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 September 30, 2014
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)
 
 
 
26555 Northwestern Highway, Southfield, Michigan
 
48033
(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
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.    Yes  x    No  ¨
As of October 20, 2014, there were 150,029,244 outstanding shares of the registrant’s $0.01 par value common stock.


FEDERAL-MOGUL HOLDINGS CORPORATION
Form 10-Q
For the Three and Nine Months Ended September 30, 2014
INDEX
 


PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FEDERAL-MOGUL HOLDINGS CORPORATION
Condensed Consolidated Statements of Operations (Unaudited)
 
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30
 
September 30
 
 
2014
 
2013
 
2014
 
2013
 
 
(Millions of Dollars,
 
 
Except per Share Amounts)
 
 
 
 
 
 
 
 
 
Net sales
 
$
1,871

 
$
1,690

 
$
5,522

 
$
5,093

Cost of products sold
 
(1,609
)
 
(1,435
)
 
(4,689
)
 
(4,311
)
 
 
 
 
 
 
 
 
 
Gross margin
 
262

 
255

 
833

 
782

 
 
 
 
 
 
 
 
 
Selling, general and administrative expenses
 
(210
)
 
(177
)
 
(585
)
 
(545
)
OPEB curtailment gain
 
—

 
—

 
—

 
19

Interest expense, net
 
(34
)
 
(24
)
 
(87
)
 
(77
)
Restructuring expense, net
 
(25
)
 
(4
)
 
(63
)
 
(20
)
Loss on debt extinguishment
 
—

 
—

 
(24
)
 
—

Equity earnings of non-consolidated affiliates
 
12

 
8

 
39

 
26

Amortization expense
 
(13
)
 
(12
)
 
(37
)
 
(36
)
Adjustment of assets to fair value
 
(1
)
 
(1
)
 
(3
)
 
(3
)
Other (expense) income, net
 
7

 
(6
)
 
(4
)
 
(1
)
 
 
 
 
 
 
 
 
 
Income (loss) from continuing operations before income taxes
 
(2
)
 
39

 
69

 
145

Income tax expense
 
(15
)
 
(6
)
 
(48
)
 
(30
)
 
 
 
 
 
 
 
 
 
Net income (loss) from continuing operations
 
(17
)
 
33

 
21

 
115

(Loss) income from discontinued operations, net of income tax
 
—

 
7

 
—

 
(49
)
Net income (loss)
 
(17
)
 
40

 
21

 
66

 
 
 
 
 
 
 
 
 
Less net income attributable to noncontrolling interests
 
(1
)
 
(2
)
 
(4
)
 
(6
)
Net income (loss) attributable to Federal-Mogul
 
$
(18
)
 
$
38

 
$
17

 
$
60

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Amounts attributable to Federal-Mogul:
 
 
 
 
 
 
 
 
Net income (loss) from continuing operations
 
$
(18
)
 
$
31

 
$
17

 
$
109

(Loss) income from discontinued operations, net of income tax
 
—

 
7

 
—

 
(49
)
Net income (loss)
 
$
(18
)
 
$
38

 
$
17

 
$
60

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

 
 
 
 
 
 
 
Net income (loss) from continuing operations
 
$
(0.12
)
 
$
0.21

 
$
0.11

 
$
0.95

(Loss) income from discontinued operations, net of income tax
 
—

 
0.05

 
—

 
(0.43
)
Net income (loss)
 
$
(0.12
)
 
$
0.26

 
$
0.11

 
$
0.52

See accompanying notes to condensed consolidated financial statements.


FEDERAL-MOGUL HOLDINGS CORPORATION
Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited)
 

 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30
 
September 30
 
 
2014
 
2013
 
2014
 
2013
 
 
(Millions of Dollars)
Net income (loss)
 
$
(17
)
 
$
40

 
$
21

 
$
66

 
 
 
 
 
 
 
 
 
Other comprehensive income (loss):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign currency translation adjustments and other
 
(99
)
 
49

 
(100
)
 
(29
)
 
 
 
 
 
 
 
 
 
Postemployment benefits:
 
 
 
 
 
 
 
 
Net unrealized postemployment benefits credits arising during period
 
7

 
10

 
7

 
22

Reclassification of net postemployment benefit losses of deconsolidated affiliates
 
(1
)
 
—

 
1

 
—

Reclassification of net postemployment benefits costs (credits) included in net income (loss) during period
 
1

 
(14
)
 
5

 
(21
)
Income taxes
 
—

 
—

 
(1
)
 
(1
)
Postemployment benefits, net of tax
 
7

 
(4
)
 
12

 
—

 
 
 
 
 
 
 
 
 
Hedge instruments:
 
 
 
 
 
 
 
 
Net unrealized hedging gains (losses) arising during period
 
—

 
3

 
1

 
(4
)
Reclassification of net hedging losses included in net income (loss) during period
 
1

 
3

 
2

 
12

Income taxes
 
(1
)
 
—

 
(1
)
 
1

Hedge instruments, net of tax
 
—

 
6

 
2

 
9

 
 
 
 
 
 
 
 
 
Other comprehensive income (loss), net of tax
 
(92
)
 
51

 
(86
)
 
(20
)
 
 
 
 
 
 
 
 
 
Comprehensive income (loss)
 
(109
)
 
91

 
(65
)
 
46

 
 
 
 
 
 
 
 
 
Less comprehensive (income) loss attributable to noncontrolling interests
 
6

 
(2
)
 
3

 
(2
)
 
 
 
 
 
 
 
 
 
Comprehensive income (loss) attributable to Federal-Mogul
 
$
(103
)
 
$
89

 
$
(62
)
 
$
44

See accompanying notes to condensed consolidated financial statements.


FEDERAL-MOGUL HOLDINGS CORPORATION
Condensed Consolidated Balance Sheets (Unaudited)
 
 
 
September 30
 
December 31
 
 
2014
 
2013
 
 
(Millions of Dollars)
ASSETS
 
 
 
 
Current assets:
 
 
 
 
Cash and equivalents
 
$
469

 
$
761

Accounts receivable, net
 
1,510

 
1,324

Inventories, net
 
1,241

 
1,068

Prepaid expenses and other current assets
 
232

 
224

Total current assets
 
3,452

 
3,377

 
 
 
 
 
Property, plant and equipment, net
 
2,163

 
2,038

Goodwill and other indefinite-lived intangible assets
 
1,052

 
1,017

Definite-lived intangible assets, net
 
369

 
356

Investments in non-consolidated affiliates
 
268

 
253

Other noncurrent assets
 
203

 
141

 
 
$
7,507

 
$
7,182

 
 
 
 
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
 
Current liabilities:
 
 
 
 
Short-term debt, including current portion of long-term debt
 
$
121

 
$
1,694

Accounts payable
 
976

 
799

Accrued liabilities
 
589

 
454

Current portion of pensions and other postemployment benefits liability
 
48

 
44

Other current liabilities
 
182

 
147

Total current liabilities
 
1,916

 
3,138

 
 
 
 
 
Long-term debt
 
2,574

 
905

Pensions and other postemployment benefits liability
 
970

 
1,028

Long-term portion of deferred income taxes
 
389

 
383

Other accrued liabilities
 
122

 
127

 
 
 
 
 
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; 151,624,744 issued shares and 150,029,244 outstanding shares as of September 30, 2014 and December 31, 2013)
 
2

 
2

Additional paid-in capital, including warrants
 
2,649

 
2,649

Accumulated deficit
 
(501
)
 
(518
)
Accumulated other comprehensive loss
 
(705
)
 
(626
)
Treasury stock, at cost
 
(17
)
 
(17
)
Total Federal-Mogul shareholders’ equity
 
1,428

 
1,490

Noncontrolling interests
 
108

 
111

Total shareholders’ equity
 
1,536

 
1,601

 
 
$
7,507

 
$
7,182

See accompanying notes to condensed consolidated financial statements.


FEDERAL-MOGUL HOLDINGS CORPORATION
Condensed Consolidated Statements of Cash Flows (Unaudited)
 
 
Nine Months Ended
 
 
September 30
 
 
2014
 
2013
 
 
(Millions of Dollars)
Cash Provided From (Used By) Operating Activities
 
 
 
 
Net income
 
$
21

 
$
66

Adjustments to reconcile net income to net cash provided from operating activities:
 
 
 
 
Depreciation and amortization
 
251

 
218

Restructuring expense, net
 
63

 
20

Payments against restructuring liabilities
 
(33
)
 
(19
)
Loss on debt extinguishment
 
24

 
—

Equity earnings of non-consolidated affiliates
 
(39
)
 
(26
)
Cash dividends received from non-consolidated affiliates
 
22

 
27

Change in postemployment benefits
 
(64
)
 
(51
)
OPEB curtailment gain
 
—

 
(19
)
Net loss from business dispositions
 
—

 
43

Adjustment of assets to fair value
 
3

 
3

Deferred tax benefit
 
(6
)
 
(9
)
Changes in operating assets and liabilities:
 
 
 
 
Accounts receivable
 
(100
)
 
(97
)
Inventories
 
(71
)
 
(43
)
Accounts payable
 
106

 
92

Other assets and liabilities
 
85

 
53

Net Cash Provided From Operating Activities
 
262

 
258

 
 
 
 
 
Cash Provided From (Used By) Investing Activities
 
 
 
 
Expenditures for property, plant and equipment
 
(282
)
 
(270
)
Payments to acquire businesses, net of cash acquired
 
(321
)
 
—

Net proceeds from sales of property, plant and equipment
 
4

 
3

Net proceeds associated with business dispositions
 
—

 
26

Capital investment in non-consolidated affiliates
 
—

 
(4
)
Net Cash Used By Investing Activities
 
(599
)
 
(245
)
 
 
 
 
 
Cash Provided From (Used By) Financing Activities
 
 
 
 
Proceeds from term loans, net of original issue discount
 
2,589

 
—

Principal payments on term loans
 
(2,537
)
 
(22
)
Debt issuance costs
 
(12
)
 
—

Contingent consideration to acquire business
 
(9
)
 
—

Increase in other long-term debt
 
7

 
3

Proceeds from equity rights offering net of related fees
 
—

 
500

Increase in short-term debt
 
—

 
17

Net remittances on servicing of factoring arrangements
 
(2
)
 
(7
)
Net Cash Provided From Financing Activities
 
36

 
491

 
 
 
 
 
Effect of foreign currency exchange rate fluctuations on cash
 
9

 
(11
)
 
 
 
 
 
(Decrease) increase in cash and equivalents
 
(292
)
 
493

Cash and equivalents at beginning of period
 
761

 
467

Cash and equivalents at end of period
 
$
469

 
$
960


See accompanying notes to condensed consolidated financial statements.


FEDERAL-MOGUL HOLDINGS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
September 30, 2014

1.
BASIS OF PRESENTATION
Holding Company Reorganization: On April 15, 2014, Federal-Mogul Corporation completed a holding company reorganization (the “Reorganization”). As a result of the Reorganization, the outstanding shares of Federal-Mogul Corporation common stock were automatically converted on a one-for-one basis into shares of Federal-Mogul Holdings Corporation common stock, and all of the stockholders of Federal-Mogul Corporation immediately prior to the Reorganization automatically became stockholders of Federal-Mogul Holdings Corporation. The rights of stockholders of Federal-Mogul Holdings Corporation are generally governed by Delaware law and Federal-Mogul Holdings Corporation’s certificate of incorporation and bylaws, which are the same in all material respects as those of Federal-Mogul Corporation immediately prior to the Reorganization. In addition, the board of directors of Federal-Mogul Holdings Corporation and its Audit Committee and Compensation Committee are composed of the same members as the board of directors, Audit Committee and Compensation Committee of Federal-Mogul Corporation prior to the Reorganization.
Information presented herein refers to Federal-Mogul Corporation. In addition, references herein to the “Company,” “Federal-Mogul,” “we,” “us,” “our” refer to Federal-Mogul Corporation for the period prior to the effective time of the Reorganization on April 15, 2014 and to Federal-Mogul Holdings Corporation for the period after the effective time of the Reorganization.
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) that 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 that 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, 2013 filed on February 24, 2014. Operating results for the three and nine months ended September 30, 2014 are not necessarily indicative of the results that may be expected for the year ended December 31, 2014.
Principles of Consolidation: The Company consolidates into its financial statements the accounts of the Company, all wholly-owned subsidiaries, and any partially-owned subsidiary 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 10, Investment in Non-consolidated Affiliates for discussion regarding the Company's subsidiaries that are 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 joint ventures are businesses established and maintained in connection with the Company's operating strategy. All intercompany transactions and balances have been eliminated.
Reclassifications: Certain prior period amounts have been reclassified to conform with the presentation used in this filing. See Note 5, Discontinued Operations, for further details.
Use of Estimates: The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported therein. Due to the inherent uncertainty involved in making estimates, actual results reported in future periods may be based upon amounts that differ from these estimates.
Controlling Ownership: As of September 30, 2014, Mr. Carl C. Icahn indirectly controls approximately 80.73% of the voting power of the Company’s capital stock and, by virtue of such stock ownership, is able to control or exert substantial influence over the Company, including the election of directors, business strategy and policies, mergers or other business combinations, acquisition or disposition of assets, future issuances of common stock or other securities, incurrence of debt or obtaining other sources of financing, and the payment of dividends on the Company’s common stock. The existence of a controlling stockholder may have the effect of making it difficult for, or may discourage or delay, a third party from seeking to acquire a majority of the Company’s outstanding common stock, which may adversely affect the market price of the stock.


Mr. Icahn’s interests may not always be consistent with the Company’s interests or with the interests of the Company’s other stockholders. Mr. Icahn and entities controlled by him may also pursue acquisitions or business opportunities that may or may not be complementary to the Company’s business. To the extent that conflicts of interest may arise between the Company and Mr. Icahn and his affiliates, those conflicts may be resolved in a manner adverse to the Company or its other shareholders.
Related Party: Insight Portfolio Group LLC (“Insight Portfolio Group”) is an entity formed by Mr. Icahn in order to maximize the potential buying power of a group of entities with which Mr. Icahn 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 Portfolio Group and agreed to pay a portion of Insight Portfolio Group’s operating expenses beginning in 2013. In addition to the minority equity interest held by the Company, certain subsidiaries of Icahn Enterprises Holdings, including CVR, Tropicana, ARI, Viskase PSC Metals and WPH also acquired minority equity interests in Insight Portfolio Group and agreed to pay a portion of Insight Portfolio Group’s operating expenses. A number of other entities with which Mr. Icahn has a relationship also acquired equity interests in Insight Portfolio Group and also agreed to pay certain operating expenses.
The Company’s payments to Insight Portfolio Group were less than $0.5 million during 2013. The Company anticipates its 2014 payments to Insight Portfolio Group to be similar to the amounts paid in 2013.
Pending Acquisition: On September 10 2014, an indirectly controlled subsidiary of the Company entered into a definitive purchase agreement with TRW Automotive Inc. ("TRW") to acquire certain business assets of the TRW engine components business for a base purchase price of approximately $385 million, subject to certain customary closing and post-closing adjustments. The transaction is subject to regulatory and other customary approvals and is expected to close in the first quarter of 2015.Divestitures: In connection with its strategic planning process, the Company assesses its operations for market position, product technology and capability, and profitability. Those businesses determined by management not to have a sustainable competitive advantage are considered non-core and may be considered for divestiture or other exit activities. In March 2013, the Company divested its sintered components operations located in France. In June 2013, the Company divested its connecting rod manufacturing facility located in Canada and its camshaft foundry located in the United Kingdom. In September 2013, the Company divested its fuel pump business, which included an aftermarket business component and a manufacturing and research and development facility located in the United States. These divestitures have been presented as discontinued operations in the consolidated statements of operations. See Note 5, Discontinued Operations, for further details.
Factoring of Trade 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:
 
 
September 30
 
December 31
 
 
2014
 
2013
 
 
(Millions of Dollars)
Gross accounts receivable factored
 
$
337

 
$
271

Gross accounts receivable factored, qualifying as sales
 
324


258

Undrawn cash on factored accounts receivable
 
2


—


Proceeds from the factoring of accounts receivable qualifying as sales and expenses associated with the factoring of receivables are as follows:
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30
 
September 30
 
 
2014
 
2013
 
2014
 
2013
 
 
(Millions of Dollars)
Proceeds from factoring qualifying as sales
 
$
456


$
379


$
1,311


$
1,077

Losses on sales of account receivables
 
(2
)

(2
)

(5
)

(5
)

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 was $21 million at September 30, 2014 and December 31, 2013. The fair values of the exposures to the Company associated with these certain facilities’ terms were determined to be immaterial.
The losses on sales of accounts receivable are recorded in the consolidated statements of operations within “Other (expense) income, 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 incurred as a result of such activities.


