Description
Federal-Mogul Corporation. Non-executive Board Chairman CARL C ICAHN bought 239,149 shares on 8-30-2012 at $ 9.41
BUSINESS OVERVIEW
Federal-Mogul Corporation (the “Company”) is a leading global supplier of powertrain and safety technologies, serving the world’s foremost original equipment manufacturers of automotive, light, medium and heavy-duty commercial vehicles, agricultural, marine, rail, aerospace, off-road and industrial applications, as well as the worldwide aftermarket. The Company’s leading technology and innovation, lean manufacturing expertise, as well as marketing and distribution deliver world-class products, brands and services with quality excellence at a competitive cost. Federal-Mogul is focused on a sustainable global profitable growth strategy, creating value and satisfaction for its customers, shareholders and employees. Federal-Mogul has established a global presence and conducts its operations through 169 manufacturing, distribution and technical facilities that are wholly or partially owned through subsidiaries and joint ventures. Federal-Mogul’s business is organized into five primary reporting segments: Powertrain Energy, Powertrain Sealing and Bearings, Vehicle Safety and Protection, Global Aftermarket, and Corporate. Federal-Mogul offers its customers a diverse array of market-leading products for original equipment manufacturers and servicers (“OE”) and replacement parts (“aftermarket”) applications, including pistons, piston rings, piston pins, cylinder liners, valve seats and guides, ignition products, dynamic seals, bonded piston seals, combustion and exhaust gaskets, static gaskets and seals, rigid heat shields, engine bearings, industrial bearings, bushings and washers, transmission components, brake disc pads, brake linings, brake blocks, element resistant systems protection sleeving products, acoustic shielding, flexible heat shields, brake system components, chassis products, wipers, fuel pumps and lighting.
Federal-Mogul has operations in 34 countries and, accordingly, all of the Company’s reporting segments derive sales from both domestic and international markets. The attendant risks of the Company’s 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.
Joint Ventures and Other Strategic Alliances. The Company forms joint ventures and strategic alliances 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, and broaden its customer base. The Company believes that certain of its joint ventures have provided, and will continue to provide, opportunities to expand business relationships with Asian and other OEs operating in BRIC growth markets. The Company is currently involved in 29 joint ventures located in 13 different countries throughout the world, including China, India, Korea, Russia, Turkey and the United States. Of these joint ventures, the Company maintains a controlling interest in 17 entities and, accordingly, the financial results of these entities are included in the Consolidated Financial Statements of the Company. The Company has a non-controlling interest in 12 of its joint ventures, of which 7 are accounted for under the equity method and 5 are accounted for under the cost method. The Company does not consolidate any entity for which it has a variable interest based solely on power to direct the activities and significant participation in the entity’s expected results that would not otherwise be consolidated based on control through voting interests. Further, the Company’s joint ventures are businesses established and maintained in connection with its operating strategy.
Net sales for the Company’s 17 consolidated joint ventures were approximately 9%, 8% and 7% of consolidated net sales for the years ended December 31, 2011, 2010 and 2009, respectively. The Company’s investments in non-consolidated joint ventures totaled $228 million and $210 million as of December 31, 2011 and 2010, respectively, and the equity in earnings of such affiliates amounted to $37 million, $32 million and $16 million for the years ended December 31, 2011, 2010 and 2009, respectively.
Restructuring Activities. The Company, as part of its sustainable global profitable growth strategy, has undertaken various restructuring activities to streamline its operations, consolidate and take advantage of available capacity and resources, and ultimately achieve cost reductions. These restructuring activities include efforts to integrate and rationalize the Company’s businesses and to relocate manufacturing operations to best cost markets.
An unprecedented downturn in the global automotive industry and global financial markets led the Company to announce, in September and December 2008, certain restructuring actions, herein referred to as “Restructuring 2009,” designed to improve operating performance and respond to increasingly challenging conditions in the global automotive market. The Company’s global workforce of 45,000 employees as of December 31, 2011 is approximately 1,700 positions less than the workforce as of September 30, 2008 due to Restructuring 2009 actions, partially offset by subsequent rehiring of employees as production volumes increased in 2010 and 2011. During 2011, the Company recorded $3 million in facility closure costs, $1 million in employee costs and $(4) million in employee cost reversals associated with Restructuring 2009. During 2010, the Company recorded $5 million in facility closure costs, $3 million in employee costs and $(8) million in employee cost reversals associated with Restructuring 2009. During 2009, the Company recorded $29 million in net employee costs and $2 million in facility closure costs associated with Restructuring 2009. The Company does not expect to incur additional restructuring expenses associated with Restructuring 2009.
During the years ended December 31, 2011, 2010 and 2009, the Company recorded $5 million, $8 million and $1 million, respectively, in net restructuring expenses outside of Restructuring 2009. The Company recorded $3 million in employee costs and $2 million in facility closure costs related to other restructuring activities during 2011. The Company recorded $7 million in employee costs and $1 million in facility closure costs related to other restructuring activities during 2010. The Company recorded $1 million in employee costs related to other restructuring activities during 2009.
The Company’s restructuring activities are further discussed in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations and Note 2 to the Consolidated Financial Statements, included in Item 8 of this report.
The Company’s Products
The following provides an overview of products manufactured and distributed by the Company’s reporting segments.
Powertrain Energy. Powertrain Energy products are used in automotive, light truck, heavy-duty, industrial, marine, agricultural, power generation and small air-cooled engine applications. The primary products of this segment include pistons, piston rings, piston pins, cylinder liners, valve seats and guides, and ignition products. These products are offered under the Federal-Mogul ® , AE ® , Champion ® , Goetze ® , Nüral ® and Daros ® brand names.
Powertrain Sealing and Bearings . Federal-Mogul is one of the world’s leading sealing solutions and bearings providers. Comprehensive design capability and an extensive product portfolio enable effective delivery of complete sealing packages and a full range of bearings, bushings, and thrust washers for engine, transmission and driveline systems to a broad array of customers. Federal-Mogul offers a portfolio of world-class brand names, including Federal-Mogul ® , Deva ® , Fel-Pro ® , FP Diesel ® , Glyco ® , Metafram ® , Metagliss ® , National ® , Payen ® and Poral ® . The group serves a number of different industries including automotive, truck, commercial equipment (construction, agricultural, power generation, marine and rail), industrial, recreation and consumer power equipment. Product offerings include dynamic seals, bonded piston seals, combustion and exhaust gaskets, static gaskets and seals, rigid heat shields, engine bearings, industrial bearings, bushings and washers, sintered engine and transmission components, and metallic filters. The Company, during 2010, also introduced Polymer Bearings (IROX™) for automotive engines. These bearings have an innovative polymer coated shell that reduces fuel consumption and CO2 emissions by withstanding mechanical loads produced by heavily boosted engines. Powertrain Sealing and Bearings operates 29 manufacturing facilities in 12 countries and derived 32% of its 2011 OE sales in the United States and Canada, 52% in Europe and 16% in Rest of World.
The Company’s Backlog
For OE customers, the Company generally receives 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 the Company generally cannot terminate purchase orders. OE order fulfillment is typically manufactured in response to customer purchase order releases, and the Company ships directly from a manufacturing location to the customer for use in vehicle production and assembly. Accordingly, the Company’s manufacturing locations turn finished goods inventory relatively quickly, producing from on-hand raw materials and work-in-process inventory within relatively short manufacturing cycles. A significant risk to the Company is lower than expected vehicle production by one or more of its OE customers or termination of the business based upon perceived or actual shortfalls in delivery, quality or value.
For its Global Aftermarket customers, the Company generally establishes product line arrangements that encompass all parts offered within a particular product line. These are typically open-ended arrangements that are subject to termination by either the Company or the customer at any time. 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 the Company’s worldwide distribution network. Inventory stocking levels in the Company’s 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 the Company will supply certain levels of OE production and aftermarket shipments over such periods, the Company believes 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 its 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 timeframe involved.
The Company’s Raw Materials and Suppliers
The Company purchases various raw materials and component parts for use in its manufacturing processes, including ferrous and non-ferrous metals, non-metallic raw materials, stampings, castings and forgings. The Company also purchases parts manufactured by other manufacturers for sale in the aftermarket. The Company has not experienced any significant shortages of raw materials, components or finished parts and normally does not carry inventories of raw materials or finished parts in excess of those reasonably required to meet its production and shipping schedules. In 2011, no outside supplier of the Company provided products that accounted for more than 2% of the Company’s annual purchases.
Icahn Sourcing LLC
Icahn Sourcing LLC (“Icahn Sourcing”) is an entity formed and controlled by Carl C. Icahn, the Chairman of the Company’s Board, in order to leverage the potential buying power of a group of entities with which Mr. Icahn either owns or otherwise has a relationship in negotiating with a wide range of suppliers of goods, services, and tangible and intangible property. The Company is a member of the buying group and, as such, is afforded the opportunity to purchase goods, services and property from vendors with whom Icahn Sourcing has negotiated rates and terms. Icahn Sourcing does not guarantee that the Company will purchase any goods, services or property from any such vendors, and the Company is under no obligation to do so. The Company does not pay Icahn Sourcing any fees or other amounts with respect to the buying group arrangement and Icahn Sourcing neither sells to nor buys from any member of the buying group. The Company has purchased a variety of goods and services as a member of the buying group at prices and on terms that it believes are more favorable than those which would be achieved on a stand-alone basis.
Seasonality of the Company’s Business
The Company’s business is moderately seasonal because many North American customers typically close assembly plants for two weeks in July for model year changeovers, and for an additional week during the December holiday season. 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, the Company’s sales and operating profits have been the strongest in the second quarter. For additional information, refer to the Company’s quarterly financial results contained in Note 22 to the Consolidated Financial Statements, included in Item 8 of this report.
The Company’s Employee Relations
The Company had approximately 45,000 employees as of December 31, 2011.
Various unions represent approximately 36% of the Company’s U.S. hourly employees and approximately 70% of the Company’s non-U.S. hourly employees. With the exception of two facilities in the U.S., most of the Company’s 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.
