10-K 1 fdml-2015123110xk.htm 10-K 10-K


 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 FORM 10-K
 ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2015
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 I.D. No.)
 
 
27300 West 11 Mile Road, Southfield, Michigan
 
48034
(Address of principal executive offices)
 
(Zip code)
Registrant’s telephone number including area code: (248) 354-7700

Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
 
Name of Each Exchange on Which Registered
Common Stock par value $0.01 per share
 
The NASDAQ Global Select Market
Securities registered pursuant to Section 12(g) of the Act:
Title of Class
Warrants to purchase Common Stock, par value $0.01 per share
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.     Yes  ¨    No  x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ¨  No  x
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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x
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 definition 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 Act).    Yes  ¨    No  x
The aggregate market value of the common stock held by non-affiliates of the Registrant was approximately $346 million as of June 30, 2015 based on the reported last sale price as reported on the NASDAQ Global Select Market on that date.
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 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  ¨
The Registrant had 169,040,651 shares of common stock outstanding as of February 25, 2016.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant’s Proxy Statement for its 2016 Annual Meeting of Stockholders are incorporated by reference into Part III of this Annual Report.
 




INDEX
 
 
Page No.
 
 
 
 
 
Exhibits
 




FORWARD-LOOKING STATEMENTS
Certain statements contained or incorporated in this Annual Report on Form 10-K 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. We 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 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 to differ materially from any future results, performance, experience or achievements expressed or implied by such forward-looking statements. We undertake no obligation to update any forward-looking statements, whether as a result of new information, future events, or otherwise.
Listed below are some of the factors that could potentially cause actual results to differ materially from historical and expected future results. Other factors besides these listed here could also materially affect our business.
Our restructuring activities and strategic initiatives may affect our short-term liquidity and may not result in the anticipated synergies and cost savings.
Variations in current and anticipated future production volumes, financial condition, or operational circumstances of our significant customers, particularly the world’s original equipment manufacturers of commercial and passenger vehicles.
Our ability to generate cost savings or manufacturing efficiencies to offset or exceed contractually or competitively required price reductions or price reductions to obtain new business.
Our ability to obtain cash adequate to fund our needs, including availability of borrowings under our various credit facilities.
Fluctuations in the price and availability of raw materials and other supplies used in the manufacturing and distribution of our products.
Material shortages, transportation system delays, or other difficulties in markets where we purchase supplies for the manufacturing of our products.
Significant work stoppages, disputes, or any other difficulties in labor markets where we obtain materials necessary for the manufacturing of our products or where our products are manufactured, distributed or sold.
Our ability to expand our development of fuel cell, hybrid-electric or other alternative energy technologies.
Changes in actuarial assumptions, interest costs and discount rates, and fluctuations in the global securities markets which directly affect the valuation of assets and liabilities associated with our pension and other postemployment benefit plans.
Various worldwide economic, political and social factors, changes in economic conditions, currency fluctuations and devaluations, credit risks in emerging markets, or political instability in foreign countries where we have significant manufacturing operations, customers or suppliers.
Legal actions and claims of undetermined merit and amount involving, among other things, product liability, patent infringement, warranty, recalls of products manufactured or sold by us, and environmental and safety issues involving our products or facilities.
Legislative activities of governments, agencies, and similar organizations, both in the United States and in other countries that may affect our operations.
Physical damage to, or loss of, significant manufacturing or distribution property, plant and equipment due to fire, weather or other factors beyond our control.
Possible terrorist attacks or acts of aggression or war, that could exacerbate other risks such as slowed vehicle production or the availability of supplies for the manufacturing of our products.
Our ability to effectively transition our information system infrastructure and functions to newer generation systems.

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PART I

ITEM 1. BUSINESS

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.

References herein to the “Company,” “Federal-Mogul,” “we,” “us,” or “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, we announced a plan to separate our Powertrain and Motorparts divisions into two independent, publicly-traded companies serving the global original equipment and aftermarket industries.

On January 15, 2016, we announced a termination of the previously announced spin-off of our Motorparts division. We will continue to operate with two separate, independent businesses with separate CEOs who will each report directly to our board of directors. The separate businesses more effectively serve their unique markets and allow each operating business to pursue its business strategy and more quickly react to our respective market conditions.

Interests Held by an Entity Controlled by Mr. Carl C. Icahn
An entity indirectly owned and controlled by Mr. Icahn filed a Schedule 13D and amendments therein with the Securities and Exchange Commission indicating that such entity has a beneficial interest in approximately 81.99% of our outstanding shares of common stock. As a result, Mr. Icahn has the indirect ability to nominate and elect all of the directors on our board of directors. Under applicable law and our certificate of incorporation and by-laws, certain actions cannot be taken without the approval of holders of a majority of our voting stock including, without limitation, mergers, the sale of substantially all of our assets, and amendments to our certificate of incorporation and by-laws. So long as Mr. Icahn continues to control a majority of our outstanding capital stock, he will continue to have these governance rights and the ability to control Federal-Mogul Holdings Corporation.

Business Overview
We are a leading global supplier of technology and innovation in vehicle and industrial products for fuel economy, emissions reduction and safety systems. We serve the world’s foremost original equipment manufacturers (“OEM”) and servicers (“OES”) (collectively “OE”) of automotive, light, medium and heavy-duty commercial vehicles, off-road, agricultural, marine, rail, aerospace, power generation and industrial equipment, as well as the worldwide aftermarket. We seek to participate in both of these markets by leveraging our 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. We believe that we are uniquely positioned to effectively manage the life cycle of a broad range of products to a diverse customer base. We are a leading technology supplier and a market share leader in several product categories. As of December 31, 2015, we had current OEM products included on more than 300 global vehicle platforms and more than 700 global powertrains used in light, medium, and heavy-duty vehicles. We offer premium brands, OE replacement, and entry/mid level products for all aftermarket customers. This broad range of vehicle and powertrain applications reinforces our belief in our unique market position.

We operate with two end-customer focused business segments. The Powertrain segment focuses on original equipment powertrain products for automotive, heavy duty, and industrial applications. The Motorparts segment sells and distributes a broad portfolio of products in the global aftermarket including more than 20 globally-recognized brands. We also serve original equipment manufacturers with products including braking, wipers, and a limited range of chassis. This organizational model allows for a strong product line focus benefitting both original equipment and aftermarket customers and enables us to be responsive to customers’ needs for superior products and to promote greater identification with our premium brands. Additionally, this organizational model enhances management focus to capitalize on opportunities for organic or acquisition

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growth, profit improvement, capital allocation, and business model optimization in line with the unique requirements of the two different customer bases and business models.

Powertrain offers its customers a diverse array of market-leading products for OE applications, including pistons, piston rings, piston pins, cylinder liners, engine valves, 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, element resistant systems protection sleeving products, acoustic shielding, and flexible heat shields. Motorparts offers powertrain products, typically manufactured by Powertrain, and is also a leading global manufacturer and distributor of brake disc pads, brake linings, brake blocks, brake system components, chassis and driveline products, engine gaskets and seals, wipers, lighting, and other product lines to OE and aftermarket customers. Motorparts markets its products under more than 20 globally recognized brands through a global distribution network.

We have manufacturing facilities, technical centers, distribution centers, and warehouses in 25 countries. Accordingly, our reporting segments derive sales from both domestic and international markets. The attendant risks of our international operations are primarily related to currency fluctuations, changes in local economic and political conditions, extraterritorial effects of United States laws such as the Foreign Corrupt Practices Act, and changes in laws and regulations.

The following tables set forth net sales and net property, plant and equipment (“PP&E”) by geographic region as a percentage of total net sales and net PP&E:
 
 
Net Sales
 
Net PP&E
 
Year Ended December 31
 
December 31
 
2015
 
2014
 
2013
 
2015
 
2014
United States
38
%
 
36
%
 
37
%
 
29
%
 
28
%
Mexico
5
%
 
5
%
 
5
%
 
7
%
 
7
%
Canada
2
%
 
2
%
 
1
%
 

 

Total North America
45
%
 
43
%
 
43
%
 
36
%
 
35
%
 
 
 
 
 
 
 
 
 
 
Germany
20
%
 
20
%
 
20
%
 
20
%
 
20
%
France
5
%
 
5
%
 
6
%
 
3
%
 
3
%
Belgium
3
%
 
4
%
 
5
%
 
1
%
 
1
%
Italy
4
%
 
4
%
 
4
%
 
2
%
 
3
%
United Kingdom
3
%
 
3
%
 
3
%
 
3
%
 
4
%
Other EMEA
7
%
 
8
%
 
6
%
 
12
%
 
13
%
Total EMEA
42
%
 
44
%
 
44
%
 
41
%
 
44
%
 
 
 
 
 
 
 
 
 
 
China
6
%
 
6
%
 
5
%
 
12
%
 
11
%
India
3
%
 
3
%
 
3
%
 
6
%
 
6
%
South America
1
%
 
2
%
 
2
%
 
2
%
 
2
%
Other
3
%
 
2
%
 
3
%
 
3
%
 
2
%
Total Rest of World
13
%
 
13
%
 
13
%
 
23
%
 
21
%
 
100
%
 
100
%
 
100
%
 
100
%
 
100
%
The following table sets forth net sales by reporting segment as a percentage of total net sales:
 
 
Year Ended December 31
 
2015
 
2014
 
2013
Net sales by reporting segment:
 
 
 
 
 
Powertrain
57
%
 
57
%
 
57
%
Motorparts
43
%
 
43
%
 
43
%
 
100
%
 
100
%
 
100
%


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See Note 21, Operations by Reporting Segment and Geographic Area, to the consolidated financial statements, included in Item 8 of this report.

Strategy
Our strategy is designed to create sustainable global profitable growth by leveraging existing and developing new competitive advantages. This strategy consists of the following primary elements:
Provide value-added products to customers in all markets served through leading technology and innovation;
Develop products to enable increased fuel economy and reduce vehicle emissions, plus enable the use of alternative energies;
Utilize our leading technology resources to develop advanced and innovative products, processes and manufacturing capabilities;
Extend our global reach to support our OE and aftermarket customers, furthering relationships with leading Asian OEs and strengthening market share with U.S. and European OEs;
Assess acquisition and investment opportunities that provide product line expansion, technological advancements, geographic positioning, penetration of emerging markets (including India and China) and market share growth;
Invest in world-class distribution and online capabilities to meet delivery expectations of our customers by enhancing our distribution footprint to improve our distribution capabilities, strengthen delivery performance and engage end customers;
Leverage the strength of our global aftermarket leading brand positions, product portfolio and range, marketing and selling expertise, and distribution and logistics capabilities;
Expand our coverage in existing product lines and add new product lines which are critical to maintaining our leadership position and leveraging our distribution and sales network;
Continue to invest in product innovation to support our premium brands and to enhance our marketing initiatives to more effectively communicate the value proposition of our branded products to end customers; and
Aggressively pursue cost competitiveness in all business segments by continuing to drive productivity in existing operations, consolidating and relocating manufacturing operations to best cost countries, utilizing our strategic alliances, and rationalizing business resources and infrastructure.

Our strategy is to develop and deliver leading technology, innovation, and service capabilities which results in market share expansion in the OE market and aftermarket. We assess individual opportunities to execute our strategy based upon estimated sales and margin growth, cost reduction potential, internal investment returns, and other criteria, and make investment decisions on a case-by-case basis. Opportunities meeting or exceeding benchmark return criteria may be undertaken through research and development activities, acquisitions, organic growth, and strategic alliances, or restructuring activities as further discussed below.

Research and Development. We maintain technical centers throughout the world designed to:
provide solutions for customers and bring new, innovative products to market;
integrate our leading technologies into advanced products and processes;
provide engineering support for all of our manufacturing sites; and
provide technological expertise in engineering and design development.

Our research and development activities are conducted at our research and development locations. Within the United States, these centers are located in Skokie, Illinois; Ann Arbor, Michigan; Plymouth, Michigan; St. Louis, Missouri; Exton, Pennsylvania; and Waupun, Wisconsin. Internationally, our research and development centers are located in Araras, Brazil; Aubange, Belgium; Chapel-en-le-Frith, United Kingdom; Coventry, United Kingdom; Burscheid, Germany; Nuremberg, Germany; Wiesbaden, Germany; Bad Camberg, Germany; Glinde, Germany; Kostelec, Czech Republic, and Shanghai, China.

Each of our business units is engaged in engineering, and research and development efforts and works closely with customers to develop custom solutions to meet their needs. Total expenditures for research and development activities, including product engineering and validation costs, were $189 million, $192 million and $173 million for the years ended December 31, 2015, 2014 and 2013.

Consolidated and Nonconsolidated Affiliates. We form certain affiliations, including joint ventures, to gain share in emerging markets, facilitate the exchange of technical information and development of new products, extend current product offerings, provide best cost manufacturing operations, broaden our customer base, and pursue strategic alternatives. We believe that certain of these affiliations have provided, and will continue to provide, opportunities to expand business relationships with Asian and other customers and partners operating in India and China growth markets. We are currently involved in 37 such affiliations located in 13 different countries throughout the world, including China, India, Korea, Russia, Turkey, Thailand and the United States. Of these affiliations, we maintain a controlling interest in 21 entities and, accordingly, the financial results of

4



these entities are included in our consolidated financial statements. We have a non-controlling interest in 16 of our affiliates, of which 12 are accounted for under the equity method and 4 are accounted for under the cost method. We do not consolidate any entity for which we have 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, our affiliations are businesses established and maintained in connection with our operating strategy.

Net sales for our 21 consolidated affiliates were approximately 5%, 5% and 8% of consolidated net sales for the years ended December 31, 2015, 2014 and 2013. Our investments in nonconsolidated affiliates totaled $296 million and $269 million as of December 31, 2015 and 2014, and the equity in earnings of such affiliates amounted to $56 million, $48 million and $34 million for the years ended December 31, 2015, 2014 and 2013.

Acquisitions. Pursuant to the Amended and Restated Share and Asset Purchase Agreement dated January 23, 2015, we completed the acquisition of TRW’s valvetrain business. On February 6, 2015, we completed the acquisition of certain assets of the TRW valvetrain business. The business was acquired through a combination of asset and stock purchases for a purchase price of approximately $309 million. On July 7, 2015, we completed the purchase of certain additional business assets of the TRW valvetrain business. The business was acquired through stock purchases for a base purchase price of approximately $56 million. The purchase included a $25 million noncontrolling interest related to a 66% stake in a majority owned entity that we consolidate in our financial statements. The acquisition was funded primarily from our available revolving line of credit and is subject to certain customary closing and post-closing adjustments. The acquisition of TRW’s valvetrain business adds a completely new product line to our portfolio, strengthens our position as a leading developer and supplier of core components for engines, and enhances our ability to support our customers to improve fuel economy and reduce emissions.

In July 2014, we completed the purchase of certain assets of the Honeywell brake component business, including two recently established manufacturing facilities in China and Romania that substantially strengthened the manufacturing and engineering capabilities of our global braking portfolio. The business was acquired through a combination of asset and stock purchases for a base purchase price of $168 million and other incurred liabilities of $15 million.

In May 2014, we completed the purchase of the Affinia chassis business. This business serves leading U.S. aftermarket customers with chassis products and broadened Motorparts product offering and customer base while also providing operational synergies. The purchase price was $149 million, net of acquired cash.

