP Securities conversion and other........................... 36.8 0.5 (0.1)
Pension....................................................... (43.2) (4.7) (4.5)
Valuation allowance........................................... 0.3 -- --
------ ------ ------
$216.1 $ 1.1 $154.5
====== ====== ======
Significant components of the Company's deferred tax assets and liabilities
as of December 31 are as follows:
2001 2000
-------- ---------
(Millions of Dollars)
Deferred tax assets:
Asbestos................................ $ 468.2 $ 551.7
Tax credits............................. 144.7 137.7
Postemployment benefits................. 167.9 166.6
Net operating loss carryforwards........ 261.2 247.1
Other temporary differences............. 255.2 195.6
-------- ---------
Total deferred tax assets........... 1,297.2 1,298.7
Valuation allowance for deferred tax assets (496.8) (219.6)
-------- ---------
Net deferred tax assets................. 800.4 1,079.1
Deferred tax liabilities:
Fixed assets............................ (273.1) (306.8)
Intangible assets....................... (174.7) (268.1)
Asbestos insurance...................... (250.0) (255.1)
Deferred gains.......................... (116.0) (118.8)
Pensions................................ (54.0) (83.8)
-------- ---------
Total deferred tax liabilities...... (867.8) (1,032.6)
-------- ---------
$ (67.4) $ 46.5
======== =========
52
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
Deferred tax assets and liabilities are recorded in the consolidated balance
sheets as follows:
2001 2000
------ -------
(Millions of Dollars)
Assets:
Deferred taxes...................... $ 55.4 $ 171.6
Other noncurrent assets............. 3.7 7.2
Liabilities:
Other current accrued liabilities... (30.0) (29.4)
Other long-term accrued liabilities. (96.5) (102.9)
------ -------
$(67.4) $ 46.5
====== =======
Income taxes paid (net of any refunds) in 2001, 2000, and 1999 were $32.5
million, $46.0 million and $87.5 million, respectively.
The 2001 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 $479.2 million of undistributed earnings at
December 31, 2001, since these earnings are considered by the Company to be
permanently reinvested. Upon distribution of these earnings, the Company may 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, 2001 the Company had $775.0 million in net operating loss
carryforwards, including $85.0 million in the United States that expire in
various amounts from 2013 to 2020 with a full valuation allowance and $466.0
million in the United Kingdom with no expiration date or valuation allowance.
Also, the Company has $224.0 million of additional foreign net operating loss
carryforwards with a full valuation allowance and various expiration dates.
Included in the previous amounts are $137.0 million of net operating loss
carryforwards acquired with the purchases of T&N, Cooper Automotive and
Fel-Pro. A valuation allowance was recorded on $63.0 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 Reportable Segment and Geographic Area
The segment information has been restated to reflect the Company's internal
organization changes in 2001. The Company is a global manufacturer with six
reportable segments: Powertrain; Sealing Systems and Systems Protection;
Friction; Aftermarket; Other; and Divested Operations.
Powertrain products are used primarily in automotive, light truck, heavy
duty, industrial, marine, agricultural, power generation and small air-cooled
engine applications. The primary products of this reportable segment include
engine bearings, pistons, piston pins, rings, cylinder liners, camshafts,
sintered products, and connecting rods.
Sealing Systems and Systems Protection products are used in automotive,
light truck, heavy duty, agricultural, off-highway, marine, railroad, high
performance and industrial applications. The primary products of this
reportable segment include dynamic seals, gaskets and systems protection
products which include element resistant sleeving products.
Friction products are used in automotive and heavy duty applications. The
primary products of this reportable segment unit include discs, pads and brake
shoes.
53
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
Aftermarket provides products from the above segments to the independent
automotive and heavy duty aftermarkets as well as the manufacturing operations
of North American brake, chassis, ignition, fuel and wipers.
Other includes the non-core businesses of lighting, European wipers &
ignition manufacturing, as well as Asia Pacific and Corporate functions.
Divested operations include the historical operating results of the
Company's divestitures in Note 3 and certain operation divested in 2000.
The Company has aggregated individual product segments within its six
reportable segments. The accounting policies of the segments are the same as
that of the Company. The Company evaluates segment performance based on several
factors, including Operational EBIT and major cash flow drivers. Operational
EBIT is defined as earnings before interest, income taxes, extraordinary items
and certain nonrecurring items such as restructuring and impairment charges,
Chapter 11 and Administration related reorganization expenses, asbestos
charges, and losses on the sales of businesses. Operational EBIT for each
segment is shown below, as it is most consistent with the corresponding
condensed consolidated financial statements (in millions).
Net Sales Operational EBIT
-------------------- ------------------
2001 2000 1999 2001 2000 1999
------ ------ ------ ----- ----- ----
(Millions of Dollars)
Powertrain............................ $1,640 $1,722 $1,766 $ 108 $ 134 $269
Sealing Systems and Systems Protection 588 682 712 20 64 115
Friction.............................. 336 385 487 4 27 91
Aftermarket........................... 2,427 2,575 2,761 258 336 409
Other, including Corporate............ 368 430 428 (276) (139) (98)
Divested Operations................... 98 219 334 7 37 49
------ ------ ------ ----- ----- ----
Total................................. $5,457 $6,013 $6,488 $ 121 $ 459 $835
====== ====== ====== ===== ===== ====
2001 2000 1999
----- ----- -----
(Millions of Dollars)
Reconciliation:
Total segments operational EBIT...................................... $ 121 $ 459 $ 835
Net interest and other financing costs............................... (305) (326) (309)
Restructuring, impairment and other special charges.................. (619) (395) (8)
Acquisition-related costs............................................ -- -- (58)
Chapter 11 and Administration related reorganization costs........... (51) -- --
----- ----- -----
Earnings (loss) before income taxes, extraordinary items and
cumulative effect of change in accounting principle............ $(854) $(262) $ 460
===== ===== =====
Depreciation and
Total Assets Capital Expenditures Amortization
------------- -------------------- ----------------
2001 2000 2001 2000 1999 2001 2000 1999
------ ------ ---- ---- ---- ---- ---- ----
(Millions of Dollars)
Powertrain................. $2,728 $2,733 $165 $151 $188 $135 $129 $ 98
Sealing Systems and Systems
Protection............... 1,032 1,290 36 40 66 53 54 37
Friction................... 399 529 46 38 30 47 57 33
Aftermarket................ 3,360 3,065 33 30 47 73 56 65
Other, including Corporate. 1,430 1,869 33 53 51 60 68 113
Divested Operations........ 104 345 1 4 13 6 10 9
------ ------ ---- ---- ---- ---- ---- ----
Total............... $9,053 $9,831 $314 $316 $395 $374 $374 $355
====== ====== ==== ==== ==== ==== ==== ====
54
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
The following table shows geographic information as of December 31:
Net Property,
Plant and
Net Sales Equipment
-------------------- -------------
2001 2000 1999 2001 2000
------ ------ ------ ------ ------
(Millions of Dollars)
United States.... $3,123 $3,685 $3,922 $ 971 $1,231
United Kingdom... 426 501 533 286 324
Germany.......... 627 812 630 374 366
France........... 345 272 303 165 117
Other............ 936 743 1,100 368 351
------ ------ ------ ------ ------
Total..... $5,457 $6,013 $6,488 $2,164 $2,389
====== ====== ====== ====== ======
16. Litigation and Environmental Matters
T&N Companies Asbestos Litigation
Background:
The Company's U.K. subsidiary, T&N Ltd., and two U.S. subsidiaries (the "T&N
Companies") are among many defendants named in numerous court actions in the
U.S. alleging personal injury resulting from exposure to asbestos or
asbestos-containing products. T&N Ltd. is also subject to asbestos-disease
litigation, to a lesser extent, in the United Kingdom and France. As of the
Petition Date, T&N Ltd. was a defendant in approximately 91,000 pending
personal injury claims. The two United States subsidiaries were defendants in
approximately 172,000 pending personal injury claims.
Recorded Liability:
In 2000, the Company increased its estimate of asbestos-related liability
for the T&N Companies by $751 million and recorded a related insurance
recoverable asset of $577 million. The revision in the estimate of probable
asbestos-related liability principally resulted from a study performed by an
econometric firm that specializes in these types of matters. The liability
(approximately $1.3 billion at December 31, 2001) represented the Company's
estimate prior to the Restructuring Proceedings for claims currently pending
and those which were reasonably estimated to be asserted and paid through 2012.
The Company did not provide a liability for claims that may be paid subsequent
to this period as it could not reasonably estimate such claims. In estimating
the liability prior to the Restructuring Proceedings, the Company made
assumptions regarding the total number of claims anticipated to be received in
a future period, the typical cost of settlement (which is sensitive to the
industry in which the plaintiff claims exposure, the alleged disease type and
the jurisdiction in which the action is being brought), the rate of receipt of
claims, the settlement strategy in dealing with outstanding claims and the
timing of settlements. As a result of the Restructuring Proceedings (see Note
1), all pending asbestos-related litigation against the Company is stayed
(subject to certain exceptions in the case of governmental authorities), and no
party may take any action to pursue or collect on such asbestos claims absent
specific authorization of the Bankruptcy Court or the High Court. Since the
Restructuring Proceedings, the Company has ceased making payments with respect
to asbestos-related lawsuits. An asbestos creditors' committee has been
appointed in the U.S. representing asbestos claimants with pending claims
against the Company, and the Bankruptcy Court has appointed a legal
representative for the interests of potential future asbestos claimants. In the
U.K., a creditors' committee consisting in large part of representatives of
asbestos claimants has been appointed. The Bankruptcy Court likely will set a
deadline for the filing of all present asbestos-related claims, including
claims by plaintiffs who allegedly entered into settlement agreements with the
Company that have not been paid. As part of the
55
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
Restructuring Proceedings, it will be determined which asbestos claims should
be allowed, or compensated, and the aggregate value of such claims. The
Company's obligations with respect to present and future claims could be
determined through litigation in Bankruptcy Court, the High Court of Justice,
Chancery Division in London, England and/or through negotiations with each of
the official committees appointed; that determination may provide the basis for
a plan of reorganization or scheme of arrangement. The T&N Companies previously
entered into $225 million of surety to meet certain collateral requirements for
asbestos indemnity obligations associated with its prior membership in the
Center for Claims Resolution. Performance under these bonds is subject to
approval by the Bankruptcy Court. Except for exchange rates, the Company has
not adjusted its estimate of the asbestos liability since September 30, 2001.
This liability is included in the consolidated balance sheet under the caption
"Liabilities subject to compromise" at December 31, 2001 for the Company's U.S.
and U.K. subsidiaries.
While the Company believes that the liability recorded was appropriate for
anticipated losses arising from asbestos-related claims against the T&N
Companies through 2012, it is the Company's view that, as a result of the
Restructuring Proceedings, there is even greater uncertainty in estimating the
future asbestos liability and related insurance recovery for pending and future
claims. There are significant differences in the treatment of asbestos claims
in a bankruptcy proceeding as compared to the tort litigation system. Among
other things, it is uncertain at this time as to the number of asbestos-related
claims that will be filed in the Restructuring Proceedings; the number of
future claims that will be included in a plan of reorganization; how claims for
punitive damages and claims by persons with no asbestos-related physical
impairment will be treated and whether such claims will be allowed; and the
impact that historical settlement values for asbestos claims may have on the
estimation of asbestos liability in the bankruptcy proceeding.
No assurance can be given that the T&N Companies will not be subject to
material additional liabilities and significant additional litigation relating
to asbestos matters through 2012 or thereafter. In the event that such
liabilities exceed the amounts recorded by the Company or the remaining
insurance coverage, the Company's results of operations and financial condition
could be materially affected.
Insurance Recoverable:
In 1996, T&N Ltd. purchased for itself and its then defined global
subsidiaries a (Pounds)500.0 million layer of insurance which will be triggered
should the aggregate costs of claims made or brought after June 30, 1996, where
the exposure occurred prior to that date, exceed (Pounds)690.0 million. During
2000, the Company concluded that the aggregate cost of the claims filed after
June 30, 1996 would exceed the trigger point and accordingly recorded an
insurance recoverable asset under the T&N policy of $577.0 million. At December
31, 2001 the recorded insurance recoverable was $553.0 million. The Company
believes that based on its review of the insurance policies and advice from
outside legal counsel that it is probable that the T&N Companies will be
entitled to receive payment from the reinsurers for the cost of the claims in
excess of the trigger point of the insurance. In December 2001, one of the
three reinsured filed suit in a London, England court to challenge the validity
of its insurance contract with the T&N Companies. The Company believes that the
suit is without merit and has responded accordingly.
The ultimate realization of insurance proceeds is directly related to the
amount of related covered claims paid by the Company. If the ultimate asbestos
claims are higher than the recorded liability, the Company expects the ultimate
insurance recoverable to be higher than the recorded amount, up to the cap of
the insurance layer. If the ultimate asbestos claims are lower than the
recorded liability, the Company expects the ultimate insurance recoverable to
be lower than the recorded amount. While the Restructuring Proceedings will
impact the timing and amount of the asbestos claims and the insurance
recoverable, there has been no change to the recorded amounts since the Company
initiated the Restructuring Proceedings. Accordingly, this asset could change
significantly based upon events that occur from the Restructuring Proceedings.
56
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
The Company has reviewed the financial viability and legal obligations of
the three reinsurance companies involved and has concluded that currently there
is little risk that the reinsurers will not be able to meet their obligation to
pay, once the claims filed after June 30, 1996 exceed the (Pounds)690 million
trigger point. The U.S. 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 paid. At December 31, 2001, the $553.0 million
insurance recoverable asset is net of an exchange rate discount of
approximately $82.0 million.
Abex and Wagner Asbestos Litigation
Background:
Two of the Company's businesses formerly owned by Cooper Industries, Inc.
known as Abex and Wagner are involved as defendants in numerous court actions
in the U.S. alleging personal injury from exposure to asbestos or
asbestos-containing products. These claims mainly involve friction products. As
of the Petition Date, Abex and Wagner were defendants in approximately 68,000
and 37,000 pending claims, respectively.
The liability of the Company with respect to claims alleging exposure to
Wagner products arises from the 1998 stock purchase from Cooper Industries of
the corporate successor by merger to Wagner Electric Company; the purchased
entity is now a wholly-owned subsidiary of the Company and one of the Debtors
in the Restructuring Proceedings. As a consequence, all claims against the
debtors, including asbestos- related claims, have been stayed.
The liability of the Company with respect to claims alleging exposure to
Abex products arises from a contractual liability entered into in 1994 by the
predecessor to the Company whose stock the Company purchased in 1998. Pursuant
to that contract, prior to the Restructuring Proceedings, the Company, through
the relevant subsidiary, was liable for certain indemnity and defense payments
incurred on behalf of an entity known as Pneumo Abex Corporation, the successor
in interest to Abex Corporation. Effective as of the Petition Date, the Company
has ceased making such payments and is currently considering whether to accept
or reject the 1994 contractual liability.
As mentioned above, as of the Petition Date, all pending asbestos litigation
of Abex (as to the Company only) and Wagner is stayed (subject to certain
exceptions in the case of governmental authorities), and no party may take any
action to pursue or collect on such asbestos claims absent specific
authorization of the Bankruptcy Court or the High Court.
Recorded Liability:
In 2000, the Company decreased its estimate of probable asbestos-related
liability for Abex and Wagner claims 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 liability (approximately $216.0 million as of December 31,
2001) represented the Company's estimate prior to the Restructuring Proceedings
for claims currently pending and those which were reasonably estimated to be
asserted and paid through 2012. The Company did not provide a liability for
claims that may be brought subsequent to this period as it could not reasonably
estimate such claims. In estimating the liability prior to the Restructuring
Proceedings, the Company made assumptions regarding the total number of claims
anticipated to be received in a future period, the typical cost of settlement
(which is sensitive to the industry in which the plaintiff claims exposure, the
alleged disease type and the jurisdiction in which the action is being
brought), the rate of receipt of claims, the settlement strategy in dealing
with outstanding claims and the timing of settlements.
57
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
As a result of the Restructuring Proceedings (see Note 1), all pending
asbestos-related litigation is stayed as previously described for the T&N
Companies.
While the Company believes that the liability recorded was appropriate for
anticipated losses arising from asbestos-related claims related to Abex and
Wagner through 2012, it is the Company's view that, as a result of the
Restructuring Proceedings, there is even greater uncertainty in estimating the
future asbestos liability and related insurance recovery for pending and future
claims. There are significant differences in the treatment of asbestos claims
in a bankruptcy proceeding as compared to the tort litigation system. Among
other things, it is uncertain at this time as to the number of asbestos-related
claims that will be filed in the proceeding; the number of future claims that
will be included in a plan of reorganization; how claims for punitive damages
and claims by persons with no asbestos-related physical impairment will be
treated and whether such claims will be allowed; and the impact historical
settlement values for asbestos claims may have on the estimation of asbestos
liability in the Restructuring Proceedings.
No assurance can be given that the Company will not be subject to material
additional liabilities and significant additional litigation relating to Abex
and Wagner asbestos matters through 2012 or thereafter. In the event that such
liabilities exceed the amounts recorded by the Company or the remaining
insurance coverage, the Company's results of operations and financial condition
could be materially affected.
Insurance Recoverable:
Abex maintained product liability insurance coverage for most of the time
that it manufactured products that contained asbestos. The subsidiary of the
Company that may be liable for certain indemnity and defense payments with
respect to Abex has the benefit of that insurance up to the extent of that
liability. Abex has been in litigation since 1982 with the insurance carriers
of its primary layer of liability concerning coverage for asbestos claims. Abex
also has substantial excess layer liability insurance coverage that, barring
unforeseen insolvencies of excess carriers or other adverse events should
provide coverage for asbestos claims against Abex.
Wagner also maintained product liability insurance coverage for some of the
time that it manufactured products that contained asbestos. The subsidiary of
the Company that may be liable for asbestos claims against Wagner has the
benefit of that insurance, subject to the rights of other potential insureds
under the policies. Primary layer liability insurance coverage for asbestos
claims against Wagner is the subject of an agreement with Wagner's solvent
primary carriers. The agreement provides for partial reimbursement of indemnity
and defense costs for Wagner asbestos claims until exhaustion of aggregate
limits. Wagner also has substantial excess layer liability insurance coverage
which, barring unforeseen insolvencies of excess carriers or other adverse
events, should provide coverage for asbestos claims against Wagner.
The ultimate realization of insurance proceeds is directly related to the
amount of related covered claims paid by the Company. If the ultimate asbestos
claims are higher than the recorded liability, the Company expects the ultimate
insurance recoverable to be higher than the recorded amount. If the ultimate
asbestos claims are lower than the recorded liability, the Company expects the
ultimate insurance recoverable to be lower than the recorded amount. While the
Restructuring Proceedings will impact the timing and amount of the asbestos
claims and the insurance recoverable, there has been no change to the recorded
amounts due to the uncertainties created by the Restructuring Proceedings.
Accordingly, this asset could change significantly based upon events that occur
from the Restructuring Proceedings.
The Company believes that based on its review of the insurance policies, the
financial viability of the insurance carriers, and advice from outside legal
counsel, it is probable that Abex and Wagner will realize an insurance
recoverable correlating with the respective liability.
58
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
Federal-Mogul and Fel-Pro Asbestos Litigation
Prior to the Restructuring Proceedings the Company was also sued in its own
name as one of a large number of defendants in a number of lawsuits brought by
claimants alleging injury from exposure to asbestos due to its ownership of
certain assets involved in gasket making. As of the Petition Date, the Company
was a defendant in approximately 61,500 Pre-Petition pending claims. Over
40,000 of these claims were transferred to a federal court, where prior to the
Restructuring Proceedings they were pending. Pre-petition claims that were in
the pipeline that were received after the Petition Date continue to be entered
into the claims system and represent an immaterial amount of claims. Prior to
the Restructuring Proceedings, the Company's Fel-Pro subsidiary also was named
as a defendant in a number of product liability cases involving asbestos,
primarily involving gasket or packing products. Fel-Pro was a defendant in
approximately 34,000 pending claims as of the Petition Date. Over 32,000 of
these claims were transferred to a federal court where, prior to the
Restructuring Proceedings, they were pending. The Company was defending all
such claims vigorously and believed that it and Fel-Pro had substantial
defenses to liability and insurance coverage for defense and indemnity. All
claims alleging exposure to the products of the Company and of Fel-Pro have
been stayed as a result of the Restructuring Proceedings.
Aggregate of Asbestos Liability and Insurance Recoverable Asset
The following is a summary of the asbestos liability and the insurance
recoverable asset for 2001 (in millions of dollars):
T&N Abex &
Companies Wagner Other Total
--------- ------ ----- --------
Liability:
Balance at December 31, 2000.................. $1,556.3 $252.7 $ 2.9 $1,811.9
2001 insurance litigation reclassification. (9.7) (3.2) -- (12.9)
2001 payments.............................. (206.9) (27.6) (0.2) (234.7)
Other...................................... (8.6) (5.5) -- (14.1)
-------- ------ ----- --------
Balance at December 31, 2001.................. $1,331.1 $216.4 $ 2.7 $1,550.2
======== ====== ===== ========
Asset:
Balance at December 31, 2000.................. $ 583.2 $187.9 $ -- $ 771.1
2001 insurance litigation reclassification. (9.7) (3.2) -- (12.9)
2001 proceeds.............................. (4.5) (14.3) -- (18.8)
Other...................................... (16.2) -- -- (16.2)
-------- ------ ----- --------
Balance at December 31, 2001.................. $ 552.8 $170.4 -- $ 723.2
======== ====== ===== ========
As of December 31, 2001, the Company has provided an aggregated
asbestos-related liability for all of its subsidiaries and businesses of
approximately $1.6 billion classified in the balance sheet under the caption
"Liabilities Subject to Compromise". Also as of December 31, 2001, the Company
has recorded an insurance recoverable of $723.2 million.
The Company's estimate of asbestos-related liabilities for pending and
expected future asbestos claims is subject to considerable uncertainty because
such liabilities are influenced by numerous variables that are inherently
difficult to predict. The Restructuring Proceedings significantly increase the
inherent difficulties and uncertainties involved in estimating the number and
cost of resolution of present and future asbestos-related claims against the
Company and may have the effect of increasing the ultimate cost of the
resolution of such claims.
59
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
Other
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. In September 2001, the Company's motion to
dismiss the lawsuit was granted. The Company is involved in various other legal
actions and claims, directly and through its subsidiaries. After taking into
consideration legal counsel's evaluation of such actions, management is of the
opinion that the outcomes are not likely to have a material adverse effect on
the Company's financial position, operating results, or cash flows.
On October 4, 2001, in connection with the Restructuring Proceedings, the
Company received notice from the New York Stock Exchange (the "Exchange") that
it was in violation of the Exchange's minimum trading price listing criteria.
The Company has been granted six months to correct the violation or the
Exchange could initiate delisting proceedings against the Company. The Company
cannot provide any assurance whether its stock price will comply with the
Exchange's listing criteria. In the event the Company's shares are delisted
from the Exchange, the Company anticipates that its shares would continue to
trade in the NASD over-the-counter bulletin board market.
