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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

x Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the Quarterly Period Ended September 30, 2014.

 

¨ Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the Transition Period From                      to                     .

Commission File No. 333-128166-10

 

 

 

LOGO

Affinia Group Intermediate Holdings Inc.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   34-2022081

(State or Other Jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification No.)

 

1 Wix Way, Gastonia, North Carolina   28054
(Address of Principal Executive Offices)   (Zip Code)

(704) 869-3300

(Registrant’s Telephone Number, Including Area Code)

1101 Technology Drive,

Ann Arbor, Michigan 48108

(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

 

 

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  ¨    No  x

(Note: As a voluntary filer not subject to the filing requirements of Section 13 or 15(d) of the Exchange Act, the registrant has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the registrant would have been required to file such reports) as if it were subject to such filing requirements).

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   ¨    Accelerated filer   ¨
Non-accelerated filer   x  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

There were 1,000 shares outstanding of the registrant’s common stock as of November 13, 2014 (all of which are privately owned and not traded on a public market).

 

 

 


Table of Contents

Index

Affinia Group Intermediate Holdings Inc.

 

Part I FINANCIAL INFORMATION

  

Item 1. Financial Statements (unaudited)

     4   

Condensed Consolidated Statements of Operations—Three and Nine Months Ended September 30, 2014 and 2013

     4   

Condensed Consolidated Statements of Comprehensive Income (Loss)—Three and Nine Months Ended September  30, 2014 and 2013

     5   

Condensed Consolidated Balance Sheets—September 30, 2014 and December 31, 2013

     6   

Condensed Consolidated Statements of Cash Flows—Nine Months Ended September 30, 2014 and 2013

     7   

Notes to Unaudited Condensed Consolidated Financial Statements

     8   

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

     28   

Item 3. Quantitative and Qualitative Disclosures About Market Risk

     46   

Item 4. Controls and Procedures

     47   

Part II OTHER INFORMATION

  

Item 1. Legal Proceedings

     48   

Item 1A. Risk Factors

     48   

Item 5. Other Information

     48   

Item 6. Exhibits

     49   

Signatures

     50   

 

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Table of Contents

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This report includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These forward-looking statements include statements concerning our plans, objectives, goals, strategies, future events, future revenue or performance, capital expenditures, financing needs, plans or intentions relating to acquisitions, business trends and other information that is not historical information. When used in this report, the words “anticipates,” “believes,” “estimates,” “expects,” “forecasts,” “intends,” “plans,” “projects,” or future or conditional verbs, such as “could,” “may,” “should,” or “will,” and variations of such words or similar expressions are intended to identify forward-looking statements. All forward-looking statements, including, without limitation, management’s examination of historical operating trends and data are based upon our current expectations and various assumptions. Our expectations, beliefs and projections are expressed in good faith and we believe there is a reasonable basis for them. However, there is no assurance that these expectations, beliefs and projections will be achieved. For a more detailed discussion of these risks and uncertainties, see Part I, “Item 1A. Risk Factors” in our Annual Report on form 10-K for the year ended December 31, 2013. With respect to all forward-looking statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.

There are a number of risks and uncertainties that could cause our actual results to differ materially from the forward-looking statements contained in this report. Such risks, uncertainties and other important factors include, among others, domestic and global economic conditions and the resulting impact on the availability and cost of credit; financial viability of key customers and key suppliers; our dependence on our largest customers; increased crude oil and gasoline prices and resulting reductions in global demand for the use of automobiles; the shift in demand from premium to economy products; pricing and pressures from imports; increasing costs for manufactured components, raw materials and energy; the expansion of return policies or the extension of payment terms; risks associated with our non-U.S. operations; risks related to our receivables factoring arrangements; product liability and warranty and recall claims brought against us; reduced inventory levels by our distributors resulting from consolidation and increased efficiency; environmental and automotive safety regulations; the availability of raw materials, manufactured components or equipment from our suppliers; challenges to our intellectual property portfolio; our ability to develop improved products; the introduction of improved products and services that extend replacement cycles or otherwise reduce demand for our products; our ability to achieve cost savings from our restructuring plans; our ability to successfully effect dispositions of existing lines of business; our ability to successfully combine our operations with any businesses we have acquired or may acquire; risk of impairment charges to our long-lived assets; risk of impairment to intangibles and goodwill; the risk of business disruptions related to a variety of events or conditions including natural and man-made disasters; risks associated with foreign exchange rate fluctuations; risks associated with our expansion into new markets; the impact on our tax rate resulting from the mix of our profits and losses in various jurisdictions; reductions in the value of our deferred tax assets; difficulties in developing, maintaining or upgrading information technology systems; risks associated with doing business in corrupting environments; and our substantial leverage and limitations on flexibility in operating our business contained in our debt agreements. Additionally, there may be other factors that could cause our actual results to differ materially from the forward-looking statements. Our forward-looking statements apply only as of the date of this report or as of the date they were made. We undertake no obligation to update or revise forward-looking statements to reflect events or circumstances that arise after the date made or to reflect the occurrence of unanticipated events.

 

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Table of Contents

PART I

FINANCIAL INFORMATION

 

Item 1. Financial Statements

Affinia Group Intermediate Holdings Inc.

Condensed Consolidated Statements of Operations (Unaudited)

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 

(Dollars in millions)

   2014     2013     2014     2013  

Net sales

   $ 364      $ 351      $ 1,060      $ 1,023   

Cost of sales

     (274     (269     (800     (784
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     90        82        260        239   

Selling, general and administrative expenses

     (48     (51     (150     (142
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating profit

     42        31        110        97   

Loss on extinguishment of debt

     —         —         —         (15

Other income and expense, net

     —         (1     (10     (3

Interest expense

     (15     (15     (45     (58
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations before income tax provision, equity in income (loss), net of tax and noncontrolling interest

     27        15        55        21   

Income tax provision

     (10     (8     (26     (12

Equity in income (loss), net of tax

     —         (2     —         (2
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income from continuing operations

     17        5        29        7   

Income from discontinued operations, net of tax

     6        4        28        7   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     23        9        57        14   

Less: net income attributable to noncontrolling interest, net of tax

     —         —         —         —    
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to the Company

   $ 23      $ 9      $ 57      $ 14   
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to the condensed consolidated financial statements.

 

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Table of Contents

Affinia Group Intermediate Holdings Inc.

Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited)

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 

(Dollars in millions)

   2014     2013     2014     2013  

Net income

   $ 23      $ 9      $ 57      $ 14   

Other comprehensive income (loss), net of tax:

        

Change in fair value of interest rate swap

     1        (1     (4     5   

Change in foreign currency translation adjustments

     (20     2        (13     (15
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive (loss) income

     (19     1        (17     (10
  

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income

     4        10        40        4   

Less: comprehensive income attributable to noncontrolling interest, net of tax

     —         —         —         —    
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income attributable to the Company

   $ 4      $ 10      $ 40      $ 4   
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to the condensed consolidated financial statements.

 

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Affinia Group Intermediate Holdings Inc.

Condensed Consolidated Balance Sheets (Unaudited)

 

(Dollars in millions)

   September 30,
2014
    December 31,
2013
 

Assets

    

Current assets:

    

Cash and cash equivalents

   $ 58      $ 101   

Trade accounts receivable, less allowances of $4 million at September 30, 2014 and $2 million at December 31, 2013

     171        141   

Inventories, net

     230        221   

Current deferred taxes

     32        39   

Prepaid taxes

     29        29   

Other current assets

     37        32   

Current assets of discontinued operations

     —         141   
  

 

 

   

 

 

 

Total current assets

     557        704   

Property, plant, and equipment, net

     121        123   

Goodwill

     3        3   

Other intangible assets, net

     55        60   

Deferred financing costs

     15        18   

Deferred income taxes

     108        80   

Investments and other assets

     18        21   
  

 

 

   

 

 

 

Total assets

   $ 877      $ 1,009   
  

 

 

   

 

 

 

Liabilities and shareholder’s equity (deficit)

    

Current liabilities:

    

Accounts payable

   $ 141      $ 121   

Notes payable

     13        23   

Current maturities of long-term debt

     —         7   

Other accrued expenses

     92        78   

Accrued payroll and employee benefits

     23        19   

Current liabilities of discontinued operations

     —         31   
  

 

 

   

 

 

 

Total current liabilities

     269        279   

Long-term debt

     807        907   

Deferred employee benefits and other noncurrent liabilities

     21        24   
  

 

 

   

 

 

 

Total liabilities

     1,097        1,210   
  

 

 

   

 

 

 

Contingencies and commitments

    

Shareholder’s equity:

    

Common stock, $.01 par value, 1,000 shares authorized, issued and outstanding

     —         —    

Additional paid-in capital

     454        456   

Accumulated deficit

     (638     (638

Accumulated other comprehensive loss

     (37     (20
  

 

 

   

 

 

 

Total shareholder’s deficit of the Company

     (221     (202

Noncontrolling interest in consolidated subsidiaries

     1        1   
  

 

 

   

 

 

 

Total shareholder’s deficit

     (220     (201
  

 

 

   

 

 

 

Total liabilities and shareholder’s equity (deficit)

   $ 877      $ 1,009   
  

 

 

   

 

 

 

See accompanying notes to the condensed consolidated financial statements.

 

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Affinia Group Intermediate Holdings Inc.

Condensed Consolidated Statements of Cash Flows (Unaudited)

 

     Nine Months Ended
September 30,
 

(Dollars in millions)

   2014     2013  

Operating activities

    

Net income

   $ 57      $ 14   

Adjustments to reconcile net income to net cash provided by operating activities:

    

Depreciation and amortization

     15        17   

Currency devaluation

     7        2  

Gain on the sale of Chassis group

     (32     —    

Stock-based compensation

     —          1   

Loss on extinguishment of debt

     —         15   

Write-off of unamortized deferred financing costs

     1        8   

Write-off of original issue discount on Subordinated Notes

     —         1   

Provision for deferred income taxes

     (29     9   

Change in trade accounts receivable

     (58     (24

Change in inventories

     (19     (6

Change in other current operating assets

     3        (33

Change in other current operating liabilities

     54        51   

Change in other

     5        14   
  

 

 

   

 

 

 

Net cash provided by operating activities

     4        69   

Investing activities

    

Proceeds from the sale of Chassis group

     149        —    

Proceeds from the sale of an equity method investment

     4        —    

Investment in companies, net cash acquired

     —         (1

Additions to property, plant and equipment

     (18     (18
  

 

 

   

 

 

 

Net cash provided by (used in) investing activities

     135        (19

Financing activities

    

Net decrease in other short-term debt

     —         (1

Payment of deferred financing costs

     —         (15

Repayments of other debt

     (10     —    

Repayments of Secured Notes

     —         (195

Repayments of Subordinated Notes

     —         (367

Repayment of Term Loans

     (109     (1

Proceeds from Senior Notes

     —         250   

Proceeds from Term Loans

     —         667   

Distribution to our shareholders

     (57     (352
  

 

 

   

 

 

 

Net cash used in financing activities

     (176     (14

Effect of exchange rates on cash

     (6     (1

(Decrease) increase in cash and cash equivalents

     (43     35   

Cash and cash equivalents at beginning of the period

     101        51   
  

 

 

   

 

 

 

Cash and cash equivalents at end of the period

   $ 58      $ 86   
  

 

 

   

 

 

 

See accompanying notes to the condensed consolidated financial statements.

 

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Affinia Group Intermediate Holdings, Inc.

Notes to the Condensed Consolidated Financial Statements (Unaudited)

1. DESCRIPTION OF BUSINESS

Affinia Group Intermediate Holdings Inc. (the “Company”), headquartered in Gastonia, North Carolina, is an innovative global leader in the design, manufacture, distribution and marketing of industrial grade filtration products and services and replacement products in South America. The Company’s broad range of filtration and other products are sold in North America, Europe, South America, Asia and Africa. The Company’s brands include WIX®, FiltronTM, Nakata® and ecoLAST®. Additionally, the Company provides private label products for certain customers, including NAPA®

The Company is wholly-owned by Affinia Group Holdings Inc. (“Holdings”), a company controlled by affiliates of The Cypress Group, L.L.C. (“Cypress”).

As discussed further in Note 5 to the Condensed Consolidated Financial Statements, “Discontinued Operation—Chassis”, in the fourth quarter of 2013, management committed to a plan to sell its global chassis business (the “Chassis group”) to F-M Chassis, an affiliate of Federal-Mogul Corporation. Accordingly, the results of the Chassis group have been included as a component of discontinued operations in the Condensed Consolidated Statements of Operations for all periods presented. The sale of the Chassis group was completed on May 1, 2014.

The accompanying Condensed Consolidated Financial Statements include the accounts of the Company and its subsidiaries. In these Notes to the Condensed Consolidated Financial Statements, the terms the “Company,” “we,” “our” and “us” refer to Affinia Group Intermediate Holdings Inc. and its direct and indirect subsidiaries on a consolidated basis.

2. BASIS OF PRESENTATION

These Condensed Consolidated Financial Statements have been prepared in accordance with generally accepted accounting principles (“GAAP”) in the United States (“U.S.”) for interim financial information and with the instructions to Form 10-Q and Regulation S-X. Accordingly, these Condensed Consolidated Financial Statements do not include all information and notes required by GAAP in the U.S. for annual financial statements. Because the interim Condensed Consolidated Financial Statements and Notes do not include all information and notes required by GAAP in the U.S. for annual financial statements, the Condensed Consolidated Financial Statements and other information included in this quarterly report should be read in conjunction with the Consolidated Financial Statements and Notes in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.

These Condensed Consolidated Financial Statements reflect all normal recurring adjustments that, in the opinion of management, are necessary to fairly present the financial position and results of operations. Amounts reported in the interim Condensed Consolidated Statement of Operations and the interim Condensed Consolidated Statements of Comprehensive Income (Loss) are not necessarily indicative of amounts expected for the respective annual periods.

In preparing financial statements that conform to GAAP, management must make estimates and assumptions that affect the reported amounts of assets and liabilities, the reported amounts of revenues and expenses, and the disclosure of contingent assets and liabilities at the date of the financial statements. Actual results could differ from those estimates.

3. NEW ACCOUNTING PRONOUNCEMENTS

Accounting Pronouncements Issued But Not Yet Adopted

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, “Revenue from Contracts with Customers.” ASU 2014-09 outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. This ASU is effective for reporting periods beginning after December 15, 2016. Early adoption is not permitted. The Company is currently assessing the impact that this new ASU will have on its revenue recognition upon adoption.

 

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In April 2014, the FASB issued ASU 2014-08, “Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity.” ASU 2014-08 amends the definition of a discontinued operation in Accounting Standards Codification (“ASC”) 205-20 and requires entities to provide additional disclosures about discontinued operations as well as disposal transactions that do not meet the discontinued operations criteria. The FASB issued the ASU to provide more decision-useful information and to make it more difficult for a disposal transaction to qualify as a discontinued operation. In addition, the ASU requires entities to reclassify assets and liabilities of a discontinued operation for all comparative periods in the statement of financial position, as well as significant changes to the presentation requirements within the statement of cash flows. This ASU is effective for all disposals (except disposals classified as held for sale before the adoption date) or components initially classified as held for sale in periods beginning on or after December 15, 2014. Early adoption is permitted. The adoption of this ASU could have a significant impact on the financial statement presentation associated with any disposal transactions that could occur once this ASU becomes effective.

Adopted Accounting Pronouncements

In July 2013, the FASB issued ASU 2013-10, “Inclusion of the Fed Funds Effective Swap Rate (or Overnight Index Swap Rate) as a Benchmark Interest Rate for Hedge Accounting Purposes.” ASU 2013-10 allows the Fed Funds Effective Swap Rate to be designated as a U.S. benchmark interest rate for hedge accounting purposes, in addition to interest rates on direct Treasury obligations of the U.S. government and the London Interbank Offered Rate (“LIBOR”). The amendments also remove the restriction on using different benchmark rates for similar hedges. The amendments are effective prospectively for qualifying new or redesignated hedging relationships entered into on or after July 17, 2013. The Company does not anticipate the requirements of ASU 2013-10 will have a material impact on the consolidated financial statements because the Company currently has not entered into any new or redesignated hedging relationships that meet these requirements.