See Note 5, Acquisitions, to the Consolidated Financial Statements, included in Item 8 of this report.
Divestitures. In connection with our strategic planning process, we assess our 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 the year ended December 31, 2015, we entered into an agreement to sell one of our subsidiaries located in France, which has been presented in the consolidated balance sheet as held for sale.
During the year ended December 31, 2013, we divested our sintered components operations located in France, our connecting rod manufacturing facility located in Canada, our camshaft foundry located in the United Kingdom, and our 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 6, Held for Sale and Discontinued Operations, to the Consolidated Financial Statements, included in Item 8 of this report.
Restructuring Activities. Our 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 and productivity improvements. Restructuring activities include efforts to integrate and rationalize our businesses and to relocate manufacturing operations to best cost markets.
During the years ended December 31, 2015, 2014 and 2013, we recorded $89 million, $86 million and $40 million in net restructuring expenses. Our restructuring activities are further discussed in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations and Note 3, Restructuring Charges and Asset Impairments, to the consolidated financial statements, included in Item 8 of this report.

Products
The following provides an overview of products manufactured and distributed by our reporting segments.

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Powertrain. The Powertrain segment primarily represents our OE business in powertrain-related components and systems. In 2015, about 94% of Powertrain’s revenue was derived from OE customers, with the remaining 6% of revenue coming directly from the Motorparts segment for eventual distribution, by Motorparts, to customers in the independent aftermarket.

Powertrain operates 84 manufacturing sites in 19 countries, serving a large number of major automotive, heavy-duty, marine and industrial customers worldwide. Powertrain derived 35% of 2015 OE sales in North America, 46% in Europe, the Middle-East and Africa ("EMEA") and 19% in the rest of the world (“Rest of World” or “ROW”).
We are one of the world’s leading powertrain component and assembly providers. Comprehensive design capability and an extensive product portfolio enable effective delivery of a broad range of engine and driveline components as well as engineered solutions to improve fuel economy, reduce emissions or enhance vehicle performance and durability. Powertrain products are used in automotive, motorcycle, light truck, heavy-duty, industrial, commercial equipment (construction, agricultural, power generation, marine and railway), aerospace, and small air-cooled engine applications. The following provides a description of the various products manufactured by Powertrain:
Product
Description
 
 
Pistons
The main task of the piston is to compress the air and fuel mixture in advance of ignition. Following combustion, the piston relays the combustion energy into mechanical energy. In this process, substantial pressures are exerted on the piston, imposing high demands on it in terms of rigidity and temperature resistance.
 
 
Piston Rings
The three main tasks of piston rings in internal combustion engines include: (1) sealing the combustion chamber, (2) supporting heat transfer from the piston to the cylinder wall, and (3) regulating lubrication and oil consumption.
 
 
Piston Pins
Piston pins attach the piston to the end of the connecting rod, allowing the piston to pivot in each cycle of the engine and following the revolution of the crankshaft.
 
 
Cylinder Liners
Cylinder liners, or sleeves are specially engineered where surfaces formed within the engine block, working in tandem with the piston and ring, as the chamber in which the thermal energy of the combustion process is converted into mechanical energy.
 
 
Valve Seats and Guides
Valve seats and guides are a wide variety of powdered metal inserts used in engines and general industrial applications, which are specially designed to meet customer requirements for extreme hardness.
 
 
Engine Valves
Engine valves are used to control the air and fuel flow into and out of the cylinders, facilitating the combustion process. Valve designs consist of mono, bimetallic and hollow valves depending on application, which includes automotive and various industrial requirements including marine and power generation. The product line also provides other related valve train components including cotters, rotators and retainers.

 
 
Engine Bearings
Engine bearings provide an intermediate surface between the connecting rod and crankshaft and between the crankshaft and engine block. Their purpose is to facilitate the conversion of combustion energy into mechanical energy by allowing low-friction movement of the connecting rods and crankshaft when absorbing the power created in the combustion chamber. They operate principally under hydrodynamic lubrication conditions.
 
The bearing product line includes lead-free aluminum engine bearings commonly used in gasoline engines and bronze bearings used in highly-loaded compression engines such as diesel or gasoline turbocharged models. 

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Industrial Bearings
Sold under the Deva®and Glycodur® brands, industrial bearings are primarily dedicated to applications operating in mixed or low lubrication conditions. Applications are mainly diverse industrial motors or converters and include wind turbines and hydroelectric power generation equipment.
 
 
Bushings and Washers
Bushings and washers are used in engines and transmissions to ensure low friction rotation or oscillation of shafts. They are made of bronze, aluminum or polymer material.
 
 
Ignition
Ignition products include spark plugs, glow plugs, ignition coils and accessories for automotive commercial and industrial applications.
 
 
Dynamic Seals
Dynamic seals are used between a housing or body structure and rotating or moving shafts to contain lubricants, fluids and pressure inside the housing, while keeping out dust and other contaminates. There are numerous areas of application including engine crankshaft, transmission driveshaft, pinion and axle, and wheel seals.
 
 
Bonded Piston Seals
Bonded piston seals use hydraulic pressure in transmissions to facilitate gearshift. These products are used in automatic, dual clutch transmissions and continuously variable transmissions.
 
 
Combustion and Exhaust Gaskets
Combustion and exhaust gaskets are used between two surfaces to contain gas and pressure produced from combustion. These gaskets are primarily used on internal combustion engine applications including cylinder head, exhaust manifold, exhaust takedown, exhaust gas recirculation and turbocharger gaskets.
 
 
Static Gaskets and Seals
Static gaskets and seals create a barrier between two surfaces to contain fluids, pressure and gases while keeping out dust and other contaminants. There are numerous areas of application including engine covers, oil pans, intake manifolds, transmission covers and differential covers.
 
 
Rigid Heat Shields
Rigid heat shields are designed to provide a heat and sound barrier to emitting components. These products cover a full range of application on a vehicle from engine to tailpipe.
 
 
Flexible Heat Shields
Flexible heat shields are designed to provide a heat barrier and for thermal management usually in the engine compartment.
 
 
Element Resistant Sleeving
Element resistant sleeving products provide protection of wires, hoses, sensors, and mechanical components and assemblies from heat, electro-magnetic interference, dirt, vibration and moisture. Element resistant sleeving products include:
 
•   automotive wire harnesses and hoses;
 
•   abrasion protection and wire management of cable assemblies;
 
•   dielectric protection of electrical leads;
 
•   thermal and mechanical protection of hose assemblies; and
 
•   acoustic insulating and sound-dampening materials.
 
 
Lighting
Automotive lighting products include power and lighting systems, and interior and exterior lighting components.
Motorparts. Motorparts sells and distributes a broad portfolio of products in the global vehicle aftermarket while also serving the OE market with products including braking, wipers, and chassis. In 2015, approximately 73% of Motorparts’ sales were derived from sales to customers in the aftermarket and approximately 27% were attributable to sales to the OE market. Motorparts operates 32 manufacturing sites in 15 countries and 35 distribution centers and warehouses in 13 countries. In 2015, Motorparts derived 56% of sales in North America, 37% in EMEA and 7% in Rest of World.
Motorparts’ products are designed to solve a problem, facilitate installation and improve safety, durability, and vehicle performance. Motorparts’ products are utilized widely in vehicle braking systems and chassis, as well as in engine and sealing applications and general service. Through global market insight, supply chain expertise, and brand and product line management, aftermarket and OE customers worldwide benefit from our innovative technology, manufacturing, supply chain and distribution capabilities.

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The following table sets forth a description of the principal products manufactured and/or sold by Motorparts:  
Product
Description
Brands
Light Vehicle Disc
Pads
A light vehicle disc pad assembly consists of:
 
friction material, which dissipates forward momentum by converting energy into heat;
 
underlayer, which is a layer of different friction material placed between the backplate and friction material to improve strength, provide a thermal barrier, corrosion resistance, noise performance or a combination of these characteristics;
 
backplate, to support and locate the friction material in the caliper; and
 
shim, which is a rubber/metal laminate developed to suppress noise.
Wagner®, Abex®, Ferodo®, Jurid®, Stop®, QuickStop®, ThermoQuiet®, and OEx®
 
 
 
Commercial Vehicle
Disc Pads
Commercial vehicle disc brake pads are a growing segment of the friction market, superseding drum brakes on trucks, buses, tractor units and trailers. The basic construction of a commercial vehicle disc pad is the same as a light vehicle disc pad.
Ferodo®, Beral®, Abex® and Stop®
 
 
 
Light Vehicle Drum
Brake Linings
Drum brake linings are friction material affixed to a brake shoe and fitted on the rear service brake, rear parking brake and/or transmission brake application.
Ferodo® and Wagner®
 
 
 
Commercial Vehicle
Full Length Linings
Full length linings are the commercial vehicle equivalent of light vehicle drum brake linings.
Ferodo®, Beral®, Abex® and Jurid®
 
 
 
Commercial Vehicle
Half Blocks
Half blocks are segments of friction material made to be riveted onto drum brake shoes. They are used on heavier vehicle applications where discs are not used.
Ferodo®, Beral®, Abex® and Jurid®
 
 
 
Railway Brake
Blocks
Railway brake blocks work by acting on the circumference of the wheel. They are lighter and quieter in operation than cast iron blocks. However, friction performance is designed to replicate that of cast iron blocks.
Ferodo® and Jurid®
 
 
 
Chassis
Chassis parts include ball joints, tie rod ends, sway bar links, idler arms, pitman arms, and control arms. These components affect vehicle steering and vehicle ride quality.
MOOG® and QuickSteer®
 
 
 
Driveline Universal
Joints
Driveline universal joints which provide a linkage between a power unit and output device such as a wheel end or service device.
MOOG®
 
 
 
Combustion and
Exhaust Gaskets
Combustion and exhaust gaskets are used between two surfaces to contain gas and pressure produced from combustion. These gaskets are primarily used on internal combustion engine applications including cylinder head, exhaust manifold, exhaust takedown, exhaust gas recirculation and turbocharger gaskets.
Fel-Pro®, Payen® and Goetze®
 
 
 
Static Gaskets and
Seals
Static gaskets and seals create a barrier between two surfaces to contain fluids, pressure and gases while keeping out dust and other contaminants. There are numerous areas of application including engine covers, oil pans, intake manifolds, shaft seals, transmission covers and differential covers.
Fel-Pro®, Payen®, Goetze® and National®
 
 
 
Wipers
Windshield wiper parts include conventional and profile style wiper blades, blade refills, and wiper arms.
ANCO® 
 
 
 
Filters
Filtration parts include oil, air, cabin, fuel and other filters for both light and commercial vehicles.  These components prevent harmful contaminants contained in liquids and gases from passing through vehicle components and potentially leading to premature wear or failure.

Champion®
 
 
 

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Pistons
The main task of the piston is to compress the air and fuel mixture in advance of ignition. Following combustion, the piston relays the combustion energy into mechanical energy. In this process, substantial pressures are exerted on the piston, imposing high demands on it in terms of rigidity and temperature resistance.
Sealed Power®, Speed Pro®, FP Diesel® and Nüral®
 
 
 
Piston Rings
The three main tasks of piston rings in internal combustion engines are (1) sealing the combustion chamber, (2) supporting heat transfer from the piston to the cylinder wall and (3) regulating lubrication and oil consumption.
Sealed Power®, Speed Pro®, FP Diesel® and Goetze®
 
 
 
Cylinder liners
Cylinder liners, or sleeves, are specially engineered where surfaces form within the engine block, working in tandem with the piston and ring, as the chamber in which the thermal energy of the combustion process is converted into mechanical energy.
FP Diesel® and Goetze®
 
 
 
Ignition
Ignition products include spark plugs, glow plugs, ignition coils and accessories for automotive, commercial and industrial applications.
Champion® and Beru®
 
 
 
Lighting
Replacement vehicle lighting products for automotive and commercial applications
Wagner®

Industry
The automotive light vehicle market, as well as the medium duty/heavy duty commercial market, is comprised of two primary segments: the OE market in which our products are used in the manufacture of new vehicles and OE dealer service parts ("OES"), and the global aftermarket, in which our products are used as replacement parts for all vehicles in operation on the road, including all previous models.

The OE Market. Demand for component parts in the OE market is generally a function of the number of new vehicles produced, which is driven by macro-economic conditions and other factors such as interest rates, fuel prices, consumer confidence, employment trends, regulatory requirements, and trade agreements. Although OE demand is tied to planned vehicle production, parts suppliers also have the opportunity to grow through increasing their product content per vehicle, by increasing market share and by expanding into new or emerging markets. Companies with a global presence, leading technology and innovation, and advanced product engineering, manufacturing and customer support capabilities are best positioned to take advantage of these opportunities.

There are currently several significant trends that are effecting the OE market, including the following:
Global Production – The global light and commercial vehicle production in developed markets during 2015 and 2014 was as follows:
 
 
Global Light and Commercial Vehicle Production
 
 
2015
 
2014
 
 
(Millions of Vehicles)
Americas
 
21.3

 
21.4

EMEA
 
23.3

 
22.3

Asia
 
46.5

 
45.7

While global OE production increased at a moderate pace, the demand for parts, including products produced by us also increased moderately during 2015 due to solid demand in the Americas and Asia.

Automotive Supply Consolidation – Consolidation within the automotive supply base is expected to continue as the entire industry evolves and as the industry responds to the need to achieve economies of scale and global capabilities to serve vehicle manufacturers who are increasingly global in their production. Suppliers will seek opportunities to achieve synergies in their operations through consolidation, while striving to acquire complementary businesses to improve global competitiveness or to strategically enhance a product offering to global customers.

Globalization of Automotive Industry – OEs are increasingly designing global platforms where the basic design of the vehicle is performed in one location, but the vehicle is produced and sold in numerous geographic markets to realize significant economies of scale by limiting variations across product designs and geographic regions. While developed markets in North America and Europe continue to remain important to OEs, increased focus is being placed upon expanded design, development, and production within emerging markets for growth opportunities, especially in India

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and China. As a result, suppliers must be prepared to provide product and technical resources in support of their customers within these emerging markets. Furthermore, OEs are moving their operations to best cost geographies outside the U.S. and Western European markets and, accordingly, OEs are increasingly requiring suppliers to provide parts on a global basis. Finally, the Asian OEs continue to expand their reach and market share in relation to traditional North American and European manufacturers. As this trend is expected to continue into the foreseeable future, suppliers must be geographically and technically positioned to meet the needs of the Asian OEs.

Focus on Fuel Economy, Reduced Emissions and Alternative Energy Sources – Increased fuel economy and decreased vehicle emissions are of great importance to OEs as legislators and customers continue to demand more efficient and cleaner operating vehicles. Increasingly stringent fuel economy standards and environmental regulations are driving OEs to focus on new technologies including downsized, higher output and turbocharged gasoline engines, diesel and turbocharged diesel, bio-mass and hybrid diesel applications, and hybrid electric and alternative energy engines. As a result, the number of powertrain configurations will increase in response to the proliferation of commercially available energy sources. Suppliers offering solutions to OEs related to numerous vehicle fuel and powertrain configurations possess a distinct competitive advantage, which is driving accelerated new product development cycles.

