Federal-Mogul Reports Q2 Earnings
23 July 1997
Federal-Mogul Second Quarter Net Earnings at $26 Million
* Second quarter earnings per share at $.61; with $.51 from operations.
* Return on invested capital up 5.0 points to 11.9%.
* Cash flow from operations, net of capital expenditures, rose to $49
million up $13 million from 1996.
* Debt was reduced $119 million bringing year-to-date reduction to $143
million.
* Inventories were reduced by $82 million; $23 million from operations.
* Private placement debt of $64.7 million retired.
SOUTHFIELD, Mich., July 23 -- Federal-Mogul Corporation's
continued drive to implement its restructuring actions, improve
margins through cost controls and streamline operations has resulted in
another quarter of solid performance.
Federal-Mogul earned $26 million on second quarter sales of $482 million
compared to net earnings of $16 million on sales of $536 million in 1996.
Earnings per share rose to $.61 with $.51 from operations compared to $.36 in
the second quarter of 1996. Operating cash flow for the second quarter was
$49 million, up $13 million compared to 1996. Debt was reduced by $119
million.
"We stated at the beginning of the year we were after solid quarter-over-
quarter performance and we are delivering," said Dick Snell, chairman and
chief executive officer. "This is our second quarter of strong operating
earnings and we have a wonderful cash story. We are halfway through the year
and already we are more than three-fourths of the way to our stated debt
reduction goal. We will continue our diligent efforts as we strive to improve
profitability and return on investment."
Return on invested capital increased in the second quarter to 11.9%, up
5.0 points from 1996 covering the cost of capital employed in the quarter.
The ratio of debt to total capital improved to 51% from 61% at the end of
1996.
Two significant non-operating items occurred in the second quarter.
Federal-Mogul retired $64.7 million in private placement debt. This
eliminated high coupon debt and potentially restrictive covenants giving the
company greater financial flexibility going forward. The early retirement of
this debt involved a make whole payment that impacted the company as a $2.6
million after-tax extraordinary item reducing fully diluted earnings per share
by $.06. Federal-Mogul also recognized an income tax benefit of $6.8 million
as a result of the divestitures that have been completed. This adjustment
increased earnings per share on a fully diluted basis by $.16. Excluding this
item, the normalized tax rate in the quarter was 37%.
Restructuring Actions Update
The execution of the company's restructuring plan announced on February 6,
1997, continues to be the organization's top priority. The restructuring plan
is on or ahead of schedule with the goal being to have the plan completed by
year-end 1997.
To date, in terms of the international aftermarket operations involved in
the restructuring, Federal-Mogul has completed the divestiture of 64 retail
stores and 17 warehouse locations in Turkey, Australia and South Africa
accounting for 1,680 employees no longer with the company. Annual sales for
the operations sold was approximately $180 million.
Federal-Mogul remains on schedule with the remainder of its divestiture
activities. The company is in discussions with interested parties regarding
retail operations in Puerto Rico, Venezuela and total aftermarket operations
in Chile, Ecuador, and Panama.
Federal-Mogul's new 102,000 sq. ft. Juarez, Mexico building for its
consolidated lighting operation will be dedicated in a ceremony July 31, 1997.
The relocation of product lines from Leiters Ford, Indiana into the larger
facility is proceeding slightly ahead of schedule. Buyers continue to be
sought for the Leiters Ford facility.
The consolidation of customer support functions currently housed in
Southfield, Michigan and Phoenix, Arizona into Federal-Mogul's Southfield
headquarters is progressing ahead of schedule. Recruiting efforts are
completed as 60 full-time and part-time employees have been hired in
Southfield and the new hire training program is in full swing. The computer
and telecommunication infrastructure has been upgraded and a ribbon cutting
open house is being planned for early October.
Closure of two of Maysville, Kentucky's three central distribution
warehouses is on schedule. The fuel and lighting product lines have been
relocated to Federal-Mogul's Jacksonville, Alabama distribution center. The
consolidation of all chassis products into Maysville's main distribution
center has resulted in the closing of two additional warehouses in Baltimore,
Maryland and Richmond, Virginia.
