Federal-Mogul Holdings LLC - FORM 10-Q - July 29, 2015

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2015
or
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number: 001-34029
 
FEDERAL-MOGUL HOLDINGS CORPORATION
(Exact name of Registrant as specified in its charter)
 
Delaware
 
46-5182047
(State or other jurisdiction of
incorporation or organization)
 
(IRS employer
identification number)
 
 
 
27300 West 11 Mile Road, Southfield, Michigan
 
48034
(Address of principal executive offices)
 
(Zip Code)
(248) 354-7700
(Registrant’s telephone number, including area code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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. (Check one):
Large accelerated filer
 
¨
 
Accelerated filer
 
x
Non-accelerated filer
 
¨
 
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
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.    Yes  x    No  ¨
As of July 24, 2015, there were 169,040,651 outstanding shares of the registrant’s $0.01 par value common stock.


FEDERAL-MOGUL HOLDINGS CORPORATION
Form 10-Q
For the Three and Six Months Ended June 30, 2015
INDEX
 


PART I
FINANCIAL INFORMATION
ITEM 1. CONDENSED FINANCIAL STATEMENTS
FEDERAL-MOGUL HOLDINGS CORPORATION
Condensed Consolidated Statements of Operations (Unaudited)
(in millions, except per share amounts)
 
 
 
Three Months Ended
 
Six Months Ended
 
 
June 30
 
June 30
 
 
2015
 
2014
 
2015
 
2014
 
 
 
 
 
 
 
 
 
Net sales
 
$
1,962

 
$
1,872

 
$
3,797

 
$
3,651

Cost of products sold
 
(1,672
)
 
(1,575
)
 
(3,256
)
 
(3,080
)
 
 
 
 
 
 
 
 
 
Gross profit
 
290

 
297

 
541

 
571

 
 
 
 
 
 
 
 
 
Selling, general and administrative expenses
 
(200
)
 
(195
)
 
(403
)
 
(376
)
Interest expense, net
 
(32
)
 
(31
)
 
(67
)
 
(53
)
Restructuring expense
 
(27
)
 
(30
)
 
(39
)
 
(38
)
Loss on debt extinguishment
 
—

 
(24
)
 
—

 
(24
)
Equity earnings of non-consolidated affiliates
 
16

 
13

 
28

 
27

Amortization expense
 
(15
)
 
(12
)
 
(29
)
 
(24
)
Other income (expense), net
 
(3
)
 
(6
)
 
(1
)
 
(12
)
 
 
 
 
 
 
 
 
 
Income from continuing operations before income taxes
 
29

 
12

 
30

 
71

Income tax expense
 
(12
)
 
(15
)
 
(23
)
 
(33
)
 
 
 
 
 
 
 
 
 
Net income (loss) from continuing operations
 
17

 
(3
)
 
7

 
38

Gain from discontinued operations, net of income tax
 
7

 
—

 
7

 
—

Net income (loss)
 
24

 
(3
)
 
14

 
38

 
 
 
 
 
 
 
 
 
Less net income attributable to noncontrolling interests
 
(2
)
 
(2
)
 
(3
)
 
(3
)
Net income (loss) attributable to Federal-Mogul
 
$
22

 
$
(5
)
 
$
11

 
$
35

 
 
 
 
 
 
 
 
 
Amounts attributable to Federal-Mogul:
 
 
 
 
 
 
 
 
Net income (loss) from continuing operations
 
$
15

 
$
(5
)
 
$
4

 
$
35

Gain from discontinued operations, net of income tax
 
7

 
—

 
7

 
—

Net income (loss)
 
$
22

 
$
(5
)
 
$
11

 
$
35

 
 
 
 
 
 
 
 
 
Net income (loss) per common share attributable to Federal-
 
 
 
 
 
 
 
 
Mogul basic and diluted:
 
 
 
 
 
 
 
 
Net income (loss) from continuing operations
 
$
0.09

 
$
(0.03
)
 
$
0.03

 
$
0.23

Gain from discontinued operations, net of income tax
 
0.04

 
—

 
0.04

 
—

Net income (loss)
 
$
0.13

 
$
(0.03
)
 
$
0.07

 
$
0.23

See accompanying notes to condensed consolidated financial statements.


FEDERAL-MOGUL HOLDINGS CORPORATION
Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited)
(in millions)
 
 
 
Three Months Ended
 
Six Months Ended
 
 
June 30
 
June 30
 
 
2015
 
2014
 
2015
 
2014
 
 
 
 
 
 
 
 
 
Net income (loss)
 
$
24

 
$
(3
)
 
$
14

 
$
38

 
 
 
 
 
 
 
 
 
Other comprehensive income (loss):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign currency translation adjustments and other
 
22

 
3

 
(97
)
 
(1
)
 
 
 
 
 
 
 
 
 
Pensions and post-retirement benefits:
 
 
 
 
 
 
 
 
Net unrealized (credits) costs
 
(3
)
 
—

 
11

 
—

Reclassification of losses of deconsolidated affiliates
 
—

 
2

 
—

 
2

Reclassification of costs included in net income (loss) during period
 
4

 
2

 
11

 
4

Income taxes
 
—

 
(1
)
 
—

 
(1
)
Pensions and post-retirement benefits, net of tax
 
1

 
3

 
22

 
5

 
 
 
 
 
 
 
 
 
Hedge instruments:
 
 
 
 
 
 
 
 
Net unrealized (losses) gains arising during period
 
(3
)
 
3

 
(2
)
 
1

Reclassification of losses included in net income (loss) during the period
 
1

 
—

 
1

 
2

Income taxes
 
—

 
(1
)
 
—

 
(1
)
Hedge instruments, net of tax
 
(2
)
 
2

 
(1
)
 
2

 
 
 
 
 
 
 
 
 
Other comprehensive income (loss), net of tax
 
21

 
8

 
(76
)
 
6

 
 
 
 
 
 
 
 
 
Comprehensive income (loss)
 
45

 
5

 
(62
)
 
44

 
 
 
 
 
 
 
 
 
Less comprehensive income attributable to noncontrolling interests
 
(2
)
 
(3
)
 
(1
)
 
(3
)
 
 
 
 
 
 
 
 
 
Comprehensive income (loss) attributable to Federal-Mogul
 
$
43

 
$
2

 
$
(63
)
 
$
41

See accompanying notes to condensed consolidated financial statements.


FEDERAL-MOGUL HOLDINGS CORPORATION
Condensed Consolidated Balance Sheets (Unaudited)
(in millions)
 
 
June 30
 
December 31
 
 
2015
 
2014
ASSETS
 
 
 
 
Current assets:
 
 
 
 
Cash and equivalents
 
$
243

 
$
332

Accounts receivable, net
 
1,579

 
1,419

Inventories, net
 
1,326

 
1,215

Prepaid expenses and other current assets
 
212

 
225

Total current assets
 
3,360

 
3,191

 
 
 
 
 
Property, plant and equipment, net
 
2,297

 
2,160

Goodwill and other indefinite-lived intangible assets
 
1,022

 
928

Definite-lived intangible assets, net
 
417

 
354

Investments in non-consolidated affiliates
 
275

 
269

Other noncurrent assets
 
189

 
165

TOTAL ASSETS
 
$
7,560

 
$
7,067

 
 
 
 
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
 
Current liabilities:
 
 
 
 
Short-term debt, including current portion of long-term debt
 
$
142

 
$
127

Accounts payable
 
971

 
926

Accrued liabilities
 
594

 
546

Current portion of pensions and other postemployment benefits liability
 
44

 
46

Other current liabilities
 
185

 
186

Total current liabilities
 
1,936

 
1,831

 
 
 
 
 
Long-term debt
 
2,777

 
2,563

Pensions and other postemployment benefits liability
 
1,262

 
1,282

Long-term portion of deferred income taxes
 
388

 
389

Other accrued liabilities
 
97

 
93

 
 
 
 
 
Shareholders’ equity:
 
 
 
 
Preferred stock ($0.01 par value; 90,000,000 authorized shares; none issued)
 
—

 
—

Common stock ($0.01 par value; 450,100,000 authorized shares; 170,636,151 issued shares and 169,040,651 outstanding shares as of June 30, 2015; 151,624,744 issued shares and 150,029,244 outstanding shares as of December 31, 2014)
 
2

 
2

Additional paid-in capital, including warrants
 
2,899

 
2,649

Accumulated deficit
 
(675
)
 
(686
)
Accumulated other comprehensive loss
 
(1,216
)
 
(1,142
)
Treasury stock, at cost
 
(17
)
 
(17
)
Total Federal-Mogul shareholders’ equity
 
993

 
806

Noncontrolling interests
 
107

 
103

Total shareholders’ equity
 
1,100

 
909

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
 
$
7,560

 
$
7,067

See accompanying notes to condensed consolidated financial statements.


FEDERAL-MOGUL HOLDINGS CORPORATION
Condensed Consolidated Statements of Cash Flows (Unaudited)
(in millions)
 
 
Six Months Ended
 
 
June 30
 
 
2015
 
2014
Cash Provided From (Used By) Operating Activities
 
 
 
 
Net income
 
$
14

 
$
38

Adjustments to reconcile net income to net cash provided from operating activities:
 
 
 
 
Depreciation and amortization
 
166

 
163

Restructuring expense
 
39

 
38

Payments against restructuring liabilities
 
(38
)
 
(19
)
Loss on debt extinguishment
 
—

 
24

Equity earnings of non-consolidated affiliates
 
(28
)
 
(27
)
Cash dividends received from non-consolidated affiliates
 
6

 
5

Change in pensions and postemployment benefits
 
(16
)
 
(31
)
Adjustment of assets to fair value
 
(2
)
 
2

Deferred tax benefit
 
(1
)
 
(4
)
Loss on sale of equity method investment
 
11

 
—

Gain from discontinued operations
 
(7
)
 
—

Gain from sales of property, plant and equipment
 
(4
)
 
(1
)
Changes in operating assets and liabilities:
 
 
 
 
Accounts receivable
 
(182
)
 
(124
)
Inventories
 
(117
)
 
(12
)
Accounts payable
 
80

 
65

Other assets and liabilities
 
(12
)
 
44

Net Cash (Used by) Provided From Operating Activities
 
(91
)
 
161

 
 
 
 
 
Cash Provided From (Used By) Investing Activities
 
 
 
 
Expenditures for property, plant and equipment
 
(216
)
 
(173
)
Payments to acquire businesses, net of cash acquired
 
(301
)
 
(165
)
Net proceeds from sale of equity method investment
 
15

 
—

Net proceeds from sales of property, plant and equipment
 
8

 
3

Net Cash Used By Investing Activities
 
(494
)
 
(335
)
 
 
 
 
 
Cash Provided From (Used By) Financing Activities
 
 
 
 
Proceeds from term loans, net of original issue discount
 
—

 
2,589

Proceeds from equity rights offering net of related fees
 
250

 
—

Proceeds from draws on revolving line of credit
 
384

 
—

Payments on revolving line of credit
 
(154
)
 
—

Principal payments on term loans
 
(13
)
 
(2,537
)
Decrease in other long-term debt
 
(4
)
 
(2
)
Debt issuance costs
 
—

 
(12
)
Increase in short-term debt
 
17

 
—

Net remittances on servicing of factoring arrangements
 
(1
)
 
(1
)
Net Cash Provided From (Used By) Financing Activities
 
479

 
37

 
 
 
 
 
Effect of foreign currency exchange rate fluctuations on cash
 
17

 
4

 
 
 
 
 
Decrease in cash and equivalents
 
(89
)
 
(133
)
Cash and equivalents at beginning of period
 
332

 
761

Cash and equivalents at end of period
 
$
243

 
$
628


See accompanying notes to condensed consolidated financial statements.


FEDERAL-MOGUL HOLDINGS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in millions, except per share amounts)

1.
BASIS OF PRESENTATION
On April 15, 2014, Federal-Mogul Corporation completed a holding company reorganization (the “Reorganization”). As a result of the Reorganization, the outstanding shares of Federal-Mogul Corporation common stock were automatically converted on a one-for-one basis into shares of Federal-Mogul Holdings Corporation common stock, and all of the stockholders of Federal-Mogul Corporation immediately prior to the Reorganization automatically became stockholders of Federal-Mogul Holdings Corporation. The rights of stockholders of Federal-Mogul Holdings Corporation are generally governed by Delaware law and Federal-Mogul Holdings Corporation’s certificate of incorporation and bylaws, which are the same in all material respects as those of Federal-Mogul Corporation immediately prior to the Reorganization. In addition, the board of directors of Federal-Mogul Holdings Corporation and its Audit Committee and Compensation Committee are composed of the same members as the board of directors, Audit Committee and Compensation Committee of Federal-Mogul Corporation prior to the Reorganization.
References herein to the “Company,” “Federal-Mogul,” “we,” “us,” “our” refer to Federal-Mogul Corporation for the period prior to the effective time of the Reorganization on April 15, 2014 and to Federal-Mogul Holdings Corporation for the period after the effective time of the Reorganization.
Interim Financial Statements
The unaudited condensed consolidated financial statements of the Company have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) have been condensed or omitted pursuant to such rules and regulations. These statements include all adjustments (consisting of normal recurring adjustments) that management believes are necessary for a fair presentation of the results of operations, comprehensive income, financial position and cash flows. The Company’s management believes that the disclosures are adequate to make the information presented not misleading when read in conjunction with the consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014 filed on February 27, 2015. Operating results for the three and six months ended June 30, 2015 are not necessarily indicative of the results that may be expected for the year ended December 31, 2015.
Principles of Consolidation
The Company consolidates into its financial statements all wholly-owned and any partially-owned subsidiaries that the Company has the ability to control. Control generally equates to ownership percentage, whereby investments that are more than 50% owned are consolidated, investments in affiliates of 50% or less but greater than 20% are accounted for using the equity method, and investments in affiliates of 20% or less are accounted for using the cost method. See Note 10, Investment in Non-consolidated Affiliates, for discussion regarding the Company's subsidiaries that are subject to regulatory control.
The Company does not consolidate any entity for which it has a variable interest based solely on power to direct the activities and significant participation in the entity’s expected results that would not otherwise be consolidated based on control through voting interests. Further, the Company’s affiliates are businesses established and maintained in connection with the Company's operating strategy. All intercompany transactions and balances have been eliminated.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported therein. Due to the inherent uncertainty involved in making estimates, actual results reported in future periods may be based upon amounts that differ from these estimates.
Controlling Ownership
As of June 30, 2015, Mr. Carl C. Icahn indirectly controls approximately 81.99% of the voting power of the Company’s capital stock and, by virtue of such stock ownership, is able to control or exert substantial influence over the Company, including the election of directors, business strategy and policies, mergers or other business combinations, acquisition or disposition of assets, future issuances of common stock or other securities, incurrence of debt or obtaining other sources of financing, and the payment of dividends on the Company’s common stock. The existence of a controlling stockholder may have the effect of making it difficult for, or may discourage or delay, a third party from seeking to acquire a majority of the Company’s outstanding common stock, which may adversely affect the market price of the stock.


Mr. Icahn’s interests may not always be consistent with the Company’s interests or with the interests of the Company’s other stockholders. Mr. Icahn and entities controlled by him may also pursue acquisitions or business opportunities that may or may not be complementary to the Company’s business. To the extent that conflicts of interest may arise between the Company and Mr. Icahn and his affiliates, those conflicts may be resolved in a manner adverse to the Company or its other shareholders.
Related Party
Insight Portfolio Group LLC (“Insight Portfolio Group”) is an entity formed by Mr. Icahn in order to maximize the potential buying power of a group of entities with which Mr. Icahn has a relationship in negotiating with a wide range of suppliers of goods, services and tangible and intangible property at negotiated rates. The Company acquired a minority equity interest in Insight Portfolio Group and agreed to pay a portion of Insight Portfolio Group’s operating expenses beginning in 2013. In addition to the minority equity interest held by the Company, certain subsidiaries of Icahn Enterprises Holdings, including CVR, Tropicana, ARI, Viskase PSC Metals and WPH also acquired minority equity interests in Insight Portfolio Group and agreed to pay a portion of Insight Portfolio Group’s operating expenses. A number of other entities with which Mr. Icahn has a relationship also acquired equity interests in Insight Portfolio Group and also agreed to pay certain operating expenses.
The Company’s payments to Insight Portfolio Group were less than $0.5 million during 2014. The Company anticipates its 2015 payments to Insight Portfolio Group to be similar to the amounts paid in 2014.
On June 1, 2015, Icahn Enterprises L.P., ("IEP"), an entity controlled by Mr. Icahn and the parent company of Federal-Mogul Holdings Corporation, completed an acquisition of substantially all of the assets of Uni-Select USA, Inc. and Beck/Arnley Worldparts, Inc. comprising the U.S. automotive parts distribution of Uni-Select Inc ("Uni-Select").
Uni-Select will be operated independently from the Company and all transactions will be approved by the independent directors of each company. In connection with IEP's acquisition of Uni-Select, Mr. Icahn has resigned from the Company's board of directors and Daniel A. Ninivaggi, Co-Chief Executive Officer of the Company has resigned from the board of directors of IEP.
Subsequent to the IEP acquisition of Uni-Select, the Company had $5 million of sales during Q2 2015 and $17 million of accounts receivable outstanding from Uni-Select as of June 30, 2015.
Factoring of Trade Accounts Receivable
Federal-Mogul subsidiaries in Brazil, France, Germany, Italy and the United States are party to accounts receivable factoring and securitization facilities. Amounts factored under these facilities consist of the following:
 
 
June 30
 
December 31
 
 
2015
 
2014
Gross accounts receivable factored
 
$
383

 
$
306

Gross accounts receivable factored, qualifying as sales
 
365


293

Undrawn cash on factored accounts receivable
 
2


2

Proceeds from the factoring of accounts receivable qualifying as sales and expenses associated with the factoring of receivables are as follows:
 
 
Three Months Ended
 
Six Months Ended
 
 
June 30
 
June 30
 
 
2015
 
2014
 
2015
 
2014
Proceeds from factoring qualifying as sales
 
$
410


$
445


$
800


$
855

Losses on sales of account receivables
 
(2
)

(2
)

(4
)

(3
)
Certain of the facilities contain terms that require the Company to share in the credit risk of the factored receivables. The maximum exposures to the Company associated with these certain facilities’ terms were $15 million and $17 million as of June 30, 2015 and December 31, 2014, respectively. The fair values of the exposures to the Company associated with these certain facilities’ terms were determined to be immaterial.
The losses on sales of accounts receivable are recorded in the condensed consolidated statements of operations within “Other (expense) income, net.” Where the Company receives a fee to service and monitor these transferred receivables, such fees are sufficient to offset the costs and, as such, a servicing asset or liability is not incurred as a result of such activities.
Accounts receivables factored but not qualifying as a sale, as defined in FASB ASC Topic 860, Transfers and Servicing, were pledged as collateral and accounted for as secured borrowings and recorded in the consolidated balance sheets within “Accounts receivable, net” and “Short-term debt, including current portion of long-term debt.”