An unprecedented downturn in the global automotive industry and global financial markets led the Company to announce, in September and December 2008, certain restructuring actions, herein referred to as “Restructuring 2009,” designed to improve operating performance and respond to increasingly challenging conditions in the global automotive market. The Company’s global workforce as of December 31, 2011 is approximately 1,700 positions less than the workforce as of September 30, 2008 due to Restructuring 2009 actions, partially offset by subsequent rehiring of employees as production volumes increased in 2010 and 2011.
Impact of Environmental Regulations on the Company
The Company’s 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 impact on the Company’s financial position or cash flows in 2011and are not expected to have a material impact on the Company’s financial position or cash flows in 2012.
The Company’s Intellectual Property
The Company holds in excess of 5,000 patents and patent applications on a worldwide basis, of which more than 1,000 have been filed in the United States. Of the approximately 5,000 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 the Company.
The Company does not materially rely on any single patent, nor will the expiration of any single patent materially affect the Company’s business. The Company’s current patents expire over various periods into the year 2033. The Company is actively introducing and patenting new technology to replace formerly patented technology before the expiration of the existing patents. In the aggregate, the Company’s worldwide patent portfolio is materially important to its business because it enables the Company to achieve technological differentiation from its competitors.
The Company also maintains more than 6,000 active trademark registrations and applications worldwide. In excess of 90% of these trademark registrations and applications are in commercial use by the Company or are licensed to third parties.
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 of approximately 77% of the Company’s outstanding shares of common stock. As a result, Mr. Icahn has the indirect ability to nominate and elect all of the directors on the Company’s Board of Directors, other than the Chief Executive Officer. Under applicable law and the Company’s certificate of incorporation and by-laws, certain actions cannot be taken without the approval of holders of a majority of the Company’s voting stock including, without limitation, mergers, the sale of substantially all of the Company’s assets, and amendments to its certificate of incorporation and by-laws. So long as Mr. Icahn continues to control a majority of the Company’s outstanding capital stock, he will continue to have these governance rights and the ability to control the Company.
The Company’s Web Site and Access to Filed Reports
The Company maintains an internet Web site at www.federalmogul.com. The contents of the Company’s Web site are not incorporated by reference in this report. The Company provides access to its annual and periodic reports filed with the SEC free of charge through this Web site. The Company’s Integrity Policy is also available on its Web site. The SEC maintains a Web site at www.SEC.gov where reports, proxy and information statements, and other information about the Company may be obtained. Paper copies of annual and periodic reports filed with the SEC may be obtained free of charge by contacting the Company’s headquarters at the address located within the SEC Filings or under Investor Relations on the Company’s Web site.
CEO BACKGROUND
Carl C. Icahn
Mr. Carl C. Icahn has served as non-executive chairman of the Board of Directors since January 2008 and as a director since December 2007. Mr. Icahn has served as chairman of the board and a director of Starfire Holding Corporation, a privately-held holding company, and chairman of the board and a director of various subsidiaries of Starfire, since 1984. Since August 2007, through his position as Chief Executive Officer of Icahn Capital LP, a wholly owned subsidiary of Icahn Enterprises L.P. (“IEP”), and certain related entities, Mr. Icahn’s principal occupation is managing private investment funds, including Icahn Partners LP, Icahn Partners Master Fund LP, Icahn Partners Master Fund II LP and Icahn Partners Master Fund III LP. From November 2004 through August 2007, Mr. Icahn conducted this occupation through his entities CCI Onshore Corp. and CCI Offshore Corp. Since November 1990, Mr. Icahn has been chairman of the board of Icahn Enterprises G.P. Inc., the general partner of IEP. IEP is a diversified holding company engaged in a variety of businesses, including investment management, automotive, metals, real estate, home fashion, railcar, casino gaming and food/packaging. Since March 2010, Mr. Icahn has been the chairman of the board of directors of Tropicana Entertainment Inc., a company that is primarily engaged in the business of owning and operating casinos and resorts. Mr. Icahn has served as chairman of the board and as a director of American Railcar Industries, Inc., a company that is primarily engaged in the business of manufacturing covered hopper and tank railcars, since 1994. Mr. Icahn served as chairman of the board and a director of XO Holdings, Inc., a telecommunications services provider, since February 2006 and of its predecessor from January 2003 to February 2006. Since September 2011, Mr. Icahn has been the President and a member of the executive committee of XO Holdings, a telecommunications company. From October 2005 until December 2011, Mr. Icahn served as a director of WestPoint International, Inc., a manufacturer of bed and bath home fashion products. Mr. Icahn was chairman of the board and president of Icahn & Co., Inc., a registered broker-dealer and a member of the National Association of Securities Dealers, from 1968 to 2005. From October 1998 through May 2004, Mr. Icahn was the president and a director of Stratosphere Corporation, the owner and operator of the Stratosphere Hotel and Casino in Las Vegas, Nevada, which, until February 2008, was a subsidiary of IEP. From September 2000 to February 2007, Mr. Icahn served as the chairman of the board of GB Holdings, Inc., which owned an interest in Atlantic Coast Holdings, Inc., the owner and operator of The Sands Hotel and Casino in Atlantic City until November 2006. From September 2006 to November 2008, Mr. Icahn was a director of ImClone Systems Incorporated, a biopharmaceutical company, and from October 2006 to November 2008, he was the chairman of the board of ImClone. From July 1993 to July 2010, Mr. Icahn served as a director of Cadus Corporation, a company engaged in the ownership and licensing of yeast-based drug discovery technologies. From May 2005 to January 2010, Mr. Icahn served as a director of Blockbuster Inc., a provider of in-home movie rental and game entertainment. Mr. Icahn was a director of WCI Communities, Inc. (“WCI”), a homebuilding company, from August 2007 to September 2009 and served as chairman of the board of WCI from September 2007 to September 2009. Mr. Icahn was a director of Motricity, Inc., a company that provides mobile content services and solutions, from April 2008 to January 2010. Mr. Icahn was a director of Yahoo! Inc., a company that provides Internet services to users, advertisers, publishers and developers worldwide, from August 2008 to October 2009. Mr. Icahn received his B.A. from Princeton University.
The Board has concluded that Mr. Icahn should serve as a director and as the Chairman of the Board because of his significant business experience and leadership roles serving as a director in various companies noted above. Additionally, Mr. Icahn is uniquely qualified based on his history of creating value in companies across multiple industries. Mr. Icahn has proven to be a successful investor and business leader for more than 40 years.
José Maria Alapont
Mr. José Maria Alapont served as president, chief executive officer, and a director of the Company from March 2005 to March 2012. Mr. Alapont also served as chairman of the Board of Directors of the Company from June 2005 to December 2007. On March 31, 2012, Mr. Alapont retired as president and chief executive officer of the Company and subsequent to such date will continue to serve on the Board of Directors of the Company. Mr. Alapont has more than 35 years of global leadership experience in both vehicle manufacturers and suppliers, with business and operations responsibilities in the Americas, Europe, Middle East & Africa, and Asia Pacific regions. From 2003 to 2005, Mr. Alapont was the chief executive officer and a member of the board of directors of IVECO, the commercial trucks and vans, public and commercial buses, recreational, special off-road, firefighting, defense and military vehicles company of the Fiat Group. He also became a member of the Fiat Group Executive Committee, the company’s strategy and policy making group. From 1997 to 2003, Mr. Alapont served in various key executive positions at Delphi Corporation, a global automotive supplier. He began at Delphi as executive director of international operations. In 1999, Mr. Alapont was named president of Delphi Europe, Middle East and Africa and a vice president of Delphi Corporation and also became a member of the Delphi Strategy Board, the company’s top policy-making group. In 2003, Mr. Alapont was named president of Delphi’s international operations, and vice president of sales and marketing. From 1990 to 1997, Mr. Alapont served in several executive roles and was a member of the Strategy Board at Valeo, a global automotive supplier. He started at Valeo as managing director of engine cooling systems, Spain. In 1991, Mr. Alapont was named executive director of Valeo’s worldwide heavy-duty engine cooling operations. In 1992, he became group vice president of Valeo’s worldwide clutch and transmission components division. He was named group vice president of the company’s worldwide lighting systems division in 1996. Mr. Alapont began and developed his automotive career from 1974 to 1989 at Ford Motor Company and, over the course of 15 years, starting at Ford of Spain, progressed through different management and executive positions in quality, testing and validation, manufacturing and purchasing positions at Ford of Europe. Since May 2011, Mr. Alapont also serves as a director of Mentor Graphics Corp,, an electric design automation company, and serves on the boards of automotive supplier trade associations and economic development groups in the U.S., Europe and Asia Pacific countries. A native of Spain, Mr. Alapont earned degrees in industrial engineering from the Technical School of Valencia in Spain and in philology/philosophy from the University of Valencia in Spain.
The Board has concluded that Mr. Alapont should serve as a director due to his extensive experience guiding and developing the strategies of leading vehicle makers and tier one suppliers in the automotive and commercial vehicle markets.
Sung Hwan Cho
Mr. Sung Hwan Cho has been Chief Financial Officer of Icahn Enterprises G.P. Inc., the general partner of Icahn Enterprises L.P., a diversified holding company engaged in a variety of businesses, including investment management, metals, automotive, real estate, railcar, food/packaging, casino gambling and home fashion, since March 16, 2012. Mr. Cho also serves as the Chief Financial Officer of Icahn Enterprises, L.P. He served as Senior Vice President and a Portfolio Company Associate at Icahn Associates Corp. and Icahn Enterprises L.P from October 2006 until March 2012. Mr. Cho served as Director of Finance for Atari, Inc., from October 2004 to September 2006. Mr. Cho served as Director of Corporate Development and Directorof Product Development at Talk America, a telecommunications provider to small business and residential customers, from 1999 to 2002. Mr. Cho served as an investment banker at Salomon Smith Barney in New York and Tokyo. He has been Director of American Railcar Industries since June 10, 2011. Mr. Cho has been a Director of Viskase Companies Inc., since November 2006. He has been a Director of Take-Two Interactive Software Inc. since April 2010 and WestPoint International Inc. since January 31, 2008. He serves as Director of PSC Metals Inc. and PSC LLC. With respect to each company mentioned above, Carl C. Icahn, directly or indirectly, either (i) controls such company or (ii) has an interest in such company through the ownership of securities. Mr. Cho received an MBA from New York University’s Leonard N. Stern School of Business and a B.S. in Computer Science from Stanford University.
