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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

x

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

For the Quarterly Period Ended June 30, 2015.

¨

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

For the Transition Period From                  to                 .

Commission File No. 333-128166-10

 

Affinia Group Intermediate Holdings Inc.

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

34-2022081

(State or Other Jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification No.)

 

 

 

1 Wix Way, Gastonia, North Carolina

 

28054

(Address of Principal Executive Offices)

 

(Zip Code)

(704) 869-3300

(Registrant’s Telephone Number, Including Area Code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ¨    No  x

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

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

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

 

Large accelerated filer

¨

Accelerated filer

¨

 

 

 

 

Non-accelerated filer

x (Do not check if a smaller reporting company)

Smaller reporting company

¨

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

There were 1,000 shares outstanding of the registrant’s common stock as of August 10, 2015 (all of which are privately owned and not traded on a public market).

 .

 

 

 

 


 

Index

Affinia Group Intermediate Holdings Inc.

 

Part I FINANCIAL INFORMATION

 

4

Item 1. Financial Statements (unaudited)

 

4

Condensed_Consolidated_Statements_of_Operations—Three and Six Months Ended June 30, 2015 and 2014

 

4

Condensed Consolidated Statements of Comprehensive Income (Loss)—Three and Six Months Ended June 30, 2015 and 2014

 

5

Condensed Consolidated Balance Sheets—June 30, 2015 and December 31, 2014

 

6

Condensed Consolidated Statements of Cash Flows—Six Months Ended June 30, 2015 and 2014

 

7

Notes to Unaudited Condensed Consolidated Financial Statements

 

8

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

 

28

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

44

Item 4. Controls and Procedures

 

45

Part II OTHER INFORMATION

 

46

Item 1. Legal Proceedings

 

46

Item 1A. Risk Factors

 

46

Item 6. Exhibits

 

47

Signatures

 

48

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2


 

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This report includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These forward-looking statements include statements concerning our plans, objectives, goals, strategies, future events, future revenue or performance, capital expenditures, financing needs, plans or intentions relating to acquisitions, business trends and other information that is not historical information. When used in this report, the words “anticipates,” “believes,” “estimates,” “expects,” “forecasts,” “intends,” “plans,” “projects,” or future or conditional verbs, such as “could,” “may,” “should,” or “will,” and variations of such words or similar expressions are intended to identify forward-looking statements. All forward-looking statements, including, without limitation, management’s examination of historical operating trends and data are based upon the Company’s current expectations and various assumptions. The Company’s expectations, beliefs and projections are expressed in good faith and the Company believes there is a reasonable basis for them. However, there is no assurance that these expectations, beliefs and projections will be achieved. For a more detailed discussion of these risks and uncertainties, see Part I, “Item 1A. Risk Factors” in our Annual Report on form 10-K for the year ended December 31, 2014. With respect to all forward-looking statements, the Company claims the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.

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

 

 

 

3


 

PART I

FINANCIAL INFORMATION

Item 1.

Financial Statements

Affinia Group Intermediate Holdings Inc.

Condensed Consolidated Statements of Operations (Unaudited)

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

(Dollars in millions)

 

2015

 

 

2014

 

 

2015

 

 

2014

 

Net sales

 

$

242

 

 

$

266

 

 

$

465

 

 

$

509

 

Cost of sales

 

 

(182

)

 

 

(191

)

 

 

(352

)

 

 

(375

)

Gross profit

 

 

60

 

 

 

75

 

 

 

113

 

 

 

134

 

Selling, general and administrative expenses

 

 

(37

)

 

 

(39

)

 

 

(70

)

 

 

(79

)

Operating profit

 

 

23

 

 

 

36

 

 

 

43

 

 

 

55

 

Other income and expense, net

 

 

(1

)

 

 

(2

)

 

 

(1

)

 

 

(10

)

Interest expense

 

 

(13

)

 

 

(15

)

 

 

(26

)

 

 

(30

)

Income from continuing operations before, income tax provision, and noncontrolling interest

 

 

9

 

 

 

19

 

 

 

16

 

 

 

15

 

Income tax provision

 

 

(5

)

 

 

(10

)

 

 

(9

)

 

 

(12

)

Net income from continuing operations

 

 

4

 

 

 

9

 

 

 

7

 

 

 

3

 

(Loss) income from discontinued operations, net of tax

 

 

(4

)

 

 

26

 

 

 

(2

)

 

 

31

 

Net income

 

 

 

 

 

35

 

 

 

5

 

 

 

34

 

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

 

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to the Company

 

$

 

 

$

35

 

 

$

5

 

 

$

34

 

See accompanying notes to the condensed consolidated financial statements.