In July 2013, the FASB issued ASU 2013-11, “Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists.” ASU 2013-11 clarifies guidance and eliminates diversity in practice on the presentation of unrecognized tax benefits when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists at the reporting date. This new guidance is effective for annual reporting periods beginning on or after December 15, 2013 and subsequent interim periods. The adoption of this standard has not had any impact on the presentation of unrecognized tax benefits in the Condensed Consolidated Balance Sheets.

In March 2013, the FASB issued ASU No. 2013-05, “Foreign Currency Matters (Topic 830)—Parent’s Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity.” ASU No. 2013-05 resolves the diversity in practice about whether Subtopic 810-10, Consolidation—Overall, or Subtopic 830-30, Foreign Currency Matters—Translation of Financial Statements, applies to the release of the cumulative translation adjustment into net income when a parent either sells a part or all of its investment in a foreign entity or no longer holds a controlling financial interest in a subsidiary or group of assets that is a business within a foreign entity. ASU 2013-5 is effective prospectively for the first annual period beginning after December 15, 2013. The adoption of this standard did not have any current impact on the results of operations, cash flows or financial position.

4. SEGMENT INFORMATION

The Company has two operating segments, Filtration and Affinia South America (“ASA”), which are considered reportable segments under ASC 280 “Segment Reporting.” Operating segments are determined based on information used by the chief operating decision maker (“CODM”) in deciding how to allocate resources and evaluate the performance of our businesses. Management evaluates the performance of its operating segments based primarily on revenue growth and operating profit. Although not considered an operating segment, corporate, eliminations and other includes corporate costs, interest expense and other amounts not allocated to the operating segments.

The Filtration segment is the Company’s largest business unit, having contributed approximately 70% of global revenues during the three and nine months ended September 30, 2014. Our Filtration products fit medium and heavy duty trucks, light vehicles, equipment in the off-highway market (i.e. residential and non-residential construction, mining, forestry and agricultural) and equipment for industrial and marine applications. The Filtration segment’s products include oil, air, fuel, cabin air, coolant, hydraulic and other filters for many types of vehicles and machinery. The products are sold under well-known brands, such as WIX® and Filtron, and private label brands including NAPA®.

The ASA segment focuses on distributing and manufacturing brake, suspension, driveshaft and U-joint components, water and fuel pumps, filters, engine products, motorcycle products, accessories and other critical aftermarket components through its operations in Argentina, Brazil, Uruguay and Venezuela. The majority of the ASA segment’s revenue is generated in Brazil. In Brazil, ASA’s operations are conducted through Affinia Automotiva, an aftermarket parts manufacturer and master distributor, and Pellegrino, a warehouse distributor. Affinia Automotiva manufactures Nakata® brand shock absorbers and distributes those and third party products to warehouse distributors, including Pellegrino.

 

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The following table presents financial information for each of our reportable segments, as well as for corporate, eliminations and other, and on a consolidated basis:

 

     Three Months Ended September 30, 2014      Three Months Ended September 30, 2013  
                   Corporate,                          Corporate,        
                   Eliminations &                          Eliminations &        

(Dollars in millions)

   Filtration      ASA      Other     Consolidated      Filtration      ASA      Other     Consolidated  

Net Sales

   $ 248       $ 116       $ —       $ 364       $ 234       $ 117       $ —       $ 351   

Operating Profit

     43         9         (10     42         35         9         (13     31   
     Nine Months Ended September 30, 2014      Nine Months Ended September 30, 2013  
                   Corporate,                          Corporate,        
                   Eliminations &                          Eliminations &        

(Dollars in millions)

   Filtration      ASA      Other     Consolidated      Filtration      ASA      Other     Consolidated  

Net Sales

   $ 732       $ 328       $ —       $ 1,060       $ 678       $ 345       $ —       $ 1,023   

Operating Profit

     117         26         (33     110         104         25         (32     97   

5. DISCONTINUED OPERATION—CHASSIS

In the fourth quarter of 2013, management committed to a plan to sell the Chassis group. Pursuant to ASC Topic 205, “Presentation of Financial Statements,” the Chassis group met the definition of a disposal group at the time management committed to a plan to sell the group and, accordingly, the results of operations of the Chassis group have been classified as a component of discontinued operations. On January 21, 2014, Affinia entered into an Asset Purchase Agreement, as amended, with Federal-Mogul Chassis LLC (formerly known as VCS Quest Acquisition LLC) (“FM Chassis”), an affiliate of Federal-Mogul Corporation, pursuant to which FM Chassis agreed to purchase the Chassis group. This transaction closed on May 1, 2014. The consolidated statements of cash flows were not adjusted to reflect this group as a discontinued operation for any period presented.

Upon the closing of this transaction in May 2014, Affinia received cash proceeds of $140 million, which represented the agreed upon selling price of $150 million less a holdback of consideration of $10 million until completion of certain post-closing performance obligations. In September 2014, the post-closing performance obligations were completed and the Company received $9 million of cash proceeds with the remaining $1 million allocated to a post-closing purchase price adjustment. There are no additional material obligations of either party associated with this transaction.

The sale of the Chassis group resulted in a pre-tax gain of $32 million, of which $21 million was recorded in the second quarter of 2014 and $11 million was recorded in the third quarter of 2014. These amounts are reflected in the Condensed Consolidated Statements of Operations within Income from discontinued operations, net of tax. The Company released an $18 million capital loss valuation allowance as a result of the sale, the tax benefit of which offset the tax expense incurred by the gain on the sale. This resulted in a tax expense of $6 million on the transaction.

 

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In addition to the gain on the sale discussed above, the following table shows the Chassis group’s net sales, income before tax provision, income tax provision and net income that are included within Income from discontinued operations, net of tax on the Condensed Consolidated Statements of Operations:

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 

(Dollars in millions)

   2014      2013      2014      2013  

Net sales

   $ —         $ 50       $ 64       $ 147   

Income before income tax provision

     —           5         5         12   

Income tax provision

     —           1         2         4   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income

   $ —         $ 4       $ 3       $ 8   
  

 

 

    

 

 

    

 

 

    

 

 

 

Affinia and FM Chassis entered into a transition services agreement (“TSA”) effective with the sale on May 1, 2014. The TSA provides for certain administrative and other services and support to be provided by Affinia to FM Chassis and to be provided by FM Chassis to Affinia. Most of the transition services will expire during 2014 or 2015. The TSA was established as an arm’s length transaction and is intended for the contracting parties to recover costs of the services provided.

The following table shows the Chassis group’s assets and liabilities that are included in assets of discontinued operations and liabilities of discontinued operations on the Condensed Consolidated Balance Sheets:

 

     December 31,  

(Dollars in millions)

   2013  

Cash

   $ 1   

Accounts receivable

     9   

Inventory

     74   

Other current assets

     4   

Property, plant and equipment

     8   

Goodwill

     22   

Other intangible assets

     22   

Other assets

     1   
  

 

 

 

Total assets of discontinued operations

   $ 141   
  

 

 

 

Accounts payable

   $ 18   

Other accrued expenses

     12   

Accrued payroll and employee benefits

     1   
  

 

 

 

Total liabilities of discontinued operations

   $ 31   
  

 

 

 

6. DERIVATIVES

The Company’s financial derivative assets and liabilities consist of standard currency forward contracts and interest rate swaps. The fair value framework requires the categorization of assets and liabilities into three levels based upon the assumptions (inputs) used to price the assets or liabilities. Level 1 provides the most reliable measure of fair value, whereas Level 3 generally requires significant management judgment. The three levels are defined as follows:

 

    Level 1: Unadjusted quoted prices in active markets for identical assets and liabilities.

 

    Level 2: Observable inputs other than those included in Level 1. For example, quoted prices for similar assets or liabilities in active markets or quoted prices for identical assets or liabilities in inactive markets.

 

    Level 3: Unobservable inputs reflecting management’s own assumptions about the inputs used in pricing the asset or liability.

All derivative instruments are recognized on our balance sheet at fair value. The fair value measurements of our currency forward contracts and interest rate swaps are based upon Level 2 inputs consisting of observable market data, as reported by a recognized independent third-party financial information provider. Based upon the Company’s periodic assessment of its own creditworthiness, and of the creditworthiness of the counterparties to its derivative instruments, fair value measurements are not adjusted for nonperformance risk.

 

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Currency Forward Contract Derivatives

Our currency forward contracts are valued using then-current spot and forward market data as provided by external financial institutions. We enter into currency forward contracts with banking institutions of only the highest tiered credit ratings and thus the counterparty credit risk associated with these contracts is not considered significant.

We enter into short-term currency forward contracts which are intended to offset the currency exchange gain (loss) related to the re-measurement process and are not designated as hedges of specific monetary asset balances subject to currency risks. Therefore, any changes in the fair value of these short-term currency forward contracts are recognized in earnings each accounting period. The aggregate notional amounts of outstanding short-term currency forward contracts were $43 million and $86 million as of September 30, 2014 and December 31, 2013, respectively. During the three months and nine months ended September 30, 2014, we recorded losses of less than $1 million and $1 million, respectively, associated with short-term currency forward contracts. During the three and nine months ended September 30, 2013, we recorded gains of less than $1 million and losses of less than $1 million, respectively, associated with short-term currency forward contracts.

Additionally, beginning in the third quarter of 2014, we entered into currency forward contracts which are intended to offset against foreign exchange risk for certain forecasted gross receivable and payable balances. These currency forward contracts are considered highly effective based on critical terms matching and the result of de minimis testing. Therefore, the gains or losses of these hedges are deferred as a component of “Accumulated Other Comprehensive Income (Loss)” (“AOCI”) and reclassified into net income in the same period during which the hedged transaction affects net income. The aggregate notional amounts of outstanding currency forward contracts were $38 million as of September 30, 2014. There were no gains or losses recorded for these currency forward contracts in the three and nine months ended September 30, 2014.

The Company’s outstanding currency forward contracts are recorded in the Condensed Consolidated Balance Sheets as either “Other current assets” or “Other accrued expenses,” depending on whether the contracts are in asset or liability positions at the end of each reporting period. Currency forward contract gains and losses are recognized in “Other income and expense, net” in the Condensed Consolidated Statements of Operations in the reporting period of occurrence.

Interest Rate Derivatives

On April 25, 2013, we entered into interest rate swaps having an aggregate notional value of $300 million to effectively fix the rate of interest on a portion of our Term Loan B-2 until April 25, 2020. The Company funds its business operations with a combination of fixed and floating-rate debt. Therefore, our reported results from operations may be adversely impacted by rising interest rates. The Company’s interest rate risk policy seeks to minimize the long-term cost of debt, subject to a limitation of the maximum percentage of net floating-rate debt versus total debt outstanding.

While our policy does not require that we maintain a specific ratio of net floating-rate debt as a proportion of total debt outstanding, we use interest rate swaps to manage the ratio of net floating-rate debt to total debt outstanding within our policy target range, thereby reducing the potential impact that interest rate variability may have on our consolidated financial results. Our policy strictly prohibits the use of interest rate derivatives to generate trading profits or to otherwise speculate on interest rate movements.

We have designated our interest rate swaps as cash flow hedges as described in ASC 815, “Derivatives and Hedging”. At the inception of the hedge, the Company formally documents its hedge relationships and risk management objectives and strategy for undertaking the hedge. In addition, the documentation identifies the interest rate swaps as a hedge of specific interest payments on variable rate debt, with the objective to perfectly offset the variability of interest expense as related to specific floating-rate debt. We also specify that the effectiveness of the interest rate swaps in mitigating interest expense variability shall be assessed using the “Hypothetical Derivative Method” as described in ASC 815.

The interest rate swaps are recorded in the Condensed Consolidated Balance Sheets as “Other current assets” or “Other accrued expenses,” depending on whether the contracts are in asset or liability positions at the end of each reporting period. In compliance with ASC 815, the Company formally assesses the effectiveness of its interest rate swaps at inception and at least every three months thereafter. These assessments have established that swaps have been, and are expected to continue to be, highly effective at offsetting the interest expense variability of the underlying floating rate debt and are therefore eligible for cash flow hedge accounting treatment.

 

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Changes in the fair value of derivatives designated as cash flow hedges are recorded as a component of other comprehensive income (loss), to the extent such cash flow hedges are effective. Amounts are reclassified from other comprehensive income (loss) to earnings when the underlying hedged items are recognized, during the period that a hedge transaction is terminated, or whenever a portion of the hedge transaction results are deemed ineffective. We reclassified less than $1 million and $2 million from other comprehensive income (loss) into interest expense during the three and nine months ended September 30, 2014, respectively. There were no amounts reclassified from other comprehensive income (loss) into interest expense during the three or nine months ended September 30, 2013. There have been no gains or losses reclassified from other comprehensive income (loss) into earnings due to hedge ineffectiveness related to any of the Company’s interest rate swap transactions, nor were there gains or losses reclassified to income due to early termination of designated cash-flow hedge transactions during the three and nine months ended September 30, 2014 or 2013.

As of September 30, 2014 and December 31, 2013, the notional amount and fair value of outstanding interest rate swaps outstanding are and were as follows:

 

(Dollars in millions)

   Notional Amount      Fair Value  

As of September 30, 2014

   $ 300       $ 5   

As of December 31, 2013

   $ 300       $ 11   

7. DEBT

Our debt consists of notes that are publicly traded, an asset-based revolving credit facility (“ABL Revolver”), term loan facilities consisting of Term Loan B-1 and Term Loan B-2 and other short-term borrowings. The fair value framework requires the categorization of our debt into three levels based upon the assumptions (inputs) used to determine fair value. The fair value of debt and the categorization of the hierarchy level of fair value, net of discount, are and were as follows:

Fair Value of Debt at September 30, 2014

 

(Dollars in millions)

   Book Value
of Debt
     Fair Value
Factor
    Fair Value
of Debt
 

Senior notes, due May 2021(1)

   $ 250         103.25   $ 258   

Term Loan B-1, due April 2026(1)

     175         98.56     173   

Term Loan B-2, due April 2020(1)

     382         98.19     375   

ABL Revolver, due April 2018(2)

     —          100     —    

Other debt(2)

     13         100     13   
       

 

 

 

Total fair value of debt at September 30, 2014

        $ 819   
       

 

 

 

Fair Value of Debt at December 31, 2013

 

(Dollars in millions)

   Book Value
of Debt
     Fair Value
Factor
    Fair Value
of Debt
 

Senior notes, due May 2021(1)

   $ 250         96.06   $ 240   

Term Loan B-1, due April 2026(1)

     199         100.63     200   

Term Loan B-2, due April 2020(1)

     465         101.38     471   

ABL revolver, due April 2018(2)

     —          100     —    

Other debt(2)

     23         100     23   
       

 

 

 

Total fair value of debt at December 31, 2013

        $ 934   
       

 

 

 

 

(1) The fair value assigned to the Company’s long-term debt reflects financial model estimates generated from a third-party provider based on observable inputs related to market prices of comparable debt instruments and represents a Level 2 approximation within the fair value categorization framework.
(2) The carrying value of fixed rate short-term debt approximates fair value because of the short term nature of these instruments. The carrying value of the Company’s current floating rate debt instruments approximates fair value because of the variable interest rates pertaining to those instruments. The fair value of debt is categorized within Level 2 of the hierarchy.

A financial covenant exists under the ABL Revolver that would be triggered if excess availability under the ABL Revolver is less than the greater of 10% of the total borrowing base and $10 million. If the covenant trigger were to occur, we would be required to satisfy and maintain a fixed charge coverage ratio of at least 1.00x, measured for the last twelve-month period. As of September 30, 2014, none of the covenant triggers had occurred. The impact of falling below the fixed charge coverage ratio would not be a default but would trigger the imposition of restrictions on our ability to pursue certain operational or financial transactions (e.g. asset dispositions, dividends and acquisitions).