The Board concluded that Mr. Cho should serve as a director due to his extensive experience providing strategic advice and guidance to the companies listed above and his financial expertise.
George Feldenkreis
Mr. Feldenkreis has served as a director of the Company since February 2008. Mr. Feldenkreis founded Perry Ellis International, Inc., a designer, distributor and licensor of apparel and accessories for men and women, in 1967. He has been involved in all aspects of the operations of Perry Ellis since that time and served as president and a director of Perry Ellis until February 1993, at which time he was elected chairman of the board and chief executive officer. Previous to founding Perry Ellis International, he founded Carfel, Inc., a major distributor of automatic transmission parts, standard clutch parts and timing components to the aftermarket, and there served as president until its sale in 2001. He is a member of the board of directors of the Greater Miami Jewish Federation, a trustee of the Simon Wiesenthal Board, a member of the board of directors of the American Apparel and Footwear Association and is a trustee of the University of Miami.
The Board has concluded that Mr. Feldenkreis should serve as a director because of his entrepreneurial vision and corporate experience gained when founding and operating companies with international operations. His tenure as the chief executive officer of Perry Ellis and automotive aftermarket experience with Carfel enables him to understand the complex business and financial issues that our Company may face and provide strategic insight to the Board and Company leadership.
Vincent J. Intrieri
Mr. Intrieri has served as a director of the Company since December 2007. Since October 2011, Mr. Intrieri has served as Senior Vice President of Icahn Enterprises G.P Inc. Since July 2006, Mr. Intrieri has been a director of Icahn Enterprises G.P. Inc., the general partner of Icahn Enterprises L.P., a diversified holding company engaged in a variety of businesses, including investment management, metals, automotive, real estate, railcar, food/packaging, casino gambling and home fashion. Since November 2004, Mr. Intrieri has been a senior managing director of Icahn Capital LP, the entity through which Carl C. Icahn manages private investment funds. Since January 1, 2005, Mr. Intrieri has been senior managing director of Icahn Associates Corp. and High River Limited Partnership, entities primarily engaged in the business of holding and investing in securities. From April 2005 through September 2008, Mr. Intrieri was the President and Chief Executive Officer of Philip Services Corporation, a metal recycling and industrial services company. Since December 2007, Mr. Intrieri has been the chairman of the board and a director of PSC Metal, Inc., a metal recycling company. From August 2005 to June 2011, Mr. Intrieri served as a director of American Railcar Industries, Inc. (“ARI”), a company that is primarily engaged in the business of manufacturing covered hopper and tank railcars. From March 2005 to December 2005, Mr. Intrieri was a senior vice president, the treasurer and the secretary of ARI. From April 2003 to June 2011, Mr. Intrieri was chairman of the board of directors and a director of Viskase Companies, Inc., a producer of cellulosic and plastic casings used in preparing and packaging processed meat products. From November 2006 to November 2008, Mr. Intrieri served on the board of directors of Lear Corporation, a supplier of automotive interior systems and components. From August 2008 to September 2009, Mr. Intrieri was a director of WCI Communities, Inc., a homebuilding company. From November 2005 to March 2011, Mr. Intrieri served as a director of WestPoint International, Inc. (“WPI”), a manufacturer and distributor of home fashion consumer products. Mr. Intrieri also serves on the boards of directors of the following companies: Dynegy Inc., a company primarily engaged in the production and sale of electric energy, capacity and ancillary services; and Motorola Solutions, Inc., a provider of communication products and services. With respect to each company mentioned above, Carl C. Icahn, directly or indirectly, either (i) controls such company or (ii) has an interest in such company through the ownership of securities. Mr. Intrieri is a certified public accountant. Mr. Intrieri received a B.S. in Accounting from The Pennsylvania State University.
The Board has concluded that Mr. Intrieri should serve as director of the Company because of his significant experience and leadership roles serving as a director of various companies noted above. In particular, his experience as a director in Icahn Capital L.P., WPI, PSC, ARI, and Viskase, enables him to understand the complex business and financial issues that our Company may face.
Rainer Jueckstock
Mr. Jueckstock has been Chief Executive Officer of the Company since April 1, 2012. Previously, Mr. Jueckstock served as senior vice president, Powertrain Energy, and a member of the strategy board of the Company since April 2005. Previously, he was senior vice president, global powertrain. Mr. Jueckstock joined the Company in 1990, and has held many positions with the Company including senior vice president, powertrain operations; senior vice president, pistons, rings and liners; vice president, rings and liners; operations director, piston rings, Europe; and managing director of the Friedberg, Germany, operation. He also served as sales director for rings and liners, Europe; finance controller in Burscheid, Germany; and finance manager in Dresden, Germany.
The Board has concluded that Mr. Jueckstock should serve as a director because of his global automotive industry experience and leadership in the roles described above, including his significant experience with the Company.
J. Michael Laisure
Mr. Laisure has served as a director of the Company since February 2008. Since August 2007, Mr. Laisure has served as the Chief Executive Officer of Fluid Routing Solutions, Inc. (“Fluid Routing”), an automotive supplier that designs and manufactures fluid and fuel handling systems, which was formerly known as Mark IV Industries. Fluid Routing filed for bankruptcy protection under Chapter 11 in February 2009 and emerged from Chapter 11 in March 2009. Mr. Laisure served from December 2006 through July 2007 as President of Delco Remy, Inc., a manufacturer of starters, alternators and rotating electrics for the automotive, commercial vehicle and off-highway markets. Mr. Laisure has served as a director of American Railcar Industries, Inc., a company that is primarily engaged in the business of manufacturing covered hopper and tank railcars, since January 2006. Since May 2005, Mr. Laisure has been consulting as an independent contractor for the automotive and industrial manufacturing space. Prior to this, he spent 32 years in various corporate accounting, sales, engineering and operational positions with Dana Corporation (“Dana”), a publicly held corporation that designs, manufactures and supplies vehicle components and technology, and its predecessors. Mr. Laisure served as president of Dana’s Automotive Systems Group from March 2004 to May 2005. From December 2001 to February 2004, Mr. Laisure served as president of Dana’s engine and fluid management group and, from December 1999 to November 2001, he served as president of Dana’s fluid management group. Mr. Laisure received a B.A. in Accounting from Ball State University and an M.B.A. from Miami (Ohio) University, and has completed the Harvard University Advanced Management Program.
The Board has concluded that Mr. Laisure should serve as a director because of his global automotive industry experience and leadership roles in the various automotive companies noted above.
Samuel J. Merksamer
Mr. Merksamer has served as a director of the Company since September 2010. Mr. Merksamer has served as an investment analyst at Icahn Capital LP, the entity through which Carl C. Icahn manages private investment funds, since May 2008. Mr. Merksamer also serves on the boards of directors of the following companies: Dynegy Inc., a company primarily engaged in the production and sale of electric energy, capacity and ancillary services; Viskase Companies, Inc., a producer of cellulosic and plastic casings used in preparing and packaging processed meat products; American Railcar Industries Inc., a company that is primarily engaged in the business of manufacturing covered hopper and tank railcars; and PSC Metals Inc., a metal recycling company. With respect to each company mentioned above, Carl C. Icahn, directly or indirectly, either (i) controls such company or (ii) has an interest in such company through the ownership of securities. Before joining Icahn Capital, Mr. Merksamer was an analyst at Airlie Opportunity Capital Management where he focused on high yield and distressed investments. Mr. Merksamer received an A.B. in Economics from Cornell University in 2002.
The Board has concluded that Mr. Merksamer should serve as a director because of his significant experience and leadership roles serving as a director in various companies noted above and his financial expertise.
Daniel A. Ninivaggi
Mr. Ninivaggi has served as a director of the Company since March 2010. Mr. Ninivaggi has served as President of Icahn Enterprises L.P. and its general partner Icahn Enterprises G.P. since April 2010 and as the Principal Executive Officer, or chief executive, of Icahn Enterprises G.P. Inc. and Icahn Enterprises L.P. since August 2010. Mr. Ninivaggi has also served as a director of Icahn Enterprises, G.P. since March 2012. Icahn Enterprises is a diversified holding company engaged in a variety of business, including investment management, automotive, metals, real estate, railcar, food packaging, gaming and home fashion. Since January 2011, he has served as Interim President and Interim Chief Executive Officer and a director of Tropicana Entertainment Inc., a company that is primarily engaged in the business of owning and operating casinos and resorts. Mr. Ninivaggi also serves as a director of CIT Group Inc., a bank holding company; XO Holdings, a telecommunications company; Viskase Companies, Inc., a producer of cellulosic and plastic casings used in preparing and packaging processed meat products; and Motorola Mobility Holdings, Inc., a provider of mobile communication devices and video and data delivery solutions. With respect to each company mentioned above, Mr. Icahn, directly or indirectly, either (i) controls such company or (ii) has an interest in such company through the ownership of securities. From July 2009 to March 2010, Mr. Ninivaggi served as Of Counsel to the international law firm of Winston & Strawn LLP. From 2003 until July 2009, Mr. Ninivaggi served in a variety of executive positions at Lear Corporation, a global supplier of automotive seating systems and electrical power management systems and components, including as General Counsel from 2003 through 2007, as Senior Vice President from 2004 until 2006, and most recently as Executive Vice President and Chief Administrative Officer from 2006 to July 2009. Mr. Ninivaggi received a B.A. in History from Columbia University in 1986, a Masters of Business Administration from the University of Chicago in 1988 and a J.D. from Stanford Law School in 1991.
