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EX-32 - EXHIBIT 32 - Federal-Mogul Holdings LLCexhibit32q12016.htm
EX-31.1 - EXHIBIT 31.1 - Federal-Mogul Holdings LLCexhibit311q12016.htm
EX-31 - EXHIBIT 31.3 - Federal-Mogul Holdings LLCexhibit313q12016.htm
EX-10.4 - EXHIBIT 10.4 - Federal-Mogul Holdings LLCexhibit104-2016federalxmog.htm
EX-31.2 - EXHIBIT 31.2 - Federal-Mogul Holdings LLCexhibit312q12016.htm
EX-10.3 - EXHIBIT 10.3 - Federal-Mogul Holdings LLCexhibit103-2016federalxmog.htm
EX-10.2 - EXHIBIT 10.2 - Federal-Mogul Holdings LLCexhibit102federal-mogul201.htm
EX-10.5 - EXHIBIT 10.5 - Federal-Mogul Holdings LLCexhibit105jrouquetofferfin.htm

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 March 31, 2016
or
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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

As of April 25, 2016, 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 Three Months Ended March 31, 2016
INDEX
 

2



PART I
FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FEDERAL-MOGUL HOLDINGS CORPORATION
Condensed Consolidated Statements of Operations (Unaudited)
(in millions, except per share amounts)
 
 
 
Three Months Ended
 
 
March 31
 
 
2016
 
2015
 
 
 
 
 
Net sales
 
$
1,897

 
$
1,835

Cost of products sold
 
(1,609
)
 
(1,584
)
 
 
 
 
 
Gross profit
 
288

 
251

 
 


 


Selling, general and administrative expenses
 
(198
)
 
(203
)
Goodwill and intangible impairment expense, net (Note 10)
 

 
6

Restructuring charges and asset impairments (Note 3)
 
(18
)
 
(13
)
Amortization expense
 
(15
)
 
(14
)
Other income (expense), net (Note 4)
 
10

 
(3
)
Operating income (loss)
 
67

 
24

 
 
 
 
 
Interest expense, net
 
(37
)
 
(35
)
Equity earnings of nonconsolidated affiliates (Note 11)
 
14

 
12

Income (loss) from continuing operations before income taxes
 
44

 
1

Income tax (expense) benefit (Note 14)
 
(8
)
 
(11
)
Net income (loss)
 
36

 
(10
)
 
 
 
 
 
Less net income attributable to noncontrolling interests
 
(1
)
 
(1
)
Net income (loss) attributable to Federal-Mogul
 
$
35

 
$
(11
)
 
 
 
 
 
Net income (loss) per common share attributable to Federal-Mogul
 
 
 
 
Basic and diluted:
 
 
 
 
Net income (loss)
 
$
0.21

 
$
(0.07
)
See accompanying notes to condensed consolidated financial statements.

3


FEDERAL-MOGUL HOLDINGS CORPORATION
Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited)
(in millions)
 
 
Three Months Ended
 
 
March 31
 
 
2016
 
2015
Net income (loss)
 
$
36

 
$
(10
)
Other comprehensive income (loss), net of tax (Note 16)
 
 
 
 
Foreign currency translation adjustments
 
42

 
(119
)
Cash flow hedging income (loss), net
 

 
1

Postemployment benefits
 
4

 
21

Other comprehensive income (loss), net of tax
 
46

 
(97
)
Comprehensive income (loss)
 
82

 
(107
)
Less: Comprehensive income (loss) attributable to noncontrolling interests
 
4

 
(1
)
Comprehensive income (loss) attributable to Federal-Mogul
 
$
78

 
$
(106
)

See accompanying notes to condensed consolidated financial statements.


4


FEDERAL-MOGUL HOLDINGS CORPORATION
Condensed Consolidated Balance Sheets (Unaudited)
(in millions)
 
 
March 31
 
December 31
 
 
2016
 
2015
ASSETS
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
252

 
$
194

Accounts receivable, net
 
1,469

 
1,374

Inventories, net (Note 9)
 
1,353

 
1,342

Prepaid expenses and other current assets
 
210

 
188

Total current assets
 
3,284

 
3,098

 
 
 
 
 
Property, plant and equipment, net
 
2,400

 
2,353

Goodwill and other indefinite-lived intangible assets (Note 10)
 
913

 
903

Definite-lived intangible assets, net
 
391

 
404

Investments in nonconsolidated affiliates (Note 11)
 
313

 
296

Other noncurrent assets
 
176

 
174

TOTAL ASSETS
 
$
7,477

 
$
7,228

 
 
 
 
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
 
Current liabilities:
 
 
 
 
Short-term debt, including current portion of long-term debt (Note 12)
 
$
157

 
$
138

Accounts payable
 
945

 
901

Accrued liabilities
 
654

 
582

Current portion of pensions and other postemployment benefits liability
 
41

 
40

Other current liabilities
 
148

 
159

Total current liabilities
 
1,945

 
1,820

 
 
 
 
 
Long-term debt (Note 12)
 
2,958

 
2,914

Pensions and other postemployment benefits liability
 
1,128

 
1,123

Long-term portion of deferred income taxes
 
372

 
367

Other accrued liabilities
 
90

 
102

 
 
 
 
 
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 March 31, 2016 and December 31, 2015)
 
2

 
2

Additional paid-in capital
 
2,899

 
2,899

Accumulated deficit
 
(761
)
 
(796
)
Accumulated other comprehensive loss
 
(1,275
)
 
(1,318
)
Treasury stock, at cost
 
(17
)
 
(17
)
Total Federal-Mogul shareholders’ equity
 
848

 
770

Noncontrolling interests
 
136

 
132

Total shareholders’ equity
 
984

 
902

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
 
$
7,477

 
$
7,228

See accompanying notes to condensed consolidated financial statements.