 

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As discussed further in Note 5 to the Condensed Consolidated Financial Statements, “Discontinued Operations—Chassis”, on May 1, 2014, Affinia closed the sale of the Chassis group. In conjunction with the closing of the sale, cash proceeds of $149 million were received. With the proceeds and cash from operations, the Company paid down $24 million of Term Loan B-1 and $85 million of Term Loan B-2. Additionally, the Company made a $57 million distribution to Holdings. Holdings used all of the distribution to partially repay the note issued by Holdings to Dana Corporation (“Dana”) as part of the financing in connection with our acquisition in 2004 of substantially all of the aftermarket business operations of Dana (the “Seller Note.”) As of September 30, 2014, the Seller Note balance was $28 million.

On April 25, 2013, we refinanced our existing notes and credit facilities and made a distribution to Holdings, our sole stockholder. The refinancing consisted of the issuance of $250 million aggregate principal amount 7.75% Senior Notes due May 1, 2021, a $200 million term loan due April 25, 2016, a $470 million term loan due April 25, 2020, the proceeds of which we used, together with $31 million of cash on hand, to redeem our 10.75% Senior Secured Notes due 2016, redeem our 9% Senior Subordinated Notes due 2014, pay fees and expenses in connection with the refinancing transaction and make a $350 million distribution to Holdings. Holdings used the distribution to redeem its preferred shares, repay $61 million of the Seller Note and make a distribution of $133 million to Holdings’ stockholders.

The sources and uses of proceeds of the 2013 refinancing consisted of the following:

 

(Dollars in millions)

   Sources                 Uses  

Term Loan B-1(1)

   $ 199       Redeemed Secured Notes      $ 180   

Term Loan B-2(1)

     468       Redeemed Subordinated Notes        367   

Senior Notes

     250       Distribution to Shareholder:     

Cash on hand

     31               Redeemed Holdings’ Preferred Shares(2)     156      
              Repaid Holdings’ Seller Note(2)     61      
              Distribution to Holdings’ Stockholders(2)     133      
       

 

 

    
      Total distribution to Shareholder(2)        350   
      Interest payments on Secured and Subordinated Notes        21   
      Call premium on Secured Notes        15   
      Deferred financing costs(3)        15   
  

 

 

         

 

 

 
   $ 948            $ 948   
  

 

 

         

 

 

 

 

(1) Less original issue discount of $2 million for Term Loan B-2 and $1 million for Term Loan B-1.
(2) A distribution to Holdings, our sole stockholder, of $350 million was used for redemption of preferred shares, payment of debt and a distribution to its stockholders.
(3) The deferred financing costs paid on the date of the refinancing were $13 million and $2 million was subsequently paid in the remainder of the second quarter of 2013.

As the refinancing was treated as an extinguishment of debt under ASC 470, “Debt”, we recorded a $15 million loss in connection with the refinancing arrangement. Additionally, we recorded a write-off of $5 million for unamortized deferred financing costs associated with the redemption of our Secured Notes and Subordinated Notes, as well as a write-off of $3 million for the replacement of our existing ABL Revolver with a new ABL Revolver. These charges were recorded within Interest Expense in the Condensed Consolidated Statements of Operations.

In conjunction with the refinancing, we recorded $15 million in total deferred financing costs, of which $14 million related to the issuance of our Senior Notes and Term Loans and $1 million was associated with the ABL Revolver.

During the second quarter of 2013, we made a distribution of $351 million to Holdings of which $350 million related to the refinancing, as previously described, and $1 million related to the payment of Holdings’ operating expenses.

 

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8. INVENTORIES

Inventories are valued at the lower of cost or market. Cost is determined on the first in first out basis for all domestic inventories or average cost basis for non-U.S. inventories. Inventories are reduced by an allowance for slow-moving and obsolete inventories based on management’s review of on-hand inventories compared to historical and estimated future sales and usage. A summary of inventories, net is provided in the table below:

 

(Dollars in millions)

   At September 30,
2014
     At December 31,
2013
 

Raw materials

   $ 64       $ 67   

Work-in-process

     14         17   

Finished goods

     152         137   
  

 

 

    

 

 

 
   $ 230       $ 221   
  

 

 

    

 

 

 

9. COMMITMENTS AND CONTINGENCIES

At September 30, 2014, the Company had purchase commitments for property, plant and equipment of approximately $4 million.

A reconciliation of the changes in our return reserves, which is included in “Other accrued expenses” in the Condensed Consolidated Balance Sheets, is presented in the following table. The table below excludes amounts associated with the Chassis group.

 

     Nine Months Ended
September 30,
 

(Dollars in millions)

   2014     2013  

Beginning balance

   $ 6      $ 5   

Amounts charged to revenue

     5        5   

Returns processed

     (6     (5
  

 

 

   

 

 

 

Ending balance

   $ 5      $ 5   
  

 

 

   

 

 

 

The Company is continuing a review of certain allegations that have arisen in connection with business operations involving our subsidiaries in Poland and Ukraine. The allegations raise issues involving potential improper payments in connection with governmental approvals, permits, or other regulatory areas and possible conflicts of interest. The review is being supervised by the Audit Committee of our Board of Directors and is being conducted with the assistance of outside professionals. The review is ongoing and no determination may yet be made as to whether, in connection with the circumstances surrounding the review, we may become subject to any fines, penalties and/or other charges imposed by any governmental authority, or any other damages or costs that may arise in connection with those circumstances. We voluntarily self-reported on these matters to the U.S. Department of Justice and the U.S. Securities and Exchange Commission and intend to fully cooperate with these agencies in their review.

10. INCOME TAXES

The total amount of unrecognized tax benefits that, if recognized, would affect the Company’s effective tax rate was $8 million as of both September 30, 2014 and December 31, 2013. The Company recognizes interest related to unrecognized tax benefits in interest expense and recognizes penalties as part of the income tax provision. As of September 30, 2014, the Company’s accrual for interest and penalties was $2 million. We are subject to taxation in the U.S. and various state and foreign jurisdictions. For jurisdictions in which we transact significant business, tax years ended December 31, 2004 and later remain subject to examination by tax authorities. We do not anticipate any material change in the total amount of unrecognized tax benefits to occur within the next twelve months.

The effective tax rate was 37% for the three months ended September 30, 2014 compared to 53% for the three months ended September 30, 2013. The decrease in the effective tax rate was attributable to a decrease in income earned in jurisdictions with higher income tax rates. The effective tax rate was 47% for the nine months ended September 30, 2014 compared to 57% for the nine months ended September 30, 2013. The decrease in the effective tax rate was attributable to a decrease in income earned in jurisdictions with higher income tax rates. Additionally, in the first quarter of 2014, the Company recorded a currency devaluation of $7 million for the Venezuelan operations. This was a non-deductible item for income tax purposes.

 

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11. LEGAL PROCEEDINGS

Various claims, lawsuits and administrative proceedings are pending or threatened against us and our subsidiaries, arising from the ordinary course of business with respect to commercial, intellectual property, product liability and environmental matters. We believe that the ultimate resolution of the foregoing matters will not have a material effect on our financial condition or results of operations or liquidity.

The Company has various accruals for civil liability, including product liability, and other costs. If there is a range of equally probable outcomes, we accrue at the lower end of the range. The Company had $2 million and $13 million accrued as of September 30, 2014 and December 31, 2013, respectively. These amounts are reflected in “Other accrued expenses” within the Condensed Consolidated Balance Sheets. The decrease in the amount accrued is due to a payment of $11 million made during the first quarter of 2014 in full settlement of the Neovia Logistics Services (U.K.) Limited claim. The Company had accrued $11 million during 2013 associated with this claim. There are no recoveries expected from third parties associated with outstanding or settled claims.

In addition, we have various other claims that are reasonably possible of occurrence for which our aggregate maximum exposure to loss is estimated at $14 million. There are currently no reserves associated with these claims.

12. ACCOUNTS RECEIVABLE FACTORING

Affinia has agreements with third party financial institutions to factor certain receivables on a non-recourse basis. The terms of the factoring arrangements provide for the factoring of certain U.S. Dollar-denominated or Canadian Dollar-denominated receivables, which are purchased at the face value amount of the receivable discounted at the annual rate of LIBOR plus a spread on the purchase date. The amount factored is not contractually defined by the factoring arrangements and our use will vary each month based on the amount of underlying receivables and the cash flow needs of the Company.

 

     Nine Months Ended
September 30,
 

(Dollars in millions)

   2014      2013  

Gross accounts receivable factored

   $ 353       $ 402   

Expenses associated with factoring of receivables

     3         3   

Accounts receivable factored by Affinia are accounted for as a sale and removed from the balance sheet at the time of factoring, with the cost associated with the factoring program presented in “Other income and expense, net” in the Condensed Consolidated Statement of Operations.

13. CHANGES IN ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

Changes in accumulated other comprehensive income (loss) (AOCI) by component, net of tax, for the three and nine months ended September 30, 2014:

 

(Dollars in millions)

   Pension
adjustments
    Foreign
currency
translation
adjustment
    Interest
Rate
Swap
     Total
AOCI
 

Balance at July 1, 2014

   $ (1   $ (19   $ 2       $ (18

Other comprehensive income (loss) before reclassifications, net of tax

     —         (20     —           (20

Amounts reclassified from accumulated other comprehensive income

     —         —          1         1   
  

 

 

   

 

 

   

 

 

    

 

 

 

Net current period other comprehensive income

     —         (20     1         (19
  

 

 

   

 

 

   

 

 

    

 

 

 

Balance at September 30, 2014

   $ (1   $ (39   $ 3       $ (37
  

 

 

   

 

 

   

 

 

    

 

 

 

 

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(Dollars in millions)

   Pension
adjustments
    Foreign
currency
translation
adjustment
    Interest
Rate
Swap
    Total
AOCI
 

Balance at January 1, 2014

   $ (1   $ (26   $ 7      $ (20

Other comprehensive income (loss) before reclassifications, net of tax

     —         (13     (5     (18

Amounts reclassified from accumulated other comprehensive income

     —         —          1        1   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net current period other comprehensive income

     —         (13     (4     (17
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance at September 30, 2014

   $ (1   $ (39   $ 3      $ (37
  

 

 

   

 

 

   

 

 

   

 

 

 

Changes in AOCI income (loss) by component, net of tax, for the three and nine months ended September 30, 2013:

 

(Dollars in millions)

   Pension
adjustments
    Foreign
currency
translation
adjustment
    Interest
Rate
Swap
    Total
AOCI
 

Balance at July 1, 2013

   $ (2   $ (24   $ 6      $ (20

Other comprehensive income (loss) before reclassifications, net of tax

     —         2        (2     —    

Amounts reclassified from accumulated other comprehensive income

     —         —         1        1   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net current period other comprehensive income

     —         2        (1     1   
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance at September 30, 2013

   $ (2   $ (22   $ 5      $ (19
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(Dollars in millions)

   Pension
adjustments
    Foreign
currency
translation
adjustment
    Interest
Rate
Swap
     Total
AOCI
 

Balance at January 1, 2013

   $ (2   $ (7   $ —        $ (9

Other comprehensive income (loss) before reclassifications, net of tax

     —         (15     4         (11

Amounts reclassified from accumulated other comprehensive income

     —         —         1         1   
  

 

 

   

 

 

   

 

 

    

 

 

 

Net current period other comprehensive income

     —         (15     5         (10
  

 

 

   

 

 

   

 

 

    

 

 

 

Balance at September 30, 2013

   $ (2   $ (22   $ 5       $ (19
  

 

 

   

 

 

   

 

 

    

 

 

 

14. VENEZUELAN OPERATIONS

In accordance with U.S. GAAP, effective January 1, 2010, the Company accounted for Venezuela as a highly inflationary economy because the three-year cumulative inflation rate for Venezuela using the blended Consumer Price Index (which is associated with the city of Caracas) and the National Consumer Price Index (developed commencing in 2008 and covering the entire country of Venezuela) exceeded 100%. Accordingly, effective January 1, 2010, our Venezuelan subsidiary used the U.S. Dollar as its functional currency. The financial statements of our subsidiary must be re-measured into the Company’s reporting currency (U.S. Dollar) and gains and losses from the re-measurement of monetary assets and liabilities are reflected in current earnings, rather than exclusively in the equity section of the balance sheet, until such time as the economy is no longer considered highly inflationary. The local currency in Venezuela is the Bolivar Fuerte (“VEF”).

On January 11, 2010, the Venezuelan government devalued the country’s currency and, on February 8, 2013, the Venezuelan government announced another devaluation of the currency to 6.30 VEF per U.S. Dollar and it eliminated the regulated parallel market rate of 5.3 VEF per U.S. Dollar. We used the official exchange rate of 6.30 VEF per U.S. Dollar to translate the financial statements of our Venezuelan subsidiary to comply with the regulations of Venezuela and are analyzing the impact of the volume restrictions on our business. The one-time devaluation had a $2 million negative impact on our pre-tax net income during the first quarter of 2013.

 

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In 2013, the Venezuelan government authorized certain companies that operate in designated industry sectors to exchange a limited volume of VEFs for U.S. Dollars at a bid rate established via weekly auctions under what is known as SICAD 1. SICAD 1 auctions began in October 2013. However, SICAD 1 auctions are not indicative of a free market exchange as only designated industries may bid into individual auctions and the highest bids are not always recognized by the Venezuelan government. In March 2014, another currency exchange mechanism (SICAD 2) became effective. SICAD 2 is intended to more closely resemble a market-driven exchange rate than the rates provided by Venezuela’s other regulated exchange mechanisms (i.e. the official rate and the SICAD 1 rate). Thus, as of March 31, 2014, entities may be able to convert VEFs at one of three legal exchange rates: official rate of 6.3 VEF to 1 U.S. Dollar, SICAD 1 rate of 10.7 VEF to 1 U.S. Dollar based on closing rate at last auction, and SICAD 2 rate of 50.86 VEF to 1 U.S. Dollar based on closing rate on March 31, 2014.

As a result of the multiple exchange rates available to settle transactions, at March 31, 2014, management reevaluated the exchange rates previously used for remeasurement, which had been the official rate of 6.3 VEF to 1 U.S. Dollar. While substantially all of our import transactions for purchases of inventory have been preapproved by the Venezuelan government at the official rate of 6.3 VEF to 1 U.S. Dollar, the Venezuelan government has not settled these transactions with vendors since November 2013. This, along with the introduction of the SICAD 1 and SICAD 2 market mechanisms, raise considerable doubts about our ability to ultimately settle transactions at the official rate in the future. Additionally, legislation enacted by the Venezuelan government in 2014 indicates that foreign investments are subject to the SICAD 1 rate rather than the official rate. While not the determinative factor, management views the passing of this legislation as a critical component in its assessment of the most representative rate to use for remeasurement purposes at March 31, 2014. Given the uncertainty of the exchange markets and the ultimate rate at which transactions may settle in the future, as well as consideration of the aforementioned legislation that was enacted earlier in 2014, we recorded a one-time devaluation of $7 million in the first quarter of 2014, which represents a move from the official rate to the SICAD 1 rate of 10.7 VEF to 1 U.S. Dollar. Of the $7 million devaluation charge, $5 million was recorded in the Filtration segment and $2 million was recorded in the ASA segment. This devaluation is reflected in “Other income and expenses, net” in the Condensed Consolidated Statements of Operations.

In the third quarter of 2014, our Venezuelan subsidiaries represented approximately 5% of the Company’s consolidated net sales and the Venezuelan subsidiaries have total assets and liabilities of less than 5% of the Company’s total consolidated assets and liabilities at September 30, 2014.

Management will continue to monitor the environment in Venezuela to determine whether further devaluation charges are required. At this time, management does not believe that the foreign exchange limitations or restrictions will have a material impact on our liquidity, cash flows or debt covenants.