The Board has concluded that Mr. Ninivaggi should serve as a director because of his experience as chief executive of a diversified holding company engaged in numerous industries, his experience as a director of various public companies and his background in the automotive industry.
David S. Schechter
Mr. Schechter has served as a director of the Company since December 2007. Since July 2008, Mr. Schechter has also served as Managing Director for Icahn Capital LP, the entity through which Carl C. Icahn manages investment funds. From November 2004 to July 2008, Mr. Schechter served as a director and senior investment analyst for Icahn Capital. From January 2004 to October 2004, Mr. Schechter served as an investment analyst with Icahn Associates Corp. and High River Limited Partnership, entities that are primarily engaged in the business of holding and investing in securities. Mr. Schechter also serves on the board of directors of the following companies: The Hain Celestial Group, Inc., a distributor of natural and organic products; WestPoint International, Inc., a manufacturer of bed and bath home fashion products; Mentor Graphics Corporation, a manufacturer of electronic hardware and software design solutions; and XO Holdings, a telecommunications company. With respect to each company mentioned above, Carl C. Icahn, directly or indirectly, either (i) controls such company or (ii) has an interest in such company through the ownership of securities. From August 2007 to August 2008, Mr. Schechter served as a director of WCI Communities, Inc., a home building company, and from February 2008 to July 2008 served as a director of BFK Capital Group, Inc. Prior to joining Mr. Icahn in January 2004, Mr. Schechter served as vice president of global special situations at Citigroup, a unit responsible for making proprietary investments in distressed situations. Mr. Schechter received a B.S. in Economics, cum laude, from the Wharton School at the University of Pennsylvania in 1997.
The Board has concluded that Mr. Schechter should serve as a director because of his experience and leadership roles serving as a director in various companies noted above which enables him to understand the complex business and financial issues that our Company may face.
Neil S. Subin
Mr. Subin has served as a director of the Company since December 2007. Mr. Subin founded and is Chairman of Broadbill Investment Partners LP, a private investment fund, since 2011. Prior to forming Broadbill Investment Partners, LP, Mr. Subin founded and was managing director and president of Trendex Capital Management, a private investment fund, since 1991. Prior to forming Trendex Capital, Mr. Subin was a private investor from 1988 to 1991 and was an associate with Oppenheimer & Co. from 1986 to 1988. Mr. Subin also serves on the board of directors of the following companies: Primus Telecommunications Group, Inc.; Hancock Fabrics, Inc.; Institutional Financial Markets, Inc.; and Phosphate Holdings, Inc.
The Board has concluded that Mr. Subin should serve as a director because of his financial acumen and ability to identify intrinsic value in companies other investors may overlook. In addition, his leadership skills and prior experience enables him to understand the complex business and financial issues that our Company may face and guide the company to effectively respond to such challenges.
James H. Vandenberghe
Mr. Vandenberghe has served as a director of the Company since February 2008. Mr. Vandenberghe was vice chairman of Lear Corporation, a supplier of automotive systems and components until May 2008. He had been affiliated with Lear and its predecessor companies for 35 years and was named vice chairman in November 1998. Mr. Vandenberghe earned a bachelor’s degree in business administration from Western Michigan University, and a master’s degree in business administration from Wayne State University. Mr. Vandenberghe sits on the board of trustees for the College for Creative Studies, the board of visitors for the Wayne State University School of Business, and the board of directors for DTE Energy and the United Way for Southeastern Michigan.
The Board has concluded that Mr. Vandenberghe should serve as a director because of his significant global automotive industry experience and leadership roles as an executive officer at Lear Corporation. Mr. Vandenberghe’s long term involvement in addressing financial and accounting issues throughout his career enables him to understand the complex business and financial issues that our Company may face.
MANAGEMENT DISCUSSION FROM LATEST 10K
Overview
Federal-Mogul Corporation is 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 and servicers (“OE”) market and the replacement market (“aftermarket”). The Company’s customers include the world’s largest automotive OEs and major distributors and retailers in the independent aftermarket. The Company, during 2011, derived 66% of its sales from the OE market and 34% from the aftermarket. Geographically, the Company derived 36% of its 2011 sales in the United States and 64% internationally. The Company has operations in established markets including Canada, France, Germany, Italy, Japan, Spain, Sweden, the United Kingdom and the United States, and emerging markets including Argentina, Brazil, China, Czech Republic, Hungary, India, Korea, Mexico, Poland, Russia, South Africa, Thailand, Turkey and Venezuela. The attendant risks of the Company’s international operations are primarily related to currency fluctuations, changes in local economic and political conditions, and changes in laws and regulations.
Environmental Matters
The Company is a defendant in lawsuits filed, or the recipient of administrative orders issued or demand letters received, in various jurisdictions pursuant to the Federal Comprehensive Environmental Response Compensation and Liability Act of 1980 (“CERCLA”) or other similar national, provincial or state environmental remedial laws. These laws provide that responsible parties may be liable to pay for remediating contamination resulting from hazardous substances that were discharged into the environment by them, by prior owners or occupants of property they currently own or operate, or by others to whom they sent such substances for treatment or other disposition at third party locations. The Company has been notified by the United States Environmental Protection Agency, other national environmental agencies, and various provincial and state agencies that it may be a potentially responsible party (“PRP”) under such laws for the cost of remediating hazardous substances pursuant to CERCLA and other national and state or provincial environmental laws. PRP designation typically requires the funding of site investigations and subsequent remedial activities.
Many of the sites that are likely to be the costliest to remediate are often current or former commercial waste disposal facilities to which numerous companies sent wastes. Despite the potential joint and several liability which might be imposed on the Company under CERCLA and some of the other laws pertaining to these sites, the Company’s share of the total waste sent to these sites has generally been small. 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.
Recorded environmental liabilities were $16 million and $19 million at December 31, 2011 and 2010, respectively. These accruals are based upon management’s best estimates, which requires management to make assumptions regarding the costs for remediation activities, the extent to which costs may be borne by other liable parties, the financial viability of such parties, the time periods over which remediation activities will be completed, and other factors. Although management believes its accruals will be adequate to cover the Company’s estimated liability for its exposure in respect to such environmental matters, any changes in the underlying assumptions could materially impact the Company’s future results of operations and financial condition. At December 31, 2011, management estimates that reasonably possible material additional losses above and beyond management’s best estimate of required remediation costs as recorded approximate $41 million.
Asset Retirement Obligations
The Company records asset retirement obligations (“ARO”) in accordance with FASB ASC Topic 410, Asset Retirement and Environmental Obligations . The Company’s primary ARO activities relate to the removal of hazardous building materials at its facilities. The Company records an ARO when amounts can be reasonably estimated, typically upon the expectation that an operating site may be closed or sold. The Company has identified sites with contractual obligations and several sites that are closed or expected to be closed and sold. In connection with these sites, the Company has accrued $22 million and $25 million as of December 31, 2011 and 2010, respectively, for ARO, primarily related to anticipated costs of removing hazardous building materials, and has considered impairment issues that may result from capitalization of ARO.
In determining whether the fair value of ARO can reasonably be estimated, the Company 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, the Company must determine if it has sufficient information upon which to estimate the obligation using expected present value techniques. This determination requires the Company 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 Company has conditional asset retirement obligations (“CARO”), primarily related to removal costs of hazardous materials in buildings, for which it believes reasonable cost estimates cannot be made at this time because the Company does not believe it has a reasonable basis to assign probabilities to a range of potential settlement dates for these retirement obligations. Accordingly, the Company is currently unable to determine amounts to accrue for CARO at such sites. If new information were to become available whereby the Company could make reasonable probability assessments for these CARO, the amount accrued for ARO could change significantly, which could materially impact the Company’s statement of operations and/or financial position. Settlements of ARO in the near-future at amounts other than the Company’s best estimates as of December 31, 2011 also could materially impact the Company’s future results of operations and financial condition.
Long-Lived Assets
As a result of fresh-start reporting, long-lived assets such as property, plant and equipment have been stated at estimated replacement cost as of December 31, 2007, unless the expected future use of the assets indicated a lower value was appropriate. Long-lived assets such as definite-lived intangible assets have been stated at fair value as of December 31, 2007. Depreciation and amortization is computed principally by the straight-line method for financial reporting purposes and by accelerated methods for income tax purposes. Definite-lived assets are periodically reviewed for impairment indicators. If impairment indicators exist, the Company performs the required analysis and records an impairment charge, as required, in accordance with the subsequent measurement provisions of FASB ASC Topic 360, Property, Plant & Equipment .
The Company performs its annual goodwill impairment analysis as of October 1, or more frequently if impairment indicators exist, in accordance with the subsequent measurement provisions of FASB ASC Topic 350, Intangibles – Goodwill and Other . This impairment analysis compares the fair values of the Company’s reporting units to their related carrying values. If a reporting unit carrying value exceeds its fair value, the Company must then calculate the reporting unit’s implied fair value of goodwill and impairment charges are recorded for any excess of the goodwill carrying value over the implied fair value of goodwill. The reporting units’ fair values are based upon consideration of various valuation methodologies, including projected future cash flows discounted at rates commensurate with the risks involved, guideline transaction multiples, and multiples of current and future earnings.
Given the complexity of the calculation, the Company has not yet finalized “Step 2” of its annual goodwill impairment assessment. Based upon the draft valuations and preliminary assessment, the Company recorded an estimated goodwill impairment charge of $259 million for the year ended December 31, 2011. To the extent that the finalization of the Company’s assessment of goodwill requires adjustment to the preliminary impairment charge, such adjustment would be recorded in the first quarter of 2012. This charge was required to adjust the carrying value of goodwill to estimated fair value. The estimated fair value was determined based upon consideration of various valuation methodologies, including projected future cash flows discounted at rates commensurate with the risks involved, guideline transaction multiples and multiples of current and future earnings.