5


FEDERAL-MOGUL HOLDINGS CORPORATION
Condensed Consolidated Statements of Cash Flows (Unaudited)
(in millions)
 
 
Three Months Ended
 
 
March 31
 
 
2016
 
2015
Cash Provided From (Used By) Operating Activities
 
 
 
 
Net income (loss)
 
$
36

 
$
(10
)
Adjustments to reconcile net income to net cash provided from (used by) operating activities:
 
 
 
 
Depreciation and amortization
 
87

 
83

Payments against restructuring liabilities
 
(11
)
 
(16
)
Equity earnings of nonconsolidated affiliates
 
(14
)
 
(12
)
Cash dividends received from nonconsolidated affiliates
 
6

 

Change in pensions and postemployment benefits
 
(12
)
 
(9
)
Restructuring charges and asset impairments
 
18

 
12

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

 
11

Gain from sales of property, plant and equipment
 
(9
)
 
(4
)
Unrealized foreign currency transaction losses
 
1

 

Changes in operating assets and liabilities:
 
 
 
 
Accounts receivable
 
(70
)
 
(129
)
Inventories
 
11

 
(101
)
Accounts payable
 
34

 
108

Other assets and liabilities
 
27

 
(31
)
Net Cash Provided From (Used by) Operating Activities
 
103

 
(99
)
 
 
 
 
 
Cash Provided From (Used By) Investing Activities
 
 
 
 
Expenditures for property, plant and equipment
 
(94
)
 
(108
)
Payments to acquire businesses, net of cash acquired
 

 
(305
)
Net proceeds from sale of equity method investment
 

 
15

Net proceeds from sales of property, plant and equipment
 
2

 
8

Transfer of cash balances upon disposition of held for sale operations
 
(12
)
 

Capital investment in nonconsolidated affiliates
 
(1
)
 

Net Cash Provided From (Used By) Investing Activities
 
(105
)
 
(390
)
 
 
 
 
 
Cash Provided From (Used By) Financing Activities
 
 
 
 
Proceeds from term loans, net of original issue discount
 
15

 

Proceeds from equity rights offering net of related fees
 

 
250

Proceeds from borrowings on revolving line of credit
 
145

 
339

Payments on revolving line of credit
 
(93
)
 
(124
)
Principal payments on term loans
 
(11
)
 
(7
)
Decrease in other long-term debt
 

 
(2
)
Increase in short-term debt
 
4

 
8

Net remittances on servicing of factoring arrangements
 
(1
)
 

Net Cash Provided From (Used By) Financing Activities
 
59

 
464

 
 
 
 
 
Effect of foreign currency exchange rate fluctuations on cash
 
(11
)
 
16

 
 
 
 
 
Cash and equivalents at beginning of period
 
194

 
332

Cash and cash equivalents of held for sale operations at January 1
 
12

 

Increase (decrease) in cash and equivalents
 
46

 
(9
)
Cash and equivalents at end of period
 
$
252

 
$
323

 
 
 
 
 
Supplementary Disclosures:
 
 
 
 
Non-cash financing and investing activities:
 
 
 
 
Change in accrued property and equipment additions
 
$
(9
)
 
$
(14
)

See accompanying notes to condensed consolidated financial statements.

6


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

1.     DESCRIPTION OF BUSINESS

Federal-Mogul Holdings Corporation (the "Company") was incorporated as a Delaware Corporation in 2014. The Company is a leading global supplier of technology and innovation in vehicle and industrial products for fuel economy, emissions reduction, and safety systems. The Company serves the world’s foremost original equipment manufacturers (“OEM”) and servicers (“OES”) (collectively, “OE”) of automotive, light, medium and heavy-duty commercial vehicles, off-road, agricultural, marine, rail, aerospace, power generation and industrial equipment, as well as the worldwide aftermarket.

Proposed Merger Transaction
On February 29, 2016, the Company announced it received a proposal from its majority shareholder Icahn Enterprises L.P. ("IEP") to purchase the shares of the Company's common stock not owned by IEP for $7.00 per share in a merger transaction.  The Company’s Board of Directors subsequently authorized the formation of a special committee consisting of three of the four independent members of the Board of Directors and chaired by Mr. Thomas W. Elward to review and evaluate this proposal and any alternative transactions involving the Company.  Following its formation, the special committee engaged Houlihan Lokey Capital, Inc. as its financial advisor and Richards, Layton & Finger as its legal counsel.  The special committee, working with its advisors, has commenced its review and evaluation of the IEP proposal and alternatives thereto. Subsequent to submitting its proposal, IEP advised the Company’s Board of Directors that it was not considering selling its stake in Federal-Mogul at the current time.

2.
BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation - 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) 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 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, 2015 filed on February 29, 2016 and the Company's Amended Annual Report on Form 10-K/A for the year ended December 31, 2015 filed on March 30, 2016. Operating results for the three months ended March 31, 2016 are not necessarily indicative of the results that may be expected for the year ended December 31, 2016.

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 11. Investment in Nonconsolidated Affiliates, for discussion regarding the Company's subsidiaries that were 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.

Reclassifications: Certain reclassifications from the prior year presentation have been made to conform to the current year presentation.

Concentrations of Credit Risk: Financial instruments, which potentially subject the Company to concentrations of credit risk, consist primarily of accounts receivable, cash deposits, cash equivalents, and derivatives. 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. The Company only utilizes well-known and highly creditworthy financial institutions for cash deposits and investments in cash equivalents or as a counterparty to derivative transactions.

7



Factoring of 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:
 
 
March 31
 
December 31
 
 
2016
 
2015
Gross accounts receivable factored
 
$
491

 
$
408

Gross accounts receivable factored, qualifying as sales
 
$
479


$
401

Undrawn cash on factored accounts receivable
 
$
1


$
1


Proceeds from the factoring of accounts receivable qualifying as sales and expenses associated with the factoring of receivables are as follows:
 
 
Three Months Ended
 
 
March 31
 
 
2016
 
2015
Proceeds from factoring qualifying as sales

$
413


$
390

Financing charges

$
(3
)

$
(2
)

Accounts receivables factored but not qualifying as a sale were pledged as collateral and accounted for as secured borrowings and recorded in the condensed consolidated balance sheets within “Accounts receivable, net” and “Short-term debt, including the current portion of long-term debt.”

The financing charges totaled $3 million as of March 31, 2016 and are recorded in the condensed consolidated statements of operations within “Other income (expense), 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 recorded as a result of such activities.

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 $4 million and $11 million as of March 31, 2016 and December 31, 2015.