 

 

 

4


 

Affinia Group Intermediate Holdings Inc.

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

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

(Dollars in millions)

 

2015

 

 

2014

 

 

2015

 

 

2014

 

Net income

 

 

 

 

$

35

 

 

$

5

 

 

$

34

 

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in fair value of interest rate swap

 

 

1

 

 

 

(3

)

 

 

(2

)

 

 

(5

)

Reclassification into earnings from interest rate swap

 

 

 

 

 

 

 

 

1

 

 

 

 

Change in fair value of derivatives

 

 

1

 

 

 

 

 

 

1

 

 

 

 

Reclassification into earnings from derivatives

 

 

(1

)

 

 

 

 

 

(1

)

 

 

 

Change in foreign currency translation adjustments

 

 

4

 

 

 

5

 

 

 

(24

)

 

 

7

 

Total other comprehensive income (loss)

 

 

5

 

 

 

2

 

 

 

(25

)

 

 

2

 

Total comprehensive income (loss)

 

 

5

 

 

 

37

 

 

 

(20

)

 

 

36

 

Less: comprehensive income attributable to noncontrolling

   interest, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income (loss) attributable to the Company

 

$

5

 

 

$

37

 

 

$

(20

)

 

$

36

 

See accompanying notes to the condensed consolidated financial statements.

 

 

 

5


 

Affinia Group Intermediate Holdings Inc.

Condensed Consolidated Balance Sheets (Unaudited)

 

 

 

June 30,

 

 

December 31,

 

(Dollars in millions)

 

2015

 

 

2014

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

59

 

 

$

28

 

Restricted cash

 

 

10

 

 

 

4

 

Trade accounts receivable, less allowances of $4 million at June 30, 2015 and

   $4 million at December 31, 2014

 

 

96

 

 

 

94

 

Inventories, net

 

 

178

 

 

 

154

 

Current deferred taxes

 

 

12

 

 

 

20

 

Prepaid taxes

 

 

14

 

 

 

22

 

Other current assets

 

 

14

 

 

 

43

 

Current assets of discontinued operations

 

 

157

 

 

 

176

 

Total current assets

 

 

540

 

 

 

541

 

Property, plant, and equipment, net

 

 

109

 

 

 

111

 

Goodwill

 

 

3

 

 

 

3

 

Other intangible assets, net

 

 

49

 

 

 

54

 

Deferred financing costs

 

 

12

 

 

 

14

 

Deferred income taxes

 

 

103

 

 

 

97

 

Investments and other assets

 

 

6

 

 

 

1

 

Total assets

 

$

822

 

 

$

821

 

Liabilities and shareholder's deficit

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

107

 

 

$

102

 

Notes payable

 

 

206

 

 

 

19

 

Other accrued expenses

 

 

55

 

 

 

47

 

Accrued payroll and employee benefits

 

 

15

 

 

 

17

 

Current liabilities of discontinued operations

 

 

46

 

 

 

50

 

Total current liabilities

 

 

429

 

 

 

235

 

Long-term debt

 

 

616

 

 

 

792

 

Deferred employee benefits and other noncurrent liabilities

 

 

14

 

 

 

13

 

Total liabilities

 

 

1,059

 

 

 

1,040

 

Contingencies and commitments

 

 

 

 

 

 

 

 

Shareholder's deficit:

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

Additional paid-in capital

 

 

456

 

 

 

455

 

Accumulated deficit

 

 

(616

)

 

 

(622

)

Accumulated other comprehensive loss

 

 

(78

)

 

 

(53

)

Total shareholder's deficit of the Company

 

 

(238

)

 

 

(220

)

Noncontrolling interest in consolidated subsidiaries

 

 

1

 

 

 

1

 

Total shareholder's deficit

 

 

(237

)

 

 

(219

)

Total liabilities and shareholder's deficit

 

$

822

 

 

$

821

 

See accompanying notes to the condensed consolidated financial statements.