Stock-Based Compensation
The Company accounts for stock-based compensation in accordance with FASB ASC Topic 718, Compensation – Stock Compensation (“FASB ASC 718”), which requires companies to expense the fair value of employee stock options and other forms of stock-based compensation. Estimating fair value for shared-based payments in accordance with FASB ASC 718 requires management to make assumptions regarding expected volatility of the underlying shares, the risk-free rate over the life of the share-based payment, and the date on which share-based payments will be settled. Any differences in actual results from management’s estimates could result in fair values different from estimated fair values, which could materially impact the Company’s future results of operations and financial condition. Additional financial information related to the Company’s share-based payments is presented in Note 18 to the Consolidated Financial Statements, included in Item 8 of this report.
Income Taxes
The Company accounts for income taxes in accordance with FASB ASC Topic 740, Income Taxes (“FASB ASC 740”). The determination of the Company’s tax provision is complex due to operations in many tax jurisdictions outside the United States. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and other tax loss and credit carryforwards. The realization of deferred tax assets is dependent upon the Company’s ability to generate future taxable income. The Company records a valuation allowance to offset its deferred tax assets to the amount that it believes is more likely than not to be realized. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The Company records a valuation allowance that primarily represents operating and other loss carryforwards for which utilization is uncertain. Management judgment is required in determining the Company’s provision for income taxes, deferred tax assets and liabilities and the valuation allowance recorded against the Company’s net deferred tax assets.
The Company did not record taxes on its undistributed earnings of $677 million at December 31, 2011 since these earnings are considered by the Company to be permanently reinvested. If at some future date, these earnings cease to be permanently reinvested, the Company may be subject to United States income taxes and foreign withholding taxes on such amounts. Determining the unrecognized deferred tax liability on the potential distribution of these earnings is not practicable as such liability, if any, is dependent on circumstances existing when remittance occurs.
At December 31, 2011, the Company had deferred tax assets of $311 million, net of a valuation allowance of $824 million, and deferred tax liabilities of $667 million. At December 31, 2010, the Company had deferred tax assets of $280 million, net of a valuation allowance of $871 million, and deferred tax liabilities of $668 million.
The Company is subject to income taxes in the U.S. at the federal and state level and numerous non-U.S. jurisdictions. Significant judgment is required in determining the Company’s worldwide provision for income taxes and recording the related assets and liabilities. In the ordinary course of business, there are many transactions and calculations where the ultimate tax determination is less than certain. Accruals for income tax contingencies are provided for in accordance with the requirements of FASB ASC 740. The Company’s U.S. federal and certain state income tax returns and certain non-U.S. income tax returns are currently under various stages of audit by applicable tax authorities. Although the outcome of ongoing tax audits is always uncertain, management believes that it has appropriate support for the positions taken on its tax returns and that its annual tax provisions included amounts sufficient to pay assessments, if any, which may be proposed by the taxing authorities. At December 31, 2011, the Company has recorded a liability for its best estimate of the more likely than not loss on certain of its tax positions, which is included in other non-current liabilities. Nonetheless, the amounts ultimately paid, if any, upon resolution of the issues raised by the taxing authorities may differ materially from the amounts accrued for each year.
Powertrain Energy
Sales increased by $444 million, or 24%, to $2,304 million for the year ended December 31, 2011 from $1,860 million for the year ended December 31, 2010. Sales volumes increased by $344 million due to OE production volume increases and market share gains in all regions. The acquisition of the Daros Group increased sales volume by $16 million. PTE generates approximately 80% of its revenue outside the United States and the resulting currency movements increased sales by $60 million. Customer pricing increased sales by $24 million.
Cost of products sold increased by $373 million to $2,005 million for the year ended December 31, 2011 compared to $1,632 million for the year ended December 31, 2010. This was due to a $278 million increase directly associated with improved sales volume, currency movements of $53 million, unfavorable productivity, net of labor and benefits inflation, of $28 million, increased materials and services sourcing costs of $21 million, and a $12 million increase directly associated with the Daros Group sales volume, partially offset by a decrease in depreciation of $19 million.
Gross margin increased by $71 million to $299 million, or 13.0% of sales, for the year ended December 31, 2011 compared to $228 million, or 12.3% of sales, for the year ended December 31, 2010. The favorable impact of increased sales volumes contributed to a $66 million increase in gross margin. Other factors contributing to the improved margin were customer price increases of $24 million, decreased depreciation of $19 million, currency movements of $7 million and $4 million directly related to the Daros Group. These increases were partially offset by unfavorable productivity, net of labor and benefits inflation, of $28 million and increased materials and services sourcing costs of $21 million.
Operational EBITDA increased by $47 million to $332 million for the year ended December 31, 2011 from $285 million for the year ended December 31, 2010. The impact of increased sales volumes of $66 million, customer price increases of $24 million, currency movements of $10 million, improved equity earnings of non-consolidated affiliates of $5 million, and $4 million directly attributable to the Daros Group were partially offset by unfavorable productivity, net of labor and benefits inflation, of $33 million, increased materials and services sourcing costs of $21 million, and other decreases of $8 million.
Powertrain Sealing and Bearings
Sales increased by $170 million, or 16%, to $1,266 million for the year ended December 31, 2011 from $1,096 million for the year ended December 31, 2010. Sales volumes increased by $122 million due to OE production volume increases and market share gains in all regions. PTSB generates approximately 70% of its revenue outside the United States and the resulting currency movements increased reported sales by $31 million. Customer pricing increased sales by $17 million.
MANAGEMENT DISCUSSION FOR LATEST QUARTER
Overview
Federal-Mogul Corporation is a leading global supplier of technology and innovation in vehicle and industrial products for fuel economy, emissions reduction, alternative energies, environment and safety systems. The Company serves the world’s foremost original equipment manufacturers and servicers (“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. During the six months ended June 30, 2012, the Company derived 67% of its sales from the OE market and 33% from the aftermarket. The Company seeks to participate in both of these markets by leveraging its original equipment product engineering and development capability, manufacturing know-how, and expertise in managing a broad and deep range of replacement parts to service the aftermarket. The Company believes that it is uniquely positioned to effectively manage the life cycle of a broad range of products to a diverse customer base.
Federal-Mogul has established a global presence and conducts its operations through various manufacturing, distribution and technical centers that are wholly-owned subsidiaries or partially-owned joint ventures. During the six months ended June 30, 2012, the Company derived 38% of its sales in the United States and 62% internationally. The Company has operations in established markets including Canada, France, Germany, Italy, Japan, Spain, Sweden, the United Kingdom and the United States, and developing markets including Argentina, Brazil, China, Czech Republic, Hungary, India, Korea, Mexico, Poland, Russia, South Africa, Thailand, Turkey and Venezuela. The attendant risks of the Company’s international operations are primarily related to currency fluctuations, changes in local economic and political conditions, and changes in laws and regulations.
Federal-Mogul offers its customers a diverse array of market-leading products for OE and replacement parts (“aftermarket”) applications, including pistons, piston rings, piston pins, cylinder liners, valve seats and guides, ignition products, dynamic seals, bonded piston seals, combustion and exhaust gaskets, static gaskets and seals, rigid heat shields, engine bearings, industrial bearings, bushings and washers, transmission components, brake disc pads, brake linings, brake blocks, element resistant systems protection sleeving products, acoustic shielding, flexible heat shields, brake system components, chassis products, wipers, fuel pumps and lighting.
The Company operates in an extremely competitive industry, driven by global vehicle production volumes and part replacement trends. Business is typically awarded to the supplier offering the most favorable combination of cost, quality, technology and service. Customers continue to demand periodic cost reductions that require the Company to continually assess, redefine and improve its operations, products, and manufacturing capabilities to maintain and improve profitability. Management continues to develop and execute initiatives to meet the challenges of the industry and to achieve its strategy for sustainable global profitable growth.
As previously announced, the Company’s board of directors decided to segment the Company’s operations into two separate and independent divisions. One division will focus primarily on the manufacture and sale of powertrain products to original equipment manufacturers (“OE Division”), while the other will consist of the Company’s global aftermarket as well as its brake, chassis and wipers businesses (“Global Aftermarket Division”). The Company has initiated several actions in connection with the creation of these two operating divisions, including the hiring of a Chief Executive Officer for the Global Aftermarket division and the identification of facilities that will be managed by each division.
Powertrain Energy
Sales decreased by $32 million, or 5%, to $565 million for the second quarter of 2012 from $597 million in the same period of 2011. PTE generates approximately 75% of its revenue outside the United States and the resulting currency movements decreased reported sales by $47 million. Sales volumes increased by $18 million due to new business launches, partially offset by net market volume declines, primarily in Europe. Customer pricing decreased sales by $3 million.
Cost of products sold decreased by $21 million to $494 million for the second quarter of 2012 compared to $515 million in the same period of 2011. This decrease was due to currency movements of $41 million, materials and services sourcing savings of $7 million and favorable productivity of $3 million, partially offset by a $27 million increase directly associated with sales volume/mix and an increase in depreciation of $3 million.
Gross margin decreased by $11 million to $71 million, or 12.6% of sales, for the second quarter of 2012 compared to $82 million, or 13.7% of sales, for the second quarter of 2011. The favorable impact on margin of new program launches was more than offset by the impact of production volume declines, primarily in Europe, and a shift in mix towards lower margin products, resulting in a net $9 million decrease in gross margin. Other factors contributing to the decreased margin were currency movements of $6 million, customer price decreases of $3 million and increased depreciation of $3 million. These decreases were partially offset by materials and services sourcing savings of $7 million and favorable productivity of $3 million.
Operational EBITDA decreased by $12 million to $77 million for the second quarter of 2012 from $89 million in the same period of 2011. The favorable impact of new program launches was more than offset by the impact of production volume declines, primarily in Europe, and a shift in mix towards lower margin products, resulting in a net $9 million decrease. Other factors contributing to the decrease were currency movements of $7 million, customer price decreases of $3 million and other decreases of $1 million, partially offset by materials and services sourcing savings of $7 million and favorable productivity of $1 million.