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 $62.8 million and $67.9 million at December 31, 2001 and
2000, respectively. The decrease is primarily due to remediation payments made
during 2001. Management believes that such accruals will be adequate to cover
the Company's estimated liability for its exposure in respect to such matters.
As a result of the Restructuring Proceedings, the Company has reclassified
approximately $23.3 million of this reserve to Liabilities Subject to
Compromise in the consolidated balance sheet, and is evaluating such
classification for other sites.
60
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
17. Quarterly Financial Data (Unaudited)
First(1) Second(2) Third(3) Fourth(4) Year
-------- --------- -------- --------- ---------
(Millions of Dollars, Except Per Share Amounts)
Year ended December 31, 2001:
Net sales......................................... $1,450.7 $1,425.4 $1,288.8 $1,292.1 $ 5,457.0
Gross margin...................................... 305.3 301.2 238.5 239.3 1,084.2
Net loss before extraordinary items............... (62.2) (33.8) (857.2) (120.5) (1,073.7)
Extraordinary items............................... -- 16.3 47.1 8.8 72.2
Net loss.......................................... (62.2) (17.5) (810.1) (111.7) (1,001.5)
Diluted loss per share before extraordinary items. (0.89) (0.48) (10.91) (1.37) (14.23)
Net loss per share................................ (0.89) (0.25) (10.31) (1.37) (13.27)
Stock price
High.............................................. $ 5.44 $ 3.52 $ 1.80 $ 1.48
Low............................................... $ 2.87 $ 1.69 $ 0.65 $ 0.45
Dividend per share................................ -- -- -- --
First(5) Second Third(6) Fourth(7) 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................. 0.18 0.65 (0.12) (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
- --------
(1) Includes a $29.8 million charge for restructuring and a $0.6 million charge
for adjustment of assets held for sale and other long-lived assets to fair
value.
(2) Includes an $2.1 million charge for restructuring, a $0.1 million charge
for adjustment of assets held for sale and other long-lived assets to fair
value, $37.6 million gain on the divestiture of businesses and a $16.3
million gain on the early extinguishment of debt.
(3) Includes an $6.1 million charge for restructuring, a $496.6 million charge
for adjustment of assets held for sale and other long-lived assets to fair
value, $75.1 million loss on the divestiture of businesses, a $47.1 million
gain on the early extinguishment of debt, $13.7 million of reorganization
costs related to Chapter 11 and Administration and a $177.0 million tax
valuation allowance.
(4) Includes a $47.8 million charge for adjustment of assets held for sale and
other long-lived assets to fair value and $36.2 million of reorganization
costs related to Chapter 11 and Administration.
(5) 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.
(6) 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.
(7) 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.
61
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. Felt Products MFG. Co.
Federal-Mogul Global Properties Inc. Federal-Mogul UK Holdings Inc. Ferodo America, Inc.
Carter Automotive Company, Inc. F-M UK Holdings Limited McCord Sealing, Inc.
Federal-Mogul World Wide Inc. Federal-Mogul Global Inc.
Federal-Mogul Ignition Company T&N Industries, Inc.
Federal-Mogul Products, Inc. Federal-Mogul Powertrain, Inc.
Federel-Mogul Piston Rings, Inc. Federal-Mogul Mystic, 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 acquired with the acquisition of T&N, plc.
These subsidiaries became guarantors as a result of the Company's Fourth
Amended and Restated Senior Credit Agreement dated December 29, 2000.
In lieu of providing separate 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 Bulleting 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.
In May 2001, the Company divested of Federal-Mogul Aviation, Inc. (see Note
3 of the Consolidated Condensed Financial Statements, "Divestitures"). The
results of operation of Aviation have been included through the divestiture
date.
The consolidating condensed financial information of the Guarantor
subsidiaries as of December 31, 2000 and for the two years in the period then
ended have been restated to include Federal-Mogul Mystic, Inc., Felt Products
Mfg. Co., Ferodo America, Inc. and McCord Sealing, Inc.
As a result of the Restructuring Proceedings (see Note 1 "Voluntary
Reorganization Under Chapter 11 and Administration") certain of the
liabilities, as shown below, were Liabilities Subject to Compromise as of the
Petition date:
Guarantor Non-Guarantor
Parent Subsidiaries Subsidiaries Consolidated
-------- ------------ ------------- ------------
Accounts payable............................ $ 42.6 $125.9 $ 31.7 $ 200.2
Other accrued liabilities................... 2.6 1.0 14.7 18.3
Environmental liabilities................... 22.4 -- 0.9 23.3
Interest payable............................ 43.5 0.2 -- 43.7
Debt........................................ 3,970.3 1.1 -- 3,971.4
Asbestos liabilities........................ 1.4 230.0 1,318.8 1,550.2
Company-obligated mandatorily redeemable
preferred securities of subsidiary holding
solely convertiblesubordinated debentures
of the Company............................ -- -- 449.5 449.5
-------- ------ -------- --------
$4,082.8 $358.2 $1,815.6 $6,256.6
======== ====== ======== ========
62
FEDERAL-MOGUL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS
December 31, 2001
(Millions of Dollars)
(Unconsolidated)
--------------------------------------
Guarantor Non-Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
--------- ------------ ------------- ------------ ------------
Net sales..................................... $ 1,252.6 $1,826.4 $2,925.4 $(547.4) $ 5,457.0
Cost of products sold......................... 1,042.8 1,483.0 2,394.5 (547.4) 4,372.9
--------- -------- -------- ------- ---------
Gross margin............................... 209.8 343.4 530.9 -- 1,084.1
Selling, general and administrative expenses.. 292.5 218.3 344.7 -- 855.5
Amortization of goodwill and other
intangible assets........................... 20.1 42.8 52.4 -- 115.3
Restructuring charge.......................... 12.2 -- 25.8 -- 38.0
Adjustment of assets held for sale and other
long- lived assets to fair value............ 0.7 380.9 163.5 -- 545.1
Interest expense, net......................... 269.8 0.2 4.8 -- 274.8
Chapter 11 and Administration related
reorganization expenses..................... 50.6 -- -- -- 50.6
Other (income) expense, net................... (60.0) 62.2 56.8 -- 59.0
--------- -------- -------- ------- ---------
Loss before income taxes................... (376.1) (361.0) (117.1) -- (854.2)
Income tax expense (benefit).................. 150.5 (8.2) 77.2 -- 219.5
--------- -------- -------- ------- ---------
Net loss before extraordinary item and
equity in loss of subsidiaries........... (526.6) (352.8) (194.3) -- (1,073.7)
Extraordinary item, net of applicable tax
benefits.................................... (72.2) -- -- -- (72.2)
--------- -------- -------- ------- ---------
Net loss before equity in loss of subsidiaries (454.4) (352.8) (194.3) (1,001.5)
Equity in loss of subsidiaries................ (547.1) (88.5) -- 635.6 --
--------- -------- -------- ------- ---------
Net Loss...................................... $(1,001.5) $ (441.3) $ (194.3) $ 635.6 $(1,001.5)
========= ======== ======== ======= =========
63
FEDERAL-MOGUL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS
December 31, 2000
(Millions of Dollars)
(Unconsolidated)
----------------------------------
Non-
Guarantor Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
-------- ------------ ------------ ------------ ------------
Net sales......................................... $1,428.2 $2,089.7 $3,145.3 $(650.0) $6,013.2
Cost of products sold............................. 1,122.1 1,601.9 2,521.9 (650.0) 4,595.9
-------- -------- -------- ------- --------
Gross margin................................... 306.1 487.8 623.4 -- 1,417.3
Selling, general and administrative expenses...... 268.9 209.5 366.2 -- 844.6
Amortization of goodwill and other intangible
assets.......................................... 20.3 47.8 55.5 -- 123.6
Restructuring charge.............................. 44.7 26.8 64.2 -- 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............................. 278.5 0.6 5.9 -- 285.0
Other (income) expense, net....................... 96.9 (152.7) 86.7 -- 30.9
-------- -------- -------- ------- --------
Earnings (loss) before income taxes............ (428.9) 340.1 (173.5) -- (262.3)
Income tax expense (benefit)...................... (105.5) 138.9 (14.2) -- 19.2
-------- -------- -------- ------- --------
Net earnings (loss) before equity inearnings
(loss) of subsidiaries....................... (323.4) 201.2 (159.3) -- (281.5)
Equity in earnings (loss) of subsidiaries......... 41.9 56.0 -- (97.9) --
-------- -------- -------- ------- --------
Net Earnings (loss)............................... $ (281.5) $ 257.2 $ (159.3) $ (97.9) $ (281.5)
======== ======== ======== ======= ========
64
FEDERAL-MOGUL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS
December 31, 1999
(Millions of Dollars)
(Unconsolidated)
-----------------------------------
Non-
Guarantor Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
-------- ------------ ------------ ------------ ------------
Net sales........................................ $1,561.4 $2,190.6 $3,285.3 $(549.8) $6,487.5
Cost of products sold............................ 1,116.0 1,611.5 2,531.4 (549.8) 4,709.1
-------- -------- -------- ------- --------
Gross margin.................................. 445.4 579.1 753.9 -- 1,778.4
Selling, general and administrative
expenses....................................... 332.0 252.6 264.3 -- 848.9
Amortization of goodwill and other intangible
assets......................................... 7.0 50.9 69.3 -- 127.2
Adjustment of assets held for sale and other
long-lived assets to fair value................ 7.9 -- -- -- 7.9
Integration costs................................ 19.6 7.5 19.8 -- 46.9
Interest expense, net............................ 258.6 -- 10.3 -- 268.9
Other (income) expense, net...................... 74.5 (148.6) 92.8 -- 18.7
-------- -------- -------- ------- --------
Earnings (loss) before income taxes,
extraordinary items and cumulative
effect of change in accounting principle.... (254.2) 416.7 297.4 -- 459.9
Income tax expense (benefit)..................... (97.9) 145.6 133.2 -- 180.9
-------- -------- -------- ------- --------
Earnings (loss) before extraordinary
items and cumulative effect of change in
accounting principle........................ (156.3) 271.1 164.2 -- 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............. (192.1) 271.1 164.2 -- 243.2
Equity in earnings (loss) of subsidiaries........ 435.3 274.1 -- (709.4) --
-------- -------- -------- ------- --------
Net Earnings (Loss).............................. $ 243.2 $ 545.2 $ 164.2 $(709.4) $ 243.2
======== ======== ======== ======= ========
65
FEDERAL-MOGUL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATING CONDENSED BALANCE SHEET
December 31, 2001
(Millions of Dollars)
(Unconsolidated)
-------------------------------------
Guarantor Non-Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
--------- ------------ ------------- ------------ ------------
ASSETS
Cash and equivalents.......................... $ 74.0 $ 3.5 $ 269.4 $ -- $ 346.9
Accounts receivable........................... 522.5 -- 422.3 -- 944.8
Inventories................................... 76.8 303.2 341.9 -- 721.9
Deferred taxes................................ 16.0 -- 39.4 -- 55.4
Prepaid expenses and income tax benefits...... 47.1 42.5 88.0 -- 177.6
--------- -------- -------- --------- --------
Total Current Assets....................... 736.4 349.2 1,161.0 -- 2,246.6
Property, plant and equipment................. 263.6 702.5 1,197.6 -- 2,163.7
Goodwill...................................... 562.8 925.2 1,220.3 -- 2,708.3
Other intangible assets....................... 92.7 299.8 262.8 -- 655.3
Investment in subsidiaries.................... 6,366.8 2,839.9 -- (9,206.7) --
Intercompany accounts, net.................... (2,374.8) 2,251.5 123.3 -- --
Asbestos-related insurance recoverable........ -- 162.7 560.5 -- 723.2
Other noncurrent assets....................... 130.4 44.8 380.9 -- 556.1
--------- -------- -------- --------- --------
Total Assets............................... $ 5,777.9 $7,575.6 $4,906.4 $(9,206.7) $9,053.2
========= ======== ======== ========= ========
LIABILITIES
Short-term debt, including current portion of
long-term debt.............................. $ -- $ 0.5 $ 24.4 $ -- $ 24.9
Accounts payable.............................. 61.6 50.4 187.5 -- 299.5
Accrued compensation.......................... 63.4 24.1 106.4 -- 193.9
Restructuring and rationalization reserves.... 25.3 13.8 42.0 -- 81.1
Other accrued liabilities..................... 85.0 130.1 167.8 -- 382.9
--------- -------- -------- --------- --------
Total Current Liabilities.................. 235.3 218.9 528.1 -- 982.3
Long-term debt................................ 250.0 -- 16.7 -- 266.7
Postemployment benefits....................... 655.1 0.1 164.6 -- 819.8
Other accrued liabilities..................... 87.8 0.5 170.2 -- 258.5
Minority interest in consolidated subsidiaries 47.8 2.5 -- -- 50.3
Liabilities subject to compromise............. 4,082.9 358.2 1,815.5 -- 6,256.6
Shareholders' Equity.......................... 419.0 6,995.4 2,211.3 (9,206.7) 419.0
--------- -------- -------- --------- --------
Total Liabilities and Shareholders' Equity. $ 5,777.9 $7,575.6 $4,906.4 $(9,206.7) $9,053.2
========= ======== ======== ========= ========
66
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 $ 6.4 $ (47.5) $ -- $ 107.2
Accounts receivable......................... 22.4 -- 490.4 -- 512.8
Investment in accounts receivable
securitization............................ -- -- 229.1 -- 229.1
Inventories................................. 135.1 296.7 376.8 -- 808.6
Deferred taxes.............................. 23.2 62.7 85.7 -- 171.6
Prepaid expenses and income tax benefits.... 49.5 52.5 93.1 -- 195.1
--------- -------- -------- --------- --------
Total Current Assets..................... 378.5 418.3 1,227.6 -- 2,024.4
Property, plant and equipment............... 270.5 815.9 1,302.4 -- 2,388.8
Goodwill.................................... 584.6 1,241.1 1,477.4 -- 3,303.1
Other intangible assets..................... 39.8 404.3 302.3 -- 746.4
Investment in subsidiaries.................. 6,187.0 2,839.0 -- (9,026.0) --
Intercompany accounts, net.................. (1,620.5) 2,035.2 (414.7) -- --
Asbestos-related insurance recoverable...... -- 194.4 576.7 -- 771.1
Other noncurrent assets..................... 273.8 (71.7) 395.1 -- 597.2
--------- -------- -------- --------- --------
Total Assets............................. $ 6,113.7 $7,876.5 $4,866.8 $(9,026.0) $9,831.0
========= ======== ======== ========= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Short-term debt, including current portion
of long-term debt......................... $ 124.4 $ 3.0 $ 20.4 $ -- $ 147.8
Accounts payable............................ 78.0 136.8 217.1 -- 431.9
Accrued compensation........................ 31.6 25.9 100.3 -- 157.8
Restructuring and rationalization reserves.. 12.6 26.8 68.5 -- 107.9
Current portion of asbestos liability....... -- -- 350.0 -- 350.0
Other accrued liabilities................... 152.3 133.6 217.8 -- 503.7
--------- -------- -------- --------- --------
Total Current Liabilities................ 398.9 326.1 974.1 -- 1,699.1
Long-term debt.............................. 3,534.7 5.9 19.1 -- 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................... 103.4 24.6 162.0 -- 290.0
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........................ 1,551.3 6,911.3 2,113.6 (9,026.0) 1,550.2
--------- -------- -------- --------- --------
Total Liabilities and Shareholders'
Equity................................. $ 6,113.7 $7,876.5 $4,866.8 $(9,026.0) $9,831.0
========= ======== ======== ========= ========
67
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
December 31, 2001
(Millions of Dollars)
(Unconsolidated)
----------------------------------
Guarantor Non-Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
------- ------------ ------------- ------------ ------------
Net Cash Provided From (Used By) Operating
Activities.................................... $(415.3) $(345.5) $ 796.6 $ -- $ 35.8
Expenditures for property, plant and equipment
and other long-term assets.................... (28.6) (87.1) (198.1) -- (313.8)
Proceeds from sale of property, plant & equip... -- 9.4 9.6 -- 19.0
Proceeds from sale of businesses................ 5.2 209.0 28.6 -- 242.8
Business acquisitions, net of cash acquired..... -- -- (18.8) -- (18.8)
------- ------- ------- ----- -------
Net Cash Provided From (Used By)
Investing Activities....................... (23.4) 131.3 (178.7) -- (70.8)
Proceeds from issuance of long-term debt........ 917.2 -- -- -- 917.2
Principal payments on long-term debt............ (163.7) -- (8.1) -- (171.8)
Increase (decrease) in short-term debt.......... (57.6) (8.4) 1.9 -- (64.1)
Fees paid for debt issuance and other securities (38.0) -- -- -- (38.0)
Change in intercompany accounts................. 75.1 219.7 (294.8) -- --
Repurchase of accounts receivable under
securitization................................ (348.1) -- -- -- (348.1)
Other........................................... (20.5) -- -- -- (20.5)
------- ------- ------- ----- -------
Net Cash Provided From (Used By)
Financing Activities....................... 364.4 211.3 (301.0) -- 274.7
------- ------- ------- ----- -------
Net Increase (Decrease) in Cash.............. $ (74.3) $ (2.9) $ 316.9 $ -- $ 239.7
======= ======= ======= ===== =======
68
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.................... $(159.2) $(13.2) $ 17.9 $ -- $(154.5)
Expenditures for property, plant and
Equipment and other long-term assets.... (35.1) (93.2) (185.0) -- (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......................... (34.3) (93.2) (116.8) -- (244.3)
Proceeds from issuance of long-term debt.. 689.0 -- -- -- 689.0
Principal payments on long-term debt...... (132.0) -- (13.3) -- (145.3)
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........... (196.5) 108.4 88.1 -- --
Sale of accounts receivable under
securitization.......................... (62.1) -- -- -- (62.1)
Dividends................................. (4.0) -- -- -- (4.0)
Other..................................... 1.2 -- (6.8) -- (5.6)
------- ------ ------- ----- -------
Net Cash Provided From (Used By)
Financing Activities............... 287.7 108.4 45.4 -- 441.5
------- ------ ------- ----- -------
Net Increase (Decrease) in Cash...... $ 94.2 $ 2.0 $ (53.5) $ -- $ 42.7
======= ====== ======= ===== =======
69
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..................... $ (35.5) $ 445.6 $ 152.3 $ -- $ 562.4
Expenditures for property, plant and
equipment and other long-term assets..... (55.8) (64.4) (275.0) -- (395.2)
Proceeds from sale of business investments. 3.9 -- 49.4 -- 53.3
Business acquisitions, net of cash acquired (97.0) (1.9) (272.3) -- (371.2)
--------- ------- ------- ------ ---------
Net Cash Used By Investing Activities...... (148.9) (66.3) (497.9) -- (713.1)
Proceeds from issuance of long-term debt... 2,123.0 -- -- -- 2,123.0
Principal payments on long-term debt....... (2,222.5) (2.0) (27.0) -- (2,251.5)
Increase (decrease) in short-term debt..... 44.2 (14.6) (32.6) -- (3.0)
Fees paid for debt issuance and other
securities............................... (25.5) -- -- -- (25.5)
Change in intercompany accounts............ (3.4) (379.0) 382.4 -- --
Sale of accounts receivable under
securitization........................... 304.3 -- -- -- 304.3
Dividends.................................. (4.3) -- -- -- (4.3)
Other...................................... (2.6) -- (2.4) -- (5.0)
--------- ------- ------- ------ ---------
Net Cash Provided From (Used By)
Financing Activities.................. 213.2 (395.6) 320.4 -- 138.0
--------- ------- ------- ------ ---------
Net Increase (Decrease) in Cash......... $ 28.8 $ (16.3) $ (25.2) $ -- $ (12.7)
========= ======= ======= ====== =========
70
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 that are
adequate to provide reasonable assurance that assets are safeguarded from loss
or unauthorized use and that 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 four 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
Chairman and Chief Executive Officer
/s/ Charles G. McClure
Charles G. McClure
President and Chief Operating Officer
/s/ G. Michael Lynch
G. Michael Lynch
Executive Vice President and Chief Financial Officer
71
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, 2001 and 2000,
and the related consolidated statements of operations, shareholders' equity,
and cash flows for each of the three years in the period ended December 31,
2001. 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, 2001 and 2000,
and the consolidated results of their operations and their cash flows for each
of the three years in the period ended December 31, 2001, 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, represents fairly in all
material respects the information set forth therein.
The accompanying consolidated financial statements have been prepared
assuming that Federal-Mogul Corporation and subsidiaries will continue as a
going concern. As more fully described in the notes to the consolidated
financial statements, on October 1, 2001, Federal-Mogul Corporation and its
wholly owned United States subsidiaries filed a voluntary petition for
reorganization under Chapter 11 of the United States Bankruptcy Code. In
addition, certain Federal-Mogul subsidiaries in the United Kingdom have filed
jointly for Chapter 11 and Administration under the United Kingdom Insolvency
Act of 1986. Uncertainties inherent in the bankruptcy process raise substantial
doubt about Federal-Mogul Corporation's ability to continue as a going concern.
Management's intentions with respect to these matters are also described in the
notes. The accompanying consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
/s/ ERNST & YOUNG LLP
Detroit, Michigan
February 8, 2002
72
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 2002 relating to its 2002 Annual Meeting of Shareholders (the ''2002
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 2002 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 2002 Proxy Statement (excluding the
information appearing under the caption ''Compensation Committee Report on
Executive Compensation'') and under the caption ''Compensation of Directors''
in the 2002 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 2002 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 2002 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.
73
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 to
Balance Charged Other Balance
at Beginning to Costs Accounts-- Deductions-- at End
Description of Period and Expenses Describe Describe of Period
- ---------------------------------------------- ------------ ------------ ---------- ------------ ---------
Year Ended December 31, 2001:
Valuation allowance for trade receivable.... $ 66.5 19.7 20.4(4) 65.8
Reserve for inventory valuation............. 29.3 20.5 49.8
Valuation allowance for deferred tax assets. 219.6 272.2 496.8
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
- -------------------
(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.
74
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 Annual Report on Form 10-K for the year ended December 31, 1997. (the "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 Annual Report on
Form 10-K for the year ended December 31, 1998.)
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. (Incorporated by reference
to Exhibit 4.9 to the Company's Annual Report on Form 10-K for the year ended December 31,
2000 (the "2000 10-K".)
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. (Incorporated by
reerence to Exhibit 4.10 to the Company's 2000 10-K.)
75
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.
(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. (Incorporated by
reference to Exhibit 4.14 to the Company's 2000 10-K.)
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. (Incorporated by
reference to Exhibit 4.15 to the Company's 2000 10-K.)
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 Revolving Credit, Term Loan and Guaranty Agreement dated October 1, 2001 by the Company
and certain of its subsidiaries in favor of The Chase Manhattan Bank, as administrative agent,
with respect to Debtors and Debtors-in-Possession under Title 11 of the United States Code.