 

 

 

6


 

Affinia Group Intermediate Holdings Inc.

Condensed Consolidated Statements of Cash Flows (Unaudited)

 

 

 

Six Months Ended June 30, 2015

 

(Dollars in millions)

 

2015

 

 

2014

 

Operating activities

 

 

 

 

 

 

 

 

Net income

 

$

5

 

 

$

34

 

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

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

11

 

 

 

10

 

Currency devaluation

 

 

 

 

 

7

 

Gain on sale of Chassis Group

 

 

 

 

 

(21

)

Stock-based compensation

 

 

2

 

 

 

 

Write-off of unamortized deferred financing costs

 

 

 

 

 

1

 

Provision for deferred income taxes

 

 

(7

)

 

 

(21

)

Change in trade accounts receivable

 

 

(9

)

 

 

(29

)

Change in inventories

 

 

(35

)

 

 

(21

)

Change in other current operating assets

 

 

42

 

 

 

19

 

Change in other current operating liabilities

 

 

17

 

 

 

33

 

Change in other

 

 

3

 

 

 

(6

)

Net cash provided by operating activities

 

 

29

 

 

 

6

 

Investing activities

 

 

 

 

 

 

 

 

Proceeds from the sale of the Chassis group

 

 

 

 

 

140

 

Proceeds from the sale of an equity method investment

 

 

 

 

 

4

 

Change in restricted cash

 

 

(6

)

 

 

 

Additions to property, plant and equipment

 

 

(11

)

 

 

(11

)

Net cash (used in) provided by investing activities

 

 

(17

)

 

 

133

 

Financing activities

 

 

 

 

 

 

 

 

Proceeds from other debt

 

 

14

 

 

 

 

Repayments of other debt

 

 

(1

)

 

 

(9

)

Repayment of term loans

 

 

 

 

 

(78

)

Distribution to our shareholders

 

 

 

 

 

(45

)

Other financing activities

 

 

(1

)

 

 

 

Net cash provided by (used in) financing activities

 

 

12

 

 

 

(132

)

Effect of exchange rates on cash

 

 

(4

)

 

 

(4

)

Increase in cash and cash equivalents

 

 

20

 

 

 

3

 

Cash and cash equivalents at beginning of the period

 

 

45

 

 

 

101

 

Cash and cash equivalents at end of the period

 

$

65

 

 

$

104

 

See accompanying notes to the condensed consolidated financial statements.

 

 

 

7


 

Affinia Group Intermediate Holdings, Inc.

Notes to the Condensed Consolidated Financial Statements (Unaudited)

1. DESCRIPTION OF BUSINESS

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

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

As discussed further in Note 5 to the Condensed Consolidated Financial Statements, “Discontinued Operation”, in the second quarter of 2015, management committed to a plan to sell the Brazilian operations of the Affinia South America (“ASA”) segment. Accordingly, the results of these businesses have been included as a component of discontinued operations in the Condensed Consolidated Statements of Operations for all periods presented.

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

 

 

2. BASIS OF PRESENTATION

These Condensed Consolidated Financial Statements have been prepared in accordance with generally accepted accounting principles (“GAAP”) in the United States (“U.S.”) for interim financial information and with the instructions to Form 10-Q and Regulation S-X. Accordingly, these Condensed Consolidated Financial Statements do not include all information and notes required by GAAP in the U.S. for annual financial statements. Because the interim Condensed Consolidated Financial Statements and Notes do not include all information and notes required by GAAP in the U.S. for annual financial statements, the Condensed Consolidated Financial Statements and other information included in this quarterly report should be read in conjunction with the Consolidated Financial Statements and Notes in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014.