Powertrain Sealing and Bearings
Sales decreased by $21 million, or 6%, to $312 million for the second quarter of 2012 from $333 million in the same period of 2011. PTSB generates approximately 65% of its revenue outside the United States and the resulting currency movements decreased reported sales by $22 million. Sales volumes decreased by $1 million due to net market volume declines, primarily in Europe, mostly offset by new business launches. Customer pricing increased sales by $2 million.
Cost of products sold decreased by $20 million to $274 million for the second quarter of 2012 compared to $294 million in the same period of 2011. This was due to currency movements of $22 million, and decreased materials and services sourcing costs of $4 million, partially offset by a $4 million increase directly associated with sales volume/mix, unfavorable productivity of $1 million and increased depreciation of $1 million.
Gross margin decreased by $1 million to $38 million, or 12.2% of sales, for the second quarter of 2012 compared to $39 million, or 11.7% of sales, for the second quarter of 2011. The favorable impact on margin of new program launches was more than offset by the impact of production volume declines, primarily in Europe, and a shift in mix towards lower margin products, resulting in a net $5 million decrease in gross margin. Other factors contributing to the margin decrease include unfavorable productivity of $1 million and increased depreciation of $1 million. These decreases were mostly offset by decreased materials and services sourcing costs of $4 million and customer price increases of $2 million.
Operational EBITDA remained flat for the second quarter of 2012 from $33 million in the same period of 2011. The favorable impact of new program launches was more than offset by the impact of production volume declines, primarily in Europe, and a shift in mix towards lower margin products, resulting in a net $5 million decrease. Other factors contributing to the decrease were unfavorable productivity of $1 million and other decreases of $1 million offset by decreased materials and services sourcing costs of $4 million, customer price increases of $2 million and currency movements of $1 million.
Vehicle Safety and Protection
Sales increased by $3 million, or 1%, to $261 million for the second quarter of 2012 from $258 million in the same period of 2011. Sales volumes increased by $20 million due to new business launches, partially offset by net market volume declines, primarily in Europe. Approximately 65% of VSP sales are generated outside the United States and the resulting currency movements decreased reported sales by $17 million.
Cost of products sold increased by $14 million to $210 million for the second quarter of 2012 compared to $196 million in the same period of 2011. This was due to a $29 million increase directly associated with sales volume/mix and unfavorable productivity of $2 million, partially offset by currency movements of $14 million, decreased materials and services sourcing costs of $2 million and decreased depreciation of $1 million.
Gross margin decreased by $11 million to $51 million, or 19.5% of sales, for the second quarter of 2012 compared to $62 million, or 24.0% of sales, for the second quarter of 2011. The favorable impact on margin of new program launches was more than offset by the impact of production volume declines, primarily in Europe, and a shift in mix towards lower margin products, resulting in a net $9 million decrease in gross margin. Other decreases include currency movements of $3 million and unfavorable productivity of $2 million. These decreases were partially offset by materials and services sourcing savings of $2 million and lowered depreciation expense of $1 million.
Operational EBITDA decreased by $16 million to $38 million for the second quarter of 2012 from $54 million in the same period of 2011. The favorable impact of new program launches was more than offset by the impact of production volume declines, primarily in Europe, and a shift in mix towards lower margin products, resulting in a net $9 million decrease. Other decreases include unfavorable productivity of $3 million, currency movements of $3 million, and other decreases of $3 million, partially offset by decreased materials and services sourcing costs of $2 million.
Global Aftermarket
Sales decreased by $46 million, or 8% , to $566 million for the second quarter of 2012, from $612 million in the same period of 2011. This decrease was due to currency movements of $28 million, lower sales volumes of $17 million due to sales decreases in Europe and North America, partially offset by sales increases in all other regions, and net customer price decreases of $1 million.
Cost of products sold decreased by $24 million to $469 million for the second quarter of 2012 compared to $493 million in the same period of 2011. This decrease was due to currency movements of $21 million and materials and services sourcing savings of $9 million, partially offset by a $6 million increase directly associated with sales volume/mix.
Gross margin decreased by $22 million to $97 million, or 17.1% of sales, for the second quarter of 2012 compared to $119 million, or 19.4% of sales, in the same period of 2011. This was due to a net unfavorable sales volume/mix impact of $23 million, currency movements of $7 million and net customer price decreases of $1 million, partially offset by improved materials and services sourcing of $9 million.
Operational EBITDA decreased by $14 million to $60 million for the second quarter of 2012 from $74 million in the same period of 2011. This decrease was due to a net unfavorable sales volume/mix impact of $23 million, currency movements of $4 million and net customer price decreases of $1 million, partially offset by decreased materials and services sourcing costs of $9 million, favorable productivity of $3 million and favorable equity earnings in non-consolidated affiliates of $2 million.
Corporate
Operational EBITDA increased by $1 million to $(49) million for the second quarter of 2012 compared to $(50) million in the same period of 2011. This was due to an increase in costs, inclusive of labor and benefits inflation, of $7 million, being mostly offset by decreased stock-based compensation expense of $2 million, currency movements of $2 million, decreased materials and services sourcing costs of $1 million and other increases of $3 million.
Powertrain Energy
Sales decreased by $2 million to $1,167 million for the six months ended June 30, 2012 from $1,169 million in the same period of 2011. PTE generates approximately 75% of its revenue outside the United States and the resulting currency movements decreased reported sales by $70 million. Sales volumes increased by $72 million due to new business launches, partially offset by net market volume declines, primarily in Europe. Customer pricing decreased sales by $4 million.
Cost of products sold increased by $3 million to $1,021 million for the six months ended June 30, 2012 compared to $1,018 million in the same period of 2011. This was due to an $81 million increase directly associated with sales volume/mix and an increase in depreciation expense of $6 million, partially offset by currency movements of $62 million, materials and services sourcing savings of $14 million and favorable productivity of $8 million.
Gross margin decreased by $5 million to $146 million, or 12.5% of sales, for the six months ended June 30, 2012 compared to $151 million, or 12.9% of sales, for the same period of 2011. The favorable impact on margin of new program launches was more than offset by the impact of production volume declines, primarily in Europe, and a shift in mix towards lower margin products, resulting in a net $9 million decrease in gross margin. Other factors contributing to the decreased margin were currency movements of $8 million, increased depreciation expense of $6 million and customer price decreases of $4 million, partially offset by reduced materials and services sourcing costs of $14 million and favorable productivity of $8 million.
Operational EBITDA decreased by $5 million to $163 million for the six months ended June 30, 2012 from $168 million in the same period of 2011. The favorable impact of new program launches was more than offset by the impact of production volume declines, primarily in Europe, and a shift in mix towards lower margin products, resulting in a net $9 million decrease. Other factors contributing to the decrease were currency movements of $10 million, customer price decreases of $4 million, decreased equity earnings of non-consolidated affiliates of $1 million and other decreases of $1 million, partially offset by reduced materials and services sourcing costs of $14 million and favorable productivity of $6 million.
Powertrain Sealing and Bearings
Sales decreased by $15 million, or 2%, to $637 million for the six months ended June 30, 2012 from $652 million in the same period of 2011. PTSB generates approximately 65% of its revenue outside the United States and the resulting currency movements decreased reported sales by $29 million. Sales volumes increased by $9 million due to new business launches, partially offset by net market volume declines, primarily in Europe. Customer pricing increased sales by $5 million.
Cost of products sold decreased by $16 million to $560 million for the six months ended June 30, 2012 compared to $576 million in the same period of 2011. This was due to currency movements of $28 million and decreased materials and services sourcing costs of $10 million, partially offset by a $20 million increase directly associated with sales volume/mix and increased depreciation expense of $2 million.
Gross margin increased by $1 million to $77 million, or 12.1% of sales, for the six months ended June 30, 2012 compared to $76 million, or 11.7% of sales, for the six months ended June 30, 2011. The favorable impact on margin of new program launches was more than offset by the impact of production volume declines, primarily in Europe, and a shift in mix towards lower margin products, resulting in a net $11 million decrease in gross margin. Other decreases to margin were due to higher depreciation of $2 million and currency movements of $1 million, which were more than offset by material and services sourcing savings of $10 million and customer price increases of $5 million.
Operational EBITDA increased by $1 million to $63 million for the six months ended June 30, 2012 from $62 million in the same period of 2011. The favorable impact of new program launches was more than offset by the impact of production volume declines, primarily in Europe, and a shift in mix towards lower margin products, resulting in a net $11 million decrease. Unfavorable productivity of $1 million and other decreases of $2 million, were more than offset by material and services sourcing savings of $10 million and customer price increases of $5 million.
Vehicle Safety and Protection
Sales increased by $22 million, or 4%, to $536 million for the six months ended June 30, 2012 from $514 million in the same period of 2011. Sales volumes increased by $44 million due to new business launches, partially offset by net market volume declines, primarily in Europe. Approximately 65% of VSP sales are generated outside the United States and the resulting currency movements decreased reported sales by $23 million. Customer pricing increased sales by $1 million.
Cost of products sold increased by $37 million to $426 million for the six months ended June 30, 2012 compared to $389 million in the same period of 2011. This was due to a $57 million increase directly associated with sales volume/mix and unfavorable productivity of $2 million, partially offset by currency movements of $19 million, decreased materials and services sourcing costs of $2 million and reduced depreciation of $1 million.
Gross margin decreased by $15 million to $110 million, or 20.5% of sales, for the six months ended June 30, 2012 compared to $125 million, or 24.3% of sales, for the six months ended June 30, 2011. The favorable impact on margin of new program launches was more than offset by the impact of production volume declines, primarily in Europe, and a shift in mix towards lower margin products, resulting in a net $13 million decrease in gross margin. Other factors contributing to the decreased margin were currency movements of $4 million and unfavorable productivity of $2 million, partially offset by materials and services sourcing savings of $2 million, customer price increases of $1 million and reduced depreciation of $1 million.