The implementation of our hub-and-spoke network for distribution of
replacement parts in North America continues as planned with two hubs
complete, Los Angeles and Dallas, and a third, Seattle due for completion in
the third quarter. The Los Angeles distribution hub has spokes (service
centers) in San Diego, Sacramento, San Francisco and Phoenix. The Dallas hub
has spokes in Oklahoma City, Lubbock, San Antonio and Houston. The Seattle
hub services spokes in Portland and the first spoke across the border in
Vancouver, Canada. Work has begun on the Atlanta hub which was recently moved
to a new location. This hub-and-spoke network is expected to be completed in
fourth quarter, 1997.
Streamlining of administration and operational functions worldwide
continues on schedule.
"The excellent execution of our restructuring plan is a tribute to the
team effort of our employees. Their coordinating efforts and commitment to
quality have made the consolidation activities seamless to our customers,"
said Snell. "We continue to keep the execution of our plan as our
organization's top priority for 1997."
Economic Value Added
On May 22, Federal-Mogul announced that Stern Stewart, the company which
is focusing America's corporate leaders on economic value added (EVA) as the
best indicator of success, had been engaged to assist in the implementation of
their EVA framework at Federal-Mogul. Implementation at Federal-Mogul is
underway.
"We remain committed to achieving positive EVA in 1998 and we have taken
encouraging steps in that direction," said Snell.
North American Original Equipment
The North American original equipment business posted second quarter sales
of $119 million compared to $118 million in 1996. Sales were up 18%,
excluding the revenues from the electrical products and ball bearing operation
divestitures from quarter to quarter comparisons. Sales were strong in
sealing system products reflecting increased demand for Unipistons. Sales
were only slightly impacted due to the recent Chrysler and General Motors
strikes. Federal-Mogul has recently been awarded new oil seal business with
British Timken that will be manufactured in Federal-Mogul's Van Wert, Ohio
facility. Federal-Mogul seals and Timken bearings will be mated into a
cartridge and installed into wheel ends for European heavy duty truck drive
axles and trailer axles.
In sealing products for General Motors, Delphi-Harrison Thermal Systems
awarded Federal-Mogul seal business for their new HU-6 air conditioning
compressor. Annual volume is 2.6 million pieces for the 1999 model year with
production at Federal-Mogul's Milan, Michigan facility to begin July 1998.
Cummins Engine Company awarded Federal-Mogul front and rear crankshaft
seal business along with one accessory drive seal for their Q19 high
horsepower engine.
Federal-Mogul has earned new servo piston business with Mazda for the
transmission in the Mazda Protege. This sealing product will be manufactured
at Federal-Mogul's Frankfort, Indiana facility and shipped directly to Japan.
Full production startup will be in February 1998 with annual volume of 700,000
pieces.
Using advanced technology to drive new product developments, Federal-Mogul
is introducing a new multi-functional tail lamp for medium and heavy duty
trucks that meets European world standards. The company is also introducing a
multi-functional, electronic self cancel turn switch. Both products were
developed at Federal-Mogul's research and development center in Logansport,
Indiana.
Federal-Mogul's seal manufacturing plant in Cardiff, Wales operating under
the name Seal Technology Systems, was honored recently by Honda of the United
Kingdom for exemplary delivery performance during 1996. The Best Delivery
Performance award is only presented to companies who deliver 100% on-time
through the whole year.
For the ninth consecutive year, Federal-Mogul's Mooresville, Indiana
bearing manufacturing facility has received its quality recertification from
Caterpillar. Caterpillar Engine Division certification is focused on advance
quality planning, process discipline, process control, continuous improvements
and achieving product quality and reliability requirements.
The company's Frankfort, Indiana seal manufacturing facility has been
awarded the 1997 Governor's Award for Excellence in pollution prevention for
their voluntary reduction in the use of toxic materials.
Federal-Mogul's manufacturing plant in Mexico City, operating under the
name RAIMSA, S.A. de C.V., has been designated as a Qualified Supplier by Case
Corporation. RAIMSA successfully passed a rigorous quality system survey by
Case and demonstrated the ability to pursue continuous quality improvements
aimed at minimizing total life cycle costs and maximizing high quality
products and services.
International Original Equipment
The international original equipment business reported second quarter
sales of $45 million compared to $55 million in 1996. Sales were up 13%,
excluding the sale of heavy wall bearing operations in Germany and Brazil,
completed on January 2, 1997, as well as the effect of exchange rates.