Noncontrolling Interests
The following table presents a rollforward of the changes in noncontrolling interests:
 
 
Six Months
 
 
Ended
 
 
June 30
 
 
2015
Equity balance of non-controlling interests as of December 31, 2014
 
$
103

 
 
 
Acquisitions
 
3

 
 
 
Comprehensive income (loss):
 
 
Net income
 
3

Foreign currency adjustments and other
 
(2
)
Equity balance of non-controlling interests as of June 30, 2015
 
$
107

New Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-9, Revenue from Contracts with Customers, which supersedes the revenue recognition requirements in Accounting Standards Codification (ASC) 605, Revenue Recognition. This ASU clarifies the principles for recognizing revenue and provides a common revenue standard for U.S. GAAP and International Financial Reporting Standards and will require revenue to be recognized when promised goods or services are transferred to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. Adoption of the new rules could affect the timing of revenue recognition for certain transactions. The FASB approved a one year delay of the effective date and the new standard is effective for reporting periods beginning after December 15, 2017 and permits two implementation approaches, one requiring retrospective application of the new standard with restatement of prior years and one requiring prospective application of the new standard with disclosure of results under old standards. The Company is currently evaluating the potential effects of this pronouncement and the implementation approach to be used.
In April 2015, the FASB issued ASU No. 2015-03, Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs: This ASU is effective for annual reporting periods beginning after December 15, 2015, with early adoption permitted. This ASU amends existing guidance to require the presentation of debt issuance costs in the balance sheet as a deduction from the carrying amount of the related debt liability instead of a deferred charge. The Company expects the adoption of this guidance will not have a material effect on its financial statements.

2.
RESTRUCTURING
The Company’s restructuring activities are undertaken as necessary to execute management’s strategy and streamline operations, consolidate and take advantage of available capacity and resources, and ultimately achieve net cost reductions. Restructuring activities include efforts to integrate and rationalize the Company’s businesses and to relocate manufacturing operations to best cost manufacturing locations.
The costs contained within “Restructuring expense” in the Company’s condensed consolidated statements of operations contain two types: employee costs (principally termination benefits), and facility closure and other costs. Termination benefits are accounted for in accordance with ASC 712, Compensation – Nonretirement Postemployment Benefits, and are recorded when it is probable that employees will be entitled to benefits and the amounts can be reasonably estimated. Estimates of termination benefits are based on the frequency of past termination benefits, the similarity of benefits under the current plan and prior plans, and the existence of statutory required minimum benefits. Termination benefits are also accounted for in accordance with ASC 420, Exit or Disposal Cost Obligations (“ASC 420”), for one-time termination benefits and are recorded dependent upon future service requirements. Facility closure and other costs are accounted for in accordance with ASC 420 and are recorded when the liability is incurred.
Estimates of restructuring charges are based on information available at the time such charges are recorded. In certain countries where the Company operates, statutory requirements include involuntary termination benefits that extend several years into the future. Accordingly, severance payments continue well past the date of termination at many international locations. Thus, restructuring programs appear to be ongoing when, in fact, terminations and other activities have been substantially completed.


Restructuring opportunities include potential plant closures and employee headcount reductions in various countries that require consultation with various parties including, but not limited to, unions/works councils, local governments and/or customers. The consultation process can take a significant amount of time and affect the final outcome and timing. The Company's policy is to record a provision for qualifying restructuring costs in accordance with the applicable accounting guidance when the outcome of such consultations becomes probable.
Management expects to finance its restructuring programs through cash generated from its ongoing operations or through cash available under its existing credit facility, subject to the terms of applicable covenants. Management does not expect that the execution of these programs will have an adverse effect on its liquidity position.
The following table provides a quarterly summary of the Company’s consolidated restructuring liabilities and related activity as of and for the six months ended June 30, 2015 by reporting segment.

 
Powertrain

Motorparts

Total
Reporting
Segment

Corporate

Total
Company
Balance at December 31, 2014
 
$
36

 
$
16


$
52


$
1


$
53

Provisions
 
6

 
6


12


—


12

Payments
 
(10
)
 
(5
)

(15
)

(1
)

(16
)
Acquisitions
 
2

 
—

 
2

 
—

 
2

Foreign Currency
 
(3
)
 
(1
)
 
(4
)
 
—

 
(4
)
Balance at March 31, 2015
 
31

 
16


47


—


47

Provisions
 
6

 
25


31


—


31

Reversals
 
(4
)
 
—


(4
)

—


(4
)
Payments
 
(16
)
 
(6
)

(22
)

—


(22
)
Balance at June 30, 2015
 
$
17

 
$
35


$
52


$
—


$
52


The following table provides a quarterly summary of the Company’s consolidated restructuring liabilities and related activity for each type of exit cost as of and for the six months ended June 30, 2015. As the table reflects, facility closure and other costs are typically paid within the quarter of incurrence.

 
Employee
Costs

Facility Closure and Other
Costs

Total
Balance at December 31, 2014
 
$
51


$
2


$
53

Provisions
 
10


2


12

Payments
 
(13
)

(3
)

(16
)
Acquisitions
 
2

 
—

 
2

Foreign Currency
 
(4
)
 
—

 
(4
)
Balance at March 31, 2015
 
46


1


47

Provisions
 
29


2


31

Reversals
 
(4
)

—


(4
)
Payments
 
(20
)

(2
)

(22
)
Balance at June 30, 2015
 
$
51


$
1


$
52


Restructuring expenses for the three months ended June 30, 2015 primarily relate to: (1) the reshaping of the Company's aftermarket distribution network in Europe, and (2) separation programs in various European countries, primarily Germany, aimed at integrating the recently acquired Honeywell braking component locations. We expect to complete these programs in 2018 and incur additional restructuring and other charges of approximately $30 million. For programs previously initiated, we expect to complete these programs in 2016 and incur additional restructuring and other charges of approximately $15 million.

The Company recognized net restructuring expenses of $30 million during the three months ended June 30, 2014. Of these expenses, $27 million was related to employee costs and $3 million was related facility closure and other costs. The Company recognized


net restructuring expenses of $38 million during the six months ended June 30, 2014. Of these expenses, $34 million was related to employee costs and $4 million was related facility closure and other costs.

3.
OTHER INCOME (EXPENSE), NET
The specific components of “Other income (expense), net” are as follows:
 
 
Three Months Ended
 
Six Months Ended
 
 
June 30
 
June 30
 
 
2015
 
2014
 
2015
 
2014
Loss on sale of equity method investment
 
$
—

 
$
—

 
$
(11
)
 
$
—

Adjustment of assets to fair value
 
(3
)
 
(2
)
 
2

 
(2
)
Gain on sale of assets
 
—

 
—

 
4

 
—

Third-party royalty income
 
2

 
1

 
4

 
3

Legal separation costs
 
(1
)
 
—

 
(2
)
 
—

Losses on sales of account receivables
 
(2
)
 
(2
)
 
(4
)
 
(3
)
Other
 
1

 
(3
)
 
6

 
(10
)
 
 
$
(3
)
 
$
(6
)
 
$
(1
)
 
$
(12
)

During the six months ended June 30, 2015 the Company recognized an $11 million loss on the disposition of an equity method investment. See Note 10, Investment in Non-consolidated Affiliates, for further details.


4 .    ACQUISITIONS
Affinia Chassis Business Acquisition
On May 1, 2014, the Company completed the Affinia chassis business acquisition. This business serves leading U.S. aftermarket customers with private label chassis product lines and will allow the Company to broaden its product offering, provide operational synergies and better service customers globally. The purchase price was $149 million, net of acquired cash. The Company paid $140 million in the second quarter of 2014 and $9 million in the third quarter of 2014.
A valuation of the assets from the Affinia chassis business acquisition resulted in $71 million allocated to tangible net assets, $26 million allocated to goodwill, and $52 million allocated to other intangible assets based on estimated fair values as of the acquisition date. The valuation of assets was performed utilizing cost, income and market approaches.
Honeywell Brake Component Acquisition
On July 11, 2014, the Company completed the purchase of certain business assets of the Honeywell brake component business including two recently established manufacturing facilities in China and Romania which substantially strengthens the manufacturing and engineering capabilities of the Company's current global braking portfolio. The business was acquired through a combination of asset and stock purchases for a base purchase price of $168 million and other incurred liabilities of $15 million.
A valuation of the assets from the Honeywell brake component business acquisition was performed utilizing cost, income and market approaches resulting in $183 million allocated to tangible net assets.


The following table summarizes the fair values of the assets acquired and liabilities assumed at the acquisition date:
 
 
Estimated Fair Value as of March 31, 2015
 
Measurement Period Adjustments
 
Fair Value as of June 30, 2015
Cash, net of assumed debt
 
$
6

 
$
—

 
$
6

Accounts receivable, net
 
108

 
(1
)
 
107

Inventory, net
 
75

 
(1
)
 
74

Property, plant and equipment, net
 
190

 
(12
)
 
178

Accounts payable
 
(107
)
 
—

 
(107
)
Acquired post-employment benefits
 
(81
)
 
—

 
(81
)
Other net assets
 
(6
)
 
12

 
6

Total identifiable net assets
 
$
185

 
$
(2
)
 
$
183


TRW Engine Components Acquisition
On February 6, 2015, the Company completed the acquisition of certain assets of the TRW engine components business. The business was acquired through a combination of asset and stock purchases for a purchase price of approximately $309 million with $6 million of consideration to be payable upon certain conditions being met, as defined within the Amended and Restated Share and Asset Purchase Agreement dated January 23, 2015. The purchase price was funded primarily from the available Replacement Revolver Facility and is subject to certain customary closing and post-closing adjustments. The acquisition of certain assets of the TRW engine components business adds a completely new product line to the Company's portfolio, strengthens the Company's position as a leading developer and supplier of core components for engines, and enhances the Company's ability to support its customers to improve fuel economy and reduce emissions.
The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the acquisition date. The Company is in the process of finalizing certain customary post-closing adjustments which could have an effect on the third-party valuations of certain tangible assets; thus, the provisional measurements of net assets are subject to change.
 
 
Estimated Fair Value as of March 31, 2015
 
Measurement Period Adjustments
 
Estimated Fair Value as of June 30, 2015
Cash
 
$
8

 
$
—

 
$
8

Accounts receivable, net
 
16

 
—

 
16

Inventory, net
 
31

 
—

 
31

Property, plant and equipment, net
 
227

 
(60
)
 
167

Goodwill
 
51

 
34

 
85

Other identified intangible assets
 
69

 
21

 
90

Accounts payable
 
(11
)
 
(1
)
 
(12
)
Accrued liabilities
 
(31
)
 
1

 
(30
)
Acquired post-employment benefits
 
(45
)
 
(1
)
 
(46
)
Other net assets
 
4

 
2

 
6

Total identifiable net assets
 
$
319

 
$
(4
)
 
$
315

In addition to the benefits noted above, goodwill is created from the expected synergies through the integration of the engine components business into the existing Powertrain segment which will allow for improved profitability.
Proforma Results
The following proforma results for the three and six months ended June 30, 2015 and 2014 assumes the Affinia chassis business acquisition, the purchase of Honeywell's friction business, and the acquisition of certain assets of the TRW engine components business occurred as of the beginning of 2014 and is inclusive of provisional purchase price adjustments. The proforma results are not necessarily indicative of the results that actually would have been obtained.




Three Months Ended

Six Months Ended


June 30

June 30


2015

2014

2015

2014


Unaudited
Net sales

$
1,962


$
2,165


$
3,841


$
4,261














Net income (loss) attributable to Federal-Mogul

$
22


$
(6
)

$
11


$
37














Earnings (loss) per share attributable to Federal-Mogul - basic and diluted

$
0.13


$
(0.04
)

$
0.07


$
0.25


During the six months ended June 30, 2015, the Company recorded $1 million in transaction related expenses, primarily legal and other professional fees, associated with the acquisition of certain assets of the TRW engine components business. These expenses are recorded in "Selling, general and administrative expenses" within the condensed consolidated statements of operations.

5.    DISCONTINUED OPERATIONS

In connection with its strategic planning process, the Company assesses its operations for market position, product technology and capability, and profitability. Those businesses not core to the Company’s long-term portfolio may be considered for divestiture or other exit activities. During the three months ended June 30, 2015, the Company recognized a $7 million adjustment (no income tax effect) which is included in “Gain from discontinued operations, net of income tax” during the three and six months ended June 30, 2015.
6.
FINANCIAL INSTRUMENTS
Commodity Price Risk
The Company’s production processes are dependent upon the supply of certain raw materials that are exposed to price fluctuations on the open market. The primary purpose of the Company’s commodity price forward contract activity is to manage the volatility associated with forecasted purchases. The Company monitors its commodity price risk exposures regularly to maximize the overall effectiveness of its commodity forward contracts. Principal raw materials hedged include natural gas, copper, nickel, tin, zinc, high-grade aluminum and aluminum alloy. Forward contracts are used to mitigate commodity price risk associated with raw materials, generally related to purchases forecast for up to fifteen months in the future.
Information regarding the Company’s outstanding commodity price hedge contracts is as follows:
 
 
June 30
 
December 31
 
 
2015
 
2014
Combined notional value
 
$
31

 
$
36

Combined notional value designated as hedging instruments
 
31

 
36

Unrealized net gain (loss) recorded in “Accumulated other comprehensive loss”
 
(2
)
 
(1
)

Substantially all of the commodity price hedge contracts mature within one year.
Foreign Currency Risk
The Company manufactures and sells its products in North America, South America, Asia, Europe, Australia and Africa. As a result, the Company’s financial results could be significantly affected by factors such as changes in foreign currency exchange rates or weak economic conditions in foreign markets in which the Company manufactures and sells its products. The Company’s operating results are primarily exposed to changes in exchange rates between the U.S. dollar and various global currencies.
The Company generally tries to use natural hedges within its foreign currency activities, including the matching of revenues and costs, to minimize foreign currency risk. Where natural hedges are not in place, the Company considers managing certain aspects of its foreign currency activities and larger transactions through the use of foreign currency options or forward contracts. Principal currencies hedged have historically included the euro, British pound and Polish zloty. Foreign currency forwards are also used in conjunction with the Company's commodity hedging program. In order to obtain critical terms match for commodity exposure, the Company engages the use of foreign exchange contracts. The Company did not hold any foreign currency price hedge contracts at June 30, 2015 or December 31, 2014.