Accounts receivables factored but not qualifying as a sale, as defined in FASB ASC Topic 860, Transfers and Servicing, were pledged as collateral and accounted for as secured borrowings and recorded in the consolidated balance sheets within “Accounts receivable, net” and “Short-term debt, including the current portion of long-term debt.”
Noncontrolling Interests: The following table presents a rollforward of the changes in noncontrolling interests:
 
 
Nine Months
 
 
Ended
 
 
September 30
 
 
2014
 
 
(Millions of Dollars)
 
 
 
Equity balance of non-controlling interests as of December 31, 2013
 
$
111

 
 
 
Comprehensive income (loss):
 
 
Net income
 
4

Foreign currency adjustments and other
 
(7
)
 
 
 
Equity balance of non-controlling interests as of September 30, 2014
 
$
108


New Accounting Pronouncements: In April 2014, the FASB issued ASU No. 2014-8, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. This ASU is effective for disposals that occur within annual periods beginning on or after December 15, 2014, and interim periods within annual periods beginning on or after December 15, 2015. This ASU elevates the threshold for a disposal to qualify as discontinued operations and significantly expands the disclosure requirements for transactions that meet the criteria for discontinued operations. The Company is currently evaluating the impact that the adoption of this guidance will have on its financial position, results of operations, comprehensive income, cash flows and/or disclosures.In May 2014, the FASB issued ASU No. 2014-9, Revenue from Contracts with Customers (Topic 606). This ASU is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. This ASU clarifies the principles for recognizing revenue and provides a common revenue standard for U.S. GAAP and International Financial Reporting Standards ("IFRS"). The Company is currently evaluating the impact that the adoption of this guidance will have on its financial position, results of operations, comprehensive income, cash flows and/or disclosures.
In June 2014, the FASB issued ASU No. 2014-12, Compensation-Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period. This ASU is effective for annual periods and interim periods within those annual periods, beginning after December 15, 2015. The Company is currently evaluating the impact that the adoption of this guidance will have on its financial position, results of operations, comprehensive income, cash flows and/or disclosures.
In August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements - Going Concern (subtopic 205-40). This ASU is effective for annual periods ending after December 15, 2016, and for annual periods and interim periods thereafter, and defines management’s responsibility to evaluate whether there is substantial doubt about an organization’s ability to continue as a going concern and to provide related footnote disclosures. The Company expects the adoption of this guidance will have no impact on the Company's financial position, results of operations, comprehensive income, cash flows and disclosures.
2.
RESTRUCTURING
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 costs contained within “Restructuring expense, net” in the Company’s consolidated statements of operations contain two types: employee costs (principally termination benefits) and facility closure and other costs. Termination benefits are accounted for in accordance with FASB ASC Topic 712, Compensation – Nonretirement Postemployment Benefits ("FASB ASC 712"), and are recorded when it is probable that employees will be entitled to benefits and the amounts can be reasonably estimated. Estimates of termination benefits are based on the frequency of past termination benefits, the similarity of benefits under the current plan and prior plans, and the existence of statutory required minimum benefits. Termination benefits are also accounted for in accordance with FASB ASC Topic 420, Exit or Disposal Cost Obligations (“FASB ASC 420”), for one-time termination benefits and are recorded dependent upon future service requirements. Facility closure and other costs are accounted for in accordance with FASB ASC 420 and are recorded when the liability is incurred.
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 impact 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 impact on its liquidity position.
The following table provides a quarterly summary of the Company’s consolidated restructuring liabilities and related activity as of and for the nine months ended September 30, 2014 by reporting segment.

 
Powertrain

Motorparts

Total
Reporting
Segment

Corporate

Total
Company

 
(Millions of Dollars)
Balance at January 1, 2014
 
$
8

 
$
14


$
22


$
2


$
24

Provisions
 
3

 
4


7


1


8

Payments
 
(3
)
 
(6
)

(9
)

(1
)

(10
)
Balance at March 31, 2014
 
8

 
12


20


2


22

Provisions
 
19

 
11


30


—


30

Payments
 
(3
)
 
(5
)

(8
)

(1
)

(9
)
Balance at June 30, 2014
 
24

 
18


42


1


43

Provisions
 
20

 
5

 
25

 
—

 
25

Payments
 
(6
)
 
(8
)
 
(14
)
 
—

 
(14
)
Foreign Currency
 
(3
)
 
—

 
(3
)
 
—

 
(3
)
Balance at September 30, 2014
 
$
35


$
15


$
50


$
1


$
51




The following table provides a quarterly summary of the Company’s consolidated restructuring liabilities and related activity for each type of exit cost as of and for the nine months ended September 30, 2014. As the table reflects, facility closure and other costs are typically paid within the quarter of incurrence.

 
Employee
Costs

Facility Closure and Other
Costs

Total

 
(Millions of Dollars)
Balance at January 1, 2014
 
$
24


$
—


$
24

Provisions
 
7


1


8

Payments
 
(9
)

(1
)

(10
)
Balance at March 31, 2014
 
22


—


22

Provisions
 
27


3


30

Payments
 
(6
)

(3
)

(9
)
Balance at June 30, 2014
 
43


—


43

Provisions
 
23


2


25

Payments
 
(12
)

(2
)

(14
)
Foreign Currency
 
(3
)
 
—

 
(3
)
Balance at September 30, 2014
 
$
51


$
—


$
51


The Company recognized net restructuring expenses of $4 million and $21 million related to employee costs during the three and nine months ended September 30, 2013.

Activities under Restructuring Programs
In February 2013, the Company’s Board of Directors approved evaluation of restructuring opportunities in order to improve operating performance. As such, the Company has initiated several programs and will continue to evaluate alternatives to align its business with executive management's strategy.

The following table provides a summary of the Company's restructuring activities which commenced in the first quarter of 2013 and through the third quarter of 2014.
 
 
Total
Expected
Costs
 
Costs in 2013
 
First
Quarter
2014
 
Second
Quarter
2014
 
Third
Quarter
2014
 
Estimated
Additional
Costs
 
 
(Millions of dollars)
Employee costs
 
$
123

 
$
38

 
$
7

 
$
27

 
$
23

 
$
28

Facility closure and other costs
 
7

 
1

 
1

 
3

 
2

 
—

 
 
$
130

 
$
39

 
$
8

 
$
30

 
$
25

 
$
28





3.
OTHER (EXPENSE) INCOME, NET
The specific components of “Other (expense) income, net” are as follows:
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30
 
September 30
 
 
2014
 
2013
 
2014
 
2013
 
 
(Millions of Dollars)
Losses on sales of account receivables
 
(2
)
 
(2
)
 
(5
)
 
(5
)
Foreign currency exchange
 
1

 
(5
)
 
(4
)
 
(7
)
Legal separation costs
 
(1
)
 
—

 
(1
)
 
—

Third-party royalty income
 
2

 
1

 
5

 
5

Adjustment of Chapter 11 accrual
 
—

 
—

 
—

 
4

Other
 
7

 
—

 
1

 
2

 
 
$
7

 
$
(6
)
 
$
(4
)
 
$
(1
)


4 .    ACQUISITIONS
On May 1, 2014, the Company completed the Affinia chassis business acquisition. This business serves leading U.S. aftermarket customers with private label chassis product lines and will allow the Company to broaden its product offering, provide operational synergies and better service customers globally. The purchase price was $149 million, net of acquired cash. The Company paid $140 million in the second quarter of 2014 and $9 million in the third quarter of 2014.
A valuation of the assets from the Affinia chassis business acquisition resulted in $71 million allocated to tangible net assets, $26 million allocated to goodwill, and $51 million allocated to other intangible assets based on estimated fair values as of the acquisition date as determined by third party valuation specialists. The valuation of assets was performed utilizing cost, income and market approaches.On July 11, 2014, the Company completed the purchase of certain business assets of the Honeywell automotive and industrial brake friction business including two recently established manufacturing facilities in China and Romania which substantially strengthens the manufacturing and engineering capabilities of the Company's current global braking portfolio.
The business was acquired through a combination of asset and stock purchases for a base purchase price of $169 million and a provisional estimate of $15 million subject to certain customary post-closing adjustments, contingent consideration and other liabilities.
A valuation of the assets from the Honeywell automotive and industrial brake friction business acquisition, performed utilizing cost, income and market approaches, resulted in $184 million allocated to tangible net assets.
The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the acquisition date. The Company is in the process of obtaining third-party valuations of certain tangible and intangible assets and assumed liabilities; thus, the provisional measurements of net assets are subject to change.
 
 
Estimated Fair Value
 
 
(Millions of Dollars)
Cash, net of assumed debt
 
$
6

Accounts receivable, net
 
108

Inventory, net
 
77

Property, plant and equipment, net
 
164

Accounts payable
 
(107
)
Acquired post-employment benefits
 
(60
)
Other net assets
 
(4
)
Total identifiable net assets
 
$
184




The following proforma results for the three and nine months ended September 30, 2014 and 2013 assumes the Affinia chassis business acquisition and the purchase of Honeywell's friction business occurred as of the beginning of 2013 and is 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

Nine Months Ended


September 30

September 30


2014

2013

2014

2013


(Millions of Dollars, Except Per Share Amounts)


Unaudited













Net sales

$
1,871


$
1,914


$
5,954


$
5,763














Net income (loss) attributable to Federal-Mogul

$
(17
)

$
39


$
5


$
40














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

$
(0.11
)

$
0.27


$
0.03


$
0.35


During the nine months ended September 30, 2014, the Company recorded $1 million in transaction related expenses associated with the Affinia chassis business acquisition and $6 million in transaction related expenses associated with the Honeywell acquisition, both are recorded in selling, general and administrative expenses within the consolidated statement of operations.
5.
DISCONTINUED OPERATIONS
In connection with its strategic planning process, the Company assesses its operations for market position, product technology and capability, and profitability. Those businesses not core to the Company’s long-term portfolio may be considered for divestiture or other exit activities.
During March 2013, the Company’s Powertrain Segment completed the divestiture of its sintered components operations located in France. This disposal resulted in a $48 million net loss (no income tax impact), which is included in “(Loss) income from discontinued operations, net of income tax” during the nine months ended September 30, 2013.

During June 2013, the Company’s Powertrain Segment completed the divestiture of its connecting rod manufacturing facility located in Canada and its camshaft foundry located in the United Kingdom. This disposal resulted in a $5 million net loss (no income tax impact), which is included in “(Loss) income from discontinued operations, net of income tax” during the nine months ended September 30, 2013.

During September 2013, the Company completed the divestiture of its fuel pump business. This disposal resulted in a $10 million net gain (inclusive of a $2 million tax benefit), which is included in “(Loss) income from discontinued operations, net of income tax” during the three and nine months ended September 30, 2013. As certain employees at the fuel pump manufacturing facility participated in the Company’s U.S. Welfare Benefit Plan, the Company had this plan re-measured due to its curtailment implications. The termination of those employees and the related reduction in the average remaining future service period to the full eligibility date of the remaining active plan participants in the U.S. Welfare Benefit Plan triggered a $19 million OPEB curtailment gain which is included in the "(Loss) gain on sale of discontinued operations" for the three and nine months ended September 30, 2013.



Operating results related to discontinued operations are as follows:
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30, 2013
 
 
(Millions of Dollars)
Net sales
 
$
23

 
$
119

Cost of products sold
 
(24
)
 
(119
)
Gross margin
 
(1
)
 
—

Selling, general and administrative expenses
 
(1
)
 
(6
)
Operating loss (no income tax impact)
 
(2
)
 
(6
)
(Loss) gain on sale of discontinued operations (net of tax impact of $2 million for the three and nine months ended September 30, 2013)
 
9

 
(43
)
(Loss) income from discontinued operations, net of income tax
 
$
7

 
$
(49
)


6.
FINANCIAL INSTRUMENTS
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 natural gas, 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:
 
 
September 30
 
December 31
 
 
2014
 
2013
 
 
(Millions of Dollars)
Combined notional value
 
$
39

 
$
51

Combined notional value designated as hedging instruments
 
39

 
51

Unrealized net gain (loss) recorded in “Accumulated other comprehensive loss”
 
1

 
(1
)

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 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’s operating results are primarily exposed to changes in exchange rates between the U.S. dollar and European currencies.
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.


Information regarding the Company’s outstanding foreign currency hedge contracts is as follows:
 
 
September 30
 
December 31
 
 
2014
 
2013
 
 
(Millions of Dollars)
Combined notional value
 
$
2

 
$
12

Combined notional value designated as hedging instruments
 
2

 
12

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

 
(1
)

Substantially all of the foreign currency price hedge contracts mature within one year.
During 2013, foreign currency contracts not designated as hedging instruments were entered into by the Company in order to offset fluctuations in consolidated earnings caused by changes in currency rates used to translate earnings at foreign subsidiaries into U.S. dollars over 2013. These contracts were not designated as hedging instruments for accounting purposes and were marked to market through the income statement.

Interest Rate Risk
The Company, during 2008, entered into a series of five-year interest rate swap agreements with a total notional value of $1,190 million to hedge the variability of interest payments associated with its variable-rate term loans. During the first quarter of 2013, the majority of these interest rate swap agreements expired. As of December 31, 2013, all of these five-year interest rate swap agreements had expired.

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 (expense) income, 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 (expense) income, net” for outstanding hedges and either “Cost of products sold” or “Other (expense) income, net” upon hedge maturity.
Concentrations of Credit Risk
Financial instruments, which potentially subject the Company to concentrations of credit risk, consist primarily of accounts receivable and cash investments. 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. No individual customer accounted for more than 6% of the Company’s direct sales during the nine months ended September 30, 2014. Two Motorparts customers account for approximately 15% of the Company’s net accounts receivable balance as of September 30, 2014. The Company requires placement of cash in financial institutions evaluated as highly creditworthy.
The following table discloses the fair values and balance sheet locations of the Company’s derivative instruments:
 
Asset Derivatives
 
Liability Derivatives
 
Balance Sheet
 
September 30
 
December 31
 
Balance Sheet
 
September 30
 
December 31
 
Location
 
2014
 
2013
 
Location
 
2014
 
2013
 
(Millions of Dollars)
Derivatives designated as cash flow hedging instruments:
 
 
 
 
 
 
 
 
 
 
 
Commodity contracts
Other current
assets
 
$
2

 
$
1

 
Other current
liabilities
 
$
(1
)
 
$
(2
)
Foreign currency contracts
Other current liabilities
 
—

 
—

 
Other current
liabilities
 
—

 
(1
)
 
 
 
$
2

 
$
1

 
 
 
$
(1
)
 
$
(3
)



The following table discloses the effect of the Company’s derivative instruments on the consolidated statement of operations and consolidated statement of comprehensive income (loss) for the three months ended September 30, 2014:
Derivatives Designated as Hedging Instruments
 
Amount of Gain (Loss)
Recognized in OCI on
Derivatives (Effective
Portion)
 
Location of Gain
(Loss) Reclassified
from AOCL into
Income (Effective
Portion)
 
Amount of Gain
(Loss) Reclassified
from AOCL into
Income (Effective
Portion)
 
 
(Millions of Dollars)
Commodity contracts
 
$
—

 
Cost of products sold
 
$
1

Foreign currency contracts
 
—

 
Cost of products sold
 
—

 
 
$
—

 
 
 
$
1


The following table discloses the effect of the Company’s derivative instruments on the consolidated statement of operations and consolidated statement of comprehensive income (loss) for the three months ended September 30, 2013:
Derivatives Designated as Hedging Instruments
 
Amount of Gain (Loss)
Recognized in OCI on
Derivatives (Effective
Portion)
 
Location of Gain (Loss) Reclassified
from AOCL into
Income (Effective
Portion)
 
Amount of Gain (Loss)
Reclassified
from AOCL into
Income (Effective
Portion)
 
 
(Millions of Dollars)
Interest rate swap contracts
 
$
—

 
Interest expense, net
 
$
(1
)
Commodity contracts
 
3

 
Cost of products sold
 
(2
)
 
 
$
3

 
 
 
$
(3
)
Derivatives Not Designated as Hedging Instruments
 
Location of Loss
Recognized in Income on
Derivatives
 
Amount of Loss
Recognized in
Income on
Derivatives
 
 
 
 
(Millions of Dollars)
Foreign currency contracts
 
Other (expense) income, net
 
$
(2
)

The following table discloses the effect of the Company’s derivative instruments on the consolidated statement of operations and consolidated statement of comprehensive income (loss) for the nine months ended September 30, 2014:
Derivatives Designated as Hedging Instruments
 
Amount of Gain (Loss)
Recognized in OCI on
Derivatives (Effective
Portion)
 
Location of Gain
(Loss) Reclassified
from AOCL into
Income (Effective
Portion)
 
Amount of Gain
(Loss) Reclassified
from AOCL into
Income (Effective
Portion)
 
 
(Millions of Dollars)
Commodity contracts
 
$
1

 
Cost of products sold
 
$
(1
)
Foreign currency contracts
 
—

 
Cost of products sold
 
(1
)
 
 
$
1

 
 
 
$
(2
)



The following table discloses the effect of the Company’s derivative instruments on the consolidated statement of operations and consolidated statement of comprehensive income (loss) for the nine months ended September 30, 2013:
Derivatives Designated as Hedging Instruments
 
Amount of Gain (Loss)
Recognized in OCI on
Derivatives (Effective
Portion)
 
Location of Gain (Loss) Reclassified
from AOCL into
Income (Effective
Portion)
 
Amount of Gain (Loss)
Reclassified
from AOCL into
Income (Effective
Portion)
 
 
(Millions of Dollars)
Interest rate swap contracts
 
$
1

 
Interest expense, net
 
$
(9
)
Commodity contracts
 
(5
)
 
Cost of products sold
 
(3
)
 
 
$
(4
)
 
 
 
$
(12
)



7.
FAIR VALUE MEASUREMENTS
FASB ASC Topic 820, Fair Value Measurements and Disclosures (“FASB ASC 820”), clarifies that 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, FASB 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.
Assets and liabilities measured at fair value are based on one or more of the following three valuation techniques noted in FASB ASC 820:
A.
Market approach: Prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities.
B.
Cost approach: Amount that would be required to replace the service capacity of an asset (replacement cost).
C.
Income approach: Techniques to convert future amounts to a single present amount based upon market expectations (including present value techniques, option-pricing and excess earnings models).