Focus on Vehicle Safety – Vehicle safety continues to receive industry attention by OEs as customers view safety as a fundamental driver in consumer purchasing decisions and legislation looks on improved vehicle safety as a public health issue. Accordingly, OEs are seeking suppliers with new technologies, capabilities, and products that have the ability to advance vehicle safety. Suppliers that are able to enhance vehicle safety through innovative products and technologies have a distinct competitive advantage.

Pricing Pressures – OEs provide extensive pricing incentives and financing alternatives to consumers in order to generate sales of new vehicles and retain or gain market share. These actions, coupled with the increasing content required to meet regulations, have placed pressures on the OEs’ profits and, in turn, the OEs expect certain recovery from their supply base. Suppliers must continually identify and implement product innovation and cost reduction activities to fund customer annual price concession expectations in order to retain current business as well as to be competitively positioned for future new business opportunities.

Raw Material Cost Fluctuations – There have been significant fluctuations in recent periods in global prices of aluminum, copper, lead, nickel, platinum, resins, steel, other base raw materials, and energy. Suppliers must continue to identify leading design and innovative technological solutions and material substitution options in order to retain a competitive advantage to the extent that cost increases are not passed on to customers.

Energy, Industrial and Transport Markets – Customers continue to develop alternatives to historic infrastructure in the energy, industrial and transport markets. This includes power generators and other power conversion devices as well as growth in the aerospace and high speed railway markets and ocean transport. Suppliers with the capability to utilize automotive expertise to service these and other related markets have a competitive advantage.

The Aftermarket Business. Products for the global vehicle aftermarket are sold directly to a wide range of distributors, retail parts stores and mass merchants that distribute these products to professional service providers, “do-it-yourself” consumers, and in some cases, directly to service chains. Demand for aftermarket products historically has been driven by three primary factors: (i) the number of vehicles in operation; (ii) the average age of vehicles in operation; and (iii) vehicle usage trends. These factors, while applicable in all regions, vary depending on the composition of the car parc and other factors, which are discussed in greater detail below:

Number of Vehicles in Operation - The global vehicle population is expected to grow to 1.4 billion by 2021. Growth in certain emerging markets, such as China, is increasing at the highest rate, while more mature markets are expected to continue to remain stable or to grow modestly in size, indicating that new car sales are well beyond the replacement rate for scrapped vehicles.

Increase in Average Age of Vehicles - The average age of vehicles on the road in the United States has increased since 2002 from 9.6 years to an estimated 11.5 years in 2015. It is expected to remain level at approximately 11.5 years or increase slightly through 2018. The average age of vehicles on the road in Europe has also steadily increased over the past decade to 9.7 years with a slight increase projected through 2020. These trends will drive the need for maintenance and repair work and thereby increasing the overall demand for aftermarket replacement parts in both markets. The average age of vehicles on the road in China is just under four years and is expected to increase over the next several years as the vehicle population matures. We believe this will lead to continuing significant growth in the China aftermarket.

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Channel Consolidation - In the more mature markets of the United States and Western Europe, there has been increasing consolidation in aftermarket distribution networks with larger, more sophisticated aftermarket distributors and retailers gaining market share. These distributors generally require larger, more sophisticated suppliers with product expertise, category management capabilities, and supply chain services and capabilities, as well as a global manufacturing and sourcing footprint.

Growth of Online Capabilities - Reaching consumers directly through online capabilities, including e-commerce, is expected to have an increasing effect on the global aftermarket industry and how aftermarket products are sold. Establishment of a robust online presence will be critical for suppliers regardless of whether they intend to participate directly in e-commerce. In 2015, Motorparts devoted significant resources to improving its online capabilities, in both customer-facing and internal applications, including a new online order management system, vendor management system, customer relationship management ("CRM"), global brand websites, and data and analytics. Initiatives to improve Motorparts online capabilities will continue in 2016.

Increase in Private Label Brands and Low-Cost Country Imports - In the United States, there has been an increase in private label or store brands sold by retailers and distributors at a lower price point than premium brands of the same products. However, in many cases, retailers or wholesale distributors creating private label brands will still rely on established suppliers, like Motorparts, to manufacture their private label products and, in some cases, utilize co-branding to support their private label offerings. Motorparts will continue to invest in product innovation and marketing to support the differentiation of its branded product lines.

Changes in Consumer Behavior - The aftermarket is affected by changes in economic conditions, volatility in fuel prices, and expanding focus on environmental and energy conservation. For example, the number of consumers with the ability to purchase new vehicles during the 2008-2010 economic downturns led to increased demand for repairs in order to keep older vehicles road-worthy. Increased environmental regulation will lead to additional replacement parts being required on a more frequent basis to meet more exacting standards. Recent falling fuel prices in the United States are likely to lead consumers to drive more and to increase disposable income available for consumers to purchase aftermarket automotive parts and complete necessary repairs.

Customers
We supply OEs with a wide variety of technologically innovative parts, substantially all of which are manufactured by us. Our OE customers consist of automotive and heavy-duty vehicle manufacturers as well as agricultural, off-highway, marine, railroad, aerospace, high performance, and industrial application manufacturers. We have well-established relationships with substantially all major American, European, and Asian automotive OEs.

Our aftermarket customers include independent warehouse distributors who redistribute products to local parts suppliers, distributors of heavy-duty vehicular parts, engine rebuilders, retail parts stores, and mass merchants. The breadth of our product lines, the strength of our leading brand names, marketing expertise, its sizable sales force, and our distribution and logistics capability are central to the success of our Motorparts operations.

No individual customer accounted for more than 10% of our net sales during 2015.

Competition
The global vehicular parts business is highly competitive. We compete with many independent manufacturers and distributors of component parts globally. In general, competition for sales is based on price, product quality, technology, delivery, customer service, and the breadth of products offered by a given supplier. We are meeting these competitive challenges by developing leading technologies, efficiently integrating and expanding our manufacturing and distribution operations, widening our product coverage within our core businesses, restructuring our operations and transferring production to best cost countries, and utilizing our worldwide technical centers to develop and provide value-added solutions to our customers. A summary of our primary independent competitors by reporting segment is set forth below.

Powertrain – Primary competitors include AGM Automotive, Art Metal, Bergmann, BinZou, Bleistahl, Bosch, Daido, Dana, Dana-Reinz, Delfingen, Denso, DongYang, ElringKlinger, FNOK, Freudenberg, Kaco/Sabo, Kolbenschmidt, Mahle, Miba, NGK, NOK, NPR, Relats, Sinteron, SKF, Taiho, and Vitrica.

Motorparts – Primary competitors include Akebono Brake Corporation, Autolite, Brake Parts Inc., Bosch Group, Centric Parts, Crowne Group LLC, Delphi Automotive LLP, Denso Corporation, Dorman Products, Inc., GRI Engineering and Development LLC (MAT Holdings, Inc.), Mahle GmbH, Mevotech Inc., NGK Spark Plug Co., Ltd.,

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NTN Bearing Corporation, Neapco Inc., Old World Industries, LLC, Phillips Industries, Pylon Manufacturing Corporation, Rain-X (ITW Global Brands), SKF Group, Osram Sylvania Ltd., The Timken Company, Trico Products Corporation, Valeo Group, Dana Corporation (Victor Reinz brand), and ZF TRW Automotive Holdings Corp.

Backlog
For OE customers, we generally receive purchase orders for specific products supplied for particular vehicles. These supply relationships typically extend over the life of the related vehicle, subject to interim design and technical specification revisions, and do not require the customer to purchase a minimum quantity. In addition to customary commercial terms and conditions, purchase orders generally provide for annual price reductions based upon expected productivity improvements and other factors. Customers typically retain the right to terminate purchase orders, but we generally cannot terminate purchase orders. OE order fulfillment is typically manufactured in response to customer purchase order releases, and we ship directly from a manufacturing location to the customer for use in vehicle production and assembly. Accordingly, our manufacturing locations turn finished goods inventory relatively quickly, producing from on-hand raw materials and work-in-process inventory within relatively short manufacturing cycles. Significant risks to us include a change in engine production, driven by mix changes, for powertrain components (e.g. a change from diesel to gasoline engines), lower than expected vehicle or engine production by one or more of our OE customers, or termination of the business based upon perceived or actual shortfalls in delivery, quality or value.

For our global aftermarket customers, Motorparts generally establishes product line arrangements that encompass substantially all parts offered within a particular product line. In some cases, Motorparts will enter into agreements with terms ranging from one to three years that cover one or more product lines with fixed prices. Pricing is market responsive and subject to adjustment based upon competitive pressures, material costs and other commercial factors. Global Aftermarket order fulfillment is largely performed from finished goods inventory stocked in our worldwide distribution network. Inventory stocking levels in our distribution centers are established based upon historical and anticipated future customer demand.

Although customer programs typically extend to future periods, and although there is an expectation that we will supply certain levels of OE production over such periods, we believe that outstanding purchase orders and product line arrangements do not constitute firm orders. Firm orders are limited to specific and authorized customer purchase order releases placed with our manufacturing and distribution centers for actual production and order fulfillment. Firm orders are typically fulfilled as promptly as possible after receipt from the conversion of available raw materials and work-in-process inventory for OE orders and from current on-hand finished goods inventory for aftermarket orders. The dollar amount of such purchase order releases on hand and not processed at any point in time is not believed to be significant based upon the time frame involved.

Raw Materials and Suppliers
We purchase various raw materials and component parts for use in our manufacturing processes, including ferrous and non-ferrous metals, non-metallic raw materials, stampings, castings and forgings. We also purchase parts manufactured by other manufacturers for sale in the aftermarket. We have not experienced any significant shortages of raw materials, components or finished parts and normally do not carry inventories of raw materials or finished parts in excess of those reasonably required to meet our production and shipping schedules. In 2015, no outside supplier provided products that accounted for more than 3% of our annual purchases.

Insight Portfolio Group LLC (formally known as Icahn Sourcing, LLC) - Related Party
Insight Portfolio Group LLC (“Insight”) is an entity formed and controlled by Icahn Enterprises, L.P ("IEP") in order to maximize the potential buying power of a group of entities with which IEP has a relationship in negotiating with a wide range of suppliers of goods, services, and tangible and intangible property at negotiated rates. We acquired a minority equity interest in Insight and agreed to pay a portion of Insight’s operating expenses beginning in 2013. In addition to the minority equity interest held by us, certain subsidiaries and affiliates of IEP, and other entities with which IEP has a relationship, also acquired minority equity interests in Insight and agreed to pay a portion of Insight’s operating expenses.

Our payments to Insight were less than $0.5 million in each of the three years 2015, 2014, and 2013. We anticipate our 2016 payments to Insight to be similar to the amounts paid in 2015.

Related Parties
On June 1, 2015, IEP completed an acquisition of substantially all of the assets of Uni-Select USA, Inc. and Beck/Arnley Worldparts, Inc. comprising the U.S. automotive parts distribution of Uni-Select Inc ("Uni-Select"). Subsequent to the IEP acquisition of Uni-Select, Uni-Select changed its name to Auto Plus.


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Auto Plus is operated independently from us and all transactions are approved by the independent directors of our company. In connection with IEP's acquisition of Auto Plus, Mr. Icahn has resigned from our board of directors and our Co-Chief Executive Officer, Daniel A. Ninivaggi, has resigned from the board of directors of IEP.

We had $27 million of net sales from the date of acquisition through December 31, 2015 to Auto Plus and $12 million of accounts receivable outstanding from Auto Plus as of December 31, 2015.

On February 3, 2016, IEP acquired a majority of the outstanding shares of Pep Boys - Manny, Moe & Jack ("Pep Boys"), a leading aftermarket provider of automotive service, tires, parts and accessories across the United States and Puerto Rico. On February 4, 2016, IEP completed the acquisition of the remaining outstanding shares of Pep Boys. Motorparts sales to Pep Boys in 2015 were approximately $5 million.

Seasonality of Our Business
Our business is moderately seasonal because many North American OE customers typically close assembly plants for two weeks in July for model year changeovers, and for an additional week during the December holiday season. OE customers in Europe historically shut down vehicle production during portions of July and August and one week in December. Shut-down periods in the Rest of World generally vary by country. The aftermarket experiences seasonal fluctuations in sales due to demands caused by weather and driving patterns. Historically, our sales and operating profits have been the strongest in the second quarter. For additional information, refer to our quarterly financial results contained in Note 22, Supplementary Quarterly Financial Information (Unaudited), to the consolidated financial statements, included in Item 8 of this report.

Employee Relations
We have 53,700 employees as of December 31, 2015. Various unions represent approximately 28% of our U.S. hourly employees and approximately 87% of our non-U.S. hourly employees. With the exception of two facilities in the U.S., most of our unionized manufacturing facilities have their own contracts with their own expiration dates and, as a result, no contract expiration date affects more than one facility.

Effect of Environmental Regulations
Our operations, consistent with those of the manufacturing sector in general, are subject to numerous existing and proposed laws, and governmental regulations designed to protect the environment, particularly regarding plant wastes and emissions, and solid waste disposal. Capital expenditures for property, plant and equipment for environmental control activities did not have a material effect on our financial position or cash flows in 2015 and are not expected to have a material effect on our financial position or cash flows in 2016.

Intellectual Property
We hold in excess of 6,300 patents and patent applications on a worldwide basis, of which more than 1,200 have been filed in the United States. Of the approximately 6,300 patents and patent applications, approximately 30% are in production use and/or are licensed to third parties, and the remaining 70% are being considered for future production use or provide a strategic technological benefit to us.

We do not materially rely on any single patent, nor will the expiration of any single patent materially affect our business. Our current patents expire over various periods into the year 2036. We are actively introducing and patenting new technology to replace formerly patented technology before the expiration of the existing patents. In the aggregate, our worldwide patent portfolio is materially important to our business because it enables us to achieve technological differentiation from our competitors.

We also maintain more than 6,600 active trademark registrations and applications worldwide. In excess of 90% of these trademark registrations and applications are in commercial use by us or are licensed to third parties.

Segment Reporting Data
Operating segment data and principal geographic area data for the years ended December 31, 2015, 2014 and 2013 are summarized in Note 21 to our consolidated financial statements.


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Web Site and Access to Filed Reports
We maintain an internet Web site at www.federalmogul.com. The contents of our Web site are not incorporated by reference in this report. We provide access to our annual and periodic reports filed with the SEC free of charge through this Web site. Our Integrity Policy is also available on our Web site. The SEC maintains a Web site at www.SEC.gov where reports, proxy and information statements, and other information about us may be obtained. Paper copies of annual and periodic reports filed with the SEC may be obtained free of charge by contacting our headquarters at the address located within the SEC Filings or under Investor Relations on our Web site.

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ITEM 1.A. RISK FACTORS

An investment in Federal-Mogul involves various risks. The risks discussed below are not the only ones faced by the Company. Please also read the cautionary note regarding “Forward-Looking Statements” beginning on page 2.

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 December 31, 2015, the Company had approximately $3.1 billion of outstanding indebtedness. The Company is permitted by the terms of its debt instruments to incur 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.  In addition, covenants in the Company’s debt agreements could limit its ability to engage in certain transactions and pursue its business strategies, which could adversely affect liquidity.
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, guarantee additional debt or issue redeemable, convertible of preferred equity;
limit the Company’s ability to make distributions or prepay its debt, incur liens, enter into agreements that restrict distributions from restricted subsidiaries, sell or otherwise dispose of assets (including capital stock of subsidiaries), enter into transactions with affiliates and merger consolidate or sell substantially all of its assets;
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.