Other
The Company presents its derivative positions and any related material collateral under master netting agreements on a net basis. For derivatives designated as cash flow hedges, changes in the time value are excluded from the assessment of hedge effectiveness. Unrealized gains and losses associated with ineffective hedges, determined using the hypothetical derivative method, are recognized in “Other income (expense), net.” Derivative gains and losses included in “Accumulated other comprehensive loss” for effective hedges are reclassified into operations upon recognition of the hedged transaction. Derivative gains and losses associated with undesignated hedges are recognized in “Other income (expense), net” for outstanding hedges and either “Cost of products sold” or “Other income (expense), net” upon hedge maturity.
Concentrations of Credit Risk
Financial instruments, which potentially subject the Company to concentrations of credit risk, consist primarily of accounts receivable and cash investments. The Company’s customer base includes virtually every significant global light and commercial vehicle manufacturer and a large number of distributors, installers and retailers of automotive aftermarket parts. The Company’s credit evaluation process and the geographical dispersion of sales transactions help to mitigate credit risk concentration. No individual customer accounted for more than 6% of the Company’s direct sales during the six months ended June 30, 2015. One Motorparts' customer accounts for approximately 11% of the Company’s net accounts receivable balance as of June 30, 2015. The Company requires placement of cash in financial institutions evaluated as highly creditworthy.
The following table discloses the fair values and balance sheet locations of the Company’s derivative instruments, all of which were designated as cash flow hedging instruments:
 
Asset Derivatives
 
Liability Derivatives
 
Balance Sheet
 
June 30
 
December 31
 
Balance Sheet
 
June 30
 
December 31
 
Location
 
2015
 
2014
 
Location
 
2015
 
2014
Derivatives designated as cash flow hedging instruments:
 
 
 
 
 
 
 
 
 
 
 
Commodity contracts
Other current
liabilities
 
$
—

 
$
1

 
Other current
liabilities
 
$
(2
)
 
$
(2
)

The following table discloses the effect of the Company’s derivative instruments on the condensed consolidated statements of operations and condensed consolidated statements of comprehensive income (loss) for the three months ended June 30, 2015:
Derivatives Designated as Hedging Instruments
 
Amount of Gain (Loss)
Recognized in OCI on
Derivatives (Effective
Portion)
 
Location of Gain
(Loss) Reclassified
from AOCL into
Income (Effective
Portion)
 
Amount of Gain
(Loss) Reclassified
from AOCL into
Income (Effective
Portion)
Commodity contracts
 
$
(3
)
 
Cost of products sold
 
$
(1
)

The following table discloses the effect of the Company’s derivative instruments on the condensed consolidated statements of operations and condensed consolidated statements of comprehensive income (loss) for the three months ended June 30, 2014:
Derivatives Designated as Hedging Instruments
 
Amount of Gain (Loss)
Recognized in OCI on
Derivatives (Effective
Portion)
 
Location of Gain (Loss) Reclassified
from AOCL into
Income (Effective
Portion)
 
Amount of Gain (Loss)
Reclassified
from AOCL into
Income (Effective
Portion)
Commodity contracts
 
$
3

 
Cost of products sold
 
$
—

Foreign currency contracts
 
—

 
Cost of products sold
 
—

 
 
$
3

 
 
 
$
—


The following table discloses the effect of the Company’s derivative instruments on the condensed consolidated statements of operations and condensed consolidated statements of comprehensive income (loss) for the six months ended June 30, 2015:
Derivatives Designated as Hedging Instruments
 
Amount of Gain (Loss)
Recognized in OCI on
Derivatives (Effective
Portion)
 
Location of Gain
(Loss) Reclassified
from AOCL into
Income (Effective
Portion)
 
Amount of Gain
(Loss) Reclassified
from AOCL into
Income (Effective
Portion)
Commodity contracts
 
$
(2
)
 
Cost of products sold
 
$
(1
)



The following table discloses the effect of the Company’s derivative instruments on the condensed consolidated statements of operations and condensed consolidated statements of comprehensive income (loss) for the six months ended June 30, 2014:
Derivatives Designated as Hedging Instruments
 
Amount of Gain (Loss)
Recognized in OCI on
Derivatives (Effective
Portion)
 
Location of Gain (Loss) Reclassified
from AOCL into
Income (Effective
Portion)
 
Amount of Gain (Loss)
Reclassified
from AOCL into
Income (Effective
Portion)
Commodity contracts
 
$
1

 
Cost of products sold
 
$
(1
)
Foreign currency contracts
 
—

 
Cost of products sold
 
(1
)
 
 
$
1

 
 
 
$
(2
)


7.
FAIR VALUE MEASUREMENTS
ASC 820, Fair Value Measurements and Disclosures (“ASC 820”), clarifies that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based upon assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, ASC 820 establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:
Level 1:
Observable inputs such as quoted prices in active markets;
Level 2:
Inputs, other than quoted prices in active markets, that are observable either directly or indirectly; and
Level 3:
Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.
An asset’s or liability’s fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Valuation techniques used need to maximize the use of observable inputs and minimize the use of unobservable inputs.
Assets and liabilities measured at fair value are based on one or more of the following three valuation techniques noted in ASC 820:
A.
Market approach: Prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities.
B.
Cost approach: Amount that would be required to replace the service capacity of an asset (replacement cost).
C.
Income approach: Techniques to convert future amounts to a single present amount based upon market expectations (including present value techniques, option-pricing and excess earnings models).
Assets and liabilities remeasured and disclosed at fair value on a recurring basis at June 30, 2015 and December 31, 2014 are set forth in the table below:
 
 
Asset
(Liability)
 
Level 2
 
Valuation
Technique
June 30, 2015
 
 
 
 
 
 
Commodity contracts
 
$
(2
)
 
$
(2
)
 
C
 
 
 
 
 
 
 
December 31, 2014
 
 
 
 
 
 
Commodity contracts
 
(1
)
 
(1
)
 
C

The Company calculates the fair value of its commodity contracts and foreign currency contracts using quoted commodity forward rates and quoted currency forward rates, respectively, to calculate forward values, and then discounts the forward values. The discount rates for all derivative contracts are based on quoted bank deposit rates.



Assets and liabilities measured at fair value on a nonrecurring basis during the six months ended June 30, 2015 and 2014 are set forth in the table below:
 
 
Asset
 
Level 3
 
Loss
 
Valuation
Technique
June 30, 2015
 
 
 
 
 
 
 
 
Property, plant and equipment
 
4

 
4

 
(4
)
 
C
 
 
 
 
 
 
 
 
 
June 30, 2014
 
 
 
 
 
 
 
 
Property, plant and equipment
 
—

 
—

 
(2
)
 
C
Property, plant and equipment with a carrying value of $8 million were written down to their fair value of $4 million, resulting in an impairment charge of $4 million which was recorded within “Adjustment of assets to fair value” in Note 3, Other Income (Expense), Net, for the six months ended June 30, 2015.

Property, plant and equipment with carrying values of $2 million were fully impaired, resulting in an impairment charge of $2 million, which was recorded within “Adjustment of assets to fair value” in the Note 3, Other Income (Expense), Net, for the six months ended June 30, 2014.

8.
INVENTORIES
Inventories are stated at the lower of cost or market. Cost was determined by the first-in, first-out method at June 30, 2015 and December 31, 2014. Inventories are reduced by an allowance for excess and obsolete inventories based on management’s review of on-hand inventories compared to historical and estimated future sales and usage.
Net inventories consist of the following:
 
 
June 30
 
December 31
 
 
2015
 
2014
Raw materials
 
$
253

 
$
232

Work-in-process
 
195

 
171

Finished products
 
1,003

 
934

 
 
1,451

 
1,337

Inventory valuation allowance
 
(125
)
 
(122
)
 
 
$
1,326

 
$
1,215




9.
GOODWILL AND OTHER INTANGIBLE ASSETS
At June 30, 2015 and December 31, 2014, goodwill and other indefinite-lived intangible assets consist of the following:
 
 
June 30, 2015
 
December 31, 2014
 
 
Gross
Carrying
Amount
 
Accumulated
Impairment
 
Net
Carrying
Amount
 
Gross
Carrying
Amount
 
Accumulated
Impairment
 
Net
Carrying
Amount
Goodwill
 
$
1,476

 
$
(684
)
 
$
792

 
$
1,391

 
$
(690
)
 
$
701

Trademarks and brand names
 
428

 
(198
)
 
230

 
425

 
(198
)
 
227

 
 
$
1,904

 
$
(882
)
 
$
1,022

 
$
1,816

 
$
(888
)
 
$
928


At June 30, 2015 and December 31, 2014, definite-lived intangible assets consist of the following:
 
 
June 30, 2015
 
December 31, 2014
 
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
Developed technology
 
$
136

 
$
(81
)
 
$
55

 
$
116

 
$
(73
)
 
$
43

Customer relationships
 
670

 
(308
)
 
362

 
598

 
(287
)
 
311

 
 
$
806

 
$
(389
)
 
$
417

 
$
714

 
$
(360
)
 
$
354


The following is a quarterly summary of the Company’s goodwill as of and for the six months ended June 30, 2015:
 
 
Powertrain
 
Motorparts
 
Net Carrying Amount
Balance at December 31, 2014
 
$
490

 
$
211

 
$
701

2014 impairment finalization
 
—

 
6

 
6

Acquisitions and purchase accounting adjustments
 
51

 
—

 
51

Foreign currency
 
(3
)
 
—

 
(3
)
Balance at March 31, 2015
 
538

 
217

 
755

Acquisitions and purchase accounting adjustments
 
32

 
—

 
32

Foreign currency
 
4

 
1

 
5

Balance at June 30, 2015
 
$
574

 
$
218

 
$
792


Given the complexity of the calculation, the Company had not finalized “Step 2” of its annual goodwill impairment assessment for the year ended December 31, 2014 prior to filing its annual report on Form 10-K. The goodwill impairment charge recognized during the fourth quarter of 2014 was $120 million. During the quarter ended March 31, 2015, the Company completed this assessment, and recorded a reduction of $6 million to its initial goodwill impairment charge. The goodwill impairment charge was required to adjust the carrying value of goodwill to estimated fair value. The estimated fair value was determined based upon consideration of various valuation methodologies, including projected future cash flows discounted at rates commensurate with the risks involved, guideline transaction multiples, and multiples of current and future earnings.



The following is a quarterly summary of the Company’s trademarks and brand names as of and for the six months ended June 30, 2015:
 
 
Powertrain
 
Motorparts
 
Net Carrying Amount
Balance at December 31, 2014
 
$
4

 
$
223

 
$
227

Foreign currency
 
—

 
—

 
—

Balance at March 31, 2015
 
4

 
223

 
227

Acquisitions and purchase accounting adjustments
 
4

 
—

 
4

Foreign currency
 
(1
)
 
—

 
(1
)
Balance at June 30, 2015
 
$
7

 
$
223

 
$
230


The following is a quarterly summary of the Company’s definite-lived intangible assets (net) as of and for the six months ended June 30, 2015:
 
 
Powertrain
 
Motorparts
 
Net Carrying Amount
Balance at December 31, 2014
 
$
53

 
$
301

 
$
354

Acquisitions and purchase accounting adjustments
 
69

 
—

 
69

Amortization expense
 
(3
)
 
(11
)
 
(14
)
Foreign currency
 
(2
)
 
—

 
(2
)
Balance at March 31, 2015
 
117

 
290

 
407

Acquisitions and purchase accounting adjustments
 
23

 
—

 
23

Amortization expense
 
(6
)
 
(9
)
 
(15
)
Foreign currency
 
2

 
—

 
2

Balance at June 30, 2015
 
$
136

 
$
281

 
$
417

During the six months ended June 30, 2015, the Company recorded $82 million of goodwill, $72 million of customer relationships and $18 million of developed technology in connection with its February 2015 acquisition of certain assets of the TRW engine components business. See Note 4, Acquisitions, for further detail on the acquisition.
The Company utilizes the straight line method of amortization, recognized over the estimated useful lives of the assets.
The Company’s estimated future amortization expense for its definite-lived intangible assets is as follows:
 
 
Millions of Dollars
2015
 
$
29

2016
 
56

2017
 
56

2018
 
48

2019
 
48

Thereafter
 
180

 
 
$
417





10.
INVESTMENT IN NON-CONSOLIDATED AFFILIATES
The Company maintains investments in several non-consolidated affiliates, which are located in China, France, Germany, Korea, Turkey, India and the United States. With the exception of the deconsolidated business discussed below, the Company generally equates control to ownership percentage whereby investments that are more than 50% owned are consolidated.
As part of the regulatory approval related to the acquisition of certain business assets of the Honeywell brake component business, the Company committed to divest, or procure the divestiture of the commercial vehicle brake pads business relating to original equipment manufacturers (“OEM”) and servicers (“OES”) (collectively “OE”) market in the European Economic Area (“EEA”), based at the manufacturing plant in Marienheide, Germany and light vehicle brake pads business relating to the OE market in the EEA, based at the manufacturing plant in Noyon, France (collectively, the “Divestment Business”).  Furthermore, to the extent possible, the Company committed to keep the Divestment Business separate from the business(es) it is retaining, and unless explicitly permitted committed to ensure: (i) management and staff have no involvement in the Divestment Business; (ii) certain key personnel of the Divestment Business have no involvement in any business retained by the Company and do not report to any individual outside the Divestment Business. As such, as of June 30, 2014 the Company deconsolidated its subsidiaries or group of assets which were subject to regulatory commitments and recorded an investment in unconsolidated subsidiary, which was accounted for as an equity method investment until disposition. The disposition of the Divestment Business was complete in the first quarter of 2015. As a result of the disposition, the Company recognized an $11 million loss on disposal recorded in the line item "Other income (expense), net" in the Company's condensed consolidated statements of operations.
The Company does not hold a controlling interest in an entity based on exposure to economic risks and potential rewards (variable interests) for which it is the primary beneficiary. Further, the Company’s affiliations are businesses established and maintained in connection with its operating strategy and are not special purpose entities.
The following represents the Company’s aggregate investments and direct ownership in these affiliates:
 
 
June 30
 
December 31
 
 
2015
 
2014
Investments in non-consolidated affiliates
 
$
275

 
$
269

 
 
 
 
 
Direct ownership percentages
 
2% to 50%
 
2% to 100%

The following table represents amounts reflected in the Company’s financial statements related to non-consolidated affiliates:
 
 
Three Months Ended
 
Six Months Ended
 
 
June 30
 
June 30
 
 
2015
 
2014
 
2015
 
2014
Equity earnings of non-consolidated affiliates
 
$
16

 
$
13

 
$
28

 
$
27

 
 
 
 
 
 
 
 
 
Cash dividends received from non-consolidated affiliates
 
6

 
5

 
6

 
5


The following table presents selected aggregated financial information of the Company’s non-consolidated affiliates:
 
 
Three Months Ended
 
Six Months Ended
 
 
June 30
 
June 30
 
 
2015
 
2014
 
2015
 
2014
Statements of Operations
 
 
 
 
 
 
 
 
Sales
 
$
219

 
$
226

 
$
432

 
$
447

Gross profit
 
46

 
49

 
89

 
96

Income from continuing operations
 
42

 
36

 
75

 
74

Net income
 
38

 
32

 
68

 
65





11.
ACCRUED LIABILITIES
Accrued liabilities consist of the following:
 
 
June 30
 
December 31
 
 
2015
 
2014
Accrued compensation
 
$
227

 
$
177

Accrued rebates
 
143

 
149

Non-income taxes payable
 
53

 
52

Restructuring liabilities
 
52

 
53

Alleged defective products
 
34

 
30

Accrued professional services
 
33

 
28

Accrued product returns
 
21

 
24

Accrued income taxes
 
18

 
24

Accrued warranty
 
13

 
9

 
 
$
594

 
$
546


12.
DEBT
On April 15, 2014, Federal-Mogul Holdings Corporation entered into a new tranche B term loan facility (the “New Tranche B Facility”) and a new tranche C term loan facility (the “New Tranche C Facility,” and together with the New Tranche B Facility, the “New Term Facilities”), which were arranged by Citigroup Global Markets Inc. and Credit Suisse Securities (USA) LLC (the "Term Arrangers"), and assumed all of the obligations of Federal-Mogul Corporation with respect to the Replacement Revolving Facility under the Credit Agreement (both defined below). The New Term Facilities were entered into, and the Replacement Revolving Facility was assumed, by Federal-Mogul Holdings Corporation pursuant to an amendment dated as of April 15, 2014 to the previously existing Term Loan and Revolving Credit Agreement dated December 27, 2007 among Federal-Mogul Corporation, the lenders party thereto, the Term Arrangers, Citibank, N.A., as Revolving Administrative Agent, Citibank, N.A., as Tranche B Term Administrative Agent, Credit Suisse AG, as Tranche C Term Administrative Agent, Citigroup Global Markets Inc., Credit Suisse Securities (USA) LLC and Wells Fargo Bank, N.A., as Joint Lead Arrangers and Joint Bookrunners with respect to the Revolving Facility and Wells Fargo Bank, N.A., as sole Documentation Agent with respect to the Revolving Facility (as amended, the "Credit Agreement").
Immediately following the closing of the New Term Facilities, Federal-Mogul Holdings Corporation contributed all of the net proceeds from the New Facilities to Federal-Mogul Corporation, and Federal-Mogul Corporation repaid its existing outstanding indebtedness as a borrower under the tranche B and tranche C term loan facilities.
In accordance with FASB ASC Topic No. 405, Extinguishments of Liabilities, the Company recognized a $24 million non-cash loss on the extinguishment of debt attributable to the write-off of the unamortized fair value adjustment and unamortized debt issuance costs which was recorded in the line item “Loss on debt extinguishment” in the Company’s Condensed Consolidated Statements of Operations in the second quarter of 2014.
The New Term Facilities, among other things, (i) provides for aggregate commitments under the New Tranche B Facility of $700 million with a maturity date of April 15, 2018, (ii) provides for aggregate commitments under the New Tranche C Facility of $1.9 billion with a maturity date of April 15, 2021, (iii) increases the interest rates applicable to the New Facilities as described below, (iv) provides that for all outstanding letters of credit there is a corresponding decrease in borrowings available under the Replacement Revolving Facility, (v) provides that in the event that as of a particular determination date more than $700 million aggregate principal amount of existing term loans and certain related refinancing indebtedness will become due within 91 days of such determination date, the Replacement Revolving Facility will mature on such determination date, (vi) provides for additional incremental indebtedness, secured on a pari passu basis, of an unlimited amount of additional indebtedness if the Company meets a financial covenant incurrence test, and (vii) amends certain other restrictive covenants. Pursuant to the New Term Facilities, Federal-Mogul Holdings Corporation assumed all of the obligations of Federal-Mogul Corporation with respect to the Replacement Revolving Facility under the Credit Agreement.
Advances under the New Tranche B Facility generally bear interest at a variable rate per annum equal to (i) the Alternate Base Rate plus a margin of 2.00% or (ii) the Adjusted LIBOR Rate plus a margin of 3.00%, subject, in each case, to a floor of 1.00%. Advances under the New Tranche C Facility generally bear interest at a variable rate per annum equal to (i) the Alternate Base Rate plus a margin of 2.75% or (ii) the Adjusted LIBOR Rate plus a margin of 3.75%, subject, in each case, to a minimum rate of 1.00% plus the applicable margin.