Operational EBITDA decreased by $23 million to $84 million for the six months ended June 30, 2012 from $107 million in the same period of 2011. The favorable impact of new program launches was more than offset by the impact of production volume declines, primarily in Europe, and a shift in mix towards lower margin products, resulting in a net $13 million decrease. Other factors contributing to the decrease were unfavorable productivity of $7 million, currency movements of $5 million and other decreases of $2 million. These decreases were partially offset by decreased materials and services sourcing costs of $2 million, customer price increases of $1 million, and increased equity earnings of non-consolidated affiliates of $1 million.
Global Aftermarket
Sales decreased by $61 million to $1,128 million for the six months ended June 30, 2012, from $1,189 million in the same period of 2011. This decrease was due to currency movements of $37 million, sales volume decreases of $22 million due to sales decreases in Europe and North America, partially offset by sales increases in all other regions, and decreased customer pricing of $2 million.
Cost of products sold decreased by $31 million to $929 million for the six months ended June 30, 2012 compared to $960 million in the same period of 2011. This decrease was due to currency movements of $26 million, materials and services sourcing savings of $17 million and favorable productivity of $4 million, partially offset by a $16 million increase directly associated with sales volume/mix.
Gross margin decreased by $30 million to $199 million, or 17.6% of sales, for the six months ended June 30, 2012 compared to $229 million, or 19.3% of sales, in the same period of 2011. This decrease was due to net unfavorable sales volume/mix, which decreased gross margin by $38 million, currency movements of $11 million and customer price decreases of $2 million, partially offset by improved materials and services sourcing of $17 million and favorable productivity of $4 million.
Operational EBITDA decreased by $18 million to $125 million for the six months ended June 30, 2012 from $143 million in the same period of 2011. This decrease was due to the impact of net unfavorable sales volume/mix of $38 million, currency movements of $9 million and customer pricing decreases of $2 million, partially offset by materials and services sourcing savings of $17 million, favorable productivity of $8 million, increased equity earnings of non-consolidated affiliates of $3 million and other increases of $3 million.
CONF CALL
David Pouliot - Director of Investor Relations
Thanks, Francel. Good morning, and thank you for joining Federal-Mogul's Second Quarter 2012 Earnings Conference Call.
Before we begin, I would like to refer you to the company's Safe Harbor statement shown on this page of the presentation and included in our earnings press release filed this morning. Please consider my reference to the statement as notification of the applicability of these Safe Harbor provisions to today's call and the documents referenced during the call.
Please turn to the agenda slide. We will have speakers today that provide an update on our quarterly results and recent developments in the company. After their comments, we will finish with closing remarks and then open up the call for your Q&A.
Rainer?
Rainer Jueckstock - Chief Executive Officer, Director and Member of Strategy Board
Thank you, David, and good morning to everybody on the phone. Before we go into the second quarter results of Federal-Mogul, I want to introduce Mike Broderick, the CEO of our Aftermarket segment. He finished his first month now with Federal-Mogul, and he's getting familiar with Federal-Mogul, its people, products and structure. Mike, your turn.
Michael T. Broderick - Chief Executive Officer of Global Aftermarket Division
Thank you, Rainer. It's a privilege to be a part of Federal-Mogul, working with our great people and our brands, well, after 16 years in various roles with AutoZone and the past 3 years as the President of CARQUEST. My role as representing the customer has been a good fit so far for the past 5 weeks.
So well, with regards to this conference call, I do look forward in the future of communicating the success of our segmentation of the business and -- which includes our key product lines and of course, driving results.
So with that being said, Rainer?
Rainer Jueckstock - Chief Executive Officer, Director and Member of Strategy Board
Okay. Thank you, Mike. If you turn to Page 5, we announced in March the segmentation of the company in 2 main segments. We are working hard on this process. We move the process towards product line. We want to keep together what needs to be kept together and to have led on strong segments with good play in the market.
By evaluating all of these options and Federal-Mogul's strength, during this process, we have no doubt that -- about our long-term stability and ability to compete. We have strong position in both OE and aftermarket on both powertrain and vehicular components, and we have incredible positions in all major global markets in our industry, combined with a disciplined approach to assess and execute our strategy. Federal-Mogul is a great company to invest even though markets are currently somewhat rough to us and our peers.
If you turn the Page 6, you have an overview about our main product lines and the main brands. We have -- you'd see in the aftermarket, we have leading brands in engine gaskets, chassis, wipers, ignition and friction. This is complementary to our position in the OE market, where, with most of our engine components and our friction business, we have the #1 or #2 position in the world. Our brands and our core product are telling a compelling story in all markets, and we are committed to create, based on these assets, further value.
With having said this, on Page 7, we move into an overview about Federal-Mogul in quarter 2 of this year. We had sales of $1.7 billion, that is around 1% growth in constant dollars. So OE sales was $1.1 billion, was up 3% based especially on the strong demand of our OE customers here in the U.S. The U.S. sales, in particular, was up by 9%. The sales in our operations in the BRIC countries, Brazil, Russia, India, China, and similar, were up 7%. Unfortunately, the European markets, sales declined by 4%, but we see our position still strengthening as the market in Europe move to faster downturns in our fields.
So global aftermarket in quarter 2 was impacted, especially in the U.S., with mild winter. The mild winter requires less replacement for our wiper business -- wiper blades and also, for some of our chassis components, and we see, similar to the OE business, a softer market in Europe, but solid growth in the rest of the world.
Federal-Mogul had to report, in quarter 2, a $59 million net loss. This includes $100 million noncash impairment charge, primarily due to our brake friction business intangible assets. EBITDA was $159 million. That is heavily impacted not only by volume in Europe, but also by negative currency.
And especially the weakness of the European market and its currency is hurting today, but the weak euro, in the long run, will potentially help us to boost export out of Europe and definitely our customers in the OE, car manufacturer, truck manufacturer and engine producers in Europe will benefit from the weak euro currency with a solid position for export markets. We are well positioned as a company to participate on this as we have -- with all major OEMs in Europe who are exporting into China and into the U.S. and into other markets, we have a strong position with them.
SG&A and cash outflow are consistent with prior quarters due to the growth, technology investment and our aftermarket commercial programs. We announced in quarter 2 the acquisition of the BERU spark plug business to strengthen our core ignition portfolio, especially in Europe. We have still a strong liquidity of $1.2 billion. And with this, we are well positioned for upcoming opportunities.
In quarter 2, we had 2 main events additional to the day-to-day business. The first one, and here we are on Page 8, we had to announce -- or we announced the restructuring program to realign our footprint to the global demand on friction and wipers. We implement a $60 million restructuring program, which will involve the downsizing and the closure of several sites, mainly in the U.S.
In order to be able to compete in the long run in both OE and aftermarket, we need to optimize our manufacturing footprint, and we had to rebalance the capacity available in high-cost versus low-cost countries. And we are also to make some adjustments in capacity where overcapacity was placed. With this, we moved capacity, especially out of our brake friction and wiper manufacturing, to low-cost countries, including into a newly acquired friction plant in Mexico.
The program will improve cost competitiveness on friction and wiper products, increase our low-cost plant capacity utilization, and we recorded, out of the $60 million total program, around $7 million already in quarter 2. We anticipate the employment severance capital investment and also, restructuring costs out of this program will be booked over the next 18 months. That's the duration of the program.
The second major event in quarter 2 for Federal-Mogul was the announcement of the acquisition of the spark plug business of BorgWarner under the brand name of BERU. This is a business with approximately $80 million in sales. You see on Page 9 some details about it. So the BERU brand, especially in Europe, for spark plugs is a well-recognized brand both in automotive and industrial ignition technology. We acquired 2 plants in Europe to be able to produce close to our OEMs in this region.
And Federal-Mogul adds capacity to its existing spark plug capacity in the size that we have now, it's $350 million annual capacity. And we are clearly establishing ourselves as the #2 on the global spark plug market. This acquisition provides Federal-Mogul with additional diverse customer relationship in all markets with automotive OE aftermarket, as well as industrial spark plugs, and we are quite positive about this acquisition.
It's a clear element of executing our product-focused strategy. Spark plug is one of the core product line in our portfolio. We are going to invest, first, on not only in this acquisition, but also in technology. And if we have opportunities for market consolidation -- further market consolidation, we will try to pursue them. And definitely, we'll invest, first, in our plant and manufacturing footprint to improve productivity.
With this, I'll hand over to Alan to go more into details of the financial results.
Alan J. Haughie - Chief Financial Officer, Senior Vice President and Member of the Strategy Board
Thanks, Rainer. This morning, I will be discussing Federal-Mogul's second quarter 2012 earnings, which will be filed later today on Form 10-Q with the SEC.
Turning to Slide 11. Sales fell 5% year-over-year to about $1.7 billion. However, negative exchange impacts accounted for about 6 points of the decline. In simple terms, approximately 60% of our sales are outside of the U.S., and there was a general weakening of international currencies against the dollar of about 10%. So in constant dollar terms, sales grew by 1%.
Now this constant dollar growth of 1% reflects OE sales growth of 3%, offset by 3% decline in the aftermarket. And given that 2/3 of our sales are to OEMs, the growth in OE sales slightly offset the decline in aftermarket sales. Furthermore, this 3% growth in OE sales reflects market share gains on top of a global production market that was, for Federal-Mogul, essentially flat. The aftermarket sales decline of 3% comprises a drop of 4% in the U.S. and Canada, a 5% decline in Europe, with a partial offset from 5% growth in the rest of the world sales.
Now some comments on regional sales. In the U.S., we've seen strong OE growth, the result of both vehicle production increases and the market share gains. In the aftermarket, U.S. sales were weaker due to a very mild winter; carryover, largely from 2011 of changes in the mix of products; dampening the overall U.S. sales increase to 2%.
In Europe, we've experienced the second straight quarter of lower vehicle production than the prior year. Increased sales from new program launches in all segments were more than offset by this production volume declines. And combined with a 5% drop in aftermarket sales, as a result of the weaker European economy, overall European sales declined by 5%. The largest proportional growth occurred in the rest of the world, including the BRIC countries, up 15% and 6%, respectively.