15. RESTRUCTURING OF OPERATIONS

The restructuring charges consist of employee termination costs and other exit costs and impairment costs. Severance costs are being accounted for in accordance with ASC Topic 420, “Exit or Disposal Cost Obligations” and ASC Topic 712, “Compensation—Nonretirement Postemployment Benefits.” On October 15, 2013, we announced that Affinia would relocate its Ann Arbor, Michigan corporate headquarters to Gastonia, North Carolina, which is the location of the Filtration segment. We recorded an accrual of $5 million as of December 31, 2013 related to the relocation. The transition to the new corporate headquarters was substantially completed by the end of the second quarter of 2014. The following summarizes the restructuring charges and activity for the Company for the nine months ended September 30, 2014:

 

(Dollars in millions)

   Total  

Balance at December 31, 2013

   $ 5   

Charges to expense:

  

Employee termination benefits

     5   

Reductions to liability:

  

Cash payments

     (8
  

 

 

 

Balance at September 30, 2014

   $ 2   
  

 

 

 

 

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16. FINANCIAL INFORMATION FOR GUARANTORS AND NON-GUARANTORS

Affinia Group Holdings Inc. (presented as Parent in the following schedules), through its 100% owned subsidiary, Affinia Group Intermediate Holdings Inc. (presented as Issuer in the following schedules), issued $250 million of Senior Notes on April 25, 2013. As of September 30, 2014, there were $250 million of Senior Notes outstanding. The notes were offered only to qualified institutional buyers and certain persons in offshore transactions.

The Senior Notes are fully, irrevocably, unconditionally and jointly and severally guaranteed on a senior unsecured basis by the Company’s current and future domestic subsidiaries (the “Guarantors”). The Senior Notes are general obligations of the Issuer and guaranteed by the Parent and the Guarantors.

The following unaudited information presents Condensed Consolidating Statements of Operations for the three and nine months ended September 30, 2014 and 2013, Condensed Consolidating Statements of Comprehensive Income for the three and nine months ended September 30, 2014 and 2013, Condensed Consolidating Balance Sheets as of September 30, 2014 and December 31, 2013 and Condensed Consolidating Statements of Cash Flows for the nine months ended September 30, 2014 and 2013 of (i) the Parent, (ii) the Issuer, (iii) the Guarantors, (iv) the Non-Guarantors, and (v) eliminations to arrive at the information for the Company on a consolidated basis.

 

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Table of Contents

Affinia Group Intermediate Holdings Inc.

Guarantor Condensed

Consolidating Statements of Operations

For the Three Months Ended September 30, 2014

 

 

(Dollars in millions)

   Parent      Issuer     Guarantor     Non-
Guarantor
    Eliminations     Consolidated
Total
 

Net sales

   $ —        $ —       $ 171      $ 233      $ (40   $ 364   

Cost of sales

     —          —         (133     (181     40        (274
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     —          —         38        52        —         90   

Selling, general and administrative expenses

     —          (8     (17     (23     —         (48
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating (loss) profit

     —          (8     21        29        —         42   

Other income and expense, net

     —          —         —         —         —         —    

Interest expense

     —          (15     —         —         —         (15
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income from continuing operations before income tax provision, equity in income (loss), net of tax and noncontrolling interest

     —          (23     21        29        —         27   

Income tax provision

     —          (5     —         (5     —         (10

Equity in income (loss), net of tax

     23         51        24        —         (98     —    
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) from continuing operations

     23         23        45        24        (98     17   

Income from discontinued operations, net of tax

     —          —         6        —         —         6   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     23         23        51        24        (98     23   

Less: net income attributable to noncontrolling interest, net of tax

     —          —         —         —         —         —    
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to the Company

   $ 23       $ 23      $ 51      $ 24      $ (98   $ 23   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Guarantor Condensed

Consolidating Statements of Comprehensive Income (Loss)

For the Three Months Ended September 30, 2014

 

(Dollars in millions)

   Parent     Issuer     Guarantor      Non-
Guarantor
    Eliminations     Consolidated
Total
 

Net income (loss)

   $ 23      $ 23      $ 51       $ 24      $ (98   $ 23   

Other comprehensive income (loss), net of tax:

             

Change in fair value of interest rate swap

     1        1        —          —         (1     1   

Change in foreign currency translation adjustments

     (20     (20     —          (20     40        (20
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total other comprehensive (loss) income

     (19     (19     —          (20     39        (19
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total comprehensive income (loss)

     4        4        51         4        (59     4   

Less: comprehensive income attributable to noncontrolling interest, net of tax

     —         —         —          —         —         —    
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Comprehensive income (loss) attributable to the Company

   $ 4      $ 4      $ 51       $ 4      $ (59   $ 4   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

 

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Guarantor Condensed

Consolidating Statements of Operations

For the Nine Months Ended September 30, 2014

 

(Dollars in millions)

   Parent      Issuer     Guarantor     Non-
Guarantor
    Eliminations     Consolidated
Total
 

Net sales

   $ —        $ —        $ 518      $ 663      $ (121   $ 1,060   

Cost of sales

     —          —         (407     (514     121        (800
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     —          —         111        149        —         260   

Selling, general and administrative expenses

     —          (30     (51     (69     —         (150
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating (loss) profit

     —          (30     60        80        —         110   

Other income and expense, net

     —          (2     (1     (7     —         (10

Interest expense

     —          (44     —         (1     —         (45
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income from continuing operations before income tax provision, equity in income (loss), net of tax and noncontrolling interest

     —          (76     59        72        —         55   

Income tax provision

     —          (8     —         (18     —         (26

Equity in income (loss), net of tax

     57         141        57        —         (255     —    
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) from continuing operations

     57         57        116        54        (255     29   

Income from discontinued operations, net of tax

     —          —         25        3        —         28   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     57         57        141        57        (255     57   

Less: net income attributable to noncontrolling interest, net of tax

     —          —         —         —         —         —    
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to the Company

   $ 57       $ 57      $ 141      $ 57      $ (255   $ 57   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Guarantor Condensed

Consolidating Statements of Comprehensive Income (Loss)

For the Nine Months Ended September 30, 2014

 

(Dollars in millions)

   Parent     Issuer     Guarantor      Non-
Guarantor
    Eliminations     Consolidated
Total
 

Net income (loss)

   $ 57      $ 57      $ 141       $ 57      $ (255   $ 57   

Other comprehensive (loss) income, net of tax:

             

Change in fair value of interest rate swap

     (4     (4     —          —         4        (4

Change in foreign currency translation adjustments

     (13     (13     —          (13     26        (13
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total other comprehensive (loss) income

     (17     (17     —          (13     30        (17
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total comprehensive income (loss)

     40        40        141         44        (225     40   

Less: comprehensive income attributable to noncontrolling interest, net of tax

     —         —         —          —         —         —    
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Comprehensive income (loss) attributable to the Company

   $ 40      $ 40      $ 141       $ 44      $ (225   $ 40   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

 

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Affinia Group Intermediate Holdings Inc.

Guarantor Condensed

Consolidating Statements of Operations

For the Three Months Ended September 30, 2013

 

(Dollars in millions)

   Parent      Issuer     Guarantor     Non-
Guarantor
    Eliminations     Consolidated
Total
 

Net sales

   $ —        $ —        $ 156      $ 235      $ (40   $ 351   

Cost of sales

     —          —         (128     (181     40        (269
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     —          —         28        54        —         82   

Selling, general and administrative expenses

     —          (16     (11     (24     —         (51
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating (loss) profit

     —          (16     17        30        —         31   

Other income and expense, net

     —          (1     —         —          —         (1

Interest expense

     —          (15     —         —          —         (15
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income from continuing operations before income tax provision, equity in income (loss), net of tax and noncontrolling interest

     —          (32     17        30        —         15   

Income tax provision

     —          (2     (2     (4     —         (8

Equity in income (loss), net of tax

     9         43        24        (2     (76     (2
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) from continuing operations

     9         9        39        24        (76     5   

Income from discontinued operations, net of tax

     —          —         4        —         —         4   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     9         9        43        24        (76     9   

Less: net income attributable to noncontrolling interest, net of tax

     —          —         —         —         —         —    
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to the Company

   $ 9       $ 9      $ 43      $ 24      $ (76   $ 9   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Guarantor Condensed

Consolidating Statements of Comprehensive Income (Loss)

For the Three Months Ended September 30, 2013

 

(Dollars in millions)

   Parent     Issuer     Guarantor      Non-
Guarantor
     Eliminations     Consolidated
Total
 

Net income (loss)

   $ 9      $ 9      $ 43       $ 24       $ (76   $ 9   

Other comprehensive (loss) income, net of tax:

              

Change in fair value of interest rate swap

     (1     (1     —          —          1        (1

Change in foreign currency translation adjustments

     2        2        —          2         (4     2   
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total other comprehensive loss

     1        1        —          2         (3     1   
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total comprehensive income (loss)

     10        10        43         26         (79     10   

Less: comprehensive income attributable to noncontrolling interest, net of tax

     —         —         —          —          —         —    
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Comprehensive income (loss) attributable to the Company

   $ 10      $ 10      $ 43       $ 26       $ (79   $ 10   
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

 

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Guarantor Condensed

Consolidating Statements of Operations

For the Nine Months Ended September 30, 2013

 

(Dollars in millions)

   Parent      Issuer     Guarantor     Non-
Guarantor
    Eliminations     Consolidated
Total
 

Net sales

   $ —        $ —       $ 477      $ 653      $ (107   $ 1,023   

Cost of sales

     —          —         (382     (509     107        (784
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     —          —         95        144        —         239   

Selling, general and administrative expenses

     —          (28     (47     (67     —         (142
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating (loss) profit

     —          (28     48        77        —         97   

Loss on extinguishment of debt

     —          (15     —         —         —         (15

Other income and expense, net

     —          (1     (1     (1     —         (3

Interest expense

     —          (57     —         (1     —         (58
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income from continuing operations before income tax provision, equity in income, net of tax and noncontrolling interest

     —          (101     47        75        —         21   

Income tax provision

     —          —          2        (14     —         (12

Equity in income, net of tax

     14         115        44        (2     (173     (2
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) from continuing operations

     14         14        93        59        (173     7   

Income (loss) from discontinued operations, net of tax

     —          —         22        (15     —         7   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     14         14        115        44        (173     14   

Less: net income attributable to noncontrolling interest, net of tax

     —          —         —         —         —         —    
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to the Company

   $ 14       $ 14      $ 115      $ 44      $ (173   $ 14   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Guarantor Condensed

Consolidating Statements of Comprehensive Income (Loss)

For the Nine Months Ended September 30, 2013

 

(Dollars in millions)

   Parent     Issuer     Guarantor      Non-
Guarantor
    Eliminations     Consolidated
Total
 

Net income (loss)

   $ 14      $ 14      $ 115       $ 44      $ (173   $ 14   

Other comprehensive loss, net of tax:

             

Change in fair value of interest rate swap

     5        5        —          —         (5     5   

Change in foreign currency translation adjustments

     (15     (15     —          (15     30        (15
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total other comprehensive loss

     (10     (10     —          (15     25        (10
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total comprehensive income (loss)

     4        4        115         29        (148     4   

Less: comprehensive income attributable to noncontrolling interest, net of tax

     —         —         —          —         —         —    
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Comprehensive income (loss) attributable to the Company

   $ 4      $ 4      $ 115       $ 29      $ (148   $ 4   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

 

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Affinia Group Intermediate Holdings Inc.

Guarantor Condensed

Consolidating Balance Sheets

September 30, 2014

 

(Dollars in millions)

   Parent     Issuer     Guarantor     Non-
Guarantor
     Eliminations     Consolidated
Total
 

Assets

             

Current assets:

             

Cash and cash equivalents

   $ —       $ 25      $ —       $ 33       $ —       $ 58   

Accounts receivable

     —         —         56        115         —         171   

Inventories

     —         —         100        130         —         230   

Other current assets

     —         37        2        59         —         98   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total current assets

     —         62        158        337         —         557   

Other non-current assets

     —         137        37        25         —         199   

Intercompany investments

     (220     297        672        1         (750     —    

Intercompany (payables) receivables

     —         155        (527     372         —         —    

Property, plant and equipment, net

     —         1        54        66         —         121   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total assets

   $ (220   $ 652      $ 394      $ 801       $ (750   $ 877   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Liabilities and shareholder’s equity

             

Current liabilities:

             

Accounts payable

   $ —       $ 8      $ 73      $ 60       $ —       $ 141   

Notes payable

     —         —         —         13         —         13   

Current maturities of long-term debt

     —         —         —         —          —         —    

Accrued payroll and employee benefits

     —         7        6        10         —         23   

Other accrued expenses

     —         34        17        41         —         92   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total current liabilities

     —         49        96        124         —         269   

Deferred employee benefits and noncurrent liabilities

     —         16        —         5         —         21   

Long-term debt

     —         806        1        —          —         807   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total liabilities

     —         871        97        129         —         1,097   

Total shareholder’s (deficit) equity

     (220     (219     297        672         (750     (220
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total liabilities and shareholder (deficit) equity

   $ (220   $ 652      $ 394      $ 801       $ (750   $ 877   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

 

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Affinia Group Intermediate Holdings Inc.

Guarantor Condensed

Consolidating Balance Sheets

December 31, 2013

 

(Dollars in millions)

   Parent     Issuer     Guarantor      Non-
Guarantor
     Eliminations     Consolidated
Total
 

Assets

              

Current assets:

              

Cash and cash equivalents

   $ —       $ 68      $ —        $ 33       $ —       $ 101   

Accounts receivable

     —         —         24         117         —         141   

Inventories, net

     —         —         87         134         —         221   

Other current assets

     —         50        —          50         —         100   

Current assets of discontinued operations

     —         —         138         3           141   
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total current assets

     —         118        249         337         —         704   

Other non-current assets

     —         122        36         24         —         182   

Intercompany investments

     (202     1,196        726         —          (1,720     —     

Intercompany (payables) receivables

     —         (672     247         425         —         —     

Property, plant and equipment, net

     —         2        50         71         —         123   
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total assets

   $ (202   $ 766      $ 1,308       $ 857       $ (1,720   $ 1,009   
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Liabilities and shareholder’s equity

              

Current liabilities:

              

Accounts payable

   $ —       $ 6      $ 65       $ 50       $ —       $ 121   

Notes payable

     —         —         —          23         —         23   

Current maturities of long-term debt

     —         7        —          —          —         7   

Accrued payroll and employee benefits

     —         8        3         8         —         19   

Other accrued expenses

     —         22        14         42         —         78   

Current liabilities of discontinued operations

     —         —         29         2         —         31   
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total current liabilities

     —         43        111         125         —         279   

Deferred employee benefits and noncurrent liabilities

     —         17        1         6         —         24   

Long-term debt

     —         907        —          —          —         907   
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total liabilities

     —         967        112         131         —         1,210   

Total shareholder’s (deficit) equity

     (202     (201     1,196         726         (1,720     (201
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total liabilities and shareholder’s (deficit) equity

   $ (202   $ 766      $ 1,308       $ 857       $ (1,720   $ 1,009   
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

 

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Table of Contents

Affinia Group Intermediate Holdings Inc.

Guarantor Condensed

Consolidating Statement of Cash Flows

For the Nine Months Ended September 30, 2014

 

(Dollars in millions)

   Parent     Issuer     Guarantor     Non-
Guarantor
    Elimination     Consolidated
Total
 

Operating activities

            

Net cash provided by (used in) operating activities

   $ 57      $ (30   $ 10      $ 24      $ (57   $ 4   

Investing activities

            

Proceeds from sale of Chassis group

     —         149        —         —         —         149   

Additions to property, plant and equipment

     —         —         (10     (8     —         (18

Other Investing Activities

     —         4        —         —         —         4   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) investing activities

     —         153        (10     (8     —         135   

Financing activities

            

Distribution to our shareholders

     —         (57     —         —         —         (57

Repayment of other debt

     (57     —         —         (10     57        (10

Repayment of Term Loans

     —         (109     —         —         —         (109
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash used in financing activities

     (57     (166     —         (10     57        (176

Effect of exchange rates on cash

     —         —         —         (6     —         (6

Decrease in cash and cash equivalents

     —         (43     —         —          —         (43

Cash and cash equivalents at beginning of the period

     —         68        —         33        —         101   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at end of the period

   $ —       $ 25      $ —       $ 33      $ —       $ 58   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

Affinia Group Intermediate Holdings Inc.