The Company’s restructuring activities and strategic initiatives may affect the Company’s short-term liquidity and may not result in the anticipated synergies and cost savings: The Company is pursuing a number of organic and inorganic growth activities, restructuring plans, and strategic initiatives to increase and improve the Company’s business and profitability. Management believes these activities will enhance the Company’s long term shareholder value; however, the investment to effectuate these activities may have an effect on the Company’s short term liquidity and may create the need for additional borrowing which may be at higher interest rates given the Company’s current level of indebtedness. In addition, it is possible the achievement of expected synergies and cost savings associated with the Company’s restructuring activities will require additional costs or charges to earnings in future periods. It is also possible the expected synergies or returns from strategic initiatives may not be achieved. Any costs or charges could adversely effect the business, results of operations, liquidity, and financial condition.

The Company’s operations in foreign countries expose the Company to risks related to economic and political conditions, currency fluctuations, import/export restrictions, regulatory and other risks: The Company has manufacturing and distribution facilities in many countries. International operations are subject to certain risks including:
exposure to local economic conditions;
exposure to local political conditions (including the risk of seizure of assets by foreign governments);
currency exchange rate fluctuations (including, but not limited to, material exchange rate fluctuations, such as devaluations) and currency controls
export and import restrictions;
restrictions on ability to repatriate foreign earnings;
labor unrest; and
compliance with U.S. laws such as the Foreign Corrupt Practices Act, and local laws prohibiting inappropriate payments.

The likelihood of such occurrences and their potential effect on the Company are unpredictable and vary from country-to-country.

Certain of the Company’s operating entities report their financial condition and results of operations in currencies other than the U.S. dollar (including, but not limited to, Brazilian real, British pound, Chinese yuan renminbi, Czech crown, euro, Indian rupee, Mexican peso, Polish zloty, Russian ruble, South Korean won, and Swedish krona). In reporting its consolidated

15



statements of operations, the Company translates the reported results of these entities into U.S. dollars at the applicable exchange rates. As a result, fluctuations in the dollar against foreign currencies will affect the value at which the results of these entities are included within Federal-Mogul’s consolidated results.

The Company is exposed to a risk of gain or loss from changes in foreign exchange rates whenever the Company, or one of its foreign subsidiaries, enters into a purchase or sales agreement in a currency other than its functional currency. While the Company reduces such exposure by matching most revenues and costs within the same currency, changes in exchange rates could affect the Company’s financial condition or results of operations.

The Company conducts operations through joint ventures which may contain various contractual restrictions and require approval for certain actions by our joint venture partners: Certain of the Company’s operations, including emerging markets, are conducted through joint ventures and strategic alliances. With respect to these joint ventures, the Company may share ownership and management responsibilities with one or more partners that may not share the same goals and objectives. Operating a joint venture requires the Company to operate the business pursuant to the terms of the agreement that was entered into with the joint venture partners, as well as to share information and decision making. Additional risks associated with joint ventures include one or more partners failing to satisfy contractual obligations, conflicts arising between the joint venture partners, a change in the ownership of any of the joint venture partners and our limited ability to control compliance with applicable rules and regulations, including the Foreign Corrupt Practices Act and related rules and regulations. Additionally, the Company’s ability to sell its interest in a joint venture may be subject to contractual and other limitations. Accordingly, any such occurrences could adversely affect the Company’s financial condition, operating results and cash flows.

The Company may pursue acquisitions or other affiliations that involve inherent risks, any of which may cause the Company not to realize anticipated benefits, and the Company may have difficulty integrating the operations of any companies that may be acquired, which may adversely affect the Company’s results of operations: In the past, the Company has grown through acquisitions, and may engage in acquisitions in the future as part of the Company’s business strategy. The full benefits of these acquisitions, however, require integration of manufacturing, administrative, financial, sales, and marketing approaches and personnel. If the Company is unable to successfully integrate its acquisitions, it may not realize the benefits of the acquisitions, the financial results may be negatively affected, or additional cash may be required to integrate such operations.

In the future, the Company may not be able to successfully identify suitable acquisition or affiliation opportunities or complete any particular acquisition, combination, affiliation or other transaction on acceptable terms. The Company’s identification of suitable acquisition candidates and affiliation opportunities and the integration of acquired business operations involve risks inherent in assessing the values, strengths, weaknesses, risks, and profitability of these opportunities. This includes the effects on the Company’s business, diversion of management’s attention, and risks associated with unanticipated problems or unforeseen liabilities, and may require significant financial resources that would otherwise be used for the ongoing development of the Company’s business.

The difficulties of integration may be increased by the necessity of coordinating geographically dispersed organizations, integrating personnel with disparate business backgrounds and combining different corporate cultures. These difficulties could be further increased to the extent the Company pursues acquisition or affiliation opportunities internationally. The Company may not be effective in retaining key employees or customers of the combined businesses. The Company may face integration issues pertaining to the internal controls and operations functions of the acquired companies and also may not realize cost efficiencies or synergies that were anticipated when selecting the acquisition candidates. The Company may experience managerial or other conflicts with its affiliation partners. Any of these items could adversely affect the Company’s results of operations.

The Company’s failure to identify suitable acquisition or joint venture opportunities may restrict the Company’s ability to grow its business. If the Company is successful in pursuing future acquisitions or other affiliations, the Company may be required to expend significant funds, incur additional debt and/or issue additional securities, which may materially adversely affect its results of operations. If the Company spends significant funds or incurs additional debt, the Company’s ability to obtain financing for working capital or other purposes could decline and the Company may be more vulnerable to economic downturns and competitive pressures.

Impairment charges relating to the Company’s goodwill and long lived assets could adversely affect its financial performance: The Company has been required to recognize impairment charges for its goodwill and other long lived. In accordance with generally accepted accounting principles, the Company periodically assesses these assets to determine if they are impaired. Significant negative industry or economic trends, disruptions to our business, inability to effectively integrate acquired businesses, unexpected significant changes or planned changes in use of these assets, changes in the structure of our

16



business, divestitures, market capitalization declines, or increases in associated discount rates may impair our goodwill and other intangible assets. Any charges relating to such impairments may adversely affect our results of operations in the periods recognized.

Adverse conditions in the automotive market adversely affect demand for the Company’s products and exposes the Company to credit risks of its customers: The revenues of the Company’s operations are closely tied to global OE automobile sales, production levels, and independent aftermarket parts replacement activity. The OE market is characterized by short-term volatility, with overall expected long-term growth in global vehicle sales and production. Automotive production in the local markets served by the Company can be affected by macro-economic factors such as interest rates, fuel prices, consumer confidence, employment trends, regulatory and legislative oversight requirements and trade agreements. A variation in the level of automobile production would affect not only sales to OE customers but, depending on the reasons for the change, could affect demand from aftermarket customers. In addition, aftermarket demand is affected by various factors, including the size and composition of the vehicle population and vehicle usage. The Company’s results of operations and financial condition could be adversely affected if the Company fails to respond in a timely and appropriate manner to changes in the demand for its products or if the Company is not able to timely identify or address financial distress of its aftermarket customers.

Accounts receivable potentially subject the Company to concentrations of credit risk. The Company’s customer base includes virtually every significant global automotive manufacturer, numerous Tier 1 automotive suppliers, and a large number of distributors and installers of automotive aftermarket parts. Consolidation in the automotive aftermarket may lead to financial distress for financially weaker customers of the Company which, coupled with payment terms that are typically longer than in the OE market, could have a negative effect on the Company’s financial results.

Consolidation, increased market power, and potential conflicts with the Company’s independent aftermarket customers could negatively affect the Company’s financial performance: The Company’s independent aftermarket customers are continuing to consolidate and gain purchasing power and the ability to demand extended payment terms and other pricing concessions. If these trends continue the financial results of the Company’s Motorparts business segment could be negatively affected. In addition, aftermarket customers may reduce their business with the Company based on perceived conflicts with the Company's strategy of supporting its branded products and supporting new distribution channels or its affiliation with certain competitors.

Cybersecurity risks and other cyber incidents could result in disruption: Threats to information technology systems associated with cybersecurity risks and cyber incidents or attacks continue to grow. The Company depends on information technology systems.  In addition, the Company collects, processes and retains certain sensitive and confidential customer information in the normal course of business. Despite the security measures in place and any additional measures that may be implement in the future, the Company’s facilities and systems, and those of its third-party service providers, could be vulnerable to security breaches, computer viruses, lost or misplaced data, programming errors, human errors, acts of vandalism or other events. Any disruption of our systems or security breach or event resulting in the misappropriation, loss or other unauthorized disclosure of confidential information, whether by the Company directly or its third-party service providers, could damage our reputation, expose us to the risks of litigation and liability, disrupt our business or otherwise affect the Company’s results of operations.
The Company is subject to possible insolvency of financial counterparties: The Company engages in numerous financial transactions and contracts including insurance policies, letters of credit, credit line agreements, financial derivatives, and investment management agreements involving various counterparties. The Company is subject to the risk that one or more of these counterparties may become insolvent and therefore be unable to discharge its obligations under such contracts.
The automotive industry is highly competitive and the Company’s success depends upon its ability to compete effectively in the market: 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. In addition, customers continue to require periodic price reductions that require the Company to continually assess, redefine and improve its operations, products, and manufacturing capabilities to maintain and improve profitability. In addition, the Company’s competitors’ efforts to increase their market share could exert additional downward pressure on product pricing and margins. There can be no assurance the Company will be able to compete effectively in the automotive market.

The Company’s pension obligations and other postemployment benefits could adversely affect the Company’s operating margins and cash flows: The automotive industry, like other industries, continues to be affected by the rising cost of providing pension and other postemployment benefits. In addition, the Company sponsors certain defined benefit plans worldwide that are underfunded and will require cash payments. If the performance of the assets in the pension plans does not meet the

17



Company’s expectations, or other actuarial assumptions are modified, the Company’s required contributions may be higher than it expects. See Note 15, Pensions and Other Post-Retirement Benefits, to the Consolidated Financial Statements, included in Item 8 of this report.

The price of the Company’s common stock is subject to volatility: Various factors could cause the market price of the Company’s common stock to fluctuate substantially including general financial market changes, changes in governmental regulation, significant automotive industry announcements or developments, the introduction of new products or technologies by the Company or its competitors, and changes in other conditions or trends in the automotive industry. Other factors that could cause the Company’s stock price to fluctuate could be actual or anticipated variations in the Company’s or its competitors’ quarterly or annual financial results, financial results failing to meet expectations of analysts or investors, changes in securities analysts’ estimates of the Company’s future performance or of that of the Company’s competitors and the general health of the automotive industry.

Mr. Carl C. Icahn exerts significant influence over the Company and his interests may conflict with the interest of the Company’s other stockholders: Mr. Carl C. Icahn indirectly controls approximately 81.99% 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.

If the Company loses any of its executive officers or key employees, the Company’s operations and ability to manage the day-to-day aspects of its business may be materially adversely affected: The Company’s future performance substantially depends on its ability to retain and motivate executive officers and key employees, both individually and as a group. If the Company loses any of its executive officers or key employees, which have many years of experience with the Company and within the automotive industry and other manufacturing industries, or is unable to recruit qualified personnel, the Company’s ability to manage the day-to-day aspects of its business may be materially adversely affected. The loss of the services of one or more executive officers or key employees, who also have strong personal ties with customers and suppliers, could have a material adverse effect on the Company’s business, financial condition, and results of operations.
The Company does not currently maintain “key person” life insurance.

The Company’s stock price may decline due to sales of shares by Mr. Carl C. Icahn: Sales of substantial amounts of the Company’s common stock by Mr. Icahn and his affiliates, or the perception that these sales may occur, may adversely affect the price of the Company’s common stock and impede its ability to raise capital through the issuance of equity securities in the future. Mr. Icahn is contractually entitled, subject to certain exceptions, to exercise rights under a registration rights agreement to cause the Company to register his shares under the Securities Act. By exercising his registration rights and selling a large number of shares, Mr. Icahn could cause the price of the Company’s common stock to decline. No other shareholder has registration rights.

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%: 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 December 31, 2015. If the ACF plans were voluntarily terminated, they would be underfunded by approximately $101 million as of December 31, 2015. These results are based on the most recent information provided by the plans’ actuaries. These liabilities could increase or

18



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 there under (“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.

Certain disruptions in supply of and changes in the competitive environment for raw materials could adversely affect the Company’s operating margins and cash flows: The Company purchases a broad range of materials, components, and finished parts. The Company also uses a significant amount of energy, both electricity and natural gas, in the production of its products. A significant disruption in the supply of these materials, supplies, and energy or the failure of a supplier with whom the Company has established a single source supply relationship could decrease production and shipping levels, materially increase operating costs and materially adversely affect profit margins. Shortages of materials or interruptions in transportation systems, labor strikes, work stoppages, or other interruptions to or difficulties in the employment of labor or transportation in the markets where the Company purchases material, components, and supplies for the production of products or where the products are produced, distributed or sold, whether as a result of labor strife, war, further acts of terrorism or otherwise, in each case may adversely affect profitability.

In recent periods there have been significant fluctuations in the prices of aluminum, copper, lead, nickel, platinum, resins, steel, other base metals and energy which have had and may continue to have an unfavorable effect on the Company’s business. Any continued fluctuations in the price or availability of energy and materials may have an adverse effect on the Company’s results of operations or financial condition. To address increased costs associated with these market forces, a number of the Company’s suppliers have implemented surcharges on existing fixed price contracts. Without the surcharge, some suppliers claim they will be unable to provide adequate supply. Competitive and marketing pressures may limit the Company’s ability to pass some of the supply and material cost increases on to the Company’s customers and may prevent the Company from doing so in the future. Furthermore, the Company’s customers are generally not obligated to accept price increases the Company may desire to pass along to them. This inability to pass on price increases to customers when material prices increase rapidly or to significantly higher than historic levels could adversely affect the Company’s operating margins and cash flow, possibly resulting in lower operating income and profitability.

The Company’s hedging activities to address commodity price fluctuations may not be successful in offsetting future increases in those costs or may reduce or eliminate the benefits of any decreases in those costs: In order to mitigate short-term variation in operating results due to the aforementioned commodity price fluctuations, the Company hedges a portion of near-term exposure to certain raw materials used in production processes, primarily natural gas, copper, nickel, tin, zinc, high-grade aluminum and aluminum alloy. The results of the Company’s hedging practice could be positive, neutral or negative in any period depending on price changes in the hedged exposures.

The Company’s hedging activities are not designed to mitigate long-term commodity price fluctuations and, therefore, will not protect from long-term commodity price increases. The Company’s future hedging positions may not correlate to actual energy or raw materials costs, which would cause acceleration in the recognition of unrealized gains and losses on hedging positions in operating results.