On December 6, 2013, the Company entered into an amendment (the “Replacement Revolving Facility”) of its Term Loan and Revolving Credit Agreement dated as of December 27, 2007 (as amended, the “Credit Agreement”), among the Company, the lenders party thereto, Citicorp USA, Inc., as Administrative Agent, JPMorgan Chase Bank, N.A., as Syndication Agent, and Wachovia Capital Finance Corporation and Wells Fargo Foothill, LLC, as Co-Documentation Agents, to amend its existing revolving credit facility to provide for a replacement revolving credit facility (the “Replacement Revolving Facility”). The Replacement Revolving Facility, among other things, (i) increased the aggregate commitments available under the Replacement Revolving Facility from $540 million to $550 million, (ii) extended the maturity date of the Replacement Revolving Facility to December 6, 2018, subject to certain limited exceptions described below, and (iii) amended the Company’s borrowing base to provide the Company with additional liquidity.
Advances under the Replacement Revolving Facility generally bear interest at a variable rate per annum equal to (i) the Alternate Base Rate (as defined in the Credit Agreement) plus an adjustable margin of 0.50% to 1.00% based on the average monthly availability under the Replacement Revolving Facility or (ii) Adjusted LIBOR Rate (as defined in the Credit Agreement) plus a margin of 1.50% to 2.00% based on the average monthly availability under the Replacement Revolving Facility. An unused commitment fee of 0.375% also is payable under the terms of the Replacement Revolving Facility.
In connection with the New Term Facilities, the Company incurred original issue discount of $9 million and debt issuance costs of $6 million in connection with the New Tranche C Facility and original issue discount of $2 million and debt issuance costs of $6 million in connection with the New Tranche B Facility. The discount and debt issuance costs are being amortized to interest expense over the terms of the loans of 84 months and 48 months, respectively. As noted above, the unamortized fair value adjustment established when applying the provisions of fresh-start reporting to the Company's Credit agreement was written off upon the closing of the New Term Facilities.
Interest expense associated with the amortization of the original issue discount, debt issuance costs and fair value adjustment recognized in the Company’s condensed consolidated statements of operations, consists of the following:
 
 
Three Months Ended
 
Six Months Ended
 
 
June 30
 
June 30
 
 
2015
 
2014
 
2015
 
2014
Amortization of debt issuance fees
 
$
—

 
$
1

 
$
1

 
$
1

Amortization of original issue discount
 
1

 
—

 
1

 
—

Amortization of fair value adjustment
 
—

 
1

 
—

 
7

 
 
$
1

 
$
2

 
$
2

 
$
8





Debt consists of the following:
 
 
June 30
 
December 31
 
 
2015
 
2014
Loans under New Term Facilities:
 
 
 
 
Revolver
 
$
230

 
$
—

Tranche B term loan
 
695

 
698

Tranche C term loan
 
1,886

 
1,895

Debt Discount
 
(10
)
 
(10
)
 
 
 
 
 
Other debt, primarily foreign instruments
 
118

 
107

 
 
2,919

 
2,690

Less:
 
 
 
 
Short-term debt, including current maturities of long-term debt
 
(142
)
 
(127
)
Total long-term debt
 
$
2,777

 
$
2,563

The obligations of the Company under the Credit Agreement are guaranteed by substantially all of the domestic subsidiaries and certain foreign subsidiaries of the Company, and are secured by substantially all personal property and certain real property of the Company and such guarantors, subject to certain limitations. The liens granted to secure these obligations and certain cash management and hedging obligations have first priority.
The Credit Agreement contains certain affirmative and negative covenants and events of default, including, subject to certain exceptions, restrictions on incurring additional indebtedness, mandatory prepayment provisions associated with specified asset sales and dispositions, and limitations on: i) investments; ii) certain acquisitions, mergers or consolidations; iii) sale and leaseback transactions; iv) certain transactions with affiliates; and v) dividends and other payments in respect of capital stock. The Company was in compliance with all debt covenants as of June 30, 2015 and December 31, 2014.
The Replacement Revolving Facility has an available borrowing base of $280 million and $516 million as of June 30, 2015 and December 31, 2014, respectively. The Company had $40 million and $34 million of letters of credit outstanding as of June 30, 2015 and December 31, 2014, respectively, pertaining to the Replacement Revolving Facility. To the extent letters of credit associated with the Replacement Revolving Facility are issued, there is a corresponding decrease in borrowings available under this facility.
Estimated fair values of the Company’s term loans under the Credit Agreement were:
 
 
Estimated
Fair
Value
(Level 1)
 
Carrying Value in Excess of Fair Value
 
Valuation
Technique
June 30, 2015
 
 
 
 
 
 
Term Loans
 
$
2,540

 
$
(31
)
 
A
 
 
 
 
 
 
 
December 31, 2014
 
 
 
 
 
 
Term Loans
 
$
2,571

 
$
(12
)
 
A

Fair market values are developed by the use of estimates obtained from brokers and other appropriate valuation techniques based on information available as of June 30, 2015 and December 31, 2014. The fair value estimates do not necessarily reflect the values the Company could realize in the current markets. Refer to Note 7, Fair Value Measurements, for definitions of input levels and valuation techniques.

13.
PENSIONS AND OTHER POST-RETIREMENT BENEFITS
The Company sponsors several defined benefit pension plans (“Pension Benefits”) and health care and life insurance benefits (“Other Post-Retirement Benefits”) for certain employees and retirees around the world.


Components of net periodic benefit cost for the three months ended June 30, 2015 and 2014 are as follows:
 
 
Pension Benefits
 
Other Post-Retirement
 
 
United States Plans
 
Non-U.S. Plans
 
Benefits
 
 
2015
 
2014
 
2015
 
2014
 
2015
 
2014
Service cost
 
$
1

 
$
1

 
$
4

 
$
3

 
$
—

 
$
—

Interest cost
 
12

 
13

 
2

 
4

 
4

 
4

Expected return on plan assets
 
(14
)
 
(15
)
 
(1
)
 
(1
)
 
—

 
—

Amortization of actuarial losses
 
2

 
1

 
3

 
2

 
—

 
1

Amortization of prior service credits
 
—

 
—

 
—

 
—

 
(1
)
 
(1
)
Net periodic benefit cost
 
$
1

 
$
—

 
$
8

 
$
8

 
$
3

 
$
4


Components of net periodic benefit cost (credit) for the six months ended June 30, 2015 and 2014 are as follows:
 
 
Pension Benefits
 
Other Post-Retirement
 
 
United States Plans
 
Non-U.S. Plans
 
Benefits
 
 
2015
 
2014
 
2015
 
2014
 
2015
 
2014
Service cost
 
$
2

 
$
2

 
$
8

 
$
6

 
$
—

 
$
—

Interest cost
 
24

 
26

 
4

 
8

 
7

 
8

Expected return on plan assets
 
(29
)
 
(31
)
 
(1
)
 
(1
)
 
—

 
—

Amortization of actuarial losses
 
5

 
2

 
6

 
3

 
2

 
1

Amortization of prior service credits
 
—

 
—

 
—

 
—

 
(2
)
 
(2
)
Net periodic benefit cost (credit)
 
$
2

 
$
(1
)
 
$
17

 
$
16

 
$
7

 
$
7



14.
INCOME TAXES
For the six months ended June 30, 2015, the Company recorded income tax expense of $23 million on income before income taxes of $30 million. This compares to income tax expense of $33 million on income from operations before income taxes of $71 million in the same period of 2014. Income tax expense for the six months ended June 30, 2015 differs from the U.S. statutory rate due primarily to pre-tax losses with no tax benefits, partially offset by pre-tax income taxed at rates lower than the U.S. statutory rate. The income tax expense for the six months ended June 30, 2014 differs from the U.S. statutory rate due primarily to pre-tax losses with no tax benefits, partially offset by pre-tax income taxed at rates lower than the U.S. statutory rate and income in jurisdictions with no tax expense due to offsetting valuation allowance changes.
On July 11, 2013, the Company became part of an affiliated group of corporations as defined in Section 1504 of the Internal Revenue Code of 1986 ("the Code"), as amended, of which American Entertainment Properties Corp. (“AEP”), a wholly owned subsidiary of Icahn Enterprises, is the common parent. The Company subsequently entered into a tax allocation agreement (the “Tax Allocation Agreement”) with AEP. Pursuant to the Tax Allocation Agreement, AEP and the Company have agreed to the allocation of certain income tax items. The Company will join AEP in the filing of AEP’s federal consolidated return and certain state consolidated returns. In those jurisdictions where the Company is filing consolidated returns with AEP, the Company will pay to AEP any tax it would have owed had it continued to file separately. To the extent that the AEP consolidated group is able to reduce its tax liability as a result of including the Company in its consolidated group, AEP will pay the Company an amount equal to 20% of such reduction and the Company will carryforward for its own use under the Tax Allocation Agreement 80% of the items that caused the tax reduction (the “Excess Tax Benefits”). While a member of the AEP affiliated group the Company will reduce the amounts it would otherwise owe AEP by the Excess Tax Benefits. Moreover, if the Company should ever become deconsolidated from AEP, AEP will reimburse the Company for any tax liability in post-deconsolidation years the Company would not have paid had it actually had the Excess Tax Benefits for its own use. The cumulative payments to the Company by AEP post-deconsolidation cannot exceed the cumulative reductions in tax to the AEP group resulting from its use of the Excess Tax Benefits. Separate return methodology will be used in determining income taxes.



15.
COMMITMENTS AND CONTINGENCIES
Environmental Matters
The Company is a defendant in lawsuits filed, or the recipient of administrative orders issued or demand letters received, in various jurisdictions pursuant to the Federal Comprehensive Environmental Response Compensation and Liability Act of 1980 (“CERCLA”) or other similar national, provincial or state environmental remedial laws. These laws provide that responsible parties may be liable to pay for remediating contamination resulting from hazardous substances that were discharged into the environment by them, by prior owners or occupants of property they currently own or operate, or by others to whom they sent such substances for treatment or other disposition at third party locations. The Company has been notified by the United States Environmental Protection Agency, other national environmental agencies, and various provincial and state agencies that it may be a potentially responsible party (“PRP”) under such laws for the cost of remediating hazardous substances pursuant to CERCLA and other national and state or provincial environmental laws. PRP designation typically requires the funding of site investigations and subsequent remedial activities.
Many of the sites that are likely to be the costliest to remediate are often current or former commercial waste disposal facilities to which numerous companies sent wastes. Despite the potential joint and several liability which might be imposed on the Company under CERCLA and some of the other laws pertaining to these sites, the Company’s share of the total waste sent to these sites has generally been small. The Company believes its exposure for liability at these sites is limited.
On a global basis, the Company has also identified certain other present and former properties at which it may be responsible for cleaning up or addressing environmental contamination, in some cases as a result of contractual commitments and/or federal or state environmental laws. The Company is actively seeking to resolve these actual and potential statutory, regulatory and contractual obligations. Although difficult to quantify based on the complexity of the issues, the Company has accrued amounts corresponding to its best estimate of the costs associated with such regulatory and contractual obligations on the basis of available information from site investigations and best professional judgment of consultants.
Total environmental liabilities, determined on an undiscounted basis, are included in the consolidated balance sheets as follows:
 
 
June 30
 
December 31
 
 
2015
 
2014
Other current liabilities
 
$
4

 
$
6

Other accrued liabilities (noncurrent)
 
10

 
9

 
 
$
14

 
$
15

Management believes that recorded environmental liabilities will be adequate to cover the Company’s estimated liability for its exposure in respect to such matters. In the event that such liabilities were to significantly exceed the amounts recorded by the Company, the Company’s results of operations and financial condition could be materially affected. At June 30, 2015, management estimates that reasonably possible material additional losses above and beyond management’s best estimate of required remediation costs as recorded approximate $36 million.
Asset Retirement Obligations
The Company records asset retirement obligations (“ARO”) in accordance with FASB ASC Topic 410, Asset Retirement and Environmental Obligations. The Company’s primary ARO activities relate to the removal of hazardous building materials at its facilities. The Company records an ARO at fair value upon initial recognition when the amount can be reasonably estimated, typically upon the expectation that an operating site may be closed or sold. ARO fair values are determined based on the Company’s determination of what a third party would charge to perform the remediation activities, generally using a present value technique.
For those sites that the Company identifies in the future for closure or sale, or for which it otherwise believes it has a reasonable basis to assign probabilities to a range of potential settlement dates, the Company will review these sites for both ARO and impairment issues.
The Company has identified sites with contractual obligations and several sites that are closed or expected to be closed and sold. In connection with these sites, the Company maintains ARO liabilities in the consolidated balance sheets as follows:


 
 
June 30
 
December 31
 
 
2015
 
2014
Other current liabilities
 
$
2

 
$
3

Other accrued liabilities (noncurrent)
 
18

 
21

 
 
$
20

 
$
24

The Company has conditional asset retirement obligations (“CARO”), primarily related to removal costs of hazardous materials in buildings, for which it believes reasonable cost estimates cannot be made at this time because the Company does not believe it has a reasonable basis to assign probabilities to a range of potential settlement dates for these retirement obligations. Accordingly, the Company is currently unable to determine amounts to accrue for CARO at such sites.
Affiliate Pension Obligations
As a result of the more than 80% ownership interest in the Company by Mr. Icahn’s affiliates, the Company is subject to the pension liabilities of all entities in which Mr. Icahn has a direct or indirect ownership interest of at least 80%. One such entity, ACF Industries LLC ("ACF"), is the sponsor of several pension plans. All the minimum funding requirements of the Code and the Employee Retirement Income Security Act of 1974 for these plans have been met as of June 30, 2015. If the ACF plans were voluntarily terminated, they would be underfunded by approximately $82 million as of June 30, 2015. These results are based on the most recent information provided by the plans’ actuaries. These liabilities could increase or decrease, depending on a number of factors, including future changes in benefits, investment returns, and the assumptions used to calculate the liability. As members of the controlled group, the Company would be liable for any failure of ACF to make ongoing pension contributions or to pay the unfunded liabilities upon a termination of the pension plans of ACF. In addition, other entities now or in the future within the controlled group in which the Company is included may have pension plan obligations that are, or may become, underfunded and the Company would be liable for any failure of such entities to make ongoing pension contributions or to pay the unfunded liabilities upon termination of such plans. Further, the failure to pay these pension obligations when due may result in the creation of liens in favor of the pension plan or the Pension Benefit Guaranty Corporation (“PBGC”) against the assets of each member of the controlled group.
The current underfunded status of the pension plans of ACF requires it to notify the PBGC of certain “reportable events” such as if the Company ceases to be a member of the ACF controlled group, or the Company makes certain extraordinary dividends or stock redemptions. The obligation to report could cause the Company to seek to delay or reconsider the occurrence of such reportable events.
Icahn Enterprises Holdings L.P. and IEH FM Holdings LLC have undertaken to indemnify Federal-Mogul for any and all liability imposed upon the Company pursuant to the Employee Retirement Income Security Act of 1974, as amended, or any regulation thereunder (“ERISA”) resulting from the Company being considered a member of a controlled group within the meaning of ERISA § 4001(a)(14) of which American Entertainment Properties Corporation is a member, except with respect to liability in respect to any employee benefit plan, as defined by ERISA § 3(3), maintained by the Company. Icahn Enterprises Holdings L.P. and IEH FM Holdings LLC are not required to maintain any specific net worth and there can be no guarantee Icahn Enterprises Holdings L.P. and IEH FM Holdings LLC will be able to fund its indemnification obligations to the Company.
Other Matters
On April 25, 2014, a group of plaintiffs brought an action against Federal-Mogul Products, Inc. (“F-M Products”), a wholly-owned subsidiary of the Company, alleging injuries and damages associated with the discharge of chlorinated hydrocarbons by the former owner of a facility located in Kentucky.  Since 1998, when F-M Products acquired the facility, it has been cooperating with the applicable regulatory agencies on remediating the prior discharges pursuant to an order entered into by the facility’s former owner. The Company is unable to estimate any reasonably possible range of loss for reasons including that the plaintiffs did not claim any amount of damages in their complaint. F-M Products intends to vigorously defend this litigation.
The Company is involved in other legal actions and claims, directly and through its subsidiaries. Management does not believe that the outcomes of these other actions or claims are likely to have a material adverse effect on the Company’s consolidated financial position, results of operations or cash flows.