Guarantor Condensed

Consolidating Statement of Cash Flows

For the Nine Months Ended September 30, 2013

 

(Dollars in millions)

   Parent      Issuer     Guarantor     Non-
Guarantor
    Elimination      Consolidated
Total
 

Operating activities

              

Net cash provided by operating activities

   $ —        $ 43      $ 10      $ 16      $ —        $ 69   

Investing activities

              

Investment in companies, net cash acquired

     —          —         —         (1     —          (1

Additions to property, plant and equipment

     —          —         (10     (8     —          (18
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Net cash used in investing activities

     —          —         (10     (9     —          (19

Financing activities

              

Net decrease in other short-term debt

     —          —         —         (1     —          (1

Repayment of Secured Notes

     —          (195     —         —         —          (195

Repayment of Subordinated Notes

     —          (367     —         —         —          (367

Repayment of Term Loans

     —          (1     —         —         —          (1

Proceeds from Senior Notes

     —          250        —         —         —          250   

Proceeds from Term Loans

     —          667        —         —         —          667   

Distribution to our shareholder

     —          (352     —         —         —          (352

Payment of deferred financing costs

     —          (15     —         —         —          (15
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Net cash used in financing activities

     —          (13     —         (1     —          (14

Effect of exchange rates on cash

     —          —         —         (1     —          (1

Increase in cash and cash equivalents

     —          30        —         5        —          35   

Cash and cash equivalents at beginning of the period

     —          23        —         28        —          51   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Cash and cash equivalents at end of the period

   $ —        $ 53      $ —       $ 33      $ —        $ 86   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

 

 

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Table of Contents

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Management’s Discussion and Analysis should be read in conjunction with the Consolidated Financial Statements and Notes included in the Annual Report on Form 10-K for the year ended December 31, 2013.

Company Overview

Affinia Group Intermediate Holdings Inc. (the “Company”) is an innovative global leader in the design, manufacture, distribution and marketing of industrial grade filtration products and services and replacement products in South America. Management’s Discussion and Analysis includes financial information prepared in accordance with generally accepted accounting principles (“GAAP”) in the United States (“U.S.”), as well as certain non-GAAP financial measures discussed below. The non-GAAP financial measures should be viewed as a supplement to, and not a substitute for, financial measures presented in accordance with GAAP. Non-GAAP measures presented herein may not be comparable to similarly titled measures used by other companies.

The Company has two operating segments, Filtration and Affinia South America (“ASA”). Management evaluates the performance of its operating segments based primarily on revenue growth and operating profit. Income taxes are not allocated to the operating segments. Although not considered an operating segment, corporate, eliminations and other includes corporate costs, interest expense and other amounts not allocated to the operating segments.

The Filtration segment is the Company’s largest business unit, having contributed approximately 70% of global revenues during the three and nine months ended September 30, 2014. Our Filtration products fit medium and heavy duty trucks, light vehicles, equipment in the off-highway market (i.e. residential and non-residential construction, mining, forestry and agricultural) and equipment for industrial and marine applications. The Filtration segment’s products include oil, air, fuel, cabin air, coolant, hydraulic and other filters for many types of vehicles and machinery. The products are sold under well-known brands, such as WIX® and Filtron™, and private label brands including NAPA®.

The ASA segment focuses on distributing and manufacturing brake, suspension, driveshaft and U-joint components, water and fuel pumps, filters, engine products, motorcycle products, accessories and other critical aftermarket components through its operations in Argentina, Brazil, Uruguay and Venezuela. The majority of the ASA segment’s revenue is generated in Brazil. In Brazil, ASA’s operations are conducted through Affinia Automotiva, an aftermarket parts manufacturer and master distributor (“Automotiva”), and Pellegrino, a warehouse distributor (“Pellegrino”). Automotiva manufactures Nakata® brand shock absorbers and distributes those and third party products to warehouse distributors, including Pellegrino distribution.

In the fourth quarter of 2013, management committed to a plan to sell its global chassis business (the “Chassis group”) and, accordingly, the results of operations of the Chassis group have been classified as a component of discontinued operations in the Condensed Consolidated Statements of Operations for all periods presented. On January 21, 2014, Affinia entered into an Asset Purchase Agreement, as amended, with Federal-Mogul Chassis LLC (formerly known as VCS Quest Acquisition LLC) (“FM Chassis”), an affiliate of Federal-Mogul Corporation, pursuant to which FM Chassis agreed to purchase the Chassis group. This transaction closed on May 1, 2014.

Results of Operations

In this section, the Company provides analysis and discussion of earnings and factors affecting earnings on both a GAAP and non-GAAP basis. Management uses these non-GAAP financial measures for planning and forecasting, and for reporting results to the Board of Directors, employees and investors concerning the Company’s financial performance.

 

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Table of Contents

The following table summarizes the Company’s consolidated results for the three months ended September 30, 2014 and 2013:

 

     Consolidated Three Months Ended September 30,              
(Dollars in millions)    2014     2013     Variance     Currency
Effect (1)
    Variance
Excluding
Currency
Effect
 

Net sales

   $ 364      $ 351      $ 13      $ (18   $ 31   

Cost of sales

     (274     (269     (5     14        (19
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     90        82        8        (4     12   

Gross margin %

     25     23      

Selling, general and administrative expenses

     (48     (51     3        2       1   

Selling, general and administrative expenses as a percent of net sales

     13     15      
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating profit

     42        31        11        (2     13   

Operating margin %

     12     9      

Other income and expense, net

     —         (1     1        —         1   

Interest expense

     (15     (15     —          —         —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations, before income tax provision, equity in income (loss), net of tax and noncontrolling interest

     27        15        12        (2     14   

Income tax provision

     (10     (8     (2     —         (2

Equity in income (loss), net of tax

     —         (2     2        —         2   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income from continuing operations

     17        5        12        (2     14   

Income from discontinued operations, net of tax

     6        4        2        —         2   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     23        9        14        (2     16   

Less: net income attributable to noncontrolling interest, net of tax

     —         —         —         —         —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to the Company

   $ 23      $ 9      $ 14      $ (2   $ 16   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) The currency effect was calculated by comparing the local currency balances for all international locations for both periods, each at the prior year exchange rate, to determine the impact of the currency between periods. These currency effects provide a clearer understanding of the operating results of our foreign entities because they exclude the varying effects that changes in foreign currency exchange rates may have on those results.

Net sales. Consolidated net sales increased by $13 million in the third quarter of 2014 in comparison to the third quarter of 2013 due to higher sales in the Filtration segment, partially offset by lower sales in the ASA segment. Excluding currency effects, consolidated net sales increased $31 million compared to the third quarter of 2013, with sales in the Filtration and ASA segments up 12% and 2%, respectively.

Gross profit/gross margin. Gross profit increased by $8 million during the third quarter of 2014 in comparison to the third quarter of 2013, with gross margin increasing to 25% in the third quarter of 2014 from 23% in the third quarter of 2013. The increase in gross margin was mainly due to favorable product mix, as a result of higher volumes of premium heavy duty and light duty products which have higher margins, and higher pricing in North America as a result of negotiated price increases with certain customers, partially offset by higher material, labor and overhead costs. Excluding currency effects, gross profit increased $12 million compared to the third quarter of 2013, which was driven by improved margins in the Filtration segment.

Selling, general and administrative (SG&A) expenses. SG&A expenses decreased by $3 million during the third quarter of 2014 in comparison to the third quarter of 2013 primarily due to recording $6 million of legal and environmental reserves in the third quarter of 2013, partially offset by an overall increase in expenses as a result of the higher sales, as well as costs associated with supporting the growth in sales.

Operating profit/operating margin. Operating profit increased by $11 million in the third quarter of 2014 in comparison to the third quarter of 2013 due primarily to the increase in gross profit, with operating margin increasing to 12% in the third quarter of 2014 from 9% in the third quarter of 2013. Excluding currency effects, operating profit increased $13 million compared to the third quarter of 2013.

 

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Other income and expense, net. The decrease in expenses in the third quarter of 2014 in comparison to the third quarter of 2013 was due to lower losses associated with foreign currency forward contracts.

Interest expense. Interest expense in the third quarter of 2014 was flat to the same period in the prior year due to lower interest costs as a result of repayment of debt balances in the second and third quarters of 2014, partially offset by a write-off of deferred financing costs as a result of early debt repayments.

Income tax provision. Income tax provision increased by $2 million in the third quarter of 2014 in comparison to the third quarter of 2013 due primarily to an increase in pre-tax income, partially offset by a lower effective tax rate.

Income from discontinued operations, net of tax. Income from discontinued operations, net of tax, is comprised of the results of the Chassis group, which was sold in May 2014. The $6 million, net of tax, earnings in the third quarter of 2014 relates to the receipt of the final $10 million of proceeds from the Chassis sales that was part of a holdback provision until completion of certain post-closing performance obligations. As those obligations were completed in the third quarter of 2014, the $10 million pre-tax gain was recognized upon the receipt of the proceeds.

Net income. Net income was $23 million in the third quarter of 2014 in comparison to $9 million in the third quarter of 2013 as a result of higher sales and operating profit in the third quarter of 2014, expenses incurred in the third quarter of 2013 associated with litigation and environmental reserves, and the gain on the sale of the Chassis group in the third quarter of 2014.

The following table summarizes the Company’s consolidated results for the nine months ended September 30, 2014 and 2013:

 

     Consolidated Nine Months Ended September 30,              
(Dollars in millions)    2014     2013     Variance     Currency
Effect(1)
    Variance
Excluding
Currency
Effect
 

Net sales

   $ 1,060      $ 1,023      $ 37      $ (67   $ 104   

Cost of sales

     (800     (784     (16     52        (68
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     260        239        21        (15     36   

Gross margin %

     25     23      

Selling, general and administrative expenses

     (150     (142     (8     7        (15

Selling, general and administrative expenses as a percent of net sales

     14     14      
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating profit

     110        97        13        (8     21   

Operating margin %

     10     9      

Loss on extinguishment of debt

     —         (15     15        —         15   

Other income and expense, net

     (10     (3     (7     1       (8

Interest expense

     (45     (58     13        —         13   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations, before income tax provision, equity in income(loss), net of tax and noncontrolling interest

     55        21        34        (7     41   

Income tax provision

     (26     (12     (14     —         (14

Equity in income (loss), net of tax

     —          (2     2        —         2   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income from continuing operations

     29        7        22        (7     29   

Income from discontinued operations, net of tax

     28        7       21        —         21   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     57        14        43        (7     50   

Less: net income attributable to noncontrolling interest, net of tax

     —         —         —         —         —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to the Company

   $ 57      $ 14      $ 43      $ (7   $ 50   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) The currency effect was calculated by comparing the local currency balances for all international locations for both periods, each at the prior year exchange rate, to determine the impact of the currency between periods. These currency effects provide a clearer understanding of the operating results of our foreign entities because they exclude the varying effects that changes in foreign currency exchange rates may have on those results.

 

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Net sales. Consolidated net sales increased by $37 million in the nine months ended September 30, 2014 in comparison to the same period in 2013 due to higher sales in the Filtration segment offset by lower sales in the ASA segment. Excluding currency effects, consolidated net sales increased $104 million in comparison to the same period in 2013, with sales in the Filtration and ASA segments up 12% and 6%, respectively.

Gross profit/gross margin. Gross profit increased by $21 million during the nine months ended September 30, 2014 in comparison to the same period in 2013, with gross margin increasing to 25% in 2014 from 23% in 2013. The increase in gross margin was mainly due to the increase in sales volume partially offset by higher material, labor and overhead costs. Excluding currency effects, gross profit increased $36 million compared to the same period 2013, as margins improved in both the Filtration and ASA segments.

Selling, general and administrative (SG&A) expenses. SG&A expenses increased by $8 million during the nine months ended September 30, 2014 in comparison to the same period in 2013 primarily due to $9 million of restructuring and other costs associated with the relocation of the corporate office, $2 million of bad debt expense associated with a Filtration customer, and an overall increase in expenses as a result of the higher sales, as well as costs associated with supporting the growth in sales. These increases were partially offset by the establishment of a $9 million legal reserve and $2 million environmental reserve during the nine months ended September 30, 2013. Excluding the impacts of currency, SG&A expenses increased by $15 million in comparison to the same period in the prior year.

Operating profit/operating margin. Operating profit increased by $13 million in the nine months ended September 30, 2014 in comparison to the same period in 2013, with operating margin increasing to 10% in 2014 compared to 9% in 2013. The increase in operating profit was driven by higher gross profit partially offset by higher SG&A expenses, as discussed above. Excluding currency effects, operating profit increased $21 million compared to the same period in the prior year.

Loss on extinguishment of debt. During the second quarter of 2013, we refinanced our debt structure and, as a result, incurred a $15 million loss due to early retirement of senior notes.

Other income and expense, net. The $7 million higher expense in the nine months ended September 30, 2014 in comparison to the same period in 2013 was driven primarily by a $5 million net increase in currency devaluation charges, as a $7 million charge was recorded in the first quarter of 2014 associated with a currency devaluation in Venezuela compared to a $2 million currency devaluation charge in the first quarter of 2013. See Note 14 to the Condensed Consolidated Financial Statements, “Venezuela Operations” for further information.

Interest expense. Interest expense decreased by $13 million in the nine months ended September 30, 2014 in comparison to the same period in the prior year due to the refinancing of debt in the second quarter of 2013, which resulted in the write-off of unamortized deferred financing costs and an additional one-time interest expense.

Income tax provision. The income tax provision increased $14 million in the nine months ended September 30, 2014 in comparison to the same period in 2013 due primarily to an increase in pre-tax income. This was partially offset by a lower effective tax rate.

Income from discontinued operations, net of tax. Income from discontinued operations, net of tax, is comprised of the results of the Chassis group, which includes a $32 million pre-tax gain on the Chassis group sale that closed in May 2014.

Net income. Net income was $57 million in the nine months ended September 30, 2014 in comparison to net income of $14 million in the same period in 2013 was driven by the $32 million pre-tax gain on the sale of the Chassis group, higher sales and operating profit in 2014, as well as expenses recorded in 2013 associated with the debt refinancing without similar charges in 2014, partially offset by $9 million of restructuring and other costs in 2014, and a net $5 million increase in currency devaluation charges in Venezuela.

 

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Table of Contents

Segment Results

Consolidated EBITDA, which includes the results for the Filtration and ASA segments as well as corporate, eliminations and other, for the three months ended September 30, 2014 and 2013 were as follows:

 

     Three Months Ended September 30, 2014  
(Dollars in millions)    Filtration     ASA     Corporate,
Eliminations
and Other
    Consolidated  

Net Sales

   $ 248      $ 116      $ —       $ 364   

Cost of Sales

     (180     (93     (1     (274
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross Profit

     68        23        (1     90   

Selling, General and Administrative Expenses

     (25     (14     (9     (48
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating Profit

     43        9        (10     42   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other Income and Expense, net

     (1     —         1        —     

Interest Expense

     (1     —         (14     (15

Add Back:

        

Depreciation and Amortization

     4        1        —         5   

Interest Expense

     1        —         14        15   
  

 

 

   

 

 

   

 

 

   

 

 

 

Consolidated EBITDA

   $ 46      $ 10      $ (9   $ 47   
  

 

 

   

 

 

   

 

 

   

 

 

 

EBITDA %

     19     9    
  

 

 

   

 

 

     
     Three Months Ended September 30, 2013  
(Dollars in millions)    Filtration     ASA     Corporate,
Eliminations
and Other
    Consolidated  

Net Sales

   $ 234      $ 117      $ —        $ 351   

Cost of Sales

     (177     (94     2        (269
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross Profit

     57        23        2        82   

Selling, General and Administrative Expenses

     (22     (14     (15     (51
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating Profit

     35        9        (13     31   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other Income and Expense, net

     (1     —         —          (1

Interest Expense

     —          —         (15     (15

Add Back:

  

Depreciation and Amortization

     3        —          —          3   

Interest Expense

     —          —          15        15   
  

 

 

   

 

 

   

 

 

   

 

 

 

Consolidated EBITDA

   $ 37      $ 9      $ (13   $ 33   
  

 

 

   

 

 

   

 

 

   

 

 

 

EBITDA %

     16     8    
  

 

 

   

 

 

     

The increase in consolidated EBITDA for the third quarter 2014 compared to the same period in the prior year was primarily driven by:

 

    A $9 million increase in the Filtration segment due primarily to improved sales, favorable product mix in North America as a result of higher sales of premium products and price increases; and

 

    Litigation and environmental reserves of $6 million recorded in the three months ended September 30, 2013 for which there were no comparable charges in the third quarter of 2014.