19



The Company is subject to a variety of environmental, health and safety laws, and regulations, and the cost of complying or the Company’s failure to comply with such requirements may have a material adverse effect on its business, financial condition and results of operations: The Company is subject to a variety of federal, state, and local environmental laws and regulations relating to the release or discharge of materials into the environment, the management, use, processing, handling, storage, transport or disposal of hazardous waste materials, or otherwise relating to the protection of public and employee health, safety, and the environment. These laws and regulations expose the Company to liability for the environmental condition of its current facilities, and also may expose the Company to liability for the conduct of others or for the Company’s actions that were in compliance with all applicable laws at the time these actions were taken. These laws and regulations also may expose the Company to liability for claims of personal injury or property damage related to alleged exposure to hazardous or toxic materials in foreign countries. Despite the Company’s intention to be in compliance with all such laws and regulations, the Company cannot guarantee that it will at all times be in compliance with all such requirements. The cost of complying with these requirements may also increase substantially in future years. If the Company violates or fails to comply with these requirements, the Company could be fined or otherwise sanctioned by regulators. These requirements are complex, change frequently, and may become more stringent over time, which could have a material adverse effect on the Company’s business.

The Company’s failure to maintain and comply with environmental permits the Company is required to maintain could result in fines or penalties or other sanctions and have a material adverse effect on the Company’s operations or results. Future events, such as new environmental regulations or changes in or modified interpretations of existing laws and regulations or enforcement policies, newly discovered information or further investigation or evaluation of the potential health hazards of products or business activities, may give rise to additional compliance and other costs that could have a material adverse effect on the Company’s business, financial conditions, and operations.

New regulations related to “conflict minerals” may force us to incur additional expenses and may make the Company’s supply chain more complex. In August 2012, the SEC adopted annual disclosure and reporting requirements for those companies who use certain minerals known as “conflict minerals” mined from the Democratic Republic of Congo and adjoining countries in their products. These new requirements required due diligence efforts in 2013, with initial disclosure requirements beginning in 2014. There will be significant costs associated with complying with these disclosure requirements, including for diligence to determine the sources of conflict minerals used in the Company’s products and other potential changes to products, processes or sources of supply as a consequence of such verification activities.

A significant labor dispute involving the Company or one or more of its customers or suppliers or that could otherwise affect our operations could adversely affect the Company’s financial performance: A substantial number of the Company’s employees and the employees of the Company’s largest customers and suppliers are members of industrial trade unions and are employed under the terms of various labor agreements. Most of the Company’s unionized manufacturing facilities have their own contracts with their own expiration dates. There can be no assurances that future negotiations with the unions will be resolved favorably or that the Company will not experience a work stoppage or disruption that could adversely affect its financial condition, operating results and cash flows. A labor dispute involving the Company, any of its customers or suppliers or any other suppliers to the Company’s customers or that otherwise affects the Company’s operations, or the inability by the Company, any of its customers or suppliers or any other suppliers to the Company’s customers to negotiate, upon the expiration of a labor agreement, an extension of such agreement or a new agreement on satisfactory terms could adversely affect the Company’s financial condition, operating results and cash flows. In addition, if any of the Company’s significant customers experience a material work stoppage, the customer may halt or limit the purchase of the Company’s products. This could require the Company to shut down or significantly reduce production at facilities relating to such products, which could adversely affect the Company’s business and harm its profitability.

The Company is involved from time to time in legal proceedings and commercial or contractual disputes, which could have an adverse effect on the Company’s profitability and consolidated financial position: The Company is involved in legal proceedings and commercial or contractual disputes that, from time to time, are significant. These are typically claims that arise in the normal course of business including, without limitation, commercial or contractual disputes, including disputes with suppliers, intellectual property matters, personal injury claims, environmental issues, tax matters and employment matters. No assurances can be given that such proceedings and claims will not have a material adverse effect on the Company’s profitability and consolidated financial position.

If the Company is unable to protect its intellectual property and prevent its improper use by third parties, the Company’s ability to compete in the market may be harmed: Various patent, copyright, trade secret, and trademark laws afford only limited protection and may not prevent the Company’s competitors from duplicating the Company’s products or gaining access to its proprietary information and technology. These means also may not permit the Company to gain or maintain a competitive advantage.


20



Any of the Company’s patents may be challenged, invalidated, circumvented or rendered unenforceable. The Company cannot guarantee it will be successful should one or more of its patents be challenged for any reason and countries outside the U.S. may diminish the protection of the Company’s patents. If the Company’s patent claims are rendered invalid or unenforceable, or narrowed in scope, the patent coverage afforded to the Company’s products could be impaired, which could significantly impede the Company’s ability to market its products, negatively affect its competitive position and materially adversely affect its business and results of operations.

The Company’s pending or future patent applications may not result in an issued patent. Additionally, newly issued patents may not provide meaningful protection against competitors or against competitive technologies. Courts in the United States and in other countries may invalidate the Company’s patents or find them unenforceable. Competitors may also be able to design around the Company’s patents. Other parties may develop and obtain patent protection for more effective technologies, designs or methods. If these developments were to occur, it could have an adverse effect on the Company’s sales. If the Company’s intellectual property rights are not adequately protected, the Company may not be able to commercialize its technologies, products or services and the Company’s competitors could commercialize the Company’s technologies, which could result in a decrease in the Company’s sales and market share and could materially adversely affect the Company’s business, financial condition and results of operations.

The Company’s products could infringe the intellectual property rights of others, which may lead to litigation that could itself be costly, could result in the payment of substantial damages or royalties, and could prevent the Company from using technology that is essential to its products: The Company cannot guarantee its products, manufacturing processes or other methods do not infringe the patents or other intellectual property rights of third parties. Infringement and other intellectual property claims and proceedings brought against the Company, whether successful or not, could result in substantial costs and harm the Company’s reputation. Such claims and proceedings can also distract and divert management and key personnel from other tasks important to the success of its business. In addition, intellectual property litigation or claims could force the Company to do one or more of the following:
cease selling or using of any products that incorporate the asserted intellectual property, which would adversely affect the Company’s revenue;
pay substantial damages for past use of the asserted intellectual property;
obtain a license from the holder of the asserted intellectual property, which license may not be available on reasonable terms, if at all; and
redesign or rename, in the case of trademark claims, products to avoid infringing the intellectual property rights of third parties, which may not be possible and could be costly and time-consuming if it is possible to do.

In the event of an adverse determination in an intellectual property suit or proceeding, or the Company’s failure to license essential technology, the Company’s sales could be harmed and its costs could increase, which could materially adversely affect the Company’s business, financial condition, and results of operations.

The Company may be exposed to certain regulatory and financial risks related to climate change: Climate change is continuing to receive ever increasing attention worldwide. Many scientists, legislators and others attribute climate change to increased levels of greenhouse gases, including carbon dioxide, which could lead to additional legislative and regulatory efforts to limit greenhouse gas emissions. The focus on emissions could increase costs associated with the Company’s operations, including costs for raw materials and transportation. Because the scope of future laws in this area is uncertain, the Company cannot predict the potential effect of such laws on its future consolidated financial condition, results of operations, or cash flows.

A material weakness in internal control over financial reporting could affect our ability to timely file reliable financial statements and could have a material adverse effect on our business, results of operations, financial condition and liquidity. If the Company discovers significant deficiencies or material weaknesses in its internal controls over financial reporting or at any recently acquired entity, it may adversely affect its ability to provide timely and reliable financial information and satisfy its reporting obligations under federal securities laws, which also could affect the market price of its common stock or its ability to remain listed on the NASDAQ Global Select Market, or NASDAQ.

As discussed in Part II, Item 9A - Controls and Procedures, we have identified a material weakness in the operating effectiveness of information technology (IT) general controls. More specifically, the Company was not consistently following its processes and procedures during 2015 to execute and monitor change management controls or to restrict or monitor access to certain of its IT systems. These processes and procedures are intended to ensure that access to financial applications and data is adequately restricted to appropriate personnel and that all changes affecting the financial applications and underlying account records are identified, authorized, tested and implemented appropriately. Additionally, as a result of the deficiencies identified, there is a possibility that the effectiveness of business process controls that are dependent on the affected IT systems or data and

21



financial reports generated from the affected IT systems may be adversely affected. A material weakness could result in a material misstatement of our annual or interim Consolidated Financial Statements. A material misstatement could result in significant adverse consequences.

If in the future we have additional material weaknesses in our internal control over financial reporting, we may not detect errors on a timely basis and our financial statements may be materially misstated. If we identify material weaknesses in our internal control over financial reporting, if we are unable to comply with the requirements of Section 404 in a timely manner, if we are unable to assert that our internal control over financial reporting is effective or if our independent registered public accounting firm is unable to attest that our internal control over financial reporting is effective, investors may lose confidence in the accuracy and completeness of our financial reports and the market price of our common stock could decrease. We could also become subject to stockholder or other third-party litigation as well as investigations by the stock exchange on which our securities are listed, the SEC, or other regulatory authorities, which could require additional financial and management resources and could result in fines, trading suspensions or other remedies.


22



ITEM 1.B. UNRESOLVED STAFF COMMENTS
Not applicable.

ITEM 2. PROPERTIES
Our world headquarters is located in Southfield, Michigan, which is a leased facility. Our operations include 227 manufacturing facilities, technical centers, distribution and warehouse centers, and sales and administration office facilities worldwide at December 31, 2015 supporting our operations. Approximately 49% of the facilities are leased; the majority of which are distribution centers, and sales and administration offices. We own the remainder of the facilities.
A summary of our facilities, by segment, type of facility and geographic region, as of December 31, 2015 are set forth in the following tables:
Powertrain
Type of Facility
North
America
 
EMEA
 
Rest of
World
 
Total
Manufacturing facilities
25

 
32

 
27

 
84

Technical centers (a)
6

 
3

 
1

 
10

Distribution and warehouses centers
6

 
1

 
3

 
10

Sales and administration offices
5

 
5

 
4

 
14

 
42

 
41

 
35

 
118

 
 
 
 
 
 
 
 
(a) Consists mainly of research and development activity.


Motorparts
Type of Facility
North
America
 
EMEA
 
Rest of
World
 
Total
Manufacturing facilities
11

 
13

 
8

 
32

Technical centers (a)
3

 
3

 

 
6

Distribution and warehouses centers
15

 
10

 
10

 
35

Sales and administration offices
17

 
9

 
10

 
36

 
46

 
35

 
28

 
109

 
 
 
 
 
 
 
 
(a) Consists mainly of research and development activity.

The facilities range in size from approximately 100 square feet to 700 thousand square feet. Management believes substantially all of our facilities are in good condition and it has sufficient capacity to meet our current and expected manufacturing and distribution needs.

ITEM 3. LEGAL PROCEEDINGS
The Company is involved in various litigation matters regarding environmental matters and other matters as described below.
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.

23



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. Therefore, the Company believes its exposure for liability at these sites is limited.
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 were $14 million and $15 million at December 31, 2015 and 2014. Management believes that such accruals 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 December 31, 2015, management estimates that reasonably possible material additional losses above and beyond management’s best estimate of required remediation costs, as recorded, approximate $45 million.
Other Matters
The Company is involved in other legal actions and claims, directly and through its subsidiaries that arise in the normal course of business. 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 financial position, operating results, or cash flows. See Note 17, Commitments and Contingencies, to the Consolidated Financial Statements, included in Item 8 of this report.

ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.


24



PART II

ITEM 5. MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Our stock is listed on the NASDAQ Global Stock Market.
There were approximately 53 stockholders of record of Common Stock as of February 25, 2016 including multiple beneficial holders at depositories, banks and brokers listed as a single holder of record in the street name of each respective depository, bank or broker. High and low sales prices for our common stock for each quarter in 2015 and 2014 are as follows: 
 
 
2015
 
2014
Quarter
 
High
 
Low
 
High
 
Low
First
 
$
15.64

 
$
12.61

 
$
22.97

 
$
15.82

Second
 
$
13.91

 
$
11.35

 
$
20.51

 
$
16.19

Third
 
$
11.24

 
$
6.78

 
$
20.82

 
$
14.87

Fourth
 
$
8.68

 
$
6.53

 
$
16.39

 
$
14.14


We did not pay any dividends in 2015 or 2014. We have certain restrictions under our debt facilities from paying dividends in the future.
The following graph compares the cumulative total stockholder return during the five year period from December 31, 2010 to December 31, 2015. The graph assumes that $100 was invested on December 31, 2010, in each of the Company’s common stock, the stocks comprising the S&P 500 Index and the stocks comprising the peer group. The peer group is comprised on the following companies: BorgWarner Inc., Dana, Magna International, Meritor, Tenneco and Timken. This performance graph shall not be deemed to be incorporated by reference by any general statement incorporating by reference this Form 10-K into any filing under the Securities Act or the Exchange Act, except to the extent we specifically incorporate this information by reference, and shall not otherwise be deemed soliciting material or filed under such Acts.



25



ITEM 6. SELECTED FINANCIAL DATA
The following table presents information from the consolidated financial statements as of or for the five years ended December 31, 2015. This information should be read in conjunction with ‘‘Management’s Discussion and Analysis of Financial Condition and Results of Operations’’ and ‘‘Financial Statements and Supplemental Data.’’
 
 
Year Ended December 31
 
 
2015
 
2014
 
2013
 
2012
 
2011
 
 
(Millions of Dollars, Except Per Share Amounts)
Consolidated Statement of Operations Data
 
 
 
 
 
 
 
 
 
 
Net sales (a)
 
$
7,419

 
$
7,317

 
$
6,786

 
$
6,444

 
$
6,719

Net income (loss) from continuing operations
 
(111
)
 
(161
)
 
101

 
(91
)
 
(56
)
 
 
 
 
 
 
 
 
 
 
 
Amounts attributable to Federal-Mogul:
 
 
 
 
 
 
 
 
 
 
Net income (loss) from continuing operations
 
(117
)
 
(168
)
 
93

 
(98
)
 
(63
)
Income (loss) from discontinued operations, net of tax
 
7

 

 
(52
)
 
(19
)
 
(27
)
Net income (loss)
 
$
(110
)
 
$
(168
)
 
$
41

 
$
(117
)
 
$
(90
)
 
 
 
 
 
 
 
 
 
 
 
Common Share Summary Attributable to Federal-Mogul
 
 
 
 
 
 
 
 
 
 
Net (loss) income per common share - basic:
 
 
 
 
 
 
 
 
 
 
Net (loss) income from continuing operations
 
$
(0.71
)
 
$
(1.12
)
 
$
0.75

 
$
(0.99
)
 
$
(0.64
)
(Loss) income from discontinued operations, net of tax
 
0.04

 

 
(0.42
)
 
(0.19
)
 
(0.27
)
Net (loss) income
 
$
(0.67
)
 
$
(1.12
)
 
$
0.33

 
$
(1.18
)
 
$
(0.91
)
 
 
 
 
 
 
 
 
 
 
 
Net (loss) income per common share - diluted:
 
 
 
 
 
 
 
 
 
 
Net (loss) income from continuing operations
 
$
(0.71
)
 
$
(1.12
)
 
$
0.75

 
$
(0.99
)
 
$
(0.64
)
(Loss) income from discontinued operations, net of tax
 
0.04

 

 
(0.42
)
 
(0.19
)
 
(0.27
)
Net (loss) income
 
$
(0.67
)
 
$
(1.12
)
 
$
0.33

 
$
(1.18
)
 
$
(0.91
)
 
 
 
 
 
 
 
 
 
 
 
Weighted average shares outstanding – basic (in millions)
 
164.7

 
150.0

 
123.4

 
98.9

 
98.9

Weighted average shares outstanding – diluted (in millions)
 
164.7

 
150.0

 
123.4

 
99.4

 
99.4

Dividends declared per common share
 
$

 
$

 
$

 
$

 
$

 
 
 
 
 
 
 
 
 
 
 
 
 
As of December 31
 
 
2015
 
2014
 
2013
 
2012
 
2011
 
 
(Millions of Dollars)
Consolidated Balance Sheet Data
 
 
 
 
 
 
 
 
 
 
Total assets
 
$
7,238

 
$
7,067

 
$
7,182

 
$
6,927

 
$
7,029

Total liabilities
 
6,336

 
6,158

 
5,581

 
6,095

 
6,046

Total debt (including short-term debt and current portion of long-term debt
 
3,062

 
2,690

 
2,599

 
2,827

 
2,829

Federal-Mogul shareholders’ equity
 
770

 
806

 
1,490

 
725

 
953

 
 
 
 
 
 
 
 
 
 
 
(a) Refer to Note 5, Acquisitions, for the effect of acquisitions on net sales and net income (loss).