16.
CHANGES IN ACCUMULATED OTHER COMPREHENSIVE LOSS BY COMPONENT (NET OF TAX)
The following represents the Company’s changes in accumulated other comprehensive loss ("AOCL") by component for the six months ended June 30, 2015:
 
 
Foreign
Currency
Translation
Adjustments
 
Gains and
Losses on
Cash Flow
Hedges
 
Pensions and Post-retirement Benefits
 
Total
Balance at December 31, 2014
 
$
(482
)
 
$
(17
)
 
$
(643
)
 
$
(1,142
)
 
 
 
 
 
 
 
 
 
Other comprehensive (loss) income before reclassifications
 
(95
)
 
(2
)
 
11

 
(86
)
Amounts reclassified from AOCL
 
—

 
1

 
11

 
12

Other comprehensive (loss) income
 
(95
)
 
(1
)
 
22

 
(74
)
 
 
 
 
 
 
 
 
 
Balance June 30, 2015
 
$
(577
)
 
$
(18
)
 
$
(621
)
 
$
(1,216
)



17.
RECLASSIFICATIONS OUT OF ACCUMULATED OTHER COMPREHENSIVE LOSS

Items not reclassified in their entirety out of AOCL to net income are as follows:
 
 
Three Months Ended
 
Six Months Ended
 
Affected Line Item in the
 
 
June 30
 
June 30
 
Statement Where Net Income
 
 
2015
 
2014
 
2015
 
2014
 
is Presented
Losses on cash flow hedges
 
 
 
 
 
 
 
 
 
 
Commodity contracts
 
$
(1
)
 
$
—

 
$
(1
)
 
$
(1
)
 
Cost of products sold
Foreign currency contracts
 
—

 
—

 
—

 
(1
)
 
Cost of products sold
Total
 
(1
)
 
—

 
(1
)
 
(2
)
 
 
Income taxes
 
—

 
1

 
—

 
1

 
Income tax expense
Net of tax
 
(1
)
 
1

 
(1
)
 
(1
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Pensions and post-retirement benefits
 
 
 
 
 
 
 
 
 
Cost of products sold and Selling, general and administrative expenses ("SG&A")
Amortization of actuarial losses
 
(5
)
 
(3
)
 
(13
)
 
(6
)
 
Amortization of prior service credits
 
1

 
1

 
2

 
2

 
Cost of products sold and SG&A
Total
 
(4
)
 
(2
)
 
(11
)
 
(4
)
 
 
Income taxes
 
—

 
1

 
—

 
1

 
Income tax expense
Net of tax
 
(4
)
 
(1
)
 
(11
)
 
(3
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Total reclassifications
 
$
(5
)
 
$
—

 
$
(12
)
 
$
(4
)
 
 


18.
STOCK-BASED COMPENSATION
A summary of the Company’s stock appreciation rights (“SARs”) activity as of and for the six months ended June 30, 2015 is as follows:
 
 
SARs
 
Weighted
Average
Exercise
Price
 
Weighted
Average
Remaining
Contractual
Life
 
Aggregate
Intrinsic
Value
 
 
(Thousands)
 
 
 
(Years)
 
 
Outstanding at December 31, 2014
 
796

 
$
19.51

 
1.4
 
$
—

Exercised
 
—

 
—

 
 
 
 
Forfeited
 
(79
)
 
17.65

 
 
 
 
Outstanding at March 31, 2015
 
717

 
$
19.71

 
1.3
 
$
—

Exercised
 
—

 
—

 
 
 
 
Forfeited
 
(77
)
 
20.10

 
 
 
 
Outstanding at June 30, 2015
 
640

 
$
19.67

 
1.1
 
$
—

 
 
 
 
 
 
 
 
 
Exercisable at June 30, 2015
 
640

 
$
19.67

 
1.1
 
$
—




In February 2012, 2011 and 2010, the Company granted approximately 809,000, 1,043,000 and 437,000 SARs, respectively, to certain employees. The SARs granted in February 2012 (“2012 SARs”) and in February 2011 (“2011 SARs”) vested 25.0% on the grant date and 25.0% on each of the next three anniversaries of the grant date. The SARs granted in February 2010 (“2010 SARs”) vested 33.3% on each of the three anniversaries of the grant date. All SARs have a term of five years from date of grant. All 2010 SARs were expired as of June 30, 2015. The SARs are payable in cash or, at the election of the Company, in stock. As the Company anticipates paying out SARs exercised in the form of cash, the SARs are being treated as liability awards for accounting purposes. The Company recognized SARs income of zero and $1 million for the three and six months ended June 30, 2015, respectively. The Company recognized SARs income of $1 million and $2 million for the three and six months ended June 30, 2014, respectively.
The June 30, 2015 and December 31, 2014 SARs fair values were estimated using the Black-Scholes valuation model with the following assumptions:
 
 
June 30, 2015
 
December 31, 2014
 
 
2012 SARs
 
2011 SARs
 
2012 SARs
 
2011 SARs
 
2010 SARs
Exercise price
 
$
17.64

 
$
21.03

 
$
17.64

 
$
21.03

 
$
17.16

Expected volatility
 
39
%
 
39
%
 
39
%
 
39
%
 
39
%
Expected dividend yield
 
—
%
 
—
%
 
—
%
 
—
%
 
—
%
Expected forfeitures
 
—
%
 
—
%
 
—
%
 
—
%
 
—
%
Risk-free rate over the expected life
 
0.22
%
 
0.05
%
 
0.28
%
 
0.14
%
 
0.03
%
Expected life (in years)
 
0.8

 
0.3

 
1.1

 
0.6

 
0.1

Fair value (in millions)
 
$
0.1

 
$
—

 
$
0.6

 
$
0.2

 
$
—

Fair value of vested portion (in millions)
 
$
0.1

 
$
—

 
$
0.4

 
$
0.2

 
$
—


Expected volatility is based on the average of five-year historical volatility and implied volatility for a group of comparable auto industry companies as of the measurement date. Risk-free rate is determined based upon U.S. Treasury rates over the estimated expected lives. Expected dividend yield is zero as the Company has not paid dividends to holders of its common stock in the recent past nor does it expect to do so in the future. Expected forfeitures are zero as the Company has no historical experience with SARs; the impact of forfeitures is recognized by the Company upon occurrence. Expected life is the average of the time until the award is fully vested and the end of the term.

19.
INCOME (LOSS) PER COMMON SHARE
The following table sets forth the computation of basic and diluted income (loss) per common share attributable to Federal-Mogul:
 
 
Three Months Ended
 
Six Months Ended
 
 
June 30
 
June 30
 
 
2015
 
2014
 
2015
 
2014
 
 
(Millions of Dollars, Except per Share Amounts)
Amounts attributable to Federal-Mogul:
 
 
 
 
 
 
 
 
Net income (loss) from continuing operations
 
$
15

 
$
(5
)
 
$
4

 
$
35

Gain from discontinued operations, net of income tax
 
7

 
—

 
7

 
—

Net income (loss)
 
$
22

 
$
(5
)
 
$
11

 
$
35

 
 
 
 
 
 
 
 
 
Weighted average shares outstanding, basic and diluted (in millions)
 
169.0

 
150.0

 
160.2

 
150.0

 
 
 
 
 
 
 
 
 
Net income (loss) per common share attributable to Federal-
 
 
 
 
 
 
 
 
Mogul basic and diluted:
 
 
 
 
 
 
 
 
Net income (loss) from continuing operations
 
$
0.09

 
$
(0.03
)
 
$
0.03

 
$
0.23

Gain from discontinued operations, net of income tax
 
0.04

 
$
—

 
0.04

 
—

Net income (loss)
 
$
0.13

 
$
(0.03
)
 
$
0.07

 
$
0.23




As a result of the Company's common stock registered rights offering announced in February 2015, the Company's total shares outstanding increased by 19,011,407 to 169,040,651 shares outstanding as of March 26, 2015.
Warrants to purchase 6,951,871 common shares, which expired December 27, 2014, were not included in the computation of diluted earnings per shares, because the exercise price was greater than the average market price of the Company’s common shares during the three and six months ended June 30, 2014.

20.    OPERATIONS BY REPORTING SEGMENT
The Company operates with two end-customer focused business segments. The Powertrain segment focuses on original equipment products for automotive, heavy duty and industrial applications. The Motorparts segment sells and distributes a broad portfolio of products in the global aftermarket, while also serving original equipment manufacturers with products including braking, chassis, wipers and other vehicle components. This organizational model allows for a strong product line focus benefitting both original equipment and aftermarket customers and enables the Company's global teams to be responsive to customers’ needs for superior products and to promote greater identification with the Company's premium brands. Additionally, this organizational model enhances management focus to capitalize on opportunities for organic or acquisition growth, profit improvement, resource utilization and business model optimization in line with the unique requirements of the two different customer bases.

The Company evaluates reporting segment performance principally on a non-GAAP Operational EBITDA basis. Management believes that Operational EBITDA provides supplemental information for management and investors to evaluate the operating performance of its business. Management uses and believes that investors benefit from referring to Operational EBITDA in assessing the Company’s operating results. Operational EBITDA presents a performance measure exclusive of capital structure and the method by which net assets were acquired, disposed of, or financed. In 2014, the Company expanded its definition of Operational EBITDA to exclude acquisition related, legal separation and headquarters relocation costs. Accordingly, operational EBITDA is defined as earnings before interest, income taxes, depreciation and amortization, and certain items such as restructuring and impairment charges, Chapter 11 and U.K. Administration related reorganization expenses, gains or losses on the sales of businesses, the non-service cost components of the U.S. based funded pension plan, curtailment gains or losses, the income statement impacts associated with SARs, loss on extinguishment of debt and costs associated with acquisitions, legal separation and headquarters relocation. Comparable periods have been adjusted to conform to this definition.
Net sales, cost of products sold and gross profit information are as follows:
 
 
Three Months Ended June 30
 
 
Net Sales
 
Cost of Products Sold
 
Gross Profit
 
 
2015
 
2014
 
2015
 
2014
 
2015
 
2014
Powertrain
 
$
1,167

 
$
1,162

 
$
(1,028
)
 
$
(1,013
)
 
$
139

 
$
149

Motorparts
 
871

 
791

 
(720
)
 
(643
)
 
151

 
148

Inter-segment eliminations
 
(76
)
 
(81
)
 
76

 
81

 
—

 
—

Total Reporting Segment
 
$
1,962

 
$
1,872

 
$
(1,672
)
 
$
(1,575
)
 
$
290

 
$
297

 
 
Six Months Ended June 30
 
 
Net Sales
 
Cost of Products Sold
 
Gross Profit
 
 
2015
 
2014
 
2015
 
2014
 
2015
 
2014
Powertrain
 
$
2,305

 
$
2,300

 
$
(2,023
)
 
$
(2,003
)
 
$
282

 
$
297

Motorparts
 
1,644

 
1,510

 
(1,385
)
 
(1,236
)
 
259

 
274

Inter-segment eliminations
 
(152
)
 
(159
)
 
152

 
159

 
—

 
—

Total Reporting Segment
 
$
3,797

 
$
3,651

 
$
(3,256
)
 
$
(3,080
)
 
$
541

 
$
571




Operational EBITDA and the reconciliation to net (loss) income are as follows:
 
 
Three Months Ended
 
Six Months Ended

 
June 30

June 30

 
2015

2014

2015

2014
Powertrain
 
$
114

 
$
117

 
$
224

 
$
234

Motorparts
 
66

 
67

 
96

 
120

Total Operational EBITDA
 
180

 
184

 
320

 
354

 
 
 
 
 
 
 
 
 
Depreciation and amortization
 
(83
)
 
(82
)
 
(166
)
 
(162
)
Interest expense, net
 
(32
)
 
(31
)
 
(67
)
 
(53
)
Restructuring expense
 
(27
)
 
(30
)
 
(39
)
 
(38
)
Loss on sale of equity method investment
 
—

 
—

 
(11
)
 
—

Discontinued operations
 
7

 
—

 
7

 
—

Acquisition related costs
 
(2
)
 
(3
)
 
(6
)
 
(6
)
Legal separation costs
 
(1
)
 
—

 
(2
)
 
—

Loss on debt extinguishment
 
—

 
(24
)
 
—

 
(24
)
Non-service cost components associated with U.S. based funded pension plans
 
—

 
2

 
—

 
3

Adjustment of assets to fair value
 
(3
)
 
(2
)
 
2

 
(2
)
Stock appreciation rights
 
—

 
1

 
1

 
2

Headquarters relocation costs
 
—

 
(1
)
 
—

 
(1
)
Income tax expense
 
(12
)
 
(15
)
 
(23
)
 
(33
)
Other
 
(3
)
 
(2
)
 
(2
)
 
(2
)
Net income (loss)
 
$
24


$
(3
)

$
14


$
38


Total assets are as follows:
 
 
June 30
 
December 31

 
2015

2014
Powertrain
 
$
3,970

 
$
3,485

Motorparts
 
3,381

 
3,355

Total Reporting Segment Assets
 
7,351

 
6,840

Corporate
 
209

 
227

Total Company Assets
 
$
7,560


$
7,067




21.    SUBSEQUENT EVENTS
On July 7, 2015, the Company completed the purchase of certain additional business assets of the TRW engine components business. The business was acquired through stock purchases for a base purchase price of approximately $56 million, funded primarily from the available Replacement Revolver Facility and subject to certain customary closing and post-closing adjustments. The purchase of TRW’s engine components business adds to the product line the Company purchased on February 6, 2015, will be integrated into the product line and further enhances the Company's ability to support its customers to improve fuel economy and reduce emissions.
The assets acquired and liabilities assumed will be recorded at fair value as of the acquisition date in accordance with ASC Topic 805, Business Combinations. The preliminary allocation of the purchase price will occur in the third quarter of 2015. There were no revenues or earnings included in the Company's condensed consolidated statements of operations related to the additional business assets purchased on July 7, 2015.

FORWARD-LOOKING STATEMENTS
Certain statements contained or incorporated in this Quarterly Report on Form 10-Q which are not statements of historical fact constitute “Forward-Looking Statements” within the meaning of the Private Securities Litigation Reform Act of 1995 (the “Reform Act”).
Forward-looking statements give current expectations or forecasts of future events. Words such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “may,” “plan,” “seek” and other words and terms of similar meaning in connection with discussions of future operating or financial performance signify forward-looking statements. The Company also, from time to time, may provide oral or written forward-looking statements in other materials released to the public. Such statements are made in good faith by the Company pursuant to the “Safe Harbor” provisions of the Reform Act.
Any or all forward-looking statements included in this report or in any other public statements may ultimately be incorrect. Forward-looking statements may involve known and unknown risks, uncertainties and other factors, which may cause the actual results, performance, experience or achievements of the Company to differ materially from any future results, performance, experience or achievements expressed or implied by such forward-looking statements. The Company undertakes no obligation to update any forward-looking statements, whether as a result of new information, future events, or otherwise.
All of the forward-looking statements are qualified in their entirety by reference to the factors discussed under “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014 (the “Annual Report”) filed on February 27, 2015 as well as the risks and uncertainties discussed elsewhere in the Annual Report and this report. Other factors besides those listed could also materially affect the Company’s business.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following Management’s Discussion and Analysis of financial condition and results of operations (“MD&A”) should be read in conjunction with the MD&A included in the Company’s Annual Report.
The Company
On April 15, 2014, Federal-Mogul Corporation completed a holding company reorganization (the “Reorganization”). As a result of the Reorganization, the outstanding shares of Federal-Mogul Corporation common stock were automatically converted on a one-for-one basis into shares of Federal-Mogul Holdings Corporation common stock, and all of the stockholders of Federal-Mogul Corporation immediately prior to the Reorganization automatically became stockholders of Federal-Mogul Holdings Corporation. The rights of stockholders of Federal-Mogul Holdings Corporation are generally governed by Delaware law and Federal-Mogul Holdings Corporation’s certificate of incorporation and bylaws, which are the same in all material respects as those of Federal-Mogul Corporation immediately prior to the Reorganization. In addition, the board of directors of Federal-Mogul Holdings Corporation and its Audit Committee and Compensation Committee are composed of the same members as the board of directors, Audit Committee and Compensation Committee of Federal-Mogul Corporation prior to the Reorganization.
References herein to the “Company,” “Federal-Mogul,” “we,” “us,” “our” refer to Federal-Mogul Corporation for the period prior to the effective time of the Reorganization on April 15, 2014 and to Federal-Mogul Holdings Corporation for the period after the effective time of the Reorganization.
On September 3, 2014, the Company announced its plan to separate its Powertrain and Motorparts business segments into two independent, publicly-traded companies serving the global original equipment and aftermarket industries. The planned separation will be implemented through a tax-free distribution of Federal-Mogul’s Motorparts division to shareholders of Federal-Mogul


Holdings Corporation. Completion of the transaction is subject to customary conditions, including among others, the Company’s receipt of an IRS ruling or opinion of counsel to the effect that the distribution will qualify as a transaction that is generally tax-free for U.S. Federal Income tax purposes; as well as effectiveness of a Form 10 Registration Statement to be filed with the SEC. 