Changes in Accounting Principle
In April 2015, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2015-03, Simplifying the Presentation of Debt Issuance Costs. The accounting guidance requires debt issuance costs related to a recognized debt liability be reported in the Consolidated Balance Sheets as a direct deduction from the carrying amount of that debt liability. The guidance is effective retrospectively and the Company has adopted this guidance in the first quarter of 2016. The adoption of this accounting guidance to the consolidated financial statements is summarized below:
 
March 31, 2016
Condensed Consolidated Balance Sheet
Prior Accounting Principles
 
Effect of Accounting Change
 
As Reported
Other noncurrent assets
$
186

 
(10
)
 
$
176

Long-term debt
$
2,968

 
(10
)
 
$
2,958

 
 
 
 
 
 
 
December 31, 2015
Consolidated Balance Sheet
Previously Reported
 
Effect of Accounting Change
 
Recast
Other noncurrent assets
$
184

 
(10
)
 
$
174

Long-term debt
$
2,924

 
(10
)
 
$
2,914



8



Noncontrolling Interests
The following table presents a rollforward of the changes in noncontrolling interests:
 
 
Three Months
 
 
Ended
 
 
March 31
Equity balance of noncontrolling interests as of January 1
 
$
132

 
 
 
Comprehensive income (loss):
 
 
Net income
 
1

Foreign currency adjustments and other
 
3

Equity balance of noncontrolling interests as of March 31
 
$
136


Recently Issued Accounting Pronouncements
In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. The updated guidance enhances the reporting model for financial instruments, which includes amendments to address aspects of recognition, measurement, presentation, and disclosure. The amendments in the ASU are effective prospectively for fiscal years beginning after December 15, 2017, and interim periods therein, with early adoption not permitted. The Company is currently evaluating the potential effects of this pronouncement.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) that replaces existing lease guidance. The new standard is intended to provide enhanced transparency and comparability by requiring lessees to record right-of-use assets and corresponding lease liabilities on the balance sheet. The new guidance will continue to classify leases as either finance or operating, with classification affecting the pattern of expense recognition in the statement of income. The standard is effective for the Company beginning January 1, 2019, with early application permitted. The new standard is required to be applied with a modified retrospective approach to each prior reporting period presented with various optional practical expedients. The Company is currently evaluating the potential effects of this pronouncement.

In March 2016, the FASB issued ASU No. 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net). ASU 2016-08 clarifies the implementation guidance on principal versus agent considerations. The guidance includes indicators to assist an entity in determining whether it controls a specified good or service before it is transferred to the customers. The Company is currently evaluating the potential effects of this pronouncement.

3.
RESTRUCTURING CHARGES AND ASSET IMPAIRMENTS

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 Company's restructuring charges consist primarily of employee costs (principally severance and/or termination benefits), facility closure and other costs, curtailment losses (gains) related to reductions of pension and retiree medical benefit obligations as a result of headcount reductions, and asset impairments related to restructuring activities.

9


 
 
Three Months Ended March 31,
 
 
2016
 
 
Powertrain
 
Motorparts
 
Corporate
 
Total
Severance and other charges, net
 
$
(12
)
 
$
(3
)
 
$

 
$
(15
)
Asset impairments related to restructuring activities
 

 

 

 

Total restructuring charges
 
(12
)
 
(3
)
 

 
(15
)
 
 
 
 
 
 
 
 
 
Other asset impairments
 

 

 

 

Impairment of assets held for sale
 

 
(3
)
 

 
(3
)
Total asset impairment charges
 

 
(3
)
 

 
$
(3
)
Total restructuring charges and asset impairments
 
$
(12
)
 
$
(6
)
 
$

 
$
(18
)
 
 
 
 
 
 
 
 
 
 
 
2015
 
 
Powertrain
 
Motorparts
 
Corporate
 
Total
Severance and other charges, net
 
$
(6
)
 
$
(6
)
 
$

 
$
(12
)
Asset impairments related to restructuring activities
 

 

 

 

Total restructuring charges
 
(6
)
 
(6
)
 

 
(12
)
 
 
 
 
 
 
 
 
 
Other asset impairments
 

 
(1
)
 

 
(1
)
Total asset impairment charges
 

 
(1
)
 

 
(1
)
Total restructuring charges and asset impairments
 
$
(6
)
 
$
(7
)
 
$

 
$
(13
)

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 restructuring liabilities and related activity as of and for the three months ended March 31, 2016 and three months ended March 31, 2015 by reporting segment:

 
Powertrain

Motorparts

Total
Reporting
Segment

Corporate

Total
Company
Balance at December 31, 2015
 
$
33

 
$
47


$
80


$


$
80

Provisions
 
12

 
3


15




15

Payments
 
(5
)
 
(6
)

(11
)



(11
)
Acquisitions
 

 

 

 

 

Foreign Currency
 
1

 
1

 
2

 

 
2

Balance at March 31, 2016
 
$
41

 
$
45


$
86


$


$
86


10


 
 
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


The following table provides a quarterly summary of the Company’s restructuring liabilities and related activity for each type of exit cost as of and for the three months ended March 31, 2016 and three months ended March 31, 2015. As the table indicates, facility closure costs are typically paid within the quarter of incurrence.

 
Employee
Costs

Facility Closure and Other
Costs

Total
Balance at December 31, 2015
 
$
79


$
1


$
80

Provisions
 
13


2


15

Payments
 
(9
)
 
(2
)
 
(11
)
Acquisitions
 

 

 

Foreign Currency
 
2

 

 
2

Balance at March 31, 2016
 
$
85


$
1


$
86


 
 
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


Due to the inherent uncertainty involved in estimating restructuring expenses, actual amounts paid for such activities may differ from amounts initially estimated. The Company did not change its estimate of any previously recorded liabilities during the three months ended March 31, 2016 or 2015.

Restructuring charges and asset impairments for the three months ended March 31, 2016 were comprised of $12 million related to the Powertrain segment and $6 million related to the Motorparts segment. The charges include severance related costs of $7 million in EMEA, $3 million in North America, and $1 million in ROW for the Powertrain segment. In addition, there was $1 million in other costs in ROW for the Powertrain segment. For the Motorparts segment, the charges include severance related costs of $2 million and other costs of $1 million in North America. In addition, there was $3 million in asset impairments in EMEA for the Motorparts segment.

Restructuring expenses for the three months ended March 31, 2016 are aimed at optimizing the Company's cost structure. We expect to complete these programs in 2017 and incur additional restructuring and other charges of approximately $1 million. For programs previously initiated in prior periods, we expect to complete these programs in 2018 and incur additional restructuring and other charges of approximately $5 million.

See Note 6, Assets Held for Sale, for further details related to the $3 million impairment loss on assets held for sale for the three months ended March 31, 2016.


11


4.
OTHER INCOME (EXPENSE), NET
The specific components of “Other income (expense), net” are as follows:
 
 
Three Months Ended
 
 
March 31
 
 
2016
 
2015
Loss on sale of equity method investment(a)
 
$

 
$
(11
)
Gain on sale of assets
 
9

 
4

Foreign currency exchange
 
(2
)
 
1

Third-party royalty income
 
2

 
2

Legal separation costs
 

 
(2
)
Financing charges
 
(3
)
 
(2
)
Other
 
4

 
5

 
 
$
10

 
$
(3
)
(a) See Note 11. Investment in Nonconsolidated Affiliates, for further details.