Assets and liabilities remeasured and disclosed at fair value on a recurring basis at September 30, 2014 and December 31, 2013 are set forth in the table below:
 
 
Asset
(Liability)
 
Level 2
 
Valuation
Technique
 
 
(Millions of Dollars)
 
 
September 30, 2014
 
 
 
 
 
 
Commodity contracts
 
$
1

 
$
1

 
C
 
 
 
 
 
 
 
December 31, 2013
 
 
 
 
 
 
Commodity contracts
 
(1
)
 
(1
)
 
C
Foreign currency contracts
 
(1
)
 
(1
)
 
C

The Company calculates the fair value of its commodity contracts and foreign currency contracts using quoted commodity forward rates and quoted currency forward rates, respectively, to calculate forward values, and then discounts the forward values.
The discount rates for all derivative contracts are based on quoted bank deposit rates. For contracts which, when aggregated by counterparty, are in a liability position, the rates are adjusted by the credit spread that market participants would apply if buying these contracts from the Company’s counterparties.
Assets measured at fair value on a nonrecurring basis during the nine months ended September 30, 2014 and 2013 are set forth in the table below:
 
 
Asset
 
Level 3
 
Loss
 
Valuation
Technique
 
 
(Millions of Dollars)
 
 
September 30, 2014
 
 
 
 
 
 
 
 
Property, plant and equipment
 
$
—

 
$
—

 
$
(3
)
 
C
 
 
 
 
 
 
 
 
 
September 30, 2013
 
 
 
 
 
 
 
 
Property, plant and equipment
 
$
2

 
$
2

 
$
(3
)
 
C

Property, plant and equipment with carrying values of $3 million were fully impaired, resulting in an impairment charge of $3 million, which was recorded within “Adjustment of assets to fair value” for the nine months ended September 30, 2014. Property, plant and equipment with carrying values of $5 million were written down to their fair value of $2 million, resulting in an impairment charge of $3 million, which was recorded within “Adjustment of assets to fair value” for the nine months ended September 30, 2013.



8.
INVENTORIES
Inventories are stated at the lower of cost or market. Cost was determined by the first-in, first-out (“FIFO”) method at September 30, 2014 and December 31, 2013. 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:
 
 
September 30
 
December 31
 
 
2014
 
2013
 
 
(Millions of Dollars)
Raw materials
 
$
241

 
$
207

Work-in-process
 
189

 
160

Finished products
 
930

 
819

 
 
1,360

 
1,186

Inventory valuation allowance
 
(119
)
 
(118
)
 
 
$
1,241

 
$
1,068


9.
GOODWILL AND OTHER INTANGIBLE ASSETS
At September 30, 2014 and December 31, 2013, goodwill and other indefinite-lived intangible assets consist of the following:
 
 
September 30, 2014
 
December 31, 2013
 
 
Gross
Carrying
Amount
 
Accumulated
Impairment
 
Net
Carrying
Amount
 
Gross
Carrying
Amount
 
Accumulated
Impairment
 
Net
Carrying
Amount
 
 
(Millions of Dollars)
Goodwill
 
$
1,394

 
$
(570
)
 
$
824

 
$
1,362

 
$
(570
)
 
$
792

Trademarks and brand names
 
426

 
(198
)
 
228

 
423

 
(198
)
 
225

 
 
$
1,820

 
$
(768
)
 
$
1,052

 
$
1,785

 
$
(768
)
 
$
1,017


At September 30, 2014 and December 31, 2013, definite-lived intangible assets consist of the following:
 
 
September 30, 2014
 
December 31, 2013
 
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
 
 
(Millions of Dollars)
Customer relationships
 
$
603

 
$
(279
)
 
$
324

 
$
555

 
$
(252
)
 
$
303

Developed technology
 
116

 
(71
)
 
45

 
116

 
(63
)
 
53

 
 
$
719

 
$
(350
)
 
$
369

 
$
671

 
$
(315
)
 
$
356


The Company’s net goodwill balances by reporting segment are as follows:
 
 
September 30
 
December 31
 
 
2014
 
2013
 
 
(Millions of Dollars)
Powertrain
 
$
493

 
$
487

Motorparts
 
331

 
305

 
 
$
824

 
$
792




The Company’s net trademarks and brand names balances by reporting segment are as follows:
 
 
September 30
 
December 31
 
 
2014
 
2013
 
 
(Millions of Dollars)
Motorparts
 
$
223

 
$
222

Powertrain
 
5

 
3

 
 
$
228

 
$
225


The following is a quarterly summary of the Company’s goodwill and other intangible assets (net) as of and for the nine months ended September 30, 2014:
 
 
 
 
 
 
Total
 
 
 
 
 
 
 
 
Goodwill
 
 
 
 
 
 
 
 
and
 
Definite-
 
 
 
 
Trademarks
 
Indefinite-
 
Lived
 
 
 
 
and
 
Lived
 
Intangibles
 
 
Goodwill
 
Brand Names
 
Intangibles
 
(Net)
 
 
(Millions of Dollars)
Balance at January 1, 2014
 
$
792

 
$
225

 
$
1,017

 
$
356

Acquisitions
 
7

 
3

 
10

 
3

Amortization expense
 
—

 
—

 
—

 
(12
)
Foreign currency
 
1

 
(1
)
 
—

 
1

Balance at March 31, 2014
 
800

 
227

 
1,027

 
348

Acquisitions and purchase accounting adjustments
 
27

 
1

 
28

 
51

Dispositions
 
—

 
—

 
—

 
(1
)
Amortization expense
 
—

 
—

 
—

 
(12
)
Foreign currency
 
—

 
—

 
—

 
(1
)
Balance at June 30, 2014
 
827

 
228

 
1,055

 
385

Acquisitions and purchase accounting adjustments
 
—

 
—

 
—

 
(1
)
Amortization expense
 
—

 
—

 
—

 
(13
)
Foreign currency
 
(3
)
 
—

 
(3
)
 
(2
)
Balance at September 30, 2014
 
$
824

 
$
228

 
$
1,052

 
$
369


During nine months ended September 30, 2014, the Company recorded $26 million of goodwill, $1 million of brand names and $51 million of customer relationships in connection with its May 2014 Affinia chassis business acquisition. See Note 4, Acquisitions, for further detail on the Affinia chassis business acquisition. Also during the nine months ended September 30, 2014, the Company recorded $8 million of goodwill, $2 million of brand names and $2 million of customer relationship in connection with its January 2014 acquisition of the DZV bearings business. The acquisition of the DZV bearings business did not have a material impact on the Company's financial statements or liquidity.
The Company utilizes the straight line method of amortization, recognized over the estimated useful lives of the assets.

10.
INVESTMENT IN NON-CONSOLIDATED AFFILIATES
The Company maintains investments in several non-consolidated affiliates, which are located in China, France, Germany, Korea, Turkey 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.


As part of the regulatory approval related to the acquisition of certain business assets of the Honeywell automotive and industrial brake friction business, the Company committed to divest, or procure the divestiture of the commercial vehicle brake pads business relating to the original equipment/original equipment services (“OEM/OES”) market in the European Economic Area (“EEA”), based at the manufacturing plant in Marienheide, Germany and light vehicle brake pads business relating to the OEM/OES market in the EEA, based at the manufacturing plant in Noyon, France (collectively, the “Divestment Business”).  Furthermore, to the extent possible, the Company committed to keep the Divestment Business separate from the business(es) it is retaining, and unless explicitly permitted committed to ensure: (i) management and staff have no involvement in the Divestment Business; (ii) certain key personnel of the Divestment Business have no involvement in any business retained by the Company and do not report to any individual outside the Divestment Business. As such, the Company deconsolidated its subsidiaries or group of assets which are subject to regulatory commitments and recorded an investment in unconsolidated subsidiary, which will be accounted for as an equity method investment until disposition.
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 joint ventures 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:
 
 
September 30
 
December 31
 
 
2014
 
2013
 
 
(Millions of Dollars)
Investments in non-consolidated affiliates
 
$
268

 
$
253

 
 
 
 
 
Direct ownership percentages
 
2% to 100%
 
2% to 50%

The following table represents amounts reflected in the Company’s financial statements related to non-consolidated affiliates:
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30
 
September 30
 
 
2014
 
2013
 
2014
 
2013
 
 
(Millions of Dollars)
Equity earnings of non-consolidated affiliates
 
$
12

 
$
8

 
$
39

 
$
26

 
 
 
 
 
 
 
 
 
Cash dividends received from non-consolidated affiliates
 
17

 
23

 
22

 
27


The following table presents selected aggregated financial information of the Company’s non-consolidated affiliates:
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30
 
September 30
 
 
2014
 
2013
 
2014
 
2013
 
 
(Millions of Dollars)
Statements of Operations
 
 
 
 
 
 
 
 
Sales
 
$
232

 
$
266

 
$
679

 
$
721

Gross margin
 
46

 
56

 
142

 
147

Income from continuing operations
 
31

 
35

 
105

 
98

Net income
 
27

 
22

 
92

 
77





11.
ACCRUED LIABILITIES
Accrued liabilities consist of the following:
 
 
September 30
 
December 31
 
 
2014
 
2013
 
 
(Millions of Dollars)
Accrued compensation
 
$
222

 
$
169

Accrued rebates
 
135

 
125

Non-income taxes payable
 
58

 
41

Restructuring liabilities
 
51

 
24

Accrued professional services
 
33

 
21

Alleged defective products
 
29

 
30

Accrued income taxes
 
27

 
17

Accrued product returns
 
25

 
21

Accrued warranty
 
9

 
6

 
 
$
589

 
$
454


12.
DEBT
On April 15, 2014, Federal-Mogul Holdings Corporation entered into a new tranche B term loan facility (the “New Tranche B Facility”) and a new tranche C term loan facility (the “New Tranche C Facility,” and together with the New Tranche B Facility, the “New Term Facilities”), which were arranged by Citigroup Global Markets Inc. and Credit Suisse Securities (USA) LLC (the "Term Arrangers"), and assumed all of the obligations of Federal-Mogul Corporation with respect to the Replacement Revolving Facility under the Credit Agreement (both defined below). The New Term Facilities were entered into, and the Replacement Revolving Facility was assumed, by Federal-Mogul Holdings Corporation pursuant to an amendment dated as of April 15, 2014 to the previously existing Term Loan and Revolving Credit Agreement dated December 27, 2007 among Federal-Mogul Corporation, the lenders party thereto, the Term Arrangers, Citibank, N.A., as Revolving Administrative Agent, Citibank, N.A., as Tranche B Term Administrative Agent, Credit Suisse AG, as Tranche C Term Administrative Agent, Citigroup Global Markets Inc., Credit Suisse Securities (USA) LLC and Wells Fargo Bank, N.A., as Joint Lead Arrangers and Joint Bookrunners with respect to the Revolving Facility and Wells Fargo Bank, N.A., as sole Documentation Agent with respect to the Revolving Facility (as amended, the "Credit Agreement").
Immediately following the closing of the New Term Facilities, Federal-Mogul Holdings Corporation contributed all of the net proceeds from the New Facilities to Federal-Mogul Corporation, and Federal-Mogul Corporation repaid its existing outstanding indebtedness as a borrower under the tranche B and tranche C term loan facilities.
In accordance with FASB ASC Topic No. 405, Extinguishments of Liabilities, the Company recognized a $24 million non-cash loss on the extinguishment of debt attributable to the write-off of the unamortized fair value adjustment and unamortized debt issuance costs which is recorded in the line item “Loss on Debt Extinguishment” in the Company’s Condensed Consolidated Statements of Operations.
The New Term Facilities, among other things, (i) provides for aggregate commitments under the New Tranche B Facility of $700 million with a maturity date of April 15, 2018, (ii) provides for aggregate commitments under the New Tranche C Facility of $1.9 billion with a maturity date of April 15, 2021, (iii) increases the interest rates applicable to the New Facilities as described below, (iv) provides that for all outstanding letters of credit there is a corresponding decrease in borrowings available under the Replacement Revolving Facility, (v) provides that in the event that as of a particular determination date more than $700 million aggregate principal amount of existing term loans and certain related refinancing indebtedness will become due within 91 days of such determination date, the Replacement Revolving Facility will mature on such determination date, (vi) provides for additional incremental indebtedness, secured on a pari passu basis, of an unlimited amount of additional indebtedness if the Company meets a financial covenant incurrence test, and (vii) amends certain other restrictive covenants. Pursuant to the New Term Facilities, Federal-Mogul Holdings Corporation assumed all of the obligations of Federal-Mogul Corporation with respect to the Replacement Revolving Facility under the Credit Agreement.


Advances under the New Tranche B Facility generally bear interest at a variable rate per annum equal to (i) the Alternate Base Rate plus a margin of 2.00% or (ii) the Adjusted LIBOR Rate plus a margin of 3.00%, subject, in each case, to a floor of 1.00%. Advances under the New Tranche C Facility generally bear interest at a variable rate per annum equal to (i) the Alternate Base Rate plus a margin of 2.75% or (ii) the Adjusted LIBOR Rate plus a margin of 3.75%, subject, in each case, to a minimum rate of 1.00% plus the applicable margin.
Due to the refinancing of the Company's term loans, the backstop commitment letter provided to the Company on December 6, 2013 from High River Limited Partnership, an affiliate of Mr. Carl C. Icahn and the Company’s largest stockholder, was terminated.
On December 6, 2013, the Company entered into an amendment (the “Replacement Revolving Facility”) of its Term Loan and Revolving Credit Agreement dated as of December 27, 2007 (as amended, the “Credit Agreement”), among the Company, the lenders party thereto, Citicorp USA, Inc., as Administrative Agent, JPMorgan Chase Bank, N.A., as Syndication Agent, and Wachovia Capital Finance Corporation and Wells Fargo Foothill, LLC, as Co-Documentation Agents, to amend its existing revolving credit facility to provide for a replacement revolving credit facility (the “Replacement Revolving Facility”). The Replacement Revolving Facility, among other things, (i) increased the aggregate commitments available under the Replacement Revolving Facility from $540 million to $550 million, (ii) extended the maturity date of the Replacement Revolving Facility to December 6, 2018, subject to certain limited exceptions described below, and (iii) amended the Company’s borrowing base to provide the Company with additional liquidity.
Advances under the Replacement Revolving Facility generally bear interest at a variable rate per annum equal to (i) the Alternate Base Rate (as defined in the Credit Agreement) plus an adjustable margin of 0.50% to 1.00% based on the average monthly availability under the Replacement Revolving Facility or (ii) Adjusted LIBOR Rate (as defined in the Credit Agreement) plus a margin of 1.50% to 2.00% based on the average monthly availability under the Replacement Revolving Facility. An unused commitment fee of 0.375% also is payable under the terms of the Replacement Revolving Facility.
In connection with the New Term Facilities, the Company incurred original issue discount of $9 million and debt issuance costs of $6 million in connection with the New Tranche C Facility and original issue discount of $2 million and debt issuance costs of $6 million in connection with the New Tranche B Facility. The discount and debt issuance costs are being amortized to interest expense over the terms of the loans of 84 months and 48 months, respectively. As noted above the unamortized fair value adjustment established when applying the provisions of fresh-start reporting to the Company's Credit agreement was written off upon the closing of the New Term Facilities.
Interest expense associated with the amortization of the original issue discount, debt issuance costs and fair value adjustment are recognized in the Company’s consolidated statements of operations, consists of the following:
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30
 
September 30
 
 
2014
 
2013
 
2014
 
2013
 
 
(Millions of Dollars)
Amortization of debt issuance fees
 
$
1

 
$
—

 
$
2

 
$
—

Amortization of fair value adjustment
 
—

 
6

 
7

 
17

 
 
$
1

 
$
6

 
$
9

 
$
17


The amortization of the original issue discount was less than $1 million for the three and nine months ended September 30, 2014, respectively.


 
 
September 30
 
December 31
Debt consists of the following:
 
2014
 
2013
 
 
(Millions of Dollars)
Term loans under New Term Facilities:
 
 
 
 
New tranche B term loan
 
$
700

 
$
—

New tranche C term loan
 
1,900

 
—

Original Issue Discount
 
(11
)
 
 
 
 
 
 
 
Term loans under Credit Agreement:
 
 
 
 
Tranche B term loan
 
—

 
1,597

Tranche C term loan
 
—

 
940

Debt discount
 
—

 
(30
)
 
 
 
 
 
Other debt, primarily foreign instruments ^
 
106

 
92

 
 
2,695

 
2,599

Less: short-term debt, including current maturities of long-term debt
 
(121
)
 
(1,694
)
Total long-term debt
 
$
2,574

 
$
905


^ The Company assumed $10 million of pre-existing debt associated with its January 2014 acquisition of the DZV bearings business.
The obligations of the Company under the Credit Agreement are guaranteed by substantially all of the domestic subsidiaries and certain foreign subsidiaries of the Company, and are secured by substantially all personal property and certain real property of the Company and such guarantors, subject to certain limitations. The liens granted to secure these obligations and certain cash management and hedging obligations have first priority.
The Credit Agreement contains certain affirmative and negative covenants and events of default, including, subject to certain exceptions, restrictions on incurring additional indebtedness, mandatory prepayment provisions associated with specified asset sales and dispositions, and limitations on: i) investments; ii) certain acquisitions, mergers or consolidations; iii) sale and leaseback transactions; iv) certain transactions with affiliates; and v) dividends and other payments in respect of capital stock. The Company was in compliance with all debt covenants as of September 30, 2014 and December 31, 2013. Per the terms of the Credit Agreement, $50 million of the Tranche C proceeds were deposited in a Term Letter of Credit Account as of December 31, 2013.
The Replacement Revolving Facility has an available borrowing base of $516 million and $550 million as of September 30, 2014 and December 31, 2013, respectively. The Company had $34 million and $39 million of letters of credit outstanding as of September 30, 2014 and December 31, 2013, respectively, 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.
Estimated fair values of the Company’s term loans under the New Term Facilities were:
 
 
Estimated
Fair
Value
(Level 1)
 
Fair Value in Excess (Deficit) of Carrying Value
 
Valuation
Technique
 
 
(Millions of Dollars)
 
 
September 30, 2014
 
 
 
 
 
 
Debt Facilities
 
$
2,578

 
$
(11
)
 
A
 
 
 
 
 
 
 
December 31, 2013
 
 
 
 
 
 
Debt Facilities
 
$
2,520

 
$
13

 
A



Fair market values are developed by the use of estimates obtained from brokers and other appropriate valuation techniques based on information available as of September 30, 2014 and December 31, 2013. The fair value estimates do not necessarily reflect the values the Company could realize in the current markets. Refer to Note 7, Fair Value Measurements, for definitions of input levels and valuation techniques.