*10.8 First Amendment to Revolving Credit, Term Loan and Guaranty Agreement dated October 1,
2001 by the Company and certain of its subsidiaries in favor of The Chase Manhattan Bank, as
administrative agent, with respect to Debtors and Debtors-in-Possession under Title 11 of the
United States Code.
10.9 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.)
76
10.10 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.)
10.11 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.)
10.12 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.)
10.13 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.)
10.14 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.)
10.15 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.)
10.16 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.)
10.17 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.)
10.18 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.)
10.19 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.)
10.20 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.)
10.21 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.)
10.22 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.)
10.23 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. (Incorporated by reference to Exhibit 10.24 to the
Company's 2000 10-K.)
10.25 Change of Control Agreement dated January 10, 2001, between the Company and Frank
Macher. (Incorporated by reference to Exhibit 10.25 to the Company's 2000 10-K.)
77
10.26 Employment Agreement dated as of January 10, 2001 and amended as of January 31, 2001,
between the Company and Charles McClure. (Incorporated by reference to Exhibit 10.26 to the
Company's 2000 10-K.)
10.27 Change of Control Agreement dated January 10, 2001, between the Company and Charles
McClure. (Incorporated by reference to Exhibit 10.27 to the Company's 2000 10-K.)
*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 October 1, 2001, the Company filed a Current Report on Form 8-K to report
that the Company and its United States subsidiaries voluntarily filed a
petition for relief under Title 11 of the United States Code with the United
States Bankruptcy Court for the District of Delaware. In addition, certain of
the Company's subsidiaries in the United Kingdom filed jointly under Title 11
and Administration under the United Kingdom Insolvency Act of 1986.
(c) Separate financial statements of affiliates whose securities are
pledged as collateral.
1) Financial statements of Federal-Mogul Products, Inc. and subsidiaries
including consolidated balance sheets as of December 31, 2001 and
2000, and the related statements of operations and comprehensive
income and cash flows for the three years ended December 31, 2001.
2) Financial statements of Federal-Mogul Ignition Company and
subsidiaries including consolidated balance sheets as of December 31,
2001 and 2000, and the related statements of operations and
comprehensive income and cash flows for the three years ended
December 31, 2001.
3) Financial statements of Federal-Mogul Powertrain, Inc. and
subsidiaries including consolidated balance sheets as of December 31,
2001 and 2000, and the related statements of operations and
comprehensive income and cash flows for the three years ended
December 31, 2001.
4) Financial statements of Federal-Mogul Piston Rings, Inc. and
subsidiaries including consolidated balance sheets as of December 31,
2001 and 2000, and the related statements of operations and
comprehensive income and cash flows for the three years ended
December 31, 2001.
78
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, 2001 and 2000,
and the related consolidated statements of operations and comprehensive income
and cash flows for each of the three years in the period ended December 31,
2001. 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, 2001 and 2000, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 2001, in conformity with
accounting principles generally accepted in the United States.
The accompanying consolidated financial statements have been prepared
assuming that Federal-Mogul Products, Inc. and subsidiaries will continue as a
going concern. As more fully described in the notes to he consolidated
financial statements, on October 1, 2001, Federal-Mogul Corporation and its
wholly owned United States subsidiaries, which includes Federal-Mogul Products,
Inc., filed a voluntary petition for reorganization under Chapter 11 of the
United States Bankruptcy Code. In addition, certain Federal-Mogul subsidiaries
in the United Kingdom have filed jointly for Chapter 11 and Administration
under the United Kingdom Insolvency Act of 1986. Uncertainties inherent in the
bankruptcy process raise substantial doubt about Federal-Mogul Products, Inc.'s
ability to continue as a going concern. Management's intentions with respect to
these matters are also described in the notes. The accompanying consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
/s/ ERNST & YOUNG LLP
Detroit, Michigan
February 8, 2002
79
FEDERAL-MOGUL PRODUCTS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(Millions of Dollars)
Year Ended December 31
-----------------------------
2000 1999
2001 (Restated) (Restated)
------- ---------- ----------
Net Sales:
Trade.................................................................... $ 574.2 $591.8 $658.2
Affiliate................................................................ 2.3 14.5 --
------- ------ ------
Total net sales...................................................... 576.5 606.3 658.2
Cost of products sold....................................................... 476.8 448.0 471.5
Selling, general and administrative expenses................................ 118.6 95.4 111.3
Amortization of goodwill and other intangibles.............................. 16.1 15.4 16.0
Restructuring charge........................................................ -- 17.8 --
Adjustment of assets held for sale and other long-lived assets to fair value -- 30.8 --
Provision for bad debt from affiliate debtors............................... 319.0 -- --
Asbestos charge............................................................. -- 8.5 --
Other expense, net.......................................................... 7.8 7.7 15.6
Interest expense............................................................ 18.7 20.0 20.1
------- ------ ------
Earnings (loss) before income taxes...................................... (380.5) (37.3) 23.7
Income taxes expense (benefit).............................................. (16.7) (9.9) 12.1
------- ------ ------
Net earnings (loss).................................................. (363.8) (27.4) 11.6
Components of Comprehensive Income (Loss):..................................
Minimum pension liability, net of tax.................................... -- -- (4.2)
------- ------ ------
Comprehensive Income (Loss).......................................... $(363.8) $(27.4) $ 7.4
======= ====== ======
See accompanying Notes to Consolidated Financial Statements.
80
FEDERAL-MOGUL PRODUCTS, INC.
CONSOLIDATED BALANCE SHEETS
(Millions of Dollars)
December 31
-------------------
2000
2001 (Restated)
-------- ----------
ASSETS
Accounts receivable.................................... $ 99.3 $ --
Inventories............................................ 139.8 140.5
Other.................................................. 12.5 16.1
-------- --------
Total Current Assets............................ 251.6 156.6
Property, plant and equipment, net..................... 239.0 233.4
Goodwill, net.......................................... 377.8 390.6
Other intangibles, net................................. 128.2 133.9
Asbestos-related insurance recoverable................. 173.6 187.9
Other noncurrent assets................................ 25.9 26.9
-------- --------
Total Assets.................................... $1,196.1 $1,129.3
======== ========
LIABILITIES AND NET PARENT INVESTMENT
Accounts payable....................................... $ 25.1 $ 61.6
Accrued liabilities.................................... 42.5 48.4
-------- --------
Total Current Liabilities....................... 67.6 110.0
Long-term portion of asbestos liability................ -- 252.7
Liabilities subject to compromise...................... 789.6 --
Other long-term liabilities............................ 2.4 47.0
Net Parent Investment.................................. 336.5 719.6
-------- --------
Total Liabilities and Net Parent Investment..... $1,196.1 $1,129.3
======== ========
See accompanying Notes to Consolidated Financial Statements.
81
FEDERAL-MOGUL PRODUCTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Millions of Dollars)
Year Ended December 31
-----------------------------
2000 1999
2001 (Restated) (Restated)
------- ---------- ----------
Cash provided from (used by) operating activities:
Net earnings (loss).......................................................... $(363.8) $(27.4) $ 11.6
Adjustments to reconcile net earnings (loss) to net cash provided from (used by)
operating activities:
Provision for bad debt from affiliate debtors................................ 319.0 -- --
Loss on sale of assets....................................................... 11.2 -- --
Depreciation and amortization................................................ 42.7 39.2 39.8
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:
Inventories................................................................ (0.9) 0.4 45.3
Accounts payable........................................................... 25.4 (1.9) (43.8)
Other assets and liabilities............................................... (63.3) (31.6) (70.8)
------- ------ ------
Net cash provided from (used by) operating activities.................... (29.7) 35.8 (17.9)
Cash provided from (used by) investing activities:
Proceeds from sale of assets................................................. 2.8 -- --
Capital expenditures......................................................... (37.6) (34.0) (34.1)
------- ------ ------
Net cash used by investing activities.................................... (34.8) (34.0) (34.1)
Cash provided from (used by) financing activities:
Repayments of long-term debt................................................. -- -- (0.8)
Proceeds from issuance of long term debt..................................... 45.9
Transfers from (to) parent................................................... 64.5 (47.7) 45.1
------- ------ ------
Net cash provided from (used by) financing activities.................... 64.5 (1.8) 44.3
------- ------ ------
Decrease in cash................................................................ -- -- (7.7)
Cash at beginning of year................................................ -- -- 7.7
------- ------ ------
Cash at end of year...................................................... $ -- $ -- $ --
======= ====== ======
See accompanying Notes to Consolidated Financial Statements.
82
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 subsidiaries
("Products"). Products is a wholly-owned subsidiary of Federal-Mogul
Corporation ("Federal-Mogul").
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, domestic tax reporting and internal and external audit.
Federal-Mogul bills Products for all such direct expenses incurred on its
behalf. General expenses, excluding Chapter 11 and Administration related
reorganization 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 periods
presented and include the assets, liabilities, revenues and expenses that are
directly related to Products' operations.
Products' separate debt and related interest expense have been included in
the consolidated financial statements. Products is fully integrated into its
parent's cash management system, as such, all cash requirements are provided by
its parent and any excess cash generated by Products is transferred to its
parent.
Voluntary Reorganization Under Chapter 11 and Administration
On October 1, 2001 (the "Petition Date"), Federal-Mogul and all of its
wholly owned United States subsidiaries filed voluntary petitions for
reorganization (the "U.S. Restructuring") under Chapter 11 of the United States
Bankruptcy Code (the "Bankruptcy Code") in the United States Bankruptcy Court
for the District of Delaware (the "Bankruptcy Court"). Products was included in
the U.S. restructuring. Also on October 1, 2001, certain of Federal-Mogul's
United Kingdom subsidiaries filed voluntary petitions for reorganization under
Chapter 11 of the Bankruptcy Code and petitions for Administration (the "U.K.
Restructuring") under the United Kingdom Insolvency Act of 1986 (the "Act") in
the High Court of Justice, Chancery division in London, England (the "High
Court"). Federal-Mogul and its U.S. and U.K. subsidiaries included in the U.S.
Restructuring and U.K. Restructuring are herein referred to as the "Debtors".
The U.S. Restructuring and U.K. Restructuring are herein referred to as the
"Restructuring Proceedings". The Chapter 11 cases of the Debtors (collectively,
the "Chapter 11 Cases") have been consolidated for purposes of joint
administration as In re: Federal-Mogul Global Inc., T&N Limited, et al (Case
No. 01-10578(SLR)). The Chapter 11 Cases do not include any of the Company's
non-U.S. subsidiaries outside of the U.K. subsidiaries mentioned above.
The Restructuring Proceedings were undertaken to resolve Federal Mogul's
asbestos-related litigation in a fair and equitable manner, to protect the
long-term value of the Debtors' businesses and to maintain the Debtors'
leadership positions in their markets.
Consequences of the Restructuring Proceedings:
The U.S. Debtors, including Products, are operating their businesses as
debtors-in-possession subject to the provisions of the Bankruptcy Code. The
U.K. Debtors are continuing to manage their operations under the supervision of
an Administrator approved by the High Court. All vendors will be paid for all
goods furnished and services provided after the Petition Date. However, as a
consequence of the U.S. Restructuring Proceedings, all pending litigation
against the U.S. Debtors as of the Petition Date is stayed (subject to certain
exceptions in the case of governmental authorities), and no party may take any
action to pursue or collect pre-petition claims
83
FEDERAL-MOGUL PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
except pursuant to an order of the Bankruptcy Court or the High Court as
applicable. It is the Debtors' intention to address all pending and future
asbestos-related claims and all other pre-petition claims through a unified
plan of reorganization under the Bankruptcy Code or scheme of arrangement under
the Act. However, it is currently impossible to predict with any degree of
certainty how a plan of reorganization or a scheme of arrangement will treat
asbestos and other pre-petition claims and what impact the U.S. Restructuring
and any plan of reorganization may have on the shares of Federal Mogul's common
stock. The formulation and implementation of the plan of reorganization or
scheme of arrangement could take a significant period of time.
In the U.S., two creditors' committees, representing asbestos claimants and
unsecured creditors have been appointed as official committees in the Chapter
11 Cases and, in accordance with the provisions of the Bankruptcy Code, will
have the right to be heard on all matters that come before the Bankruptcy
Court. Federal-Mogul expects that the appointed committees, together with the
now-appointed legal representative for the future asbestos claimants to be
appointed by the Bankruptcy Court, will play important roles in the U.S.
Restructuring Proceedings.
As provided by the Bankruptcy Code, the Debtors initially had the exclusive
right to propose a plan of reorganization within 120 days following the
Petition Date with the Bankruptcy Court. The Debtors have asked the Bankruptcy
Court to extend the period of exclusivity to August 1, 2002, and the request
was granted. If the Debtors fail to file a plan of reorganization during such
period or any extension thereof, or if such plan of reorganization is not
accepted by the requisite numbers of creditors and equity holders entitled to
vote on the plan, other parties in interest in the Chapter 11 Cases may be
permitted to propose their own plan(s) of reorganization for the Debtors. As
provided by the Act, the Administrator will propose a scheme of arrangement
with the High Court.
Products is unable to predict at this time what the treatment of creditors
and equity security holders of the respective Debtors will be under any
proposed plan(s) of reorganization or schemes of arrangement. One alternative
such plan(s) of reorganization may provide, among other things, that all
present and future asbestos-related liabilities of the Debtors will be
discharged and assumed and resolved by one or more independently administered
trusts established in compliance with Section 524(g) of the Bankruptcy Code.
Such plan(s) may also provide for the issuance of an injunction by the
Bankruptcy Court pursuant to Section 524(g) of the Bankruptcy Code that will
enjoin actions against the reorganized Debtors alleging asbestos-related
claims, which claims will be paid in whole or in part by one or more Section
524(g) trusts. Similar plans of reorganization have been confirmed in chapter
11 cases of other companies involved in asbestos-related litigation. Section
524(g) of the Bankruptcy Code provides that, if certain specified conditions
are satisfied, a court may issue a supplemental permanent injunction barring
the assertion of asbestos-related claims against the reorganized company and
channeling those claims to an independent trust.
There are two possible types of U.K. schemes of arrangements. The first is
under Section 425 of the Companies Act of 1985, which may involve a scheme for
the reconstruction of the company. If a majority in number representing
three-fourths in value of the creditors or members or any class of them agree
to the compromise or arrangement it is binding if sanctioned by the High Court.
Section 425 may be invoked where there is an Administration order in force in
relation to the company. The other possible type of scheme arises under section
1 of the Insolvency Act of 1986 in relation to Company Voluntary Arrangements
("CVA"). If a majority in value representing more than three-fourths of the
creditors agrees to the compromise or arrangement set out in the CVA proposal,
it will be approved.
Products is unable to predict at this time what treatment will be accorded
under any such plan(s) of reorganization to intercompany indebtedness,
licenses, executory contracts, transfers of goods and services, and other
intercompany arrangements, transactions and relationships that were entered
into prior to the Petition Date.
84
FEDERAL-MOGUL PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
These arrangements, transactions, and relationships may be challenged by
various parties in the Chapter 11 Cases, and the outcome of those challenges,
if any, may have an impact on the treatment of various claims under such
plan(s) of reorganization.
The Bankruptcy Court may confirm a plan of reorganization only upon making
certain findings required by the Bankruptcy Code, and a plan may be confirmed
over the dissent of non-accepting creditors and equity security holders if
certain requirements of the Bankruptcy Code are met. The payment rights and
other entitlements of pre-petition creditors and equity shareholders may be
substantially altered by any plan(s) of reorganization confirmed in the Chapter
11 Cases. There is no assurance that there will be sufficient assets to satisfy
the Debtors' pre-petition liabilities in whole or in part, and the pre-petition
creditors of some Debtors may be treated differently than those of other
Debtors. Pre-petition creditors may receive under the proposed plan(s) less
than 100% of the face value of their claims, and the interests of
Federal-Mogul's equity security holders may be substantially diluted or
cancelled in whole or in part. As noted above, it is not possible at this time
to predict the outcome of the Chapter 11 Cases, the terms and provisions of any
plan(s) of reorganization, or the effect of the Chapter 11 reorganization
process on the claims of the pre-petition creditors of the Debtors or the
interests of the Company's equity security holders.
Chapter 11 Financing:
In connection with the Restructuring Proceedings, Federal-Mogul entered into
a $675 million in debtor-in-possession ("DIP") credit facility to supplement
liquidity and fund operations during the reorganization process. The DIP credit
facility expires in October, 2003 and bears interest at either alternate base
rate ("ABR") plus 2.5 percentage points or a formula based on the London
Inter-Bank Offered Rate plus 3.5 percentage points. The ABR is the greatest of
either the bank's prime rate or the base CD rate plus 1 percentage point or the
fed funds rate plus 1/2 percentage point. Products believes, based on
information presently available, that cash provided from operations and the
cash available from the DIP credit facility will provide sufficient liquidity
to allow its businesses to operate without interruption in the foreseeable
future.
Products' inventories, accounts receivable, and property, plant and
equipment have been pledged as collateral to the DIP credit facility.
Financial Statement Presentation:
The accompanying consolidated financial statements have been prepared in
accordance with AICPA Statement of Position 90-7 ("SOP 90-7"), "Financial
Reporting by Entities in Reorganization under the Bankruptcy Code" and on a
going concern basis, which contemplates continuity of operations, realization
of assets and liquidation of liabilities in the ordinary course of business.
However, as a result of the U.S. Restructuring, such realization of assets and
liquidation of liabilities, without substantial adjustments and/or changes of
ownership, are highly uncertain. Given this uncertainty, there is substantial
doubt about the ability of Products to continue as a going concern. While
operating as debtors-in-possession under the protection of Chapter 11 of the
Bankruptcy Code and Administration under the Act, and subject to approval of
the Bankruptcy Court, Administrator or the High Court or otherwise as permitted
in the ordinary course of business, Products may sell or otherwise dispose of
assets and liquidate or settle liabilities for some amounts other than those
reflected in the consolidated financial statements. Further, a plan of
reorganization could materially change the amounts and classifications in the
historical consolidated financial statements.
As reflected in the consolidated financial statements, "Liabilities Subject
to Compromise" refers to Products' liabilities incurred prior to the Petition
Date. The amounts of the various liabilities that are subject to
85
FEDERAL-MOGUL PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
compromise are set forth below. These amounts represent Federal-Mogul's
estimate of known or potential pre-petition claims to be resolved in connection
with the Restructuring Proceedings. Such claims remain subject to future
adjustments. Future adjustments may result from (i) negotiations; (ii) actions
of the Bankruptcy Court, High Court or Administrator; (iii) further
developments with respect to disputed claims; (iv) rejection of executory
contracts and unexpired leases; (v) the determination as to the value of any
collateral securing claims; (vi) proofs of claim; or (vii) other events.
Payment terms for these claims will be established in connection with the U.S.
Restructuring Proceedings.
Pursuant to the Bankruptcy Code, the Debtors have filed schedules with the
Bankruptcy Court setting forth the assets and liabilities of the Debtors as of
the Petition Date. Differences between amounts recorded by the Debtors and
claims filed by creditors will be investigated and resolved as part of the
Restructuring Proceedings. No bar dates have been set for the filing of proofs
of claim against the Debtors. Accordingly, the ultimate number and allowed
amount of such claims are not presently known. The Debtors have received
approval from the Bankruptcy Court to pay or otherwise honor certain of their
pre-petition obligations, including employee wages, salaries, benefits and
other employee obligations and from limited available funds, pre-petition
claims of certain critical vendors, certain customer programs and warranty
claims and certain other pre-petition claims.
The appropriateness of using the going concern basis for its financial
statements is dependent upon, among other things, (i) Federal-Mogul's ability
to comply with the terms of the DIP credit facility and any cash management
order entered by the Bankruptcy Court in connection with the Chapter 11 Cases;
(ii) the ability of Federal-Mogul to maintain adequate cash on hand; (iii) the
ability of Products and Federal-Mogul to generate cash from operations; (iv)
confirmation of a plan(s) of reorganization under the Bankruptcy Code; and
(v) Federal-Mogul's ability to achieve profitability following such
confirmation.
Liabilities Subject to Compromise at December 31, 2001 are comprised of (in
millions):
Accounts payable........................ $ 61.9
Accounts payable to affiliated companies 160.1
Loans payable to affiliated companies... 316.7
Environmental liabilities............... 0.5
Interest payable to affiliated companies 25.3
Asbestos liabilities.................... 225.1
------
$789.6
======
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 accounting principles generally accepted in the United States 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. Cost is
determined using the last-in, first-out method ("LIFO"). If inventories had
been valued at current cost, amounts reported would have been increased by $4.9
million and $5.3 million as of December 31, 2001 and 2000, respectively.
Inventories have also been reduced by an allowance for excess and obsolete
inventories based on management's review of inventories compared to estimated
future sales and usage.
86
FEDERAL-MOGUL PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
At December 31, inventories consisted of the following:
2001 2000
------ ------
(Millions of Dollars)
Finished products.............. $113.3 $ 94.1
Work-in-process................ 14.8 14.4
Raw materials.................. 32.2 32.0
------ ------
160.3 140.5
Reserve for inventory valuation (20.5) --
------ ------
$139.8 $140.5
====== ======
Property, Plant and Equipment: Property, plant and equipment are stated at
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--24 to 40 years
and machinery and equipment--3 to 12 years. At December 31, property, plant and
equipment consisted of the following:
2001 2000
------ ------
(Millions of Dollars)
Property, plant and equipment:
Land and land improvements. $ 6.6 $ 6.6
Buildings.................. 69.1 65.4
Machinery and equipment.... 241.8 213.3
------ ------
317.5 285.3
Accumulated depreciation... (78.5) (51.9)
------ ------
$239.0 $233.4
====== ======
Future minimum payments under noncancelable operating leases with initial or
remaining terms of more than one year are, in millions: 2002 - $4.4; 2003 -
$1.6; 2004 - $0.2; 2005 - $0.1; 2006 - $0.1 and thereafter $0.2.
Total rental expense under operating leases for the years ended December 31,
2001, 2000 and 1999 was $7.4 million, $8.7 million and $9.8 million,
respectively, exclusive of property taxes, insurance and other occupancy costs
generally payable by Federal-Mogul.
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 2001 2000
----------- ------ ------
(Millions of Dollars)
Goodwill................. 40 years $412.1 $413.5
Accumulated amortization. (34.3) (22.9)
------ ------
377.8 390.6
Trademarks............... 40 years 65.6 66.1
Developed technology..... 24 years 67.2 67.2
Assembled workforce...... 15 years 12.5 12.5
------ ------
145.3 145.8
Accumulated amortization. (17.1) (11.9)
------ ------
128.2 133.9
------ ------
Net Intangible Assets. $506.0 $524.5
====== ======
87
FEDERAL-MOGUL PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 2001 or 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.
Research and Development Costs: Products expenses research and development
costs as incurred. Research and development expense was approximately $5.9
million, $6.3 million, and $4.4 million for 2001, 2000 and 1999, respectively.
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 non-cancelable 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, inter-company amounts, income taxes
accrued and deferred, post-employment liabilities, other transactions between
Products and Federal-Mogul, foreign currency translations and equity pension
adjustments. Products recorded a provision for bad debt from affiliate debtors
of $319.0 million for pre-petition accounts receivable from related debtor
entities outside of Products at the Petition Date. These receivables were
previously recorded in Net Parent Investment.