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

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

 

 

3. NEW ACCOUNTING PRONOUNCEMENTS

Accounting Pronouncements Issued But Not Yet Adopted       

In April 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2015-03 “Simplifying the Presentation of Debt Issuance Costs.”  ASU 2015-03 changes the presentation of the debt issuance costs in the financial statements by presenting the costs as a direct deduction from the related debt liability rather than as an asset.  Amortization of the costs will be reported as interest expense.  This ASU is effective for reporting periods beginning after December 15, 2015.  Early adoption is permitted.  The impact of the new ASU would be a reclassification from deferred financing costs to long-term debt in the period of adoption, applied retrospectively.  As of June 30, 2015 the deferred financing costs balance was $12 million.  

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, “Revenue from Contracts with Customers.” ASU 2014-09 outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. This ASU is effective for reporting periods beginning after December 15, 2017. Early adoption is not permitted. The Company is currently assessing the impact that this new ASU will have on its revenue recognition upon adoption.

 

8


 

In August 2014, the FASB issued ASU 2014-15, “Presentation of Financial Statements – Going Concern.” ASU 2014-15 requires management to assess an entity’s ability to continue as a going concern, and to provide related footnote disclosures in certain circumstances. This ASU is effective for reporting periods beginning after December 15, 2016. Early adoption is permitted. The Company does not expect the updated guidance to have a material impact on the consolidated financial position, results of operations or cash flows.

 

Adopted Accounting Pronouncements

In April 2014, the FASB issued ASU 2014-08, “Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity.” ASU 2014-08 amends the definition of a discontinued operation in Accounting Standards Codification (“ASC”) 205-20 and requires entities to provide additional disclosures about discontinued operations as well as disposal transactions that do not meet the discontinued operations criteria. The FASB issued the ASU to provide more decision-useful information and to make it more difficult for a disposal transaction to qualify as a discontinued operation. In addition, the ASU requires entities to reclassify assets and liabilities of a discontinued operation for all comparative periods in the statement of financial position, as well as significant changes to the presentation requirements within the statement of cash flows. This ASU is effective for all disposals (except disposals classified as held for sale before the adoption date) or components initially classified as held for sale in periods beginning on or after December 15, 2014. Early adoption is permitted. See Note 5 to the Consolidated Financial Statements, “Discontinued Operations” for the impact of this accounting pronouncement.

 

 

 

4. SEGMENT INFORMATION

The Company has two operating segments, Filtration and Affinia South America (“ASA”), which are considered reportable segments under ASC 280 “Segment Reporting.” Operating segments are determined based on information used by the chief operating decision maker (“CODM”) in deciding how to allocate resources and evaluate the performance of the Company’s businesses. Management evaluates the performance of its operating segments based primarily on revenue growth and operating profit. Although not considered an operating segment, corporate, eliminations and other includes corporate costs, interest expense and other amounts not allocated to the operating segments.  In the first quarter of 2015, the Company’s management changed the calculation of segment earnings whereby certain corporate costs that were previously allocated to the operating segments were no longer allocated.  Accordingly, all of these previously allocated costs remained in corporate, eliminations and other.  Prior period segment results were recast to conform to current period presentation.    

  Filtration’s products fit medium and heavy duty trucks, light vehicles, equipment in the off-highway market (i.e. residential and non-residential construction, mining, forestry and agricultural) and equipment for industrial and marine applications. Filtration’s products include oil, air, fuel, cabin air, coolant, hydraulic and other filters for many types of vehicles and machinery. The products are sold under well-known brands, such as WIX® and Filtron®, and private label brands including NAPA®.

ASA focuses on distributing and manufacturing brake, suspension, driveshaft and U-joint components, water and fuel pumps, filters, engine products, motorcycle products, accessories and other critical aftermarket components through its operations in Argentina, Brazil, Uruguay and historical operations in Venezuela, which was closed in the second quarter of 2014. During the second quarter of 2015, management committed to a plan to sell the Brazilian operations within ASA, which is comprised of Automotiva and Pellegrino (“ASA Brazil”) and accordingly the results of that disposal group have been included as a component of discontinued operations and excluded from the tables below.  See Note 5 to the Consolidated Financial Statements, “Discontinued Operation” for further information regarding ASA Brazil. Since ASA Brazil meets the criteria of assets held for sale under ASC Topic 205, “Presentation of Financial Statements,” (“ASC 205”), the results of operations have been reflected as discontinued operations for all periods presented.  Currently, the ASA segment consists of continuing operations in Argentina and Uruguay, as well as the results of the Venezuela operations prior to shut down in the second quarter of 2014.