Sales of conventional engine bearings were up as the weak Deutsche Mark
contributed to higher car production volumes for export sales. Federal-
Mogul's sputter bearing business also increased due to strong demand for
diesel engine cars in Europe. The company was able to increase production
levels of sputter bearings due to additional capacity at Federal-Mogul's
Wiesbaden, Germany facility. The sales increase was attributed to higher
production demands from Volvo Car, SKF, Ford, Bertrand Faure, Opel and Saab.
Federal-Mogul's European operations received several new business awards.
The company has been awarded a sputter bearing order for the Cummins AHD
engine and the connecting rod bearings for the new 1.6 liter Ford ZETEC SE
engine.
As a partner in the development of major new engines, Federal-Mogul has
been awarded the engine bearing work for the: Mercedes OM660 and OM 668
gasoline and diesel engine for the new sub-mini Swatch car; Fiat Auto 1.9
liter diesel engine; and Peugeot EW6 / EW7 1.6 liter and 1.7 liter gasoline
engine family.
North American Replacement
The North American replacement business reported second quarter sales of
$186 million compared to $211 million in 1996. Sales were lower due to
softness in the North American aftermarket, particularly in engine and chassis
products.
The business has significantly improved operating costs and continues to
make working capital improvements. North American inventory was reduced in
the second quarter by $16 million. Days sales outstanding of receivables has
also shown significant improvement due to concentrated efforts to collect past
due amounts.
The company has entered into a pilot program with Bonded Motors Inc. to
provide just-in-time delivery of replacement parts required by Bonded in its
automotive engine remanufacturing process. Under this pilot program, Federal-
Mogul will package components for Bonded Motors and deliver those parts on a
next-day basis.
As announced July 7, Jeff J. O'Neill was named vice president of marketing
for the North American aftermarket business. Hired for his strong consumer
marketing and brand management experience, O'Neill joins the company from The
Quaker Oats Company where he most recently served as business director, Quaker
Snacks.
International Replacement
The international replacement business reported second quarter sales of
$133 million compared to $152 million in 1996. Excluding the divestitures in
Turkey, Australia and South Africa, sales were relatively flat quarter over
quarter. International replacement inventory was reduced by $8 million.
Wholesale business in Mexico and Venezuela has increased due to the
expanded distribution of TRW and Sealed Power products in those countries.
Exports from Federal-Mogul's international distribution center in Fort
Lauderdale, Florida are also up due to direct sales to Central America. Sales
in Latin America were strong for suspension parts, anti-friction bearings,
electric fuel pumps and oil seals.
Aftermarket sales through Federal-Mogul's branches in Greece, Spain and
Italy were soft. The company saw export markets perform below plan due to
weak sales in Africa and the Far East. However, demand was strong in Eastern
Europe.
Headquartered in Southfield, Michigan, Federal-Mogul is a $2 billion
global manufacturer and distributor of a broad range of non-discretionary
parts primarily for automobiles, light trucks, heavy trucks, and farm and
construction vehicles. For more information on Federal-Mogul, visit the
company's web site at http://www.federal-mogul.com. Federal-Mogul's press
releases are available by fax through Company News On-Call, call 800-758-5804,
ext. 306225.
Information in this press release contains forward-looking statements
which are not historical facts and involve risk and uncertainties. Actual
results, events and performance could differ materially from those
contemplated by these forward-looking statements including, without
limitations, the company's ability to effectively divest certain assets, the
cost and timing of implementing restructuring actions, certain global and
regional economic conditions and other factors discussed in this press release
and those detailed from time to time in the company's filings with the
Securities and Exchange Commission.