Currency Translation: Exchange adjustments related to international
currency transactions are reflected in the consolidated statements of
operations.
Fair Value of Financial Instruments: The carrying amounts of certain
financial instruments such as accounts receivable and accounts payable
approximate their fair value.
Effect of Accounting Pronouncements: On July 20, 2001, the FASB issued SFAS
No. 141, "Business Combinations" and SFAS No. 142 "Goodwill and Other
Intangible Assets". These pronouncements significantly change the accounting
for business combinations, goodwill, and intangible assets. SFAS No. 141
eliminates the pooling-of-interests method of accounting for business
combinations and further clarifies the criteria to recognize intangible assets
separately from goodwill. The requirements of SFAS No. 141 are effective for
any business combination accounted for by the purchase method that is completed
after June 30, 2001. Under SFAS No. 142 goodwill and indefinite lived
intangible assets are no longer amortized but are reviewed for impairment
annually (or more frequently if impairment indicators arise). Separable
intangible assets that are not deemed to have an indefinite life will continue
to be amortized over their useful lives. The amortization provisions of SFAS
No. 142 apply to goodwill and intangible assets acquired after June 30, 2001.
With respect to goodwill and intangible assets acquired prior to July 1, 2001,
companies are required to adopt the pronouncement in their fiscal year
beginning after December 15, 2001.
88
FEDERAL-MOGUL PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In 2002, Products will adopt SFAS No. 142, which will result in the
discontinuance of amortization of goodwill and indefinite-lived intangible
assets that were recorded in connection with previous business combinations.
SFAS No. 142 will also require Products to perform impairment tests of goodwill
and indefinite lived intangible assets on an annual basis (or more frequently
if impairment indicators exist). During 2002, Products will complete the first
of the required impairment tests of goodwill and indefinite lived intangible
assets. Although Products has not completed its analysis of the effect of the
initial impairment test under this statement, initial assessments indicate that
adoption will require a substantial write-off of its $377.8 million of net
goodwill recorded at December 31, 2001.
Note 3: Change in Reporting Entity
In 2001, Products changed the structure of their reporting entity from prior
years to exclude financial results of three Canadian operating facilities. As
such, the financial statements and the accompanying notes as of December 31,
2000 and the two years in the period then ended have been restated to reflect
this change in reporting entity. The effect of the change in reporting entity
resulted in a $ 0.4 million increase in net income for the year ended December
31, 2000 and a $5.1 million reduction in net income for the year ended December
31, 1999.
Note 4: Acquisitions and Divestitures
During August 2001, Products completed the divestiture of its Pontotoc,
Mississippi, operation to Union Spring and Manufacturing Corporation. The
leased plant and manufacturing operation will continue to supply coil springs
and metal stampings to Products for sale to automotive aftermarket customers
under a long-term supply agreement.
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 7).
Note 5: Restructuring Charges
Cash payments made during 2001 were $3.5 million against previously
established restructuring reserves. The restructuring reserve is included in
accrued liabilities and totals $11.6 million as of December 31, 2001. Products
expects to substantially complete this program in 2002.
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 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, 2001, Products has reduced their employee headcount by 341.
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.
89
FEDERAL-MOGUL PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 6: Commitments and Contingencies
Abex and Wagner Asbestos Litigation
Background:
Two of Products' businesses formerly owned by Cooper Industries, Inc. known
as Abex and Wagner are involved as defendants in numerous court actions in the
U.S. alleging personal injury from exposure to asbestos or asbestos-containing
products. These claims mainly involve friction products. As of the Petition
Date, Abex and Wagner were defendants in approximately 68,000 and 37,000
pending claims, respectively.
The liability of Products with respect to claims alleging exposure to Wagner
products arises from the 1998 stock purchase from Cooper Industries of the
corporate successor by merger to Wagner Electric Company; the purchased entity
is now a wholly-owned subsidiary of Federal-Mogul and one of the Debtors in the
Restructuring Proceedings. As a consequence, all claims against the debtors,
including asbestos-related claims, have been stayed.
The liability of Products with respect to claims alleging exposure to Abex
products arises from a contractual liability entered into in 1994 by the
predecessor to Products whose stock Federal-Mogul purchased in 1998. Pursuant
to that contract, prior to the Restructuring Proceedings, Products was liable
for certain indemnity and defense payments incurred on behalf of an entity
known as Pneumo Abex Corporation, the successor in interest to Abex
Corporation. Effective as of the Petition Date, Products has ceased making such
payments and is currently considering whether to accept or reject the 1994
contractual liability.
As mentioned above, as of the Petition Date, all pending asbestos litigation
of Abex (as to Federal-Mogul only) and Wagner is stayed (subject to certain
exceptions in the case of governmental authorities), and no party may take any
action to pursue or collect on such asbestos claims absent specific
authorization of the Bankruptcy Court or the High Court.
Recorded Liability:
In 2000, Products decreased its estimate of probable asbestos-related
liability for Abex and Wagner claims 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 liability (approximately $225.1 million as of December 31,
2001) represented Products' estimate prior to the Restructuring Proceedings for
claims currently pending and those which were reasonably estimated to be
asserted and paid through 2012. Products did not provide a liability for claims
that may be brought subsequent to this period as it could not reasonably
estimate such claims. In estimating the liability prior to the Restructuring
Proceedings, Products made assumptions regarding the total number of claims
anticipated to be received in a future period, the typical cost of settlement
(which is sensitive to the industry in which the plaintiff claims exposure, the
alleged disease type and the jurisdiction in which the action is being
brought), the rate of receipt of claims, the settlement strategy in dealing
with outstanding claims and the timing of settlements.
As a result of the Restructuring Proceedings (see Note 1), all pending
asbestos-related litigation is stayed as previously described for the T&N
Companies.
While Products believes that the liability recorded was appropriate for
anticipated losses arising from asbestos-related claims related to Abex and
Wagner through 2012, it is Products' view that, as a result of the
Restructuring Proceedings, there is even greater uncertainty in estimating the
future asbestos liability and related insurance recovery for pending and future
claims. There are significant differences in the treatment of asbestos
90
FEDERAL-MOGUL PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
claims in a bankruptcy proceeding as compared to the tort litigation system.
Among other things, it is uncertain at this time as to the number of
asbestos-related claims that will be filed in the proceeding; the number of
future claims that will be included in a plan of reorganization; how claims for
punitive damages and claims by persons with no asbestos-related physical
impairment will be treated and whether such claims will be allowed; and the
impact historical settlement values for asbestos claims may have on the
estimation of asbestos liability in the Restructuring Proceedings.
No assurance can be given that Products will not be subject to material
additional liabilities and significant additional litigation relating to Abex
and Wagner asbestos matters through 2012 or thereafter. In the event that such
liabilities exceed the amounts recorded by the remaining insurance coverage,
Products' results of operations and financial condition could be materially
affected.
Insurance Recoverable:
Abex maintained product liability insurance coverage for most of the time
that it manufactured products that contained asbestos. Products may be liable
for certain indemnity and defense payments with respect to Abex and has the
benefit of that insurance up to the extent of that liability. Abex has been in
litigation since 1982 with the insurance carriers of its primary layer of
liability concerning coverage for asbestos claims. Abex also has substantial
excess layer liability insurance coverage that, barring unforeseen insolvencies
of excess carriers or other adverse events should provide coverage for asbestos
claims against Abex.
Wagner also maintained product liability insurance coverage for some of the
time that it manufactured products that contained asbestos. Products may be
liable for asbestos claims against Wagner and has the benefit of that
insurance, subject to the rights of other potential insureds under the
policies. Primary layer liability insurance coverage for asbestos claims
against Wagner is the subject of an agreement with Wagner's solvent primary
carriers. The agreement provides for partial reimbursement of indemnity and
defense costs for Wagner asbestos claims until exhaustion of aggregate limits.
Wagner also has substantial excess layer liability insurance coverage which,
barring unforeseen insolvencies of excess carriers or other adverse events,
should provide coverage for asbestos claims against Wagner.
The ultimate realization of insurance proceeds is directly related to the
amount of related covered claims paid by Products. If the ultimate asbestos
claims are higher than the recorded liability, Products expects the ultimate
insurance recoverable to be higher than the recorded amount. If the ultimate
asbestos claims are lower than the recorded liability, Products expects the
ultimate insurance recoverable to be lower than the recorded amount. While the
Restructuring Proceedings will impact the timing and amount of the asbestos
claims and the insurance recoverable, there has been no change to the recorded
amounts due to the uncertainties created by the Restructuring Proceedings.
Accordingly, this asset could change significantly based upon events that occur
from the Restructuring Proceedings.
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 Abex and Wagner will realize an insurance
recoverable correlating with the respective liability.
Environmental Liabilities
At December 31, 2001 and 2000, Products had accruals of $3.7 million and
$5.1 million, respectively, reserved for potential environmental liabilities,
including $2.4 million and $3.9 million, respectively, classified as long-term
liabilities, and $0.5 million included in liabilities subject to compromise at
December 31, 2001. These accruals are based on Products' current estimate of
the most likely amount of losses that it believes will be incurred.
Products has accrued the estimated cost associated with environmental
matters based upon current available information from site investigations and
consultations.
91
FEDERAL-MOGUL PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 7: 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.
Products has inter-company loans with Federal-Mogul in the amount of $270.8
million, which is included in the liabilities subject to compromise at December
31, 2001 and in net parent investment balance at December 31, 2000. In 2001,
2000 and 1999, Federal-Mogul charged interest on the inter-company loans based
on the stated rate of 7.0%. In accordance with SOP 90-7, Products has stopped
recording interest expense on its intercompany debt effective October 1, 2001.
Products' contractual interest not accrued or paid in 2001 for this note was
$4.7 million.
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 liabilities subject to compromise at December 31, 2001 and in net
parent investment balance at December 31, 2000. In accordance with SOP 90-7,
Products has stopped recording interest expense on its intercompany debt
effective October 1, 2001. Products contractual interest not accrued or paid
for this note in 2001 was $0.7 million.
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. Federal-Mogul is in default of the terms
of such debt agreements. Borrowing outstanding on such agreements aggregate
$3,971.4 million as of December 31, 2001.
Through September 30, 2001, Products participated in Federal-Mogul's
accounts receivable securitization program. Federal-Mogul sold certain accounts
receivable to Federal-Mogul Funding Corporation ("FMFC"), a special purpose
wholly owned subsidiary of Federal-Mogul, which then sold such receivables,
without recourse, to a financial conduit. The transfers of these receivables
were charged to the Net Parent Investment. Amounts excluded from the
consolidated balance sheets under these arrangements were $113.4 million at
December 31, 2000.
On October 1, 2001, FMFC notified BankOne and Wachovia Bank that an
Amortization Event, as defined in the accounts receivable securitization
agreement, had occurred effective with the U.S. Restructurings. As a result,
transfers of receivables to the trust ceased.
At December 31, 2001, there was no such accounts receivable securitization
program.
92
FEDERAL-MOGUL PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 8: Net Parent Investment
Changes in net parent investment were as follows:
(Millions of Dollars)
Balance at January 1, 1999.............................................. $ 810.5
Comprehensive income................................................. 7.4
Intercompany transactions, net....................................... (23.2)
-------
Balance at December 31, 1999............................................ 794.7
Comprehensive loss................................................... (27.4)
Intercompany transactions, net....................................... (47.7)
-------
Balance at December 31, 2000............................................ 719.6
Reclassification of intercompany accounts and loans payable at the
Petition Date to Liabilities subject to compromise................. (502.1)
Reclassification of receivables from affiliates at the Petition Date. 319.0
Transfer accounts receivable from Federal-Mogul to Products.......... 99.3
-------
635.8
Comprehensive loss................................................... (363.8)
Intercompany transactions, net....................................... 64.5
-------
Balance at December 31, 2001............................................ $ 336.5
=======
Note 9: 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.
2001 2000 1999
------ ------ -----
(Millions of Dollars)
Components of income tax expense (benefit):
Current................................. $ -- $(13.3) $15.6
Deferred................................ (16.7) 3.4 (3.5)
------ ------ -----
Income tax expense (benefit)............ $(16.7) $ (9.9) $12.1
====== ====== =====
A reconciliation between the statutory federal income tax rate and the
effective tax rate is as follows:
2001 2000
---- ----
U.S. Federal statutory rate 35% 35%
State and local taxes...... 2 1
Nondeductible goodwill..... (2) (7)
Valuation allowance........ (31) --
--- --
Effective tax rate......... 4% 29%
=== ==
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.
93
FEDERAL-MOGUL PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Significant components of Products' net deferred tax asset are non-deductible
accruals and amortization and depreciation timing differences.
2001 2000
------- ------
(Millions of Dollars)
Current deferred tax assets................ $ 47.0 $ 50.3
Long-term deferred tax assets (liabilities) 71.0 (67.0)
------- ------
Total deferred tax assets (liabilities).... 118.0 (16.7)
Valuation allowance........................ (118.0) --
------- ------
Net deferred tax liabilities............... $ -- $(16.7)
======= ======
As Products files a consolidated tax return with Federal-Mogul, the net
deferred tax liability at December 31, 2000 is a component of the Net Parent
Investment.
Note 10: Pension Plans
Products is included in the Federal-Mogul Corporation Pension Plan. As such,
the related pension liability is recorded in Net Parent Investment at December
31, 2001 and 2000.
The pension charge allocated to Products was approximately $2.1 million and
$0.7 million for 2001 and 2000, respectively. For the year ended December 31,
1999, the credit to Products from Federal-Mogul was approximately $1.0 million.
The aggregated projected benefit obligation of $801.8 million and $716.1
million at December 31, 2001 and 2000, respectively, was based upon a discount
rate of 7.5% and 8.0%, respectively. The fair value of the plan's assets were
$686.1 million and $852.5 million at December 31, 2001 and 2000, respectively.
Contributions for 2001 and 2000 were $0.5 million and $6.8 million,
respectively.
Note 11: 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 $2.3 million, $1.8
million and $2.5 million for 2001, 2000 and 1999, respectively. The unfunded
projected benefit obligation of these plans aggregated approximately $34.8
million at December 31, 2001 based upon a discount rate of 7.5%.
Note 12: 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. 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 2001, 2000 or 1999. All revenues and
assets of Products reside in the United States.
94
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 December 31, 2001 and
2000, and the related consolidated statements of operations and comprehensive
income and cash flows for each of the three years in the period ended December
31, 2001. 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, 2001 and 2000, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 2001, in conformity with
accounting principles generally accepted in the United States.
The accompanying consolidated financial statements have been prepared
assuming that Federal-Mogul Ignition Company and subsidiaries will continue as
a going concern. As more fully described in the notes to the consolidated
financial statements, on October 1, 2001, Federal-Mogul Corporation and its
wholly owned United States subsidiaries, which includes Federal-Mogul Ignition
Company, filed a voluntary petition for reorganization under Chapter 11 of the
United States Bankruptcy Code. In addition, certain of Federal-Mogul
Corporation's subsidiaries in the United Kingdom have filed jointly for Chapter
11 and Administration under the United Kingdom Insolvency Act of 1986.
Uncertainties inherent in the bankruptcy process raise substantial doubt about
Federal-Mogul Ignition Company's ability to continue as a going concern.
Management's intentions with respect to these matters are also described in the
notes. The accompanying consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
/s/ ERNST & YOUNG LLP
Detroit, Michigan
February 8, 2002
95
FEDERAL-MOGUL IGNITION COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(Millions of Dollars)
Year Ended December 31
-----------------------------
2001 2000 1999
------- ---------- ----------
(Restated) (Restated)
Net sales:
Trade......................................................................... $ 867.8 $ 960.0 $1,034.6
Affiliate..................................................................... 121.7 120.8 95.1
------- -------- --------
Total net sales........................................................... 989.5 1,080.8 1,129.7
Cost of products sold............................................................ 772.3 802.5 802.4
Selling, general and administrative expenses..................................... 159.0 156.5 125.7
Amortization of goodwill and other intangible assets............................. 14.6 19.0 18.4
Provision for bad debt from affiliate debtors.................................... 306.4 -- --
International currency (gains) losses............................................ 2.0 (1.0) 3.1
Restructuring charge............................................................. 3.7 10.2 --
Adjustment of assets held for sale fair value and other long-lived assets to fair
value.......................................................................... 289.1 4.7 --
Interest expense, net............................................................ 23.7 32.9 34.3
Gain on sale of business......................................................... (35.6) -- --
Other expense, net............................................................... 9.1 23.9 31.6
------- -------- --------
Earnings (loss) before income taxes........................................... (554.8) 32.1 114.2
Income taxes expense (benefit)................................................... (3.2) 11.2 40.8
------- -------- --------
Net earnings (loss)....................................................... (551.6) 20.9 73.4
Components of comprehensive income (loss):.......................................
Minimum pension liability, net of tax......................................... -- -- (4.1)
Translation adjustments....................................................... (6.1) 9.5 18.0
------- -------- --------
Comprehensive income (loss)............................................... $(557.7) $ 30.4 $ 87.3
======= ======== ========
See accompanying Notes to Consolidated Financial Statements
96
FEDERAL-MOGUL IGNITION COMPANY
CONSOLIDATED BALANCE SHEETS
(Millions of Dollars)
December 31
-----------------
2001 2000
ASSETS ------ ----------
(Restated)
Cash and cash equivalents.............................. $ 32.6 $ 50.5
Accounts receivable.................................... 101.9 54.6
Inventories............................................ 158.0 160.3
Supplies inventories................................... 19.9 21.2
Other.................................................. 19.7 22.2
------ --------
Total Current Assets............................ 332.1 308.8
Property, plant and equipment, net..................... 267.6 348.9
Goodwill, net.......................................... 135.5 336.4
Other intangible assets, net........................... 153.2 247.4
Other noncurrent assets................................ 11.1 5.9
------ --------
Total Assets.................................... $899.5 $1,247.4
====== ========
LIABILITIES AND NET PARENT INVESTMENT
Accounts payable....................................... $ 40.2 $ 69.3
Accrued compensation................................... 20.0 20.3
Restructuring and rationalization reserves............. 3.2 8.8
Accrued rebates and customer incentives................ 6.9 8.4
Other accrued liabilities.............................. 21.9 27.3
------ --------
Total Current Liabilities....................... 92.2 134.1
Other long-term liabilities............................ 12.4 28.9
Liabilities subject to compromise...................... 796.3 --
Minority interest in consolidated subsidiaries......... 70.7 78.3
Net Parent Investment..................................
Accumulated other comprehensive loss................ (43.9) (50.0)
Intercompany transactions........................... (28.2) 1,056.1
------ --------
Net Parent Investment........................... (72.1) 1,006.1
------ --------
Total Liabilities and Net Parent Investment..... $899.5 $1,247.4
====== ========
See accompanying Notes to Consolidated Financial Statements.
97
FEDERAL-MOGUL IGNITION COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Millions of Dollars)
Year Ended December 31
-----------------------------
2001 2000 1999
------- ---------- ----------
(Restated) (Restated)
Cash Provided From (Used by) Operating Activities:
Net earnings (loss).......................................................... $(551.6) $ 20.9 $ 73.4
Adjustments to reconcile net earnings (loss) to net cash provided from (used by)
operating activities:
Depreciation and amortization................................................ 49.6 56.0 50.6
Restructuring charge......................................................... 3.7 10.2 --
Adjustment of assets held for sale to fair value............................. 289.1 4.7 --
Provision for bad debt from affiliate debtors................................ 306.4 -- --
Gain on sale of businesses, net.............................................. (35.6) -- --
Changes in assets and liabilities
Accounts receivable...................................................... (4.3) 6.4 23.6
Inventories.............................................................. (14.8) (1.5) 12.8
Accounts payable......................................................... 8.0 (15.1) 11.4
Other assets and liabilities............................................. (42.0) 47.4 (39.6)
------- ------ ------
Net Cash Provided From Operating Activities........................... 8.5 129.0 132.2
Cash Provided From (Used by) Investing Activities:
Business acquisition, net of cash acquired................................... -- -- (1.9)
Expenditures for property, plant and equipment and other long term assets.... (73.9) (57.0) (30.1)
Proceeds from sale of business............................................... 164.8 -- --
------- ------ ------
Net Cash Provided From (Used By) Investing Activities................. 90.9 (57.0) (32.0)
Cash Provided From (Used By) Financing Activities:
Transfers to parent.......................................................... (117.3) (54.4) (73.2)
------- ------ ------
Net Cash Used By Financing Activities................................. (117.3) (54.4) (73.2)
------- ------ ------
Increase (Decrease) in Cash and Equivalents..................................... (17.9) 17.6 27.0
Cash and equivalents at beginning of year............................. 50.5 32.9 5.9
------- ------ ------
Cash and equivalents at end of year................................... $ 32.6 $ 50.5 $ 32.9
======= ====== ======
See accompanying Notes to Consolidated Financial Statements.
98
FEDERAL-MOGUL IGNITION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 operates with financial and operations 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 Ignition for all such direct expenses incurred on its
behalf. General expenses, excluding Chapter 11 and Administration related
reorganization 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 periods
presented and includes the assets, liabilities, revenues and expenses that are
directly related to Ignition's operations.
Ignition's separate debt and related interest expense have been included in
the consolidated financial statements. Ignition is fully integrated into its
parent's cash management system, as such, all of their domestic cash
requirements are provided by its parent and any excess cash generated by
Ignition is transferred to the parent.
Voluntary Reorganization Under Chapter 11 and Administration
On October 1, 2001 (the "Petition Date"), Federal-Mogul and all of its
wholly owned United States subsidiaries filed voluntary petitions for
reorganization (the "U.S. Restructuring") under Chapter 11 of the United States
Bankruptcy Code (the "Bankruptcy Code") in the United States Bankruptcy Court
for the District of Delaware (the "Bankruptcy Court"). Ignition was included in
the U.S. Restructuring. Also on October 1, 2001, certain of Federal-Mogul's
United Kingdom subsidiaries filed voluntary petitions for reorganization under
Chapter 11 of the Bankruptcy Code and petitions for Administration (the "U.K.
Restructuring") under the United Kingdom Insolvency Act of 1986 (the "Act") in
the High Court of Justice, Chancery division in London, England (the "High
Court"). Federal-Mogul and its U.S. and U.K. subsidiaries included in the U.S.
Restructuring and U.K. Restructuring are herein referred to as the "Debtors".
The U.S. Restructuring and U.K. Restructuring are herein referred to as the
"Restructuring Proceedings". The Chapter 11 cases of the Debtors (collectively,
the "Chapter 11 Cases") have been consolidated for purposes of joint
administration as In re: Federal-Mogul Global Inc., T&N Limited, et al (Case
No. 01-10578(SLR)). The Chapter 11 Cases do not include any of Federal-Mogul
non-U.S. subsidiaries outside of the U.K. subsidiaries mentioned above.