13.
PENSIONS AND OTHER POSTEMPLOYMENT BENEFITS
The Company sponsors several defined benefit pension plans (“Pension Benefits”) and health care and life insurance benefits (“Other Postemployment Benefits” or “OPEB”) for certain employees and retirees around the world.
Components of net periodic benefit cost (credit) for the three months ended September 30 are as follows:
 
 
Pension Benefits
 
Other Postemployment
 
 
United States Plans
 
Non-U.S. Plans
 
Benefits
 
 
2014
 
2013
 
2014
 
2013
 
2014
 
2013
 
 
(Millions of Dollars)
Service cost
 
$
—

 
$
1

 
$
3

 
$
3

 
$
—

 
$
—

Interest cost
 
13

 
11

 
4

 
4

 
4

 
4

Expected return on plan assets
 
(15
)
 
(14
)
 
(1
)
 
(1
)
 
—

 
—

Amortization of actuarial losses
 
1

 
4

 
1

 
2

 
1

 
1

Amortization of prior service credits
 
—

 
—

 
—

 
—

 
(2
)
 
(2
)
Net periodic benefit cost (credit)
 
$
(1
)
 
$
2

 
$
7

 
$
8

 
$
3

 
$
3


Components of net periodic benefit cost (credit) for the nine months ended September 30 are as follows:
 
 
Pension Benefits
 
Other Postemployment
 
 
United States Plans
 
Non-U.S. Plans
 
Benefits
 
 
2014
 
2013
 
2014
 
2013
 
2014
 
2013
 
 
(Millions of Dollars)
Service cost
 
$
2

 
$
3

 
$
9

 
$
9

 
$
—

 
$
—

Interest cost
 
39

 
35

 
12

 
11

 
12

 
12

Expected return on plan assets
 
(46
)
 
(43
)
 
(2
)
 
(3
)
 
—

 
—

Amortization of actuarial losses
 
3

 
11

 
4

 
6

 
2

 
4

Amortization of prior service credits
 
—

 
—

 
—

 
—

 
(4
)
 
(8
)
Curtailment Gain
 
—

 
—

 
—

 
—

 
—

 
(19
)
Net periodic benefit cost (credit)
 
$
(2
)
 
$
6

 
$
23

 
$
23

 
$
10

 
$
(11
)

During the second quarter of 2013, the Company ceased operations at one of its U.S. manufacturing locations. The resulting reduction in the average remaining future service period to the full eligibility date of the remaining active plan participants in the Company’s U.S. Welfare Benefit Plan triggered the recognition of a $19 million OPEB curtailment gain, which was recognized in the consolidated statements of operations during the nine months ended September 30, 2013.

14.
INCOME TAXES
For the nine months ended September 30, 2014, the Company recorded income tax expense of $48 million on income from continuing operations before income taxes of $69 million. This compares to income tax expense of $30 million on income from continuing operations before income taxes of $145 million in the same period of 2013. Income tax expense for the nine months ended September 30, 2014 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 and income in jurisdictions with no tax expense due to offsetting valuation allowance changes. The income tax expense for the nine months ended September 30, 2013 differs from the U.S. statutory rate due primarily to pre-tax income taxed at rates lower than the U.S. statutory rate and income in jurisdictions with no tax expense due to offsetting valuation allowance changes, partially offset by pre-tax losses with no tax benefits.
During the first quarter of 2014, the Company effectively settled tax positions through examination. As a result, $20 million of unrecognized tax benefits were resolved unfavorably with the taxing authority.


On July 11, 2013, the Company became part of an affiliated group of corporations as defined in Section 1504 of the Internal Revenue Code of 1986 ("the Code"), as amended, of which American Entertainment Properties Corp. (“AEP”), a wholly owned subsidiary of Icahn Enterprises, is the common parent. The Company subsequently entered into a tax allocation agreement (the “Tax Allocation Agreement”) with AEP. Pursuant to the Tax Allocation Agreement, AEP and the Company have agreed to the allocation of certain income tax items. The Company will join AEP in the filing of AEP’s federal consolidated return and certain state consolidated returns. In those jurisdictions where the Company is filing consolidated returns with AEP, the Company will pay to AEP any tax it would have owed had it continued to file separately. To the extent that the AEP consolidated group is able to reduce its tax liability as a result of including the Company in its consolidated group, AEP will pay the Company an amount equal to 20% of such reduction and the Company will carryforward for its own use under the Tax Allocation Agreement 80% of the items that caused the tax reduction (the “Excess Tax Benefits”). While a member of the AEP affiliated group the Company will reduce the amounts it would otherwise owe AEP by the Excess Tax Benefits. Moreover, if the Company should ever become deconsolidated from AEP, AEP will reimburse the Company for any tax liability in post-deconsolidation years the Company would not have paid had it actually had the Excess Tax Benefits for its own use. The cumulative payments to the Company by AEP post-deconsolidation cannot exceed the cumulative reductions in tax to the AEP group resulting from its use of the Excess Tax Benefits. Separate return methodology will be used in determining income taxes.

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.
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 consolidated balance sheets as follows:
 
 
September 30
 
December 31
 
 
2014
 
2013
 
 
(Millions of Dollars)
Other current liabilities
 
$
4

 
$
5

Other accrued liabilities (noncurrent)
 
10

 
9

 
 
$
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 September 30, 2014, management estimates that reasonably possible material additional losses above and beyond management’s best estimate of required remediation costs as recorded approximate $42 million.



Asset Retirement Obligations
The Company records asset retirement obligations (“ARO”) in accordance with FASB ASC Topic 410, Asset Retirement and Environmental Obligations. The Company’s primary 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 consolidated balance sheets as follows:
 
 
September 30
 
December 31
 
 
2014
 
2013
 
 
(Millions of Dollars)
Other current liabilities
 
$
4

 
$
4

Other accrued liabilities (noncurrent)
 
21

 
22

 
 
$
25

 
$
26


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

In July 2013, the Company completed a common stock rights offering. The purchases of shares of common stock in the rights offering increased the indirect control of Mr. Carl C. Icahn to approximately 80.73% of the voting power. 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 September 30, 2014. If the ACF plans were voluntarily terminated, they would be underfunded by approximately $73 million as of September 30, 2014. 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.
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 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 nine months ended September 30, 2014:
 
 
Foreign
Currency
Translation
Adjustments
 
Gains and
Losses on
Cash Flow
Hedges
 
Post-
employment
Benefits
 
Total
 
 
(Millions of Dollars)
Balance January 1, 2014
 
$
(249
)
 
$
(16
)
 
$
(361
)
 
$
(626
)
 
 
 
 
 
 
 
 
 
Other comprehensive income (loss) before reclassifications
 
(93
)
 
1

 
7

 
(85
)
Amounts reclassified from AOCL
 
—

 
2

 
6

 
8

Income taxes
 
—

 
(1
)
 
(1
)
 
(2
)
Other comprehensive income (loss)
 
(93
)
 
2

 
12

 
(79
)
 
 
 
 
 
 
 
 
 
Balance September 30, 2014
 
$
(342
)
 
$
(14
)
 
$
(349
)
 
$
(705
)



17.
RECLASSIFICATIONS OUT OF ACCUMULATED OTHER COMPREHENSIVE LOSS

Items not reclassified in their entirety out of AOCL to net income are as follows:
 
 
Three Months Ended
 
Nine Months Ended
 
Affected Line Item in the
 
 
September 30
 
September 30
 
Statement Where Net Income
 
 
2014
 
2013
 
2014
 
2013
 
is Presented
 
 
(Millions of Dollars)
 
 
 
 
 
 
Losses on cash flow hedges
 
 
 
 
 
 
 
 
 
 
Commodity contracts
 
$
1

 
$
(2
)
 
$
(1
)
 
$
(3
)
 
Cost of products sold
Foreign currency contracts
 
 
 
—

 
(1
)
 
—

 
Cost of products sold
Interest rate swap contracts
 
—

 
(1
)
 
—

 
(9
)
 
Interest expense, net
Total
 
1

 
(3
)
 
(2
)
 
(12
)
 
 
Income taxes
 
(1
)
 
—

 
1

 
(1
)
 
Income tax expense
Net of tax
 
—

 
(3
)
 
(1
)
 
(13
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Postemployment benefits
 
 
 
 
 
 
 
 
 
 
Recognition of unamortized losses
 
—

 
—

 
—

 
(4
)
 
Loss from discontinued operations, net of tax
Curtailment gain
 
—

 
19

 
—

 
19

 
Gain (loss) from discontinued operations, net of tax
Curtailment gain
 
—

 
—

 
—

 
19

 
OPEB curtailment gain
Amortization of prior service credits
 
2

 
2

 
4

 
8

 
Cost of products sold and Selling, general and administrative expenses ("SG&A")
Amortization of actuarial losses
 
(3
)
 
(7
)
 
(9
)
 
(21
)
 
Cost of products sold and SG&A
Total
 
(1
)
 
14

 
(5
)
 
21

 
 
Income taxes
 
—

 
—

 
1

 
1

 
Income tax (expense) benefit
Net of tax
 
(1
)
 
14

 
(4
)
 
22

 
 
 
 
 
 
 
 
 
 
 
 
 
Total reclassifications
 
$
(1
)
 
$
11

 
$
(5
)
 
$
9

 
 


18.
WARRANTS
On December 27, 2007, the Company issued 6,951,871 warrants to purchase 6,951,871 common shares of the Company at an exercise price equal to $45.815, exercisable through December 27, 2014. All of these warrants remain outstanding as of September 30, 2014.



19.
STOCK-BASED COMPENSATION
A summary of the Company’s stock appreciation rights (“SARs”) activity as of and for the nine months ended September 30, 2014 is as follows:
 
 
SARs
 
Weighted
Average
Exercise
Price
 
Weighted
Average
Remaining
Contractual
Life
 
Aggregate
Intrinsic
Value
 
 
(Thousands)
 
 
 
(Years)
 
(Millions)
Outstanding at January 1, 2014
 
1,259

 
$
19.43

 
2.4
 
$
1

Exercised
 
(37
)
 
17.10

 
 
 
 
Forfeited
 
(3
)
 
20.10

 
 
 
 
Outstanding at March 31, 2014
 
1,219

 
$
19.49

 
2.2
 
$
1

Exercised
 
(15
)
 
17.48

 
 
 
 
Forfeited
 
(314
)
 
19.52

 
 
 
 
Outstanding at June 30, 2014
 
890

 
$
19.52

 
1.9
 
$
1

Exercised
 
(5
)
 
17.56

 
 
 
 
Forfeited
 
(14
)
 
20.41

 
 
 
 
Outstanding at September 30, 2014
 
871

 
$
19.08

 
1.7
 
$
—

 
 
 
 
 
 
 
 
 
Exercisable at September 30, 2014
 
769

 
$
19.76

 
1.6
 
$
—


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 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 exercises in the form of cash, the SARs are being treated as liability awards for accounting purposes. The Company recognized SARs income of $2 million and $4 million for the three and nine months ended September 30, 2014, respectively. The Company recognized SARs expense of $3 million and $4 million for the three and nine months ended September 30, 2013, respectively.
The September 30, 2014 and December 31, 2013 SARs fair values were estimated using the Black-Scholes valuation model with the following assumptions:
 
 
September 30, 2014
 
December 31, 2013
 
 
2012 SARs
 
2011 SARs
 
2010 SARs
 
2012 SARs
 
2011 SARs
 
2010 SARs
Exercise price
 
$
17.64

 
$
21.03

 
$
17.16

 
$
17.64

 
$
21.03

 
$
17.16

Expected volatility
 
39
%
 
39
%
 
39
%
 
48
%
 
48
%
 
48
%
Expected dividend yield
 
—
%
 
—
%
 
—
%
 
—
%
 
—
%
 
—
%
Expected forfeitures
 
—
%
 
—
%
 
—
%
 
—
%
 
—
%
 
—
%
Risk-free rate over the expected life
 
0.21
%
 
0.06
%
 
0.02
%
 
0.29
%
 
0.14
%
 
0.10
%
Expected life (in years)
 
1.2

 
0.7

 
0.2

 
1.7

 
1.1

 
0.6

Fair value (in millions)
 
$
0.5

 
$
0.2

 
$
—

 
$
2.6

 
$
2.3

 
$
0.5

Fair value of vested portion (in millions)
 
$
0.3

 
$
0.2

 
$
—

 
$
1.1

 
$
1.7

 
$
0.5


Expected volatility is based on the average of five-year historical volatility and implied volatility for a group of comparable auto industry companies as of the measurement date. Risk-free rate is determined based upon U.S. Treasury rates over the estimated expected lives. Expected dividend yield is zero as the Company has not paid dividends to holders of its common stock in the recent past nor does it expect to do so in the future. Expected forfeitures are zero as the Company has no historical experience with SARs; the impact of forfeitures is recognized by the Company upon occurrence. Expected life is the average of the time until the award is fully vested and the end of the term.



20.
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
 
Nine Months Ended
 
 
September 30
 
September 30
 
 
2014
 
2013
 
2014
 
2013
 
 
(Millions of Dollars, Except per Share Amounts)
Amounts attributable to Federal-Mogul:
 
 
 
 
 
 
 
 
Net income (loss) from continuing operations
 
$
(18
)
 
$
31

 
$
17

 
$
109

(Loss) income from discontinued operations, net of income tax
 
—

 
7

 
—

 
(49
)
Net income (loss)
 
$
(18
)
 
$
38

 
$
17

 
$
60

 
 
 
 
 
 
 
 
 
Weighted average shares outstanding, basic (in millions)
 
150.0

 
145.0

 
150.0

 
114.4

 
 
 
 
 
 
 
 
 
Incremental shares on assumed conversion of warrants (in millions)
 
—

 
—

 
—

 
—

 
 
 
 
 
 
 
 
 
Weighted average shares outstanding, diluted (in millions)
 
150.0

 
145.0

 
150.0

 
114.4

 
 
 
 
 
 
 
 
 
Net income (loss) per common share attributable to Federal-Mogul – basic and diluted:
 
 
 
 
 
 
 
 
Net income (loss) from continuing operations
 
$
(0.12
)
 
$
0.21

 
$
0.11

 
$
0.95

(Loss) income from discontinued operations, net of income tax
 
—

 
0.05

 
—

 
(0.43
)
Net income (loss)
 
$
(0.12
)
 
$
0.26

 
$
0.11

 
$
0.52


Warrants to purchase 6,951,871 common shares were not included in the computation of weighted average shares outstanding, including dilutive shares, for the three and nine months ended September 30, 2014 and 2013 because the exercise price was greater than the average market price of the Company’s common shares during these periods.
As a result of the Company’s common stock registered rights offering announced in May 2013, the Company’s total shares outstanding increased by 51,124,744 shares to 150,029,244 shares outstanding as of July 10, 2013.
21.    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.
The Company evaluates reporting segment performance principally on a non-GAAP Operational EBITDA basis. Management believes that Operational EBITDA provides supplemental information for management and investors to evaluate the operating performance of its business. Management uses and believes that investors benefit from referring to Operational EBITDA in assessing the Company’s operating results, as well as in planning, forecasting and analyzing future periods as this financial measure approximates the cash flow associated with the operational earnings of the Company. Additionally, Operational EBITDA presents measures of corporate performance exclusive of capital structure and the method by which assets were acquired and financed. Accordingly, operational EBITDA is defined as earnings from continuing operations before interest, income taxes, depreciation and amortization, and certain items such as restructuring and impairment charges, Chapter 11 and U.K. Administration related reorganization expenses, gains or losses on the sales of businesses, the non-service cost components of the U.S. based funded pension plan, OPEB curtailment gains or losses, the income statement impacts associated with stock appreciation rights, loss on extinguishment of debt and costs assoc


iated with acquisitions, legal separation and headquarters relocation.
Net sales, cost of products sold and gross margin information are as follows:

 
Three Months Ended September 30

 
Net Sales

Cost of Products Sold

Gross Margin

 
2014

2013

2014

2013

2014

2013

 
(Millions of Dollars)
Powertrain
 
$
1,091

 
$
1,038

 
$
(963
)
 
$
(908
)
 
$
128

 
$
130

Motorparts
 
859

 
734

 
(725
)
 
(609
)
 
134

 
125

Inter-segment eliminations
 
(79
)
 
(82
)
 
79

 
82

 
—

 
—

Total Reporting Segment
 
1,871

 
1,690

 
(1,609
)
 
(1,435
)
 
262

 
255

Corporate
 
—

 
—

 
—

 
—

 
—

 
—

Total Company
 
$
1,871

 
$
1,690

 
$
(1,609
)
 
$
(1,435
)
 
$
262

 
$
255

 
 
Nine Months Ended September 30
 
 
Net Sales
 
Cost of Products Sold
 
Gross Margin
 
 
2014
 
2013
 
2014
 
2013
 
2014
 
2013
 
 
(Millions of Dollars)
Powertrain
 
$
3,391

 
$
3,139

 
$
(2,966
)
 
$
(2,741
)
 
$
425

 
$
398

Motorparts
 
2,369

 
2,209

 
(1,961
)
 
(1,825
)
 
408

 
384

Inter-segment eliminations
 
(238
)
 
(255
)
 
238

 
255

 
—

 
—

Total Reporting Segment
 
5,522

 
5,093

 
(4,689
)
 
(4,311
)
 
833

 
782

Corporate
 
—

 
—

 
—

 
—

 
—

 
—

Total Company
 
$
5,522

 
$
5,093

 
$
(4,689
)
 
$
(4,311
)
 
$
833

 
$
782




Operational EBITDA and the reconciliation to net income (loss) are as follows:
 
 
Three Months Ended
 
Nine Months Ended

 
September 30

September 30

 
2014

2013

2014

2013

 
(Millions of Dollars)
 
 
 
 
Powertrain
 
$
104

 
$
94

 
$
338

 
$
286

Motorparts
 
48

 
53

 
168

 
164

Total Operational EBITDA
 
152

 
147

 
506

 
450

 
 
 
 
 
 
 
 
 
Depreciation and amortization *
 
(88
)
 
(74
)
 
(251
)
 
(216
)
Interest expense, net
 
(34
)
 
(24
)
 
(87
)
 
(77
)
Restructuring expense, net
 
(25
)
 
(4
)
 
(63
)
 
(20
)
Acquisition related costs
 
(9
)
 
—

 
(14
)
 
(3
)
Legal separation costs
 
(1
)
 
—

 
(1
)
 
—

Loss on debt extinguishment
 
—

 
—

 
(24
)
 
—

OPEB curtailment gain
 
—

 
—

 
—

 
19

Non-service cost components associated with U.S. based funded pension plans
 
2

 
(1
)
 
5

 
(2
)
Discontinued operations *
 
—

 
7

 
—

 
(49
)
Adjustment of assets to fair value
 
(1
)
 
(1
)
 
(3
)
 
(3
)
Stock appreciation rights
 
2

 
(3
)
 
4

 
(4
)
Headquarters relocation costs
 
(2
)
 
—

 
(4
)
 
—

Income tax expense
 
(15
)
 
(6
)
 
(48
)
 
(30
)
Other
 
2

 
(1
)
 
1

 
1

Net income (loss)
 
$
(17
)

$
40


$
21


$
66


* Contained within discontinued operations is $2 million of depreciation and amortization expense for the nine months ended September 30, 2013.
 