9


 

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

 

 

 

Three Months Ended June 30, 2015

 

 

Three Months Ended June 30, 2014

 

(Dollars in millions)

 

Filtration

 

 

ASA

 

 

Corporate, Eliminations & Other

 

 

Consolidated

 

 

Filtration

 

 

ASA

 

 

Corporate, Eliminations & Other

 

 

Consolidated

 

Net Sales

 

$

230

 

 

$

12

 

 

$

 

 

$

242

 

 

$

251

 

 

$

15

 

 

$

 

 

$

266

 

Operating Profit

 

 

35

 

 

 

2

 

 

 

(14

)

 

 

23

 

 

 

47

 

 

 

3

 

 

 

(14

)

 

 

36

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 30, 2015

 

 

Six Months Ended June 30, 2014

 

(Dollars in millions)

 

Filtration

 

 

ASA

 

 

Corporate, Eliminations & Other

 

 

Consolidated

 

 

Filtration

 

 

ASA

 

 

Corporate, Eliminations & Other

 

 

Consolidated

 

Net Sales

 

$

444

 

 

$

21

 

 

$

 

 

$

465

 

 

$

484

 

 

$

25

 

 

$

 

 

$

509

 

Operating Profit

 

 

63

 

 

 

4

 

 

 

(24

)

 

 

43

 

 

 

79

 

 

 

6

 

 

 

(30

)

 

 

55

 

 

 

5. DISCONTINUED OPERATIONS

As described further below in the second quarter of 2015, management committed to a plan to sell its Brazilian operations within ASA. In accordance with ASC 205 this portion of the ASA segment met the definition of a disposal group at the time management committed to a plan to sell and, accordingly, the results of operations have been classified as a component of discontinued operations for all periods presented as this disposal represents a strategic shift that will have a significant effect on the Company’s operations and financial results.

On June 12, 2015, Affinia Canada ULC and Affinia Southern Holdings LLC (collectively, “Sellers”), wholly-owned indirect subsidiaries of Affinia Group Intermediate Holdings Inc. (the “Company”), entered into two separate purchase and sale agreements (the “Purchase Agreements”) to sell their equity interests in each of Pellegrino Distribuidora de Autopecas Ltda. (“Pellegrino”) and Affinia Automotiva Ltda. (“Automotiva”).  The purchasers under the Pellegrino Purchase Agreement are Distribuidora Automotiva S.A. and Car Central De Autopecas e Rolamentos Ltda. (the “Pellegrino Purchasers”) and the purchasers under the Automotiva Purchase Agreement are Auto Norte Distribuidora de Pecas Ltda., Cobra Rolamentos e Autopecas Ltda., Distribuidora Automotiva S.A., Jorge C. Schertel, Pedro Molina Quaresma and Sedim-Administracao e Participacoes Ltda. (the “Automotiva Purchasers”)  The closing of each sale is contingent on the simultaneous closing of the other sale, unless waived by the Sellers, and the closing of each sale is contingent on customary closing conditions, including antitrust clearance under Brazilian law.

The purchase price to Sellers for the sale of each of Pellegrino and Automotiva will be paid in Brazilian Reals.  The Pellegrino purchase price is 215,000,000 Brazilian Reals and the purchase price for the sale of Automotiva is 146,285,000 Brazilian Reals (in each case, the “Base Purchase Price”), and, in each case, plus or minus an adjustment reflecting (i) an estimate of interim profits or losses, as applicable, of the Sellers related to the Pellegrino or Automotiva business, respectively, each calculated in accordance with a process established in the respective Purchase Agreement, and (ii) minus a percentage of certain claims that may arise after signing and before closing.  After closing, the parties will determine a final purchase price reflecting the actual interim profits and losses and such claims, as well as other adjustments, calculated in accordance with a process established in the respective Purchase Agreement.