In the three months ended March 31, 2016, the other income (expense), net included the recognition of a $9 million gain related to the sale of real estate made in a prior year. The gain and receipt of the proceeds was contingent upon the property's redevelopment by the buyer.

5.    ACQUISITIONS

TRW Engine Components Acquisition
Pursuant to the Amended and Restated Share and Asset Purchase Agreement dated January 23, 2015, the Company completed the acquisition of TRW’s valvetrain business and closed the transaction on February 6, 2015. The business was acquired through a combination of asset and stock purchases for a purchase price of approximately $309 million. On July 7, 2015, the Company completed the purchase of certain additional business assets of the TRW's valvetrain business. The business was acquired through stock purchases for a base purchase price of approximately $56 million. The purchase includes a $25 million noncontrolling interest related to a 66% stake in a majority owned entity the Company consolidates into its financial statements. The acquisition was funded primarily from the Company's available revolving line of credit and is subject to certain customary closing and post-closing adjustments. The acquisition of TRW’s valvetrain 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 fair value of the assets acquired and liabilities assumed at the acquisition date:
 
Fair Value
Cash
$
14

Accounts receivable, net
31

Inventory, net
36

Property, plant and equipment, net
234

Goodwill
74

Other identified intangible assets
107

Accounts payable
(22
)
Accrued liabilities
(39
)
Acquired postemployment benefits
(46
)
Other net assets
1

Total identifiable net assets
$
390


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.

12



Proforma Results
The following proforma results for the three months ended March 31, 2016 and 2015 assume the purchase of the TRW valvetrain business occurred as of the beginning of 2015 and are 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

March 31

2016

2015
Net sales
$
1,897


$
1,879







Net income (loss) attributable to Federal-Mogul
$
35


$
(11
)






Earnings (loss) per share attributable to Federal-Mogul - basic and diluted
$
0.21


$
(0.07
)

During the three months ended March 31, 2016, the Company did not record any transaction related expenses. During the three months ended March 31, 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 were recorded in "Selling, general and administrative expenses" within the condensed consolidated statements of operations.

6.    ASSETS HELD FOR SALE

Held for Sale Operations
The Company classifies assets and liabilities as held for sale ("disposal group") when management, having the authority to approve the action, commits to a plan to sell the disposal group, the sale is probable within one year, and the disposal group is available for immediate sale in its present condition. The Company also considers whether an active program to locate a buyer has been initiated, whether the disposal group is marketed actively for sale at a price that is reasonable in relation to its current fair value, and whether actions required to complete the plan indicate that it is unlikely that significant changes to the plan will be made or the plan will be withdrawn.

The Company aggregates the assets and aggregates the liabilities of all held-for-sale disposal groups on the balance sheet for the period in which the disposal group is held for sale.

In the first quarter 2016, the Company classified land and building of one of its closed Motorparts aftermarket sites as held for sale. The net book value of the assets was $3 million and the Company accepted an offer of to sell the site. The Company has recorded an impairment loss in the amount of $3 million for the three months ended March 31, 2016 which has been included in "Restructuring charges and asset impairments, net" in the condensed consolidated statements of operations. The remaining asset balance has been recorded in "Prepaid expenses and other current assets" as of March 31, 2016.
 
In the first quarter 2016, the Company has engaged in the process to sell one of its closed facilities in the Motorparts segment. The net book value of the assets, which mainly consists of the land and building, is $2 million. The closed facility meets held for sale accounting treatment and the related assets have been recorded in "Prepaid expenses and other current assets" as of March 31, 2016.

In the first quarter 2016, the Company entered into a sales purchase agreement to sell the assets of one of its closed Powertrain manufacturing locations. The net book value of the assets, which mainly consists of the land and building is $1 million. The agreed upon sales price is in excess of net book value and the related assets have been recorded in "Prepaid expenses and other current assets" as of March 31, 2016.

In 2015, the Company entered into a share agreement to sell 100% of the shares of one of its subsidiaries in the Powertrain segment along with certain related assets of another subsidiary. The Company classified the assets and liabilities related to this transaction as held for sale. Prior to December 31, 2015, the Company contributed $12 million in cash to the subsidiary. The transaction closed on January 1, 2016 with no additional amounts recognized for the three months ended March 31, 2016.


13


7.
DERIVATIVES AND HEDGING ACTIVITIES

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 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:
 
 
March 31
 
December 31
 
 
2016
 
2015
Combined notional value
 
$
21

 
$
28

Combined notional value designated as hedging instruments
 
$
21

 
$
28

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

The Company has designated these contracts as cash flow hedging instruments and has a net liability position related to these instruments in the amount of $2 million and $3 million as of March 31, 2016 and December 31, 2015. The Company records unrecognized gains and losses in other comprehensive income and makes regular reclassifying adjustments into "Cost of products sold" within the condensed consolidated statement of operations when amounts are recognized. For the three months ended March 31, 2016 and March 31, 2015, the Company recognized $1 million and $2 million of losses into other comprehensive income and has reclassified $1 million of losses and $1 million of gains into "Cost of products sold" within the condensed consolidated statement of operations.

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 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 March 31, 2016 or December 31, 2015. For the three months ended March 31, 2016 and March 31, 2015 there were no amounts reclassified into net income.

Concentrations of Credit Risk
Financial instruments including cash equivalents, derivative contracts, and accounts receivable, expose the Company to counter-party credit risk for non-performance. The Company’s counterparties for cash equivalents and derivative contracts are banks and financial institutions that meet the Company’s requirement of high credit standing. The Company’s counterparties for derivative contracts are substantial investment and commercial banks with significant experience using such derivatives. The Company manages its credit risk through policies requiring minimum credit standing and limiting credit exposure to any one counter-party and through monitoring counter-party credit risks. The Company’s concentration of credit risk related to derivative contracts at March 31, 2016 and 2015 is not material.

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.

14



8.
FAIR VALUE MEASUREMENTS

ASC 820, Fair Value Measurements and Disclosures (“ASC 820”), clarifies 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. The Company estimates the fair value of its derivative contracts using an income approach based on valuation techniques to convert future amounts to a single, discounted amount. Estimates of the fair value of foreign currency and commodity derivative instruments are determined using exchange traded prices and rates.