Total assets are as follows:
 
 
September 30
 
December 31

 
2014

2013

 
(Millions of Dollars)
Powertrain
 
$
3,490

 
$
3,373

Motorparts
 
3,594

 
3,055

Total Reporting Segment Assets
 
7,084

 
6,428

Corporate
 
423

 
754

Total Company Assets
 
$
7,507


$
7,182




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, 2013 (the “Annual Report”) filed on February 24, 2014 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
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.
The Company
On April 15, 2014, Federal-Mogul Corporation completed a holding company reorganization (the “Reorganization”). As a result of the Reorganization, the outstanding shares of Federal-Mogul Corporation common stock were automatically converted on a one-for-one basis into shares of Federal-Mogul Holdings Corporation common stock, and all of the stockholders of Federal-Mogul Corporation immediately prior to the Reorganization automatically became stockholders of Federal-Mogul Holdings Corporation. The rights of stockholders of Federal-Mogul Holdings Corporation are generally governed by Delaware law and Federal-Mogul Holdings Corporation’s certificate of incorporation and bylaws, which are the same in all material respects as those of Federal-Mogul Corporation immediately prior to the Reorganization. In addition, the board of directors of Federal-Mogul Holdings Corporation and its Audit Committee and Compensation Committee are composed of the same members as the board of directors, Audit Committee and Compensation Committee of Federal-Mogul Corporation prior to the Reorganization.
Information presented herein refers to Federal-Mogul Corporation. In addition, references herein to the “Company,” “Federal-Mogul,” “we,” “us,” “our” refer to Federal-Mogul Corporation for the period prior to the effective time of the Reorganization on April 15, 2014 and to Federal-Mogul Holdings Corporation for the period after the effective time of the Reorganization.
On September 3, 2014 the Company announced its plan to separate its Powertrain and Motorparts divisions into two independent, publicly-traded companies serving the global original equipment and aftermarket industries. The planned separation will be implemented through a tax-free distribution of Federal-Mogul’s Motorparts division to shareholders of Federal-Mogul Holdings Corporation.

Completion of the transaction is subject to customary conditions, including among others, the Company’s receipt of an IRS ruling or opinion of counsel to the effect that the distribution will qualify as a transaction that is generally tax-free for U.S. Federal Income tax purposes; as well as effectiveness of a Form 10 Registration Statement to be filed with the SEC. No assurances can be given regarding the ultimate timing of the separation or that it will be consummated; however, the company’s objective is to complete the spin-off of Federal-Mogul Motorparts in the first half of 2015.
Overview
The Company is a leading global supplier of technology and innovation in vehicle and industrial products for fuel economy, emissions reduction, alternative energies, environment and safety systems. The Company serves the world’s foremost original equipment manufacturers (“OEM”) and servicers (“OES”) of automotive, light, medium and heavy-duty commercial vehicles, off-road, agricultural, marine, rail, aerospace, power generation and industrial equipment (collectively, “OE”), as well as the worldwide aftermarket. The Company seeks to participate in both of these markets by leveraging its original equipment product engineering and development capability, manufacturing know-how, and expertise in managing a broad and deep range of


replacement parts to service the aftermarket. The Company believes that it is uniquely positioned to effectively manage the life cycle of a broad range of products to a diverse customer base.
The Company has established a global presence and conducts its operations through various manufacturing, distribution and technical centers that are wholly-owned subsidiaries or partially-owned joint ventures. During the nine months ended September 30, 2014, the Company derived 37% of its sales in the United States and 63% internationally. The Company has operations in established markets including Australia, Belgium, France, Germany, Italy, Japan, Spain, Sweden, the United Kingdom and the United States, and emerging markets including Argentina, Brazil, China, Czech Republic, Hungary, India, Korea, Mexico, Morocco, Poland, Romania, Russia, South Africa and Thailand. The attendant risks of the Company’s international operations are primarily related to currency fluctuations, changes in local economic and political conditions, and changes in laws and regulations.
The Company offers its customers a diverse array of market-leading products for OE and replacement parts (“aftermarket”) applications, including pistons, piston rings, piston pins, cylinder liners, valve seats and guides, ignition products, dynamic seals, bonded piston seals, combustion and exhaust gaskets, static gaskets and seals, rigid heat shields, engine bearings, industrial bearings, bushings and washers, brake disc pads, brake linings, brake blocks, element resistant systems protection sleeving products, acoustic shielding, flexible heat shields, brake system components, chassis products, wipers and lighting.
The Company operates in an extremely competitive industry, driven by global vehicle production volumes and part replacement trends. Business is typically awarded to the supplier offering the most favorable combination of cost, quality, technology and service. Customers continue to demand periodic cost reductions that require the Company to continually assess, redefine and improve its operations, products, and manufacturing capabilities to maintain and improve profitability. Management continues to develop and execute initiatives to meet the challenges of the industry and to achieve its strategy for sustainable global profitable growth.
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 global Federal-Mogul teams to be responsive to customers’ needs for superior products and to promote greater identification with Federal-Mogul 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.
The Powertrain segment primarily represents the Company’s OE business. About 93% of Powertrain's sales are to OEM customers, with the remaining 7% of its sales being sold directly to Motorparts for eventual distribution, by Motorparts, to customers in the independent aftermarket. Discussions about the Company’s Powertrain segment or its OE business should be seen as analogous. The performance of Powertrain is therefore highly correlated to changes in regional OEM light and commercial vehicle production, together with the changes in the mix of technologies (such as between light vehicle gasoline and light vehicle diesel), and changes in demand for non-automotive and industrial applications. These drivers are enhanced by the rate at which the Company gains new programs, which is itself affected by the rate at which the OEM’s make improvements to emissions and fuel economy – some in response to regional regulations. The Motorparts segment primarily represents the Company’s aftermarket business. About 75% of Motorparts' sales are to the customers in the independent aftermarket. The remaining 25% of the Motorparts business is to OEM or tier 1 suppliers to OEM, and the OES market, essentially, dealer supplied replacement parts – a feature more prevalent in Europe than in North America. The OES market is subject to the same general commercial patterns as the aftermarket business. The performance of Motorparts is therefore highly correlated to the factors that variously influence the different regional replacement parts markets around the world, such as vehicle miles driven, the average age of vehicles on the road, the size of the regional vehicle parcs and levels of consumer confidence. These drivers are enhanced by the relative strength of the aftermarket brands and the breadth of the portfolio offered relative to the changing needs of the local markets.
For a more detailed description of the Company’s business, products, industry, operating strategy and associated risks, refer to the Annual Report.




Results of Operations
Consolidated Results – Three Months Ended September 30, 2014 vs. Three Months Ended September 30, 2013

Net sales:
 
 
Three Months Ended
 
 
September 30
 
 
2014
 
2013
 
 
(Millions of Dollars)
Powertrain
 
$
1,091

 
$
1,038

Motorparts
 
859

 
734

Inter-segment eliminations
 
(79
)
 
(82
)
Total
 
$
1,871

 
$
1,690


The percentage of net sales by group and region for the three months ended September 30, 2014 and 2013 are listed below.
 
 
Powertrain
 
Motorparts
 
Total
2014
 
 
 
 
 
 
North America
 
35
%
 
53
%
 
43
%
EMEA
 
47
%
 
40
%
 
44
%
Rest of World
 
18
%
 
7
%
 
13
%
 
 
 
 
 
 
 
2013
 
 
 
 
 
 
North America
 
35
%
 
57
%
 
44
%
EMEA
 
48
%
 
37
%
 
43
%
Rest of World
 
17
%
 
6
%
 
13
%

Cost of products sold:
 
 
Three Months Ended
 
 
September 30
 
 
2014
 
2013
 
 
(Millions of Dollars)
Powertrain
 
$
(963
)
 
$
(908
)
Motorparts
 
(725
)
 
(609
)
Inter-segment eliminations
 
79

 
82

Total Reporting Segment
 
$
(1,609
)
 
$
(1,435
)



Gross margin:
 
 
Three Months Ended
 
 
September 30
 
 
2014
 
2013
 
 
(Millions of Dollars)
Powertrain
 
$
128

 
$
130

Motorparts
 
134

 
125

Total Reporting Segment
 
$
262

 
$
255


Consolidated sales increased by $181 million or 11%, to $1,871 million for the third quarter of 2014 from $1,690 million in the same period of 2013 with negligible unfavorable foreign currency impact of $5 million. Excluding sales directly related to acquisitions of $157 million, sales organically increased by $29 million, net of customer price deductions of $3 million. This organic growth is comprised of Powertrain increases of $55 million or 5%, partly offset by Motorparts decreases of $26 million. By region, this organic growth is comprised of flat sales in Europe, a 1% increase in sales in North America and a 10% increase in sales in ROW.
The Company's organic sales growth of $29 million is driven by an increase in the Powertrain Segment's external sales volumes of $55 million or 5%, net of customer price deductions. This increase is driven by improved light vehicle production and continued market share gains. In North America, Powertrain sales increased by 7% or $24 million. In Europe, where approximately 50% of Powertrain sales is derived, sales increased by 3% or $12 million compared to an increase in European light vehicle production of 1% and a decrease in commercial vehicle production of 7%. Powertrain sales in ROW increased by 11% as the company continued to aggressively invest in the region. When taking into account the regional and market mix of Powertrain sales, its sales grew in excess of underlying market demand.
Cost of products sold increased by $174 million to $1,609 million for the third quarter of 2014 compared to $1,435 million in the same period of 2013. The increase in cost of products sold related to the increase in external sales volumes/mix was $154 million, including the increase related to acquisitions of $137 million, unfavorable productivity of $15 million, strategic initiative and project costs of $5 million and an increase in depreciation of $8 million, were partially offset by savings in material costs of $9 million.
Gross margin increased by $7 million to $262 million, or 14.0% of sales for the third quarter of 2014 compared to $255 million, or 15.1% of sales in the same period of 2013. The improvement in gross margin from an increase in external sales volumes was $35 million including increased gross margin directly related to acquisitions of $20 million. Favorable materials and services sourcing of $9 million were offset by unfavorable productivity of $15 million, strategic initiative and project costs of $5 million, increased depreciation of $8 million, unfavorable customer pricing of $3 million and unfavorable currency impacts of $5 million.
Reporting Segment Results – Three Months Ended September 30, 2014 vs. Three Months Ended September 30, 2013
The following table provides a reconciliation of changes in sales, cost of products sold, gross margin and operational EBITDA from continuing operations for the three months ended September 30, 2014 compared with the three months ended September 30, 2013 for each of the Company’s reporting segments. Operational EBITDA is defined as earnings from continuing operations before interest, income taxes, depreciation and amortization, and certain items such as restructuring and impairment charges, Chapter 11 and U.K. Administration related reorganization expenses, gains or losses on the sales of businesses, the non-service cost components of the U.S. based funded pension plan, OPEB curtailment gains or losses, the income statement impacts associated with stock appreciation rights, loss on extinguishment of debt and costs associated with acquisitions, legal separation and headquarters relocation.




 
 
Powertrain
 
Motorparts
 
Inter-segment
Elimination
 
Total
Reporting
Segment
 
Corporate
 
Total
Company
 
 
(Millions of Dollars)
Sales
 
 
 
 
 
 
 
 
 
 
 
 
Three months ended September 30, 2013
 
$
1,038

 
$
734

 
$
(82
)
 
$
1,690

 
$
—

 
$
1,690

External sales volumes
 
67

 
122

 
—

 
189

 
—

 
189

Inter-segment sales volumes
 
(7
)
 
4

 
3

 
—

 
—

 
—

Customer pricing
 
(6
)
 
3

 
—

 
(3
)
 
—

 
(3
)
Foreign currency
 
(1
)
 
(4
)
 
—

 
(5
)
 
—

 
(5
)
Three months ended September 30, 2014
 
$
1,091

 
$
859

 
$
(79
)
 
$
1,871

 
$
—

 
$
1,871

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Powertrain
 
Motorparts
 
Inter-segment
Elimination
 
Total
Reporting
Segment
 
Corporate
 
Total
Company
Cost of Products Sold
 
 
Three months ended September 30, 2013
 
$
(908
)
 
$
(609
)
 
$
82

 
$
(1,435
)
 
$
—

 
$
(1,435
)
External sales volumes / mix
 
(48
)
 
(106
)
 
—

 
(154
)
 
—

 
(154
)
Inter-segment sales volumes
 
6

 
(4
)
 
(3
)
 
(1
)
 
—

 
(1
)
Productivity, net of inflation
 
(5
)
 
(10
)
 
—

 
(15
)
 
—

 
(15
)
Project costs / strategic initiatives
 
(6
)
 
1

 
—

 
(5
)
 
—

 
(5
)
Materials and services sourcing
 
3

 
6

 
—

 
9

 
—

 
9

Depreciation
 
(4
)
 
(4
)
 
—

 
(8
)
 
—

 
(8
)
Foreign currency
 
(1
)
 
1

 
—

 
—

 
—

 
—

Three months ended September 30, 2014
 
$
(963
)
 
$
(725
)
 
$
79

 
$
(1,609
)
 
$
—

 
$
(1,609
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Powertrain
 
Motorparts
 
Inter-segment
Elimination
 
Total
Reporting
Segment
 
Corporate
 
Total
Company
Gross Margin
 
 
Three months ended September 30, 2013
 
$
130

 
$
125

 
$
—

 
$
255

 
$
—

 
$
255

External sales volumes / mix
 
19

 
16

 
—

 
35

 
—

 
35

Inter-segment sales volumes
 
—

 
—

 
—

 
—

 
—

 
—

Unabsorbed fixed costs on inter-segment sales
 
(1
)
 
—

 
—

 
(1
)
 
—

 
(1
)
Customer pricing
 
(6
)
 
3

 
—

 
(3
)
 
—

 
(3
)
Productivity, net of inflation
 
(5
)
 
(10
)
 
—

 
(15
)
 
—

 
(15
)
Project costs / strategic initiatives
 
(6
)
 
1

 
—

 
(5
)
 
—

 
(5
)
Materials and services sourcing
 
3

 
6

 
—

 
9

 
—

 
9

Depreciation
 
(4
)
 
(4
)
 
—

 
(8
)
 
—

 
(8
)
Foreign currency
 
(2
)
 
(3
)
 
—

 
(5
)
 
—

 
(5
)
Three months ended September 30, 2014
 
$
128

 
$
134

 
$
—

 
$
262

 
$
—

 
$
262

 
 
 
 
 
 
 
 
 
 
 
 
 


 
 
Powertrain
 
Motorparts
 
Inter-segment
Elimination
 
Total
Reporting
Segment
 
Corporate
 
Total
Company
Operational EBITDA
 
 
Three months ended September 30, 2013
 
$
94

 
$
53

 
$
—

 
$
147

 
$
—

 
$
147

External sales volumes / mix
 
20

 
5

 
—

 
25

 
—

 
25

Unabsorbed fixed costs on inter-segment sales
 
(1
)
 
—

 
—

 
(1
)
 
—

 
(1
)
Customer pricing
 
(6
)
 
3

 
—

 
(3
)
 
—

 
(3
)
Productivity, net of inflation
 
(7
)
 
(10
)
 
—

 
(17
)
 
—

 
(17
)
Project costs / strategic initiatives
 
(6
)
 
(6
)
 
—

 
(12
)
 