This transaction is expected to close in the third quarter of 2015.  The gain on sale of ASA Brazil will be dependent on the exchange rate in effect at the date of closing, as well as the impact of the adjustments at closing described above.  The proceeds from sale are required to be used to pay down the Company’s outstanding debt.  The Consolidated Statements of Cash Flows were not adjusted to reflect this operation as a discontinued operation for any period presented.

The following table shows the net sales, cost of sales, gross profit, selling general and administrative expenses, operating profit, income before tax provision, income tax provision and net income that are included within Income from discontinued operations, net of tax on the Condensed Consolidated Statement of Operations associated with the ASA Brazil disposal group:

 

10


 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

(Dollars in millions)

 

2015

 

 

2014

 

 

2015

 

 

2014

 

Net sales

 

$

79

 

 

$

100

 

 

$

159

 

 

$

188

 

Cost of sales

 

$

(66

)

 

$

(80

)

 

$

(131

)

 

$

(151

)

Gross profit

 

 

13

 

 

 

20

 

 

 

28

 

 

 

37

 

Selling, general and administrative expenses

 

$

(9

)

 

$

(14

)

 

$

(19

)

 

$

(25

)

Operating profit

 

$

4

 

 

$

6

 

 

$

9

 

 

$

12

 

Income from continuing operations before, income tax provision, and noncontrolling interest

 

 

4

 

 

 

6

 

 

 

9

 

 

 

12

 

Income tax provision(1)

 

 

8

 

 

 

1

 

 

 

11

 

 

 

3

 

Net (loss) income

 

$

(4

)

 

$

5

 

 

$

(2

)

 

$

9

 

(1)

The amount includes $7 million of additional tax expense recorded in the second quarter of 2015 as a result of capital gains tax associated with the pending sale of ASA Brazil.

The following tables shows the ASA Brazil disposal group’s asset and liabilities that are included in assets of discontinued operations and liabilities of discontinued operations on the Condensed Consolidated Balance Sheets:

 

 

 

June 30,

 

 

December 31,

 

(Dollars in millions)

 

2015

 

 

2014

 

Cash and cash equivalents

 

$

5

 

 

$

17

 

Trade accounts receivable

 

 

49

 

 

 

52

 

Inventories, net

 

 

60

 

 

 

60

 

Other current assets

 

 

18

 

 

 

20

 

Property, plant, and equipment, net

 

 

10

 

 

 

12

 

Other assets

 

 

15

 

 

 

15

 

Current assets of discontinued operations

 

$

157

 

 

$

176

 

Accounts payable

 

 

34

 

 

 

36

 

Other accrued expenses

 

 

12

 

 

 

14

 

Current liabilities of discontinued operations

 

$

46

 

 

$

50

 

The following table shows the depreciation, amortization and capital expenditures that are included within the consolidated statement of cash flow associated with the ASA Brazil disposal group.

 

 

 

Six Months Ended June 30,

 

(Dollars in millions)

 

2015

 

 

2014

 

Depreciation and amortization

 

$

1

 

 

$

1

 

Capital Expenditures

 

$

1

 

 

$

1

 

 

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

Upon the closing of this transaction, Affinia received cash proceeds of $140 million, which represented the agreed upon selling price of $150 million less a holdback of consideration of $10 million until completion of certain post-closing performance obligations. The Company released an $18 million capital loss valuation allowance as a result of the sale, the tax benefit of which offset the tax expense incurred by the gain on the sale. This resulted in a tax expense of less than $1 million on the sale transaction.

The sale of the Chassis group resulted in a pre-tax gain of $21 million, excluding the $10 million holdback, which is reflected in the Condensed Consolidated Statements of Operations within Income from discontinued operations, net of tax.