Items Measured at Fair Value on a Recurring Basis
Assets and liabilities remeasured and disclosed at fair value on a recurring basis at March 31, 2016 and December 31, 2015 are set forth in the table below:
 

Liability
 
Level 2
March 31, 2016
 
 
 
Commodity contracts
$
(2
)
 
$
(2
)
December 31, 2015
 
 
 
Commodity contracts
$
(3
)
 
$
(3
)

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

Items Measured at Fair Value on a Nonrecurring Basis
In addition to items that are measured at fair value on a recurring basis, we also have assets that may be measured at fair value on a nonrecurring basis. As these items are not measured at fair value on a recurring basis, they are not included in the tables above. These assets include, long-lived assets, intangible assets and investments in affiliates which may be written down to fair value as a result of impairment.

During the three months ended March 31, 2016 and March 31, 2015 the Company recorded impairment charges of $3 million and $1 million related to property, plant, and equipment, which have been recorded within "Restructuring charges and asset impairments, net" in the condensed consolidated statement of operations.

The Company's investment in nonconsolidated affiliates is discussed further in Note 11, Investment in Nonconsolidated Affiliates.

Financial Instruments not Carried at Fair Value
Estimated fair values of the Company’s term loans under the Credit Agreement were:
 
March 31, 2016
 
December 31, 2015
 
 
 
Carrying Value
 
Fair Value
 
Carrying Value
 
Fair Value
 
Measurement Approach
Term Loans
$
2,553

 
$
2,323

 
$
2,559

 
$
2,273

 
Level 2

Fair value approximates carrying value for foreign debt as well as the U.S. revolver.


15


Fair market values are developed by the use of estimates obtained from brokers and other appropriate valuation techniques based on information available as of March 31, 2016 and 2015. The fair value estimates do not necessarily reflect the values the Company could realize in the current markets.

9.
INVENTORIES
Inventories are stated at the lower of cost or market. Cost was determined by the first-in, first-out method at March 31, 2016 and December 31, 2015. 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:
 
 
March 31
 
December 31
 
 
2016
 
2015
Raw materials
 
$
278

 
$
254

Work-in-process
 
190

 
175

Finished products
 
1,012

 
1,027

 
 
1,480

 
1,456

Inventory valuation allowance
 
(127
)
 
(114
)
 
 
$
1,353

 
$
1,342


10.
GOODWILL AND OTHER INTANGIBLE ASSETS

A summary of changes in the net carrying amounts of goodwill by segment are as follows:
 
Three Months Ended March 31, 2016
 
Powertrain
 
Motorparts
 
Total
Net carrying amount, January 1
$
512

 
$
161

 
$
673

Acquisitions and purchase accounting adjustments
6

 

 
6

Foreign exchange
6

 

 
6

Net carrying amount, March 31
$
524

 
$
161

 
$
685

 
 
 
 
 
 
 
 
 
 
 
 
 
Powertrain
 
Motorparts
 
Total
Accumulated impairment charges at March 31, 2016 and December 31, 2015
$
136

 
$
648

 
$
784


The Company conducts its assessment for goodwill impairments on October 1 of each year for all reporting units. Due to the complexity of the 2015 second step goodwill impairment test, the Company has not finalized its assessment as of March 31, 2016. Based on the preliminary results of the annual impairment test the Company recorded an estimate of goodwill charges of $44 million as of December 31, 2015.


16


At March 31, 2016 and December 31, 2015, intangible assets consist of the following

 
 
March 31, 2016
 
December 31, 2015
 
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
Definite-lived intangible assets:
 
 
 
 
 
 
 
 
 
 
 
 
Developed technology
 
$
138

 
$
(90
)
 
$
48

 
$
140

 
$
(86
)
 
$
54

Customer relationships
 
687

 
(344
)
 
343

 
683

 
(333
)
 
350

 
 
$
825

 
$
(434
)
 
$
391

 
$
823

 
$
(419
)
 
$
404

 
 
 
 
 
 
 
 
 
 
 
 
 
Indefinite-lived intangible assets:
 
 
 
 
 
 
 
 
 
 
 
 
Trademarks and brand names
 
 
 
 
 
$
228

 
 
 
 
 
$
230



The Company's recorded amortization expense associated with definite-lived intangible assets was:
 
Three Months Ended
 
March 31,
 
2016
 
2015
Amortization expense
$
15

 
$
14


The Company’s estimated future amortization expense for its definite-lived intangible assets is as follows:
 
Remaining 2016
 
2017
 
2018
 
2019
 
2020
 
2021 and thereafter
 
Total
Expected amortization expenses
$
44

 
58

 
49

 
49

 
49

 
142

 
$
391


11.
INVESTMENT IN NONCONSOLIDATED AFFILIATES

The Company maintains investments in several nonconsolidated affiliates, which are located in China, Korea, Turkey, India, Germany, 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.

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:
 
 
March 31
 
December 31
 
 
2016
 
2015
Investments in nonconsolidated affiliates
 
$
313

 
$
296

 
 
 
 
 
Direct ownership percentages
 
2% to 50%

 
2% to 50%


The following table represents amounts reflected in the Company’s financial statements related to nonconsolidated affiliates:
 
 
Three Months Ended
 
 
March 31
 
 
2016
 
2015
Equity earnings of nonconsolidated affiliates
 
$
14

 
$
12

 
 
 
 
 
Cash dividends received from nonconsolidated affiliates
 
$
6

 
$


17



The following tables present summarized aggregated financial information of the Company’s nonconsolidated affiliates for the three months ended March 31, 2016 and 2015. The amounts represent 100% of the interest in the nonconsolidated affiliates and not the Company's proportionate share.
 
 
Three Months Ended March 31, 2016
Statements of Operations
 
Turkey JVs
 
Anqing TP Goetze
 
All Other
 
Total
Sales
 
$
91

 
$
39

 
$
112

 
$
242

Gross profit
 
$
24

 
$
12

 
$
25

 
$
61

Income from continuing operations
 
$
18

 
$
9

 
$
15

 
$
42

Net income
 
$
14

 
$
9

 
$
14

 
$
37


 
 
Three Months Ended March 31, 2015
Statements of Operations
 
Turkey JVs
 
Anqing TP Goetze
 
All Other
 
Total
Sales
 
$
82

 
$
47

 
$
84

 
$
213

Gross profit
 
$
19

 
$
15

 
$
9

 
$
43

Income from continuing operations
 
$
15

 
$
13

 
$
5

 
$
33

Net income
 
$
12

 
$
13

 
$
5

 
$
30


In  January 2015, Federal-Mogul Piston Segman ve Gomlek Uretim Tesisleri A.S was dissolved to form two separate joint ventures, Federal-Mogul Motorparts Otomotiv A.S and Federal-Mogul Powertrain Otomotiv A.S. The Company retained a 50% noncontrolling interest in the new joint ventures. These entities, along with Federal-Mogul Izmit Piston ve Pim Uretim Tesisleri A.S. and Federal Mogul Dis Ticaret A.S. are collectively referred to herein as the Turkey JVs.