—

 
(12
)
Sourcing, cost of products sold
 
3

 
6

 
—

 
9

 
—

 
9

Equity earnings in non-consolidated affiliates
 
2

 
1

 
—

 
3

 
—

 
3

Foreign currency
 
4

 
(3
)
 
—

 
1

 
—

 
1

Other
 
1

 
(1
)
 
—

 
—

 
—

 
—

Three months ended September 30, 2014
 
$
104

 
$
48

 
$
—

 
$
152

 
$
—

 
$
152

Depreciation and amortization
 
 
 
 
 
 
 
 
 
 
 
(88
)
Interest expense, net
 
 
 
 
 
 
 
 
 
 
 
(34
)
Restructuring expense, net
 
 
 
 
 
 
 
 
 
 
 
(25
)
Acquisition related costs
 
 
 
 
 
 
 
 
 
 
 
(9
)
Legal separation costs
 
 
 
 
 
 
 
 
 
 
 
(1
)
Non-service cost components associated with
the U.S. based funded pension plan
 
 
 
 
 
 
 
 
 
 
 
2

Adjustment of assets to fair value
 
 
 
 
 
 
 
 
 
 
 
(1
)
Stock appreciation rights
 
 
 
 
 
 
 
 
 
 
 
2

Headquarters relocation costs
 
 
 
 
 
 
 
 
 
 
 
(2
)
Income tax expense
 
 
 
 
 
 
 
 
 
 
 
(15
)
Other
 
 
 
 
 
 
 
 
 
 
 
2

Net income
 
 
 
 
 
 
 
 
 
 
 
$
(17
)

Powertrain
Sales increased by $53 million, or 5%, to $1,091 million for the third quarter of 2014 from $1,038 million in the same period of 2013. Excluding negligible unfavorable currency movements of $1 million and sales directly related to the acquisition of the DZV bearings business of $6 million, external sales volumes increased by $55 million or 5% net of $6 million from customer price decreases. This increase is driven by improved light vehicle production and continued market share gains. In North America, Powertrain sales increased by 7% or $24 million. In Europe, where approximately 50% of Powertrain sales is derived, sales increased by 2% or $11 million compared to an increase in European light vehicle production of 1% and a decrease in commercial vehicle production of 7%. Powertrain sales in ROW increased by 11% as the company continued to aggressively invest in the region. When taking into account the regional and market mix of Powertrain sales, its sales grew in excess of underlying market demand.
Cost of products sold increased by $55 million to $963 million for the third quarter of 2014 compared to $908 million in the same period of 2013. The increase in materials, labor and overhead as a direct result of external sales volumes/mix was $48 million. The increase from unfavorable productivity net of inflation of $5 million, project costs of $6 million and increased depreciation of $4 million were partially offset by a decrease in materials, labor and overhead from a decrease in inter-segment sales volumes of $6 million and savings in material costs of $3 million.
Gross margin decreased by $2 million to $128 million, or 11.7% of sales for the third quarter of 2014 from $130 million, or 12.5% of sales in the same period of 2013. Margin increased by $19 million directly related to the increase in external sales volumes/mix inclusive of $1 million of margin directly related to the acquisition of the DZV bearings business. Material and services sourcing savings improved margins by $3 million. Gross margin was negatively impacted by unfavorable productivity, net of inflation of $5 million, project costs of $6 million, unfavorable customer pricing of $6 million, increased depreciation of $4 million, and negative currency movements of $2 million.


Operational EBITDA increased by $10 million to $104 million for the third quarter of 2014 from $94 million in the same period of 2013. The increase is attributable to $20 million of net favorable impact from external sales volumes/mix inclusive of a $2 million increase from the acquisition of the DZV bearings business, currency movements of $4 million, savings from materials and services sourcing of $3 million and a $2 million increase in earnings from non-consolidated affiliates. These increases were partially offset by unfavorable productivity net of inflation of $7 million, project costs of $6 million, and unfavorable customer pricing of $6 million.

Motorparts
Sales increased by $125 million, or 17%, to $859 million for the third quarter of 2014 from $734 million in the same period of 2013. When excluding negative currency movements of $4 million and the increase in sales of $151 million related to the Affinia chassis business acquisition and Honeywell friction business acquisition, external sales decreased by $26 million. Sales in North America were down 4% primarily due to the exit of certain unprofitable business as well as lower sales in Mexico. European sales decreased by 5% largely the result of weaker aftermarket and service channel sales including a significant decline in Eastern Europe. Sales in ROW increased by 7% driven by continued growth in Asia.
Cost of products sold increased by $116 million to $725 million for the third quarter of 2014 compared to $609 million in the same period of 2013. The increase in materials, labor and overhead related to the Affinia chassis business acquisition and Honeywell friction business acquisition was $132 million. Excluding cost of sales related to acquisitions, cost of products sold decreased by $16 million. The decrease is due to reduced external sales volumes combined with materials and services sourcing savings of $32 million, partially offset by $10 million of unfavorable productivity, including inventory adjustments, and increased depreciation of $4 million.
Gross margin increased by $9 million to $134 million, or 15.6% of sales, for the third quarter of 2014 compared to $125 million or 17% of sales, in the same period of 2013. The increase in gross margin related to the Affinia chassis business acquisition and Honeywell friction business acquisition was $19 million. Excluding gross margin related to acquisitions, gross margin decreased by $10 million. The decrease is due to the impact on gross margin from reduced external sales volumes of $3 million, $10 million of unfavorable productivity, including inventory adjustments, increased depreciation of $4 million, and unfavorable currency movements of $3 million. These decreases were partially offset by materials and sourcing savings of $6 million and favorable pricing of $3 million.
Operational EBITDA decreased by $5 million to $48 million for the third quarter of 2014 from $53 million in the same period of 2013. The decrease is attributable to $10 million of unfavorable productivity, including inventory adjustments, costs associated with strategic initiatives of $6 million and unfavorable currency movements of $3 million. These decreases were partially offset by the net favorable impact of $5 million from reduced external sales volumes/mix offset by positive contribution from the Affinia chassis business acquisition, savings in materials and sourced products of $6 million, and favorable pricing of $3 million.

Selling, General and Administrative Expenses
Selling, general and administrative expenses (“SG&A”) were $210 million, or 11.2% of net sales, for the third quarter of 2014 as compared to $177 million, or 10.5% of net sales, for the same quarter of 2013. The increase in SG&A costs is primarily attributable to the addition of SG&A costs from the Affinia chassis business acquisition and the Honeywell friction business acquisition as well as project costs associated with strategic initiatives in Motorparts.
The Company maintains technical centers throughout the world designed to integrate the Company’s leading technologies into advanced products and processes, to provide engineering support for all of the Company’s manufacturing sites, and to provide technological expertise in engineering and design development providing solutions for customers and bringing new, innovative products to market. Included in SG&A were research and development (“R&D”) costs, including product and validation costs, of $50 million for the third quarter of 2014 compared with $43 million for the same period of 2013.

Interest Expense, Net
Net interest expense was $34 million for the third quarter of 2014 compared to $24 million for the third quarter of 2013. This increase is attributable to higher rates following the refinancing of the Company's term loans in April 2014.



Restructuring Activities
The following is a summary of the Company’s consolidated restructuring liabilities and related activity as of and for the quarter ended September 30, 2014:
 
 
Powertrain
 
Motorparts
 
Total
Reporting
Segment
 
Corporate
 
Total
Company
 
 
(Millions of Dollars)
Balance at June 30, 2014
 
$
24

 
$
18

 
$
42

 
$
1

 
$
43

Provisions
 
20

 
5

 
25

 
—

 
25

Payments
 
(6
)
 
(8
)
 
(14
)
 
—

 
(14
)
Foreign currency
 
(3
)
 
—

 
(3
)
 
—

 
(3
)
Balance at September 30, 2014
 
$
35

 
$
15

 
$
50

 
$
1

 
$
51


Other (Expense) Income, Net
The specific components of “Other (expense) income, net” for the three months ended September 30, are as follows:
 
 
Three Months Ended
 
 
September 30
 
 
2014
 
2013
 
 
(Millions of Dollars)
Losses on sales of account receivables
 
(2
)
 
(2
)
Foreign currency exchange
 
$
1

 
$
(5
)
Legal separation costs
 
(1
)
 
—

Third-party royalty income
 
2

 
1

Adjustment of Chapter 11 accrual
 
—

 
—

Other
 
7

 
—

 
 
$
7

 
$
(6
)

Income Taxes
For the three months ended September 30, 2014, the Company recorded income tax expense of $15 million on a loss from continuing operations before income taxes of $2 million. This compares to an income tax expense of $6 million on income from continuing operations before income taxes of $39 million in the same period of 2013. The income tax expenses for the three months ended September 30, 2014 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 and income in jurisdictions with no tax expense due to offsetting valuation allowance changes. The income tax expense for the three months ended September 30, 2013 differs from the U.S. statutory rate due primarily to pre-tax income taxed at rates lower than the U.S. statutory rate and income in jurisdictions with no tax expense due to offsetting valuation allowance changes, partially offset by pre-tax losses with no tax benefits.



Discontinued Operations
In connection with its strategic planning process, the Company assesses its operations for market position, product technology and capability, and profitability. Those businesses determined by management not to have a sustainable competitive advantage are considered non-core and may be considered for divestiture or other exit activities.
During 2013, the Company divested its sintered components operations located in France (first quarter event), its connecting rod manufacturing facility located in Canada (second quarter event), its camshaft foundry located in the United Kingdom (second quarter event) and its fuel pump business, which included an aftermarket business component and a manufacturing and research and development facility located in the United States (third quarter event). These divestitures have been presented as discontinued operations in the consolidated statements of operations. The Company recognized a gain on sale of discontinued operations, inclusive of income taxes, of $9 million during the three months ended September 30, 2013.

Consolidated Results – Nine Months Ended September 30, 2014 vs. Nine Months Ended September 30, 2013

Net sales:
 
 
Nine Months Ended
 
 
September 30
 
 
2014
 
2013
 
 
(Millions of Dollars)
Powertrain
 
$
3,391

 
$
3,139

Motorparts
 
2,369

 
2,209

Inter-segment eliminations
 
(238
)
 
(255
)
Total
 
$
5,522

 
$
5,093


The percentage of net sales by group and region for the nine months ended September 30, 2014 and 2013 are listed below.
 
 
Powertrain
 
Motorparts
 
Total
2014
 
 
 
 
 
 
North America
 
34
%
 
56
%
 
43
%
EMEA
 
49
%
 
38
%
 
44
%
Rest of World
 
17
%
 
6
%
 
13
%
 
 
 
 
 
 
 
2013
 
 
 
 
 
 
North America
 
34
%
 
57
%
 
44
%
EMEA
 
49
%
 
37
%
 
44
%
Rest of World
 
17
%
 
6
%
 
12
%

Cost of products sold:
 
 
Nine Months Ended
 
 
September 30
 
 
2014
 
2013
 
 
(Millions of Dollars)
Powertrain
 
$
(2,966
)
 
$
(2,741
)
Motorparts
 
(1,961
)
 
(1,825
)
Inter-segment eliminations
 
238

 
255

Total Reporting Segment
 
$
(4,689
)
 
$
(4,311
)


42

Gross margin:
 
 
Nine Months Ended
 
 
September 30
 
 
2014
 
2013
 
 
(Millions of Dollars)
Powertrain
 
$
425

 
$
398

Motorparts
 
408

 
384

Total Reporting Segment
 
$
833

 
$
782

Consolidated sales increased by $429 million or 8%, to $5,522 million for the nine months ended September 30, 2014 from $5,093 million in the same period of 2013 including favorable foreign currency impact of $21 million. Excluding sales directly related to acquisitions of 198 million, sales organically increased by $210 million or 4%, net of customer price deductions of $25 million. This organic growth is comprised of an increase in Powertain's external sales volumes of $241 million or 8% including customer price reductions of $22 million, partly offset by a decrease in Motorparts external sales of $31 million including customer price reductions of $3 million. By region, this organic growth is comprised of a 1% increase in sales in Europe , a 4% increase in sales in North America and a 11% increase in sales in ROW.
The Company's organic sales growth of $210 million is driven by an increase in Powertain's external sales volumes, net of customer price decreases of $241 million or 8%. This increase is driven by higher sales volumes and market share gain. In Europe, Powertain sales increased by 5% or $75 million compared to an increase in European light vehicle of 4% and a decrease in commercial vehicle production of 4%. In North America, Powertain sales increased by 11% or $104 million compared to an increase in both light vehicle and commercial vehicle production of 4% and 12% respectively. In ROW, as Powertain's presence in the emerging light vehicle market continued to grow, Powertrain sales increased by $62 million or 13%, compared to an increase in both light vehicle of 3% and a decline in commercial vehicle production of 1%. When taking into account Powertrain's regional and market mix, its sales therefore grew in excess of underlying market demand.
Cost of products sold increased by $378 million to $4,689 million for the nine months ended September 30, 2014 compared to $4,311 million in the same period of 2013. The increase in materials, labor and overhead as a direct result of external sales volumes/mix was $329 million including the increase related to acquisitions of $170 million. The impact from unfavorable productivity and strategic initiative and project costs of $37 million, foreign currency of $23 million and an increase in depreciation of $20 million were partially offset by savings in material costs of $34 million.
Gross margin increased by $51 million to $833 million, or 15.1% of sales, for the nine months ended September 30, 2014 compared to $782 million, or 15.4% of sales in the same period of 2013. The favorable impact on margins due to external sales volumes/mix was $104 million, including a $28 million increase related to acquisitions, representing a conversion of 24% on the incremental sales. Favorable materials and services sourcing savings of $34 million were offset by unfavorable productivity of $24 million, project costs and costs related to strategic initiatives of $13 million, unfavorable customer pricing of $25 million and increased depreciation of $20 million.

Reporting Segment Results – Nine Months Ended September 30, 2014 vs. Nine Months Ended September 30, 2013
The following table provides a reconciliation of changes in sales, cost of products sold, gross margin and operational EBITDA from continuing operations for the nine months ended September 30, 2014 compared with the nine months ended September 30, 2013 for each of the Company’s reporting segments. Operational EBITDA is defined as earnings from continuing operations before interest, income taxes, depreciation and amortization, and certain items such as restructuring and impairment charges, Chapter 11 and U.K. Administration related reorganization expenses, gains or losses on the sales of businesses, the non-service cost components of the U.S. based funded pension plan, OPEB curtailment gains or losses, the income statement impacts associated with stock appreciation rights, loss on extinguishment of debt and costs associated with acquisitions, legal separation and headquarters relocation.




 
 
Powertrain
 
Motorparts
 
Inter-segment
Elimination
 
Total
Reporting
Segment
 
Corporate
 
Total
Company
 
 
(Millions of Dollars)
Sales
 
 
 
 
 
 
 
 
 
 
 
 
Nine months ended September 30, 2013
 
$
3,139

 
$
2,209

 
$
(255
)
 
$
5,093

 
$
—

 
$
5,093

External sales volumes
 
277

 
156

 
—

 
433

 
—

 
433

Inter-segment sales volumes
 
(23
)
 
6

 
17

 
—

 
—

 
—

Customer pricing
 
(22
)
 
(3
)
 
—

 
(25
)
 
—

 
(25
)
Foreign currency
 
20

 
1

 
—

 
21

 
—

 
21

Nine months ended September 30, 2014
 
$
3,391

 
$
2,369

 
$
(238
)
 
$
5,522

 
$
—

 
$
5,522

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Powertrain
 
Motorparts
 
Inter-segment
Elimination
 
Total
Reporting
Segment
 
Corporate
 
Total
Company
Cost of Products Sold
 
 
Nine months ended September 30, 2013
 
$
(2,741
)
 
$
(1,825
)
 
$
255

 
$
(4,311
)
 
$
—

 
$
(4,311
)
External sales volumes / mix
 
(205
)
 
(124
)
 
—

 
(329
)
 
—

 
(329
)
Inter-segment sales volumes
 
20

 
(6
)
 
(17
)
 
(3
)
 
—

 
(3
)
Productivity, net of inflation
 
(7
)
 
(17
)
 
—

 
(24
)
 
—

 
(24
)
Project costs / strategic initiatives
 
(11
)
 
(2
)
 
—

 
(13
)
 
—

 
(13
)
Materials and services sourcing
 
13

 
21

 
—

 
34

 
—

 
34

Depreciation
 
(15
)
 
(5
)
 
—

 
(20
)
 
—

 
(20
)
Foreign currency
 
(20
)
 
(3
)
 
—

 
(23
)
 
—

 
(23
)
Nine months ended September 30, 2014
 
$
(2,966
)
 
$
(1,961
)
 
$
238

 
$
(4,689
)
 
$
—

 
$
(4,689
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Powertrain
 
Motorparts
 
Inter-segment
Elimination
 
Total
Reporting
Segment
 
Corporate
 
Total
Company
Gross Margin
 
 
Nine months ended September 30, 2013
 
$
398

 
$
384

 
$
—

 
$
782

 
$
—

 
$
782

External sales volumes / mix
 
72

 
32

 
—

 
104

 
—

 
104

Inter-segment sales volumes
 
—

 
—

 
—

 
—

 
—

 
—

Unabsorbed fixed costs on inter-segment sales
 
(3
)
 
—

 
—

 
(3
)
 
—

 
(3
)
Customer pricing
 
(22
)
 
(3
)
 
—

 
(25
)
 
—

 
(25
)
Productivity, net of inflation
 
(7
)
 
(17
)
 
—

 
(24
)
 
—

 
(24
)
Project costs / strategic initiatives
 
(11
)
 
(2
)
 
—

 
(13
)
 
—

 
(13
)
Materials and services sourcing
 
13

 
21

 
—

 
34

 
—

 
34

Depreciation
 
(15
)
 