26



The following table represents items that affect the comparability of the amounts shown above for the years ended December 31, 2015, 2014, and 2013:
 
 
Year ended December 31
 
 
2015
 
2014
 
2013
 
2012
 
2011
 
 
(Millions of Dollars)
Goodwill and intangible impairment expense, net
 
$
(94
)
 
$
(120
)
 
$

 
$
(142
)
 
$
(296
)
OPEB curtailment gain
 
$

 
$

 
$
19

 
$
51

 
$

Loss on debt extinguishment
 
$

 
$
(24
)
 
$

 
$

 
$

Restructuring charges and asset impairments, net
 
$
(121
)
 
$
(110
)
 
$
(29
)
 
$
(78
)
 
$
(16
)

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Executive Overview

Our Business: We are a leading global supplier of a broad range of components, accessories, and systems to the automotive, small engine, heavy-duty, marine, railroad, agricultural, off-road, aerospace and energy, industrial, and transport markets, including customers in both the original equipment manufacturers (“OEM”) and servicers (“OES”) (collectively “OE”) market and the replacement market (“aftermarket”). Our customers include the world’s largest automotive OEs, and major distributors and retailers in the independent aftermarket.

We operate with two end-customer focused business segments. The Powertrain segment focuses on original equipment powertrain products for automotive, heavy duty and industrial applications. Powertrain operates manufacturing facilities in 19 countries and derived 35% of its 2015 OE sales in North America, 46% in Europe, the Middle-East and Africa ("EMEA"), and 19% in the rest of the world ("Rest of World" or "ROW"). The Motorparts segment sells and distributes a broad portfolio of products in the global aftermarket including more than 20 globally-recognized brands. We also serve OEMs with products including braking, wipers, and a limited range of chassis components. Motorparts operates manufacturing sites in 15 countries and distribution centers and warehouses in 13 countries. In 2015, Motorparts derived 56% of its sales in North America, 37% in EMEA, and 7% in Rest of World.

Termination of Spin-off: On January 15, 2016, we announced the termination of the previously announced spin-off of the Motorparts division. We will continue to operate with two separate, independent businesses with separate CEOs who will each report directly to our board of directors. The separate businesses more effectively serve their unique markets and allow each operating business to pursue its business strategy and more quickly react to its unique market conditions.

Financial Results for the Year Ended December 31, 2015: Consolidated net sales were $7,419 million, an increase of $102 million, or 1.4%. The increase was primarily driven by a 10% increase in sales volumes of $734 million (which included a $657 million benefit from acquisitions), which was substantially offset by the $642 million unfavorable effect of foreign currency exchange.
 
Cost of products sold was $6,345 million for the year ended December 31, 2015, an increase of $85 million, or 1%. The increase was driven by $645 million in incremental costs related to higher sales volumes attributable to acquisitions, and partly to volumes related to organic growth. This was substantially offset by the $529 million favorable effect of foreign currency exchange and $31 million of savings from net performance. Net performance gains were burdened by incremental costs associated with the realignment of our North American distribution centers within our Motorparts division and strategic initiatives within both divisions.

Gross profit increased by $17 million to $1,074 million, or 14.5% of sales, for the year ended December 31, 2015 compared to $1,057 million, or 14.4% of sales, for the year ended December 31, 2014. This was primarily driven by higher sales volumes of $98 million, which included the effect of acquisitions, and the $32 million favorable effect of performance, which was offset by the negative effects of foreign currency exchange.

For the year-ended December 31, 2015:
Net loss attributable to Federal-Mogul for the year-ended December 31, 2015 was $110 million, which included goodwill and intangible impairment charges of $94 million, and restructuring charges and asset impairments of $121 million.

27




We impaired $50 million and $44 million of goodwill related to our Motorparts and Powertrain segments, respectively.

Restructuring charges and asset impairments were comprised of $62 million related to the Powertrain segment and $59 million related to the Motorparts segment. This charge includes $89 million of costs related to severance and other charges primarily focused on reducing inefficiencies in the cost structure of recent acquisitions and the EMEA aftermarket.

Total debt, including short-term debt and current portion of long-term debt, increased by $372 million. This was attributable to the additional strategic investments made during 2015 including the acquisition of TRW’s valvetrain business, which was funded primarily by our revolving line of credit. We had $194 million of cash and $170 million of availability under our credit facilities at December 31, 2015.

Recent Trends and Market Conditions:
Our business and operating results are affected by the relative strength of:

General economic conditions: Our OE business is directly related to automotive sales and automotive vehicle production by our customers. Automotive sales depend on a number of factors, including global and regional economic conditions. Demand for aftermarket products is driven by three primary factors including: the number of vehicles in operation; the average age of vehicles; and vehicle usage trends (primarily distance traveled).  

Early estimates of global GDP indicate a 2.4 percent increase in 2015. Major factors contributing to this rate of growth include generally stable conditions in developed regions and slowing growth in emerging markets. While the Chinese economic growth rate slowed from previous years, GDP estimates indicate 6.9 percent growth in 2015. Full-year GDP estimates for the European Union, Japan, and the United States are 1.5, 0.8 and 2.5 percent, respectively. Economic conditions in key regions remain mixed. However, the combination of low interest rates and declining fuel prices continues to support vehicle sales and production globally. Declining commodity prices have also strengthened the position of automotive manufacturers. However, visibility on global GDP remains limited and uncertain.

Global vehicle production levels: Global vehicle production increased by 1.3 percent in 2015. European vehicle production rose 4.1 percent from 2014 levels. North American vehicle production increased 3.6 percent, with positive growth in Mexico and the United States. Vehicle production in the Asia-Pacific region increased just under 1 percent in 2015, reaching another record high.  Among the major regions, only South America posted a decline in 2015, down 19.3 percent.

Global vehicle sales levels: Global vehicle sales increased by 1.8 percent in 2015. European vehicle sales rose 3.5 percent from 2014 levels. North American vehicles sales increased 6.3 percent, with positive growth in Canada, Mexico and the United States. Vehicle sales in the Asia-Pacific region increased 1.5 percent in 2015, reaching another record high. Among the major regions, only South America posted a decline in 2015 which was down 21.1 percent.

Part replacement trends: The strength of our aftermarket business is influenced by several key drivers. These include the vehicle population (or "parc"), average vehicle age, fuel prices and vehicle distance traveled. The vehicle parc is estimated to have expanded in most major markets, including the United States, Japan, China, and Germany.  Average vehicle ages also increased, despite growth in new vehicle sales, in most regions. 

Recent decline in oil prices: The recent decline in oil prices results in lower fuel prices for consumers. Lower fuel prices provide consumers with more discretionary income for vehicle repairs and tends to encourage more driving miles, which in turn accelerates wear on vehicle components, accelerating the need for replacements. Low fuel prices also encourage more vehicle sales, which increases demand for parts from OEMs. 

Foreign currencies: Given the global nature of our operations, we are subject to fluctuations in foreign exchanges rates. During 2015, foreign currency fluctuations had a considerable effect on our reported earnings in U.S. dollars compared to 2014.


28



Strategy:
Our strategy is to develop and deliver leading technology, innovation, and service capabilities which results in market share expansion in the OE market and aftermarket. Our strategy is designed to create sustainable global profitable growth by leveraging existing and developing new economic advantages. This strategy consists of the following:

Extending our global reach to support our OE and aftermarket customers, furthering our relationships with leading Asian OEs and strengthening market share with U.S. and European OEs.
During 2015, we acquired TRW’s valvetrain business, which adds a completely new product line to our product portfolio, and strengthens our position as a leading developer and supplier of core components for engines.

During 2014, we completed the purchase of certain assets of the Honeywell brake component business and the Affinia chassis business. The Honeywell brake component acquisition included two recently established manufacturing facilities in China and Romania that substantially strengthened the manufacturing and engineering capabilities of our global braking portfolio.

Assess acquisition and investment opportunities that provide product line expansion, technological advancements, geographic positioning, penetration of emerging markets (including India and China) and market share growth.
In addition to the TRW valvetrain acquisition during 2015, we also made investments in joint ventures in India, as well as entered into two new joint ventures, one in Thailand and one in China focused on automotive aftermarket vehicle repair business. We will be the preferred supplier to the China joint venture and will provide our broad portfolio of premium-branded automotive parts for distribution through a network of repair shops. These investments position the company to capitalize on the development of the independent aftermarket in the Asia Pacific region.

Leverage the strength of our global aftermarket leading brand positions, product portfolio and range, marketing and selling expertise, and distribution and logistics capabilities.
The acquired of the Affinia chassis business serves leading U.S. aftermarket customers with chassis products and broadened our product offering and customer base while also providing operational synergies.
  
During 2015, we executed on various marketing campaigns for our premium brands. We also launched a series of 'Tech First' initiatives to provide online, on-demand, and onsite technical training and support to vehicle repair technicians who use and install our products. This initiative included the opening of 'Garage Gurus,' a nationwide technical education network network consisting of 10 technical support centers and mobile training vans in major U.S. markets; a repair shop engagement program in France and Germany; and the opening of the company’s first technical training and support center in China.

Aggressively pursue cost competitiveness in all business segments by continuing to drive productivity in existing operations, consolidating and relocating manufacturing operations to best cost countries, utilizing our strategic alliances, and rationalizing business resources and infrastructure.
Restructuring expenses for the year ended December 31, 2015 primarily related to our EMEA locations and were aimed at (1) the reshaping of the aftermarket distribution network, (2) reducing production complexities, and (3) reducing inefficiencies in indirect and fixed costs structures.

We assess individual opportunities to execute our strategy based upon estimated sales and margin growth, cost reduction potential, internal investment returns, and other criteria, and make investment decisions on a case-by-case basis. Opportunities meeting or exceeding benchmark return criteria may be undertaken through research and development activities, acquisitions, and other strategic alliances, or restructuring activities.

Outlook
We expect to benefit from the effect of our synergistic acquisitions, strategic initiatives and restructuring actions initiated over the last several years through improved efficiencies and cost savings; as well as a reduction in the cash outlay and related costs directly associated with these actions. Incremental costs associated with the realignment of our North American distribution centers within our Motorparts division are expected to decline as the distribution centers reach full utilization. We also believe there are opportunities to reduce inventory levels, which increased as part of the ramp-up of these distribution centers. However, we expect further investments in our European and Asia Pacific distribution networks and information technology systems in 2016 and 2017.

Critical Accounting Estimates

Our consolidated financial statements and accompanying notes as included in Item 8 “Financial Statements and Supplementary Data” of this Annual Report on From 10K have been prepared in conformity with accounting principles generally accepted in

29



the United Sates (“U.S GAAP”). Accordingly, our significant accounting policies have been disclosed in the consolidated financial statements and accompanying notes under Note 2, “Basis of Presentation and Summary of Significant Accounting Policies." We provide enhanced information that supplements such disclosures for accounting estimates when the estimate involves matters that are highly uncertain at the time the accounting estimate is made and different estimates or changes to an estimate could have a material effect on the reported financial position, changes in financial condition or results of operations.

When more than one accounting principle, or the method of its application, is generally accepted, management selects the principle or method that it considers to be the most appropriate given the specific circumstances. Application of these accounting principles requires us to make estimates about the future resolution of existing uncertainties. Estimates are typically based upon historical experience, current trends, contractual documentation, and other information, as appropriate. Due to the inherent uncertainty involving estimates, actual results reported in the future may differ from those estimates. In preparing these financial statements, we have made our best estimates and judgments of the amounts and disclosures included in the financial statements, giving due regard to materiality. The following summarizes our critical accounting policies.

Pension Plans and Other Postemployment Benefit Plans
We sponsor defined benefit pension plans and postretirement plans for certain employees and retirees around the world. Our defined benefit plans are accounted for on an actuarial basis, which requires the selection of various assumptions, including an expected long-term rate of return, discount rate, and mortality and mortality improvement rates of plan participants.

Differences in actual experience or changes in assumptions may materially affect the pension obligations. Actual results that differ from assumptions are accumulated in net actuarial gains and losses which are subject to amortization and expensed over future periods. The unamortized pre-tax actuarial loss on our pension plans was $532 million and $590 million at December 31, 2015 and 2014. We expect to recognize amortization expense of $15 million in 2016.

Assumptions used to calculate benefit obligations as of the end of a fiscal year directly affect the expense to be recognized in future periods. The primary assumptions affecting our accounting for employee benefits as of December 31, 2015 are as follows:

Long-term rate of return on plan assets: The required use of the expected long-term rate of return on plan assets may result in recognized returns that are greater or less than the actual returns on those plan assets in any given year. While the development of the long-term rate of return on assets gives appropriate consideration to recent fund performance and historical returns, the assumption is designed to approximate a long-term prospective rate. The expected long-term rate of return used to calculate net periodic pension cost is 6.55% for U.S. plans and a weighted average of 3.52% for non-U.S. plans.

Discount rate: The discount rate reflects the effective yield on high quality fixed income securities available in the marketplace as of the measurement date to settle pension and postemployment benefit obligations. The discount rate assumption is established at the measurement date. In the U.S., we use a cash flow matching approach that uses projected cash flows matched to spot rates along a high quality corporate yield curve to determine the present value of cash flows to calculate a single equivalent discount rate. The benefit obligation for pension plans in Belgium, France, and Germany represents 91% of the non-U.S. pension benefit obligation at December 31, 2015. The discount rates for plans in Belgium, France, and Germany are determined using a cash flow matching approach similar to the U.S. approach.

The weighted-average discount rates used to calculate net periodic benefit cost for the 2015 and year-end obligations as of December 31, 2015 were as follows:
 
 
Pension Benefits
 
 
 
 
U.S.
 
Non-U.S.
 
Other Postretirement
 
 
Plans
 
Plans
 
Benefits
Used to calculate net periodic benefit cost
 
3.85
%
 
1.77
%
 
3.84
%
Used to calculate benefit obligations
 
4.15
%
 
2.72
%
 
4.18
%

Health care cost trend: We review external data and our historical trends for health care costs to determine the health care cost trend rate. The assumed health care cost trend rate used to measure next year’s postretirement health care benefits is 6.97% for both health care and drug costs, both declining to an ultimate trend rate of 5.00% in 2022.


30



Mortality Assumptions: We have reviewed the mortality improvement tables published by the Society of Actuaries in the three months ended December 31, 2015 and determined our current assumptions are appropriate to measure our December 31, 2015 U.S. pension plans’ benefit obligations.

