Federal Mogul Corporation Financial Review
EG 40421 September 16, 2011 Christine Dunphy Charles Hunter Chris Mork Mark Solorio Tina Yue
Company Overview: From its humble start in 1899 as a mill and rubber supplier, Federal Mogul has grown and expanded to become an enormous international corporation. With 45,000 employees and locations in 45 different nations, Federal Mogul Corporation is large in both manpower and global span. The Federal Mogul Corporation claims 106 manufacturing locations, with headquarters in Southfield, MI. Federal Mogul Corporation’s annual sales for 2010 were over $6.2 billion dollars. This large corporation now produces a number of different mechanical products and aftermarket parts under a variety of brand names. It is a leading industry supplier of automotive engine parts. Recent company news cites Federal Mogul’s impact on the Durabowl Mercedes-Benz V6 pistons and a sponsorship of Kevin Harvick, a NASCAR driver, by Iconic Champion. Due to the diversity and number of goods that Federal Mogul Corporation produces, it competes against a number of different companies in different product and geographic areas. These competitors include the Dana Holding Corporation, GKN and Mahle. While Federal Mogul is a market share leader in some areas such as piston rings, it produces many goods and competes against companies in various markets, making it difficult to judge the company’s overall market share. Federal Mogul Brands
Financial Review: According to Federal Mogul's financial statements (Balance Sheet and Incomes and Expenses for 2008-2010 can be found in Appendix A), the company has been improving over the past few years. Nearly every ratio or statistic from 2008-2010 shows Federal Mogul gaining ground, though not enough to put its books in the black over that time period. Federal Mogul has being losing money over the past few years while continuing to grow. This pattern may be the
result of a large company surviving in a difficult economy which is driving smaller autoparts manufacturers out of business.
Compared to one of its competitors, the Dana holding
corporation, Federal Mogul has much better financial statistics. With better figures than its competitors and 2010 reports showing Federal Mogul’s gross profit as positive, Federal Mogul’s financial is encouraging. The Balance Sheets and Incomes and Expenses for the past three years have been analyzed. The next table shows some significant ratios during these years based on these financial statements. Table 1: Key Ratios for Federal Mogul Financial Lev. 5.34 6.48 7.27
2010 2009 2008
Current Ratio 2.42 2.37 2.03
Quick Ratio 1.61 1.55 1.24
Debt to Equity 4.34 5.48 6.27
As Table 1 illustrates, over the past three years, Federal Mogul’s financial standing has been improving. The current ratio has been above 2 and the quick ratio has been above 1 every single year, meaning Federal Mogul had enough money to pay all of its credit. The debt to equity has been decreasing steadily over the years as well, meaning the company is continuing to invest more in itself than it borrows. Table 2 shows some key figures (in millions of dollars) on the Income and Expenses sheet for the past few years.
Table 2: Key figures for Incomes and Expenses (in millions of dollars)
2010 2009
Gross Margin % 2.7 -0.6
Gross Profit (Margin) 1007 792
Operating Income 323 102
EBIT 179 -72
Net Income (loss) 167 -33
2008
-6.8
1124
350
-446
-465
Although Federal Mogul was losing money in 2008 and 2009, it was able to improve to
end 2010 with a positive gross margin percentage and net income. This is hardly enough to cover all of the losses for the previous two years but the trend is definitely improving. Figure 1 shows the percentage of net sales breakdown of for COGS, SG&A Expenses, Other Expenses, Taxes, and the Net Income for the 2010.
Percentages of Net Sales 0.19%
2.34%
2.67%
11% COGS SG&A Expenses Other Expenses Taxes Income
83.80%
Figure 1: Percentages of Net Sales for 2010
Figure 1 shows that the vast majority of the revenue is for the cost of goods sold, meaning that Federal Mogul has been spending most of its revenue on purchasing and assembling their products. Therefore, the figure shows that reducing the COGS would produce the most yield to add to the net income. Table 3 below shows some key statistics for the Balance and Income and Expenses Sheets for the past three years. Table 3: Return Percentages and Cash to Cash Cycle ROA
ROE
Days of
Days of
Days of
Cash to
2010 2009 2008
2.45% -1.01% -6.16%
12.2% -3% -46.7%
Accounts Receivable
Accounts Payable
Inventory
43 45 34
32 30 27
41 45 39
Cash Investment Time 52 60 46
Table 3 shows that 2008 and 2009 had poor return percentages. The fact that the ROA and ROE were negative show the extent to which Federal Mogul was suffering for the previous two years. This was mostly caused by the negative EBIT and net income for the two year span. However, it shows a positive trend as both the ROA and the ROE continued to increase until they became positive in 2010. Federal Mogul has several different competitors as a result of the different types of products it offers.