As part of the regulatory approval related to an acquisition, the Company committed to divest, or procure the divestiture of the commercial and light vehicle brake pads business relating to the original equipment manufacturers market in the European Economic Area. As such, the Company deconsolidated these subsidiaries and accounted for them as equity method investments until disposition. The disposition was completed in the first quarter of 2015. As a result, the Company recognized an $11 million loss on disposal recorded in the line item "Other income (expense), net" in the condensed consolidated statements of operations.

12.    DEBT

The following is a summary of debt outstanding as of March 31, 2016 and December 31, 2015:
 
 
March 31
 
December 31
 
 
2016
 
2015
Loans under facilities:
 
 
 
 
Revolver
 
$
390

 
$
340

Tranche B term loan
 
690

 
691

Tranche C term loan
 
1,871

 
1,876

Debt discount
 
(8
)
 
(8
)
Unamortized debt issuance fees
 
(10
)
 
(10
)
Other debt, primarily foreign instruments
 
182

 
163

 
 
3,115

 
3,052

Less:
 
 
 
 
Short-term debt, including current maturities of long-term debt
 
(157
)
 
(138
)
Total long-term debt
 
$
2,958

 
$
2,914


During the three months ended March 31, 2016 the Company increased its borrowing capacity under its revolving line of credit by $50 million up to $600 million.


18


The Replacement Revolving Facility has an available borrowing base of $170 million and $40 million of letters of credit outstanding at March 31, 2016, pertaining to the term loan credit 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.

Interest expense associated with the amortization of the debt issuance costs recognized in the Company’s condensed consolidated statements of operations, consists of the following:
 
Three Months Ended
 
March 31
 
2016
 
2015
Amortization of debt issuance fees
$
1

 
$
1


13.
PENSIONS AND OTHER POSTRETIREMENT BENEFITS

The Company sponsors several defined benefit pension plans (“Pension Benefits”) and health care and life insurance benefits (“Other Postretirement Benefits” or "OPEB") for certain employees and retirees around the world.

Components of net periodic benefit cost (credit) for the three months ended March 31, 2016 and 2015 are as follows:
 
 
Pension Benefits
 
Other Postretirement
 
 
United States Plans
 
Non-U.S. Plans
 
Benefits
 
 
2016
 
2015
 
2016
 
2015
 
2016
 
2015
Service cost
 
$
1

 
$
1

 
$
3

 
$
4

 
$

 
$

Interest cost
 
12

 
12

 
3

 
2

 
3

 
3

Expected return on plan assets
 
(12
)
 
(15
)
 

 

 

 

Amortization of actuarial losses
 
3

 
3

 
1

 
3

 
1

 
2

Amortization of prior service credits
 

 

 

 

 
(1
)
 
(1
)
Net periodic benefit cost (credit)
 
$
4

 
$
1

 
$
7

 
$
9

 
$
3

 
$
4


14.
INCOME TAXES

Under the liability method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse.

For the three months ended March 31, 2016, the Company recorded income tax expense of $8 million on income from continuing operations before income taxes of $44 million. This compares to income tax expense of $11 million on income from operations before income taxes of $1 million in the same period of 2015. Income tax expense for the three months ended March 31, 2016 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. Income tax expense for the three months ended March 31, 2015 differs from the U.S. statutory rate due primarily to pre-tax losses with no tax benefits.

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.


19


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 condensed consolidated balance sheets as follows:
 
 
March 31
 
December 31
 
 
2016
 
2015
Other current liabilities
 
$
5

 
$
4

Other accrued liabilities (noncurrent)
 
9

 
10

 
 
$
14

 
$
14


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 March 31, 2016, management estimates that reasonably possible material additional losses above and beyond management’s best estimate of required remediation costs as recorded approximate $43 million.

Asset Retirement Obligations
The Company’s primary asset retirement obligations ("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 condensed consolidated balance sheets as follows:
 
 
March 31
 
December 31
 
 
2016
 
2015
Other current liabilities
 
$
2

 
$
2

Other accrued liabilities (noncurrent)
 
14

 
14

 
 
$
16

 
$
16



20


The following is a rollforward of the Company’s ARO liability for the period ended March 31, 2016 and 2015:
Balance at December 31, 2015
 
16

Liabilities incurred
 

Liabilities settled/adjustments
 

Foreign Currency
 

Balance at March 31, 2016
 
$
16

 
 
 
Balance at December 31, 2014
 
$
24

Liabilities incurred
 

Liabilities settled/adjustments
 
(3
)
Foreign Currency
 
(2
)
Balance at March 31, 2015
 
$
19


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 March 31, 2016. If the ACF plans were voluntarily terminated, they would be underfunded by approximately $91 million as of March 31, 2016. 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.

21


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 condensed 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 three months ended March 31, 2016:
 
 
Three Months Ended March 31,
 
 
2016
 
2015
 
 
 
Foreign currency translation adjustments and other
 
 
 
 
Balance at beginning of period
 
$
(714
)
 
$
(482
)
Other comprehensive income (loss) before reclassification adjustment, net of tax
 
40

 
(117
)
Reclassification from other comprehensive income (loss)(a)
 
(1
)
 

Other comprehensive loss, net of tax
 
39

 
(117
)
Balance at end of period
 
$
(675
)
 
$
(599
)
 
 
 
 
 
Pensions and postretirement benefits
 
 
 
 
Balance at beginning of period
 
$
(587
)
 
$
(643
)
Other comprehensive income (loss) before reclassifications
 

 
14

Reclassification from other comprehensive income (loss)(b)
 
4

 
7

Other comprehensive income (loss), net of tax
 
4

 
21

Balance at end of period
 
$
(583
)
 
$
(622
)
 
 
 
 
 
Hedge instruments
 
 
 
 
Balance at beginning of period
 
$
(17
)
 
$
(17
)
Other comprehensive income (loss) before reclassifications(c)
 

 
1

Other comprehensive income (loss), net of tax
 

 
1

Balance at end of period
 
$
(17
)
 
$
(16
)
 
 
 
 
 
Other comprehensive income (loss) attributable to noncontrolling interests, net of tax(d)
 
3

 
(2
)
 
 
 
 
 
(a) Includes accumulated foreign currency translation on sale of foreign entity. Refer to Note 6 for additional information.
(b) Includes amortization of prior service costs/credits and actuarial gains/losses which are included in cost of products sold, and selling, general, and administrative. Refer to Note 13 for additional information.
(c) Includes commodity contacts and foreign currency contracts which are included in cost of products sold. Refer to Note 7 for additional information.
(d) Consists of foreign currency translation adjustments.