The following table illustrates the sensitivity to a change in certain assumptions for projected benefit obligations (“PBO”) and associated expense. The changes in these assumptions have no effect on our funding requirements.
 
 
Pension Benefits
Other  Postretirement
Benefits
 
 
United States Plans
Non-U.S. Plans
 
 
Change
in 2016
Pension
Expense
 
Change
in
PBO
 
Change in 2016 Pension
Expense
 
Change
in
PBO
 
Change
in 2016
Expense
 
Change
in
PBO
 
 
(Millions of Dollars)
25 basis point ("bp") decrease in discount rate
 
$
(1
)
 
$
32

 
$
1

 
$
16

 
$

 
$
8

25 bp increase in discount rate
 

 
(30
)
 
(1
)
 
(15
)
 

 
(7
)
25 bp decrease in return on assets rate
 
2

 
n/a

 

 
n/a

 
n/a

 
n/a

25 bp increase in return on assets rate
 
(2
)
 
n/a

 

 
n/a

 
n/a

 
n/a


The assumed health care trend rate has a significant effect on the amounts reported for non-pension plans. The following table illustrates the sensitivity to a change in the assumed health care trend rate: 
 
 
Total Service and
Interest Cost
 
APBO
 
 
(Millions of Dollars)
100 bp increase in health care cost trend rate
 
$
1

 
$
28

100 bp decrease in health care cost trend rate
 
$
(1
)
 
$
(24
)

Environmental Matters
Environmental remediation liabilities are recognized when a loss is probable and can be reasonably estimated. Such liabilities generally are not subject to insurance coverage. The cost of each environmental remediation is estimated by engineering, financial, and legal specialists based on current law and considers the estimated cost of investigation and remediation required and the likelihood that, where applicable, other responsible parties will be able to fulfill their legal obligations and commitments. The process of estimating environmental remediation liabilities is complex and dependent primarily on the nature and extent of historical information and physical data relating to a contaminated site, the complexity of the site, the uncertainty as to what remediation and technology will be required, and the outcome of discussions with regulatory agencies and, if applicable, other responsible parties. In future periods, new laws or regulations, advances in remediation technologies and additional information about the ultimate remediation methodology to be used could significantly change our estimates. Refer to Note 17, Commitments and Contingencies, to the consolidated financial statements included herein for additional details. We cannot ensure that environmental requirements will not change or become more stringent over time or that our eventual environmental costs and liabilities will not exceed the amount of current reserves. In the event that such liabilities were to significantly exceed the amounts recorded, our results of operations could be materially affected.

Asset Retirement Obligations
In determining whether the fair value of asset retirement obligations ("ARO") can reasonably be estimated, we must determine if the obligation can be assessed in relation to the acquisition price of the related asset or if an active market exists to transfer the obligation. If the obligation cannot be assessed in connection with an acquisition price and if no market exists for the transfer of the obligation, we must determine if it has sufficient information upon which to estimate the obligation using expected present value techniques. This determination requires us to estimate the range of settlement dates and the potential methods of settlement, and then to assign the probabilities to the various potential settlement dates and methods. The majority of the identified ARO liabilities involve Asbestos related cleanup. Refer to Note 17, Commitments and Contingencies, to the consolidated financial statements included herein for additional details. We cannot ensure that ARO requirements will not change or become more stringent over time or that our eventual environmental costs and liabilities will not exceed the amount of current reserves. In the event that such liabilities were to significantly exceed the amounts recorded, our results of operations could be materially affected.


31



Valuation of Long-Lived Assets, Intangible Assets and Investments in Affiliates and Expected Useful Lives
We monitor our long-lived and definite lived assets for impairment indicators on an ongoing basis based on projections of anticipated future cash flows, including future profitability assessments of various manufacturing sites when events and circumstances warrant such a review. If impairment indicators exist, we perform the required impairment analysis by comparing the undiscounted cash flows expected to be generated from the long-lived assets to the related net book values. If the net book value exceeds the undiscounted cash flows, an impairment loss is measured and recognized. An impairment loss is measured as the difference between the net book value and the fair value of the long-lived assets. Even if an impairment charge is not required, a reassessment of the useful lives over which depreciation or amortization is being recognized may be appropriate based on our assessment of the recoverability of these assets. We estimate cash flows and fair value using internal budgets based on recent sales data, independent automotive production volume estimates and customer commitments, and review of appraisals. The key factors which impact our estimates are (1) future production estimates; (2) customer preferences and decisions; (3) product pricing; (4) manufacturing and material cost estimates; and (5) product life / business retention. Any differences in actual results from the estimates could result in fair values different from the estimated fair values, which could materially effect our future results of operations and financial condition. We believe the projections of anticipated future cash flows and fair value assumptions are reasonable; however, changes in assumptions underlying these estimates could affect our valuations.

Goodwill and Indefinite-lived Intangible Asset Impairment Testing
We review goodwill for impairment annually or more frequently if events or changes in circumstances indicate that goodwill might be impaired. We perform impairment assessments at the reporting unit level. If the fair value of the reporting unit is greater than its carrying amount (step 1), goodwill is not considered to be impaired and the second step is not required. However, if the fair value of the reporting unit is less than its carrying amount, the second step is to measure the amount of the impairment loss, if any. The second step requires a reporting unit to compare its implied fair value of goodwill to its carrying amount. If the carrying amount of goodwill exceeds its implied fair value, the reporting unit would recognize an impairment loss for that excess. Assumptions used in the discounted cash flow analysis that have the most significant effect on the estimated fair value of the Company's reporting units are the weighted average cost of capital and revenue growth-rates.

We perform an annual impairment analysis of our trademarks and brand names annually or more frequently if events or changes in circumstances indicate the assets might be impaired. We perform quantitative assessment estimating fair values based upon the prospective stream of hypothetical after-tax royalty cost savings discounted at rates that reflect the rates of return appropriate for these intangible assets. Our trademarks and brand names further broken down by product line. The primary, and most sensitive, input utilized in determining the fair values of trademarks and brand names is sales by product line. We Company performed a sensitivity analysis on its trademarks and brand names and determined that a one percentage point decrease in its projected future sales growth rates within each aftermarket product line would result in a $1 million impairment.

Income Taxes
Deferred tax assets and liabilities reflect temporary differences between the amount of assets and liabilities for financial and tax reporting purposes. Such amounts are adjusted, as appropriate, to reflect changes in tax rates expected to be in effect when the temporary differences reverse. A valuation allowance is recorded to reduce our deferred tax assets to the amount that is more likely than not to be realized. Changes in tax laws or accounting standards and methods may affect recorded deferred taxes in future periods.

When establishing a valuation allowance, we consider future sources of taxable income such as “future reversals of existing taxable temporary differences, future taxable income exclusive of reversing temporary differences and carryforwards” and “tax planning strategies.” A tax planning strategy is defined as “an action that: is prudent and feasible; an enterprise ordinarily might not take, but would take to prevent an operating loss or tax credit carryforward from expiring unused; and would result in realization of deferred tax assets.” In the event we determine it is more likely than not that the deferred tax assets will not be realized in the future, the valuation adjustment to the deferred tax assets will be charged to earnings in the period in which we make such a determination. The valuation of deferred tax assets requires judgment and accounting for the deferred tax effect of events that have been recorded in the financial statements or in tax returns and our future projected profitability. Changes in our estimates, due to unforeseen events or otherwise, could have a material impact on our financial condition and results of operations.

We calculate our current and deferred tax provision based on estimates and assumptions that could differ from the actual results reflected in income tax returns filed in subsequent years. Adjustments based on filed returns are recorded when identified. The amount of income taxes we pay is subject to ongoing audits by federal, state and foreign tax authorities. Our estimate of the potential outcome of any uncertain tax issue is subject to management’s assessment of relevant risks, facts, and circumstances existing at that time. We use a more-likely-than-not threshold for financial statement recognition and measurement of tax

32



positions taken or expected to be taken in a tax return. We record a liability for the difference between the benefit recognized and measured and tax position taken or expected to be taken on our tax return. To the extent that our assessment of such tax positions changes, the change in estimate is recorded in the period in which the determination is made. We report tax-related interest and penalties as a component of income tax expense. We do not believe there is a reasonable likelihood that there will be a material change in the tax related balances or valuation allowance balances. However, due to the complexity of some of these uncertainties, the ultimate resolution may be materially different from the current estimate. Refer to Note 16, Income Taxes, to the audited consolidated financial statements included herein for additional information.

Non-GAAP Measures:
Management utilizes Operational EBITDA as the key performance measure of segment profitability and uses the measure in its financial and operational decision making processes; for internal reporting; and for planning and forecasting purposes to effectively allocate resources. Operational EBIDTA is defined as EBITDA (earnings before interest, taxes, depreciation and amortization), as adjusted for additional amounts. Examples of these adjustments include impairment charges related to goodwill, other long-lived assets and investments; restructuring charges; certain gains or losses on the settlement/extinguishment of obligations; and receivable financing charges. During 2015, we modified our definition of Operational EBITDA to adjust for financing charges related to certain receivable financing programs. Comparable periods have been adjusted to conform to this definition.

Operational EBITDA presents a performance measure exclusive of capital structure and the method by which net assets were acquired, disposed of, or financed. Management believes this measure provides additional transparency into its core operations and is most reflective of the operational profitability or loss of our operating segments and reporting units. The measure also allows management and investors to view operating trends, perform analytical comparisons and benchmark performance between periods and among operating segments.

Operational EBITDA should not be considered a substitute for results prepared in accordance with U.S. GAAP and should not be considered an alternative to net income, which is the most directly comparable financial measure to Operational EBITDA that is in accordance with U.S. GAAP. Operational EBITDA, as determined and measured by Federal Mogul, should not be compared to similarly titled measures reported by other companies.

RESULTS OF OPERATIONS
The following discussion of our results of operations should be read in connection with Items 1, 3 and 7A of this Form 10-K, as well as “Forward-Looking Statements” and Item 1.A. “Risk Factors.” These items provide additional relevant information regarding the business, our strategy, and the various industry dynamics in the OE market and the aftermarket which have a direct and significant effect on our results of operations, as well as the risks associated with our business.


33



Consolidated Results:
 
 
Year Ended December 31
 
Variance
 
 
2015
 
2014
 
2013
 
2015 v 2014
 
2014 v 2013
 
 
(Millions of Dollars, Except Per Share Amounts)
Consolidated Statement of Operations Data
 
 
 
 
 
 
 
 
 
 
Net sales
 
$
7,419

 
$
7,317

 
$
6,786

 
$
102

 
$
531

Cost of products sold
 
(6,345
)
 
(6,260
)
 
(5,766
)
 
(85
)
 
(494
)
Gross profit
 
1,074

 
1,057

 
1,020

 
17

 
37

Selling, general and administrative expenses
 
(794
)
 
(776
)
 
(719
)
 
(18
)
 
(57
)
Goodwill and intangible impairment expense, net
 
(94
)
 
(120
)
 

 
26

 
(120
)
Interest expense, net
 
(138
)
 
(120
)
 
(99
)
 
(18
)
 
(21
)
Restructuring charges and asset impairments, net
 
(121
)
 
(110
)
 
(29
)
 
(11
)
 
(81
)
Amortization expense
 
(59
)
 
(49
)
 
(47
)
 
(10
)
 
(2
)
Equity earnings of nonconsolidated affiliates, net of tax
 
56

 
48

 
34

 
8

 
14

Loss on debt extinguishment
 

 
(24
)
 

 
24

 
(24
)
Other income (expense), net
 
(5
)
 
(11
)
 
(3
)
 
6

 
(8
)
Income tax (expense) benefit
 
(30
)
 
(56
)
 
(56
)
 
26

 

Net income (loss) from continuing operations
 
(111
)
 
(161
)
 
101

 
50

 
(262
)
Gain (loss) from discontinued operations, net of tax
 
7

 

 
(52
)
 
7

 
52

Less net income attributable to noncontrolling interests
 
(6
)
 
(7
)
 
(8
)
 
1

 
1

Net income (loss) attributable to Federal-Mogul
 
$
(110
)
 
$
(168
)
 
$
41

 
$
58

 
$
(209
)
 
 
 
 
 
 
 
 
 
 
 
Amounts attributable to Federal-Mogul:
 
 
 
 
 
 
 
 
 
 
Net income (loss) from continuing operations
 
(117
)
 
(168
)
 
93

 
51

 
(261
)
Income (loss) from discontinued operations, net of tax
 
7

 

 
(52
)
 
7

 
52

Net income (loss)
 
$
(110
)
 
$
(168
)
 
$
41

 
$
58

 
$
(209
)

Comparison of Year Ended December 31, 2015 to Year Ended December 31, 2014

Sales: Consolidated net sales increased by $102 million, or 1.4%, compared to the year ended December 31, 2014. The increase over 2014 sales was primarily driven by a 10% increase in sales volumes of $743 million (which included a $657 million benefit from acquisitions) and was substantially offset by a $642 million unfavorable effect of foreign currency exchange.

Cost of Sales: Cost of products sold increased by $85 million compared to the year ended December 31, 2014. The increase was driven by a $645 million in incremental costs related to higher sales volumes attributable to acquisitions, and partly to volumes related to organic growth. This was substantially offset by the $529 million favorable effect of foreign currency exchange and $31 million of savings from net performance. Net performance gains were burdened by incremental costs associated with the realignment of our North American distribution centers within our Motorparts division and strategic initiatives within both divisions.

Gross Profit: Gross profit as a percentage of sales, for the year ended December 31, 2015 was 14.5% compared to 14.4% for the year ended December 31, 2014. Gross profit increased by $17 million compared to the year ended December 31, 2014. The increase was primarily driven by the favorable effects of higher sales volumes (net of changes in mix) of $98 million, which included the effect from acquisitions, $32 million favorable effects of net performance. These favorable effects were substantially offset by the negative effects of foreign currency exchange.

Selling, General and Administrative Expense: Selling, general and administrative expenses (“SG&A”) as a percentage of sales, was 10.7% for the year ended December 31, 2015 as compared to 10.6% for the year ended December 31, 2014. This increase of $18 million is primarily attributable to the addition of SG&A expenses associated with acquisitions, partially offset by foreign exchange. Included in SG&A was a $7 million charge related to the bankruptcy of one of our aftermarket customers.
Research and development (“R&D”) costs, including product and validation costs, of $189 million and $192 million for the years ended December 31, 2015 and December 31, 2014.

34




Goodwill and intangible impairment expense, net: Goodwill and intangible asset impairments decreased by $26 million for the year ended December 31, 2015 compared to the year ended December 31, 2014. During 2015, we impaired $50 million and $44 million of goodwill related to our Motorparts and Powertrain segments. During 2014, we impaired $120 million of goodwill related to our Motorparts segment.

Restructuring charges and asset impairments: Restructuring charges and asset impairments increased by $11 million for the year ended December 31, 2015 compared to the year ended December 31, 2014. This was driven by overall higher severance and other charges of $3 million, primarily related to our overall restructuring efforts in Europe, and an increase in asset impairments of $8 million, primarily related to an impairment of assets held for sale during 2015.

Amortization expense: Amortization expense increased by $10 million for the year ended December 31, 2015 compared to the year ended December 31, 2014. During 2015, we completed the acquisition of TRW’s valvetrain business thereby adding $107 million of definite lived intangible assets which contributed to the increase in amortization expense.