 

11


 

The following table shows the Chassis group’s net sales, income before tax provision, income tax provision and net income that are included within Income from discontinued operations, net of tax on the Condensed Consolidated Statements of Operations associated with the Chassis disposal group:

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

(Dollars in millions)

 

2015

 

 

2014

 

 

2015

 

 

2014

 

Net sales

 

$

 

 

$

17

 

 

$

 

 

$

64

 

Income from continuing operations before, income tax provision, and noncontrolling interest

 

 

 

 

 

3

 

 

 

 

 

 

5

 

Income tax provision

 

 

 

 

 

1

 

 

 

 

 

 

2

 

Net income

 

$

 

 

$

2

 

 

$

 

 

$

3

 

 

In addition to the amounts reflected in the tables above associated with the ASA Brazil and Chassis Group, (Loss) income from discontinued operations on the Condensed Consolidated Statement of Operations includes additional amounts of $19 million for both the three and six months ended June 30, 2014.  These additional amounts include the pre-tax gain on the sale of the Chassis group discussed above.

 

 

 

 

6. DERIVATIVES AND HEDGING

The Company uses foreign currency forward contracts and interest rate swaps to manage foreign exchange and interest rate risks, respectively.  The primary use of the foreign currency forward contracts is to hedge the risks associated with changes in foreign exchange rates.  Interest rate swaps are used to manage interest rate risk associated with borrowings.  The Company executes derivative contracts for risk management purposes and does not engage in any speculative or trading activity.    

All derivative instruments are recorded at fair value as assets or liabilities on the Condensed Consolidated Balance Sheets.  Fair value is determined using observable market data provided by recognized independent third-party financial information providers and is based upon Level 2 inputs under the fair value hierarchy within ASC 820 “Fair Value Measurements and Disclosures” (“ASC 820”). There are no cash collateral requirements related to any of the Company’s open derivative instruments.

Changes in the fair value of derivative instruments that qualify for and for which the Company has elected hedge accounting in accordance with ASC 815 “Derivatives and Hedging” (“ASC 815”) are reflected as a component of Accumulated Other Comprehensive Income (Loss) (“AOCI”) until the hedged transaction impacts earnings.  Changes in the fair value of derivative agreements that either do not qualify for hedge accounting, have not been designated as hedges or for which the hedge has been de-designated are reflected in current earnings.     

Currency Forward Contract Derivatives

The Company operates globally and is exposed to foreign currency exchange rate fluctuations in the normal course of business.  The Company’s foreign currency exposure relates primarily to certain non-functional currency denominated assets and liabilities, primarily accounts receivable, accounts payable and intercompany balances.  To minimize the risk associated with changes in foreign currency exchange rates, the Company has established a program that utilizes foreign currency forward contracts to offset the risk associated with the effects of certain foreign currency exposures.  Gains or losses on the Company’s foreign currency exposure are intended to be mitigated by gains or losses on the foreign currency forward contracts.  These foreign currency forward contracts generally have terms of six months or less and are entered into at the prevailing market exchange rate at the end of each month.    

Prior to the third quarter of 2014, the Company did not formally designate foreign currency forward contracts as hedges for accounting purposes and, accordingly, changes in the fair value of these contracts were recognized in current period earnings.  Beginning in the third quarter of 2014, the Company entered into foreign currency forward contracts for anticipated future transactions and these contracts are designated as cash flow hedges.  In accordance with ASC 815, the effective portion of these cash flow hedges are included as a component of AOCI until the underlying transaction impacts earnings.  At the time the underlying transaction impacts earnings, the Company will de-designate the hedging instrument and reflect the change in fair value in current earnings to offset the remeasurement impact of the gross receivable or payable balance until the underlying transaction is settled.        

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

12


 

Interest Rate Risk Management

The Company is exposed to changes in interest rates as a result of the issuance of variable-rate and fixed-rate debt.  Interest rate risk is managed by limiting variable-rate exposure and monitoring changes in interest rates.  To manage risks associated with changes in interest rates, the Company enters into interest rate swaps to effectively fix the interest rate on variable-rate debt.  The Company designates its interest rate swaps as cash flow hedges and, accordingly, changes in the fair value of interest rate swaps designated as cash flow hedges are recorded as a component of AOCI to the extent such cash flow hedges are effective.  Amounts are reclassified from AOCI when the underlying hedged items are recognized, during the period that a hedge transaction is terminated, or whenever a portion of the hedge transaction results are deemed ineffective.