Excluding currency impacts, consolidated EBITDA would have been $49 million in the third quarter of 2014, which is $16 million higher compared to the third quarter of 2013.

 

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Consolidated EBITDA, which includes the results for the Filtration and ASA segments as well as corporate, eliminations and other, for the nine months ended September 30, 2014 and 2013 were as follows:

 

 

     Nine Months Ended September 30, 2014  
(Dollars in millions)    Filtration     ASA     Corporate,
Eliminations
and Other
    Consolidated  

Net Sales

   $ 732      $ 328      $ —       $ 1,060   

Cost of Sales

     (538     (261     (1 )     (800
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross Profit

     194        67        (1     260   

Selling, General and Administrative Expenses

     (77     (41     (32     (150
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating Profit

     117        26        (33     110   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other Income and Expense, net

     (9     (3     2        (10

Interest Expense

     (1     —          (44     (45

Add Back:

        

Depreciation and Amortization

     12        3        —         15   

Interest Expense

     1        —         44        45   
  

 

 

   

 

 

   

 

 

   

 

 

 

Consolidated EBITDA

   $ 120      $ 26      $ (31   $ 115   
  

 

 

   

 

 

   

 

 

   

 

 

 

EBITDA %

     16     8    
  

 

 

   

 

 

     

 

 

     Nine Months Ended September 30, 2013  
(Dollars in millions)    Filtration     ASA     Corporate,
Eliminations
and Other
    Consolidated  

Net Sales

   $ 678      $ 345      $ —        $ 1,023   

Cost of Sales

     (507     (277     —          (784
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross Profit

     171        68        —          239   

Selling, General and Administrative Expenses

     (67     (43     (32     (142
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating Profit

     104        25        (32     97   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other Income and Expense, net

     (5     —         (13     (18

Interest Expense

     (1     —         (57     (58

Add Back:

        

Depreciation and Amortization

     11        2        1        14   

Interest Expense

     1        —         57        58   
  

 

 

   

 

 

   

 

 

   

 

 

 

Consolidated EBITDA

   $ 110      $ 27      $ (44   $ 93   
  

 

 

   

 

 

   

 

 

   

 

 

 

EBITDA %

     16     8    
  

 

 

   

 

 

     

The increase in consolidated EBITDA for the nine months ended September 30, 2014 compared to the same period in the prior year was primarily driven by:

 

    A $15 million loss on extinguishment of debt recorded in the second quarter of 2013 associated with the debt refinancing,

 

    Litigation and environmental reserves of $6 million recorded in the third quarter 2013 for which there were no comparable charges in 2014, and

 

    A $10 million increase in the Filtration segment due primarily to improved sales, favorable product mix in North America as a result of higher sales of premium products and price increases.

These increases were partially offset by:

 

    Restructuring and other charges of $9 million recorded in the nine months ended September 30, 2014 for which there were no comparable charges in the nine months ended September 30, 2013. The restructuring charges, which are a component of SG&A, relate to the relocation of the corporate office from Ann Arbor, Michigan to Gastonia, North Carolina, and

 

    $5 million net increase in currency devaluation charges in Venezuela.

 

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Excluding currency impacts, consolidated EBITDA would have been $122 million in the nine months ended September 30, 2014, which is $29 million higher compared to the same period in 2013.

The following segment information shows the components of operating profit and segment EBITDA for each segment. See Note 4 to the Condensed Consolidated Financial Statements, “Segment Information,” for a discussion of the Company’s segment structure.

Filtration Segment

Results for the Filtration segment for the three months ended September 30, 2014 and 2013 were as follows:

 

     Three Months Ended September 30,  
(Dollars in millions)    2014     2013     Variance     Currency
Effect(1)
    Variance Excluding
Currency Effect
 

Net Sales

   $ 248      $ 234      $ 14      $ (15   $ 29   

Cost of Sales

     (180     (177     (3     12        (15
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross Profit

     68        57        11        (3     14   

Gross Profit %

     27     24      
  

 

 

   

 

 

   

 

 

   

 

 

   

Selling, General and Administrative Expenses

     (25     (22     (3     —          (3
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating Profit

     43        35        8        (3     11   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating Profit %

     17     15      
  

 

 

   

 

 

       

Other Income and Expense, net

     (1     (1     —         —          —    

Interest Expense

     (1     —          (1     —         (1

Add back:

          

Depreciation and Amortization

     4        3        1        —         1  

Interest Expense

     1        —          1        —         1   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Segment EBITDA

   $ 46      $ 37      $ 9      $ (3 )   $ 12   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

EBITDA %

     19     16    
  

 

 

   

 

 

       

 

(1) The currency effect was calculated by comparing the local currency balances for all international locations for both periods, each at the prior year exchange rate, to determine the impact of the currency between periods. These currency effects provide a clearer understanding of the operating results of our foreign entities because they exclude the varying effects that changes in foreign currency exchange rates may have on those results.

Three months ended September 30, 2014 compared to September 30, 2013:

Net Sales. Net sales increased by $14 million in the third quarter of 2014 in comparison to the third quarter of 2013. The increase was driven primarily by:

•        A $15 million increase in North America due to favorable sales mix, with a higher volume of premium heavy duty and light duty products compared to the prior year, higher pricing as a result of negotiated price increases with certain customers and new business as a result of taking market share from competitors, and

•        Flat sales in South America due largely to unfavorable currency impacts in Venezuela. Excluding the impacts of currency, sales in South America improved $13 million compared to the same period in the prior year. The improvement in currency adjusted sales was driven by higher pricing to offset the impacts of the currency devaluation, increased sales volume to existing customers, and addition of new products.

Cost of Sales. Cost of sales increased by $3 million in the third quarter of 2014 in comparison to the third quarter of 2013. The increase was primarily related to increases in materials, labor and overhead as a direct result of the higher sales volumes in North America.

 

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Gross Profit. Gross profit increased by $11 million in the third quarter of 2014 in comparison to the third quarter of 2013. The increase was driven primarily by sales mix in North America, as a result of higher volumes of premium heavy duty and light duty products, which have higher margins. Gross profit was at 27% and 24% of net sales for the three months ended September 30, 2014 and 2013, respectively.

Selling, General and Administrative Expenses. SG&A expenses increased by $3 million in the third quarter of 2014 in comparison to the third quarter of 2013. The increase was primarily due to higher selling and general and administrative expenses to support the growth in sales.

Operating Profit. Operating profit increased by $8 million in the third quarter of 2014 in comparison to the third quarter of 2013. The increase in operating profit was driven by improvement in gross profit partially offset by higher SG&A expenses as discussed above. Operating profit was at 17% of net sales for the third quarter of 2014 compared to 15% in the same period in 2013.

Other income and expense, net. Other income and expense, net was flat in the third quarter of 2014 in comparison to the third quarter of 2013.

Segment EBITDA. Segment EBITDA increased by $9 million in the third quarter of 2014 in comparison to the third quarter of 2013. The increase in segment EBITDA was primarily driven by improved results in North America.

Results for the Filtration segment for the nine months ended September 30, 2014 and 2013 were as follows:

 

     Nine Months Ended September 30,  
(Dollars in millions)    2014     2013     Variance     Currency
Effect(1)
    Variance Excluding
Currency Effect
 

Net Sales

   $ 732      $ 678      $ 54      $ (28   $ 82   

Cost of Sales

     (538     (507     (31     23        (54
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross Profit

     194        171        23        (5     28   

Gross Profit %

     27     25      
  

 

 

   

 

 

   

 

 

   

 

 

   

Selling, General and Administrative Expenses

     (77     (67     (10     2        (12
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating Profit

     117        104        13        (3     16   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating Profit %

     16     15      
  

 

 

   

 

 

       

Other Income and Expense, net

     (9     (5     (4     —         (4

Interest Expense

     (1     (1     —          —         —     

Add back:

          

Depreciation and Amortization

     12        11        1       —         1   

Interest Expense

     1        1        —          —         —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Segment EBITDA

   $ 120      $ 110      $ 10      $ (3 )   $ 13   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

EBITDA %

     16     16      
  

 

 

   

 

 

       

 

(1) The currency effect was calculated by comparing the local currency balances for all international locations for both periods, each at the prior year exchange rate, to determine the impact of the currency between periods. These currency effects provide a clearer understanding of the operating results of our foreign entities because they exclude the varying effects that changes in foreign currency exchange rates may have on those results.

 

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Nine months ended September 30, 2014 compared to September 30, 2013:

Net Sales. Net Sales increased by $54 million in the nine months ended September 30, 2014 in comparison to the same period in 2013. On a currency adjusted basis, sales improved $82 million in comparison to the prior year. The unfavorable currency impacts were primarily driven by the devaluation of the Venezuelan bolivar. The increase was driven primarily by:

•        A $39 million increase in North America due to favorable sales mix, with a higher volume of premium heavy duty and light duty products compared to the prior year, higher pricing as a result of negotiated price increases with certain customers, introduction of a new product line in the third quarter of 2013, and new business as a result of taking market share from competitors,

•        A $13 million increase in Europe due to higher sales in Poland of $7 million as a result of expanding market share and higher sales to existing customers and $7 million of incremental sales from the United Kingdom distribution company that was acquired during the third quarter of 2013, and

•        A $2 million increase in South America. Excluding the impacts of currency, sales in South America improved $29 million compared to the same period in the prior year. The improvement in currency adjusted sales was driven by higher pricing, largely in Venezuela, to offset the impacts of the currency devaluation and increased sales volume to existing customers.

Cost of Sales. Cost of sales increased by $31 million in the nine months ended September 30, 2014 in comparison to the same period in 2013. The increase was primarily related to increases in materials, labor and overhead as a direct result of the higher sales volumes in North America, Europe and South America. On a currency adjusted basis, cost of sales increased $54 million compared to the same period in 2013.

Gross Profit. Gross profit increased by $23 million in the nine months ended September 30, 2014 in comparison to the same period of 2013. The increase was driven by higher sales, favorable sales mix and higher pricing; partially offset by an increase in the cost of sales due to the factors discussed above. Gross profit improved to 27% of net sales for the nine months ended September 30, 2014 compared to 25% in the same period in the prior year. On a currency adjusted basis, gross profit increased by $28 million in comparison so the same period in the prior year.

Selling, General and Administrative Expenses. SG&A expenses increased by $10 million in the nine months ended September 30, 2014 in comparison to the same period in 2013. The increase in SG&A expenses was due primarily to a $5 million increase as a result of higher sales, as well as to support the growth in sales, a $3 million increase in advertising and promotional costs, and a $2 million bad debt expense associated with a customer.

Operating Profit. Operating profit increased $13 million in the nine months ended September 30, 2014 in comparison to the same period of 2013. The increase in operating profit was driven by improvement in gross profit partially offset by higher SG&A expenses as discussed above. Operating profit was at 16% and 15% of net sales for the nine months ended September 30, 2014 and 2013, respectively.

Other Income and Expense, net. The $4 million higher expense in the nine months ended September 30, 2014 in comparison to the same period in 2013, was due primarily to a $3 million year-over-year impact of charges associated with currency devaluation in Venezuela. See Note 14 to the Condensed Consolidated Financial Statements, “Venezuela Operations” for further information.

Segment EBITDA. Segment EBITDA increased by $10 million in the nine months ended September 30, 2014 in comparison to the same period in 2013. The increase in segment EBITDA was driven by higher operating profit partially offset by a $3 million net impact of a currency devaluation in Venezuela.

Matters Impacting Future Results

On August 29, 2014, Wix Filtration Corp LLC (“Wix”), an indirect wholly-owned subsidiary of Affinia, and CQ Sourcing, Inc. (“CQ Sourcing”), a subsidiary of Advance Auto Parts, Inc., agreed to end their current business relationship effective as of December 31, 2014. Such current business relationship consists of Wix selling to CQ Sourcing various CARQUEST filters. CQ Sourcing is the Company’s second largest customer in terms of annual net sales, representing approximately 5% of consolidated net sales and 8% of Filtration segment net sales. Until December 31, 2014, Wix will continue to sell such filters to CQ Sourcing in accordance with the commercial sales terms currently in place and no later than 60 days after December 31, 2014, CQ Sourcing will purchase from Wix all filters of Wix either finished or committed as a branded CARQUEST filter and all of Wix’s CARQUEST branded packaging.

As discussed further in Note 14 to the Condensed Consolidated Financial Statements, “Venezuelan Operations”, in the first quarter of 2014 the Filtration segment was unfavorably impacted by a $5 million charge associated with a devaluation of currency in Venezuela (the Bolivar Fuerte (“VEF”)). Management will continue to assess the implications of the multiple exchange rates in Venezuela to determine the appropriate exchange rates to apply to both transactions denominated in U.S. Dollars as well as the

 

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periodic remeasurement of VEF balances into U.S. Dollars for purposes of financial reporting. Significant judgment is required to determine rates available to convert currency or settle transactions, as well as the probability of accessing and obtaining U.S. Dollar by using a particular exchange rate or exchange mechanism. Results of operations in the future could be adversely impacted by the need to apply a different exchange rate to future transactions, as well as the potential for additional devaluations of currency as part of the periodic remeasurement process. At September 30, 2014, total monetary assets and liabilities associated with our Venezuelan operations were less than 5% of the Company’s total consolidated assets and liabilities.

Affinia South America (ASA) Segment

Results for the ASA segment for the three months ended September 30, 2014 and 2013 were as follows:

 

           Three Months Ended September 30,  
(Dollars in millions)    2014     2013     Variance     Currency
Effect(1)
    Variance Excluding
Currency Effect
 

Net Sales

   $ 116      $ 117      $ (1   $ (3   $ 2   

Cost of Sales

     (93     (94     1        2        (1
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross Profit

     23        23        —          (1     1   

Gross Profit %

     20     20      
  

 

 

   

 

 

       

Selling, General and Administrative Expenses

     (14     (14     —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating Profit

     9        9        —         (1     1   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating Profit %

     8     8      
  

 

 

   

 

 

       

Other Income and Expense, net

     —         —         —         —         —    

Add back:

          

Depreciation and Amortization

     1        —          1        —         1   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Segment EBITDA

   $ 10      $ 9      $ 1      $ (1   $ 2   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

EBITDA %

     9     8      
  

 

 

   

 

 

       

 

(1) The currency effect was calculated by comparing the local currency balances for all international locations for both periods, each at the prior year exchange rate, to determine the impact of the currency between periods. These currency effects provide a clearer understanding of the operating results of our foreign entities because they exclude the varying effects that changes in foreign currency exchange rates may have on those results.

Net Sales. Net sales decreased by $1 million in the third quarter of 2014 in comparison to the third quarter of 2013. The decrease was driven primarily by a $3 million unfavorable impact related to currency translation effects primarily related to the Brazilian Real and the Argentinean Peso. Excluding the impacts of currency, net sales were up $2 million compared to the third quarter of 2013, driven by a $4 million increase in Argentina due to proactive price increases to offset the impacts of inflation, and a $2 million increase in our Brazilian master distribution and Argentinian distribution companies due to higher pricing, new business consisting primarily of new product lines and part numbers, and higher sales to existing customers. This was partially offset by a $3 million decrease as a result of the shutdown of operations in Venezuela at the end of the second quarter of 2014.

Cost of Sales. Cost of sales decreased by $1 million in the third quarter of 2014 in comparison to the third quarter of 2013.The decrease was primarily driven by a $2 million favorable impact related to currency translation effects primarily related to the Brazilian Real and the Argentinean Peso. Excluding the impacts of currency, cost of sales were $1 million higher than in the second quarter of 2013. The increase was attributed to higher materials, labor and overhead costs as a direct result of the increased sales volumes in Brazil and Argentina, including the inflationary impacts on materials and production costs.

