by Amy Antenora
Editor, aftermarketNews.com

ANN ARBOR, MI — April will mark one full year that Affinia Group has been doing business out of its new Ann Arbor, MI, headquarters and it’s been a very good year, according to the top executives there.

For the year ending Dec. 31, 2005, Affinia reported revenue $2.1 billion, an increase of 2.1 percent over the combined results for the prior year. The company said the increase was primarily driven by a strong performance in its filtration products group, as well as from foreign exchange gains. Affinia experienced a net loss of $30 million for the year, compared with the combined net income of $24 million for the year prior. This decrease is primarily attributable to non-cash charges of $21 million on the sale of the Beck/Arnley subsidiary and a $25 million restructuring charge in the fourth quarter, which the company previously stated would be $33 million. In addition, interest expense increased by $48 million, due to financing associated with the acquisition on Nov. 30, 2004. These costs were offset by an increase in gross profit of $23 million, excluding restructuring, and a net $21 million decrease in our tax provision.

As of Dec. 31, 2005, Affinia had $82 million of cash. Total debt for the company as of Dec. 31, 2005 was $612 million, with no amounts outstanding under the company’s receivables securitization program, reflecting a $95 million reduction in debt compared with the prior year. As of Dec. 31, 2005, Affinia was in compliance with all financial covenants in its senior credit agreement which include a leverage ratio, cash interest expense ratio and maximum annual capital expenditures test.

In a conference call earlier this week, top Affinia executives Terry McCormack, John Washbish and Keith Wilson talked about the company’s current financial condition and its continued plans for restructuring in 2006. The restructuring plans have included, and will continue to focus on, streamlining operations at its facilities around the globe.

In 2005, Affinia closed seven facilities – five in the under vehicle segment and two in the underhood segment. The company’s Anjou, Montreal, Canada, brake shoe plant was merged with the company’s Dallas, TX, operation, while the Montreal friction facility was closed and production moved to four plants: Guelph, Ontario; Cuba, MO; Stanford, KY; and Mexico City. The company’s Toronto drum & rotor machining facility was also closed, and the production of aftermarket parts was moved to McHenry, IL. The production of OE parts was moved to the company’s plant in Waupaca, WI. Affinia’s facility in Puerto Rico, which manufactured rubber products for the hydraulics group, has been closed and products re-sourced to low-cost countries. Affinia’s Newark, DE, distribution center has been re-located to the master distribution center in McHenry, IL.

At the end of last year, the company’s total employment was 11,678 people, down 10.5 percent from 2004. Staff at company headquarters was reduced by 25 percent in February and March 2005. Overall, restructuring efforts in 2005 resulted in a total cost of $23 million, cash impact of $11 million and annualized savings of $28 million. The company also reorganized the under vehicle management team, replacing three key positions – director of product planning, director of global sourcing, centralizing the company’s purchasing function, also adding senior VP of operations for the entire under vehicle group. On the customer relationship management (CRM) side, headed by Washbish, three key positions were created – senior VP of CRM for CARQUEST, Affinia’s second largest account; senior VP for sales on the under vehicle group; and a senior VP of CRM for all Affinia brands.

“In addition to the nice tangibles, these are pretty attractive intangibles that will turn into positive results going forward,” said Washbish, who serves as Affinia’s president of customer relationship management and vice president and general manager of its Under Vehicle Group.

The company has also created its own consulting firm, hiring a number of people to serve as an internal team to focus on Affinia’s involvement in the aftermarket. McCormack, president and chief executive officer, also announced the company has opened a Chinese business office to support future endeavors there.

On the underhood side, the company closed two distribution centers in order to further streamline operations. Quinton-Hazell’s Italian distribution business was absorbed by shipping direct from other countries and from the company’s DC in Spain. On the filter side, Affinia closed its Edmonton, Canada, location and absorbed that business by shipping from its location in Ontario.

According to Wilson, vice president and general manager, Affinia Under Hood Group, these efforts cost $3 million, about one-third of which was cash, with savings last year of $1 million and annualized savings moving forward of $2 million.

Affinia will continue its restructuring plans in 2006 with the closure of its Erie, PA, and McHenry, IL, drum and rotor machining plants. An estimated pre-tax charge of $15 million for the closure of these plants, 20 percent of which relates to employee severance for the 340 positions that will be eliminated by year’s end. The company also announced its intent to sell its foundries in Sudbury and St. Catherines, Ontario, and its machining plant in Waupaca, WI.

The company will also close its Southampton filter manufacturing facility in the UK. The net loss for Southampton in 2004 and 2005 was $4.5 million and $7.6 million, respectively. “This has been the number-one drain on our financial performance in the filtration arena,” said Wilson. The company said it will have an estimated a pre-tax charge of $18.6 million as a result of this closure, of which $14.6 million relates to employee severance. The expected number of employees affected is 168.

Outside of plant closures and other plans to streamline operations, the company has worked to redefine itself philosophically as well, according to McCormack. Using a handbook called “Purpose Driven Company,” Affinia has created its own code of conduct and redefined the company’s culture to one of what McCormack described as “God, family, company – always doing what’s right.”

“Central to the success of this company’s future, taking us well beyond 2010, is now our true international vision. It’s one that will drive this company for future results that many of you will be surprised to see across time,” McCormack told analysts listening to the call.

“It really boils down to bright people working together as a team, dedicated to being the very best,” he said in closing. “It’s really about our future. ‘One Team, One Result’ is phrase that we’ve coined. We talk about it a lot and it’s what we believe. We’re creating a fresh new company and I believe you can just start to feel what we feel and see right now. Our first year is under our belt. We’re on the right track, and we’re certainly in the right industry – the vehicular aftermarket. We have the right people, the right products and we’re blessed with the very best customers and now we have the right international vision. We have an enormous amount of hard work ahead of us. This is not going to be simple. The next 24 months are going to be extraordinarily hard and heavy lifting. We’ve got a bright future and one that you will see unfold across the next two or three years as we prepare to head into 2010.”

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