Therefore, it is difficult to compare Federal Mogul to several other
companies. However, one main competitor is the Dana Holding Corporation based in Maumee, Ohio. The Balance Sheet and Income and Expenses of 2010 for the Dana Holding Corporation can be seen in Appendix A. Overall, Federal Mogul seems to be performing more efficiently than the Dana Holding Corporation when looking at 2010's Balance Sheet and Income and Expenses. Figure 2 shows a comparison between important ratios and percentages for Federal Mogul and the Dana Holding Corporation for 2010.
Figure 2: Federal Mogul vs. the Dana Holding Company. Key Ratios and Percentages for 2010 Figure 2 shows that Federal Mogul is outperforming the Dana Holding Corporation in almost every category. The only ratio that favors the Dana Holding Corporation is debt to equity.
However, when considering that Federal Mogul has a better current ratio and
significantly higher ROE, an observer can see that the liabilities can be covered rather easily and it remains safer to invest in Federal Mogul. Federal Mogul can also be seen as the better, larger company in Figure 3 below, which shows key figures from the two companies' Income and Expenses Sheets.
Figure 3: Federal Mogul vs. the Dana Holding Corporation. Key Figures in I&E. (millions of dollars) Figure 3 shows that Federal Mogul had more than10 times the net income of the Dana Holding Company. This gap is mostly caused by the initial difference in gross profit and expenses. The difference in gross profit is likely because Federal Mogul was able to purchase their products at a cheaper price shown through the roughly equal revenue values for 2010 (FDML = $6.2 billion, DAN = $6.1 billion), with Dana's COGS being significantly higher (FDML = $5.2 billion, DAN = $5.5 billion).
For the past few years, Federal Mogul has been improving. Every significant ratio or percentage has improved to some degree since 2008. However, when reflecting on the fact that the gross margin percentage in 2008 was -6.8%, Federal Mogul had a lot of room to improve before it could be considered a successful company. Therefore in order to recover from the past few years, Federal Mogul must maintain this growth. When comparing Federal Mogul to a competitor, the Dana Holding Corporation, Federal Mogul clearly has the advantage. Moreover, one could argue that despite losses, Federal Mogul has weathered the rough economy better that its competitors and thus currently has the advantage in the automotive parts market.
Cash Flow Analysis: For the 2010 fiscal year, Federal Mogul experienced a net increase in cash of $71 million. This was an encouraging figure for the company’s outlook, but this cash increase was significantly less than the increases seen in previous years. In 2009, Federal Mogul’s cash holdings increased by $146 million, while the observed increase was $462 million in 2008. Nonetheless, considering the current economic climate, the increase of over $70 million, along with positive gross profit for 2010, is an indicator of strong company performance. Federal Mogul acquired a net cash inflow of $404 million from operating activities. This increase was the result of several factors, the primary being the result of a $333 million adjustment for depreciation. Federal Mogul actually experienced a net increase in accounts receivable, meaning the company had more purchase payments outstanding. There was an increase in liabilities, indicating that the company was in possession of products for which it had yet to pay, allowing it to maintain that cash temporarily. Finally, there was an increase in the value of inventories, meaning the company consumed cash by storing more product.
In the second aspect of cash flow, investing activities, Federal Mogul saw a decrease of $283 million of cash. However, this decrease was primarily the result of over $250 million in capital expenditures, that is, payment for physical assets of the business such as factories and equipment. Thus, the decrease in cash resulting from investing activities is likely a positive sign, as it is an indication that the company was investing in itself and seeking to grow in a tough economic environment. Federal Mogul did not invest in any related businesses in 2010. In financing activities, the final aspect of cash flow, Federal Mogul experienced a cash decrease of $44 million. This was primarily the result of a net $34 million in borrowing. This is also a positive indicator for the company, as they are confident in the direction of the company and future outlook, leading to a willingness to take on debt to finance the company.
No
dividends were paid to stockholders, an indication of weakness in the company’s stock, though dividends were not offered in either 2008 or 2009. Again, in 2010, Federal Mogul experienced a net increase in cash of $71 million, an Federal Mogul Plant
indication of strong performance when considered with other factors. It should be noted, though, that Federal Mogul has significantly increased its days of cash holdings in recent years. In 2008, the company had 30.3 days of cash on hand. In 2009, this number jumped dramatically to 48.1 days and decreased slightly to 45.6 in 2010. This significant jump in days of cash indicates a company tendency toward retrenchment in light of the uncertain economic outlook. Federal
Mogul is likely uncertain of short-term demand in the automotive industry, leading to a need to acquire and hold cash if a downturn occurs.