Gross Profit. Gross profit was flat for the third quarter of 2014 compared to the third quarter of 2013. This is a result of the factors discussed above, the gross profit percentage was also flat at 20% in the third quarter of both 2014 and 2013. Excluding the impacts of currency, gross profit increased $1 million compared to the third quarter of 2013. The improvement in gross profit was due primarily to increased sales resulting in better fixed cost absorption in our Brazilian master distribution business, as well as higher pricing and improved sourcing (i.e. import of product versus light assembly) which resulted in headcount reductions in our Argentinian distribution companies.

Selling, General and Administrative Expenses. SG&A expenses were flat for the third quarter of 2014 in comparison to the third quarter of 2013. Currency impacts were negligible on SG&A expenses.

 

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Segment EBITDA. Segment EBITDA increased by $1 million in the third quarter of 2014 compared to the third quarter of 2013. Excluding the impacts of currency, segment EBITDA was up $2 million compared to the third quarter of 2013 primarily due to higher sales and an increase in gross profit.

Results for the ASA segment for the nine months ended September 30, 2014 and 2013 were as follows:

 

           Nine Months Ended September 30,  
(Dollars in millions)    2014     2013     Variance     Currency
Effect(1)
    Variance Excluding
Currency Effect
 

Net Sales

   $ 328      $ 345      $ (17   $ (39   $ 22   

Cost of Sales

     (261     (277     16        29        (13
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross Profit

     67        68        (1     (10     9   

Gross Profit %

     20     20      
  

 

 

   

 

 

       

Selling, General and Administrative Expenses

     (41     (43     2        5        (3
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating Profit

     26        25        1        (5     6   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating Profit %

     8     7      
  

 

 

   

 

 

       

Other Income and Expense, net

     (3     —         (3     1       (4

Add back:

          

Depreciation and Amortization

     3        2        1        —         1  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Segment EBITDA

   $ 26      $ 27      $ (1   $ (4   $ 3   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

EBITDA %

     8     8      
  

 

 

   

 

 

       

 

(1) The currency effect was calculated by comparing the local currency balances for all international locations for both periods, each at the prior year exchange rate, to determine the impact of the currency between periods. These currency effects provide a clearer understanding of the operating results of our foreign entities because they exclude the varying effects that changes in foreign currency exchange rates may have on those results.

Net Sales. Net sales decreased by $17 million in the nine months ended September 30, 2014 in comparison to the same period in 2013. The decrease was driven primarily by a $39 million unfavorable impact related to currency translation effects primarily related to the Brazilian Real and the Argentinean Peso. Excluding the impacts of currency, net sales were up $22 million compared to the same period in 2013, driven by increases in our Brazilian master distribution and Argentine distribution companies due to higher pricing, new business consisting primarily of new product lines and part numbers, and higher sales to existing customers.

Cost of Sales. Cost of sales decreased by $16 million in the nine months ended September 30, 2014 in comparison to the same period in 2013. The decrease was primarily driven by a $29 million favorable impact related to currency translation effects primarily related to the Brazilian Real and the Argentinean Peso. Excluding the impacts of currency, cost of sales were $13 million higher than the same period in 2013. The increase was attributed to higher materials, labor and overhead costs as a direct result of the increased sales volumes in Brazil and Argentina, including inflationary impacts of materials and production costs.

Gross Profit. Gross profit decreased $1 million in the nine months ended September 30, 2014 compared to the same period in 2013 as a result of the factors discussed above, while gross profit percentage was flat for the nine months ended September 30, 2014 compared to the same period in 2013 at 20%. Excluding the impacts of currency, gross profit increased $9 million compared to the same period in 2013. The improvement in gross profit was due primarily to increased sales resulting in better fixed cost absorption in our Brazilian master distribution business, as well as higher pricing and improved sourcing (i.e. import of product versus light assembly) which resulted in headcount reductions in our Argentine distribution companies.

Selling, General and Administrative Expenses. SG&A expenses decreased by $2 million in the nine months ended September 30, 2014 in comparison to the same period of 2013. The decrease was driven primarily by a $5 million favorable impact related to currency translation effects. Excluding the impacts of currency, SG&A expenses were $3 million higher than the corresponding period in 2013 as a result of Pellegrino opening new branches in Brazil.

Other Income and Expense, net. Other income and expense increased by $3 million in the nine months ended September 30, 2014 in comparison to the same period in 2013 due primarily to a $2 million charge associated with currency devaluation in Venezuela during the first quarter of 2014. See Note 14 to the Condensed Consolidated Financial Statements, “Venezuela Operations” for further information.

 

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Segment EBITDA. Segment EBITDA decreased by $1 million in the nine months ended September 30, 2014 compared to the same period in 2013 largely as a result of the $2 million Venezuelan currency devaluation in the first quarter of 2014 and other unfavorable currency impacts. Excluding the impacts of currency, segment EBITDA was up $3 million compared to the nine months ended September 30, 2013.

Results by Geographic Region

Net sales and Income (loss) from continuing operations before income tax provision and noncontrolling interest by geographic region were as follows:

 

     Three Months Ended September 30,  
(Dollars in millions)    2014     2013     Variance  

Net Sales

      

United States

   $ 158      $ 142      $ 16   

Foreign

     206        209      $ (3
  

 

 

   

 

 

   

 

 

 

Total net sales

   $ 364      $ 351      $ 13   
  

 

 

   

 

 

   

 

 

 

United States sales as a percent of total net sales

     43     40  

Foreign sales as a percent of total net sales

     57     60  
(Dollars in millions)    2014     2013     Variance  

Income (loss) from continuing operations before income tax provision, equity in income (loss), net of tax and noncontrolling interest

      

United States

   $ (3   $ (14   $ 11   

Foreign

     30        29        1   
  

 

 

   

 

 

   

 

 

 

Total income from continuing operations before income tax provision, equity in income (loss), net of tax and noncontrolling interest

   $ 27      $ 15      $ 12   

United States. Net sales in the United Sates increased by $16 million in the third quarter of 2014 in comparison to the third quarter of 2013 due to higher North America sales within our Filtration segment. See “Segment Results” section above. The United States income (loss) from continuing operations before income tax provision, equity in income (loss), net of tax and noncontrolling interest was lower than the foreign income from continuing operations before income tax provision, equity in income (loss), net of tax and noncontrolling interest due to the inclusion of corporate costs in our United States operations and higher profitability of some of our subsidiaries in foreign locations. The majority of our debt relates to our United States operations and, consequently, almost all of the associated interest expense is allocated to our domestic operations. During the third quarter of 2014, our United States operations had $14 million of interest expense and our foreign operations had less than $1 million of interest expense.

Foreign. Foreign net sales decreased by $3 million in the third quarter of 2014 in comparison to the third quarter of 2013 due to by lower sales in our Brazilian and Argentinean distribution companies and our Venezuela filtration products, largely as a result of unfavorable currency impacts. See “Segment Results” above for a discussion of the impacts of currency on net sales for the third quarter of 2014. Income from continuing operations before income tax provision, equity in income (loss), net of tax and noncontrolling interest increased in the third quarter of 2014 in comparison to the third quarter of 2013 primarily as a result of an improvement in gross profit, which was driven by an increase in sales volume in our European Filtration operations.

 

     Nine Months Ended September 30,  
(Dollars in millions)    2014     2013     Variance  

Net Sales

    

United States

   $ 477      $ 439      $ 38   

Foreign

     583        584      $ (1
      

 

 

 

Total net sales

   $ 1,060      $ 1,023      $ 37   
      

 

 

 

United States sales as a percent of total net sales

     45     43  

Foreign sales as a percent of total net sales

     55     57  
(Dollars in millions)    2014     2013     Variance  

Income (loss) from continuing operations before income tax provision, equity in income (loss), net of tax and noncontrolling interest

  

United States

   $ (17   $ (55   $ 38   

Foreign

     72        76        (4
  

 

 

   

 

 

   

Total income from continuing operations before income tax provision, equity in income (loss), net of tax and noncontrolling interest

   $ 55      $ 21      $ 34   

 

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United States. Net sales in the United States increased by $38 million in the nine months ended September 30, 2014 in comparison to the same period in 2013 due to higher North America sales within our Filtration segment. See “Segment Results” section above. The United States income (loss) from continuing operations before income tax provision, equity in income (loss), net of tax and noncontrolling interest was lower than the foreign income from continuing operations before income tax provision, equity in income (loss), net of tax and noncontrolling interest due to the inclusion of corporate costs in our United States operations and higher profitability of some of our subsidiaries in foreign locations. The majority of our debt relates to our United States operations and, consequently, almost all of the associated interest expense is allocated to our domestic operations. During the nine months ended September 30, 2014, our United States operations had $44 million of interest expense and our foreign operations had less than $1 million of interest expense.

Foreign. Net sales decreased by $1 million in the nine months ended September 30, 2014 in comparison to the same period in 2013 due to increased sales in our European Filtration business, largely offset by lower sales in our Brazilian and Argentinean distribution companies and our Venezuela filtration products as a result of unfavorable currency impacts. See “Segment Results” above for a discussion of the impacts of currency on net sales for the nine months ended September 30, 2014. Income from continuing operations before income tax provision, equity in income (loss) net of tax and noncontrolling interest decreased in 2014 in comparison to 2013 primarily as a result of a $5 million currency devaluation in Venezuela and unfavorable currency translation effects, partially offset by an improvement in gross profit, which was driven by an increase in sales volume.

 

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Liquidity and Capital Resources

The Company’s primary source of liquidity is cash flow from operations and available borrowings from our ABL Revolver.

As of September 30, 2014, the Company had $820 million in aggregate indebtedness. As of September 30, 2014, we had an additional $83 million of borrowing capacity available under our ABL Revolver after giving effect to $9 million in outstanding letters of credit, none of which was drawn against, and less than $1 million for borrowing base reserves. In addition, we had cash and cash equivalents of $58 million as of September 30, 2014. We had $33 million of cash and cash equivalents outside the United States, of which approximately $7 million is considered permanently reinvested for funding ongoing operations outside of the U.S. If such permanently reinvested funds are needed for operations in the U.S., the Company would be required to accrue additional tax expense, primarily related to foreign withholding taxes.

Based on the current level of operations, we believe that cash flow from operations and available cash, together with available borrowings under our ABL Revolver, will be adequate to meet our short term and long term liquidity needs. Our ABL Revolver matures in April 2018, our Senior Notes mature in May 2021, our Term Loan B-1 matures in April 2016 and our Term Loan B-2 matures in April 2020. If we were to undertake a significant acquisition or capital improvement plan, we may need additional sources of liquidity. We expect to meet any such liquidity needs by entering into new or additional credit facilities and/or offering new or additional debt securities, but whether such sources of liquidity will be available to us at any given point in the future will depend on a number of factors that are outside of our control, including general market conditions.

On May 1, 2014, Affinia closed the sale of its Chassis group. Upon closing, Affinia received cash proceeds of $140 million, which represents the agreed upon selling price of $150 million less the holdback of consideration of $10 million until completion of certain post-closing performance obligations. In September 2014, the post-closing performance obligations were completed and the Company received $9 million of cash proceeds with the remaining $1 million allocated to a post-closing purchase price adjustment. There are no additional material obligations of either party associated with this transaction. With the receipt of the sales proceeds, the Company paid down $24 million of debt associated with Term Loan B-1 and $85 million associated with Term Loan B-2.

Additionally, in 2014, the Company made a $57 million distribution to Affinia Group Holdings Inc. (“Holdings”). Holdings used all of the distribution to partially repay its outstanding third party debt.

ABL Revolver

We replaced our existing asset-based credit facility with a new ABL Revolver on April 25, 2013. The ABL Revolver comprises a revolving credit facility of up to $175 million for borrowings available solely to the U.S. domestic borrowers, including (i) a $30 million sub-limit for letters of credit and (ii) a $15 million swingline facility. Availability under the ABL Revolver is based upon monthly (or more frequent under certain circumstances) borrowing base valuations of our eligible inventory and accounts receivable, among other things, and is reduced by certain reserves in effect from time to time.

At September 30, 2014, there were no outstanding borrowings under the ABL Revolver. We had an additional $83 million of availability after giving effect to $9 million in outstanding letters of credit and less than $1 million for borrowing base reserves as of September 30, 2014.

Maturity. The ABL Revolver is scheduled to mature on April 25, 2018.

Guarantees and collateral. The indebtedness, obligations and liabilities under the ABL Revolver are unconditionally guaranteed jointly and severally on a senior secured basis by the Company and certain of its current and future U.S. subsidiaries, and are secured, subject to permitted liens and other exceptions and exclusions, by a first-priority lien on accounts receivable, inventory, cash, deposit accounts, securities accounts and proceeds of the foregoing and certain assets related thereto and a second-priority lien on the collateral that secures the Term Loans on a first-priority basis.

Mandatory prepayments. If at any time the outstanding borrowings under the ABL Revolver (including outstanding letters of credit and swingline loans) exceed the lesser of (i) the borrowing base as in effect at such time and (ii) the aggregate revolving commitments as in effect at such time, the borrowers will be required to prepay an amount equal to such excess and/or cash collateralize outstanding letters of credit.

Voluntary prepayments. Subject to certain conditions, the ABL Revolver allows the borrowers to voluntarily reduce the amount of the revolving commitments and to prepay the loans without premium or penalty other than customary breakage costs for LIBOR rate contracts.

 

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Interest rates and fees. Outstanding borrowings under the ABL Revolver accrue interest at an annual rate of interest equal to (i) a base rate plus the applicable spread, as set forth below or (ii) a LIBOR rate plus the applicable spread, as set forth below. Swingline loans bear interest at a base rate plus the applicable spread. The Company will pay a commission on letters of credit issued under the new ABL Revolver at a rate equal to the applicable spread for loans based upon the LIBOR rate.

 

Level

   Average
Aggregate
Availability
     Base Rate Loans and
Swingline Loans
    LIBOR Loans  

I

   <$ 50,000,000         1.00     2.00

II

   > $

 

$

50,000,000

but <

100,000,000

  

 

  

     0.75     1.75

III

   >$  100,000,000         0.50     1.50

The borrowers will pay certain fees with respect to the ABL Revolver, including (i) an unused commitment fee on the undrawn portion of the credit facility of 0.25% per annum in the event that more than 50% of the commitments (excluding swingline loans) under the credit facility are utilized, and 0.375% per annum in the event that no more than 50% of the commitments (excluding swingline loans) under the credit facility are utilized and (ii) customary annual administration fees and fronting fees in respect of letters of credit equal to 0.125% per annum on the stated amount of each letter of credit outstanding during each fiscal quarter. During an event of default, all loans and other obligations under the ABL Revolver may bear interest at a rate 2.00% in excess of the otherwise applicable rate of interest.

Cash Dominion. Commencing on the day that an event of default occurs or availability under the ABL Revolver is less than the greater of 12.5% of the total borrowing base and $17.5 million and continuing until no event of default has existed and availability has been greater than such thresholds at all times for 60 consecutive days, amounts in the Company’s deposit accounts and the deposit accounts of the guarantors (other than certain excluded accounts) will be transferred daily into a blocked account held by the administrative agent and applied to reduce the outstanding amounts under the ABL Revolver.

Covenants. The ABL Revolver contains negative covenants that, among other things, limit or restrict the ability of the Company and its subsidiaries to: create liens and encumbrances; incur additional indebtedness; merge, dissolve, liquidate or consolidate; make acquisitions, investments, advances or loans; dispose of or transfer assets; pay dividends or make other payments in respect of their capital stock; amend certain material governance documents; change the nature of the business of the borrowers and their subsidiaries; redeem or repurchase capital stock or prepay, redeem or repurchase certain debt; engage in certain transactions with affiliates; change the borrowers’ fiscal periods; and enter into certain restrictive agreements. The ABL Revolver also contains certain customary affirmative covenants and events of default, including a change of control.