17.
STOCK-BASED COMPENSATION

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. 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 has total outstanding awards of approximately 238,000 and 603,000 as of March 31, 2016 and December 31, 2015. As of March 31, 2016, all 2011 SARs and all 2010 SARs were expired.

The Company did not recognize any SARs income for the three months ended March 31, 2016 and recognized $1 million in income for the three months ended March 31, 2015.

22



18.
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
 
March 31
 
2016
 
2015
Amounts attributable to Federal-Mogul:
 
 
 
Net income (loss)
$
35

 
$
(11
)
 
 
 
 
Weighted average shares outstanding, basic and diluted (in millions)
169.0

 
151.3

 
 
 
 
Net income (loss) per common share attributable to Federal-Mogul
 
 
 
Basic and diluted:
 
 
 
Net income (loss)
$
0.21

 
$
(0.07
)

19.    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.

Net sales, cost of products sold and gross profit information are as follows:
 
 
Three Months Ended March 31
 
 
Net Sales
 
Cost of Products Sold
 
Gross Profit
 
 
2016
 
2015
 
2016
 
2015
 
2016
 
2015
Powertrain
 
$
1,128

 
$
1,138

 
$
(992
)
 
$
(996
)
 
$
136

 
$
142

Motorparts
 
831

 
773

 
(679
)
 
(664
)
 
152

 
109

Inter-segment eliminations
 
(62
)
 
(76
)
 
62

 
76

 

 

Total Reporting Segment
 
$
1,897

 
$
1,835

 
$
(1,609
)
 
$
(1,584
)
 
$
288

 
$
251

 
 
 
 
 
 
 
 
 
 
 
 
 
Inter-segment eliminations attributable to sales from Powertrain to Motorparts
 
$
54

 
$
67

 
 
 
 
 
 
 
 
Inter-segment eliminations attributable to sales from Motorparts to Powertrain
 
$
9

 
$
10

 
 
 
 
 
 
 
 


23


Operational EBITDA and the reconciliation to net income (loss) are as follows:
 
 
Three Months Ended March 31
 
 
2016
 
2015
 
 
(millions of dollars)
Powertrain
 
$
119

 
$
111

Motorparts
 
74

 
31

Total Operational EBITDA
 
193

 
142

 
 
 
 
 
Items required to reconcile Operational EBITDA to EBITDA:
 
 
 
 
Restructuring charges and asset impairments (a)
 
(18
)
 
(13
)
Goodwill and intangible impairment expense, net
 

 
6

Loss on sale of equity method investment
 

 
(11
)
Financing charges
 
(3
)
 
(2
)
Acquisition related costs
 

 
(4
)
Segmentation costs
 

 
(1
)
Other (b)
 
(4
)
 
2

EBITDA
 
168

 
119

 
 
 
 
 
Items required to reconcile EBITDA to net income (loss):
 
 
 
 
Depreciation and amortization
 
(87
)
 
(83
)
Interest expense, net
 
(37
)
 
(35
)
Income tax (expense) benefit
 
(8
)
 
(11
)
Net income (loss)
 
$
36

 
$
(10
)
 
 
Three Months Ended March 31
Footnotes:
 
2016
 
2015
(a) Restructuring charges and asset impairments, net:
 
(millions of dollars)
Restructuring charges related to severance and other charges, net
 
$
(15
)
 
$
(12
)
Asset impairments, including impairments related to restructuring activities
 
(3
)
 
(1
)
Total Restructuring charges
 
(18
)
 
(13
)
 
 
 
 
 
(b) Other reconciling items:
 
 
 
 
Non-service cost components associated with U.S. based funded pension plans
 
(3
)
 

Stock appreciation rights
 

 
1

Other
 
(1
)
 
1

 
 
$
(4
)
 
$
2


Total assets are as follows:
 
 
March 31
 
December 31

 
2016

2015
Powertrain
 
$
4,198

 
$
3,997

Motorparts
 
3,135

 
3,141

Total Reporting Segment Assets
 
7,333

 
7,138

Corporate
 
144

 
90

Total Company Assets
 
$
7,477


$
7,228



24


20.     RELATED PARTY TRANSACTIONS

Insight Portfolio Group, LLC (“Insight”) is an entity formed and controlled by IEP in order to maximize the potential buying power of a group of entities with which IEP 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 and agreed to pay a portion of Insight’s operating expenses beginning in 2013. In addition to the minority equity interest held by the Company, certain subsidiaries of IEP and other entities with which IEP has a relationship also acquired equity interests in Insight and also agreed to pay certain operating expenses.

The Company’s payments to Insight were less than $0.5 million for the years ended December 31, 2015 and 2014.

On June 1, 2015, IEP, the Company's parent, 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"). Subsequent to the IEP acquisition of Uni-Select, Uni-Select changed its name to Auto Plus. Auto Plus is operated independently from the Company and transactions with Auto Plus are approved by the Company's audit committee in accordance with the Company's policy regarding related party transactions. In connection with IEP's acquisition of Auto Plus, Mr. Icahn resigned from the Company's board of directors and Daniel A. Ninivaggi, Co-Chief Executive Officer of the Company resigned from the board of directors of IEP.

The Company had $13 million of sales for the three months ended March 31, 2016 to Auto Plus and $15 million of accounts receivable outstanding from Auto Plus as of March 31, 2016.

On February 3, 2016, IEP acquired a majority of the outstanding shares of Pep Boys - Manny, Moe & Jack ("Pep Boys"), a leading aftermarket provider of automotive service, tires, parts and accessories across the United States and Puerto Rico. On February 4, 2016, IEP completed the acquisition of the remaining outstanding shares of Pep Boys.

The Company had $1 million of sales for the three months ended March 31, 2016 to Pep Boys and $1 million of accounts receivable outstanding from Pep Boys as of March 31, 2016.

21.    SUBSEQUENT EVENTS

On April 18, 2016, the Company entered into a purchase agreement to acquire a filter manufacturing business in Mexico, which primarily serves the Mexican market. The proposed purchase price is $24 million.