Analyst’s Review of Federal-Mogul Corporation: Analysts believe that this stock is worthy to be bought and more should be added to the stockholders’ portfolio, as seen in Figure 4 below. Based on the growth of the company for the last few months, analysts believe that this company’s stock is on the average, recommended to be overweight. Over the next eight to twelve months, the stock’s return is expected to be greater than the typical anticipated return of the company.
Figure 4: Analyst Recommendations for Federal Mogul Stock Federal-Mogul Corporation (NASDAQ: FDML) had $1.04 billion in total cash and $2.89 billion in total debt for the last quarter. This company has a P/E ratio of 7.7. In the past week, it
has fallen about 10% and is down more than 14% for the year. However, Gabelli, an analyst, reported an expectation that Federal Mogul will see opportunities for further margin expansion from the company’s OE divisions. Gabelli recommends purchasing this stock, as it remains valued at a great price at 5.6x FY12 EBITDA and less than 8x EPS. Currently, shares of FDML were trading at $16.15. It certainly does not help that investor Carl Icahn has been buying shares this month, including more than 250,000 shares in the past week, worth more than $4 million. In an interview, Icahn believed that this company is undervalued at its current price. This company is in a stable position as Icahn Enterprises purchased Federal Mogul’s debt and helped restructure the company in bankruptcy. Between 2009 and 2010, this company generated strong cash flow during its downturn and had a 33% increase in EBITDA. In the second quarter of last year, as seen in Figure 5, the company reported $1.6 billion of net sales and a small cash flow. However, the second quarter of the present financial year reported an increase of net sales, specifically $1.8 billion, or a 13% increase versus the prior year, and improved financial results. Gross margin was $299 million or 16.6% of sales, an increase of $25 million compared to the second quarter of the previous year. Selling, general and administrative expenses were improved to a record low of 9.6 % of sales in the quarter. Net income for the second quarter of 2011 was $64 million or $0.64 per diluted share, versus $49 million or $0.49 per diluted share in the second quarter of 2010. This constituted a 31 % increase. Operational EBITDA(1) was $200 million or 11.1 % of sales during the quarter, and cash flow(2) was $22 million, demonstrating the company's strong operating performance and efficient ability to grow above the global vehicle markets.
Figu
re 5: 2nd Quarter Statistics for 2010 and 2011 The company is advancing with its piston technology to reduce fuel consumption and exhaust emissions. Jose Maria Alapont, the President and CEO of the company, said that Federal Mogul expects it will have a positive outcome due to the rising piston technologies that will support sustainable global growth. He said, “Federal Mogul had solid profit improvement in the second quarter 2011, and implemented additional effective actions this year that enabled the company to fully offset adverse materials cost impact through supplier negotiations, additional operating efficiency and customer price recoveries.� This company will continue on a positive trajectory with its continuing sales growth and profitable operating performance.
Management Comments:
Jose Alapont delivered a brief overview of important financial and operating results for the second quarter of 2011 on July 28th, 2011. The following is a summary Jose Alapont’s comments from the earnings conference. Federal Mogul operates in a competitive industry driven by global vehicle production and part replacement trends. The company continually assesses, redefines, and improves its operations, products, and manufacturing to maintain profitability. Sustainable global growth strategy includes the following ongoing initiatives: best-cost production, global organization, lean manufacturing and productivity, global distribution optimization, and global delivery. Federal-Mogul is delivering sustainable global profitable growth. Their performance demonstrates the company’s capability to drive additional sales growth while managing cost to deliver solid profitability. In all original equipment business segments, sales were stronger in the second quarter. Federal-Mogul’s sales growth was very strong, up 22% overall with sales in China up 20% and India, 28%. Federal-Mogul has continued to implement process improvements to drive efficiency. Their action to offset the challenges of higher raw material cost in several areas has led to cost reductions from suppliers, improved manufacturing efficiency, and customer price recovery. Federal-Mogul’s gross margin and earnings before interest, taxes, depreciation, and amortization were positive and were up versus last year. Net income increased significantly on a year to year basis. They have generated positive cash flow
Federal Mogul CEO Jose Alapont
and continue to reinforce their liquidity. Federal-Mogul’s financial performance and working capital produce reliable cash generation and strong liquidity, which enables the company to invest in organic growth or to make strategic acquisitions.