In addition, commencing on the day that an event of default occurs or availability under the ABL Revolver is less than the greater of 10% of the total borrowing base and $15 million and continuing until no event of default has existed and availability under the ABL Revolver has been greater than such thresholds at all times, in each case, for 30 consecutive days, the Company will be required to maintain a fixed charge coverage ratio of at least 1.0x measured for the last 12-month period. As of November 13, 2014, the Company remained in compliance with all debt covenants. The fixed charge coverage ratio was 1.80 as of September 30, 2014. If none of the covenant triggers have occurred, the impact of falling below the fixed charge coverage ratio would not be a default but instead would limit our ability to pursue certain operational or financial transactions (e.g. acquisitions).

On February 4, 2014, we entered into (i) the First Amendment to the Credit Agreement dated as of February 4, 2014 (“Term Loan Amendment”), among the Company, Affinia, JP Morgan Chase Bank, NA, as administrative agent and the lenders party thereto and (ii) the First Amendment to the ABL Credit Agreement dated as of February 4, 2014 (“ABL Amendment”), among the Company, Affinia, certain subsidiaries party thereto, the lenders party thereto and Bank of America, N.A, as administrative agent. The Term Loan Amendment and the ABL Amendment are referred to herein collectively as the “Amendments.”

The Amendments, among other things, amend certain negative covenants to permit the sale of the Chassis group and to permit certain restricted payments and loans and advances to Holdings. The Term Loan Amendment also amends certain prepayment terms in connection with the Chassis sale.

The ABL Amendment contains additional amendments which, among other things, (i) reduce the dominion threshold to the greater of 12.5% of the total borrowing base and $12.5 million and (ii) amend the trigger period such that, commencing on the day that an event of default occurs or availability under the ABL Revolver is less than the greater of 10.0% of the total borrowing base and $10 million and continuing until no event of default has existed and availability under the ABL Revolver has been greater than such thresholds at all times, in each case, for 30 consecutive days, the Company is required to maintain a Fixed Charge Coverage Ratio of at least 1.0x measured for the last 12-month period.

 

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Indenture

Senior Notes. On April 25, 2013, Affinia issued $250 million of Senior Notes as part of the refinancing. The Senior Notes accrue interest at the rate of 7.75% per annum, payable semi-annually on May 1 and November 1 of each year. The Senior Notes will mature on May 1, 2021. The terms of the Indenture provide that, among other things, the Senior Notes rank equally in right of payment to all of Affinia’s and all of the Company’s 100% owned current and future domestic subsidiaries (“Guarantors”) existing and future senior debt and senior in right of payment to all of Affinia’s and Guarantors’ existing and future subordinated debt. The Senior Notes are structurally subordinated to all of the liabilities and obligations of the Company’s subsidiaries that do not guarantee the Senior Notes. The Senior Notes are effectively junior in right of payment to all of Affinia’s and the Guarantors’ secured indebtedness, including the Term Loans and the ABL Revolver, to the extent of the value of the collateral securing such indebtedness. The outstanding balance of the Senior Notes at September 30, 2014 was $250 million.

Guarantees. The Guarantors guarantee Affinia’s obligations under the Notes on a senior unsecured basis.

Interest Rate. Interest on the Notes accrues at a rate of 7.75% per annum. Interest on the Notes is payable in cash semiannually in arrears on May 1 and November 1 of each year.

Other Covenants. The Indenture contains affirmative and negative covenants that, among other things, limit or restrict Affinia’s ability (as well as the Guarantors) to: incur additional debt; provide guarantees and issue mandatorily redeemable preferred stock; pay dividends on or make distributions in respect of capital stock or make certain other restricted payments or investments including the prepayment of certain indebtedness; enter into agreements that restrict distributions from restricted subsidiaries; sell or otherwise dispose of assets, including capital stock of restricted subsidiaries; enter into transactions with affiliates; create or incur liens; and merge, consolidate or sell substantially all of its assets.

Events of Default. The Indenture provides for customary events of default (subject in certain cases to customary grace and cure periods), which include nonpayment, breach of covenants in the Indenture, payment defaults or acceleration of other indebtedness, failure to pay certain judgments and certain events of bankruptcy and insolvency. Generally, if an event of default occurs, the Trustee or holders of at least 25% in principal amount of the then outstanding Notes may declare the principal, premium, if any, interest and other monetary obligations on all the Notes to be due and payable immediately.

Term Loan Facility

On April 25, 2013, the Company entered into a credit facility (the “Term Loan Facility”) consisting of (i) a Term Loan B-1 in an aggregate principal amount of $200 million and (ii) a Term Loan B-2 in an aggregate principal amount of $470 million (collectively the “Term Loans”). The Term Loan B-1 was offered at a price of 99.75%, of its face value, resulting in approximately $199 million of net proceeds for the Term Loan B-1. Term Loan B-2 was offered at a price of 99.50%, of its face value, resulting in approximately $468 million of net proceeds for Term Loan B-2. The $1 million and $2 million original issue discount for Term Loan B-1 and Term Loan B-2, respectively, will be amortized based on the effective interest rate method and included in interest expense until the Term Loans mature. Term Loan B-1 amortizes in quarterly installments in an amount equal to 1.00% per annum, with the balance due on April 25, 2016. Term Loan B-2 amortizes in quarterly installments in an amount equal to 1.00% per annum, with the balance due on April 25, 2020. As of September 30, 2014, $175 million principal amount of Term Loan B-1 was outstanding, net of less than $1 million issue discount which is being amortized until the Term Loan B-1 matures and $382 million principal amount of Term Loan B-2 was outstanding, net of the $2 million issue discount which is being amortized until the Term Loan B-2 matures.

Guarantees and collateral. The indebtedness, obligations and liabilities under the Term Loan Facility are unconditionally guaranteed jointly and severally on a senior secured basis by the Company and certain of its current and future U.S. subsidiaries, and are secured, subject to permitted liens and other exceptions and exclusions, by a first-priority lien on substantially all tangible and intangible assets of the borrower and each guarantor (including (i) a perfected pledge of all of the capital stock of the borrower and each direct, wholly-owned material subsidiary held by the borrower or any guarantor (subject to certain limitations with respect to foreign subsidiaries) and (ii) perfected security interests in, and mortgages on, equipment, general intangibles, investment property, intellectual property, material fee-owned real property, intercompany notes and proceeds of the foregoing) except for certain excluded assets and the collateral securing the ABL Revolver on a first priority basis, and a second-priority lien on the collateral securing the ABL Revolver on a first-priority basis.

Mandatory prepayments. The Term Loan Facility requires the following amounts to be applied to prepay the Term Loans, subject to certain thresholds, exceptions and reinvestment rights: 100% of the net proceeds from the incurrence of indebtedness (other than permitted indebtedness), 100% of the net proceeds of certain asset sales (including insurance or condemnation proceeds), other than the collateral securing the ABL Revolver on a first-priority basis, and 50% of excess cash flow with stepdowns to 25% and 0% based on certain leverage targets.

 

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Mandatory prepayments will be allocated ratably between Term Loan B-1 and Term Loan B-2 and, within each, will be applied to reduce remaining amortization payments in the direct order of maturity for the immediately succeeding eight quarters and, thereafter, pro rata.

Voluntary prepayment. The Company may voluntarily prepay outstanding Term Loans in whole or in part at any time without premium or penalty (other than a 1.00% premium payable until, in the case of Term Loan B-1, nine months following April 25, 2013 and, in the case of Term Loan B-2, one year following April 25, 2013, on (i) the amount of loans prepaid or refinanced with proceeds of long-term bank debt financing or any other financing similar to such borrowings having a lower effective yield or (ii) the amount of loans the terms of which are amended to the same effect), subject to payment of customary breakage costs in the case of LIBOR rate loans. Optional prepayments of the Term Loans will be applied to the remaining installments thereof at the direction of the Company.

Interest rates. Outstanding borrowings under the Term Loan Facility accrue interest at an annual rate of interest equal to (i) a base rate plus the applicable spread or (ii) a LIBOR rate plus the applicable spread. The applicable margin for borrowings under Term Loan B-1 is 1.75% with respect to base rate borrowings and 2.75% with respect to LIBOR rate borrowings, and the applicable margin for borrowing under the Term Loan B-2 is 2.50% with respect to base rate borrowings and 3.50% with respect to LIBOR rate borrowings. The LIBOR rate is subject to a floor of 0.75% per annum with respect to Term Loan B-1 and 1.25% per annum with respect to Term Loan B-2. Overdue principal with respect to the Term Loans will bear interest at a rate 2.00% in excess of the otherwise applicable rate of interest and other overdue amounts with respect to the Term Loans will bear interest at a rate of 2.00% in excess of the rate applicable to base rate borrowings.

Covenants. The Term Loan Facility contains negative covenants that, among other things, limit or restrict the ability of the Company and its subsidiaries to create liens and encumbrances; incur additional indebtedness; merge, dissolve, liquidate or consolidate; make acquisitions, investments, advances or loans; dispose of or transfer assets; pay dividends or make other payments in respect of their capital stock; amend certain material governance documents; change the nature of the business of the borrower and its subsidiaries; redeem or repurchase capital stock or prepay, redeem or repurchase certain debt; engage in certain transactions with affiliates; change the borrower’s fiscal periods; and enter into certain restrictive agreements. The Term Loan Facility also contains certain customary affirmative covenants and events of default, including a change of control.

CASH FLOW INFORMATION

Operating Cash Flows

Net cash provided by operating activities is summarized in the table below for the nine months ended September 30, 2014 and 2013:

 

     Nine Months Ended
September 30,
 
(Dollars in millions)    2014     2013  

Net income

   $ 57      $ 14   

Change in trade accounts receivable

     (58     (24

Change in inventories

     (19     (6

Gain on the sale of Chassis group

     (32     —    

Write-off of unamortized deferred financing costs

     1        8   

Loss on extinguishment of debt

     —         15   

Change in other current operating liabilities

     48        51   
  

 

 

   

 

 

 

Subtotal

     (3     58   

Other changes in operating activities

     7        11   
  

 

 

   

 

 

 

Net cash provided by operating activities

   $ 4      $ 69   
  

 

 

   

 

 

 

Net income—Net income increased for the nine months ended September 30, 2014 compared to the nine months ended September 30, 2013 driven by higher sales in 2014 and expenses associated with the debt refinancing in 2013, as well as the gain on the sale of the Chassis group in 2014.

Change in trade accounts receivable—The change in trade accounts receivable was a $58 million and $24 million use of cash in the nine months ended September 30, 2014 and 2013, respectively. The change in accounts receivable is due to timing of payments and an increased accounts receivable balance due to sale growth in 2014.

Change in inventories—The change in inventories was a $19 million and $6 million use of cash in the nine months ended September 30, 2014 and 2013, respectively. The change in inventories is primarily due to higher inventory balances to support sales growth in 2014.

 

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Gain on the sale of the Chassis group—For the nine months ended September 30, 2014 the results include a $32 million pre-tax gain on the sale of the Chassis group.

Write-off of unamortized deferred financing costs—The Company recorded a write-off of $8 million to interest expense in the nine months ended September 30, 2013 for unamortized deferred financing costs associated with the refinancing of our debt.

Loss on extinguishment of debt—During the nine months ended September 30, 2013 we refinanced our debt structure and as a result incurred a loss due to early retirement of Secured Notes.

Investing Cash Flows

Net cash used in investing activities is summarized in the table below for the nine months ended September 30, 2014 and 2013:

 

     Nine Months Ended
September 30,
 
(Dollars in millions)    2014     2013  

Proceeds from sale of Chassis group

   $ 149      $ —    

Investment in companies, net cash acquired

     —        $ (1

Additions to property, plant and equipment

     (18   $ (18

Proceeds from sale of equity method investment

     4        —    
  

 

 

   

 

 

 

Net cash used in investing activities

   $ 135      $ (19
  

 

 

   

 

 

 

Financing Cash Flows

Net cash provided by financing activities is summarized in the table below for the nine months ended September 30, 2014 and 2013:

 

     Nine Months Ended
September 30,
 
(Dollars in millions)    2014     2013  

Payments of other debt

   $ (10   $ (1

Repayment on Secured Notes

     —         (195

Repayment on Subordinated Notes

     —         (367

Proceeds from Senior Notes

     —         250   

Repayment on Term Loans

     (109     (1 )

Proceeds from Term Loans

     —         667   

Distribution to our shareholder

     (57     (352

Payment of deferred financing costs

     —         (15
  

 

 

   

 

 

 

Net cash used in financing activities

   $ (176   $ (14
  

 

 

   

 

 

 

During the nine months ended September 30, 2014, we paid down $109 million of outstanding debt under the Term Loan Facility and $10 million of debt in Poland. We made a distribution of $57 million to Holdings which Holdings used to partially pay down its outstanding third-party debt.

During the nine months ended September 30, 2013, we refinanced our existing notes and credit facilities. The refinancing consisted of $250 million of Senior Notes due 2021, a $200 million Term Loan B-1 due 2016, a $470 million Term Loan B-2 due 2020, the proceeds of which we used, together with $31 million of cash on hand, to redeem our Secured Notes and our Subordinated Notes, make a distribution of $350 million to Holdings and pay fees and expenses in connection with the refinancing transactions.

 

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Contractual Obligations

Except as set forth in Note 9 to the Condensed Consolidated Financial Statements, “Commitments and Contingencies” there were no material changes in our commitments under contractual obligations, as disclosed in the Company’s audited consolidated financial statements for the year ended December 31, 2013. Our principal commitments consist of obligations under debt obligations at maturity, under operating lease agreements, and under purchase commitments for property, plant, and equipment.

Off-Balance Sheet Arrangements

We have not entered into any off-balance sheet arrangements and do not have any holdings in variable interest entities.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There have been no material changes to the information concerning the Company’s exposures to market risk as stated in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013. See Note 6 to the Condensed Consolidated Financial Statements, “Derivatives,” for information with respect to foreign currency risk, interest rate risk and commodity price risk. The translated values of revenue and expense from the Company’s international operations are subject to fluctuations due to changes in currency exchange rates.

We are exposed to various market risks, such as currency exchange and interest rate fluctuation. Where necessary to minimize such risks we may enter into financial derivative transactions; however, we do not enter into derivatives or other financial instruments for trading or speculative purposes.

Currency risk

We conduct business throughout the world. Although we manage our businesses in such a way as to reduce a portion of the risks associated with operating internationally, changes in currency exchange rates may adversely impact our results of operations and financial position.

The results of operations and financial position of each of our operations are measured in their respective local (functional) currency. Business transactions denominated in currencies other than an operation’s functional currency produce foreign exchange gains and losses, as a result of the re-measurement process, as described in ASC Topic 830, “Foreign Currency Matters.” To the extent that our business activities create monetary assets or liabilities denominated in a non-local currency, changes in an entity’s functional currency exchange rate versus each currency in which an entity transacts business have a varying impact on an entity’s results of operations and financial position, as reported in functional currency terms. Therefore, for entities that transact business in multiple currencies, we seek to minimize the net amount of cash flows and balances denominated in non-local currencies. However, in the normal course of conducting international business, some amount of non-local currency exposure will exist. Therefore, management monitors these exposures and may engage in business activities or execute financial hedge transactions intended to mitigate the potential financial impact due to changes in the respective exchange rates.

Our consolidated results of operations and financial position, as reported in U.S. Dollars, are also affected by changes in currency exchange rates. The results of operations of non-U.S. Dollar functional entities are translated into U.S. Dollars for consolidated reporting purposes each period at the average currency exchange rate experienced during the period. To the extent that the U.S. Dollar may appreciate or depreciate over time, the contribution of non-U.S. Dollar denominated results of operations to our U.S. Dollar reported consolidated earnings will vary accordingly. Therefore, changes in the various local currency exchange rates, as applied to the revenue and expenses of our non-U.S. Dollar operations may have a significant impact on our sales and, to a lesser extent, consolidated net income trends. In addition, a significant portion of our consolidated financial position is maintained at foreign locations and is denominated in functional currencies other than the U.S. Dollar. The non-U.S. Dollar denominated mon