eBearing News - Federal-Mogul Restates 1999 Financials, Announces More Job Cuts

Federal-Mogul Corporation (Southfield, Michigan) announced a major restructuring today, including shuttering several plants and many warehouses, net layoffs of 1,500 people and other aggressive initiatives to address the company's cost structure and invested capital base.

The upheaval comes amidst earnings disappointments, the CFO's unexpected resignation, [Click here to read the article] scoring poorly on the 1999 Wall Street Journal Shareholder Scoreboard [Click here to read the article], the market's continuing assault on F-M's market capitalization and a deeply depressed stock price.

Under the plan, F-M will incur one-time charges and incremental expenses totaling approximately $200 million over the next two years. In addition, assets will be written down by $35 million to reflect their current market value.

Federal-Mogul will restate Fiscal Year 1999 earnings to include proper realization of $5.2 million, or $0.04 per share, in expenses related to its inability to find a buyer for the lighting, wiper blade and fuel businesses. Because those businesses were on the block, Federal-Mogul chose not to include their expenses. However, no buyers could be found.

Details of the restructuring:

Approximately 1,500 people, or about 3% of Federal-Mogul's workforce, will lose their jobs -- the majority from European operations. 1,500 is a net number -- employment will decline more than 1,500 in the 29 closing/downsizing facilities but some of those where the work is being shifted will see increased employment.

200 of the workforce reduction will come from middle management across the company.

In general, the intention is to shift work from high-cost to lower-cost facilities.

Worldwide, Federal-Mogul currently employs about 50,500 people.

F-M has now said it will close 29 distribution facilities worldwide, including the 22 North American aftermarket branch warehouses already announced, as we reported here in January [Click here to see the warehouse closing schedule].

F-M will also close or downsize 29 manufacturing facilities.

The Sealing Systems plant in Milan, Michigan will be closed and production moved to other facilities.

The Mooresville, Indiana heavywall engine bearing plant will be closed and production shifted to the Powertrain Systems plant in McConnelsville, Ohio.

Warehousing and distribution for all aftermarket gasket products will be moved to the Sealing Systems distribution facility in Skokie, Illinois. The McCord gasket line warehouse will be closed.

Seven as-yet-undisclosed major initiatives involving the aftermarket operations in both North America and South America (a customer bankruptcy and weakness in those Aftermarket operations contributed to Federal-Mogul's 1999 earnings problems).

Nineteen as-yet-undisclosed major initiatives involving manufacturing operations in North America and South America.

Eighteen as-yet-undisclosed consolidations of manufacturing and distribution operations in Europe and Asia.

Finally, Federal-Mogul's 1999 Annual Report (released today) adds, "It is possible the company may identify additional areas of potential improvements requiring further restructuring plans."

Restructuring Effects on Earnings

F-M noted that the majority of expenditures related to the restructuring will occur this year.

Projected EBIT (pro forma) Effects:
Fiscal Year 2000: $14 million
Fiscal Year 2001: $38 million
Fiscal Year 2002: $54 million

F-M claims that the Internal Rate of Return (IRR) from the actions is approximately 30%, well above the company's cost of capital.

Earnings Restatement

In the third quarter of 1999, F-M decided to sell the lighting, wiper blade and fuel systems businesses. Taking an aggressive accounting position, F-M stopped including pretax depreciation or amortization for those businesses.

This gave the 1999 operating results a pretax boost of $5.2 million. At the time, some analysts strongly objected to the move as over-aggressive bookkeeping.

However, the businesses failed to attract any qualified buyers at F-M's asking price and F-M has now been forced to roll their expenses back in.

In taking the lighting, wiper blade and fuel systems businesses off the market, F-M has been forced to restate 4Q1999 and FY1999 earnings to reflect those $5.2 million ($0.04 per share) additional pretax and amortization expenses.
[Click here to see F-M Fourth-Quarter 1999 Operating Results as originally released]

After the $0.04 restatement, F-M's final 4Q1999 operating number is $0.86 per share, $4.04 for the full Fiscal Year 1999. First Call/Thompson Financial's estimate for 4Q1999 had been $1.00 per share. Including other charges, 4Q1999 EPS was $0.79 per share.

Dick Snell, Federal-Mogul's Chairman and CEO, said, "We are working to reduce our invested capital base to improve economic value. I am pleased with the aggressive actions identified by our team."

Note on Operating Results Due To Aftermarket vs. OEM Sales Mix

During today's conference call, F-M noted that the dynamics of the projected sales mix for 2000 had a large impact on the restructuring decisions.

The projected mix of OEM to aftermarket sales for 1Q2000 was 50% / 50%. However, that mix has turned out to be 54% OEM vs. 46% aftermarket. Since aftermarket sales carry margins roughly double those of OEM sales, the impact on the bottom line is substantial.

In light of a strong projected OEM build rate and softening aftermarket sales, F-M expects that the aftermarket percentage will drop even further for 2000.

F-M's aftermarket sales were weak in January, primarily due to discount incentives which were put on long inventory during December. The company said it believes customers simply shifted their buying patterns to take advantage of the additional discounts; no dating or terms were offered. It also said the entire aftermarket suffered a weak February, but March sales so far are strong.