On February 24, 2015, the Company announced that it would defer the previously announced spin-off of its Motorparts division to allow for the integration of its recently completed brake component, chassis and valvetrain acquisitions and to recognize the benefits of the strategic initiatives in the Motorparts division. The Company’s board of directors intends to revisit the timing of the spin-off prior to December 31, 2015. Meanwhile the company will continue to operate as two separate, independent divisions. No assurances can be given regarding the ultimate timing of the separation or that it will be consummated.
Overview
The Company is a leading global supplier of technology and innovation in vehicle and industrial products for fuel economy, emissions reduction, alternative energies, environment and safety systems. The Company serves the world’s foremost original equipment manufacturers (“OEM”) and servicers (“OES”) of automotive, light, medium and heavy-duty commercial vehicles, off-road, agricultural, marine, rail, aerospace, power generation and industrial equipment (collectively, “OE”), as well as the worldwide aftermarket. The Company seeks to participate in both of these markets by leveraging its original equipment product engineering and development capability, manufacturing know-how, and expertise in managing a broad and deep range of replacement parts to service the aftermarket. The Company believes that it is uniquely positioned to effectively manage the life cycle of a broad range of products to a diverse customer base.
The Company has established a global presence and conducts its operations through various manufacturing, distribution and technical centers that are wholly-owned subsidiaries or partially-owned non-consolidated affiliates. During the six months ended June 30, 2015, the Company derived 37% of its sales in the United States and 63% internationally. The Company has operations in established markets including Australia, Belgium, France, Germany, Italy, Japan, Spain, Sweden, the United Kingdom and the United States, and emerging markets including Argentina, Brazil, China, Czech Republic, Hungary, India, Korea, Mexico, Morocco, Poland, Romania, Russia, South Africa and Thailand. The attendant risks of the Company’s international operations are primarily related to currency fluctuations, changes in local economic and political conditions, and changes in laws and regulations.
The Company offers its customers a diverse array of market-leading products for OE and replacement parts (“aftermarket”) applications, including pistons, piston rings, piston pins, cylinder liners, valve seats and guides, engine valves, ignition products, dynamic seals, bonded piston seals, combustion and exhaust gaskets, static gaskets and seals, rigid heat shields, engine bearings, industrial bearings, bushings and washers, brake disc pads, brake linings, brake blocks, element resistant systems protection sleeving products, acoustic shielding, flexible heat shields, brake system components, chassis products, wipers and lighting.
The Company operates in an extremely competitive industry, driven by global vehicle production volumes and part replacement trends. Business is typically awarded to the supplier offering the most favorable combination of cost, quality, technology and service. Customers continue to demand periodic cost reductions that require the Company to continually assess, redefine and improve its operations, products, and manufacturing capabilities to maintain and improve profitability. Management continues to develop and execute initiatives to meet the challenges of the industry and to achieve its strategy for sustainable global profitable growth.
The Company operates with two end-customer focused business segments. The Powertrain segment focuses on original equipment products for automotive, heavy duty and industrial applications. The Motorparts segment sells and distributes a broad portfolio of products in the global aftermarket, while also serving original equipment manufacturers with products including braking, chassis, wipers and other vehicle components. This organizational model allows for a strong product line focus benefitting both original equipment and aftermarket customers and enables the global Federal-Mogul teams to be responsive to customers’ needs for superior products and to promote greater identification with Federal-Mogul premium brands. Additionally, this organizational model enhances management focus to capitalize on opportunities for organic or acquisition growth, profit improvement, resource utilization and business model optimization in line with the unique requirements of the two different customer bases.
The Powertrain segment primarily represents the Company’s OE business. About 94% of Powertrain's sales are to OE customers, with the remaining 6% of its sales being sold directly to Motorparts for eventual distribution, by Motorparts, to customers in the independent aftermarket. Discussions about the Company’s Powertrain segment or its OE business should be seen as analogous. The performance of Powertrain is therefore highly correlated to changes in regional OEM light and commercial vehicle production, together with the changes in the mix of technologies (such as between light vehicle gasoline and light vehicle diesel), and changes in demand for non-automotive and industrial applications. These drivers are enhanced by the rate at which the Company gains new programs, which is itself affected by the rate at which the OEM’s make improvements to emissions and fuel economy – some in response to regional regulations. The Motorparts segment primarily represents the Company’s aftermarket business. About 70% of Motorparts' sales are to the customers in the independent aftermarket. The remaining 30% of the Motorparts business is to OEM or tier 1 suppliers to OEM, and the OES market, essentially, dealer supplied replacement parts – a feature more prevalent in Europe than in North America. The OES market is subject to the same general commercial patterns as the aftermarket business. The


performance of Motorparts is therefore highly correlated to the factors that variously influence the different regional replacement parts markets around the world, such as vehicle miles driven, the average age of vehicles on the road, the size of the regional vehicle parcs and levels of consumer confidence. These drivers are enhanced by the relative strength of the aftermarket brands and the breadth of the portfolio offered relative to the changing needs of the local markets.
For a more detailed description of the Company’s business, products, industry, operating strategy and associated risks, refer to the Annual Report.




Consolidated Results – Three Months Ended June 30, 2015 vs. Three Months Ended June 30, 2014

Net sales:
 
 
Three Months Ended
 
 
June 30
 
 
2015
 
2014
 
 
(Millions of Dollars)
Powertrain
 
$
1,167

 
$
1,162

Motorparts
 
871

 
791

Inter-segment eliminations
 
(76
)
 
(81
)
Total
 
$
1,962

 
$
1,872


The percentage of net sales by group and region for the three months ended June 30, 2015 and 2014 are listed below.
 
 
Powertrain
 
Motorparts
 
Total
2015
 
 
 
 
 
 
North America
 
36
%
 
57
%
 
45
%
EMEA
 
47
%
 
35
%
 
42
%
Rest of World
 
17
%
 
7
%
 
13
%
 
 
 
 
 
 
 
2014
 
 
 
 
 
 
North America
 
34
%
 
58
%
 
44
%
EMEA
 
49
%
 
36
%
 
43
%
Rest of World
 
17
%
 
6
%
 
13
%

Cost of products sold:
 
 
Three Months Ended
 
 
June 30
 
 
2015
 
2014
 
 
(Millions of Dollars)
Powertrain
 
$
(1,028
)
 
$
(1,013
)
Motorparts
 
(720
)
 
(643
)
Inter-segment eliminations
 
76

 
81

Total Reporting Segment
 
$
(1,672
)
 
$
(1,575
)



Gross profit:
 
 
Three Months Ended
 
 
June 30
 
 
2015
 
2014
 
 
(Millions of Dollars)
Powertrain
 
$
139

 
$
149

Motorparts
 
151

 
148

Total Reporting Segment
 
$
290

 
$
297


Consolidated sales increased by $90 million or 5%, to $1,962 million for the three months ended June 30, 2015 from $1,872 million in the same period of 2014. The company was negatively impacted by the strengthening of the U.S. dollar against several global currencies which resulted in an unfavorable foreign currency impact of $177 million. On a constant dollar basis, sales increased by 16% or $267 million. This sales growth is comprised of an increase in Powertrain's external sales of $125 million, reflecting the inclusion of the sales of the TRW engine components business acquisition as well as an increase in volume for the quarter. External sales in the Motorparts division increased by $142 million, driven by the Affinia chassis and the Honeywell brake component business acquisitions, combined with a 4% increase in the underlying business.

Consolidated gross profit decreased by $7 million to $290 million, or 14.8% of sales, for the three months ended June 30, 2015 compared to $297 million, or 15.9% of sales in the same period of 2014. The unfavorable impact on gross profit was driven by negative foreign currency of $35 million, strategic costs and project costs of $11 million and negative productivity of $22 million. These costs were partially offset by increases in sales and volume mix of $50 million and savings in material and services sourcing of $13 million. The decrease in gross margin percentage was primarily due to negative currency impact plus strategic costs in the Motorparts business segment.

Reporting Segment Results – Three Months Ended June 30, 2015 vs. Three Months Ended June 30, 2014
The following table provides a reconciliation of changes in sales, cost of products sold, gross profit and Operational EBITDA for the three months ended June 30, 2015 compared with the three months ended June 30, 2014 for each of the Company’s reporting segments. In 2014 the Company expanded its definition of Operational EBITDA to exclude acquisition related, legal separation and headquarters relocation costs. Accordingly, Operational EBITDA is defined as earnings before interest, income taxes, depreciation and amortization, and certain items such as restructuring and impairment charges, Chapter 11 and U.K. Administration related reorganization expenses, gains or losses on the sales of businesses, the non-service cost components of the U.S. based funded pension plan, curtailment gains or losses, the income statement impacts associated with stock appreciation rights, loss on extinguishment of debt and costs associated with acquisitions, legal separation and headquarters relocation. Comparable periods have been adjusted to conform to this definition.




 
 
Powertrain
 
Motorparts
 
Inter-segment
Elimination
 
Total
Reporting
Segment
 
 
(Millions of Dollars)
Sales
 
 
 
 
 
 
 
 
Three months ended June 30, 2014
 
$
1,162

 
$
791

 
$
(81
)
 
$
1,872

External sales volumes
 
133

 
134

 
—

 
267

Inter-segment sales volumes
 
(3
)
 
(2
)
 
5

 
—

Customer pricing
 
(8
)
 
8

 
—

 
—

Foreign currency
 
(117
)
 
(60
)
 
—

 
(177
)
Three months ended June 30, 2015
 
$
1,167

 
$
871

 
$
(76
)
 
$
1,962

 
 
 
 
 
 
 
 
 
 
 
Powertrain
 
Motorparts
 
Inter-segment
Elimination
 
Total
Reporting
Segment
Cost of Products Sold
 
 
Three months ended June 30, 2014
 
$
(1,013
)
 
$
(643
)
 
$
81

 
$
(1,575
)
Sales volumes / mix
 
(108
)
 
(104
)
 
(5
)
 
(217
)
Productivity, net of inflation
 
(11
)
 
(11
)
 
—

 
(22
)
Strategic costs and project costs
 
(3
)
 
(8
)
 
—

 
(11
)
Materials and services sourcing
 
7

 
6

 
—

 
13

Depreciation
 
—

 
(2
)
 
—

 
(2
)
Foreign currency
 
100

 
42

 
—

 
142

Three months ended June 30, 2015
 
$
(1,028
)
 
$
(720
)
 
$
76

 
$
(1,672
)
 
 
 
 
 
 
 
 
 
 
 
Powertrain
 
Motorparts
 
Inter-segment
Elimination
 
Total
Reporting
Segment
Gross Profit
 
 
Three months ended June 30, 2014
 
$
149

 
$
148

 
$
—

 
$
297

Sales volumes / mix
 
22

 
28

 
—

 
50

Customer pricing
 
(8
)
 
8

 
—

 
—

Productivity, net of inflation
 
(11
)
 
(11
)
 
—

 
(22
)
Strategic costs and project costs
 
(3
)
 
(8
)
 
—

 
(11
)
Materials and services sourcing
 
7

 
6

 
—

 
13

Depreciation
 
—

 
(2
)
 
—

 
(2
)
Foreign currency
 
(17
)
 
(18
)
 
—

 
(35
)
Three months ended June 30, 2015
 
$
139

 
$
151

 
$
—

 
$
290



 
 
Powertrain
 
Motorparts
 
Inter-segment
Elimination
 
Total
Reporting
Segment
Operational EBITDA
 
 
Three months ended June 30, 2014
 
$
117

 
$
67

 
$
—

 
$
184

Sales volumes / mix
 
20

 
19

 
—

 
39

Customer pricing
 
(8
)
 
8

 
—

 
—

Productivity, net of inflation
 
(6
)
 
(15
)
 
—

 
(21
)
Strategic costs and project costs
 
(4
)
 
(8
)
 
—

 
(12
)
Materials and services sourcing
 
7

 
6

 
—

 
13

Equity earnings in non-consolidated affiliates
 
4

 
—

 
—

 
4

Foreign currency
 
(16
)
 
(12
)
 
—

 
(28
)
Other
 
—

 
1

 
—

 
1

Three months ended June 30, 2015
 
$
114

 
$
66

 
$
—

 
$
180

 
 
 
 
 
 
 
 
 
Depreciation and amortization
 
 
 
 
 
 
 
(83
)
Interest expense, net
 
 
 
 
 
 
 
(32
)
Restructuring expense
 
 
 
 
 
 
 
(27
)
Discontinued operations
 
 
 
 
 
 
 
7

Acquisition related costs
 
 
 
 
 
 
 
(2
)
Legal separation costs
 
 
 
 
 
 
 
(1
)
Adjustment of assets to fair value
 
 
 
 
 
 
 
(3
)
Income tax expense
 
 
 
 
 
 
 
(12
)
Other
 
 
 
 
 
 
 
(3
)
Net income
 
 
 
 
 
 
 
$
24


Powertrain
Sales increased by $5 million to $1,167 million for the three months ended June 30, 2015 from $1,162 million in the same period of 2014. The Powertrain division generated approximately 70% of its sales outside of the United States and the resulting currency movements decreased sales by approximately $117 million. Therefore, on a constant dollar basis, external sales increased 13% compared to the second quarter of 2014. The increase in Powertrain’s sales reflects the inclusion of the acquisition of certain assets of the TRW engine components business, which closed on February 6, 2015, as well as an increase in volume which increased sales by $125 million. This includes the impact of customer price decreases of $8 million. When excluding the impact of sales from the TRW engine components business acquisition, sales in North America decreased by 1%, while light vehicle production and commercial vehicle production increased by 3% and 9%, respectively. In EMEA, sales increased by 4% compared to a 1% increase in light vehicle production and a 2% decrease in commercial vehicle production. Sales in ROW increased by 1% compared to a 1% decrease in light vehicle production and a decrease in commercial vehicle production of 7%.
The decrease in gross profit is primarily related to negative exchange impacts, negative productivity and customer price reductions, offset by higher sales and materials and services sourcing savings. Therefore, gross margin percentage decreased from 12.8% in 2014 to 11.9% of sales for the three months ended June 30, 2015.
Operational EBITDA decreased by $3 million to $114 million, or 9.8% of sales for the three months ended June 30, 2015 from $117 million, or 10.1% of sales in the same period of 2014, due to lower gross profit primarily from a negative foreign currency impact, customer price reductions and negative productivity, offset by higher sales volumes and materials and services sourcing savings during the three months ended June 30, 2015.
Motorparts
Sales increased by $80 million, or 10%, to $871 million for the three months ended June 30, 2015 from $791 million in the same period of 2014. Excluding the unfavorable currency impact of $60 million, sales increased by $140 million or 19%, on a constant dollar basis. This increase was primarily related to the Honeywell braking and the Affinia chassis component acquisitions, combined with a 4% increase in the underlying business.


On a comparable basis, excluding the impacts of exchange and acquisitions, North America sales increased by 7%, mainly driven by an increase in sales to the U.S. and Canada aftermarket. EMEA sales at constant exchange rates and excluding the impact of acquisitions, decreased by 1.5%, including a 1% increase in Western Europe aftermarket sales and a $2 million reduction in sales to the Russian aftermarket. At constant exchange rates, ROW sales increased by 39%, primarily due the Honeywell acquisition as well as continued growth in the China and India Aftermarket businesses driven by product line and customer expansion
Gross profit increased by $3 million to $151 million for the three months ended June 30, 2015. This increase was primarily driven by $28 million attributable to increased sales volumes including sales from the Honeywell braking and Affinia chassis acquisitions, favorable customer pricing of $8 million and favorable material and services sourcing savings of $6 million. These favorable impacts on gross profit were partially offset, by a $8 million increase in strategic costs; unfavorable productivity of $11 million and an $18 million negative exchange impact. The gross margin percentage decreased to 17.3% of sales for the three months ended June 30, 2015 from 18.7% of sales in the same period of 2014.
Operational EBITDA decreased by $1 million to $66 million for the three months ended June 30, 2015 from $67 million in the same period of 2014. Items positively impacting EBITDA included $19 million attributable to increased sales volumes including sales from the Honeywell braking and Affinia chassis acquisitions, favorable customer pricing of $8 million and favorable material and services sourcing savings of $6 million. Major items which negatively impacted EBITDA included $8 million of strategic costs, negative productivity of $15 million and a $12 million impact from currency changes.

Selling, General and Administrative Expenses
Selling, general and administrative expenses (“SG&A”) were $200 million, or 10.2% of net sales, for the three months ended June 30, 2015 as compared to $195 million, or 10.4% of net sales, for the same period of 2014. The increase in costs is primarily attributable to the addition of SG&A expenses associated with the Affinia chassis business acquisition, the Honeywell friction business acquisition and the TRW engine components business acquisition, partially offset by the benefits of prior restructuring initiatives and exchange rate impacts.
The Company maintains technical centers throughout the world designed to integrate the Company’s leading technologies into advanced products and processes, to provide engineering support for all of the Company’s manufacturing sites, and to provide technological expertise in engineering and design development providing solutions for customers and bringing new, innovative products to market. Included in SG&A were research and development (“R&D”) costs, including product and validation costs, of $45 million and $46 million for the three months ended June 30, 2015 and 2014, respectively.