(5
)
 
—

 
(20
)
 
—

 
(20
)
Foreign currency
 
—

 
(2
)
 
—

 
(2
)
 
—

 
(2
)
Nine months ended September 30, 2014
 
$
425

 
$
408

 
$
—

 
$
833

 
$
—

 
$
833



 
 
Powertrain
 
Motorparts
 
Inter-segment
Elimination
 
Total
Reporting
Segment
 
Corporate
 
Total
Company
Operational EBITDA
 
 
Nine months ended September 30, 2013
 
$
286

 
$
164

 
$
—

 
$
450

 
$
—

 
$
450

External sales volumes / mix
 
75

 
16

 
—

 
91

 
—

 
91

Unabsorbed fixed costs on inter-segment sales
 
(3
)
 
—

 
—

 
(3
)
 
—

 
(3
)
Customer pricing
 
(22
)
 
(3
)
 
—

 
(25
)
 
—

 
(25
)
Productivity, net of inflation
 
(2
)
 
(11
)
 
—

 
(13
)
 
—

 
(13
)
Project costs / strategic initiatives
 
(10
)
 
(11
)
 
—

 
(21
)
 
—

 
(21
)
Sourcing, cost of products sold
 
13

 
21

 
—

 
34

 
—

 
34

Sourcing, SG&A
 
—

 
2

 
—

 
2

 
—

 
2

Equity earnings in non-consolidated affiliates
 
8

 
3

 
—

 
11

 
—

 
11

Foreign currency
 
(2
)
 
(2
)
 
—

 
(4
)
 
—

 
(4
)
Other
 
(5
)
 
(11
)
 
—

 
(16
)
 
—

 
(16
)
Nine months ended September 30, 2014
 
$
338

 
$
168

 
$
—

 
$
506

 
$
—

 
$
506

Depreciation and amortization
 
 
 
 
 
 
 
 
 
 
 
(251
)
Interest expense, net
 
 
 
 
 
 
 
 
 
 
 
(87
)
Restructuring expense, net
 
 
 
 
 
 
 
 
 
 
 
(63
)
Acquisition related costs
 
 
 
 
 
 
 
 
 
 
 
(14
)
Legal separation costs
 
 
 
 
 
 
 
 
 
 
 
(1
)
Loss on debt extinguishment
 
 
 
 
 
 
 
 
 
 
 
(24
)
Non-service cost components associated with
the U.S. based funded pension plan
 
 
 
 
 
 
 
 
 
 
 
5

Adjustment of assets to fair value
 
 
 
 
 
 
 
 
 
 
 
(3
)
Stock appreciation rights
 
 
 
 
 
 
 
 
 
 
 
4

Headquarters relocation costs
 
 
 
 
 
 
 
 
 
 
 
(4
)
Income tax expense
 
 
 
 
 
 
 
 
 
 
 
(48
)
Other
 
 
 
 
 
 
 
 
 
 
 
1

Net income
 
 
 
 
 
 
 
 
 
 
 
$
21


Powertrain
Sales increased by $252 million, or 8%, to $3,391 million for the nine months ended September 30, 2014 from $3,139 million in the same period of 2013. This increase is inclusive of $14 million of sales directly related to acquisitions. The Powertrain segment generates approximately 70% of its sales outside the United States and the resulting currency movements increased sales by $20 million. External sales volumes increased by $241 million or 8%, net of $22 million from customer price decreases. This increase is driven by higher sales volumes and market share gain. In Europe, Powertain sales increased by 5% or $75 million compared to an increase in European light vehicle of 4% and a decrease in commercial vehicle production of 4%. In North America, Powertain sales increased by 11% or $104 million compared to an increase in both light vehicle and commercial vehicle production of 4% and 12% respectively. In ROW, as Powertain's presence in the emerging light vehicle market continued to grow, Powertrain sales increased by $62 million or 13%, compared to an increase in both light vehicle of 3% and a decline in commercial vehicle production of 1%. When taking into account Powertrain's regional and market mix, its sales grew in excess of underlying market demand.
Cost of products sold increased by $225 million to $2,966 million for the nine months ended September 30, 2014 compared to $2,741 million in the same period of 2013. The increase in materials, labor and overhead as a direct result of external and inter-segment sales volumes/mix was $185 million. The increase from foreign currency impacts of $20 million, project costs of $11 million, unfavorable productivity of $7 million, and increased depreciation of $15 million were partially offset by savings in materials and services sourcing costs of $13 million.


Gross margin increased by $27 million to $425 million, or 12.5% of sales for the nine months ended September 30, 2014 from $398 million, or 12.7% of sales in the same period of 2013. Gross margin increased by $72 million due to the increase in external sales volumes/mix including increased margin of $2 million from acquisitions, representing a conversion of 26% on the incremental sales. Unfavorable customer pricing of $22 million, increased depreciation of $15 million, project costs of $11 million, and unfavorable productivity of $7 million were partially offset by savings from materials and services sourcing of $13 million.
Operational EBITDA increased by $52 million to $338 million or 10.1% of revenue for the nine months ended September 30, 2014 from $286 million or 9.1% of revenue in the same period of 2013. The increase in Operational EBITDA as a result of the net increase in external sales volumes/mix was $75 million including the favorable impact of $4 million from acquisitions. Additionally, Operational EBITDA increased from savings from materials and services sourcing of $13 million and a $8 million increase in earnings from non-consolidated affiliates. These increases were partially offset by unfavorable customer pricing of $22 million, project costs of $10 million, unfavorable productivity of $2 million, foreign currency of $2 million, unabsorbed fixed costs on inter-segment sales of $3 million and other reductions of $5 million.

Motorparts
Sales increased by $160 million, or 7%, to $2,369 million for the nine months ended September 30, 2014 from $2,209 million in the same period of 2013. This increase is inclusive of $184 million directly related to the Affinia chassis business acquisition and Honeywell friction business acquisition. Excluding sales from acquisitions, external sales volumes decreased by $31 million, including customer price reductions of $3 million. On a regional basis, sales in North America were down 1% driven by an increase in the US & Canada aftermarket offset by a decline in Mexico and export aftermarket sales due to general softness in those markets. As well, North America OE sales decreased due to the planned exit of a customer supply contract. In Europe, sales decreased by 4% driven by lower demand in the aftermarket and service channels. Sales in ROW increased by 5% versus 2013 driven by strong aftermarket demand, especially in Asia.
Cost of products sold increased by $136 million to $1,961 million for the nine months ended September 30, 2014 compared to $1,825 million in the same period of 2013. The increase in materials, labor and overhead related to the Affinia chassis business acquisition and Honeywell friction business acquisition was $158 million. Excluding costs related to acquisitions, the cost of products sold decreased by $22 million. The decrease is due to the impact on cost of products sold from reduced net external sales volumes of $28 million and materials and services sourcing savings of $21 million. These decreases were partially offset by project costs of $2 million, $17 million of unfavorable productivity, including inventory adjustments, increased depreciation of $5 million, and currency movements of $3 million.
Gross margin increased by $24 million to $408 million, or 17.2% of sales, for the nine months ended September 30, 2014 compared to $384 million or 17.4% of sales, in the same period of 2013. The increase in absolute gross margin related to the Affinia chassis business acquisition and Honeywell friction business acquisition was $26 million. Excluding gross margin related to acquisitions, gross margin decreased by $2 million. Materials and services sourcing savings of $21 million, the favorable impact of sales volumes/mix of $6 million were offset by $17 million of unfavorable productivity, including inventory adjustments, project costs of $2 million, unfavorable customer pricing of $3 million, increased depreciation of $5 million and unfavorable foreign currency of $2 million.
Operational EBITDA increased by $4 million to $168 million for the nine months ended September 30, 2014 from $164 million in the same period of 2013. Savings in materials and sourced products of $23 million, the favorable impact on Operational EBITDA from the increase in sales volumes/mix of $16 million including positive contribution from the Affinia chassis business acquisition and increased equity earnings in non-consolidated affiliates of $3 million were partially offset by $11 million of unfavorable productivity, including inventory adjustments, project costs of $11 million, unfavorable customer pricing of $3 million, and other reductions of $11 million, primarily related to weaker performance in the wiper business.

Selling, General and Administrative Expenses
Selling, general and administrative expenses (“SG&A”) were $585 million, or 10.6% of net sales, for the nine months ended September 30, 2014 as compared to $545 million, or 10.7% of net sales, for the same period of 2013. The increase in SG&A costs is primarily attributable to the addition of SG&A costs from the Affinia chassis business acquisition and the Honeywell friction business acquisition as well as project costs associated with strategic initiatives in Motorparts.
The Company maintains technical centers throughout the world designed to integrate the Company’s leading technologies into advanced products and processes, to provide engineering support for all of the Company’s manufacturing sites, and to provide technological expertise in engineering and design development providing solutions for customers and bringing new, innovative products to market. Included in SG&A were research and development (“R&D”) costs, including product and validation costs, of $143 million for the nine months ended September 30, 2014 compared with $130 million for the same period of 2013.



Interest Expense, Net
Net interest expense was $87 million for the nine months ended September 30, 2014 compared to $77 million for the same period of 2013. This increase is attributable to higher rates following the refinancing of the Company's term loans in April 2014.

Restructuring Activities
The following is a summary of the Company’s consolidated restructuring liabilities and related activity as of and for nine months ended September 30, 2014:
 
 
Powertrain
 
Motorparts
 
Total
Reporting
Segment
 
Corporate
 
Total
Company
 
 
(Millions of Dollars)
Balance at January 1, 2014
 
$
8

 
$
14

 
$
22

 
$
2

 
$
24

Provisions
 
3

 
4

 
7

 
1

 
$
8

Payments
 
(3
)
 
(6
)
 
(9
)
 
(1
)
 
$
(10
)
Balance at March 31, 2014
 
$
8

 
$
12

 
$
20

 
$
2

 
$
22

Provisions
 
19

 
11

 
30

 
—

 
30

Payments
 
(3
)
 
(5
)
 
(8
)
 
(1
)
 
(9
)
Balance at June 30, 2014
 
$
24

 
$
18

 
$
42

 
$
1

 
$
43

Provisions
 
20

 
5

 
25

 
—

 
25

Payments
 
(6
)
 
(8
)
 
(14
)
 
—

 
(14
)
Foreign Currency
 
(3
)
 
—

 
(3
)
 
—

 
(3
)
Balance at September 30, 2014
 
$
35

 
$
15

 
$
50

 
$
1

 
$
51


In February 2013, the Company’s Board of Directors approved evaluation of restructuring opportunities in order to improve operating performance. As such, the Company has initiated several programs and will continue to evaluate alternatives to align its business with executive management's strategy.

OPEB Curtailment Gain
During the second quarter of 2013, the Company ceased operations at one of its U.S. manufacturing locations. As this location participated in the Company’s U.S. Welfare Benefit Plan, the Company had this plan re-measured due to its curtailment implications. The resulting reduction in the average remaining future service period to the full eligibility date of the remaining active plan participants in the Company’s U.S. Welfare Benefit Plan triggered the recognition of a $19 million OPEB curtailment gain, which was recognized in the consolidated statements of operations during the nine months ended September 30, 2013.



Other (Expense) Income, Net
The specific components of “Other (expense) income, net” for the nine months ended September 30, 2014 are as follows:
 
 
Nine Months Ended
 
 
September 30
 
 
2014
 
2013
 
 
(Millions of Dollars)
Losses on sales of account receivables
 
(5
)
 
(5
)
Foreign currency exchange
 
$
(4
)
 
$
(7
)
Legal separation costs
 
(1
)
 
—

Third-party royalty income
 
5

 
5

Adjustment of Chapter 11 accrual
 
—

 
4

Other
 
1

 
2

 
 
$
(4
)
 
$
(1
)

Income Taxes
For the nine months ended September 30, 2014, the Company recorded income tax expense of $48 million on income from continuing operations before income taxes of $69 million. This compares to an income tax expense of $30 million on income from continuing operations before income taxes of $145 million in the same period of 2013. Income tax expense for the nine months ended September 30, 2014 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 and income in jurisdictions with no tax expense due to offsetting valuation allowance changes. The income tax expense for the nine months ended September 30, 2013 differs from the U.S. statutory rate due primarily to pre-tax income taxed at rates lower than the U.S. statutory rate and income in jurisdictions with no tax expense due to offsetting valuation allowance changes, partially offset by pre-tax losses with no tax benefits.
During the nine months ended September 30, 2014, the Company effectively settled tax positions through examination. As a result, $20 million of unrecognized tax benefits were resolved unfavorably with the taxing authority.
On July 11, 2013, the Company became part of an affiliated group of corporations as defined in Section 1504 of the Internal Revenue Code of 1986, as amended, of which American Entertainment Properties Corp. (“AEP”), a wholly owned subsidiary of Icahn Enterprises, is the common parent. The Company subsequently entered into a Tax Allocation Agreement (the “Tax Allocation Agreement”) with AEP. Pursuant to the Tax Allocation Agreement, AEP and the Company have agreed to the allocation of certain income tax items. The Company will join AEP in the filing of AEP’s federal consolidated return and certain state consolidated returns. In those jurisdictions where the Company is filing consolidated returns with AEP, the Company will pay to AEP any tax it would have owed had it continued to file separately. To the extent that the AEP consolidated group is able to reduce its tax liability as a result of including the Company in its consolidated group, AEP will pay the Company an amount equal to 20% of such reduction and the Company will carryforward for its own use under the Tax Allocation Agreement 80% of the items that caused the tax reduction (the “Excess Tax Benefits”). While a member of the AEP affiliated group the Company will reduce the amounts it would otherwise owe AEP by the Excess Tax Benefits. Moreover, if the Company should ever become deconsolidated from AEP, AEP will reimburse the Company for any tax liability in post-consolidation years the Company would not have paid had it actually had the Excess Tax Benefits for its own use. The cumulative payments to the Company by AEP post-consolidation cannot exceed the cumulative reductions in tax to the AEP group resulting from its use of the Excess Tax Benefits. Separate return methodology will be used in determining income taxes



Discontinued Operations
In connection with its strategic planning process, the Company assesses its operations for market position, product technology and capability, and profitability. Those businesses determined by management not to have a sustainable competitive advantage are considered non-core and may be considered for divestiture or other exit activities.
During 2013, the Company divested its sintered components operations located in France (first quarter event), its connecting rod manufacturing facility located in Canada (second quarter event), its camshaft foundry located in the United Kingdom (second quarter event) and its fuel pump business, which included an aftermarket business component and a manufacturing and research and development facility located in the United States (third quarter event). These divestitures have been presented as discontinued operations in the consolidated statements of operations. The Company recognized a loss on sale of discontinued operations, inclusive of income taxes, of $43 million million during the nine months ended September 30, 2013.


Litigation and Environmental Contingencies
For a summary of material litigation and environmental contingencies, refer to Note 15, Commitments and Contingencies, of the consolidated financial statements.

Liquidity and Capital Resources
Cash Flow
Cash flow provided from operating activities was $262 million for the nine months ended September 30, 2014 compared to cash flow to $258 million for the comparable period of 2013. The $4 million year-over-year increase is primarily attributable to the year-over-year improvement in cash flow provided by other operating assets and liabilities of $32 million offset by the year-over-year cash outflow from working capital of $17 million, primarily driven by the investment in inventory made as part of the strategic initiatives.
Cash flow used by investing activities was $599 million for the nine months ended September 30, 2014 compared to $245 million for the comparable period of 2013. Capital expenditures of $282 million and $270 million for the nine months ended September 30, 2014 and 2013, respectively, were required to support future sales growth and productivity improvements. During the nine months ended September 30, 2014, there were $321 million of payments to acquire businesses, net of cash acquired, which included: $15 million to acquire the DZV bearings business; $140 million to acquire the Affinia chassis business, exclusive of $9 million of contingent consideration classified within financing activities; $156 million to acquire the Honeywell Friction Business and other investments of $10 million. The Company assumed $10 million of pre-existing debt associated with the DZV bearings business acquisition. During the nine months ended September 30, 2013, there were $26 million of net payments related to business dispositions.
Cash flow provided by financing activities was $36 million for the nine months ended September 30, 2014 compared to cash flow provided from financing activities of $491 million for the comparable period of 2013. The cash provided by financing activities in 2013 is primarily due to the a $500 million cash inflow associated with the Company's stock rights offering in which approximately 51 million shares of the Company's common stock was purchased during July 2013.
Financing Activities
On April 15, 2014, Federal-Mogul Holdings Corporation entered into a new tranche B term loan facility (the “New Tranche B Facility”) and a new tranche C term loan facility (the “New Tranche C Facility,” and together with the New Tranche B Facility, the “New Term Facilities”), which were arranged by Citigroup Global Markets Inc. and Credit Suisse Securities (USA) LLC (the "Term Arrangers"), and assumed all of the obligations of Federal-Mogul Corporation with respect to the Replacement Revolving Facility under the Credit Agreement (both defined below). The New Term Facilities were entered into, and the Replacement Revolving Facility was assumed, by Federal-Mogul Holdings Corporation pursuant to an amendment dated as of April 15, 2014 to the previously existing Term Loan and Revolving Credit Agreement dated December 27, 2007 among Federal-Mogul Corporation, the lenders party thereto, the Term Arrangers, Citibank, N.A., as Revolving Administrative Agent, Citibank, N.A., as Tranche B Term Administrative Agent, Credit Suisse AG, as Tranche C Term Administrative Agent, Citigroup Global Markets Inc., Credit Suisse Securities (USA) LLC and Wells Fargo Bank, N.A., as Joint Lead Arrangers and Joint Bookrunners with respect to the Revolving Facility and Wells Fargo Bank, N.A., as sole Documentation Agent with respect to the Revolving Facility (as amended, the "Credit Agreement").
Immediately following the closing of the New Term Facilities, Federal-Mogul Holdings Corporation contributed all of the net proceeds from the New Facilities to Federal-Mogul Corporation, and Federal-Mogul Corporation repaid its existing outstanding indebtedness as a borrower under the tranche B and tranche C term loan facilities.