The Restructuring Proceedings were undertaken to resolve Federal Mogul's
asbestos-related litigation in a fair and equitable manner, to protect the
long-term value of the Debtors' businesses and to maintain the Debtors'
leadership positions in their markets.
Consequences of the Restructuring Proceedings:
The U.S. Debtors, including Ignition, are operating their businesses as
debtors-in-possession subject to the provisions of the Bankruptcy Code. The
U.K. Debtors are continuing to manage their operations under the supervision of
an Administrator approved by the High Court. All vendors will be paid for all
goods furnished and services provided after the Petition Date. However, as a
consequence of the U.S. Restructuring Proceedings, all pending litigation
against the U.S. Debtors as of the Petition Date is stayed (subject to certain
exceptions in the case of governmental authorities), and no party may take any
action to pursue or collect pre-petition claims except pursuant to an order of
the Bankruptcy Court or the High Court as applicable. It is the Debtors'
intention to address all pending and future asbestos-related claims and all
other pre-petition claims through a unified plan of reorganization under the
Bankruptcy Code or scheme of arrangement under the Act. However, it is currently
99
FEDERAL-MOGUL IGNITION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
impossible to predict with any degree of certainty how a plan of reorganization
or a scheme of arrangement will treat asbestos and other pre-petition claims
and what impact the U.S. Restructuring and any plan of reorganization may have
on the shares of Federal Mogul's common stock. The formulation and
implementation of the plan of reorganization or scheme of arrangement could
take a significant period of time.
In the U.S., two creditors' committees, representing asbestos claimants and
unsecured creditors, have been appointed as official committees in the Chapter
11 Cases and, in accordance with the provisions of the Bankruptcy Code, will
have the right to be heard on all matters that come before the Bankruptcy
Court. Federal-Mogul expects that the appointed committees, together with the
now-appointed legal representative for the future asbestos claimants to be
appointed by the Bankruptcy Court, will play important roles in the U.S.
Restructuring Proceedings.
As provided by the Bankruptcy Code, the Debtors initially had the exclusive
right to propose a plan of reorganization within 120 days following the
Petition Date with the Bankruptcy Court. The Debtors have asked the Bankruptcy
Court to extend the period of exclusivity to August 1, 2002, and the request
was granted. If the Debtors fail to file a plan of reorganization during such
period or any extension thereof, or if such plan of reorganization is not
accepted by the requisite numbers of creditors and equity holders entitled to
vote on the plan, other parties in interest in the Chapter 11 Cases may be
permitted to propose their own plan(s) of reorganization for the Debtors. As
provided by the Act, the Administrator will propose a scheme of arrangement
with the High Court.
Ignition is unable to predict at this time what the treatment of creditors
and equity security holders of the respective Debtors will be under any
proposed plan(s) of reorganization or schemes of arrangement. One alternative
such plan(s) of reorganization may provide, among other things, that all
present and future asbestos-related liabilities of the Debtors will be
discharged and assumed and resolved by one or more independently administered
trusts established in compliance with Section 524(g) of the Bankruptcy Code.
Such plan(s) may also provide for the issuance of an injunction by the
Bankruptcy Court pursuant to Section 524(g) of the Bankruptcy Code that will
enjoin actions against the reorganized Debtors alleging asbestos-related
claims, which claims will be paid in whole or in part by one or more Section
524(g) trusts. Similar plans of reorganization have been confirmed in chapter
11 cases of other companies involved in asbestos-related litigation. Section
524(g) of the Bankruptcy Code provides that, if certain specified conditions
are satisfied, a court may issue a supplemental permanent injunction barring
the assertion of asbestos-related claims against the reorganized company and
channeling those claims to an independent trust.
There are two possible types of U.K. schemes of arrangements. The first is
under Section 425 of the Companies Act of 1985, which may involve a scheme for
the reconstruction of the company. If a majority in number representing
three-fourths in value of the creditors or members or any class of them agree
to the compromise or arrangement it is binding if sanctioned by the High Court.
Section 425 may be invoked where there is an Administration order in force in
relation to the company. The other possible type of scheme arises under section
1 of the Insolvency Act of 1986 in relation to Company Voluntary Arrangements
("CVA"). If a majority in value representing more than three-fourths of the
creditors agrees to the compromise or arrangement set out in the CVA proposal,
it will be approved.
Ignition is unable to predict at this time what treatment will be accorded
under any such plan(s) of reorganization to intercompany indebtedness,
licenses, executory contracts, transfers of goods and services, and other
intercompany arrangements, transactions and relationships that were entered
into prior to the Petition Date. These arrangements, transactions, and
relationships may be challenged by various parties in the Chapter 11 Cases, and
the outcome of those challenges, if any, may have an impact on the treatment of
various claims under such plan(s) of reorganization.
100
FEDERAL-MOGUL IGNITION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Bankruptcy Court may confirm a plan of reorganization only upon making
certain findings required by the Bankruptcy Code, and a plan may be confirmed
over the dissent of non-accepting creditors and equity security holders if
certain requirements of the Bankruptcy Code are met. The payment rights and
other entitlements of pre petition creditors and equity shareholders may be
substantially altered by any plan(s) of reorganization confirmed in the Chapter
11 Cases. There is no assurance that there will be sufficient assets to satisfy
the Debtors' pre-petition liabilities in whole or in part, and the pre-petition
creditors of some Debtors may be treated differently than those of other
Debtors. Pre-petition creditors may receive under the proposed plan(s) less
than 100% of the face value of their claims, and the interests of
Federal-Mogul's equity security holders may be substantially diluted or
cancelled in whole or in part. As noted above, it is not possible at this time
to predict the outcome of the Chapter 11 Cases, the terms and provisions of any
plan(s) of reorganization, or the effect of the Chapter 11 reorganization
process on the claims of the pre-petition creditors of the Debtors or the
interests of Federal-Mogul's equity security holders.
Chapter 11 Financing:
In connection with the Restructuring Proceedings, Federal-Mogul entered into
court approved commitment for up to $675 million in debtor-in-possession
("DIP") credit facility to supplement liquidity and fund operations during the
reorganization process. The DIP credit facility expires in October, 2003 and
bears interest at either alternate base rate ("ABR") plus 2.5 percentage points
or a formula based on the London Inter-Bank Offered Rate plus 3.5 percentage
points. The ABR is the greatest of either the bank's prime rate or the base CD
rate plus 1 percentage point or the fed funds rate plus 1/2 percentage point.
Ignition believes, based on information presently available, that cash provided
from operations and the cash available from the DIP credit facility will
provide sufficient liquidity to allow its businesses to operate without
interruption in the foreseeable future.
Ignitions domestic inventories, accounts receivables and property, plant and
equipment have been pledged as collateral to the DIP credit facility.
Financial Statement Presentation:
The accompanying consolidated financial statements have been prepared in
accordance with AICPA Statement of Position 90-7 ("SOP 90-7"), "Financial
Reporting by Entities in Reorganization under the Bankruptcy Code" and on a
going concern basis, which contemplates continuity of operations, realization
of assets and liquidation of liabilities in the ordinary course of business.
However, as a result of the U.S. Restructuring, such realization of assets and
liquidation of liabilities, without substantial adjustments and/or changes of
ownership, are highly uncertain. Given this uncertainty, there is substantial
doubt about the ability of Ignition to continue as a going concern. While
operating as debtors-in-possession under the protection of Chapter 11 of the
Bankruptcy Code and Administration under the Act, and subject to approval of
the Bankruptcy Court, Administrator or the High Court or otherwise as permitted
in the ordinary course of business, Ignition may sell or otherwise dispose of
assets and liquidate or settle liabilities for some amounts other than those
reflected in the consolidated financial statements. Further, a plan of
reorganization could materially change the amounts and classifications in the
historical consolidated financial statements.
As reflected in the consolidated financial statements, "Liabilities Subject
to Compromise" refers to entities of Ignition's liabilities incurred prior to
the Petition Date. The amounts of the various liabilities that are subject to
compromise are set forth below. These amounts represent the Company's estimate
of known or potential pre-petition claims to be resolved in connection with the
Restructuring Proceedings. Such claims remain subject to future adjustments.
Future adjustments may result from (i) negotiations; (ii) actions of the
Bankruptcy Court, High Court or Administrator; (iii) further developments with
respect to disputed claims; (iv) rejection of executory contracts and unexpired
leases; (v) the determination as to the value of any collateral securing
claims; (vi) proofs of claim; or (vii) other events. Payment terms for these
claims will be established in connection with the U.S. Restructuring.
101
FEDERAL-MOGUL IGNITION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Pursuant to the Bankruptcy Code, the Debtors have filed schedules with the
Bankruptcy Court setting forth the assets and liabilities of the Debtors as of
the Petition Date. Differences between amounts recorded by the Debtors and
claims filed by creditors will be investigated and resolved as part of the
Restructuring Proceedings. No bar dates have been set for the filing of proofs
of claim against the Debtors. Accordingly, the ultimate number and allowed
amount of such claims are not presently known. The Debtors have received
approval from the Bankruptcy Court to pay or otherwise honor certain of their
pre-petition obligations, including employee wages, salaries, benefits and
other employee obligations and from limited available funds, pre-petition
claims of certain critical vendors, certain customer programs and warranty
claims and certain other pre-petition claims.
The appropriateness of using the going concern basis for its financial
statements is dependent upon, among other things, (i) Federal-Mogul's ability
to comply with the terms of the DIP credit facility and any cash management
order entered by the Bankruptcy Court in connection with the Chapter 11 Cases;
(ii) the ability of Federal-Mogul to maintain adequate cash on hand; (iii) the
ability of Ignition and Federal-Mogul to generate cash from operations; (iv)
confirmation of a plan(s) of reorganization under the Bankruptcy Code; and (v)
Federal-Mogul's ability to achieve profitability following such confirmation.
Liabilities Subject to Compromise at December 31, 2001 are comprised of (in
millions):
Loans payable to affiliated companies... $602.2
Accounts payable to affiliated companies 156.5
Accounts payable........................ 34.6
Environmental liabilities............... 3.0
------
Total............................ $796.3
======
Debtors' Financial Statements
The condensed financial statements of the Ignition entities included in the
U.S. Restructuring are presented as follows:
Federal-Mogul Ignition Company
Debtors' Statement of Operations
Year Ended December 31, 2001
(Millions of Dollars)
Net sales
Trade....................................................................... $ 607.8
Affiliate................................................................... 47.0
----------
Total net sales......................................................... 654.8
Cost of products sold.......................................................... 528.9
Selling, general and administrative expenses................................... 120.0
Amortization of goodwill and other intangible assets........................... 12.9
Provision for bad debts from affiliate debtors................................. 244.3
Restructuring charges.......................................................... 1.9
Adjustment of assets held for sale and other long-lived assets to fair value... 207.6
Interest expense............................................................... 28.7
Gain on sale of businesses, net................................................ (35.6)
Other expense, net............................................................. 9.9
----------
Loss before income taxes and equity loss of Non-Debtor subsidiaries..... (463.8)
Income tax benefit............................................................. (3.8)
----------
Loss before equity loss of Non-Debtor subsidiaries...................... 460.0
Equity loss of Non-Debtor subsidiaries......................................... (91.6)
----------
Net loss................................................................ $ (551.6)
==========
102
FEDERAL-MOGUL IGNITION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Federal-Mogul Ignition Company
Debtors' Balance Sheet
December 31, 2001
(Millions of Dollars)
ASSETS
Accounts receivable.................................... $ 46.2
Accounts receivable--Non-Debtor affiliates............. 11.2
Inventories............................................ 119.1
Other current assets................................... 9.7
----------
Total Current Assets............................ 186.2
Property, plant and equipment, net..................... 134.0
Goodwill, net.......................................... 115.4
Other intangible assets, net........................... 152.1
Investment in Non-Debtor subsidiaries.................. 250.6
Loan receivable--Non-Debtor affiliates................. 15.7
Loan payable--Non-Debtor affiliates.................... 1.5
Other noncurrent assets................................ 5.3
----------
Total Assets.................................... $ 859.3
==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable and accrued compensation.............. $ 12.2
Accounts payable--Non-Debtors.......................... 17.2
Other accrued liabilities.............................. 15.6
----------
Total Current Liabilities....................... 45.0
Other accrued liabilities.............................. 1.3
Liabilities subject to compromise...................... 796.3
Net Parent Investment.................................. 15.2
----------
Total Liabilities and Net Parent Investment..... $ 859.3
==========
103
FEDERAL-MOGUL IGNITION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Federal-Mogul Ignition Company
Debtors' Statement of Cash Flows
Year Ended December 31, 2001
(Millions of Dollars)
Cash Provided From (Used By) Operating Activities:
Net loss....................................................................... $ (551.6)
Adjustments to reconcile net loss to net cash provided from (used by)
operating activities:
Depreciation and amortization.............................................. 33.5
Provision for bad debt from affiliate debtors.............................. 244.3
Restructuring charges...................................................... 1.9
Gain on sale of businesses, net............................................ (35.6)
Adjustment of assets held for sale and other long-lived assets to fair
value.................................................................... 207.6
Equity loss of Non-Debtor subsidiaries..................................... 91.6
Changes in working capital................................................. (16.6)
Payments against restructuring and rationalization reserves................ (7.1)
--------
Net Cash Provided Used By Operating Activities.......................... (32.0)
Cash Provided From (Used By) Investing Activities:
Expenditures for property, plant and equipment and other long-term assets...... (15.5)
Proceeds from sales of businesses.............................................. 164.8
--------
Net Cash Provided From Investing Activities............................. 149.3
Cash Provided From (Used By) Financing Activities:
Transfers to parent............................................................ (117.3)
--------
Net Cash Used By Financing Activities................................... (117.3)
Change in cash and equivalents.......................................... --
Cash and equivalents at beginning of year............................... --
--------
Cash and equivalents at end of year..................................... $ --
========
Note 2: 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 accounting principles generally accepted in the United States 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.
104
FEDERAL-MOGUL IGNITION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Inventories: Inventories are carried at cost or, if lower, net realizable
value. Cost is determined using the last-in, first-out ("LIFO") method for
approximately 70% and 72% of the inventory at December 31, 2001 and 2000,
respectively. The remaining inventories are recorded using the first-in,
first-out method. If inventories had been valued at current cost amounts
reported would have increased by $6.6 million at December 31, 2001. LIFO
approximated cost at December 31, 2000. Inventories have also been reduced by
an allowance for excess and obsolete inventories based on management's review
of inventories compared to estimated future sales and usage. At December 31,
inventories consisted of the following:
2001 2000
------ ------
(Millions of Dollars)
Raw materials.................. $ 38.1 $ 38.6
Work-in-process................ 39.3 41.6
Finished goods................. 87.0 81.9
------ ------
164.4 162.1
Reserve for inventory valuation (6.4) (1.8)
------ ------
$158.0 $160.3
====== ======
Property, Plant and Equipment: Property, plant and equipment are stated at
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--24 to 40 years;
and machinery and equipment--3 to 12 years. At December 31, property, plant and
equipment consisted of the following:
2001 2000
------- ------
(Millions of Dollars)
Property, plant and equipment:
Land and land improvements. $ 5.4 $ 3.4
Buildings.................. 60.9 73.8
Machinery and equipment.... 317.1 367.2
------- ------
383.4 444.4
Accumulated depreciation... (115.8) (95.5)
------- ------
$ 267.6 $348.9
======= ======
Total rental expense under operating leases for the years ended December 31,
2001, 2000 and 1999 was $8.8 million, $7.6 million and $8.6 million,
respectively, exclusive of property taxes, insurance and other occupancy costs
generally payable by Federal-Mogul.
Future minimum payments under noncancelable operating leases with initial or
remaining terms of more than one year are, in millions: 2002- $3.9; 2003- $3.3;
2004- $3.1; 2005- $2.2; 2006- $0.9 and thereafter $0.1.
105
FEDERAL-MOGUL IGNITION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 2001 2000
----------- ------ ------
(Millions of Dollars)
Goodwill................. 40 years $154.4 $355.8
Accumulated amortization. (18.9) (19.4)
------ ------
135.5 336.4
Trademarks............... 40 years 120.2 188.5
Developed technology..... 24 years 44.3 69.4
Assembled workforce...... 15 years 6.2 9.6
------ ------
170.7 267.5
Accumulated amortization. (17.5) (20.1)
------ ------
153.2 247.4
------ ------
Net Intangible Assets.... $288.7 $583.8
====== ======
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. Ignition concluded that the impairment charges recorded
in 2001 were in accordance with Statement of Financial Accounting Standards
("SFAS") No. 121 "Accounting for the Impairment of Long-Lived Assets and Assets
to be Disposed of" and appropriate in the circumstances. There were no
impairment charges during 2000 or 1999. Intangible assets are amortized on a
straight-line basis over their estimated useful lives.
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. Ignition recorded a provision for bad debt from affiliated debtors
of $306.4 million for pre-petition intercompany accounts receivable from
related debtors outside of Ignition at the Petition Date. These receivables
were previously recorded in Net Parent Investment.
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.
Shipping and Handling Costs: Ignition 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 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.
106
FEDERAL-MOGUL IGNITION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 loss.
Adjustments of Assets Held for Sale and Other Long-Lived Assets to Fair
Value: Concurrent with Ignition's on-going planning process, Ignition
performed an impairment assessment of its long-lived assets in accordance with
SFAS No. 121 during the third quarter of 2001. Ignition's impending U.S.
Restructuring and recent operating losses were indicators of impairment as
provided by SFAS No. 121. Ignition determined that the undiscounted cash flows
of certain of its operating units, were less than the carrying value of the
long-lived assets of those operating units. Accordingly, Ignition adjusted the
carrying value of those assets to their fair value resulting in an impairment
charge of $289.1 million. The fair value was determined by anticipated future
cash flows discounted at a rate commensurate with the risk involved.
Effect of Accounting Pronouncements: On July 20, 2001, the FASB issued
Statement of Financial Accounting Standards ("SFAS") No. 141, "Business
Combinations" and SFAS No. 142 "Goodwill and Other Intangible Assets". These
pronouncements significantly change the accounting for business combinations,
goodwill, and intangible assets. SFAS No. 141 eliminates the
pooling-of-interests method of accounting for business combinations and further
clarifies the criteria to recognize intangible assets separately from goodwill.
The requirements of SFAS No. 141 are effective for any business combination
accounted for by the purchase method that is completed after June 30,
2001.Ignition has not made acquisitions since such time. Under SFAS No. 142
goodwill and indefinite lived assets are no longer amortized but are reviewed
for impairment annually (or more frequently if impairment indicators arise).
Separable intangible assets that are not deemed to have an indefinite life will
continue to be amortized over their useful lives. The amortization provisions
of SFAS No. 142 apply to goodwill and intangible assets acquired after June 30,
2001. With respect to goodwill and intangible assets acquired prior to July 1,
2001, companies are required to adopt the pronouncement in their fiscal year
beginning after December 15, 2001.
In 2002, Ignition will adopt SFAS No. 142, which will result in the
discontinuance of amortization of goodwill and indefinite-lived intangible
assets that were recorded in connection with previous business combinations.
SFAS 142 will also require Ignition to perform impairment tests of goodwill and
indefinite-lived intangible assets on an annual basis (or more frequently if
impairment indicators exist). During 2002, Ignition will complete the first of
the required impairment tests of goodwill and indefinite-lived intangible
assets. Ignition has not completed its analysis of the initial impairment test
under this statement but Ignition does not believe that the effect of adoption
will have a material impact on the consolidated financial statements.
107
FEDERAL-MOGUL IGNITION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 3: Change in Reporting Entity
In 2001, Ignition changed the structure of its reporting entity from the
prior year to exclude financial results of foreign operations in South Africa,
the United Kingdom, Brazil, Venezuela, Australia, India, and China and include
financial results of foreign operations in Mexico and Japan. As such, the
financial statements and the accompanying notes as of December 31, 2000 and the
two years in the period then ended have been restated to reflect this change in
reporting entity. The effect of the change in reporting entity resulted in a
$23.2 million increase to net income for the year ended December 31, 2000 and a
$29.5 million increase in net income for the year ended December 31, 1999.
Note 4: Acquisitions
Ignition completed one acquisition in 1999, which had an aggregate cost of
$1.9 million, with $1.3 million of goodwill recorded. The acquisition has been
accounted for as a purchase and the results of the acquisitions are included in
the consolidated statements of operations since the respective acquisition
dates.
Note 5: Sales of Businesses
During 2001, Ignition completed divestures of non-core business including:
. In May 2001, the divestiture of it Champion aviation ignition products
division ("Aviation") to TransDigm Inc. Aviation provides products for
all major commercial, military and general aircraft applications.
. In August 2001, the divestiture of the aftermarket operations of Blazer
Lighting Products ("Blazer") to Clean-Rite Produts LLC, an automotive
aftermarket supplier. Blazer manufactures exterior vehicle lighting
products.
In aggregate, these businesses had 2000 net sales of $90.1 million and 454
employees. Ignition received aggregated proceeds of $164.8 million. Ignition
recorded an after tax gain of $35.6 million on these divestures.
Note 6: Restructuring and Impairment
During 2001, Ignition recorded $3.7 million of restructuring charges
primarily related to severance costs resulting from the salaried employee
reductions in North America and Europe. Cash payments made during 2001 were
$9.0 million.
In 2000, Ignition recognized a $10.2 million restructuring charge related to
severance and exit costs. Severance costs of $4.7 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.
Also in 2000, Ignition recorded a $4.7 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 7: Commitments and Contingencies
At December 31, 2001 and 2000, Ignition had accruals of $5.7 million and
$11.8 million, respectively, reserved for potential environmental liabilities,
including $1.2 million and $5.4 million, respectively, classified as long-term
liabilities and $3.0 million classified as Liabilities subject to compromise at
December 31, 2001. These accruals are based on Ignition's current estimate of
the most likely amount of losses that it believes will be incurred. Ignition
has accrued the estimated cost associated with environmetal matters based upon
current available information from site investigators and consultants.
108
FEDERAL-MOGUL IGNITION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
Note 8: 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.
Ignition has an intercompany loan with Federal-Mogul in the amount of $508
million, which is included in the net parent investment balance at December 31,
2001 and 2000. In 2001, 2000 and 1999, Federal-Mogul charged interest on the
intercompany loans based on the stated rate of 6.8%. In accordance with SOP
90-7, Ignition stopped recording interest expense on its outstanding notes
effective October 1, 2001. As a result, Ignition was relieved of approximately
$8.1 million of interest expense.
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. Federal-Mogul is in default of the terms
of such debt agreements. Borrowings under such agreements aggregated $3,971.4
million as of December 31, 2001.
Through September 30, 2001, Ignition sold certain domestic accounts
receivable to Federal-Mogul Funding Corporation ("FMFC"), a special purpose
wholly-owned subsidiary of Federal-Mogul, which then sold such receivables,
without recourse, to a financial conduit. The transfers of these receivables in
2000 were charged to the Net Parent Investment account. Amounts excluded from
the consolidated balance sheets under these arrangements were $38.8 million at
December 31, 2000.