Interest Expense, Net
Net interest expense was $32 million for the three months ended June 30, 2015 compared to $31 million for the same period of 2014. The increase in net interest expense is due to increased borrowings under the Replacement Revolving Facility, offset by lower amortization costs.

Restructuring Activities
The following is a summary of the Company’s consolidated restructuring liabilities and related activity as of and for three months ended June 30, 2015:
 
 
Powertrain
 
Motorparts
 
Total
Reporting
Segment
 
Corporate
 
Total
Company
 
 
(Millions of Dollars)
Balance at March 31, 2015
 
$
31

 
$
16

 
$
47

 
$
—

 
$
47

Provisions
 
6

 
25

 
31

 
—

 
31

Reversals
 
(4
)
 
—

 
(4
)
 
—

 
(4
)
Payments
 
(16
)
 
(6
)
 
(22
)
 
—

 
(22
)
Foreign Currency
 
—

 


 
—

 
—

 
—

Balance at June 30, 2015
 
$
17

 
$
35

 
$
52

 
$
—

 
$
52


Restructuring expenses for the three months ended June 30, 2015 primarily relate to: (1) the reshaping of the Company's aftermarket distribution network in Europe, and (2) separation programs in various European countries, primarily Germany, aimed at integrating the recently acquired Honeywell braking component locations. We expect to complete these programs in


2018 and incur additional restructuring and other charges of approximately $30 million. For programs previously initiated, we expect to complete these programs in 2016 and incur additional restructuring and other charges of approximately $15 million.



Other Income (Expense), Net
The specific components of “Other income (expense), net” are as follows:

 
 
Three Months Ended
 
 
June 30
 
 
2015
 
2014
 
 
(Millions of Dollars)
Adjustment of assets to fair value
 
(3
)
 
(2
)
Third-party royalty income
 
2

 
1

Legal separation costs
 
(1
)
 
—

Losses on sales of account receivables
 
(2
)
 
(2
)
Other
 
1

 
(3
)
 
 
$
(3
)
 
$
(6
)


Income Taxes
For the three months ended June 30, 2015, the Company recorded income tax expense of $12 million on income from operations before income taxes of $29 million. This compares to income tax expense of $15 million on income from operations before income taxes of $12 million in the same period of 2014. Income tax expense for the three months ended June 30, 2015 differs from the U.S. statutory rate due primarily to pre-tax losses with no tax benefits, partially offset by pre-tax income taxed at rates lower than the U.S. statutory rate. The income tax expense for the three months ended June 30, 2014 differs from the U.S. statutory rate due primarily to pre-tax losses with no tax benefits, partially offset by pre-tax income taxed at rates lower than the U.S. statutory rate and income in jurisdictions with no tax expense due to offsetting valuation allowance changes.

Consolidated Results – Six Months Ended June 30, 2015 vs. Six Months Ended June 30, 2014

Net sales:
 
 
Six Months Ended
 
 
June 30
 
 
2015
 
2014
 
 
(Millions of Dollars)
Powertrain
 
$
2,305

 
$
2,300

Motorparts
 
1,644

 
1,510

Inter-segment eliminations
 
(152
)
 
(159
)
Total
 
$
3,797

 
$
3,651


The percentage of net sales by group and region for the six months ended June 30, 2015 and 2014 are listed below.


 
 
Powertrain
 
Motorparts
 
Total
2015
 
 
 
 
 
 
North America
 
36
%
 
56
%
 
44
%
EMEA
 
47
%
 
37
%
 
43
%
Rest of World
 
17
%
 
7
%
 
13
%
 
 
 
 
 
 
 
2014
 
 
 
 
 
 
North America
 
34
%
 
57
%
 
43
%
EMEA
 
49
%
 
37
%
 
44
%
Rest of World
 
17
%
 
6
%
 
13
%

Cost of products sold:
 
 
Six Months Ended
 
 
June 30
 
 
2015
 
2014
 
 
(Millions of Dollars)
Powertrain
 
$
(2,023
)
 
$
(2,003
)
Motorparts
 
(1,385
)
 
(1,236
)
Inter-segment eliminations
 
152

 
159

Total Reporting Segment
 
$
(3,256
)
 
$
(3,080
)



Gross profit:
 
 
Six Months Ended
 
 
June 30
 
 
2015
 
2014
 
 
(Millions of Dollars)
Powertrain
 
$
282

 
$
297

Motorparts
 
259

 
274

Total Reporting Segment
 
$
541

 
$
571


Consolidated sales increased by $146 million or 4%, to $3,797 million for the six months ended June 30, 2015 from $3,651 million in the same period of 2014. The company was negatively impacted by the strengthening of the U.S. dollar against several global currencies which resulted in an unfavorable foreign currency impact of $337 million. On a constant dollar basis, sales increased by 15% or $483 million, net of customer price reductions of $4 million. This sales growth is comprised of an increase in Powertrain's external sales of $238 million, reflecting the inclusion of the acquisition of certain assets of the TRW engine components business as well as increases in volume and market share gains for the six months ended June 30, 2015. External sales in the Motorparts division increased by $245 million, driven by the Affinia chassis and the Honeywell brake component business acquisition.
Consolidated gross profit decreased by $30 million to $541 million, or 14.2% of sales, for the six months ended June 30, 2015 compared to $571 million, or 15.6% of sales in the same period of 2014. The favorable impact on gross profit was due to increased external sales volumes and mix of $80 million and the favorable sourcing savings of $21 million, which were offset by an unfavorable currency impact of $67 million, strategic costs and project costs of $30 million, net customer price reductions of $4 million, increased depreciation of $5 million and unfavorable productivity of $25 million. The decrease in gross margin percentage was primarily due to negative currency impact and strategic costs in the Motorparts division.

Reporting Segment Results – Six Months Ended June 30, 2015 vs. Six Months Ended June 30, 2014
The following table provides a reconciliation of changes in sales, cost of products sold, gross profit and Operational EBITDA for the six months ended June 30, 2015 compared with the six months ended June 30, 2014 for each of the Company’s reporting segments. In 2014 the Company expanded its definition of Operational EBITDA to exclude acquisition related, legal separation and headquarters relocation costs. Accordingly, Operational EBITDA is defined as earnings before interest, income taxes, depreciation and amortization, and certain items such as restructuring and impairment charges, Chapter 11 and U.K. Administration related reorganization expenses, gains or losses on the sales of businesses, the non-service cost components of the U.S. based funded pension plan, curtailment gains or losses, the income statement impacts associated with stock appreciation rights, loss on extinguishment of debt and costs associated with acquisitions, legal separation and headquarters relocation. Comparable periods have been adjusted to conform to this definition.




 
 
Powertrain
 
Motorparts
 
Inter-segment
Elimination
 
Total
Reporting
Segment
 
 
(Millions of Dollars)
Sales
 
 
 
 
 
 
 
 
Six months ended June 30, 2014
 
$
2,300

 
$
1,510

 
$
(159
)
 
$
3,651

External sales volumes
 
253

 
234

 
—

 
487

Inter-segment sales volumes
 
(5
)
 
(2
)
 
7

 
—

Customer pricing
 
(15
)
 
11

 
—

 
(4
)
Foreign currency
 
(228
)
 
(109
)
 
—

 
(337
)
Six months ended June 30, 2015
 
$
2,305

 
$
1,644

 
$
(152
)
 
$
3,797

 
 
 
 
 
 
 
 
 
 
 
Powertrain
 
Motorparts
 
Inter-segment
Elimination
 
Total
Reporting
Segment
Cost of Products Sold
 
 
Six months ended June 30, 2014
 
$
(2,003
)
 
$
(1,236
)
 
$
159

 
$
(3,080
)
Sales volumes / mix
 
(205
)
 
(195
)
 
(7
)
 
(407
)
Productivity, net of inflation
 
(14
)
 
(11
)
 
—

 
(25
)
Strategic costs and project costs
 
(5
)
 
(25
)
 
—

 
(30
)
Materials and services sourcing
 
11

 
10

 
—

 
21

Depreciation
 
(1
)
 
(4
)
 
—

 
(5
)
Foreign currency
 
194

 
76

 
—

 
270

Six months ended June 30, 2015
 
$
(2,023
)
 
$
(1,385
)
 
$
152

 
$
(3,256
)
 
 
 
 
 
 
 
 
 
 
 
Powertrain
 
Motorparts
 
Inter-segment
Elimination
 
Total
Reporting
Segment
Gross Profit
 
 
Six months ended June 30, 2014
 
$
297

 
$
274

 
$
—

 
$
571

Sales volumes / mix
 
43

 
37

 
—

 
80

Customer pricing
 
(15
)
 
11

 
—

 
(4
)
Productivity, net of inflation
 
(14
)
 
(11
)
 
—

 
(25
)
Strategic costs and project costs
 
(5
)
 
(25
)
 
—

 
(30
)
Materials and services sourcing
 
11

 
10

 
—

 
21

Depreciation
 
(1
)
 
(4
)
 
—

 
(5
)
Foreign currency
 
(34
)
 
(33
)
 
—

 
(67
)
Six months ended June 30, 2015
 
$
282

 
$
259

 
$
—

 
$
541



 
 
Powertrain
 
Motorparts
 
Inter-segment
Elimination
 
Total
Reporting
Segment
Operational EBITDA
 
 
Six months ended June 30, 2014
 
$
234

 
$
120

 
$
—

 
$
354

Sales volumes / mix
 
41

 
21

 
—

 
62

Customer pricing
 
(15
)
 
11

 
—

 
(4
)
Productivity, net of inflation
 
(11
)
 
(21
)
 
—

 
(32
)
Strategic costs and project costs
 
(6
)
 
(35
)
 
—

 
(41
)
Materials and services sourcing
 
11

 
11

 
—

 
22

Equity earnings in non-consolidated affiliates
 
3

 
1

 
—

 
4

Foreign currency
 
(31
)
 
(20
)
 
—

 
(51
)
Other
 
(2
)
 
8

 
—

 
6

Six months ended June 30, 2015
 
$
224

 
$
96

 
$
—

 
$
320

 
 
 
 
 
 
 
 
 
Depreciation and amortization
 
 
 
 
 
 
 
(166
)
Interest expense, net
 
 
 
 
 
 
 
(67
)
Discontinued operations
 
 
 
 
 
 
 
7

Restructuring expense
 
 
 
 
 
 
 
(39
)
Loss on sale of equity method investment
 
 
 
 
 
 
 
(11
)
Acquisition related costs
 
 
 
 
 
 
 
(6
)
Legal separation costs
 
 
 
 
 
 
 
(2
)
Adjustment of assets to fair value
 
 
 
 
 
 
 
2

Stock appreciation rights
 
 
 
 
 
 
 
1

Income tax expense
 
 
 
 
 
 
 
(23
)
Other
 
 
 
 
 
 
 
(2
)
Net income
 
 
 
 
 
 
 
$
14


Powertrain
Sales increased by $5 million to $2,305 million for the six months ended June 30, 2015 from $2,300 million for the same period of 2014. The Powertrain division generated approximately 70% of its sales outside of the United States and the resulting currency movements decreased sales by approximately $228 million. Therefore, on a constant dollar basis, external sales increased 12% compared to the same period in 2014. The increase in Powertrain’s sales reflects the inclusion of the TRW engine components business acquisition, which closed on February 6, 2015, as well as increases in volume and market share gains which together, increased sales by $238 million. This also includes the impact of customer price decreases of $15 million. When excluding the impact of sales from the TRW engine components business acquisition, sales in North America increased by 1%, while light vehicle production and commercial vehicle production increased by 3% and 13%, respectively. In EMEA, sales increased by 3% compared to a 3% increase in light vehicle production and a 1% decrease in commercial vehicle production. Revenue in ROW increased by 1% compared to flat light vehicle production and a decrease in commercial vehicle production of 12%.
The decrease in gross profit was primarily related to higher sales and materials and services sourcing savings, offset by negative exchange impacts, customer price reductions and negative productivity. Therefore, gross margin percentage decreased from 12.9% in 2014 to 12.2% of sales for the six months ended June 30, 2015.
Operational EBITDA decreased by $10 million to $224 million or 9.7% of sales for the six months ended June 30, 2015 from $234 million or 10.2% of sales in the same period of 2014 primarily due to lower gross profit.

Motorparts
Sales increased by $134 million, or 9%, to $1,644 million for the six months ended June 30, 2015 from $1,510 million in the same period of 2014. Excluding the unfavorable currency impact of $109 million, sales increased by $243 million or 17%, on a constant


dollar basis. This increase was primarily due to additional sales related to the Honeywell braking and Affinia chassis component acquisitions.
On a comparable basis, excluding exchange and the impact of acquisitions, North America sales increased by 2%, EMEA sales decreased by 1%, and ROW sales increased by 38%, primarily due the Honeywell acquisition as well as continued growth in the China and India Aftermarket businesses driven by product line and customer expansion.
Gross profit decreased by $15 million to $259 million for the six months ended June 30, 2015 compared to $274 million in the same period of 2014. The decrease in gross profit, was primarily driven by $25 million of strategic costs, negative productivity of $11 million and an unfavorable foreign currency impact of $33 million. These decreases were partially offset by the impacts of $37 million from sales volumes including sales from the Honeywell braking and Affinia chassis acquisitions, favorable customer pricing of $11 million and favorable material and services sourcing savings of $10 million. The gross margin percentage decreased to 15.8% of sales for the six months ended June 30, 2015 from 18.1% of sales in the same period of 2014.
Operational EBITDA decreased by $24 million to $96 million for the six months ended June 30, 2015 from $120 million in the same period of 2014. Major items which negatively impacted EBITDA included $35 million of strategic costs, unfavorable productivity of $21 million and a $20 million impact from currency changes. These decreases, were partially offset by items positively impacting EBITDA which include $21 million attributable to sales volumes including sales from the Honeywell braking and Affinia chassis acquisitions, favorable customer pricing of $11 million and favorable material and services sourcing savings of $11 million.

Selling, General and Administrative Expenses
Selling, general and administrative expenses (“SG&A”) were $403 million, or 10.6% of net sales, for the six months ended June 30, 2015 as compared to $376 million, or 10.3% of net sales, for the same period of 2014. The increase in costs is primarily attributable to the addition of SG&A expenses associated with the Affinia chassis business acquisition, the Honeywell friction business acquisition and the TRW engine components business acquisition. SG&A expenses in the Motorparts division also included an additional $10 million of strategic costs as compared to the six months ended June 30, 2014.
The Company maintains technical centers throughout the world designed to integrate the Company’s leading technologies into advanced products and processes, to provide engineering support for all of the Company’s manufacturing sites, and to provide technological expertise in engineering and design development providing solutions for customers and bringing new, innovative products to market. Included in SG&A were research and development (“R&D”) costs, including product and validation costs, of $96 million and $93 million for the six months ended June 30, 2015 and 2014, respectively.


Interest Expense, Net
Net interest expense was $67 million for the six months ended June 30, 2015 compared to $53 million for the same period of 2014. This increase is primarily attributable to higher rates and increased borrowings under the Replacement Revolving Facility, offset by lower amortization costs.



Restructuring Activities
The following is a summary of the Company’s consolidated restructuring liabilities and related activity as of and for six months ended June 30, 2015:
 
 
Powertrain
 
Motorparts
 
Total
Reporting
Segment
 
Corporate
 
Total
Company
 
 
(Millions of Dollars)
Balance at December 31, 2014
 
$
36

 
$
16

 
$
52

 
$
1

 
$
53

Provisions
 
6

 
6

 
12

 
—

 
12

Payments
 
(10
)
 
(5
)
 
(15
)
 
(1
)
 
(16
)
Acquisitions
 
2

 
—

 
2

 
—

 
2

Foreign Currency
 
(3
)
 
(1
)
 
(4
)
 
—

 
(4
)
Balance at March 31, 2015
 
31

 
16

 
47

 
—

 
47

Provisions
 
6

 
25

 
31

 
—

 
31

Reversals
 
(4
)
 
—

 
(4
)
 
—

 
(4
)
Payments
 
(16
)
 
(6
)
 
(22
)
 
—

 
(22
)
Foreign Currency
 
—

 


 
—

 
—

 
—

Balance at June 30, 2015
 
$
17

 
$
35

 
$
52

 
$
—

 
$
52


Restructuring expenses for the three months ended June 30, 2015 primarily relate to: (1) the reshaping of the Company's aftermarket distribution network in Europe, and (2) separation programs in various European countries, primarily Germany, aimed at integrating the recently acquired Honeywell braking component locations. We expect to complete these programs in 2018 and incur additional restructuring and other charges of approximately $30 million. For programs previously initiated, we expect to complete these programs in 2016 and incur additional restructuring and other charges of approximately $15 million.

During the first quarter of 2015, certain claims for additional severance were brought against the Company related to one of its restructuring activities. While the Company has recorded its best estimate, the cost associated with those actions could increase; however, the Company does not expect the incremental costs to exceed $10 million.