Conclusion: Federal Mogul suffered along with the auto industry through tough economic times from 2008 to the present. As a well-established company and leader in many of the auto parts markets, Federal Mogul has been able to survive. Federal Mogul adapted to the rough market better than its competitors and managed to grow, leading to current reports stating that Federal Mogul is in a good economic position. Federal Mogul’s balance sheet, management statements and analysts’ reviews all show a company which struggled and is now returning to an improved market position.
Federal Mogul Products
Appendix A: Federal Mogul and Competitor Financial Statements FEDERAL-MOGUL CORPORATION Consolidated Statements of Operations Year Ended December 31 2010 2009 2008 (Millions of Dollars, Except Per Share Amount s) Net sales Cost of products sold
$ 6,219 $ 5,330 $ 6,866 (5,212) (4,538) (5,742)
Gross margin
1,007
Selling, general and administrative expenses Other postemployment benefits curtailment gains Interest expense, net Amortization expense Equity earnings of non-consolidated affiliates Restructuring expense, net Adjustment of assets to fair value Other (expense) income, net Income (loss) before income taxes Income tax (expense) benefit Net income (loss) Less net income attributable to noncontrolling interests
792
1,124
(684) 29 (129) (49) 32 (8) (2) (17)
(690) — (132) (49) 16 (32) (17) 40
(774) — (180) (76) 23 (132) (451) 20
179 (12)
(72) 39
(446) (19)
167 (6)
(33) (12)
(465) (3)
161 $
(45) $ (468)
Net income (loss) attributable to Federal-Mogul
$
Net Income (Loss) Per Common Share Attributable to FederalMogul: Basic
$ 1.63 $ (0.46) $ (4.69)
Diluted
$ 1.62 $ (0.46) $ (4.69)
FEDERAL-MOGUL CORPORATION Consolidated Balance Sheets December 31 2010
2009
(Millions of Dollars) ASSETS Current assets: Cash and equivalents Accounts receivable, net Inventories, net Prepaid expenses and other current assets
$ 1,105 1,075 847 244
$ 1,034 950 823 221
Total current assets
3,271
3,028
Property, plant and equipment, net Goodwill and other indefinite-lived intangible assets Definite-lived intangible assets, net Investments in non-consolidated affiliates Other noncurrent assets
1,802 1,431 484 210 98
1,834 1,427 515 238 85
$ 7,296
$ 7,127
$
$
LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Short-term debt, including current portion of long-term debt Accounts payable Accrued liabilities Current portion of postemployment benefit liability Other current liabilities
73 660 428 47 143
97 537 410 61 175
Total current liabilities
1,351
1,280
Long-term debt Postemployment benefits Long-term portion of deferred income taxes Other accrued liabilities
2,752 1,172 470 186
2,760 1,298 498 192
—
—
Shareholders' equity: Preferred stock ($.01 par value; 90,000,000 authorized shares; none issued) Common stock ($.01 par value; 450,100,000 authorized shares; 100,500,000 issued shares; 98,904,500 outstanding shares as of both December 31, 2010 and 2009) Additional paid-in capital, including warrants Accumulated deficit Accumulated other comprehensive loss Treasury stock, at cost
1 2,150 (352) (505) (17)
1 2,123 (513) (571) (17)
Total Federal-Mogul shareholders' equity Noncontrolling interests
1,277 88
1,023 76
Total shareholders' equity
1,365
1,099
$ 7,296
$ 7,127
FEDERAL-MOGUL CORPORATION Consolidated Balance Sheets Successor December 31 2009 2008 (Millions of Dollars) ASSETS Current assets: Cash and equivalents Accounts receivable, net Inventories, net Prepaid expenses and other current assets Total current assets
$ 1,034 950 823 221 3,028
Property, plant and equipment, net Goodwill and other indefinite-lived intangible assets Definite-lived intangible assets, net Other noncurrent assets
LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Short-term debt, including current portion of long-term debt Accounts payable Accrued liabilities Current portion of postemployment benefit liability Other current liabilities
$
888 939 894 267 2,988
1,834 1,427 515 323
1,911 1,430 564 343
$ 7,127
$ 7,236
$
$
97 537 410 61 175
102 622 483 61 204
Total current liabilities
1,280
1,472
Long-term debt Postemployment benefits Long-term portion of deferred income taxes Other accrued liabilities
2,760 1,298 498 192