On October 1, 2001, FMFC notified BankOne and Wachovia Bank that an
Amortization Event, as defined in the accounts receivable securitization
agreement, had occurred effective with the U.S. Restructurings. As a result,
transfers of receivables to the trust ceased. At December 31, 2001, there was
no such accounts receivable securitization program.
109
FEDERAL-MOGUL IGNITION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 9: Net Parent Investment
Changes in net parent investment were as follows:
(Millions of Dollars)
---------------------
Balance at January 1, 1999.............................................. $ 786.1
Comprehensive income................................................. 87.3
Intercompany transactions, net....................................... (87.1)
--------
Balance at December 31, 1999............................................ 786.3
Comprehensive income................................................. 30.4
Intercompany transactions, net....................................... 189.4
--------
Balance at December 31, 2000............................................ 1,006.1
Reclassification of intercompany accounts and loans payable at the
Petition Date to Liabilities Subject to Compromise................. (758.7)
Reclassification of receivables from affiliates at the Petition Date. 306.4
Reclassification transfer of accounts receivable from Federal-Mogul
to Ignition........................................................ 43.0
--------
596.8
Comprehensive loss................................................... (557.7)
Intercompany transactions, net....................................... (111.2)
--------
Balance at December 31, 2001............................................ $ (72.1)
========
Ignition includes accumulated other comprehensive income in Net Parent
Investment. At December 31, 2001 accumulated other comprehensive income
included $48.0 million of foreign currency translation adjustments and $(4.1)
million of minimum pension funding. At December 31, 2000 accumulated other
comprehensive income included $54.1 million of foreign currency translation
adjustments and $(4.1) million of minimum pension funding.
Note 10: 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.
Year ended
December 31
--------------------
(Millions of Dollars)
2001 2000 1999
------ ----- ------
Components of income tax expense (benefit):
Current................................. $ 46.6 $ 6.8 $ 63.3
Deferred................................ (49.8) 4.4 (22.5)
------ ----- ------
Income tax expense (benefit)............ $ (3.2) $11.2 $ 40.8
====== ===== ======
110
FEDERAL-MOGUL IGNITION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Year Ended
December 31
--------------------
(Millions of Dollars
2001 2000 1999
---- ---- ----
Effective tax rate reconciliation:
U.S. Federal statutory rate..... 35% 35% 35%
State and local taxes........... 1 -- 1
Foreign operations.............. (1) (5) (3)
Divestitures.................... (4) -- --
Goodwill impairment............. (5) -- --
Goodwill amortization and other. 1 (5) (2)
Valuation allowance............. (26) -- --
--- -- --
Effective tax rate.............. 1% 25% 31%
=== == ==
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.
2001 2000
------- ------
(Millions of Dollars)
Current deferred tax assets/(liabilities).. $ 29.2 $ 28.1
Long term deferred tax assets/(liabilities) 117.4 (73.7)
------- ------
Gross deferred tax assets/(liabilities).... 146.6 (45.6)
Valuation allowance........................ (142.4) --
------- ------
Net deferred tax assets/(liabilities)...... $ 4.2 $(45.6)
======= ======
As Ignition files a consolidated tax return with Federal-Mogul, the net
deferred tax asset at December 31, 2001 and 2000 is a component of the Net
Parent Investment.
Note 11: Pension Plans
Ignition is included in the Federal-Mogul Corporation Pension Plan. As such,
the related pension liability is recorded in Net Parent Investment at December
31, 2001 and 2000.
The pension charge allocated to Ignition for the year ended, at December 31,
2001 was $2.9 million. For the years ended December 31, 2000 and 1999, pension
credits were $0.3 and $2.8 million, respectively.
The aggregated projected benefit obligation of $797.3 million and $721.8
million at December 31, 2001 and 2000, respectively, was based upon a discount
rate of 7.5% and 8.0%, respectively. The fair value of the plan's assets was
$686.1 million and $852.5 million at December 31, 2001 and 2000, respectively.
Contributions were $0.2 million and $7.5 million for December 31, 2001 and
2000, respectively.
Note 12: 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 $14.4
111
FEDERAL-MOGUL IGNITION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
million, $11.5 million and $11.8 million, for 2001, 2000 and 1999,
respectively. The unfunded projected benefit obligation of these plans
aggregated approximately $159.8 million at December 31, 2001, based upon a
discount rate of 7.5%
Note 13: Concentrations of Credit Risk and Other
Financial instruments, which potentially subject Ignition to concentrations
of credit risk, consist primarily of accounts receivable and cash investments.
Ignition's customer base is primarily in the automotive industry. Ignition's
credit evaluation process, reasonably short collection terms and the
geographical dispersion of sales transactions help to migate any concentration
of credit risk. Ignition requires placement of cash in financial institutions
evaluated as highly creditworthy. 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 2001, 2000 or 1999. The following
table shows the geographic information as of and for the year-ended December 31:
Net Property, Plant
Trade Sales and Equipment
---------------------- -------------------
2001 2000 1999 2001 2000
------ ------ -------- ------ ------
United States $608.2 $686.8 $ 711.7 $135.7 $200.8
Mexico....... 169.2 178.0 170.9 83.0 90.0
Europe....... 73.7 73.8 137.7 48.6 57.8
Other........ 16.7 21.4 14.3 0.3 0.3
------ ------ -------- ------ ------
Total........ $867.8 $960.0 $1,034.6 $267.6 $348.9
====== ====== ======== ====== ======
112
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, 2001 and
2000 and the related consolidated statements of operations, and cash flows for
each of the three years in the period ended December 31, 2001. 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, 2001 and 2000 and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 2001, in conformity with
accounting principles generally accepted in the United States.
The accompanying consolidated financial statements have been prepared
assuming that Federal-Mogul Powertrain, Inc. and subsidiaries will continue as
a going concern. As more fully described in the notes to the consolidated
financial statements, on October 1, 2001, Federal-Mogul Corporation and its
wholly owned United States subsidiaries, which includes Federal-Mogul
Powertrain, Inc., filed a voluntary petition for reorganization under Chapter
11 of the United States Bankruptcy Code. In addition, certain Federal-Mogul
subsidiaries in the United Kingdom have filed jointly for Chapter 11 and
Administration under the United Kingdom Insolvency Act of 1986. Uncertainties
inherent in the bankruptcy process raise substantial doubt about Federal-Mogul
Powertrain, Inc.'s ability to continue as a going concern. Management's
intentions with respect to these matters are also described in the notes. The
accompanying consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
/s/ ERNST & YOUNG LLP
Detroit, Michigan
February 8, 2002
113
FEDERAL-MOGUL POWERTRAIN, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Millions of Dollars)
Year Ended
December 31
------------------------
2001 2000 1999
--------- ------ ------
Net sales:
Trade............................................... $ 669.7 $770.4 $766.0
Affiliate........................................... 29.7 30.3 33.9
--------- ------ ------
Total net sales................................. 699.4 800.7 799.9
Cost of products sold.................................. 591.6 652.9 623.1
Selling, general and administrative expenses........... 68.5 68.7 62.3
Amortization of goodwill and other intangible assets... 12.0 13.3 13.5
Provision for bad debt from affiliate debtors.......... 1,088.4 -- --
Adjustment of assets held for sale and other long-lived
assets to fair value.................................. 133.7 -- --
Interest expense....................................... 30.2 40.6 40.9
Other expense, net..................................... 24.6 10.8 4.7
--------- ------ ------
Earnings (loss) before income taxes............. (1,249.6) 14.4 55.4
Income tax expense (benefit)........................... (40.0) 10.5 26.2
--------- ------ ------
Net Earnings (loss).......................... $(1,209.6) $ 3.9 $ 29.2
========= ====== ======
See accompanying Notes to Consolidated Financial Statements.
114
FEDERAL-MOGUL POWERTRAIN, INC.
CONSOLIDATED BALANCE SHEETS
(Millions of Dollars)
December 31
-------------
2001 2000
------ ------
ASSETS
Accounts receivable......................................... $ 84.6 $ 2.6
Inventories................................................. 33.6 41.3
Other....................................................... 5.9 5.8
------ ------
Total Current Assets..................................... 124.1 49.7
Property, plant and equipment, net.......................... 340.5 416.8
Goodwill, net............................................... 322.2 453.5
Other intangible assets, net................................ 7.1 15.6
Other noncurrent assets..................................... 24.1 19.9
------ ------
Total Assets............................................. $818.0 $955.5
====== ======
LIABILITIES AND NET PARENT INVESTMENT
Accounts payable............................................ $ 20.9 $ 40.6
Accrued compensation........................................ 15.1 17.3
Short-term debt, including current portion of long-term debt 0.5 3.0
Other accrued liabilities................................... 16.5 23.4
------ ------
Total Current Liabilities................................ 53.0 84.3
Long-term debt.............................................. 1.2 4.4
Other accrued liabilities................................... 3.1 6.1
Liabilities subject to compromise........................... 645.2 --
Minority interest in consolidated subsidiaries.............. 24.6 25.7
Net Parent Investment....................................... 90.9 835.0
------ ------
Total Liabilities and Net Parent Investment.............. $818.0 $955.5
====== ======
See accompanying Notes to Consolidated Financial Statements.
115
FEDERAL-MOGUL POWERTRAIN, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Millions of Dollars)
Year Ended
December 31
--------------------------
2001 2000 1999
--------- ------ -------
Cash provided from (used by) operating activities:
Net earnings (loss).......................................................... ($1,209.6) $ 3.9 $ 29.2
Adjustments to reconcile net earnings (loss) to net cash provided from (used by)
operating activities:
Depreciation and amortization................................................ 49.9 49.6 48.0
Provision for bad debt from affiliate debtors................................ 1,088.4 -- --
Adjustment of assets held for sale and other long-lived assets to
fair value................................................................. 133.7 -- --
Changes in assets and liabilities:
Accounts receivable...................................................... 2.6 6.4 2.0
Inventories.............................................................. 4.7 (0.3) 5.1
Accounts payable and accrued liabilities................................. (0.9) (40.4) 28.6
Other assets and liabilities, net........................................ 19.8 (7.0) (6.9)
--------- ------ -------
Net cash provided from operating activities........................... 88.6 12.2 106.0
Cash provided from (used by) investing activities:
Business acquisition, net of cash acquired................................... -- -- (25.2)
Expenditures for property, plant and equipment and other
long-term assets......................................................... (37.2) (52.6) (91.5)
Proceeds from sale of business............................................... 45.4 -- --
--------- ------ -------
Net cash provided from (used by) investing activities................. 8.2 (52.6) (116.7)
Cash provided from (used by) financing activities:
Repayments of long-term debt................................................. (4.7) (3.9) (4.6)
Transfers from (to) parent................................................... (92.1) 44.3 15.0
--------- ------ -------
Net cash provided from (used by) financing activities................. (96.8) 40.4 10.4
--------- ------ -------
Decrease in cash................................................................ -- -- (0.3)
Cash at beginning of year............................................. -- -- 0.3
--------- ------ -------
Cash at end of year................................................... $ -- $ -- $ --
========= ====== =======
See accompanying Notes to Consolidated Financial Statements.
116
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").
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, excluding Chapter 11 and Administration related
reorganization 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 periods
presented and include the assets, liabilities, revenues and expenses that are
directly related to Powertrain's operations.
Powertrain's separate debt and related interest expense have been included
in the consolidated financial statements. Powertrain is fully integrated into
its parent's cash management system, as such, all cash requirements are
provided by its parent and any excess cash generated by Powertrain is
transferred to its parent.
Voluntary Reorganization Under Chapter 11 and Administration
On October 1, 2001 (the "Petition Date"), Federal-Mogul and all of its
wholly owned United States subsidiaries filed voluntary petitions for
reorganization (the "U.S. Restructuring") under Chapter 11 of the United States
Bankruptcy Code (the "Bankruptcy Code") in the United States Bankruptcy Court
for the District of Delaware (the "Bankruptcy Court"). Powertrain was included
in the U.S. Restructuring. Also on October 1, 2001, certain of Federal-Mogul's
United Kingdom subsidiaries filed voluntary petitions for reorganization under
Chapter 11 of the Bankruptcy Code and petitions for Administration (the "U.K.
Restructuring") under the United Kingdom Insolvency Act of 1986 (the "Act") in
the High Court of Justice, Chancery division in London, England (the "High
Court"). Federal-Mogul and its U.S. and U.K. subsidiaries included in the U.S.
Restructuring and U.K. Restructuring are herein referred to as the "Debtors".
The U.S. Restructuring and U.K. Restructuring are herein referred to as the
"Restructuring Proceedings". The Chapter 11 cases of the Debtors (collectively,
the "Chapter 11 Cases") have been consolidated for purposes of joint
administration as In re: Federal-Mogul Global Inc., T&N Limited, et al (Case
No. 01-10578(SLR)). The Chapter 11 Cases do not include any of Federal-Mogul's
non-U.S. subsidiaries outside of the U.K. subsidiaries mentioned above.
The Restructuring Proceedings were undertaken to resolve Federal Mogul's
asbestos-related litigation in a fair and equitable manner, to protect the
long-term value of the Debtors' businesses and to maintain the Debtors'
leadership positions in their markets.
Consequences of the Restructuring Proceedings:
The U.S. Debtors, including Powertrain, are operating their businesses as
debtors-in-possession subject to the provisions of the Bankruptcy Code. The
U.K. Debtors are continuing to manage their operations under the supervision of
an Administrator approved by the High Court. All vendors will be paid for all
goods furnished and services provided after the Petition Date. However, as a
consequence of the U.S. Restructuring Proceedings, all pending litigation
against the U.S. Debtors as of the Petition Date is stayed (subject to certain
exceptions in the case of governmental authorities), and no party may take any
action to pursue or collect pre-petition claims except pursuant to an order of
the Bankruptcy Court or the High Court as applicable. It is the Debtors'
intention to address all pending and future asbestos-related claims and all
other pre-petition claims through a unified plan of reorganization under the
Bankruptcy Code or scheme of arrangement under the Act. However, it is currently
117
FEDERAL-MOGUL POWERTRAIN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
impossible to predict with any degree of certainty how a plan of reorganization
or a scheme of arrangement will treat asbestos and other pre-petition claims
and what impact the U.S. Restructuring and any plan of reorganization may have
on the shares of Federal Mogul's common stock. The formulation and
implementation of the plan of reorganization or scheme of arrangement could
take a significant period of time.
In the U.S., two creditors' committees, representing asbestos claimants and
unsecured creditors, have been appointed as official committees in the Chapter
11 Cases and, in accordance with the provisions of the Bankruptcy Code, will
have the right to be heard on all matters that come before the Bankruptcy
Court. Federal-Mogul expects that the appointed committees, together with the
now-appointed legal representative for the future asbestos claimants to be
appointed by the Bankruptcy Courts, will play important roles in the U.S.
Restructuring Proceedings.
As provided by the Bankruptcy Code, the Debtors initially had the exclusive
right to propose a plan of reorganization within 120 days following the
Petition Date with the Bankruptcy Court. The Debtors have asked the Bankruptcy
Court to extend the period of exclusivity to August 1, 2002, and the request
was granted. If the Debtors fail to file a plan of reorganization during such
period or any extension thereof, or if such plan of reorganization is not
accepted by the requisite numbers of creditors and equity holders entitled to
vote on the plan, other parties in interest in the Chapter 11 Cases may be
permitted to propose their own plan(s) of reorganization for the Debtors. As
provided by the Act, the Administrator will propose a scheme of arrangement
with the High Court.
Powertrain is unable to predict at this time what the treatment of creditors
and equity security holders of the respective Debtors will be under any
proposed plan(s) of reorganization or schemes of arrangement. One alternative
such plan(s) of reorganization may provide, among other things, that all
present and future asbestos-related liabilities of the Debtors will be
discharged and assumed and resolved by one or more independently administered
trusts established in compliance with Section 524(g) of the Bankruptcy Code.
Such plan(s) may also provide for the issuance of an injunction by the
Bankruptcy Court pursuant to Section 524(g) of the Bankruptcy Code that will
enjoin actions against the reorganized Debtors alleging asbestos-related
claims, which claims will be paid in whole or in part by one or more Section
524(g) trusts. Similar plans of reorganization have been confirmed in chapter
11 cases of other companies involved in asbestos-related litigation. Section
524(g) of the Bankruptcy Code provides that, if certain specified conditions
are satisfied, a court may issue a supplemental permanent injunction barring
the assertion of asbestos-related claims against the reorganized company and
channeling those claims to an independent trust.
There are two possible types of U.K. schemes of arrangements. The first is
under Section 425 of the Companies Act of 1985, which may involve a scheme for
the reconstruction of the company. If a majority in number representing
three-fourths in value of the creditors or members or any class of them agree
to the compromise or arrangement it is binding if sanctioned by the High Court.
Section 425 may be invoked where there is an Administration order in force in
relation to the company. The other possible type of scheme arises under section
1 of the Insolvency Act of 1986 in relation to Company Voluntary Arrangements
("CVA"). If a majority in value representing more than three-fourths of the
creditors agrees to the compromise or arrangement set out in the CVA proposal,
it will be approved.
Powertrain is unable to predict at this time what treatment will be accorded
under any such plan(s) of reorganization to intercompany indebtedness,
licenses, executory contracts, transfers of goods and services, and other
intercompany arrangements, transactions and relationships that were entered
into prior to the Petition Date. These arrangements, transactions, and
relationships may be challenged by various parties in the Chapter 11 Cases, and
the outcome of those challenges, if any, may have an impact on the treatment of
various claims under such plan(s) of reorganization.
118
FEDERAL-MOGUL POWERTRAIN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Bankruptcy Court may confirm a plan of reorganization only upon making
certain findings required by the Bankruptcy Code, and a plan may be confirmed
over the dissent of non-accepting creditors and equity security holders if
certain requirements of the Bankruptcy Code are met. The payment rights and
other entitlements of pre-petition creditors and equity shareholders may be
substantially altered by any plan(s) of reorganization confirmed in the Chapter
11 Cases. There is no assurance that there will be sufficient assets to satisfy
the Debtors' pre-petition liabilities in whole or in part, and the pre-petition
creditors of some Debtors may be treated differently than those of other
Debtors. Pre-petition creditors may receive under the proposed plan(s) less
than 100% of the face value of their claims, and the interests of
Federal-Mogul's equity security holders may be substantially diluted or
cancelled in whole or in part. As noted above, it is not possible at this time
to predict the outcome of the Chapter 11 Cases, the terms and provisions of any
plan(s) of reorganization, or the effect of the Chapter 11 reorganization
process on the claims of the pre-petition creditors of the Debtors or the
interests of the Company's equity security holders.
Chapter 11 Financing:
In connection with the Restructuring Proceedings, Federal-Mogul entered into
a court approved commitment for up to $675 million in debtor-in-possession
("DIP") credit facility to supplement liquidity and fund operations during the
reorganization process. The DIP credit facility expires in October, 2003 and
bears interest at either alternate base rate ("ABR") plus 2.5 percentage points
or a formula based on the London Inter-Bank Offered Rate plus 3.5 percentage
points. The ABR is the greatest of either the bank's prime rate or the base CD
rate plus 1 percentage point or the fed funds rate plus 1/2 percentage point.
Powertrain believes, based on information presently available, that cash
provided from operations and the cash available from the DIP credit facility
will provide sufficient liquidity to allow its businesses to operate without
interruption in the foreseeable future.
Powertrain's inventories, accounts receivable and property, plant and
equipment have been pledged as collateral to the DIP credit facility.
Financial Statement Presentation:
The accompanying consolidated financial statements have been prepared in
accordance with AICPA Statement of Position 90-7 ("SOP 90-7"), "Financial
Reporting by Entities in Reorganization under the Bankruptcy Code" and on a
going concern basis, which contemplates continuity of operations, realization
of assets and liquidation of liabilities in the ordinary course of business.
However, as a result of the U.S. Restructuring, such realization of assets and
liquidation of liabilities, without substantial adjustments and/or changes of
ownership, are highly uncertain. Given this uncertainty, there is substantial
doubt about the ability of Powertrain to continue as a going concern. While
operating as debtors-in-possession under the protection of Chapter 11 of the
Bankruptcy Code and Administration under the Act, and subject to approval of
the Bankruptcy Court, Administrator or the High Court or otherwise as permitted
in the ordinary course of business, Powertrain may sell or otherwise dispose of
assets and liquidate or settle liabilities for some amounts other than those
reflected in the consolidated financial statements. Further, a plan of
reorganization could materially change the amounts and classifications in the
historical consolidated financial statements.
As reflected in the consolidated financial statements, "Liabilities Subject
to Compromise" refers to Powertrain's liabilities incurred prior to the
commencement of the Petition Date. The amounts of the various liabilities that
are subject to compromise are set forth below. These amounts represent the
Company's estimate of known or potential pre-petition claims to be resolved in
connection with the Restructuring Proceedings. Such claims remain subject to
future adjustments. Future adjustments may result from (i) negotiations; (ii)
actions of the Bankruptcy Court, High Court or Administrator; (iii) further
developments with respect to disputed claims; (iv) rejection of executory
contracts and unexpired leases; (v) the determination as to the value of any
collateral securing claims; (vi) proofs of claim; or (vii) other events.
Payment terms for these claims will be established in connection with the U.S.
Restructuring.
119
FEDERAL-MOGUL POWERTRAIN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Pursuant to the Bankruptcy Code, the Debtors have filed schedules with the
Bankruptcy Court setting forth the assets and liabilities of the Debtors as of
the Petition Date. Differences between amounts recorded by the Debtors and
claims filed by creditors will be investigated and resolved as part of the
Restructuring Proceedings. No bar dates have been set for the filing of proofs
of claim against the Debtors. Accordingly, the ultimate number and allowed
amount of such claims are not presently known. The Debtors have received
approval from the Bankruptcy Court to pay or otherwise honor certain of their
pre-petition obligations, including employee wages, salaries, benefits and
other employee obligations and from limited available funds, pre-petition
claims of certain critical vendors, certain customer programs and warranty
claims and certain other pre-petition claims.
The appropriateness of using the going concern basis for the Powertrain
consolidated financial statements is dependent upon, among other things, (i)
Federal-Mogul's ability to comply with the terms of the DIP credit facility and
any cash management order entered by the Bankruptcy Court in connection with
the Chapter 11 Cases; (ii) the ability of Federal-Mogul to maintain adequate
cash on hand; (iii) the ability of Powertrain and Federal-Mogul to generate
cash from operations; (iv) confirmation of a plan(s) of reorganization under
the Bankruptcy Code; and (v) Federal-Mogul's ability to achieve profitability
following such confirmation.
Liabilities Subject to Compromise at December 31, 2001 are comprised of (in
millions):
Accounts payable........................... $ 29.5
Intercompany payables to affiliates........ 610.5
Other accrued liabilities.................. 1.0
Environmental liabilities.................. 3.2
Debt....................................... 1.0
------
Total Liabilities Subject to Compromise. $645.2
======
Debtors Financial Statements
The condensed financial statements of the Powertrain entities included in
the U.S. Restructuring are presented as follows:
Federal-Mogul Powertrain, Inc.