Other Income (Expense), Net
The specific components of “Other income (expense), net” are as follows:

 
 
Six Months Ended
 
 
June 30
 
 
2015
 
2014
 
 
(Millions of Dollars)
Loss on sale of equity method investment
 
$
(11
)
 
$
—

Adjustment of assets to fair value
 
2

 
(2
)
Gain on sale of assets
 
4

 
—

Third-party royalty income
 
4

 
3

Legal separation costs
 
(2
)
 
—

Losses on sales of account receivables
 
(4
)
 
(3
)
Other
 
6

 
(10
)
 
 
$
(1
)
 
$
(12
)

Loss on sale of equity method investment: During the six months ended June 30, 2015 the Company recognized an $11 million loss on the disposition of an equity method investment as discussed in Note 10, Investment in Non-consolidated Affiliates, in Part I, Item 1 of this report.

Income Taxes
For the six months ended June 30, 2015, the Company recorded income tax expense of $23 million on income from operations before income taxes of $30 million. This compares to income tax expense of $33 million on income from operations before income taxes of $71 million in the same period of 2014. Income tax expense for the six months ended June 30, 2015 differs from the U.S. statutory rate due primarily to pre-tax losses with no tax benefits, partially offset by pre-tax income taxed at rates lower than the U.S. statutory rate. The income tax expense for the six months ended June 30, 2014 differs from the U.S. statutory rate due primarily to pre-tax losses with no tax benefits, partially offest by pre-tax income taxed at rates lower than the U.S. statutory rate and income in jurisdictions with no tax expense due to offsetting valuation allowance changes.
On July 11, 2013, the Company became part of an affiliated group of corporations as defined in Section 1504 of the Internal Revenue Code of 1986, as amended, of which American Entertainment Properties Corp. (“AEP”), a wholly owned subsidiary of Icahn Enterprises, is the common parent. The Company subsequently entered into a Tax Allocation Agreement (the “Tax Allocation Agreement”) with AEP. Pursuant to the Tax Allocation Agreement, AEP and the Company have agreed to the allocation of certain income tax items. The Company will join AEP in the filing of AEP’s federal consolidated return and certain state consolidated returns. In those jurisdictions where the Company is filing consolidated returns with AEP, the Company will pay to AEP any tax it would have owed had it continued to file separately. To the extent that the AEP consolidated group is able to reduce its tax liability as a result of including the Company in its consolidated group, AEP will pay the Company an amount equal to 20% of such reduction and the Company will carryforward for its own use under the Tax Allocation Agreement 80% of the items that caused the tax reduction (the “Excess Tax Benefits”). While a member of the AEP affiliated group the Company will reduce the amounts it would otherwise owe AEP by the Excess Tax Benefits. Moreover, if the Company should ever become deconsolidated from AEP, AEP will reimburse the Company for any tax liability in post-deconsolidation years the Company would not have paid had it actually had the Excess Tax Benefits for its own use. The cumulative payments to the Company by AEP post-deconsolidation cannot exceed the cumulative reductions in tax to the AEP group resulting from its use of the Excess Tax Benefits. Separate return methodology will be used in determining income taxes.

Litigation and Environmental Contingencies
For a summary of material litigation and environmental contingencies, refer to Note 15, Commitments and Contingencies, of the condensed consolidated financial statements.

Liquidity and Capital Resources
Operating Activities


As summarized in the table below, net cash (used by) provided from operating activities was $(91) million and $161 million for the six months ended June 30, 2015 and 2014, respectively.
 
 
Six Months Ended
 
 
June 30
 
 
2015
 
2014
 
 
(Millions of Dollars)
Operational cash flow before changes in operating assets and liabilities
 
$
140

 
$
188

 
 
 
 
 
Changes in operating assets and liabilities:
 
 
 
 
Accounts receivable
 
(182
)
 
(124
)
Inventories
 
(117
)
 
(12
)
Accounts payable
 
80

 
65

Other assets and liabilities
 
(12
)
 
44

Total change in operating assets and liabilities
 
(231
)
 
(27
)
 
 
 
 
 
Net Cash (Used by) Provided From Operating Activities
 
$
(91
)
 
$
161


Operational cash flow before changes in operating assets and liabilities
Cash flow from operations before changes in operating assets and liabilities was $140 million for six months ended June 30, 2015 compared to $188 million for the comparable period of 2014. The decrease is mainly driven by lower earnings in 2015 compared to 2014 and higher restructuring payments. Operational EBITDA decreased by $34 million to $320 million for six months ended June 30, 2015 compared to $354 million in 2014, while restructuring payments increased by 19 million.
Cash (outflow) from changes in operating assets and liabilities
Cash (outflow) from changes in operating assets and liabilities was $231 million for six months ended June 30, 2015 compared to $27 million for the comparable period of 2014.
The net increase in working capital for the six months ended June 30, 2015 as compared to 2014 reflects the additional working capital needs related to the TRW engine components business acquisition. The remaining working capital increase is primarily related to increased inventory in the Motorparts division, partly due to higher volumes, plus additional inventory required to support the distribution center strategic initiatives, and the Affinia and Honeywell integration activities.

Investing Activities
Cash flow used by investing activities was $494 million for the six months ended June 30, 2015 compared to $335 million for the comparable period of 2014.
Capital expenditures were $216 million and $173 million for the six months ended June 30, 2015 and 2014, respectively. The increase in capital expenditures between the two periods is in the Motorparts division and reflects the ongoing investment in its strategic initiatives, principally in the new distribution centers during the quarter.
During the six months ended June 30, 2015, there was a payment of $301 million, net of acquired cash, to purchase certain assets of the TRW engine components business.
During the six months ended June 30, 2014, there were $165 million of payments, net of acquired cash, to acquire businesses, $15 million of which was to acquire the DZV bearings business and $140 million of which was paid for the Affinia Chassis Business Acquisition. The Company assumed $10 million of pre-existing debt associated with the DZV bearings business acquisition.
Financing Activities
Cash flow provided by financing activities was $479 million for the six months ended June 30, 2015 compared to cash flow provided by financing activities of $37 million for the comparable period of 2014. This includes $230 million net borrowings on the revolver primarily for the acquisition of certain assets of the TRW engine components business. The other major item was $250 million cash inflow associated with the Company's common stock rights offering in which approximately 19 million shares of the Company's common stock were issued in March 2015.


On April 15, 2014, Federal-Mogul Holdings Corporation entered into a new tranche B term loan facility (the “New Tranche B Facility”) and a new tranche C term loan facility (the “New Tranche C Facility,” and together with the New Tranche B Facility, the “New Term Facilities”), which were arranged by Citigroup Global Markets Inc. and Credit Suisse Securities (USA) LLC (the "Term Arrangers"), and assumed all of the obligations of Federal-Mogul Corporation with respect to the Replacement Revolving Facility under the Credit Agreement (both defined below). The New Term Facilities were entered into, and the Replacement Revolving Facility was assumed, by Federal-Mogul Holdings Corporation pursuant to an amendment dated as of April 15, 2014 to the previously existing Term Loan and Revolving Credit Agreement dated December 27, 2007 among Federal-Mogul Corporation, the lenders party thereto, the Term Arrangers, Citibank, N.A., as Revolving Administrative Agent, Citibank, N.A., as Tranche B Term Administrative Agent, Credit Suisse AG, as Tranche C Term Administrative Agent, Citigroup Global Markets Inc., Credit Suisse Securities (USA) LLC and Wells Fargo Bank, N.A., as Joint Lead Arrangers and Joint Bookrunners with respect to the Revolving Facility and Wells Fargo Bank, N.A., as sole Documentation Agent with respect to the Revolving Facility (as amended, the "Credit Agreement").
Immediately following the closing of the New Term Facilities, Federal-Mogul Holdings Corporation contributed all of the net proceeds from the New Facilities to Federal-Mogul Corporation, and Federal-Mogul Corporation repaid its existing outstanding indebtedness as a borrower under the tranche B and tranche C term loan facilities.
In accordance with FASB ASC Topic No. 405, Extinguishments of Liabilities, the Company recognized a $24 million non-cash loss on the extinguishment of debt attributable to the write-off of the unamortized fair value adjustment and unamortized debt issuance costs which is recorded in the line item “Loss on debt extinguishment” in the Company’s Condensed Consolidated Statements of Operations.
The New Term Facilities, among other things, (i) provides for aggregate commitments under the New Tranche B Facility of $700 million with a maturity date of April 15, 2018, (ii) provides for aggregate commitments under the New Tranche C Facility of $1.9 billion with a maturity date of April 15, 2021, (iii) increases the interest rates applicable to the New Facilities as described below, (iv) provides that for all outstanding letters of credit there is a corresponding decrease in borrowings available under the Replacement Revolving Facility, (v) provides that in the event that as of a particular determination date more than $700 million aggregate principal amount of existing term loans and certain related refinancing indebtedness will become due within 91 days of such determination date, the Replacement Revolving Facility will mature on such determination date, (vi) provides for additional incremental indebtedness, secured on a pari passu basis, of an unlimited amount of additional indebtedness if the Company meets a financial covenant incurrence test, and (vii) amends certain other restrictive covenants. Pursuant to the New Term Facilities, Federal-Mogul Holdings Corporation assumed all of the obligations of Federal-Mogul Corporation with respect to the Replacement Revolving Facility under the Credit Agreement.
Advances under the New Tranche B Facility generally bear interest at a variable rate per annum equal to (i) the Alternate Base Rate plus a margin of 2.00% or (ii) the Adjusted LIBOR Rate plus a margin of 3.00%, subject, in each case, to a floor of 1.00%. Advances under the New Tranche C Facility generally bear interest at a variable rate per annum equal to (i) the Alternate Base Rate plus a margin of 2.75% or (ii) the Adjusted LIBOR Rate plus a margin of 3.75%, subject, in each case, to a minimum rate of 1.00% plus the applicable margin.
On December 6, 2013, the Company entered into an amendment (the “Replacement Revolving Facility”) of its Term Loan and Revolving Credit Agreement dated as of December 27, 2007 (as amended, the “Credit Agreement”), among the Company, the lenders party thereto, Citicorp USA, Inc., as Administrative Agent, JPMorgan Chase Bank, N.A., as Syndication Agent, and Wachovia Capital Finance Corporation and Wells Fargo Foothill, LLC, as Co-Documentation Agents, to amend its existing revolving credit facility to provide for a replacement revolving credit facility (the “Replacement Revolving Facility”). The Replacement Revolving Facility, among other things, (i) increased the aggregate commitments available under the Replacement Revolving Facility from $540 million to $550 million, (ii) extended the maturity date of the Replacement Revolving Facility to December 6, 2018, subject to certain limited exceptions described below, and (iii) amended the Company’s borrowing base to provide the Company with additional liquidity.
Advances under the Replacement Revolving Facility generally bear interest at a variable rate per annum equal to (i) the Alternate Base Rate (as defined in the Credit Agreement) plus an adjustable margin of 0.50% to 1.00% based on the average monthly availability under the Replacement Revolving Facility or (ii) Adjusted LIBOR Rate (as defined in the Credit Agreement) plus a margin of 1.50% to 2.00% based on the average monthly availability under the Replacement Revolving Facility. An unused commitment fee of 0.375% also is payable under the terms of the Replacement Revolving Facility.
The Company’s ability to obtain cash adequate to fund its needs depends generally on the results of its operations, restructuring initiatives, and the availability of financing. Management believes that cash on hand, cash flow from operations, and available borrowings under its New Facilities and its Replacement Revolving Facility will be sufficient to fund capital expenditures and meet its operating obligations through the end of 2015. In the longer term, the Company believes that its base operating potential, supplemented by the benefits from its announced restructuring programs, will provide adequate long-term cash flows. However,


there can be no assurance that such initiatives are achievable in this regard.
Off Balance Sheet Arrangements
The Company does not have any material off-balance sheet arrangements.
Other Liquidity and Capital Resource Items
Federal-Mogul subsidiaries in Brazil, France, Germany, Italy and the United States are party to accounts receivable factoring and securitization facilities. Amounts factored under these facilities consist of the following:
 
 
June 30
 
December 31
 
 
2015
 
2014
 
 
(Millions of Dollars)
Gross accounts receivable factored
 
$
383

 
$
306

Gross accounts receivable factored, qualifying as sales
 
365

 
293

Undrawn cash on factored accounts receivable
 
2

 
2


Proceeds from the factoring of accounts receivable qualifying as sales and expenses associated with the factoring of receivables are as follows:
 
 
Three Months Ended
 
Six Months Ended
 
 
June 30
 
June 30
 
 
2015
 
2014
 
2015
 
2014
 
 
(Millions of Dollars)
Proceeds from factoring qualifying as sales
 
$
410

 
$
445

 
$
800

 
$
855

Losses on sales of account receivables
 
(2
)
 
(2
)
 
(4
)
 
(3
)
Certain of the facilities contain terms that require the Company to share in the credit risk of the factored receivables. The maximum exposures to the Company associated with these certain facilities’ terms were $15 million and $17 million as of June 30, 2015 and December 31, 2014, respectively. The fair values of the exposures to the Company associated with these certain facilities’ terms were determined to be immaterial.



ITEM 3. QUALITATIVE AND QUANTITATIVE 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, 2014. Refer to Note 6, Financial Instruments, to the consolidated financial statements for information with respect to interest rate risk, commodity price risk and foreign currency 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. During the six months ended June 30, 2015, the Company derived 37% of its sales in the United States and 63% internationally. Of these international sales, 56% are denominated in the euro, with no other single currency representing more than 11%. To minimize foreign currency risk, the Company generally maintains natural hedges within its non-U.S. activities, including the matching of operational revenues and costs. Where natural hedges are not in place, the Company manages certain aspects of its foreign currency activities and larger transactions through the use of foreign currency options or forward contracts.

ITEM 4. CONTROLS AND PROCEDURES
A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected.
Disclosure Controls and Procedures
The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Company’s periodic Securities Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including its Co-Chief Executive Officers and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
As of June 30, 2015, an evaluation was performed under the supervision and with the participation of the Company’s management, including the Co-Chief Executive Officers and the Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based upon that evaluation, the Co-Chief Executive Officers and the Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of June 30, 2015, at the reasonable assurance level previously described.
Changes to Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the U.S. Securities Exchange Act of 1934. As of June 30, 2015, the Company’s management, with the participation of the Co-Chief Executive Officers and the Chief Financial Officer, has evaluated for disclosure, changes to the Company’s internal control over financial reporting that occurred during the three months ended June 30, 2015 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. There were no material changes in the Company’s internal control over financial reporting during the three months ended June 30, 2015.



PART II
OTHER INFORMATION
 
ITEM 1.
LEGAL PROCEEDINGS
(a)
Contingencies.
Note 15, Commitments and Contingencies, that is included in Part I of this report, is incorporated herein by reference.

ITEM 4.
MINE SAFETY DISCLOSURES
Not applicable.



ITEM 6.
EXHIBITS
(a)
Exhibits:
 
 
3.1
 
Certificate of Incorporation of Federal-Mogul Holdings Corporation (Incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K dated April 14, 2014 and filed with the Securities and Exchange Commission on April 16, 2014).
 
 
 
 
 
 
 
3.2
 
Bylaws of Federal-Mogul Holdings Corporation (Incorporated by reference to Exhibit 3.2 to the Company’s Current Report on Form 8-K dated April 14, 2014 and filed with the Securities and Exchange Commission on April 16, 2014).
 
 
 
 
 
 
 
10.1
 
Amendment No. 1 to the Federal-Mogul Holdings Corporation 2010 Stock Incentive Plan (Incorporated by reference to Exhibit A to the Company's Definitive Proxy Statement on Schedule 14A filed with the Securities and Exchange Commission on April 28, 2015). †
*
 
31.1

Certification by Daniel A. Ninivaggi, Co-Chief Executive Officer, Federal-Mogul Holdings Corporation, and Chief Executive Officer, Motorparts, pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934.
 
 



*
 
31.2

Certification by Rainer Jueckstock, Co-Chief Executive Officer, Federal-Mogul Holdings Corporation, and Chief Executive Officer, Powertrain, pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934.
 
 



*
 
31.3

Certification by Rajesh Shah, Chief Financial Officer, Federal-Mogul Holdings Corporation, pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934.
 
 



*
 
32

Certification by the Company’s Co-Chief Executive Officers and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, and Rule 13a-14(b) of the Securities Exchange Act of 1934.
 
 



*
 
101.INS

XBRL Instance Document
 
 
 
 
 
*
 
101.SCH
 
XBRL Taxonomy Extension Schema Document
 
 
 
 
 
*
 
101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase Document
 
 
 
 
 
*
 
101.LAB
 
XBRL Taxonomy Extension Label Linkbase Document
 
 
 
 
 
*
 
101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase Document
 
 
 
 
 
*
 
101.DEF
 
XBRL Taxonomy Extension Definition Linkbase Document
 
 
 
 
 
*
 
Filed Herewith
†
 
Management contracts and compensatory plans or arrangements.



SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
FEDERAL-MOGUL HOLDINGS CORPORATION
 
By:
/s/ Rajesh Shah
 
 
 
Rajesh Shah
 
Senior Vice President and Chief Financial Officer
 
Principal Financial Officer
 
 
By:
/s/ Jérôme Rouquet
 
 
 
Jérôme Rouquet
 
Senior Vice President, Controller, and Chief Accounting Officer
 
Principal Accounting Officer
Dated: July 29, 2015

Federal-Mogul Holdings LLC Reports