Equity earnings of nonconsolidated affiliates: Equity in earnings of nonconsolidated affiliates increased by $8 million for the year ended December 31, 2015 compared to the year ended December 31, 2014. The increase was primarily driven by increased earnings at a number of our nonconsolidated affiliates, including an initial investment in two new affiliates,
and the sale of a nonconsolidated affiliate that incurred a loss of $1 million in 2014.

Loss on Debt extinguishment: Loss on Debt extinguishment was $24 million for the year ended December 31, 2014. In 2014, we entered into a new tranche B term loan facility and a new tranche C term loan facility and repaid our existing outstanding indebtedness under previous facilities. In conjunction with the transaction, we recorded a loss on retirement of debt of $24 million, including the write-off of a portion of related debt issuance costs and debt discount.

Interest Expense, Net: Net interest expense was $138 million in the year ended December 31, 2015 compared to $120 million for the year ended December 31, 2014. This increase is primarily attributable to the realization of higher interest rates for the full year, and increased borrowings under the Replacement Revolving Facility, offset by lower amortization costs.

Other Income (Expense), Net: Other expense, net was $5 million for the year ended December 31, 2015 compared to $11 million for the year ended December 31, 2014. The primary reason for the decrease is a $6 million reduction in the amount of segmentation costs recognized for the year ended December 31, 2015 compared to the year ended December 31, 2014.

Income tax (expense) / benefit: For the year ended December 31, 2015, we recorded an income tax expense of $30 million on a loss from continuing operations before income taxes of $81 million, compared to income tax expense of $56 million on a loss from continuing operations before income taxes of $105 million for the year ended December 31, 2014.

Income tax expense for the year ended December 31, 2015 differs from the U.S. statutory rate due primarily to goodwill impairment, pre-tax losses with no tax benefits, partially offset by pre-tax income taxed at rates lower than the U.S. statutory rate, recording a valuation allowance on deferred tax assets that are believed to be not more likely than not to be realized and a tax benefit recorded related to special economic zone tax incentive.

The income tax expense for the year ended December 31, 2014 differs from the U.S. statutory rate due primarily to goodwill impairment, pre-tax income taxed at rates lower than the U.S. Statutory rate, recording a valuation allowance on deferred tax assets that are believed to be not more likely than not to be realized, income in jurisdictions with no tax expense due to offsetting valuation allowance release, partially offset by pre-tax losses with no tax benefits and a tax benefit recorded related to special economic zone tax incentive.

Gain (loss) from discontinued operation, net of tax: During the year ended December 31, 2015, we recognized a $7 million adjustment (no income tax effect) which is included in “Gain (loss) from discontinued operations, net of tax” within the consolidated statement of operations related to a 2013 divestiture of our fuel pump business.

Comparison of Year Ended December 31, 2014 to Year Ended December 31, 2013

Sales: Consolidated net sales increased by $531 million, or 8%, compared to the year ended December 31, 2014. The increase over 2013 sales was primarily driven by a 9% increase in sales volumes resulting from a $356 million benefit from acquisitions, higher demand, and organic growth, together totaling $612 million, which was partially offset by a $51 million unfavorable effect of foreign currency exchange.


35



Cost of Sales: Cost of products sold increased by $494 million compared to the year ended December 31, 2014. The increase was primarily driven by a $505 million increase in costs primarily related to higher sales volumes, which is partly attributable to acquisitions, and $32 million of unfavorable net performance. These costs were partially offset by the $43 million favorable effect of foreign currency exchange.

Gross Profit: Gross profit as a percentage of sales for the year ended December 31, 2014 was 14.4% of sales, for the year ended December 31, 2014 compared to 15.0% for the year ended December 31, 2013. While gross profit increased by $37 million for the year ended December 31, 2014 compared to the year ended December 31, 2013, primarily due to increased sales volumes, the gross profit margin decreased primarily due to: changes in mix and pricing, and increases to strategic initiatives and unfavorable productivity.

Selling, General and Administrative Expense: Selling, general and administrative expenses (“SG&A”) as a percentage of sales, was 10.6% for the years ended December 31, 2014 and 2013. The increase of $57 million is primarily attributable to the addition of SG&A expenses associated with acquisitions. Included in SG&A were research and development (“R&D”) costs, including product and validation costs, of $192 million and $173 million for the years ended December 31, 2014 and December 31, 2013, respectively.

Goodwill and intangible impairment expense, net: Goodwill and intangible asset impairments increased by $120 million for the year ended December 31, 2014 compared to the year ended December 31, 2013. During 2014, we impaired $120 million of goodwill related to our Motorparts segment.

Interest Expense, Net: Net interest expense was $120 million in the year ended December 31, 2014 compared to $99 million for the year ended December 31, 2013. The increase is primarily due to the increased interest rates after the refinancing of our term loans in April 2014.

Restructuring charges and asset impairments: Restructuring charges and asset impairments increased by $81 million for the year ended December 31, 2014 compared to the year ended December 31, 2013. The increase was primarily related to higher severance and other charges of $46 million, primarily related to our overall restructuring efforts in Europe, an increase in asset impairments of $16 million, which included a $5 million impairment of a nonconsolidated affiliate, partially offset by an OPEB curtailment gain recorded in 2013 that was related to a restructuring action.

Amortization expense: Amortization expense increased by $2 million for the year ended December 31, 2014 compared to the year ended December 31, 2013. During 2014, we completed the acquisition of certain Affinia assets and DZV bearings operations thereby adding $52 million of definite lived intangible assets which contributed to the increase in amortization expense.

Equity in earnings of nonconsolidated affiliates: Equity in earnings of nonconsolidated affiliates increased by $14 million for the year ended December 31, 2014 compared to the year ended December 31, 2013. The increase was primarily driven by increased earnings at nonconsolidated affiliates located in the Asia and EMEA regions.

Loss on Debt extinguishment: Loss on Debt extinguishment was $24 million for the year ended December 31, 2014. In 2014, we entered into a new tranche B term loan facility and a new tranche C term loan facility and repaid our existing outstanding indebtedness under previous facilities. In conjunction with the transaction, we recorded a loss on retirement of debt of $24 million, including the write-off of a portion of related debt issuance costs and debt discount.

Other Expense, Net: Other expense, net was $11 million for the year ended December 31, 2014 compared to $3 million for the year ended December 31, 2013. The primary reason for the increase is the recognition of $10 million in segmentation costs during the year ended December 31, 2014.

Foreign currency exchange: We recognized $7 million in foreign currency exchange losses during the year ended December 31, 2014, compared to $10 million in foreign currency exchange losses during the year ended December 31, 2013.

Income tax (expense) / benefit: For the year ended December 31, 2014, we recorded income tax expense of $56 million on a loss from continuing operations before income taxes of $105 million, compared to income tax expense of $56 million on a loss from continuing operations before income taxes of $157 million for the year ended December 31, 2013

The income tax expense for the year ended December 31, 2014 differs from the U.S. statutory rate due primarily to goodwill impairment, pre-tax income taxed at rates lower than the U.S. Statutory rate, recording a valuation allowance on deferred tax assets that are believed to be not more likely than not to be realized, income in jurisdictions with no tax expense due to

36



offsetting valuation allowance release, partially offset by pre-tax losses with no tax benefits and a tax benefit recorded related to special economic zone tax incentive.

The income tax expense for the year ended December 31, 2013 differs from the U.S. statutory rate due primarily to goodwill impairment with no tax benefit and pre-tax losses with no tax benefit, partially offset by pre-tax income taxed at rates lower than the U.S. Statutory rate, income in jurisdictions with no tax expense due to offsetting valuation allowance release, release of uncertain tax positions due to audit settlements, valuation allowance release, and a tax benefit recorded related to special economic zone tax incentive.

Gain (loss) from discontinued operation net of tax: During the year ended December 31, 2013, we recognized a $52 million loss which is included in “Gain (loss) from discontinued operations, net of tax” within the consolidated statement of operations related to the divestiture of three separate businesses.


37



SEGMENT RESULTS OF OPERATIONS

Comparison of Year Ended December 31, 2015 to Year Ended December 31, 2014

2015 Sales Analysis:
Sales by Region:
 
 
 
 
 
 
 
 
Powertrain
 
%
 
Motorparts
 
%
 
(Millions of Dollars)
North America
$
1,562

 
35
%
 
$
1,815

 
56
%
EMEA
2,059

 
46
%
 
1,195

 
37
%
ROW
829

 
19
%
 
243

 
7
%
 
$
4,450

 
100
%
 
$
3,253

 
100
%

Volume Increase (Decrease) by Region:
 
 
 
 
 
 
 
 
 
 
 
 
 
Excluding Acquisitions
 
Including Acquisitions
 
Powertrain
 
%
 
Motorparts
 
%
 
Powertrain
 
%
 
Motorparts
 
%
 
(Millions of Dollars)
 
(Millions of Dollars)
North America
$
13

 
0.3
%
 
$
30

 
0.9
 %
 
$
145

 
3.3
%
 
$
71

 
2.2
%
EMEA
36

 
0.8
%
 
(18
)
 
(0.6
)%
 
279

 
6.3
%
 
152

 
4.7
%
ROW
4

 
0.1
%
 
21

 
0.7
 %
 
46

 
1.0
%
 
50

 
1.5
%
 
$
53

 
1.2
%
 
$
33

 
1.0
 %
 
$
470

 
10.6
%
 
$
273

 
8.4
%

 
 
Powertrain
 
Motorparts
 
Inter-segment
Elimination
 
Total
Reporting
Segment
 
 
(Millions of Dollars)
2014 Sales
 
$
4,430

 
$
3,192

 
$
(305
)
 
$
7,317

External sales volumes
 
53

 
33

 

 
86

Inter-segment sales volumes
 
(15
)
 
(6
)
 
21

 

Acquisitions
 
417

 
240

 
 
 
657

Other
 
(28
)
 
29

 

 
1

Foreign currency
 
(407
)
 
(235
)
 

 
(642
)
2015 Sales
 
$
4,450

 
$
3,253

 
$
(284
)
 
$
7,419


Other: Primarily represents commercial actions and pricing.

2015 Cost of Products Sold Analysis:
 
 
Powertrain
 
Motorparts
 
Inter-segment
Elimination
 
Total
Reporting
Segment
 
 
(Millions of Dollars)
2014 Cost of Products Sold
 
$
(3,897
)
 
$
(2,668
)
 
$
305

 
$
(6,260
)
Sales volumes / mix
 
(407
)
 
(217
)
 
(21
)
 
(645
)
Performance
 
41

 
(10
)
 

 
31

Foreign currency
 
350

 
179

 

 
529

2015 Cost of Products Sold
 
$
(3,913
)
 
$
(2,716
)
 
$
284

 
$
(6,345
)

Sales Volumes: The increase is primarily due to the increase in sales attributable to acquisitions.


38



Performance: Represents cost savings from various initiatives in excess of the costs to implement initiatives which are primarily focused on obtaining cost efficiencies, and/or are considered to be strategic in nature. Performance also includes the benefit of favorable material and service sourcing. The Motorparts segment includes costs related to the realignment of our North American distribution network.

2015 Gross Profit Analysis:
 
 
Powertrain
 
Motorparts
 
Inter-segment
Elimination
 
Total
Reporting
Segment
 
 
(Millions of Dollars)
2014 Gross Profit
 
$
533

 
$
524

 
$

 
$
1,057

Sales volumes/mix
 
48

 
50

 

 
98

Performance and other
 
13

 
19

 

 
32

Foreign currency
 
(57
)
 
(56
)
 

 
(113
)
2015 Gross Profit
 
$
537

 
$
537

 
$

 
$
1,074


2015 Operational EBITDA Analysis:
 
 
Powertrain
 
Motorparts
 
Inter-segment
Elimination
 
Total
Reporting
Segment
 
 
(Millions of Dollars)
2014 Operational EBITDA(a)
 
$
431

 
$
199

 
$

 
$
630

Sales volumes / mix
 
50

 
32

 

 
82

Performance and other
 
(6
)
 
12

 

 
6

Equity earnings in nonconsolidated affiliates
 
12

 
(1
)
 

 
11

Increase in other costs
 
(1
)
 

 

 
(1
)
Foreign currency
 
(58
)
 
(26
)
 

 
(84
)
2015 Operational EBITDA (a)
 
$
428

 
$
216

 
$

 
$
644

 
 
 
 
 
 
 
 
 
(a) Refer to “Non-GAAP Measures” in the Critical Accounting Estimates section above.

Sales volume / mix: Sales volume and mix included in Operational EBITDA includes the effects of increased selling, general, and administrative expenses attributable to acquisitions, net of adjustments to earnings that are included in Operational EBITDA.


39



Comparison of Year Ended December 31, 2014 to Year Ended December 31, 2013

2014 Sales Analysis:
Sales by Region:
 
 
 
 
 
 
 
 
Powertrain
 
%
 
Motorparts
 
%
 
(Millions of Dollars)
North America
$
1,478

 
34
%
 
$
1,745

 
55
%
EMEA
2,139

 
48
%
 
1,238

 
39
%
ROW
813

 
18
%
 
209

 
6
%
 
$
4,430

 
100
%
 
$
3,192

 
100
%

Volume Increase (Decrease) by Region:
 
 
 
 
 
 
 
 
 
 
 
 
 
Excluding Acquisitions
 
Including Acquisitions
 
Powertrain
 
%
 
Motorparts
 
%
 
Powertrain
 
%
 
Motorparts
 
%
 
(Millions of Dollars)
 
(Millions of Dollars)
North America
$
125

 
3.0
%
 
$
(34
)
 
(1.2
)%
 
$
125

 
3.0
%
 
$
93

 
3.2
%
EMEA
106

 
2.5
%
 
(30
)
 
(1.0
)%
 
124

 
3.0
%
 
154

 
5.2
%
ROW
81

 
1.9
%
 
8

 
0.3
 %
 
81

 
1.9
%
 
35

 
1.2
%
 
$
312

 
7.4
%
 
$
(56
)
 
(1.9
)%
 
$
330

 
7.9
%
 
$
282

 
9.6
%

 
 
Powertrain
 
Motorparts
 
Inter-segment
Elimination
 
Total
Reporting
Segment
 
 
(Millions of Dollars)
2013 Sales
 
$
4,173

 
$
2,935

 
$
(322
)
 
$
6,786

External sales volumes
 
312

 
(56
)
 

 
256

Inter-segment sales volumes
 
(17
)
 

 
17

 

Acquisitions
 
18

 
338

 
 
 
356

Other
 
(29
)
 
(1
)
 

 
(30
)
Foreign currency
 
(27
)
 
(24
)
 

 
(51
)
2014 Sales
 
$
4,430

 
$
3,192

 
$
(305
)
 
$
7,317

Other: Primarily represents product pricing adjustments.
2014 Cost of Products Sold Analysis:
 
 
Powertrain
 
Motorparts
 
Inter-segment
Elimination
 
Total
Reporting
Segment
 
 
(Millions of Dollars)
2013 Cost of Products Sold
 
$
(3,656
)
 
$
(2,432
)
 
$
322

 
$
(5,766
)
Sales volumes / mix
 
(252
)
 
(253
)
 

 
(505