Debtors' Statement of Operations
Year Ended December 31, 2001
(Millions of Dollars)
Net sales................................................................... $ 672.9
Cost of products sold....................................................... 562.0
Selling, general and administrative expenses................................ 68.3
Amortization of goodwill and other intangible assets........................ 11.9
Provision for bad debt from affiliate debtors............................... 1,088.4
Adjustment of assets held for sale and other long-lived assets to fair value 105.1
Interest expense............................................................ 30.0
Other expense, net.......................................................... 25.3
---------
Loss before income taxes and equity loss of subsidiaries............. (1,218.1)
Income tax benefit.......................................................... (40.0)
---------
Loss before equity loss of subsidiaries.............................. (1,178.1)
Equity loss of Non-Debtor subsidiaries...................................... (31.5)
---------
Net Loss............................................................. $(1,209.6)
=========
120
FEDERAL-MOGUL POWERTRAIN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Federal-Mogul Powertrain, Inc.
Debtors' Balance Sheet
December 31, 2001
(Millions of Dollars)
ASSETS
Accounts receivable......................................... $ 68.4
Accounts receivable -- Non-Debtor affiliates................ 9.7
Inventories................................................. 31.3
Other....................................................... 6.6
------
Total Current Assets..................................... 116.0
Property, plant and equipment, net.......................... 326.2
Goodwill, net............................................... 322.2
Other intangible assets, net................................ 7.1
Investments in Non-Debtor subsidiaries...................... 30.7
Other noncurrent assets..................................... 4.6
------
Total Assets............................................. $806.8
======
LIABILITIES AND NET PARENT INVESTMENT
Short-term debt, including current portion of long-term debt $ 0.5
Accounts payable............................................ 17.3
Accrued compensation........................................ 14.8
Other accrued liabilities................................... 15.8
------
Total Current Liabilities................................ 48.4
Other accrued liabilities................................... 3.1
Minority interest in consolidated subsidiaries.............. 24.6
Liabilities subject to compromise........................... 645.2
Net Parent Investment....................................... 85.5
------
Total Liabilities and Net Parent Investment.............. $806.8
======
121
FEDERAL-MOGUL POWERTRAIN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Federal-Mogul Powertrain, Inc.
Debtors' Statements of Cash Flows
Year Ended December 31, 2001
(Millions of Dollars)
Cash provided from (used by) operating activities:
Net loss..................................................................... ($1,209.6)
Adjustments to reconcile net loss to net cash provided from (used by) operating
activities:
Depreciation and amortization................................................ 47.5
Provision for bad debt from affiliate debtors................................ 1,088.4
Equity loss of Non-Debtor subsidiaries....................................... 31.5
Adjustment of assets held for sale and other long-lived assets to fair value. 105.1
Changes in other assets and liabilities...................................... 25.7
---------
Net cash provided from operating activities........................... 88.6
Cash provided from (used by) investing activities:
Expenditures for property, plant and equipment and other
long-term assets......................................................... (37.2)
Proceeds from sale of business............................................... 45.4
---------
Net cash provided from investing activities........................... 8.2
Cash provided from (used by) financing activities:..............................
Repayments of long-term debt................................................. (4.7)
Transfers to parent.......................................................... (92.1)
---------
Net cash used by financing activities................................. (96.8)
---------
Change in cash.................................................................. --
Cash, at beginning of year................................................... --
---------
Cash, at end of year......................................................... $ --
=========
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 accounting principles generally accepted in the United States 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
determined by the last-in, first-out (LIFO) method was used for 24% and 9% of
the inventory at December 31, 2001 and 2000, respectively. The remaining
inventories are recorded using the first-in, first out (FIFO) method. LIFO
approximated FIFO cost at December 31, 2001 and 2000.
122
FEDERAL-MOGUL POWERTRAIN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
At December 31, inventories consisted of the following:
2001 2000
----- -----
(Millions of Dollars)
Raw materials..................... $10.5 $13.1
Work-in-process................... 10.7 15.2
Finished goods.................... 14.0 15.1
----- -----
35.2 43.4
Reserve for valuation of inventory (1.6) (2.1)
----- -----
$33.6 $41.3
===== =====
Property, Plant and Equipment: Property, plant and equipment are stated at
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--24 to 40 years
and machinery and equipment--3 to 12 years. At December 31, property, plant and
equipment consisted of the following:
2001 2000
------- ------
(Millions of Dollars)
Property, plant and equipment:
Land and land improvements. $ 4.3 $ 3.8
Buildings.................. 77.2 72.8
Machinery and equipment.... 385.0 431.1
------- ------
466.5 507.7
Accumulated depreciation... (126.0) (90.9)
------- ------
$ 340.5 $416.8
======= ======
Future minimum payments under noncancelable operating leases with initial or
remaining terms of more than one year are, in millions: 2002 -- $1.8; 2003 --
$1.4; 2004 -- $1.2; 2005 -- $1.1, 2006 -- $1.1 and thereafter $4.3.
Total rental expense under operating leases for the years ended December 31,
2001, 2000 and 1999 was approximately $3.3 million, $2.4 million and $1.2
million, respectively, exclusive of property taxes, insurance and other
occupancy costs generally payable by Federal-Mogul.
123
FEDERAL-MOGUL POWERTRAIN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 2001 2000
--------- ------ ------
(Millions of Dollars)
Goodwill......................... 40 years $353.8 $489.3
Accumulated amortization......... (31.6) (35.8)
------ ------
322.2 453.5
Trademarks....................... 40 years 1.2 1.2
Developed technology............. 24 years -- 6.6
Assembled workforce.............. 15 years 8.2 10.4
------ ------
9.4 18.2
Accumulated amortization......... (2.3) (2.6)
------ ------
7.1 15.6
------ ------
Net Intangible Assets..... $329.3 $469.1
====== ======
Changes to Goodwill and Other Amortized Intangible Assets are as follows:
Other Amortized
Goodwill Intangible Assets
-------- -----------------
(Millions of dollars)
December 31, 2000... $453.5 $15.6
Impairment....... (64.4) (7.5)
Sale of Business. (55.7) (0.2)
Amortization..... (11.2) (0.8)
------ -----
December 31, 2001... $322.2 $ 7.1
====== =====
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. Powertrain impairment charges recorded in 2001 were in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 121
"Accounting for the Impairment of Long-Lived Assets and Assets to be Disposed
of" and appropriate in the circumstances. 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 $2.8 million, $4.5 million and $3.9 million for 2001, 2000 and
1999, 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. Powertrain recorded a provision for bad debt from affiliate
debtors of $1.1 billion for pre-petition accounts and loan receivable from
related debtors outside of Powertrain at the Petition Date. These receivables
were previously recorded in Net Parent Investment.
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
124
FEDERAL-MOGUL POWERTRAIN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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: Costs of pre-production
tooling and engineering 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. Pre-production tooling and engineering costs that are owned by
Powertrain are capitalized as part of machinery and equipment.
Reclassifications: Certain items in the prior year financial statements
have been reclassified to conform to the presentation used in 2001.
Adjustment of Assets Held for Sale and Other Long-Lived Assets to Fair Value
Concurrent with an on-going planning process, Powertrain performed an
impairment assessment of its long-lived assets in accordance with SFAS No. 121
during the third quarter of 2001. Powertrain's impending Restructuring
Proceedings and recent operating losses were indicators of impairment as
provided by SFAS No. 121. Powertrain determined that the undiscounted cash
flows of certain of its operating units, were less than the carrying value of
the long-lived assets of those operating units. Accordingly, Powertrain
adjusted the carrying value of those assets to their fair value resulting in an
impairment charge of $133.7 million. The fair value was determined by
anticipated future cash flows discounted at a rate commensurate with the risk
involved.
The following is a summary of the impairment charge by long-lived asset (in
millions):
Goodwill..................... $ 64.4
Other intangible assets...... 7.5
Property, plant and equipment 61.8
------
$133.7
======
Fair Value of Financial Instruments: The carrying amounts of certain
financial instruments such as accounts receivable and accounts payable
approximate their fair value.
Effect of Accounting Pronouncements:
On July 20, 2001, the FASB issued Statement of Financial Accounting
Standards ("SFAS") No. 141, "Business Combinations" and SFAS No. 142 "Goodwill
and Other Intangible Assets". These pronouncements significantly change the
accounting for business combinations, goodwill, and intangible assets. SFAS No.
141 eliminates the pooling-of-interests method of accounting for business
combinations and further clarifies the criteria to recognize intangible assets
separately from goodwill. The requirements of SFAS No. 141 are effective for
any business combination accounted for by the purchase method that is completed
after June 30, 2001. Under SFAS No. 142 goodwill and indefinite lived
intangible assets are no longer amortized but are reviewed for impairment
annually (or more frequently if impairment indicators arise). Separable
intangible assets that are not deemed to have an indefinite life will continue
to be amortized over their useful lives. The amortization provisions of SFAS
No. 142 apply to goodwill and intangible assets acquired after June 30, 2001.
With respect to goodwill and intangible assets acquired prior to July 1, 2001,
companies are required to adopt the pronouncement in their fiscal year
beginning after December 15, 2001.
125
FEDERAL-MOGUL POWERTRAIN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In 2002, Powertrain will adopt Statement of Financial Accounting Standard
("SFAS") No. 142, which will result in the discontinuance of amortization of
goodwill and indefinite life intangible assets that were recorded in connection
with previous business combinations. SFAS No. 142 will also require Powertrain
to perform impairment tests of goodwill and indefinite lived intangible assets
on an annual basis (or more frequently, if impairment indicators exist). During
2002, Powertrain will complete the first of the required impairment tests of
goodwill and indefinite lived intangible assets. Although Powertrain has not
completed its analysis of the effect of the initial impairment test under this
statement, initial assessments indicate that adoption will require a
significant write-off of goodwill and indefinite lived intangible assets.
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. The results of operations of Crane are included in
the consolidated statement of operations since the date of the acquisition.
Note 4: Sales of Businesses
In July 2001, Powertrain completed the divestiture of its industrial heavy
wall bearing operation in McConnelsville, Ohio, to Miba-Bearings - US, LLC, a
subsidiary of Miba AG, a major Austrian industrial bearing manufacturer. This
business had 2000 net sales of $34.7 million and 279 employees. Powertrain
received aggregated proceeds of $45.4 million and recognized a pre-tax loss of
$17.2 million. The loss is included in "other expense, net" in the accompanying
consolidated statements of operations.
Note 5: Commitments and Contingencies
Environmental Liabilities
At December 31, 2001 and 2000, Powertrain had accruals of $6.8 million and
$7.7 million, respectively, reserved for potential environmental liabilities,
including $2.6 million and $6.1 million, respectively, classified as a
long-term liabilities and $3.2 million included in Liabilities Subject to
Compromise at December 31, 2001. These accruals are based on Powertrain's
current estimate of the most likely amount of losses that it believes will be
incurred.
Powertrain has accrued the estimated cost associated with environmental
matters based upon current available information from site investigations and
consultations.
Powertrain has not discounted its environmental liability. While
environmental liability accruals involve estimates that can have wide ranges of
potential liability, Powertrain has taken a proactive approach and has managed
the costs in these areas over the years. Powertrain does not believe that the
nature of their products, production processes, or materials or other factors
involved in the manufacturing process subject Powertrain to unusual risks or
exposures for environmental liability. Powertrain'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.
Note 6: Redeemable Stock
Federal-Mogul Piston Ring, Inc., which is a wholly owned subsidiary of
Powertrain issued 862 shares of Class B Common Stock, redeemable at the option
of the holder, to a minority investor in 1994. The shares of Class B stock are
redeemable for $23,201.85 per share plus accrued dividends. The redeemable
stock is included in "Minority interest in consolidated subsidiaries" in the
consolidated balance sheets.
126
FEDERAL-MOGUL POWERTRAIN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 7: 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.
Federal-Mogul has allocated Powertrain a portion of the interest it incurred
on the financing of T&N, plc. Federal-Mogul allocated Powertrain $29.8 million
of interest in 2001 and $40.0 million of interest in 2000 and 1999. 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% to Petition date. In
accordance with SOP 90-7, Powertrain stopped recording interest expense on its
outstanding notes effective October 1, 2001. As a result, Powertrain was
relieved of approximately $10.2 million of interest expense.
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. Federal-Mogul is in default of the terms
of such debt agreements. Borrowing outstanding on such agreements aggregated
$3,971.4 million as of December 31, 2001.
Through September 30, 2001, Powertrain participated in Federal-Mogul's
accounts receivable securitization program. Federal-Mogul sold certain accounts
receivable to Federal-Mogul Funding Corporation ("FMFC"), a special purpose
wholly owned subsidiary of Federal-Mogul, which then sold such receivables,
without recourse, to a financial conduit. The transfers of these receivables
were charged to the Net Parent Investment. Amounts excluded from the
consolidated balance sheets under these arrangements were $105.7 million at
December 31, 2000.
On October 1, 2001, FMFC notified BankOne and Wachovia Bank that an
Amortization Event, as defined in the accounts receivable securitization
agreement, had occurred effective with the U.S. Restructurings. As a result,
transfers of receivables to the trust ceased.
At December 31, 2001, there was no such accounts receivable securitization
program.
127
FEDERAL-MOGUL POWERTRAIN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 8: Net Parent Investment
Changes in net parent investment were as follows:
(Millions
of Dollars)
Balance at January 1, 1999.............................................. $ 826.7
Net earnings......................................................... 29.2
Intercompany transactions, net....................................... (45.0)
---------
Balance at December 31, 1999............................................ 810.9
Net earnings......................................................... 3.9
Intercompany transactions, net....................................... 20.2
---------
Balance at December 31, 2000............................................ 835.0
Reclassification of intercompany accounts and loans payable at the
Petition Date to Liabilities subject to compromise................. (610.5)
Reclassification of receivables from affiliates at the Petition Date. 1,088.4
Transfer accounts receivable from Federal-Mogul to Powertrain........ 79.7
---------
1,392.6
Net loss............................................................. (1,209.6)
Intercompany transactions, net....................................... (92.1)
---------
Balance at December 31, 2001............................................ $ 90.9
=========
Note 9: 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.
2001 2000 1999
------ ----- -----
(Millions of Dollars)
Components of income tax expense (benefit):
Current................................. $ 2.9 $ 9.8 $25.9
Deferred................................ (42.9) 0.7 0.3
------ ----- -----
Income tax expense (benefit)............ $(40.0) $10.5 $26.2
====== ===== =====
A reconciliation between the statutory federal income tax rate and the
effective tax rate is as follows:
2001 2000 1999
---- ---- ----
U.S. Federal statutory rate 35% 35% 35%
State and local taxes...... 2 3 3
Nondeductible goodwill..... (2) 35 9
Divestitures............... (2) -- --
Valuation Allowance........ (30) -- --
--- -- --
Effective tax rate......... 3% 73% 47%
=== == ==
128
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 Powertrain's net deferred tax asset are non-deductible accruals,
intangible assets and depreciation timing differences.
2001 2000
------- ------
(Millions of Dollars)
Current deferred tax (liabilities)/assets.. $ (5.6) $ 5.1
Long-term deferred tax (liabilities)/assets 378.0 (37.9)
------- ------
Net deferred (liabilities)/assets.......... 372.4 (32.8)
Valuation Allowance........................ (372.4) --
------- ------
Net deferred liabilities................... $ -- $(32.8)
======= ======
As Powertrain files a consolidated tax return with Federal-Mogul, the net
deferred tax liability at December 31, 2000 is a component of the Net Parent
Investment.
Note 10: Pension Plans
Powertrain is included in the Federal-Mogul Corporation Pension Plan. As
such the related pension liability is included in Net Parent Investment at
December 31, 2001 and 2000. The pension charge allocated to Powertrain, was
approximately $3.9 million and $3.1 million for 2001 and 2000, respectively.
For the year ended December 31, 1999, the credit to Powertrain from
Federal-Mogul was approximately $2.1 million.
The aggregated projected benefit obligation of such domestic plans of $796.9
million and $716.1 million as of December 31, 2001 and 2000, respectively was
based upon a discount rate of 7.5% and 8.0%, respectively. The fair value of
the plan's assets was $686.1 million and $852.5 million at December 31, 2001
and 2000, respectively. Contributions for 2001 were $0.1 million.
Note 11: 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 $5.3 million, $6.2
million and $3.8 million for 2001, 2000 and 1999, respectively. The unfunded
projected benefit obligation of these plans aggregated approximately $59.7
million at December 31, 2001, based upon a discount rate of 7.5%
Note 12: 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. Powertrain manufactures
and distributes pistons, piston pins, rings, cylinder liners, camshafts, engine
bearings, sintered products and sealing systems. Powertrain's largest customers
are Ford Motor Co. and General Motors Corporation, from which approximately
31%, 28% and 27% of net sales in 2001, 2000 and 1999, respectively were
derived. All revenues and assets of Powertrain reside in the United States.
129
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Federal-Mogul Corporation
We have audited the accompanying consolidated balance sheets of
Federal-Mogul Piston Rings, Inc. as of December 31, 2001 and 2000, and the
related statements of operations and cash flows for each of the three years in
the period ended December 31, 2001. 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 Piston Rings,
Inc. at December 31, 2001 and 2000, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 2001,
in conformity with accounting principles generally accepted in the United
States.
The accompanying financial statements have been prepared assuming that
Federal-Mogul Piston Rings, Inc. will continue as a going concern. As more
fully described in the notes to the financial statements, on October 1, 2001,
Federal-Mogul Corporation and its wholly owned United States subsidiaries,
which includes Federal-Mogul Piston Rings, Inc., filed a voluntary petition for
reorganization under Chapter 11 of the United States Bankruptcy Code. In
addition, certain Federal-Mogul subsidiaries in the United Kingdom have filed
jointly for Chapter 11 and Administration under the United Kingdom Insolvency
Act of 1986. Uncertainties inherent in the bankruptcy process raise substantial
doubt about Federal-Mogul Piston Ring, Inc.'s ability to continue as a going
concern. Management's intentions with respect to these matters are also
described in the notes. The accompanying financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
/S/ ERNST & YOUNG LLP
Detroit, Michigan
February 8, 2002
130
FEDERAL-MOGUL PISTON RINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Millions of Dollars)
Year Ended
December 31
----------------------
2001 2000 1999
------- ------ ------
Net Sales:
Trade...................................... $ 96.2 $119.0 $131.4
Affiliate.................................. 10.7 12.6 10.3
------- ------ ------
Total net sales............................ 106.9 131.6 141.7
Cost of products sold......................... 92.9 108.2 113.7
Selling, general and administrative expenses.. 8.0 10.3 13.6
Amortization of goodwill and other intangibles 1.5 1.5 1.4
Provision for bad debt from affiliate debtors. 147.3 -- --
Other expense, net............................ 3.1 2.1 2.8
Interest expense.............................. 5.0 6.6 6.6
------- ------ ------
Earnings (loss) before income taxes........ (150.9) 2.9 3.6
Income taxes expense.......................... 4.7 0.1 0.4
------- ------ ------
Net earnings (loss)........................ $(155.6) $ 2.8 $ 3.2
======= ====== ======
See accompanying Notes to Consolidated financial statements.
131
FEDERAL-MOGUL PISTON RINGS, INC.
CONSOLIDATED BALANCE SHEETS
(Millions of Dollars)
December 31
--------------
2001 2000
------ ------
ASSETS
Accounts receivable............................ $ 9.3 $ --
Inventories.................................... 4.7 5.8
Other.......................................... 0.5 0.1
------ ------
Total Current Assets........................ 14.5 5.9
Property, plant and equipment, net............. 63.2 66.9
Goodwill, net.................................. 45.3 46.6
Other intangibles, net......................... 2.0 2.2
------ ------
Total Assets................................ $125.0 $121.6
====== ======
LIABILITIES AND NET PARENT INVESTMENT
Accounts payable............................... $ 2.2 $ 5.6
Accrued liabilities............................ 7.0 8.2
------ ------
Total Current Liabilities................... 9.2 13.8
Liabilities subject to compromise.............. 152.4 --
Other long-term liabilities.................... 1.2 2.6
Redeemable stock............................... 20.0 20.0
Net Parent Investment.......................... (57.8) 85.2
------ ------
Total Liabilities and Net Parent Investment. $125.0 $121.6
====== ======
See accompanying Notes to Consolidated financial statements.
132
FEDERAL-MOGUL PISTON RINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Millions of Dollars)
Year Ended December 31
---------------------
2001 2000 1999
------- ----- -----
Cash provided from (used by) operating activities:
Net earnings (loss)................................................ $(155.6) $ 2.8 $ 3.2
Adjustments to reconcile net earnings (loss) to net cash provided from
(used by) operating activities:
Provision for bad debt from affiliate debtors...................... 147.3 -- --
Depreciation and amortization...................................... 8.5 8.6 7.6
Changes in assets and liabilities:.................................
Accounts receivable............................................ -- -- (7.9)
Inventories.................................................... 1.1 0.4 9.6
Accounts payable............................................... 1.1 (3.7) (2.4)
Other assets and liabilities................................... (1.7) (7.1) (3.6)
------- ----- -----
Net cash provided from operating activities................. 0.7 1.0 6.5
Cash flows used by investing activities:
Capital expenditures, net.......................................... (3.3) (6.0) (0.3)
------- ----- -----
Net cash used by investing activities....................... (3.3) (6.0) (0.3)
Cash flows used by financing activities:
Transfers from (to) parent......................................... 2.6 5.0 (6.2)
------- ----- -----
Net cash used by financing activities....................... 2.6 5.0 (6.2)
Change in cash........................................................ -- -- --
Cash at beginning of year.......................................... -- -- --
------- ----- -----
Cash at end of year................................................ $ -- $ -- $ --
======= ===== =====
See accompanying Notes to Consolidated financial statements.
133
FEDERAL-MOGUL PISTON RINGS, 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 Piston Rings, Inc. ("Piston
Rings"). Piston Rings is a wholly-owned subsidiary of Federal-Mogul Powertrain,
Inc., which is a wholly-owned subsidiary of T&N Industries, Inc., which is a
wholly-owned subsidiary of Federal-Mogul Corporation ("Federal-Mogul").
Piston Rings 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 Piston Rings for all such direct expenses incurred on its
behalf. General expenses, excluding Chapter 11 and Administration related
reorganization expenses, that are not directly attributable to the operations
of Piston Rings 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
Piston Rings 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 Piston Rings' operations.
Piston Rings' separate debt and related interest expense have been included
in the consolidated financial statements. Piston Rings is fully integrated into
its parent's cash management system, as such, all cash requirements are
provided by its parent and any excess cash generated by Piston Rings is
transferred to its parent.
