SOUTHFIELD, Mich. – Federal-Mogul Corp. has announced second quarter 2012 financial results, including higher North American and BRIC original equipment (OE) sales, which offset a decline in both OE and aftermarket sales in Europe caused by general economic weakness.
Total sales were $1.7 billion, down 5 percent versus the second quarter of 2011, but up 1 percent on a constant dollar basis versus the second quarter 2011. Federal-Mogul reported a net loss in the second quarter of 2012 of $(59) million or (60 cents) per diluted share, including $(119) million of non-cash impairment charges relating primarily to brake friction business intangible assets. Without these impairment charges, net income would have been $53 million in the second quarter of 2012.
Operational EBITDA was $159 million or 9.3 percent of sales, down from the second quarter of 2011 due to the impact of lower sales, negative exchange and unfavorable product and regional mix. The cash outflow of $(99) was the result of capital investment in plant facilities and equipment to support growth and productivity, combined with increased working capital for competitive aftermarket commercial programs.
"We are putting in place the foundation for stronger performance at Federal-Mogul. The company is investing in its core technology portfolio of powertrain products, vehicle safety products and leading aftermarket brands," said Rainer Jueckstock, Federal-Mogul OE division CEO. "The recently announced BERU spark plug acquisition is a great example of value-enhancing strategic acquisitions in core automotive technologies and key markets.
"In addition, we announced a comprehensive restructuring of our global brake friction and wipers manufacturing footprint to improve cost competitiveness and raise capacity utilization in low-cost locations," he continued.
"We are taking the necessary actions to restructure our business for improved profitability and to meet customer expectations for leading technology at competitive costs," added Michael Broderick, Federal-Mogul Aftermarket division CEO. "This will be especially beneficial when supplying products to the aftermarket, where price competition is a more significant factor in purchase decisions."
Total sales in the second quarter were $1.7 billion, up 1 percent on a constant dollar basis versus the second quarter of 2011, with 6 percentage points of negative exchange impact due to the significant change in international currencies versus the U.S. dollar. Federal-Mogul derives about 60 percent of total revenue from sales to customers outside the U.S. market and was therefore significantly impacted by recent currency devaluations versus the dollar. Total sales in North America were up 4 percent in constant dollars versus the same period last year.
Federal-Mogul’s global original equipment sales were $1.1 billion, up 3 percent in constant dollars versus the second quarter of 2011, driven by a 9 percent OE sales increase in the U.S. and 7 percent OE sales increase in the BRIC markets, off-setting a 4 percent revenue decline in Europe. Light vehicle production in Europe during the quarter decreased 9 percent versus the second quarter of 2011 as regional vehicle makers reacted to macroeconomic factors driving slower automotive sales.
The company’s global aftermarket sales were $566 million or 3 percent lower on a constant dollar basis versus the second quarter of 2011. Sales in the U.S. were softer due to mix changes and in Europe due to economic conditions resulting in lower market demand and inventory reductions at certain distributors. Aftermarket sales in the rest of the world grew 5 percent on a constant dollar basis, reflecting stronger customer demand for the company’s leading products in these growth markets.
Gross Margin and Net Income
The company in the second quarter of 2012 had a gross margin of $255 million or 15 percent of sales, compared to $299 million or 16.6 percent in the second quarter of 2011. The gross margin in the second quarter of 2012 was negatively impacted by currency, unfavorable product and regional mix, as well as short-term inefficiencies caused by new site and product line start-up activities in several locations.
Federal-Mogul in the second quarter of 2012 recorded a net loss of $(59) million or (60 cents) earnings per share versus $64 million or 64 cents earnings per share in the second quarter of 2011. The net loss includes impairment charges of $(119) million primarily relating to brake friction business intangible assets. The company would have realized a net income of $53 million without these charges.
Restructuring
The company began a restructuring program in the second quarter of 2012 to further shift production of brake friction and wiper products to lower-cost locations within the company’s global manufacturing network, including a recently acquired brake friction facility in Mexico. Federal-Mogul said the restructuring program will involve the closure or substantial downsizing of selected brake friction and wiper manufacturing sites over the next 18 months. The restructuring program is expected to cost a total of $60 million. An initial charge of $(7) million for restructuring actions related to the program was recorded during the second quarter of 2012.
Goodwill Impairment
Federal-Mogul’s brake friction business continued to be impacted by commercial and market factors that caused the company to initiate a comprehensive brake friction footprint restructuring program in the quarter. This combination of factors led the company to reassess the value of its goodwill, resulting in a $(91) million non-cash goodwill impairment charge in the second quarter.
BERU Acquisition
Federal-Mogul announced on July 2 the acquisition of the BERU spark plug business from BorgWarner Inc. The purchase will include the spark plug manufacturing sites at Chazelles, France, and Neuhaus, Germany. The acquired units will add approximately $80 million annualized sales and increase Federal-Mogul’s annual spark plug production capacity to more than 350 million per year. The acquisition solidly positions the company as the second-largest global spark plug producer with manufacturing in all regions to serve automotive OE, aftermarket and industrial equipment customers. The two locations employ approximately 500 personnel.
Segmentation
As previously announced, the company intends to establish two separate operating divisions, each focused on their unique end customers and specific product portfolio. Michael Broderick was appointed CEO of Federal-Mogul Aftermarket division and joined the company on June 25.
"We continue to closely monitor economic and market indicators, especially in Europe where recent announcements by our customers indicate a weaker sales outlook for the balance of 2012. Our high degree of powertrain content on customers’ vehicle and engine export programs helps to offset market softness in Europe, as sales remain stronger in China and other expanding markets," said Alan Haughie, CFO. "We are moving rapidly to define and implement the company’s long term structure. We are positioning the company for future market developments and to benefit from anticipated improvements in customer focus, resource utilization and overall operating performance," he said.