2,768 1,240 554 206
—
—
Shareholders' equity: Preferred stock ($.01 par value; 90,000,000 authorized shares; none issued) Common stock ($.01 par value; 450,100,000 authorized shares; 100,500,000 issued shares; 98,904,500 outstanding shares as of both December 31, 2009 and 2008) Additional paid-in capital, including warrants Accumulated deficit Accumulated other comprehensive loss Treasury stock, at cost
1 2,123 (513) (571) (17)
1 2,123 (468) (688) (17)
Total Federal-Mogul shareholders' equity Noncontrolling interests
1,023 76
951 45
Total shareholders' equity
1,099
996
$ 7,127
$ 7,236
Dana Holding Corporation Consolidated Statement of Operations (In millions except per share amounts) Dana Year Ended
Eleven Months
One Month
December 31,
Ended
Ended
December 31,
January 31,
2010
Net sales Costs and expenses
$
Cost of sales Selling, general and administrative expenses Amortization of intangibles Restructuring charges, net Impairment of goodwill Impairment of long-lived assets Other income (expense), net Income (loss) before interest, reorganization items and income taxes Interest expense Reorganization items Fresh start accounting adjustments Income (loss) before income taxes Income tax benefit (expense) Equity in earnings of affiliates Income (loss) from continuing operations Loss from discontinued operations Net income (loss) Less: Noncontrolling interests net income (loss) Net income (loss) attributable to the parent company Preferred stock dividend requirements Net income (loss) available to common stockholders
Prior Dana
6,109
2009
$
5,450 402 61 73
5,228
2008
$
4,985 313 71 118
7,344
2008
$
751 702 34
156 98 (317)
7,113 303 66 114 169 14 53 (382)
89
139 (2)
142 25
35 (31) 10 14
(454) 27 (9) (436)
14 4
(436) (5)
(549) (107) (11) (667) (4) (671) 6
8 98 1,009 914 (199) 2 717 (6) 711 2
10
(431)
(677)
709
1 124
12 8 11
$
32 (22)
$
32 (463)
$
29 (706)
$
709
Basic Diluted Loss per share from discontinued operations attributable to parent company stockholders:
$ $
(0.16) (0.16)
$ $
(4.19) (4.19)
$ $
(7.02) (7.02)
$ $
4.77 4.75
Basic Diluted Net income (loss) per share available to parent company stockholders:
$ $
$ $
(0.04) (0.04)
$ $
(0.04) (0.04)
Basic Diluted Average common shares outstanding
$ $
$ $
(7.06) (7.06)
$ $
4.73 4.71
Income (loss) per share from continuing operations available to parent company stockholders:
Basic Diluted
— —
(0.16) (0.16) 141 141
$ $
$ $
— —
(4.19) (4.19) 110 110
100 100
150 150
Dana Holding Corporation Consolidated Balance Sheet (In millions) December 31, 2010
2009
Assets Current assets Cash and cash equivalents Accounts receivable
$
Trade, less allowance for doubtful accounts of $11 in 2010 and $18 in 2009 Other Inventories Other current assets Current assets held for sale Total current assets Goodwill Intangibles Investments and other assets Investments in affiliates Property, plant and equipment, net Noncurrent assets held for sale Total assets
1,134
$
947 728 172 608 89 99 2,643 111 438 262 112 1,484 104 5,154
816 184 708 91 2,933 104 352 238 121 1,351 $
5,099
$
$
167 779 144 28 38 251
$
Liabilities and equity Current liabilities Notes payable, including current portion of long-term debt Accounts payable Accrued payroll and employee benefits Accrued restructuring costs Taxes on income Other accrued liabilities Current liabilities held for sale Total current liabilities Long-term debt Deferred employee benefits and other noncurrent liabilities Total liabilities Commitments and contingencies (Note 15)
1,407 780 1,128 3,315
34 601 103 29 101 270 79 1,217 969 1,189 3,375
242 520 1
242 529 1
Parent company stockholders' equity Preferred stock, 50,000,000 shares authorized Series A, $0.01 par value, 2,500,000 shares outstanding Series B, $0.01 par value, 5,311,298 and 5,400,000 shares outstanding Common stock, $0.01 par value, 450,000,000 shares authorized, 144,126,032 and 139,414,149 outstanding Additional paid-in capital Accumulated deficit Treasury stock, at cost Accumulated other comprehensive loss Total parent company stockholders' equity Noncontrolling equity Total equity Total liabilities and equity
$
2,613 (1,191) (4)
2,580 (1,169)
(496) 1,685 99 1,784 5,099
(504) 1,679 100 1,779 5,154
$
Appendix B: Federal Mogul Product Listing