Voluntary Reorganization Under Chapter 11 and Administration
On October 1, 2001 (the "Petition Date"), Federal-Mogul and all of its
wholly owned United States subsidiaries filed voluntary petitions for
reorganization (the "U.S. Restructuring") under Chapter 11 of the United States
Bankruptcy Code (the "Bankruptcy Code") in the United States Bankruptcy Court
for the District of Delaware (the "Bankruptcy Court"). Piston Rings was
included in the U.S. Restructuring. Also on October 1, 2001, certain of
Federal-Mogul's United Kingdom subsidiaries filed voluntary petitions for
reorganization under Chapter 11 of the Bankruptcy Code and petitions for
Administration (the "U.K. Restructuring") under the United Kingdom Insolvency
Act of 1986 (the "Act") in the High Court of Justice, Chancery division in
London, England (the "High Court"). Federal-Mogul and its U.S. and U.K.
subsidiaries included in the U.S. Restructuring and U.K. Restructuring are
herein referred to as the "Debtors". The U.S. Restructuring and U.K.
Restructuring are herein referred to as the "Restructuring Proceedings". The
Chapter 11 cases of the Debtors (collectively, the "Chapter 11 Cases") have
been consolidated for purposes of joint administration as In re: Federal-Mogul
Global Inc., T&N Limited, et al (Case No. 01-10578(SLR)). The Chapter 11 Cases
do not include any of the Company's non-U.S. subsidiaries outside of the U.K.
subsidiaries listed above.
The Restructuring Proceedings were taken to resolve Federal Mogul's
asbestos-related litigation in a fair and equitable manner, to protect the
long-term value of the Debtors' businesses and to maintain the Debtors'
leadership positions in their markets.
Consequences of the Restructuring Proceedings:
U.S. Debtors, including Piston Rings, are operating their businesses as
debtors-in-possession subject to the provisions of the Bankruptcy Code. The
U.K. Debtors are continuing to manage their operations under the supervision of
an Administrator approved by the High Court. All vendors will be paid for all
goods furnished and services provided after the Petition Date. However, as a
consequence of the Restructuring Proceedings, all pending litigation against
the Debtors as of the Petition Date is stayed (subject to certain exceptions in
the case of governmental authorities), and no party may take any action to
pursue or collect pre-petition claims except
134
FEDERAL-MOGUL PISTON RINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
pursuant to an order of the Bankruptcy Court as applicable. It is the Debtors'
intention to address all pending and future asbestos-related claims and all
other pre-petition claims through a unified plan of reorganization under the
Bankruptcy Code or scheme of arrangement under the Act. However, it is
currently impossible to predict with any degree of certainty how a plan of
reorganization will treat asbestos and other pre-petition claims and what
impact the Restructuring Proceedings and any plan of reorganization may have on
the shares of Federal-Mogul's common stock. The formulation and implementation
of the plan of reorganization could take a significant period of time.
In the U.S., two creditors' committees, representing asbestos claimants and
unsecured creditors have been appointed as official committees in the Chapter
11 Cases and, in accordance with the provisions of the Bankruptcy Code, will
have the right to be heard on all matters that come before the Bankruptcy
Court. Federal-Mogul expects that the appointed committees, together with the
now-appointed legal representative for the future asbestos claimants to be
appointed by the Bankruptcy Courts, will play important roles in the U.S.
Restructuring Proceedings.
As provided by the Bankruptcy Code, the Debtors initially had the exclusive
right to propose a plan of reorganization within 120 days following the
Petition Date with the Bankruptcy Court. The Debtors have asked the Bankruptcy
Court to extend the period of exclusivity to August 1, 2002, and the request
was granted. If the Debtors fail to file a plan of reorganization during such
period or any extension thereof, or if such plan of reorganization is not
accepted by the requisite numbers of creditors and equity holders entitled to
vote on the plan, other parties in interest in the Chapter 11 Cases may be
permitted to propose their own plan(s) of reorganization for the Debtors.As
provided by the Act, the Administrator will propose a scheme of arrangement
with the High Court.
Piston Rings is unable to predict at this time what the treatment of
creditors and equity security holders of the respective Debtors will be under
any proposed plan(s) of reorganization or schemes of arrangement. One
alternative such plan(s) of reorganization may provide, among other things, is
that all present and future asbestos-related liabilities of the Debtors will be
discharged and assumed and resolved by one or more independently administered
trusts established in compliance with Section 524(g) of the Bankruptcy Code.
Such plan(s) may also provide for the issuance of an injunction by the
Bankruptcy Court pursuant to Section 524(g) of the Bankruptcy Code that will
enjoin actions against the reorganized Debtors alleging asbestos-related
claims, which claims will be paid in whole or in part by one or more Section
524(g) trusts. Similar plans of reorganization have been confirmed in chapter
11 cases of other companies involved in asbestos-related litigation. Section
524(g) of the Bankruptcy Code provides that, if certain specified conditions
are satisfied, a court may issue a supplemental permanent injunction barring
the assertion of asbestos-related claims against the reorganized company and
channeling those claims to an independent trust.
There are two possible types of U.K. schemes of arrangements. The first is
under Section 425 of the Companies Act of 1985, which may involve a scheme for
the reconstruction of the company. If a majority in number representing
three-fourths in value of the creditors or members or any class of them agree
to the compromise or arrangement it is binding if sanctioned by the High Court.
Section 425 may be invoked where there is an Administration order in force in
relation to the company. The other possible type of scheme arises under section
1 of the Insolvency Act of 1986 in relation to Company Voluntary Arrangements
("CVA"). If a majority in value representing more than three-fourths of the
creditors agrees to the compromise or arrangement set out in the CVA proposal,
it will be approved.
Piston Rings is unable to predict at this time what treatment will be
accorded under any such plan(s) of reorganization to intercompany indebtedness,
licenses, executory contracts, transfers of goods and services, and other
intercompany arrangements, transactions and relationships that were entered
into prior to the Petition Date.
135
FEDERAL-MOGUL PISTON RINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
These arrangements, transactions, and relationships may be challenged by
various parties in the Chapter 11 Cases, and the outcome of those challenges,
if any, may have an impact on the treatment of various claims under such
plan(s) of reorganization.
The Bankruptcy Court may confirm a plan of reorganization only upon making
certain findings required by the Bankruptcy Code, and a plan may be confirmed
over the dissent of non-accepting creditors and equity security holders if
certain requirements of the Bankruptcy Code are met. The payment rights and
other entitlements of pre-petition creditors and equity shareholders may be
substantially altered by any plan(s) of reorganization confirmed in the Chapter
11 Cases. There is no assurance that there will be sufficient assets to satisfy
the Debtors' pre-petition liabilities in whole or in part, and the pre-petition
creditors of some Debtors may be treated differently than those of other
Debtors. Pre-petition creditors may receive under the proposed plan(s) less
than 100% of the face value of their claims, and the interests of
Federal-Mogul's equity security holders may be substantially diluted or
cancelled in whole or in part. As noted above, it is not possible at this time
to predict the outcome of the Chapter 11 Cases, the terms and provisions of any
plan(s) of reorganization, or the effect of the Chapter 11 reorganization
process on the claims of the pre-petition creditors of the Debtors or the
interests of the Company's equity security holders.
Chapter 11 Financing:
In connection with the Restructuring Proceedings, Federal-Mogul entered into
a court approved commitment for up to $675 million in a debtor-in-possession
("DIP") credit facility to supplement liquidity and fund operations during the
reorganization process. The DIP credit facility expires in 2003 and bears
interest at either alternate base rate ("ABR") plus 2.5 percentage points or a
formula based on the London Inter-Bank Offered Rate ("LIBOR") plus 3.5
percentage points. The ABR is the greatest of either the bank's prime rate or
the base CD rate plus 1 percentage point or the fed funds rate plus 1/2
percentage point. Piston Rings believes, based on information presently
available, that cash provided from operations and the cash available from the
DIP credit facility will provide sufficient liquidity to allow its businesses
to operate without interruption in the foreseeable future.
Piston Rings' inventories, accounts receivable and property, plant and
equipment have been pledged as collateral to the DIP credit facility.
Financial Statement Presentation:
The accompanying financial statements have been prepared in accordance with
AICPA Statement of Position 90-7 ("SOP 90-7"), "Financial Reporting by Entities
in Reorganization under the Bankruptcy Code" and on a going concern basis,
which contemplates continuity of operations, realization of assets and
liquidation of liabilities in the ordinary course of business. However, as a
result of the U.S. Restructuring, such realization of assets and liquidation of
liabilities, without substantial adjustments and/or changes of ownership, are
highly uncertain. Given this uncertainty, there is substantial doubt about the
ability of Piston Rings to continue as a going concern. While operating as
debtors-in-possession under the protection of Chapter 11 of the Bankruptcy
Code, and subject to approval of the Bankruptcy Court, Administrator or the
High Court or otherwise as permitted in the ordinary course of business, Piston
Rings may sell or otherwise dispose of assets and liquidate or settle
liabilities for some amounts other than those reflected in the financial
statements. Further, a plan of reorganization could materially change the
amounts and classifications in the historical financial statements.
As reflected in the financial statements, "Liabilities Subject to
Compromise" refers to Piston Rings' liabilities incurred prior to the Petition
Date. The amounts of the various liabilities that are subject to compromise are
set forth below. These amounts represent Piston Rings' estimate of known or
potential pre-petition claims to
136
FEDERAL-MOGUL PISTON RINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
be resolved in connection with the Restructuring Proceedings. Such claims
remain subject to future adjustments. Future adjustments may result from (i)
negotiations; (ii) actions of the Bankruptcy Court; (iii) further developments
with respect to disputed claims; (iv) rejection of executory contracts and
unexpired leases; (v) the determination as to the value of any collateral
securing claims; (vi) proofs of claim; or (vii) other events. Payment terms for
these claims will be established in connection with the U.S. Restructuring
Proceedings.
Pursuant to the Bankruptcy Code, the Debtors will file schedules with the
Bankruptcy Court setting forth the assets and liabilities of the Debtors as of
the Petition Date. Differences between amounts recorded by the Debtors and
claims filed by creditors will be investigated and resolved as part of the
Restructuring Proceedings. No bar dates have been set for the filing of proofs
of claim against the Debtors. Accordingly, the ultimate number and allowed
amount of such claims are not presently known. The Debtors have received
approval from the Bankruptcy Court to pay or otherwise honor certain of their
pre-petition obligations, including employee wages, salaries, benefits and
other employee obligations and from limited available funds, pre-petition
claims of certain critical vendors, certain customer programs and warranty
claims and certain other pre-petition claims.
The appropriateness of using the going concern basis for its financial
statements is dependent upon, among other things, (i) Federal-Mogul's ability
to comply with the terms of the DIP credit facility and any cash management
order entered by the Bankruptcy Court in connection with the Chapter 11 Cases;
(ii) the ability of Federal-Mogul to maintain adequate cash on hand; (iii) the
ability of Piston Rings and Federal-Mogul to generate cash from operations;
(iv) confirmation of a plan(s) of reorganization under the Bankruptcy Code; and
(v) Federal-Mogul's ability to achieve profitability following such
confirmation.
Liabilities Subject to Compromise at December 31, 2001 are comprised of (in
millions):
Accounts payable to affiliated companies $146.6
Accounts payable........................ 4.5
Environmental liabilities............... 1.3
------
Total............................ $152.4
======
Note 2: Summary of Significant Accounting Policies
Use of Estimates: The preparation of financial statements in conformity
with accounting principles generally accepted in the United States 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. Cost is
determined using the first-in, first-out method ("FIFO").
At December 31, inventories consisted of the following:
2001 2000
----- -----
(Millions of Dollars)
Raw materials.................. $ 0.4 $ 0.5
Work-in-process................ 1.9 2.8
Finished goods................. 2.5 2.7
----- -----
4.8 6.0
Reserve for inventory valuation (0.1) (0.2)
----- -----
$ 4.7 $ 5.8
===== =====
137
FEDERAL-MOGUL PISTON RINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Property, Plant and Equipment: Property, plant and equipment are stated at
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--24 to 40 years
and machinery and equipment--3 to 12 years. At December 31, property, plant and
equipment consisted of the following:
2001 2000
------ ------
(Millions of Dollars)
Property, plant and equipment:
Land and land improvements.... $ 0.3 $ 0.2
Buildings..................... 12.5 15.7
Machinery and equipment....... 74.6 79.4
------ ------
87.4 95.3
Accumulated depreciation...... (24.2) (28.4)
------ ------
$ 63.2 $ 66.9
====== ======
Rental expense under operating leases for the year ended December 31, 2001
was $0.2 million. For the years ended December 31, 2000 and December 31, 1999,
respectively, rental expense under operating leases was $0.3 million.
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 2001 2000
--------- ----- -----
(Millions of Dollars)
Goodwill......................... 40 years $50.1 $50.1
Accumulated amortization......... (4.8) (3.5)
----- -----
45.3 46.6
Assembled workforce.............. 15 years 2.6 2.6
Accumulated amortization......... (0.6) (0.4)
----- -----
2.0 2.2
----- -----
Net Intangible Assets..... $47.3 $48.8
===== =====
Intangible assets are periodically reviewed for indicators of impairment. If
impairment exists, 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.
Revenue Recognition: Piston Rings 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. Piston
Rings generally records sales upon shipment of product to customers and
transfer of title under standard commercial terms.
138
FEDERAL-MOGUL PISTON RINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Recoverable Customer Engineering and Tooling: Pre-production tooling and
engineering costs that Piston Rings will not own and that will be used in
producing Piston Rings under long-term supply arrangements are expensed as
incurred unless the supply arrangement provides Piston Rings the non-cancelable
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 Piston Rings are capitalized as part of machinery and equipment.
Shipping and Handling Costs: Piston Rings 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 Piston Rings' historical earnings, inter-company amounts, income
taxes accrued and deferred, post-employment liabilities, other transactions
between Piston Rings and Federal-Mogul, foreign currency translations and
equity pension adjustments. Piston Rings recorded a provision for bad debt from
affiliated debtors of $147.3 million for pre-petition accounts receivable from
related debtor entities outside of Piston Rings at the Petition Date. These
receivables were previously recorded in Net Parent Investment.
Fair Value of Financial Instruments: The carrying amounts of certain
financial instruments such as accounts receivable and accounts payable
approximate their fair value.
Effect of Accounting Pronouncements: On July 20, 2001, the FASB issued
Statement of Financial Accounting Standards ("SFAS") No. 141, "Business
Combinations" and SFAS No. 142 "Goodwill and Other Intangible Assets". These
pronouncements significantly change the accounting for business combinations,
goodwill, and intangible assets. SFAS No. 141 eliminates the
pooling-of-interests method of accounting for business combinations and further
clarifies the criteria to recognize intangible assets separately from goodwill.
The requirements of SFAS No. 141 are effective for any business combination
accounted for by the purchase method that is completed after June 30, 2001.
Under SFAS No. 142 goodwill and indefinite lived intangible assets are no
longer amortized but are reviewed for impairment annually (or more frequently
if impairment indicators arise). Separable intangible assets that are not
deemed to have an indefinite life will continue to be amortized over their
useful lives. The amortization provisions of SFAS No. 142 apply to goodwill and
intangible assets acquired after June 30, 2001. With respect to goodwill and
intangible assets acquired prior to July 1, 2001, companies are required to
adopt the pronouncement in their fiscal year beginning after December 15, 2001.
In 2002, Piston Rings will adopt SFAS No. 142, which will result in the
discontinuance of amortization of goodwill and indefinite life intangible
assets that were recorded in connection with previous business combinations.
SFAS No. 142 will also require Piston Rings to perform impairment tests of
goodwill and indefinite lived intangible assets on an annual basis (or more
frequently if impairment indicators exist). During 2002, Piston Rings will
complete the first of the required impairment tests of goodwill and indefinite
lived intangible assets. Although Piston Rings has not completed its analysis
of the effect of the initial impairment test under this statement, initial
assessments indicate that adoption will require a substantial write-off of
Piston Rings' $45.3 million of net goodwill recorded at December 31, 2001.
Note 3: Commitments and Contingencies
Environmental Liabilities
At December 31, 2001 and 2000, Piston Rings had accruals of $2.3 million and
$2.7 million, respectively, reserved for potential environmental liabilities,
including $0.7 million and $2.1 million, respectively, classified as long-term
liabilities, and $1.3 million included in Liabilities Subject to Compromise at
December 31, 2001. These accruals are based on Piston Rings' current estimate
of the most likely amount of losses that it believes
139
FEDERAL-MOGUL PISTON RINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
will be incurred. Piston Rings has accrued the estimated cost associated with
environmental matters based upon current available information from site
investigations and consultants.
Piston Rings has not discounted its environmental liability. While
environmental liability accruals involve estimates that can have wide ranges of
potential liability, Piston Rings has taken a proactive approach and has
managed the costs in these areas over the years. Piston Rings does not believe
that the nature of their products, production processes, or materials or other
factors involved in the manufacturing process subject Piston Rings to unusual
risks or exposures for environmental liability. Piston Rings' 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 4: Redeemable Stock
Piston Rings issued 862 shares of Class B common stock, redeemable at the
option of the holder, to a minority investor in 1994. The shares of Class B
stock are redeemable for $23,201.85 per share plus accrued dividends.
Note 5: Long-Term Debt and Other Financing Arrangements
Piston Rings' cash and indebtedness is managed by Federal-Mogul. The
majority of the cash provided by or used by a particular division, including
Piston Rings, is provided through this consolidated cash and debt management
system. As a result, the amount of domestic cash or debt historically related
to Piston Rings is not determinable.
Piston Rings has no inter-company loans with Federal-Mogul.
Federal-Mogul has allocated Piston Rings a portion of the interest it
incurred on the financing of T&N plc. Federal-Mogul allocated Piston Rings $5.0
million of interest in 2001, and $6.6 million in 2000 and 1999. Interest was
calculated by allocating a portion of the amount Federal-Mogul borrowed to
purchase T&N plc. Federal-Mogul allocated $110.8 million of the debt to Piston
Rings and calculated interest at a rate of 6%. In accordance with SOP 90-7,
Piston Rings stopped recording interest expense on its intercompany debt
effective October 1, 2001.
Federal-Mogul has pledged 100% of Piston Rings' 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, Piston Rings 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. Federal-Mogul is in default of the terms
of such debt agreements. Borrowings under such agreements aggregated $3,971.4
million as of December 31, 2001.
Through September 30, 2001, Piston Rings participated in Federal-Mogul's
accounts receivable securitization program. Federal-Mogul sold certain accounts
receivable to Federal-Mogul Funding Corporation ("FMFC"), a special purpose
wholly owned subsidiary of Federal-Mogul, which then sold such receivables,
without recourse, to a financial conduit. The transfers of these receivables
were charged to the Net Parent Investment. Amounts excluded from the
consolidated balance sheets under these arrangements were $12.8 million at
December 31, 2000.
140
FEDERAL-MOGUL PISTON RINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
On October 1, 2001, FMFC notified BankOne and Wachovia Bank that an
Amortization Event, as defined in the accounts receivable securitization
agreement, had occurred effective with the U.S. Restructurings. As a result,
transfers of receivables to the trust ceased.
At December 31, 2001, there was no such accounts receivable securitization
program.
Note 6: Net Parent Investment
Changes in net parent investment were as follows:
(Millions
of
Dollars)
Balance at January 1, 1999..................................................... $ 109.7
Comprehensive income........................................................ 3.2
Intercompany transactions, net.............................................. (19.2)
-------
Balance at December 31, 1999................................................... 93.7
Comprehensive income........................................................ 2.8
Intercompany transactions, net.............................................. (11.3)
-------
Balance at December 31, 2000................................................... 85.2
Reclassification of intercompany accounts and loans payable at the Petition
Date to Liabilities subject to compromise................................. (146.6)
Reclassification of receivables from affilates at the Petition Date......... 147.3
Transfer of accounts receivable from Federal-Mogul to Piston Rings.......... 9.3
-------
95.2
Comprehensive loss.......................................................... (155.6)
Intercompany transactions, net.............................................. 2.6
-------
Balance at December 31, 2001................................................... $ (57.8)
=======
Note 7: Income Taxes
Piston Rings 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.
2001 2000 1999
---- ---- ----
(Millions of Dollars)
Components of income tax expense:
Current....................... $ -- $ -- $ --
Deferred...................... 4.7 0.1 0.4
---- ---- ----
Income tax expense............ $4.7 $0.1 $0.4
==== ==== ====
A reconciliation between the statutory federal income tax rate and the
effective tax rate is as follows:
2001 2000
---- ----
U.S. Federal statutory rate 35% 35%
State and local taxes...... 2 2
Nondeductible goodwill..... (1) (30)
Valuation allowance........ (39) --
--- ---
Effective tax rate......... (3)% 7%
=== ===
141
FEDERAL-MOGUL PISTON RINGS, 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 Piston Rings' net deferred tax asset are non-deductible accruals
and amortization and depreciation timing differences.
2001 2000
------ -----
(Millions of Dollars)
Current deferred tax assets.. $ 0.6 $ 0.6
Long-term deferred tax assets 59.2 10.1
------ -----
Total deferred tax assets.... 59.8 10.7
Valuation allowance.......... (59.8) --
------ -----
Net deferred tax assets...... $ -- $10.7
====== =====
As Piston Rings files a consolidated tax return with Federal-Mogul, the net
deferred tax asset at December 31, 2000 is a component of the Net Parent
Investment.
Note 8: Pension Plans
Piston Rings is included in the Federal-Mogul Corporation Pension Plan. As
such the related pension liability is included in Net Parent Investment at
December 31, 2001 and 2000.
The pension charge allocated to Piston Rings, was approximately $0.7 million
for 2001. For the years ended December 31, 2000, and 1999, the credit to Piston
Rings from Federal-Mogul was approximately $0.2 million and $0.6 million,
respectively.
The fully funded aggregated projected benefit obligation of such domestic
plans of $796.9 million and $716.1 million at December 31, 2001 and 2000,
respectively was based upon a discount rate of 7.5% and 8.0%, respectively. No
contributions from Piston Rings were made for the year ended December 31, 2001.
Contributions for the year ended December 31, 2000 were $6.9 million. The fair
value of the plan's assets was $686.1 million and $852.5 million at December
31, 2001 and 2000, respectively.
Note 9: Postretirement Benefits Other Than Pensions
As part of T&N plc. and subsequently Federal-Mogul, benefits provided to
employees of Piston Rings 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 94% of the total. The majority of participants under such plans
are retirees. The expense related to such plans approximated $5.3 million, $6.2
million and $3.8 million for 2001, 2000 and 1999, respectively. The unfunded
projected benefit obligation of these plans aggregated approximately $59.7
million at December 31, 2001, based upon a discount rate of 7.5%
Note 10: Concentrations of Credit Risk and Other
Piston Rings 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 Piston Rings'
customer base. Piston Rings performs periodic credit evaluations of their
customers and generally does not require collateral.
Piston Rings operates in a single business segment. Piston Rings
manufactures and distributes piston rings for use in many engine markets
including automotive, heavy duty, diesel, locomotive and compressors. In
addition, Piston Rings manufactures and distributes liners to automotive and
heavy-duty engine assemblers. Piston Rings' largest customers are Briggs &
Stratton, Cummins, Ford Motor Co., General Motors, and Navistar from which
approximately 58%, 54%, and 24% of net sales in 2001, 2000 and 1999,
respectively, were derived. All revenues and assets of Piston Rings reside in
North America, principally in the United States.
142