In accordance with FASB ASC Topic No. 405, Extinguishments of Liabilities, the Company recognized a $ 24 million non-cash loss on the extinguishment of debt attributable to the write-off of the unamortized fair value adjustment and unamortized debt issuance costs which is recorded in the line item “Loss on Debt Extinguishment” in the Company’s Condensed Consolidated Statements of Operations.
The New Term Facilities, among other things, (i) provides for aggregate commitments under the New Tranche B Facility of $700 million with a maturity date of April 15, 2018, (ii) provides for aggregate commitments under the New Tranche C Facility of $1.9 billion with a maturity date of April 15, 2021, (iii) increases the interest rates applicable to the New Facilities as described below, (iv) provides that for all outstanding letters of credit there is a corresponding decrease in borrowings available under the Replacement Revolving Facility, (v) provides that in the event that as of a particular determination date more than $700 million aggregate principal amount of existing term loans and certain related refinancing indebtedness will become due within 91 days of such determination date, the Replacement Revolving Facility will mature on such determination date, (vi) provides for additional incremental indebtedness, secured on a pari passu basis, of an unlimited amount of additional indebtedness if the Company meets a financial covenant incurrence test, and (vii) amends certain other restrictive covenants. Pursuant to the New Term Facilities, Federal-Mogul Holdings Corporation assumed all of the obligations of Federal-Mogul Corporation with respect to the Replacement Revolving Facility under the Credit Agreement.
Advances under the New Tranche B Facility generally bear interest at a variable rate per annum equal to (i) the Alternate Base Rate plus a margin of 2.00% or (ii) the Adjusted LIBOR Rate plus a margin of 3.00%, subject, in each case, to a floor of 1.00%. Advances under the New Tranche C Facility generally bear interest at a variable rate per annum equal to (i) the Alternate Base Rate plus a margin of 2.75% or (ii) the Adjusted LIBOR Rate plus a margin of 3.75%, subject, in each case, to a minimum rate of 1.00% plus the applicable margin.
Due to the refinancing of the Company's term loans, the backstop commitment letter provided to the Company on December 6, 2013 from High River Limited Partnership, an affiliate of Mr. Carl C. Icahn and the Company’s largest stockholder, was terminated.
On December 6, 2013, the Company entered into an amendment (the “Replacement Revolving Facility”) of its Term Loan and Revolving Credit Agreement dated as of December 27, 2007 (as amended, the “Credit Agreement”), among the Company, the lenders party thereto, Citicorp USA, Inc., as Administrative Agent, JPMorgan Chase Bank, N.A., as Syndication Agent, and Wachovia Capital Finance Corporation and Wells Fargo Foothill, LLC, as Co-Documentation Agents, to amend its existing revolving credit facility to provide for a replacement revolving credit facility (the “Replacement Revolving Facility”). The Replacement Revolving Facility, among other things, (i) increased the aggregate commitments available under the Replacement Revolving Facility from $540 million to $550 million, (ii) extended the maturity date of the Replacement Revolving Facility to December 6, 2018, subject to certain limited exceptions described below, and (iii) amended the Company’s borrowing base to provide the Company with additional liquidity.
Advances under the Replacement Revolving Facility generally bear interest at a variable rate per annum equal to (i) the Alternate Base Rate (as defined in the Credit Agreement) plus an adjustable margin of 0.50% to 1.00% based on the average monthly availability under the Replacement Revolving Facility or (ii) Adjusted LIBOR Rate (as defined in the Credit Agreement) plus a margin of 1.50% to 2.00% based on the average monthly availability under the Replacement Revolving Facility. An unused commitment fee of 0.375% also is payable under the terms of the Replacement Revolving Facility.
Due to the refinancing of the Company's term loans, the backstop commitment letter provided to the Company on December 6, 2013 from High River Limited Partnership, an affiliate of Mr. Carl C. Icahn and the Company’s largest stockholder, was terminated.
The Company’s ability to obtain cash adequate to fund its needs depends generally on the results of its operations, restructuring initiatives, and the availability of financing. Management believes that cash on hand, cash flow from operations, and available borrowings under its New Facilities and its Replacement Revolving Facility will be sufficient to fund capital expenditures and meet its operating obligations through the end of 2014. In the longer term, the Company believes that its base operating potential, supplemented by the benefits from its announced restructuring programs, will provide adequate long-term cash flows. However, there can be no assurance that such initiatives are achievable in this regard.
Off Balance Sheet Arrangements
The Company does not have any material off-balance sheet arrangements.



Other Liquidity and Capital Resource Items
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:
 
 
September 30
 
December 31
 
 
2014
 
2013
 
 
(Millions of Dollars)
Gross accounts receivable factored
 
$
337

 
$
271

Gross accounts receivable factored, qualifying as sales
 
324

 
258

Undrawn cash on factored accounts receivable
 
2

 
—


Proceeds from the factoring of accounts receivable qualifying as sales and expenses associated with the factoring of receivables are as follows:
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30
 
September 30
 
 
2014
 
2013
 
2014
 
2013
 
 
(Millions of Dollars)
Proceeds from factoring qualifying as sales
 
$
456

 
$
379

 
$
1,311

 
$
1,077

Losses on sales of account receivables
 
(2
)
 
(2
)
 
(5
)
 
(5
)
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 was $21 million at September 30, 2014 and December 31, 2013. The fair values of the exposures to the Company associated with these certain facilities’ terms were determined to be immaterial.



ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes to the information concerning the Company’s exposures to market risk as stated in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013. Refer to Note 6, Financial Instruments, to the consolidated financial statements for information with respect to interest rate risk, commodity price risk and foreign currency risk.
The translated values of revenue and expense from the Company’s international operations are subject to fluctuations due to changes in currency exchange rates. During the nine months ended September 30, 2014, the Company derived 37% of its sales in the United States and 63% internationally. Of these international sales, 57% are denominated in the euro, with no other single currency representing more than 10%. To minimize foreign currency risk, the Company generally maintains natural hedges within its non-U.S. activities, including the matching of operational revenues and costs. Where natural hedges are not in place, the Company manages certain aspects of its foreign currency activities and larger transactions through the use of foreign currency options or forward contracts. The Company estimates that a hypothetical 10% adverse movement of all foreign currencies in the same direction against the U.S. dollar over the nine months ended September 30, 2014 would have decreased “Net income from continuing operations attributable to Federal-Mogul” by approximately $11 million.

ITEM 4. CONTROLS AND PROCEDURES
A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected.
Disclosure Controls and Procedures
The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Company’s periodic Securities Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including its Co-Chief Executive Officers and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
As of September 30, 2014, an evaluation was performed under the supervision and with the participation of the Company’s management, including the Co-Chief Executive Officers and the Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based upon that evaluation, the Co-Chief Executive Officers and the Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of September 30, 2014, at the reasonable assurance level previously described.
Changes to Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the U.S. Securities Exchange Act of 1934. As of September 30, 2014, the Company’s management, with the participation of the Co-Chief Executive Officers and the Chief Financial Officer, has evaluated for disclosure, changes to the Company’s internal control over financial reporting that occurred during the fiscal nine months ended September 30, 2014 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. There were no material changes in the Company’s internal control over financial reporting during the nine months ended September 30, 2014.



PART II
OTHER INFORMATION
 
ITEM 1.
LEGAL PROCEEDINGS
(a)
Contingencies.
Note 15, Commitments and Contingencies, that is included in Part I of this report, is incorporated herein by reference.

ITEM 1A.
RISK FACTORS

Except for the updated risk factor described below, there have been no material changes to the risk factors previously disclosed in the Company's Annual Report on Form 10-K for the year ended December 31, 2013 filed on February 24, 2014.

The separation of our Powertrain and Motorparts divisions into two independent, publicly traded companies may not be completed on the terms or timeline currently contemplated, if at all. Further, the separation will require significant time, resources and attention from management, which may distract management from the operation of our business and the execution of our other initiatives: On September 3, 2014, we announced our intention to pursue the separation of our Powertrain and Motorparts divisions into two independent, publicly traded companies (the “Separation Transaction”). We are engaged in planning and executing the Separation Transaction and our objective is to complete the Separation Transaction in the first half of 2015. Unanticipated developments could delay or negatively impact the Separation Transaction or increase our expenses relating to the transaction. We cannot assure that we will be able to complete the Separation Transaction on the terms that we announced or on the anticipated timeline, if at all.  If we are unable to consummate the Separation Transaction, we will have incurred costs without realizing the benefits of such transaction.   Further, the Separation Transaction will require significant time, resources and attention from management, which may distract management from the operation of our business and the execution of our other initiatives. Our employees may also be distracted due to uncertainty about their future roles pending the completion of the Separation Transaction. If the Separation Transaction is completed, such transaction may not achieve the intended results. Any such difficulties could have a material adverse effect on our financial condition, results of operations or cash flows.
The Company has substantial indebtedness, which could restrict the Company’s business activities and could subject the Company to significant interest rate risk: As of September 30, 2014, the Company had approximately $2.7 billion of outstanding indebtedness. The Company is permitted by the terms of its debt instruments to incur substantial additional indebtedness, subject to the restrictions therein. The Company’s inability to generate sufficient cash flow to satisfy its debt obligations, or to refinance its debt obligations on commercially reasonable terms, would have a material adverse effect on the Company’s business, financial condition and results of operations.
The Company’s indebtedness could:
•
limit the Company’s ability to borrow money for working capital, capital expenditures, debt service requirements or other corporate purposes;
•
require the Company to dedicate a substantial portion of its cash flow to payments on indebtedness, which would reduce the amount of cash flow available to fund working capital, capital expenditures, product development and other corporate requirements;
•
increase the Company’s vulnerability to general adverse economic and industry conditions; and
•
limit the Company’s ability to respond to business opportunities.
A significant portion of the Company’s indebtedness accrues interest at variable rates. To the extent market interest rates rise, the cost of the Company’s debt would increase, adversely affecting the Company’s financial condition, results of operations, and cash flows.
On April 15, 2014, Federal-Mogul Holdings Corporation, as the new borrower, entered into the New Term Facilities and assumed the Replacement Revolving Facility, which among other things, (i) provides for aggregate commitments under a new tranche B loan facility of $700 million with a maturity date of April 15, 2018, and (ii) provides for aggregate commitments under a new tranche C loan facility of $1.9 billion with a maturity date of April 15, 2021. See Note 12, Debt, of the Company's consolidated financial statements for a further discussion. Although the New Term Facilities extended the maturity of the Company's outstanding indebtedness, the Company may need to borrow additional funds or refinance its existing indebtedness in the future, and there are no assurances that the Company will be able to do so on commercially reasonable terms or at all.



ITEM 4.
MINE SAFETY DISCLOSURES
Not applicable.

ITEM 6.
EXHIBITS
(a)
Exhibits:
2.1

 
Agreement and Plan of Merger, dated April 14, 2014, by and among Federal-Mogul Corporation, Federal-Mogul Holdings Corporation, Federal-Mogul MergerCo Inc. and Federal-Mogul Holding Sweden AB. (Incorporated by Reference to Exhibit 2.1 to the Company's Current Report on Form 8-K dated April 14, 2014 and filed with the Securities and Exchange Commission on April 16, 2014).
 
 
 
2.2

 
Asset Purchase Agreement, dated as of January 21, 2014, between Affinia Group Inc. and VCS Quest Acquisition LLC (Incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K dated January 21, 2014 and filed with the Securities and Exchange Commission on January 22, 2014).
 
 
 
2.3

 
Amended and Restated Stock and Asset Purchase Agreement dated as of January 7, 2014 by and among Honeywell International Inc., Platin 966. GmbH and Saxid SAS (Incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K dated July 9, 2014 and filed with the Securities and Exchange Commission on July 15, 2014).
 
 
 
3.1

 
Certificate of Incorporation of Federal-Mogul Holdings Corporation (Incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K dated April 14, 2014 and filed with the Securities and Exchange Commission on April 16, 2014).
 
 
 
3.2

 
Bylaws of Federal-Mogul Holdings Corporation (Incorporated by reference to Exhibit 3.2 to the Company’s Current Report on Form 8-K dated April 14, 2014 and filed with the Securities and Exchange Commission on April 16, 2014).
 
 
 
10.1

 
Separation Agreement between the Company and Kevin P. Freeland, dated February 4, 2014 (Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K dated February 4, 2014 and filed with the Securities and Exchange Commission on February 10, 2014).
 
 
 
10.2

 
Employment Agreement between the Company and Daniel A. Ninivaggi, dated February 5, 2014 (Incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K dated February 4, 2014 and filed with the Securities and Exchange Commission on February 10, 2014).
 
 
 
10.3

 
Share and Asset Purchase Agreement dated as of September 10, 2014 by and between TRW Automotive Inc. and Platin 1058. GmbH (Incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K dated September 10, 2014 and filed with the Securities and Exchange Commission on September 15, 2014).
 
 
 
31.1


Certification by Daniel A. Ninivaggi, Co-Chief Executive Officer, Federal-Mogul Holdings Corporation, and Chief Executive Officer, Motorparts, pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934.



31.2


Certification by Rainer Jueckstock, Co-Chief Executive Officer, Federal-Mogul Holdings Corporation, and Chief Executive Officer, Powertrain, pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934.



31.3


Certification by Rajesh Shah, Chief Financial Officer, Federal-Mogul Holdings Corporation, pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934.



32


Certification by the Company’s Co-Chief Executive Officers and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, and Rule 13a-14(b) of the Securities Exchange Act of 1934.



101


Financial statements from the quarterly report on Form 10-Q of Federal-Mogul Holdings Corporation for the quarter ended September 30, 2014, filed on October 22, 2014, formatted in XBRL: (i) the Consolidated Statements of Operations; (ii) the Consolidated Statements of Comprehensive Income (Loss); (iii) the Consolidated Balance Sheets; (iv) the Consolidated Statements of Cash Flows: and (v) the Notes to the Consolidated Financial Statements filed herewith.



SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
FEDERAL-MOGUL HOLDINGS CORPORATION
 
By:
/s/ Rajesh Shah
 
 
 
Rajesh Shah
 
Senior Vice President and Chief Financial Officer
 
Principal Financial Officer
 
 
By:
/s/ Jérôme Rouquet
 
 
 
Jérôme Rouquet
 
Senior Vice President, Controller, and Chief Accounting Officer
 
Principal Accounting Officer
Dated: October 22, 2014





Exhibit 31.1
CERTIFICATION
Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934
I, Daniel A. Ninivaggi, Co-Chief Executive Officer, Federal-Mogul Holdings Corporation (the “Company”), and Chief Executive Officer, Motorparts, certify that:

1.
I have reviewed this quarterly report on Form 10-Q of Federal-Mogul Holdings Corporation;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Company and have:
a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation;
d)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation;
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):
a)
All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: October 22, 2014
 
By:
/s/ Daniel A. Ninivaggi
 
 
 
Daniel A. Ninivaggi
 
Co-Chief Executive Officer, Federal-Mogul Holdings Corporation
 
Chief Executive Officer, Motorparts






Exhibit 31.2
CERTIFICATION
Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934
I, Rainer Jueckstock, Co-Chief Executive Officer, Federal-Mogul Holdings Corporation (the “Company”), and Chief Executive Officer, Powertrain, certify that:

1.
I have reviewed this quarterly report on Form 10-Q of Federal-Mogul Holdings Corporation;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Company and have:
a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation;
d)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation;
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):
a)
All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: October 22, 2014
 
By:
/s/ Rainer Jueckstock
 
 
 
Rainer Jueckstock
 
Co-Chief Executive Officer, Federal-Mogul Holdings Corporation
 
Chief Executive Officer, Powertrain






Exhibit 31.3
CERTIFICATION
Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934
I, Rajesh Shah, the Chief Financial Officer of Federal-Mogul Holdings Corporation (the “Company”), certify that:

1.
I have reviewed this quarterly report on Form 10-Q of Federal-Mogul Holdings Corporation;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Company and have:
a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation;
d)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation;
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):
a)
All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: October 22, 2014
 
By:
/s/ Rajesh Shah
 
 
 
Rajesh Shah
 
Senior Vice President
 
Chief Financial Officer






Exhibit 32
CERTIFICATION
Pursuant to 18 United States Code § 1350 and
Rule 13a-14(b) of the Securities Exchange Act of 1934
The Undersigned hereby certifies that to his knowledge the quarterly report on Form 10-Q of Federal-Mogul Holdings Corporation (the “Company”) filed with the Securities and Exchange Commission on the date hereof fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that the information contained in such quarterly report fairly presents, in all material respects, the financial condition and results of operations of the Company.
A signed original of this written statement, or other document authenticating, acknowledging, or otherwise adopting the signatures that appear in typed form within the electronic version of this written statement, has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.
Date: October 22, 2014
 
By:
/s/ Daniel A. Ninivaggi
 
 
 
Daniel A. Ninivaggi
 
Co-Chief Executive Officer, Federal-Mogul Holdings Corporation
 
Chief Executive Officer, Motorparts
 
 
By:
/s/ Rainer Jueckstock
 
 
 
Rainer Jueckstock
 
Co-Chief Executive Officer, Federal-Mogul Holdings Corporation
 
Chief Executive Officer, Powertrain
 
 
By:
/s/ Rajesh Shah
 
 
 
Rajesh Shah
 
Senior Vice President
 
Chief Financial Officer


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