FEDERAL-MOGUL CORPORATION EARNINGS STATEMENT
(Millions of Dollars, Except Per Share Data)
(Unaudited)
Three Months Ended Six Months Ended
June 30 June 30
1997 1996 1997 1996
Net sales $481.8 $536.4 $967.4 $1,058.3
Cost of products sold 366.5 419.1 740.0 828.8
Gross margin 115.3 117.3 227.4 229.5
Selling, general and
administrative expenses 73.5 81.0 151.9 164.0
Interest expense 9.0 10.6 18.8 21.8
Interest income (1.1) (.7) (1.8) (1.5)
International currency
exchange losses (gains) (.1) 1.4 - 2.3
Other expense (income), net(.4) .2 1.6 1.1
Earnings Before Income Taxes
and Extraordinary Item 34.4 24.8 56.9 41.8
Income taxes 5.9 9.0 14.5 15.4
Net Earnings Before
Extraordinary Item 28.5 15.8 42.4 26.4
Extraordinary item -
loss on early retirement
of debt, net of applicable
income tax benefit 2.6 - 2.6 -
Net Earnings $25.9 $15.8 $39.8 $26.4
Earnings Per Common Share
Primary
Income before extraordinary
item $ .74 $ .39 $1.08 $ .63
Extraordinary item -
loss on early retirement
of debt, net of applicable
income tax benefit (.07) - (.07) -
Net earnings $ .67 $ .39 $1.01 $ .63
Fully Diluted
Income before extraordinary
item $ .67 $ .36 $.99 $ .59
Extraordinary item -
loss on early retirement
of debt, net of applicable
income tax benefit (.06) - (.06) -
Net earnings $ .61 $ .36 $.93 $ .59
Weighted Average Shares Used
Primary 35,414,397 35,099,033 35,297,017 35,081,465
Fully Diluted 41,575,875 41,988,886 41,536,920 37,542,827
FEDERAL-MOGUL CORPORATION BALANCE SHEET
(Millions of Dollars)
(Unaudited)
June 30 December 31
1997 1996
Assets
Current Assets:
Cash and equivalents $19.6 $33.1
Accounts receivable 232.8 231.3
Inventories 303.5 417.0
Prepaid expenses and
income tax benefits 83.4 81.5
Total Current Assets 639.3 762.9
Property, Plant and Equipment 319.0 350.3
Goodwill 148.4 154.0
Other Intangible Assets 62.5 63.1
Business Investments and
Other Assets 130.9 124.9
Total Assets $1,300.1 $1,455.2
Liabilities and Shareholders' Equity
Current Liabilities:
Short-term debt $66.9 $280.1
Accounts payable 123.1 142.7
Accrued compensation 40.1 37.6
Other accrued liabilities 189.4 203.4
Total Current Liabilities 419.5 663.8
Long-Term Debt 279.7 209.6
Postemployment Benefits 201.1 207.1
Other Accrued Liabilities 64.8 56.2
Total Liabilities 965.1 1,136.7
Shareholders' Equity:
Series D preferred stock 76.6 76.6
Series C ESOP preferred stock 50.6 53.1
Unearned ESOP compensation (25.3) (28.4)
Common stock 177.5 175.7
Additional paid-in capital 293.9 283.5
Retained earnings (166.6) (193.0)
Currency translation and other (71.7) (49.0)
Total Shareholders' Equity 335.0 318.5
Total Liabilities and
Shareholders' Equity $1,300.1 $1,455.2
FEDERAL-MOGUL CORPORATION CASH FLOWS
(Millions of Dollars)
(Unaudited)
Six Months Ended
June 30
1997 1996
Cash Provided From (Used By)
Operating Activities
Net earnings $39.8 $26.4
Adjustments to reconcile net
earnings to net cash provided
from (used by) operating
activities
Depreciation and amortization 27.3 30.6
Deferred income taxes 5.2 (.7)
Postemployment benefits 2.0 1.6
Increase in accounts receivable (30.9) (21.7)
Decrease in accounts payable (1.0) (.6)
Decrease in inventories 40.5 25.5
Increase in current liabilities
and other 15.3 20.1
Loss on early retirement of debt 4.1 -
Payments against restructuring
and reengineering reserves (12.5) (8.9)
Net Cash Provided From
Operating Activities 89.8 72.3
Cash Provided From (Used By)
Investing Activities
Expenditures for property,
plant and equipment (20.8) (24.2)
Proceeds from sale of
business investments 66.6 -
Purchases of business investments - (.3)
Other - .7
Net Cash Provided From
(Used By) Investing Activities 45.8 (23.8)
Cash Provided From (Used By)
Financing Activities
Issuance of common stock 9.7 .4
Fees for early retirement of debt(4.1) -
Net decrease in debt (138.8) (11.7)
Dividends (13.5) (13.6)
Other (2.4) (3.1)
Net Cash Used By Financing
Activities (149.1) (28.0)
Increase (Decrease) in Cash
and Equivalents (13.5) 20.5
Cash and Equivalents at
Beginning of Period 33.1 19.4
Cash and Equivalents at
End of Period $19.6 $39.9
SOURCE Federal-Mogul Corporation