Slide 12 provides information on our constant dollar year-over-year OE sales performance compared to year-over-year changes in light and commercial vehicle production by region. At a regional level, it is actually difficult to perfectly correlate vehicle production growth rates to our OE sales given that many of the engines manufactured in one region are destined for vehicles assembled in a different one.
However, given Federal-Mogul's relative presence in these and other known automotive markets, a simple growth rate expectation for Federal-Mogul's OE sales for the second quarter versus last year due to market factors alone would be set essentially flat. So as demonstrated on the slide, our OE sales growth of 3% continues to be at or above the production growth rates of the underlying markets based on the local market data sources.
Now please turn to Slide 13 for more details on our second quarter earnings performance. The sales decrease of $96 million comprises $18 million of constant dollar growth, offset by $140 million of adverse currency movements. Gross margin decreased by $44 million to $255 million, including unfavorable currency impacts of $16 million. Other than exchange, the main margin decline is primarily the result of changes in regional market and product mix. These factors will be discussed in more detail in a moment. However, the result is a year-over-year decline in the gross margin percentage of 1.6 points.
SG&A remained similar to last year, but as a percentage of sales increased by 0.6 point. Restructuring expenses increased by $8 million, the majority of which relates to the recently announced programs in the friction and wipers manufacturing businesses with the closure and downsizing of several high-cost aftermarket manufacturing locations.
And we recorded a noncash impairment charge of $119 million for the quarter, including $100 million associated with our friction product line intangible assets. The friction business continues to be impacted by lower volumes and adverse mix. And in the light of the associated restructuring plan, the company reassessed the value of the related goodwill and intangibles during the quarter, resulting in the impairment.
However, we reported a tax benefit to the period of $29 million compared to our prior year tax charge of $17 million. This improvement primarily relates to the release of uncertain tax positions due to audit settlement in the U.S. of $19 million; valuation allowance releases in Germany, which continues to be profitable, of $11 million; a $5 million tax benefit relating to a special economic zone incentive in Poland; and the credit due to impairment charges of $7 million.
EBITDA, however, decreased by $41 million over the quarter to $159 million. This will be covered in more detail later in the presentation, but largely reflects the decline in gross margin. In the absence of the impairment charges, on which the tax impact is $7 million, net income would have been $53 million for the quarter.
On Slide 14, we have a reconciliation of our profit measure, operational EBITDA to our net income for the period. As just mentioned, we realized EBITDA of $159 million in the second quarter of 2012 compared to $200 million last year. The largest change to the reconciliation of the items previously discussed, namely, the change in income taxes and the restructuring and impairment charges.
On Slide 15, we provide a summary of the second quarter consolidated cash flow. Cash flow from operations and investing activities was a net outflow of $99 million compared to a net inflow of $22 million in the prior year. And this is largely a reflection of the working capital uses in the aftermarket, plus continued capital investment in support of current and future growth. This leaves us with liquidity of $700 million of cash and $0.5 billion in undrawn revolver.
Slide 16 represents the year-over-year roll-forward of our second quarter sales and EBITDA. The light blue bar on the foot of the page walks sales from last year to this year, and the waterfall above it represents the associated EBITDA impacts. Before discussing the components in detail, the essence of our year-over-year EBITDA decline is negative product mix, both in OE and aftermarket, coupled with lower-cost absorption due to lower year-over-year inventory build for the aftermarket.
Specifically, with regard to sales, about $75 million or 4% growth in sales is the new business wins in all segment and in all regions, with slightly higher proportional gains in Europe. As mentioned previously, the economic conditions in Europe played a major role in the year-over-year sales evolution, with lower production of both light and commercial vehicles, as well as the generally weak economic climate impacting the aftermarket.
In North America, aftermarket demand was impacted by the mild winter, and price continues to be a significant driver of consumer spending decisions. These adverse volume impacts were partly offset by increases in OE volumes in Asia and North America, resulting in a net sales volume decrease of $57 million. And the remainder of the sales movement is primarily exchange of $112 million.
Turning to EBITDA. The impact of the market share gains was an increase in EBITDA of $18 million, a conversion on the increased sales of 24%. However, EBITDA decreased by $64 million, with almost 3/4 of this change relating to adverse mix impacts, with the remainder of the decrease, about $16 million, being the direct impact of lower volumes. So similar to the first quarter of this year, the mix impact of about $48 million can roughly be divided into 3 equal pieces.
Firstly, within the OE business, there was a market-driven geographical mix shift away from the more technically demanding and higher-margin European platforms, including a shift away from light vehicle diesel towards gasoline, a trend exacerbated by the fact that gasoline engines are dominant in the U.S. Secondly, the U.S. aftermarket consumers continue to favor lower-priced products. And thirdly, during the second quarter 2011, we built around $60 million more of aftermarket inventory than we have done this year. And this change is reflected in lower comparative year-over-year cost absorption.
Material costs have improved significantly year-over-year, resulting in an increase in EBITDA. That's a pricing of $21 million. And the negative impact of exchange on EBITDA was $11 million, bringing EBITDA to $159 million.
Page 17 introduces our review of business segment performance for the second quarter, focusing on the comparison and trends in sales and operational EBITDA.
Turning now to Slide 18. The format used for the business segment discussions will be to cover the second quarter sales performance on the left side of the page, with the right side of the page covering the second quarter EBITDA performance compared to last year.
The 3 OE segments show similar things, with light and commercial vehicle production in Europe being lower and increased vehicle production in the U.S. and the rest of the world, with the greatest proportional growth in regions outside of Europe and North America. All of these segments have been hit by the adverse mix to some degree.
Starting with powertrain energy. The significant items in the quarterly comparison include a negative impact on sales due to exchange of $47 million or 8%; a 3% constant dollar sales increase, with market share gains in all regions; and market volume increases in all regions except Europe. EBITDA, however, decreased by $12 million, $7 million of which related to negative exchange. And although we benefited from lower material costs, this impact was more than offset by adverse price and mix. These factors resulted in a decrease in EBITDA as a percent of sales of 1.4 points.
The next slide, 19, provides an overview of our Powertrain Sealing and Bearings segment. The significant items in the second quarter comparison include a negative impact on sales due to exchange of $22 million or 6%; flat constant dollar sales, with increases from market share gains experienced in all regions sufficient to offset the impact of lower vehicle production in Europe. EBITDA was flat year-over-year, with material cost savings and customer price increases offsetting the adverse mix. And this resulted in an increase in EBITDA as a percent of sales by 0.7 point.
The next slide, 20, provides an overview of our Vehicle Safety and Protection segment. The main items in the second quarter comparison include a negative impact on sales due to exchange of $17 million or 7% and a 9% constant dollar sales increase. This business segment had market share gains across all regions, with the U.S. and Canada up 20% due to significant new programs in friction and systems protection. And the rest of the world was up 26%. However, in Europe, volume declines more than offset new business wins resulting in a 7% constant dollar decline in the region. EBITDA fell by $16 million, including $3 million in negative exchange.
Now VSP is the segment most impacted by the lost absorption from reduced production for the aftermarket. And this contributed approximately $12 million of the EBITDA decline, resulting in a 6-point decline in EBITDA percentage. But this is the result of much improved inventory management compared to last year, as will be shown in the first half cash flow.
And finally, the Global Aftermarket segment on Page 21. The negative impact on sales due to exchange is $28 million or 4%. In constant dollars, sales fell 3%, with a 4% decrease in the U.S. and Canada and a 5% decrease in Europe due largely to the economic climate. However, our aftermarket product portfolio continues to expand in the rest of the world, resulting in a 5% constant dollar increase and representing 15% of total sales for the period.
EBITDA decreased by $14 million to $60 million, with $4 million of the decline relating to negative exchange. Furthermore, our continued outsourcing strategy to reduce material costs increased EBITDA by $8 million. Productivity improvements added a further $5 million to EBITDA. But these factors only partially offset the adverse mix and volume impacts discussed previously of $23 million.
Now please turn to Slide 22 for more details on our first half earnings performance. The year-over-year sales decline of $56 million comprises $159 million of adverse currency partly offset by $103 million or 3% of growth in constant dollars. And this includes a constant dollar increase of 6% in OE sales and a 2% decline in aftermarket sales. The gross margin decline of $47 million includes $24 million due to negative exchange. And as with the second quarter, the principal cause of the remaining margin decline is regional market and product mix.
SG&A expenses increased by $13 million, including $6 million of increased U.S. pension expense and about $4 million of increased U.S. medical expenses. The increase in restructuring reflects the charge taken in Q2 on the recently announced programs in the friction and wipers business, as well as the program implemented in the aftermarket in the prior quarter to realign our distribution and sales force in North America.
The impairment charges for the first half reflect the charge taken in Q2. This resulted in a net loss year-to-date of $26 million. EBITDA declined by $51 million to $327 million, and $20 million of this change relates to unfavorable exchange.
On Slide 23, we have a reconciliation of our profit measure, operational EBITDA to our net income for the period. As just mentioned, we realized EBITDA of $327 million in the first half of this year compared to $378 million last year. The decrease in income tax expense and the impairment charge largely reflects the second quarter items previously discussed.
And finally, on Slide 24, we provide a summary of the first half consolidated cash flow. Cash flow from operations and investing activities was a net outflow of $211 million compared to a net outflow of $87 million in the prior year. Similar to the quarterly analysis, this is mostly due to the working capital uses in the aftermarket, combined with continued capital investment in support of current and future growth.
However, it should be noted that the year-over-year improvement in inventory build of $100 million, and that is a $40 million build this year compared to the $148 million build last year, is entirely in the aftermarket. And it is this significant reduction in the inventory build that is the source of about $30 million last year via absorption in gross margin for the first 6 months of the year.
And this leaves us with liquidity of $700 million in cash and $0.5 billion in undrawn revolver.
That concludes our presentation. Now operator, I believe we are ready to open the line for Q&A. Could you please give the instructions?
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Fund Letters
