NEW YORK (Feb. 15, 2001) — In an aggressive cost-cutting plan, automotive parts supplier Federal-Mogul Corp. said it will close up to 50 plants, reduce its supply base of 55,000 by more than 50 percent and once again consider the sale of some non-core businesses.
The seal maker has not yet determined the net number of employees it will impact as it consolidates 150 plants by a third or exactly which units it might target for divestiture.
Federal-Mogul also will close another 13 distribution points, reducing the total number to six, and cut its $900 million in inventories, said Alan Johnson, executive vice president of the Americas and Asia during an investors presentation in New York Jan. 3.
"Simply stated, we have too many facilities on a global basis," Mr. Johnson said.
The supplier doesn´t anticipate improved earnings until 2002, as any gains will be offset by restructuring costs this year.
Federal-Mogul also successfully amended and expanded its bank credit agreements by $550 million.
The new terms ease the covenant restrictions the manufacturer was bound by, some of which it technically violated at the end of last year, Interim CEO and Chairman Robert S. Miller told analysts. Its fourth quarter loss will likely be much larger than the 25 cents per share it had projected because of continued softness in the automotive aftermarket and declining original equipment volumes.
"If we can´t make these covenants, then we ought to be canned," Mr. Miller said.
The additional credit largely was secured to provide ample liquidity to cover financial scenarios for the next three years, the life of Federal-Mogul´s credit line, said G. Michael Lynch, executive vice president and CFO. "It should provide assurance to our customers, creditors and employees that we are in this for the long haul."
Federal-Mogul´s pre-existing credit line would have been sufficient to fund the effects of slowing auto sales and asbestos payments, but the new credit line provides extra breathing room, he said.
"To get this agreement, we had to give up something, and the big thing is security," Mr. Miller said.
The supplier granted new lenders liens on its U.S. assets and pre-existing lenders a second security interest.
"We also had to give up some operating flexibility, but we can sell assets and redeploy $500 million back into our business," he said.
"I have a lot of confidence in Steve Miller´s ability to do this; I think the bankers have a lot of faith in him, too," said David Cole, managing partner and director of the Center for Automotive Research at the Environmental Research Institute for Michigan in Ann Arbor, Mich.
But some analysts still express pessimism the supplier can overcome asbestos payments that more than tripled to $338 million last year from $89 million in 1998.
"Their strategy is to buy time on the hopes that there is a legislative solution," with regards to asbestos claimants who aren´t impaired or suffering from related malignancies, said Darren Kimball, automotive supplier analyst at Lehman Brothers. "It´s a small hope, but it´s probably the best one they´ve got."
In the meantime, Federal-Mogul will have to improve its operational performance and internal cash flow. "The reality is, it´s likely to worsen," Mr. Kimball said.
He also expressed disbelief that the supplier´s asbestos claims are at their height right now as a study commissioned by Federal-Mogul contends.
"The study was presented as if it were a fact, but in earnest, it´s a view," he said.
"...No one should be under the false notion that the risks have diminished—of further deterioration and ultimately, filing for bankruptcy," Mr. Kimball said.
Ms. Begin writes for Rubber & Plastics News, a sister publication of Tire Business.