Notional Amounts

The table below shows notional amounts associated with currency forward contracts and interest rate swaps as June 30, 2015 and December 31, 2014:

(Dollars in millions)

 

June 30, 2015

 

 

December 31, 2014

 

Foreign Currency Forward Contracts

 

 

75

 

 

$

70

 

Interest Rate Contracts

 

 

300

 

 

 

300

 

 

The following table shows the fair value of interest rate derivatives and the line items in the Condensed Consolidated Balance Sheets where they are reported.  The fair value of foreign currency forward contracts were insignificant at both June 30, 2015 and December 31, 2014.  

 

 

 

June 30, 2015

 

 

December 31, 2014

 

(Dollars in millions)

 

Asset

 

 

Liability

 

 

Asset

 

 

Liability

 

Derivative Designated as Hedging Instruments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest Rate Contracts

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other current assets

 

$

 

 

$

 

 

$

2

 

 

$

 

Other accrued expenses

 

 

 

 

$

 

 

 

 

 

$

 

Total Derivatives Designated as Hedging Instruments

 

$

 

 

$

 

 

$

2

 

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The following table shows the gains and losses recognized on de-designated derivatives and the line items on the Condensed Consolidated Statements of Operations where the pretax gains and losses were reported.

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

(Dollars in millions)

 

2015

 

 

2014

 

 

2015

 

 

2014

 

Location of Pretax (Losses) Recognized in Earnings

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign Currency Forward Contracts

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income and expense, net

 

$

 

 

$

(2

)

 

$

1

 

 

$

(1

)

Total Pretax (Losses) Recognized in Earnings

 

$

 

 

$

(2

)

 

$

1

 

 

$

(1

)

 

The following table shows the gains and losses recognized on cash flow hedges and the line items on the Condensed Consolidated Statements of Operations where such gains and losses are included when reclassified from AOCI.  Amounts for interest rate contracts are reclassified to earnings as interest expense over the term of the related debt.  Amounts for foreign currency forward contracts are reclassified to earnings within other income and expense, net as the underlying transactions impact earnings.  Amounts associated with foreign currency forward contracts were insignificant during the three months ended June 30, 2015 and 2014.

 

13


 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2015

 

 

2014

 

 

2015

 

 

2014

 

Pretax Gains (Losses) Recorded in AOCI

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest Rate Contracts

 

$

2

 

 

$

(4

)

 

$

(2

)

 

$

(7

)

Total Pretax Gains (Losses) Recorded in AOCI

 

$

2

 

 

$

(4

)

 

$

(2

)

 

$

(7

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Location of Pretax (Losses) Reclassified from AOCI into Earnings

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest Rate Contracts

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest Expense

 

$

1

 

 

$

 

 

$

1

 

 

$

 

Total Pretax (Losses) Recognized in Earnings

 

$

1

 

 

$

 

 

$

1

 

 

$

 

 

 

7. DEBT

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

Fair Value of Debt at June 30, 2015

(Dollars in millions)

 

Book Value

of Debt

 

 

Fair Value

Factor

 

 

Fair Value

of Debt

 

Senior notes, due May 2021(1)

 

$

250

 

 

 

103.13

%

 

$

258

 

Term Loan B-1, due April 2016(1)

 

 

175

 

 

 

99.38

%

 

 

174

 

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

 

 

366

 

 

 

100.00

%

 

 

366

 

ABL Revolver, due April 2018(2)

 

 

 

 

 

100.00

%

 

 

 

Other debt(2)

 

 

31

 

 

 

100.00

%

 

 

31

 

Total fair value of debt at June 30, 2015

 

 

 

 

 

 

 

 

 

$

829

 

 

Fair Value of Debt at December 31, 2014

 

 

 

Book Value

 

 

Fair Value

 

 

Fair Value

 

(Dollars in millions)

 

of Debt

 

 

Factor

 

 

of Debt

 

Senior notes, due May 2021(1)

 

$

250

 

 

 

102.50

%

 

$

256

 

Term Loan B-1, due April 2016(1)

 

 

175

 

 

 

97.88

%

 

 

171

 

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

 

 

367

 

 

 

97.00

%

 

 

356

 

ABL revolver, due April 2018(2)

 

 

 

 

 

100.00

%

 

 

 

Other debt(2)

 

 

19

 

 

 

100.00

%