25


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, 2015 filed on February 29, 2016 and the Company's Amended Annual Report on Form 10-K/A for the year ended December 31, 2015 filed on March 30, 2016, 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

References herein to the “Company,” “Federal-Mogul,” “we,” “us,” “our” refer to Federal-Mogul Holdings Corporation.

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.

Executive Overview

Our Business: We are a leading global supplier of a broad range of components, accessories, and systems to the automotive, small engine, heavy-duty, marine, railroad, agricultural, off-road, aerospace and energy, industrial, and transport markets, including customers in both the original equipment manufacturers (“OEM”) and servicers (“OES”) (collectively “OE”) market and the replacement market (“aftermarket”). Our customers include the world’s largest automotive OEs, and major distributors and retailers in the independent aftermarket. For a more detailed description of the Company’s business, products, industry, operating strategy and associated risks, refer to the Annual Report.

Proposed Merger Transaction: On February 29, 2016, the Company announced it received a proposal from its majority shareholder Icahn Enterprises, L.P. ("IEP") to purchase the shares of the Company's common stock not owned by IEP for $7.00 per share in a merger transaction.  The Company’s Board of Directors subsequently authorized the formation of a special committee consisting of three of the four independent members of the Board of Directors and chaired by Mr. Thomas W. Elward to review and evaluate this proposal and any alternative transactions involving the Company.  Following its formation, the special committee engaged Houlihan Lokey Capital, Inc. as its financial advisor and Richards, Layton & Finger as its legal counsel.  The special committee, working with its advisors, has commenced its review and evaluation of the IEP proposal and alternatives thereto. Subsequent to submitting its proposal, IEP advised the Company’s Board of Directors that it was not considering selling its stake in Federal-Mogul at the current time.

Financial Results for the Three Months Ended March 31, 2016: Consolidated net sales were $1,897 million, an increase of $62 million, or 3.4%. The increase was primarily driven by a 7.1% increase in sales volumes of $117 million (which included a $50 million benefit from acquisitions) and was substantially offset by a $52 million unfavorable effect of foreign currency exchange.
 
Cost of products sold was $1,609 million for the three months ended March 31, 2016, an increase of $25 million, or 1.6%. The increase was primarily driven by $95 million in incremental costs related to higher sales volumes attributable to organic growth

26


and acquisitions. This was partially offset by the $44 million favorable effect of foreign currency exchange and $26 million of savings from net performance.

Gross profit increased by $37 million to $288 million, or 15.2% of sales, for the three months ended March 31, 2016 compared to $251 million, or 13.7% of sales, for the three months ended March 31, 2015. The increase was primarily driven by the favorable effects of higher sales volumes (net of changes in mix) of $22 million, which included the effect from acquisitions, and a $23 million favorable effect of performance, which was offset by the negative effects of foreign currency exchange.

For the three months ended March 31, 2016:
Net income attributable to Federal-Mogul for the three months ended March 31, 2016 was $35 million which included other income of $9 million (net of tax) related to the recognition of a gain on the sale of real estate made in a prior year, and restructuring charges and asset impairments of $18 million.

Restructuring charges and asset impairments were comprised of $12 million related to the Powertrain segment and $6 million related to the Motorparts segment. The charges includes $15 million of costs related to severance and other charges are $7 million in EMEA, $6 million in North America, and $2 million in ROW, primarily focused on optimizing our cost structure. In addition, there was $3 million in asset impairments in EMEA.

Total debt, including short-term debt and current portion of long-term debt, increased by $63 million. The increase was primarily attributable to net borrowings on the revolving line of credit of $46 million. These net borrowings partially attributed to the $58 million increase in cash during the three months ended March 31, 2016. We had $252 million of cash and $170 million of availability under our credit facilities at March 31, 2016.

Recent Trends and Market Conditions:
There is inherent uncertainty in the continuation of the trends discussed below. In addition, there may be other factors or trends that can have an effect on our business. Our business and operating results are affected by the relative strength of:

General economic conditions: Our OE business is directly related to automotive sales and automotive vehicle production by our customers. Automotive sales depend on a number of factors, including global and regional economic conditions. Demand for aftermarket products is driven by three primary factors including: the number of vehicles in operation; the average age of vehicles; and vehicle usage trends (primarily distance traveled).  

Global vehicle production levels: Global vehicle production increased by 0.7 percent in the first quarter of 2016. European vehicle production rose 1.6 percent and North American vehicle production increased 4.0 percent, with positive growth in Canada and the United States. Vehicle production in the Asia-Pacific region increased just over 1 percent, reaching another record high. Among the major regions, only South America posted a decline during the three months ended March 31, 2016, down 30.8 percent.

Global vehicle sales levels: Global vehicle sales increased by 2.3 percent in the first quarter of 2016. European vehicle sales rose 3.2 percent and North American vehicles sales increased 4.5 percent, with positive growth in Canada, Mexico and the United States. Vehicle sales in the Asia-Pacific region increased 3.0 percent, reaching another record high. Among the major regions, only South America posted a decline during the three months ended March 31, 2016, which was down 19.7 percent.

Part replacement trends: The strength of our aftermarket business is influenced by several key drivers. These include the vehicle population (or "parc"), average vehicle age, fuel prices and vehicle distance traveled. The vehicle parc is estimated to have expanded in most major markets, including the United States, Japan, China, and Germany.  Average vehicle ages also increased, despite growth in new vehicle sales, in most regions. 

Recent decline in oil prices: The volatility in recent oil prices, which are generally at historic lows, results in lower fuel prices for consumers.  However, on an aggregate level, the losses from these lower prices have been larger and quicker than expected as energy companies cut back on investment and lay off workers, while the gains are smaller and slower to materialize, as the majority of this extra discretionary income has been offset by paying off debt, precautionary saving, and slower income growth.   But for some households, lower fuel prices do provide more discretionary income for a variety of purchases, including new vehicle sales, which increases demand for production parts from OEMs.  That additional income can also support vehicle repairs and tends to encourage more driving miles, which in turn accelerates wear on vehicle components, accelerating the need for replacements.

Foreign currencies: Given the global nature of our operations, we are subject to fluctuations in foreign exchange rates and there has been significant volatility in foreign currency rates.

27



Strategy:
Our strategy is to develop and deliver leading technology, innovation, and service capabilities which result in market share expansion in the OE market and aftermarket. Our strategy is designed to create sustainable global profitable growth by leveraging existing and developing new economic advantages. This strategy consists of the following: