UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION


Washington,
DC 20549





FORM
10-Q





R
            QUARTERLY REPORT PURSUANT TO
      SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934





For
the quarterly period ended June 30, 2010





 ̈
            TRANSITION REPORT PURSUANT TO
      SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934





For
the transition period from ____________ to ____________





Commission
File Number: 333-107219





UNITED
COMPONENTS, INC.


(Exact
Name of Registrant as Specified in Its Charter)





Delaware(State
      or Other Jurisdiction of
              04-3759857Incorporation
      or Organization)
              (I.R.S.
      Employer Identification No.)





14601
      Highway 41 NorthEvansville,
      Indiana
              47725(Address
      of Principal Executive Offices)
              (Zip
      Code)





(812)
867-4156


(Registrant’s
Telephone Number, Including Area Code)





Indicate
by check mark whether the registrant: (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes  ̈ No R (Note: As a
voluntary filer not subject to the filing requirements, the registrant has filed
all reports under Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months.)





Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes  ̈ No  ̈





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check one):





Large
      accelerated filer  ̈
            Accelerated
      filer  ̈
            Non-accelerated
      filer R
            Smaller
      Reporting Company  ̈(Do
      not check if a smaller reporting company)





Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes  ̈ No R





The
registrant had 1,000 shares of its $0.01 par value common stock outstanding as
of August 11, 2010.















United
Components, Inc.





Index





Part
      I FINANCIAL INFORMATIONItem
      1.
                        Consolidated
      Financial Statements (unaudited)Condensed
      consolidated balance sheets — June 30, 2010 and December 31,
      2009
                        3Condensed
      consolidated income statements — Three and six months ended June 30, 2010
      and 2009
                        4Condensed
      consolidated statements of cash flows — Six months ended June 30, 2010 and
      2009
                        5Condensed
      consolidated statements of changes in equity — Six months ended June 30,
      2010 and 2009
                        6Notes
      to condensed consolidated financial statements
                        7Item
      2.
                        Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                        28Item
      3.
                        Quantitative
      and Qualitative Disclosures About Market Risk
                        47Item
      4.
                        Controls
      and Procedures
                        48Part
      II OTHER INFORMATIONItem
      1.
                        Legal
      Proceedings
                        50Item
      1A.
                        Risk
      Factors
                        50Item
      2.
                        Unregistered
      Sales of Equity Securities and Use of Proceeds
                        62Item
      3.
                        Default
      Upon Senior Securities
                        62Item
      4.
                        Reserved
                        62Item
      5.
                        Other
      Information
                        62Item
      6.
                        Exhibits
                        62Signatures
                        63Exhibits




2




PART
I


FINANCIAL
INFORMATION





Item
1. Financial Statements


United
Components, Inc.





Condensed
Consolidated Balance Sheets


(in
thousands)





June 30,
                            2010
                          
                          
                          December 31,
                            2009(unaudited)
                          
                          
                          (audited)AssetsCurrent
      assetsCash
      and cash equivalents
                          
                          $
                          174,157
                          
                          
                          $
                          131,913Accounts
      receivable, net
                          
                          
                          257,517
                          
                          
                          
                          261,210Inventories,
      net
                          
                          
                          134,234
                          
                          
                          
                          133,058Deferred
      tax assets
                          
                          
                          32,711
                          
                          
                          
                          30,714Other
      current assets
                          
                          
                          16,696
                          
                          
                          
                          23,499Total
      current assets
                          
                          
                          615,315
                          
                          
                          
                          580,394Property,
      plant and equipment, net
                          
                          
                          140,034
                          
                          
                          
                          149,753Goodwill
                          
                          
                          241,461
                          
                          
                          
                          241,461Other
      intangible assets, net
                          
                          
                          65,899
                          
                          
                          
                          68,030Deferred
      financing costs, net
                          
                          
                          1,476
                          
                          
                          
                          1,843Restricted
      cash
                          
                          
                          16,790
                          
                          
                          
                          9,400Other
      long-term assets
                          
                          
                          7,061
                          
                          
                          
                          6,304Total
      assets
                          
                          $
                          1,088,036
                          
                          
                          $
                          1,057,185Liabilities
      and equityCurrent
      liabilitiesAccounts
      payable
                          
                          $
                          113,055
                          
                          
                          $
                          111,898Short-term
      borrowings
                          
                          
                          6,184
                          
                          
                          
                          3,460Current
      maturities of long-term debt
                          
                          
                          232
                          
                          
                          
                          17,925Accrued
      expenses and other current liabilities
                          
                          
                          122,214
                          
                          
                          
                          106,981Total
      current liabilities
                          
                          
                          241,685
                          
                          
                          
                          240,264Long-term
      debt, less current maturities
                          
                          
                          401,049
                          
                          
                          
                          400,853Pension
      and other postretirement liabilities
                          
                          
                          71,594
                          
                          
                          
                          70,802Deferred
      tax liabilities
                          
                          
                          8,603
                          
                          
                          
                          8,546Due
      to UCI International
                          
                          
                          35,653
                          
                          
                          
                          30,105Other
      long-term liabilities
                          
                          
                          5,740
                          
                          
                          
                          6,672Total
      liabilities
                          
                          
                          764,324
                          
                          
                          
                          757,242Contingencies
      — Note JEquityUnited
      Components, Inc. shareholder’s equityCommon
      stock
                          
                          
                          —
                          
                          
                          
                          —Additional
      paid in capital
                          
                          
                          278,985
                          
                          
                          
                          278,756Retained
      earnings
                          
                          
                          78,515
                          
                          
                          
                          51,879Accumulated
      other comprehensive loss
                          
                          
                          (33,788
                          )
                          
                          
                          (32,502
                          )Total
      United Components, Inc. shareholder’s equity
                          
                          
                          323,712
                          
                          
                          
                          298,133Noncontrolling
      interest — Note N
                          
                          
                          —
                          
                          
                          
                          1,810Total
      equity
                          
                          
                          323,712
                          
                          
                          
                          299,943Total
      liabilities and equity
                          
                          $
                          1,088,036
                          
                          
                          $
                          1,057,185





The
accompanying notes are an integral part of these statements.





3





United
Components, Inc.




Condensed Consolidated Income
Statements(unaudited)


(in
thousands)





Three Months Ended June 30,
                  
                  
                  Six Months Ended June 30,2010
                  
                  
                  2009
                  
                  
                  2010
                  
                  
                  2009Net
      sales
                  
                  $
                  236,198
                  
                  
                  $
                  217,422
                  
                  
                  $
                  466,502
                  
                  
                  $
                  437,284Cost
      of sales
                  
                  
                  176,228
                  
                  
                  
                  169,698
                  
                  
                  
                  349,304
                  
                  
                  
                  350,140Gross
      profit
                  
                  
                  59,970
                  
                  
                  
                  47,724
                  
                  
                  
                  117,198
                  
                  
                  
                  87,144Operating
      (expense) incomeSelling
      and warehousing
                  
                  
                  (15,077
                  )
                  
                  
                  (14,086
                  )
                  
                  
                  (29,372
                  )
                  
                  
                  (28,384
                  )General
      and administrative
                  
                  
                  (10,789
                  )
                  
                  
                  (11,019
                  )
                  
                  
                  (21,409
                  )
                  
                  
                  (22,071
                  )Amortization
      of acquired intangible assets
                  
                  
                  (1,336
                  )
                  
                  
                  (1,481
                  )
                  
                  
                  (2,671
                  )
                  
                  
                  (2,961
                  )Restructuring
      gains (costs), net (Note B)
                  
                  
                  (344
                  )
                  
                  
                  598
                  
                  
                  
                  (2,380
                  )
                  
                  
                  393Patent
      litigation costs (Note J)
                  
                  
                  (74
                  )
                  
                  
                  —
                  
                  
                  
                  (1,038
                  )
                  
                  
                  —Operating
      income
                  
                  
                  32,350
                  
                  
                  
                  21,736
                  
                  
                  
                  60,328
                  
                  
                  
                  34,121Other
      expense
                    Interest
      expense, net
                  
                  
                  (6,817
                  )
                  
                  
                  (7,793
                  )
                  
                  
                  (13,664
                  )
                  
                  
                  (15,792
                  )Management
      fee expense
                  
                  
                  (500
                  )
                  
                  
                  (500
                  )
                  
                  
                  (1,000
                  )
                  
                  
                  (1,000
                  )Miscellaneous,
      net
                  
                  
                  (1,352
                  )
                  
                  
                  (1,669
                  )
                  
                  
                  (2,303
                  )
                  
                  
                  (3,154
                  )Income
      before income taxes
                  
                  
                  23,681
                  
                  
                  
                  11,774
                  
                  
                  
                  43,361
                  
                  
                  
                  14,175Income
      tax expense
                  
                  
                  (9,380
                  )
                  
                  
                  (4,361
                  )
                  
                  
                  (16,762
                  )
                  
                  
                  (5,496
                  )Net
      income
                  
                  
                  14,301
                  
                  
                  
                  7,413
                  
                  
                  
                  26,599
                  
                  
                  
                  8,679Less:
      Loss attributable to noncontrolling interest
                  
                  
                  (2
                  )
                  
                  
                  (75
                  )
                  
                  
                  (37
                  )
                  
                  
                  (379
                  )Net
      income attributable to United Components, Inc.
                  
                  $
                  14,303
                  
                  
                  $
                  7,488
                  
                  
                  $
                  26,636
                  
                  
                  $
                  9,058





The
accompanying notes are an integral part of these statements.





4




United
Components, Inc.





Condensed Consolidated Statements of
Cash Flows(unaudited)


(in
thousands)





Six Months Ended June 30,2010
                
                
                2009Cash
      flows from operating activitiesNet
      income attributable to United Components, Inc.
                
                $
                26,636
                
                
                $
                9,058Adjustments
      to reconcile net income to net cash provided by operating
      activities:Depreciation
      and amortization of other intangible assets
                
                
                17,704
                
                
                
                18,805Amortization
      of deferred financing costs and debt discount
                
                
                683
                
                
                
                801Deferred
      income taxes
                
                
                (2,354
                )
                
                
                (199
                )Other
      non-cash, net
                
                
                2,361
                
                
                
                (1,246
                )Changes
      in operating assets and liabilities:Accounts
      receivable
                
                
                1,863
                
                
                
                12,510Inventories
                
                
                (4,525
                )
                
                
                22,395Other
      current assets
                
                
                7,281
                
                
                
                126Accounts
      payable
                
                
                3,857
                
                
                
                617Accrued
      expenses and other current liabilities
                
                
                15,926
                
                
                
                11,182Other
      long-term assets
                
                
                812
                
                
                
                (165
                )Due
      to UCI International
                
                
                5,548
                
                
                
                2,600Other
      long-term liabilities
                
                
                766
                
                
                
                1,575Net
      cash provided by operating activities
                
                
                76,558
                
                
                
                78,059Cash
      flows from investing activitiesCapital
      expenditures
                
                
                (11,741
                )
                
                
                (7,530
                )Proceeds
      from sale of property, plant and equipment
                
                
                114
                
                
                
                2,436Proceeds
      from sale of joint venture interest (net of transaction costs and cash
      sold)
                
                
                272
                
                
                
                —Increase
      in restricted cash
                
                
                (7,390
                )
                
                
                (9,400
                )Net
      cash used in investing activities
                
                
                (18,745
                )
                
                
                (14,494
                )Cash
      flows from financing activitiesIssuances
      of debt
                
                
                9,619
                
                
                
                6,543Debt
      repayments
                
                
                (24,708
                )
                
                
                (26,177
                )Net
      cash used in financing activities
                
                
                (15,089
                )
                
                
                (19,634
                )Effect
      of currency exchange rate changes on cash
                
                
                (480
                )
                
                
                102Net
      increase (decrease) in cash and cash equivalents
                
                
                42,244
                
                
                
                44,033Cash
      and cash equivalents at beginning of year
                
                
                131,913
                
                
                
                46,612Cash
      and cash equivalents at end of period
                
                $
                174,157
                
                
                $
                90,645





The
accompanying notes are an integral part of these statements.





5




United
Components, Inc.





Condensed Consolidated Statements of
Changes in Equity(unaudited)


(in
thousands)




United Components, Inc. Shareholder’s EquityCommon
                                      Stock
                                    
                                    
                                    Additional
                                      Paid In
                                      Capital
                                    
                                    
                                    Retained
                                      Earnings
                                    
                                    
                                    Accumulated
                                      Other
                                      Comprehensive
                                      Income (Loss)
                                    
                                    
                                    Noncontrolling
                                      Interest
                                    
                                    
                                    Total Equity
                                    
                                    
                                    Comprehensive
                                      IncomeBalance
      at January 1, 2009
                                    
                                    $
                                    —
                                    
                                    
                                    $
                                    278,430
                                    
                                    
                                    $
                                    21,243
                                    
                                    
                                    $
                                    (39,600
                                    )
                                    
                                    $
                                    2,490
                                    
                                    
                                    $
                                    262,563Recognition
      of stock based compensation expense
                                    
                                    
                                    
                                    
                                    
                                    
                                    220
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    220Comprehensive
      incomeNet
      income (loss)
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    9,058
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    (379
                                    )
                                    
                                    
                                    8,679
                                    
                                    
                                    $
                                    9,058Other
      comprehensive incomeForeign
      currency adjustment (after $111 of income tax cost)
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    703
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    703
                                    
                                    
                                    
                                    703Pension
      liability (after $1,505 of income tax cost)
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    2,434
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    2,434
                                    
                                    
                                    
                                    2,434Total
      comprehensive income
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    $
                                    12,195Balance
      at June 30, 2009
                                    
                                    $
                                    —
                                    
                                    
                                    $
                                    278,650
                                    
                                    
                                    $
                                    30,301
                                    
                                    
                                    $
                                    (36,463
                                    )
                                    
                                    $
                                    2,111
                                    
                                    
                                    $
                                    274,599Balance
      at January 1, 2010
                                    
                                    $
                                    —
                                    
                                    
                                    $
                                    278,756
                                    
                                    
                                    $
                                    51,879
                                    
                                    
                                    $
                                    (32,502
                                    )
                                    
                                    $
                                    1,810
                                    
                                    
                                    $
                                    299,943Recognition
      of stock based compensation expense
                                    
                                    
                                    
                                    
                                    
                                    
                                    229
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    229Sale
      of joint venture
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    (1,773
                                    )
                                    
                                    
                                    (1,773
                                    )Comprehensive
      income
                                      Net
      income (loss)
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    26,636
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    (37
                                    )
                                    
                                    
                                    26,599
                                    
                                    
                                    $
                                    26,636Other
      comprehensive incomeForeign
      currency adjustment (after $19 of income tax benefit)
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    (1,666
                                    )
                                    
                                    
                                    
                                    
                                    
                                    
                                    (1,666
                                    )
                                    
                                    
                                    (1,666
                                    )Pension
      liability (after $234 of income tax cost)
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    380
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    380
                                    
                                    
                                    
                                    380Total
      comprehensive income
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    $
                                    25,350Balance
      at June 30, 2010
                                    
                                    $
                                    —
                                    
                                    
                                    $
                                    278,985
                                    
                                    
                                    $
                                    78,515
                                    
                                    
                                    $
                                    (33,788
                                    )
                                    
                                    $
                                    —
                                    
                                    
                                    $
                                    323,712




The
accompanying notes are an integral part of these statements.





6





United
Components, Inc.


Notes
to Condensed Consolidated Financial Statements (unaudited)





NOTE A — GENERAL AND BASIS OF
FINANCIAL STATEMENT PRESENTATION





General





United
Components, Inc. is an indirect wholly-owned subsidiary of UCI International,
Inc. (“UCI International”), formerly known as UCI Holdco, Inc. UCI International
and United Components, Inc. are corporations formed at the direction of The
Carlyle Group. At June 30, 2010, affiliates of The Carlyle Group owned 90.8% of
UCI International’s common stock while the remainder was owned by members of
United Components, Inc.’s board of directors and certain current and former
employees. As of June 30, 2010, UCI International had $339.2 million of Floating
Rate Senior PIK Notes (the “UCI International Notes”) outstanding. While United
Components, Inc. has no direct obligation under the UCI International Notes,
United Components, Inc. is the sole source of cash generation for UCI
International. The UCI International Notes do not appear on United Components,
Inc.’s balance sheets, and the related interest expense is not included in
United Components, Inc.’s income statements. See Note I.





United
Components, Inc. operates in one business segment through its subsidiaries.
United Components, Inc. manufactures and distributes vehicle parts, primarily
servicing the vehicle replacement parts market in North America and
Europe.





Basis
of Presentation





The
accompanying unaudited condensed consolidated financial statements include the
accounts of United Components, Inc., its wholly-owned subsidiaries and a 51%
owned joint venture (see Note N). All significant intercompany accounts and
transactions have been eliminated. In these notes to the financial statements,
the term “UCI” refers to United Components, Inc. and its subsidiaries. The term
“United Components” refers to United Components, Inc. without its
subsidiaries.





The
accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by accounting principles generally accepted in the United States (“U.S.
GAAP”) for complete financial statements.





The
December 31, 2009 consolidated balance sheet has been derived from the audited
financial statements included in UCI’s annual report on Form 10-K for the year
ended December 31, 2009. The financial statements at June 30, 2010 and for the
three and six months ended June 30, 2010 and 2009 are unaudited. In the opinion
of UCI management, these financial statements include all adjustments necessary
for a fair presentation of the financial position and results of operations for
such periods.





The
preparation of financial statements in conformity with U.S. GAAP requires
management to make estimates and assumptions in determining the reported amounts
of assets and liabilities at the date of the financial statements and the
reported amounts of sales and expenses during the reporting period. The
estimates and assumptions include estimates of the collectability of accounts
receivable and the realizability of inventory, goodwill and other intangible
assets. They also include estimates of cost accruals, environmental liabilities,
warranty and other product returns, insurance reserves, income taxes, pensions
and other postretirement benefits and other factors. Management has exercised
reasonableness in deriving these estimates; however, actual results could differ
from these estimates.





These
financial statements should be read in conjunction with the financial statements
and notes thereto included in UCI’s annual report on Form 10-K for the year
ended December 31, 2009.





7





United
Components, Inc.


Notes
to Condensed Consolidated Financial Statements (unaudited)




Operating
results for the three and six months ended June 30, 2010 are not necessarily
indicative of the results that may be expected for the year ending December 31,
2010.





Income
Statement Reclassification





Certain
engineering expenses totaling $0.5 million and $1.4 million for the three and
six months ended June 30, 2009 were presented in general and administrative
expenses. These engineering expenses have been reclassified to cost of sales in
the condensed consolidated income statements for the three and six months ended
June 30, 2009 in order to conform to the current year presentation.





Recently
Adopted Accounting Guidance





On
January 1, 2010, UCI adopted changes issued by the Financial Accounting
Standards Board (“FASB”) to accounting for variable interest entities. These
changes require an enterprise to perform an analysis to determine whether the
enterprise’s variable interest or interests give it a controlling financial
interest in a variable interest entity; to require ongoing reassessments of
whether an enterprise is the primary beneficiary of a variable interest entity;
to eliminate the solely quantitative approach previously required for
determining the primary beneficiary of a variable interest entity; to add an
additional reconsideration event for determining whether an entity is a variable
interest entity when any changes in facts and circumstances occur such that
holders of the equity investment at risk, as a group, lose the power from voting
rights or similar rights of those investments to direct the activities of the
entity that most significantly impact the entity’s economic performance; and to
require enhanced disclosures that will provide users of financial statements
with more transparent information about an enterprise’s involvement in a
variable interest entity. The adoption of these changes had no impact on UCI’s
financial statements.





Effective
January 1, 2010, UCI adopted changes issued by the FASB on January 6,
2010, for a scope clarification to the FASB’s previously-issued guidance on
accounting for noncontrolling interests in consolidated financial statements.
These changes clarify the accounting and reporting guidance for noncontrolling
interests and changes in ownership interests of a consolidated subsidiary. An
entity is required to deconsolidate a subsidiary when the entity ceases to have
a controlling financial interest in the subsidiary. Upon deconsolidation of a
subsidiary, an entity recognizes a gain or loss on the transaction and measures
any retained investment in the subsidiary at fair value. The gain or loss
includes any gain or loss associated with the difference between the fair value
of the retained investment in the subsidiary and its carrying amount at the date
the subsidiary is deconsolidated. In contrast, an entity is required to account
for a decrease in its ownership interest of a subsidiary that does not result in
a change of control of the subsidiary as an equity transaction.  See
Note N for a discussion of the disposition of UCI’s 51% owned joint
venture.





NOTE B — RESTRUCTURING GAINS
(COSTS)





UCI
incurred costs related to the company’s capacity consolidation activities which
are reported in the income statement in “Restructuring gains
(costs).”  The components of restructuring gains (costs) are as
follows (in millions):


Three Months Ended June 30,
                
                
                Six Months Ended June 30,2010
                
                
                2009
                
                
                2010
                
                
                2009Costs
      to maintain land and building held for sale
                
                $
                —
                
                
                $
                —
                
                
                $
                (0.2
                )
                
                $
                (0.2
                )Curtailment
      and settlement losses
                
                
                (0.2
                )
                
                
                (0.1
                )
                
                
                (0.5
                )
                
                
                (0.1
                )Severance
      costs
                
                
                (0.1
                )
                
                
                —
                
                
                
                (0.1
                )
                
                
                —Disposition
      of investment in joint venture
                
                
                —
                
                
                
                —
                
                
                
                (1.6
                )
                
                
                —Gain
      on sale of building, net of moving costs
                
                
                —
                
                
                
                1.4
                
                
                
                —
                
                
                
                1.4Asset
      impairments
                
                
                —
                
                
                
                (0.7
                )
                
                
                —
                
                
                
                (0.7
                )$
                (0.3
                )
                
                $
                0.6
                
                
                $
                (2.4
                )
                
                $
                0.4




8





United
Components, Inc.


Notes
to Condensed Consolidated Financial Statements (unaudited)




2010
Activities





In the
three and six months ended June 30, 2010, UCI recorded pension curtailment and
settlement losses and other severance costs related to headcount reductions at
its Mexican subsidiaries.  Additionally, UCI recorded a non-cash
charge of $1.6 million related to the sale of the company’s interest in a 51%
owned joint venture in the six months ended June 30, 2010 (see Note
N).





2009
Capacity Consolidation and European Realignment Actions





In the
three months ended June 30, 2009, UCI implemented restructuring plans to further
align UCI’s cost structure with customers’ spending and current market
conditions. The restructuring plans targeted excess assembly and aluminum
casting capacity and restructuring costs of the plan included workforce
reductions, facility closures, consolidations and realignments.





UCI idled
a Mexican aluminum casting operation in the three months ended June 30, 2009 and
consolidated the capacity into it’s Chinese casting operation. During that
period, UCI also relocated a small amount of filter manufacturing capacity which
resulted in the idling of certain equipment with no alternative use. In
connection with these capacity consolidations, UCI recorded asset impairments of
$0.7 million associated with this capacity consolidation and incurred post
employment benefit plans curtailment costs of $0.1 million.





In order
to accommodate expected growth in Europe, UCI’s Spanish distribution operation
was relocated to a new leased facility resulting in the idling and subsequent
sale of an owned facility. UCI recognized a gain of $1.5 million on the sale of
this facility in the three months ended June 30, 2009. UCI incurred other costs
of $0.1 million associated with the relocation of the facility.





NOTE C — SALES OF
RECEIVABLES





UCI has
factoring agreements arranged by four customers with eight
banks.  Under these agreements, UCI has the ability to sell undivided
interests in certain of its receivables to the banks which in turn have the
right to sell an undivided interest to a financial institution or other third
party. UCI enters into these relationships at its discretion as part of its
overall customer agreements and cash management activities. Pursuant to these
relationships, UCI sold $79.7 million and $62.9 million of receivables during
the three months ended June 30, 2010 and 2009, respectively, and $135.8 million
and $122.8 million for the six months ended June 30, 2010 and 2009,
respectively.





If
receivables had not been factored, $128.6 million and $121.5 million of
additional receivables would have been outstanding at June 30, 2010 and December
31, 2009, respectively. UCI retained no rights or interest, and has no
obligations, with respect to the sold receivables. UCI does not service the
receivables after the sales.





The sales
of receivables were accounted for as sales and were removed from the balance
sheet at the time of the sales. The costs of the sales were discounts deducted
by the factoring companies. These costs were $1.4 million and $1.7 million in
the three months ended June 30, 2010 and 2009, respectively, and $2.3 million
and $3.2 million for the six months ended June 30, 2010 and 2009, respectively.
These costs are recorded in the income statements in “Miscellaneous,
net.”





9





United
Components, Inc.


Notes
to Condensed Consolidated Financial Statements (unaudited)




NOTE D —
INVENTORIES




The
components of inventory are as follows (in millions):





June 30,
                    2010
                  
                  
                  December 31,
                    2009Raw
      materials
                  
                  $
                  52.6
                  
                  
                  $
                  47.5Work
      in process
                  
                  
                  25.0
                  
                  
                  
                  27.6Finished
      products
                  
                  
                  72.9
                  
                  
                  
                  73.1Valuation
      reserves
                  
                  
                  (16.3
                  )
                  
                  
                  (15.1
                  )$
                  134.2
                  
                  
                  $
                  133.1




NOTE E — RESTRICTED
CASH





During
the six months ended June 30, 2010, UCI posted $7.4 million of cash to
collateralize a letter of credit required to appeal the judgment in the patent
litigation discussed in more detail in Note J.  During the six months
ended June 30, 2009, UCI also posted $9.4 million of cash to collateralize a
letter of credit required by its workers compensation insurance
carrier.  This cash totaling $16.8 million is recorded as “Restricted
cash” as a component of long-term assets on UCI’s balance sheet at June 30,
2010. This cash is invested in highly liquid, high quality government securities
and is not available for general operating purposes as long as the letters of
credit remain outstanding or until alternative collateral is
posted.





NOTE F — ACCRUED EXPENSES AND OTHER
CURRENT LIABILITIES





“Accrued
expenses and other current liabilities” consists of the following (in
millions):





June 30,
                      2010
                    
                    
                    December 31,
                      2009Salaries
      and wages
                    
                    $
                    3.9
                    
                    
                    $
                    3.1Bonuses
      and profit sharing
                    
                    
                    4.4
                    
                    
                    
                    6.1Vacation
      pay
                    
                    
                    4.5
                    
                    
                    
                    4.4Product
      returns
                    
                    
                    48.4
                    
                    
                    
                    42.1Rebates,
      credits and discounts due customers
                    
                    
                    15.3
                    
                    
                    
                    13.6Insurance
                    
                    
                    10.1
                    
                    
                    
                    9.8Taxes
      payable
                    
                    
                    12.8
                    
                    
                    
                    7.4Interest
                    
                    
                    1.5
                    
                    
                    
                    1.2Other
                    
                    
                    21.3
                    
                    
                    
                    19.3$
                    122.2
                    
                    
                    $
                    107.0





NOTE G — PRODUCT RETURNS
LIABILITY





The
liability for product returns is included in “Accrued expenses and other current
liabilities.” This liability includes accruals for estimated parts returned
under warranty and for parts returned because of customer excess quantities. UCI
provides warranties for its products’ performance and warranty periods vary by
part. In addition to returns under warranty, UCI allows its customers to return
quantities of parts that the customer determines to be in excess of its current
needs. Customer rights to return excess quantities vary by customer and by
product category. Generally, these returns are contractually limited to 3% to 5%
of the customer’s purchases in the preceding year. While UCI does not have a
contractual obligation to accept excess quantity returns from all customers,
common practice for UCI and the industry is to accept periodic returns of excess
quantities from on-going customers. If a customer elects to cease purchasing
from UCI and change to another vendor, it is industry practice for the new
vendor, and not UCI, to accept any inventory returns resulting from the vendor
change and any subsequent inventory returns.  UCI routinely monitors
returns data and adjusts estimates based on this data.





10





United
Components, Inc.


Notes
to Condensed Consolidated Financial Statements (unaudited)





Changes
in UCI’s product returns accrual were as follows (in millions):





Six Months Ended June 30,2010
                    
                    
                    2009Beginning
      of year
                    
                    $
                    42.1
                    
                    
                    $
                    32.0Cost
      of unsalvageable parts
                    
                    
                    (24.5
                    )
                    
                    
                    (24.5
                    )Reductions
      to sales
                    
                    
                    30.8
                    
                    
                    
                    27.2End
      of period
                    
                    $
                    48.4
                    
                    
                    $
                    34.7





NOTE H — PENSION





The
following are the components of net periodic pension expense (in
millions):





Three Months Ended June 30,
                
                
                Six Months Ended June 30,2010
                
                
                2009
                
                
                2010
                
                
                2009Service
      cost
                
                $
                1.1
                
                
                $
                1.1
                
                
                $
                2.2
                
                
                $
                2.2Interest
      cost
                
                
                3.4
                
                
                
                3.3
                
                
                
                6.7
                
                
                
                6.6Expected
      return on plan assets
                
                
                (3.7
                )
                
                
                (3.6
                )
                
                
                (7.3
                )
                
                
                (7.3
                )Amortization
      of prior service cost and unrecognized loss
                
                
                0.2
                
                
                
                0.1
                
                
                
                0.4
                
                
                
                0.3Curtailment
      and settlement losses
                
                
                0.2
                
                
                
                0.2
                
                
                
                0.5
                
                
                
                0.2$
                1.2
                
                
                $
                1.1
                
                
                $
                2.5
                
                
                $
                2.0





The
curtailment and settlement losses shown in the above table were incurred as a
result of headcount reductions that were made in connection with the activities
discussed in Note B.





NOTE I — DEBT





UCI’s
debt is summarized as follows (in millions):





June 30,
                    2010
                  
                  
                  December 31,
                    2009Short-term
      borrowings
                  
                  $
                  6.2
                  
                  
                  $
                  3.5Capital
      lease obligations
                  
                  
                  0.8
                  
                  
                  
                  0.9Term
      loan
                  
                  
                  172.3
                  
                  
                  
                  190.0Senior
      subordinated notes
                  
                  
                  230.0
                  
                  
                  
                  230.0Unamortized
      debt issuance costs
                  
                  
                  (1.9
                  )
                  
                  
                  (2.2
                  )407.4
                  
                  
                  
                  422.2Less:Short-term
      borrowings
                  
                  
                  6.2
                  
                  
                  
                  3.5Term
      loan
                  
                  
                  —
                  
                  
                  
                  17.7Current
      maturities
                  
                  
                  0.2
                  
                  
                  
                  0.2Long-term
      debt
                  
                  $
                  401.0
                  
                  
                  $
                  400.8





UCI’s
balance sheet does not include the UCI International Notes. While UCI has no
direct obligation under the UCI International Notes, UCI is the sole source of
cash generation for UCI International. Interest on the UCI International Notes
is payable “in kind” through December 2011 and therefore, UCI International has
no cash interest payments until after that date.





11





United
Components, Inc.


Notes
to Condensed Consolidated Financial Statements (unaudited)





Senior
credit facility — The senior credit facility includes a term loan
pursuant to which, as a result of previous prepayments there are no scheduled
repayments before December 2011. Mandatory prepayments of the term loan are
required, however, when UCI generates Excess Cash Flow as defined in the senior
credit facility. UCI generated Excess Cash Flow in the year ending December 31,
2009, resulting in a mandatory prepayment of $17.7 million which was made on
April 1, 2010 reducing the amount outstanding under the term loan to $172.3
million. The term loan matures in June 2012.





The
senior credit facility requires UCI to maintain certain financial covenants and
requires mandatory prepayments under certain events as defined in the agreement.
The facility also includes certain negative covenants restricting or limiting
UCI’s ability to, among other things: declare dividends or redeem stock; prepay
certain debt; make loans or investments; guarantee or incur additional debt;
make certain capital expenditures; engage in acquisitions or other business
combinations; sell assets; and alter UCI’s business. UCI believes that, as of
June 30, 2010, it is in compliance with all of these covenants.





Senior
subordinated notes (the “Notes”) — The Notes bear interest at 9 3/8% and
interest is payable in arrears semi-annually on June 15 and December 15 of each
year. The Notes are unsecured and rank equally in right of payment with any of
UCI’s future senior subordinated indebtedness. They are subordinated to
indebtedness and other liabilities of UCI’s subsidiaries that are not guarantors
of the Notes. They are guaranteed on a full and unconditional and joint and
several basis by UCI’s domestic subsidiaries. There are no principal payments
required under the Notes until they mature on June 15, 2013.





Short-term
borrowings — At June 30, 2010, short-term borrowings included $0.9
million of a Spanish subsidiary’s notes payable and $5.3 million of the Chinese
subsidiaries’ notes payable to foreign credit institutions. At December 31,
2009, short-term borrowings included $0.3 million of a Spanish subsidiary’s
notes payable and $3.2 million of the Chinese subsidiaries’ notes payable to
foreign credit institutions. The Spanish subsidiary’s notes payable are
collateralized by certain accounts receivable related to the amounts financed.
The Chinese subsidiaries’ notes payable are secured by receivables.





NOTE J —
CONTINGENCIES





Insurance
Reserves





UCI
purchases insurance policies for workers’ compensation, automobile and product
and general liability. These policies include high deductibles for which UCI is
responsible. These deductibles are estimated and recorded as expenses in the
period incurred. Estimates of these expenses are updated each quarter, and the
expenses are adjusted accordingly. These estimates are subject to substantial
uncertainty because of several factors that are difficult to predict, including
actual claims experience, regulatory changes, litigation trends and changes in
inflation. Estimated unpaid losses for which UCI is responsible are included in
the balance sheet in “Accrued expenses and other current
liabilities.”





12




United
Components, Inc.


Notes
to Condensed Consolidated Financial Statements (unaudited)





Environmental;
Health and Safety





UCI is
subject to a variety of federal, state, local and foreign environmental; health
and safety laws and regulations, including those governing the discharge of
pollutants into the air or water, the management and disposal of hazardous
substances or wastes, and the cleanup of contaminated sites. UCI or its
predecessors have been identified as a potentially responsible party, or is
otherwise currently responsible for contamination at five sites. One of these
sites is a former facility in Edison, New Jersey (the “New Jersey Site”), where
a state agency has ordered UCI to continue with the monitoring and investigation
of chlorinated solvent contamination. The New Jersey Site has been the subject
of litigation to determine whether a neighboring facility was responsible for
contamination discovered at the New Jersey Site. A judgment has been rendered in
that litigation to the effect that the neighboring facility is not responsible
for the contamination. UCI is analyzing what further investigation and
remediation, if any, may be required at the New Jersey Site. We are also
responsible for a portion of chlorinated solvent contamination at a previously
owned site in Solano County, California (the “California Site”), where UCI, at
the request of the regional water board, is investigating and analyzing the
nature and extent of the contamination and is conducting some remediation. Based
on currently available information, management believes that the cost of the
ultimate outcome of the environmental matters related to the New Jersey Site and
the California Site will not exceed the $1.3 million accrued at June 30, 2010 by
a material amount, if at all. However, because all investigation and analysis
has not yet been completed and due to inherent uncertainty in such environmental
matters, it is possible that the ultimate outcome of these matters could have a
material adverse effect on results for a single quarter.





In
addition to the two matters discussed above, UCI or its predecessors have been
named as a potentially responsible party at a third-party waste disposal site in
Calvert City, Kentucky (the “Kentucky Site”). UCI estimates settlement costs at
$0.1 million for this site. Also, UCI is involved in regulated remediation at
two of its manufacturing sites (the “Manufacturing Sites”). The combined cost of
the remaining remediation at such Manufacturing Sites is $0.2 million. UCI
anticipates that the majority of the $0.3 million reserved for settlement and
remediation costs will be spent in the next year. To date, the expenditures
related to the Kentucky Site and the Manufacturing Sites have been
immaterial.





Antitrust
Litigation





UCI and
its wholly-owned subsidiary, Champion Laboratories, Inc. (“Champion”), were
named as two of multiple defendants in 23 complaints originally filed in the
District of Connecticut, the District of New Jersey,  the Middle
District of Tennessee and the Northern District of Illinois alleging conspiracy
violations of Section 1 of the Sherman Act, 15 U.S.C. § 1, related to
aftermarket oil, air, fuel and transmission filters. Eight of the complaints
also named The Carlyle Group as a defendant, but those plaintiffs voluntarily
dismissed Carlyle from each of those actions without prejudice. Champion, but
not UCI, was also named as a defendant in 13 virtually identical actions
originally filed in the Northern and Southern Districts of Illinois, and the
District of New Jersey. All of these complaints are styled as putative class
actions on behalf of all persons and entities that purchased aftermarket filters
in the U.S. directly from the defendants, or any of their predecessors, parents,
subsidiaries or affiliates, at any time during the period from January 1, 1999
to the present. Each case seeks damages, including statutory treble damages, an
injunction against future violations, costs and attorney’s fees. UCI and
Champion were also named as two of multiple defendants in 17 similar complaints
originally filed in the District of Connecticut, the Northern District of
California, the Northern District of Illinois and the Southern District of New
York by plaintiffs who claim to be indirect purchasers of aftermarket filters.
Two of the complaints also named The Carlyle Group as a defendant, but the
plaintiffs in both of those actions voluntarily dismissed Carlyle without
prejudice. Champion, but not UCI, was also named in 3 similar actions originally
filed in the Eastern District of Tennessee, the Northern District of Illinois
and the Southern District of California. These complaints allege conspiracy
violations of Section 1 of the Sherman Act and/or violations of state antitrust,
consumer protection and unfair competition law. They are styled as putative
class actions on behalf of all persons or entities who acquired indirectly
aftermarket filters manufactured and/or distributed by one or more of the
defendants, their agents or entities under their control, at any time between
January 1, 1999 and the present; with the exception of three cases which each
allege a class period from January 1, 2002 to the present, and one complaint
which alleges a class period from the “earliest legal permissible date” to the
present. The complaints seek damages, including statutory treble damages, an
injunction against future violations, disgorgement of profits, costs and
attorney’s fees.





13





United
Components, Inc.


Notes
to Condensed Consolidated Financial Statements (unaudited)





On August
18, 2008, the Judicial Panel on Multidistrict Litigation (“JPML”) issued an
order transferring the U.S. direct and indirect purchaser aftermarket filters
cases to the Northern District of Illinois for coordinated and consolidated
pretrial proceedings before the Honorable Robert W. Gettleman pursuant to 28
U.S.C. §1407. On November 26, 2008, all of the direct purchaser plaintiffs filed
a Consolidated Amended Complaint. This complaint names Champion as one of
multiple defendants, but it does not name UCI. The complaint is styled as a
putative class action and alleges conspiracy violations of Section 1 of the
Sherman Act. The direct purchaser plaintiffs seek damages, including statutory
treble damages, an injunction against future violations, costs and attorney’s
fees. On February 2, 2009, Champion filed its answer to the direct purchasers’
Consolidated Amended Complaint.





On
December 1, 2008, all of the indirect purchaser plaintiffs, except Gasoline and
Automotive Service Dealers of America (“GASDA”), filed a Consolidated Indirect
Purchaser Complaint. This complaint names Champion as one of multiple
defendants, but it does not name UCI. The complaint is styled as a putative
class action and alleges conspiracy violations of Section 1 of the Sherman Act
and violations of state antitrust, consumer protection and unfair competition
law. The indirect purchaser plaintiffs seek damages, including statutory treble
damages, penalties and punitive damages where available, an injunction against
future violations, disgorgement of profits, costs and attorney’s fees. On
February 2, 2009, Champion and the other defendants jointly filed a motion to
dismiss the Consolidated Indirect Purchaser Complaint. On November 5, 2009, the
Court granted the motion in part, and denied it in part. The Court directed the
indirect purchaser plaintiffs to file an amended complaint conforming to the
order. On November 30, 2009, the indirect purchasers filed an amended complaint.
On December 17, 2009, the indirect purchasers filed a motion for leave to file a
second amended complaint. On December 22, 2009, the Court granted the motion for
leave, but gave defendants permission to move to dismiss the second amended
complaint. Defendants’ filed that motion to dismiss on January 19, 2010. On
April 2, 2010, the Court granted the motion in part, and denied it in
part.  On June 30, 2010, the indirect purchasers filed a third amended
complaint.  Champion’s answer to the third amended complaint was filed
on July 30, 2010.





On
February 2, 2009, Champion, UCI and the other defendants jointly filed a motion
to dismiss the GASDA complaint. On April 13, 2009, GASDA voluntarily dismissed
UCI from its case without prejudice. On November 5, 2009, the Court granted
defendants’ motion to dismiss.





Pursuant
to a stipulated agreement between the parties, all defendants produced limited
initial discovery on January 30, 2009.  Since December 10, 2009, the
parties have propounded nine sets of discovery requests on each other and have
served subpoenas on 20 third parties. On June 20, 2010, the Court granted the
parties’ joint motion for an extension of the deadline for the substantial
completion of the production of documents to September 20, 2010. Pursuant to the
Court’s second case management order, the parties will meet and confer to
discuss the scheduling of depositions to take place after September 20, 2010. On
July 16, 2010, the Court ordered that any plaintiff seeking certification of a
class shall file their motions for class certification and any related expert
reports by February 25, 2011. Expert discovery on merits-related issues will
follow the court’s ruling on plaintiffs’ motions for class
certification.




On
January 12, 2009, Champion, but not UCI, was named as one of ten defendants in a
related action filed in the Superior Court of California, for the County of Los
Angeles on behalf of a purported class of direct and indirect purchasers of
aftermarket filters. On March 5, 2009, one of the defendants filed a notice of
removal to the U.S. District Court for the Central District of California, and
then subsequently requested that the JPML transfer this case to the Northern
District of Illinois for coordinated pre-trial proceedings, which the JPML
granted. On February 25, 2010, the plaintiff filed a Consolidated Second Amended
Class Action Complaint in the Northern District of Illinois on behalf of a
purported class of California gasoline retailers who indirectly purchase filters
from defendants for resale.





14





United
Components, Inc.


Notes
to Condensed Consolidated Financial Statements (unaudited)





Champion,
but not UCI, was also named as one of five defendants in a class action filed in
Quebec, Canada. This action alleges conspiracy violations under the Canadian
Competition Act and violations of the obligation to act in good faith (contrary
to art. 6 of the Civil Code of Quebec) related to the sale of aftermarket
filters. The plaintiff seeks joint and several liability against the five
defendants in the amount of $5.0 million in compensatory damages and $1.0
million in punitive damages. The plaintiff is seeking authorization to have the
matter proceed as a class proceeding, which motion has not yet been ruled
on.





Champion,
but not UCI, was also named as one of 14 defendants in a class action filed on
May 21, 2008, in Ontario, Canada. This action alleges civil conspiracy,
intentional interference with economic interests, and conspiracy violations
under the Canadian Competition Act related to the sale of aftermarket filters.
The plaintiff seeks joint and several liability against the 14 defendants in the
amount of $150 million in general damages and $15 million in punitive damages.
The plaintiff is also seeking authorization to have the matter proceed as a
class proceeding, which motion has not yet been ruled on.





On July
30, 2008, the Office of the Attorney General for the State of Florida issued
Antitrust Civil Investigative Demands to Champion and UCI requesting documents
and information related to the sale of oil, air, fuel and transmission filters.
We are cooperating with the Attorney General’s requests. On April 16, 2009, the
Florida Attorney General filed a complaint against Champion and eight other
defendants in the Northern District of Illinois. The complaint alleges
violations of Section 1 of the Sherman Act and Florida law related to the sale
of aftermarket filters. The complaint asserts direct and indirect purchaser
claims on behalf of Florida governmental entities and Florida consumers. It
seeks damages, including statutory treble damages, penalties, fees, costs and an
injunction. The Florida Attorney General action is being coordinated with the
rest of the filters cases pending in the Northern District of Illinois before
the Honorable Robert W. Gettleman.





On June
10, 2010, the Office of the Attorney General for the State of Washington issued
an Antitrust Civil Investigative Demand to Champion requesting documents and
information related to the sale of oil, air, fuel and transmission filters. We
are cooperating with the Attorney General’s requests.





The
Antitrust Division of the Department of Justice (DOJ) investigated the
allegations raised in these suits and certain current and former employees of
the defendants, including Champion, testified pursuant to subpoenas. On January
21, 2010, DOJ sent a letter to counsel for Champion stating that “the Antitrust
Division’s investigation into possible collusion in the replacement auto filters
industry is now officially closed.”





We intend
to vigorously defend against these claims.





Value-Added
Tax Receivable





UCI’s
Mexican operation has outstanding receivables denominated in Mexican pesos in
the amount of $2.2 million, net of allowances, from the Mexican Department of
Finance and Public Credit. The receivables relate to refunds of Mexican
value-added tax, to which UCI believes it is entitled in the ordinary course of
business. The local Mexican tax authorities have rejected UCI’s claims for these
refunds, and UCI has commenced litigation in the regional federal administrative
and tax courts to order the local tax authorities to process these
refunds.  During the three months ended June 30, 2010, UCI recorded a
$1.4 million provision due to uncertainties of collection of these
receivables.





15




United
Components, Inc.


Notes
to Condensed Consolidated Financial Statements (unaudited)





Patent
Litigation





Champion
is a defendant in litigation with Parker-Hannifin Corporation pursuant to which
Parker-Hannifin claims that certain of Champion’s products infringe a
Parker-Hannifin patent. On December 11, 2009, following trial, a jury verdict
was reached, finding in favor of Parker-Hannifin with damages of approximately
$6.5 million. On May 3, 2010, the court entered a partial judgment in this
matter, awarding Parker-Hannifin $6.5 million in damages and a permanent
injunction. Both parties have filed post-trial motions. Parker-Hannifin is
seeking treble damages and attorneys’ fees. Champion is seeking a judgment as a
matter of law on the issues of infringement and patent invalidity. Champion
continues to vigorously defend this matter; however, there can be no assurance
with respect to the outcome of litigation. Champion recorded a $6.5 million
liability in the financial statements for this matter included in “Accrued
expenses and other current liabilities” at June 30, 2010. In the three and six
months ended June 30, 2010, Champion incurred post-trial costs of $0.1 million
and $1.0 million, respectively. These costs are included in the income
statements in “Patent litigation costs”.





In order
to appeal the judgment in this matter, during the three months ended June 30,
2010 UCI posted a letter of credit in the amount of $7.4 million.  The
issuer of the letter of credit required UCI to cash collateralize the letter of
credit.  This cash is recorded as “Restricted cash” and is a component
of long-term assets on the balance sheet at June 30, 2010.





Other
Litigation




UCI is
subject to various other contingencies, including routine legal proceedings and
claims arising out of the normal course of business. These proceedings primarily
involve commercial claims, product liability claims, personal injury claims and
workers’ compensation claims. The outcome of these lawsuits, legal proceedings
and claims cannot be predicted with certainty. Nevertheless, UCI believes that
the outcome of any currently existing proceedings, even if determined adversely,
would not have a material adverse effect on UCI’s financial condition or results
of operations.





NOTE K — GEOGRAPHIC
INFORMATION





UCI had
the following net sales by country (in millions):





Three Months Ended June 30,
                    
                    
                    Six Months Ended June 30,2010
                    
                    
                    2009
                    
                    
                    2010
                    
                    
                    2009United
      States
                    
                    $
                    200.2
                    
                    
                    $
                    184.9
                    
                    
                    $
                    396.2
                    
                    
                    $
                    375.6Canada
                    
                    
                    8.6
                    
                    
                    
                    7.3
                    
                    
                    
                    15.6
                    
                    
                    
                    13.8Mexico
                    
                    
                    5.9
                    
                    
                    
                    6.4
                    
                    
                    
                    11.9
                    
                    
                    
                    12.3United
      Kingdom
                    
                    
                    4.4
                    
                    
                    
                    3.5
                    
                    
                    
                    7.3
                    
                    
                    
                    5.3France
                    
                    
                    2.6
                    
                    
                    
                    2.4
                    
                    
                    
                    5.5
                    
                    
                    
                    4.3Germany
                    
                    
                    1.5
                    
                    
                    
                    1.1
                    
                    
                    
                    3.2
                    
                    
                    
                    2.3China
                    
                    
                    0.6
                    
                    
                    
                    0.5
                    
                    
                    
                    2.2
                    
                    
                    
                    2.3Spain
                    
                    
                    1.1
                    
                    
                    
                    1.1
                    
                    
                    
                    2.1
                    
                    
                    
                    1.9Other
                    
                    
                    11.3
                    
                    
                    
                    10.2
                    
                    
                    
                    22.5
                    
                    
                    
                    19.5$
                    236.2
                    
                    
                    $
                    217.4
                    
                    
                    $
                    466.5
                    
                    
                    $
                    437.3




16





United
Components, Inc.


Notes
to Condensed Consolidated Financial Statements (unaudited)




Net
long-lived assets by country are as follows (in millions):





June 30,
                      2010
                    
                    
                    December 31,
                      2009United
      States
                    
                    $
                    194.5
                    
                    
                    $
                    192.9China
                    
                    
                    24.6
                    
                    
                    
                    29.7Mexico
                    
                    
                    8.4
                    
                    
                    
                    8.9Spain
                    
                    
                    3.7
                    
                    
                    
                    3.8Goodwill
                    
                    
                    241.5
                    
                    
                    
                    241.5$
                    472.7
                    
                    
                    $
                    476.8





NOTE L — OTHER
INFORMATION





At June
30, 2010, 1,000 shares of common stock were authorized, issued and outstanding.
The par value of each share of common stock is $0.01 per share.





Cash
payments for interest and income taxes (net of refunds) are as follows (in
millions):





Three Months Ended June 30,
                      
                      
                      Six Months Ended June 30,2010
                      
                      
                      2009
                      
                      
                      2010
                      
                      
                      2009Interest
                      
                      $
                      11.9
                      
                      
                      $
                      12.7
                      
                      
                      $
                      12.7
                      
                      
                      $
                      15.3Income
      taxes (net of refunds)
                      
                      
                      3.6
                      
                      
                      
                      0.6
                      
                      
                      
                      4.0
                      
                      
                      
                      1.0





For
federal and certain state tax purposes, UCI is included in the consolidated tax
returns of UCI International. UCI records tax expense as if it were filing
income tax returns on a stand-alone basis. To the extent UCI’s tax on its
current taxable income is offset by UCI International’s current taxable losses,
UCI records that portion of its tax expense as a payable to UCI International.
Other income tax liabilities and refunds receivable are reported as income taxes
payable and receivable. At June 30, 2010 and December 31, 2009, income
tax-related payables to UCI International were $41.0 million and $34.9 million,
respectively. These amounts are included in the net “Due to UCI International”
amounts in the respective balance sheets.





UCI sells
vehicle parts to a wide base of customers. Sales are primarily to automotive
aftermarket customers. UCI has outstanding receivables owed by these customers
and to date has experienced no significant collection problems. Sales to a
single customer, AutoZone, approximated 30% and 29% of total net sales for the
six months ended June 30, 2010 and 2009, respectively. No other customer
accounted for more than 10% of total net sales for six months ended June 30,
2010 and 2009.





NOTE M — FAIR VALUE
ACCOUNTING





The
accounting guidance on fair value measurements uses the term “inputs” to broadly
refer to the assumptions used in estimating fair values. It distinguishes
between (i) assumptions based on market data obtained from independent third
party sources (“observable inputs”) and (ii) UCI’s assumptions based on the best
information available (“unobservable inputs”). The accounting guidance requires
that fair value valuation techniques maximize the use of “observable inputs” and
minimize the use of “unobservable inputs.” The fair value hierarchy consists of
the three broad levels listed below. The highest priority is given to Level 1,
and the lowest is given to Level 3.





Level 1 —  Quoted market prices in active markets
for identical assets or liabilities





17





United
Components, Inc.


Notes
to Condensed Consolidated Financial Statements (unaudited)





Level 2 —  Inputs other than Level 1 inputs that
are either directly or indirectly observable





Level 3 —  Unobservable inputs developed using
UCI’s estimates and assumptions, which reflect those that market participants
would use when valuing an asset or liability





The
determination of where an asset or liability falls in the hierarchy requires
significant judgment.





Assets
measured at fair value on a nonrecurring basis




During
the six months ended June 30, 2010 and 2009, no assets were adjusted to their
fair values on a nonrecurring basis.





Fair
value of financial instruments





Cash equivalents - The
carrying amount of cash equivalents ($163.6 million at June 30, 2010 and $122.7
million at December 31, 2009) approximates fair value because the original
maturity is less than 90 days.





Restricted cash – The
carrying amount of restricted cash ($16.8 million at June 30, 2010 and $9.4
million at December 31, 2009) approximates fair value because the original
maturity is less than 90 days.





The
following table summarizes the valuation of cash equivalents and restricted cash
measured at fair value in the June 30, 2010 and December 31, 2009 balance sheets
(in millions):





Fair Value Measurements using
                    Quoted Prices in Active Markets for
                    Identical Assets
                    (Level 1)June 30, 2010
                  
                  
                  December 31, 2009Cash
      equivalents
                  
                  $
                  163.6
                  
                  
                  $
                  122.7Restricted
      cash
                  
                  $
                  16.8
                  
                  
                  $
                  9.4





Trade accounts receivable -
The carrying amount of trade receivables approximates fair value because of
their short outstanding terms.





Trade accounts payable - The
carrying amount of trade payables approximates fair value because of their short
outstanding terms.





Short-term borrowings - The
carrying value of these borrowings equals fair value because their interest
rates reflect current market rates.





Long-term debt - The fair
value of the $172.3 million of term loan borrowings under the senior credit
facility at June 30, 2010 was $162.9 million. The fair value of the $190.0
million of term loan borrowings under the senior credit facility at December 31,
2009 was $176.7 million. The estimated fair value of the term loan was based on
information provided by an independent third party who participates in the
trading market for debt similar to the term loan. Due to the infrequency of
trades, this input is considered to be a Level 2 input.








18





United
Components, Inc.


Notes
to Condensed Consolidated Financial Statements (unaudited)




The fair
value of the $230 million notes at June 30, 2010 and December 31, 2009 was
$230.0 million and $221.1 million, respectively. The estimated fair value of the
notes was based on bid/ask prices, as reported by a third party bond pricing
service. Due to the infrequency of trades of the notes, these inputs are
considered to be Level 2 inputs.


NOTE N — JOINT VENTURE
SALE




In May
2010, UCI completed the sale of its entire 51% interest in its Chinese joint
venture to its joint venture partner, Shandong Yanzhou Liancheng Metal Products
Co. Ltd. (“LMC”). The sale price was approximately $0.9 million, plus the
assumption of certain liabilities due UCI of approximately $2.4 million, less
estimated transaction costs.  Cash proceeds at closing, net of
transaction costs and cash sold, was $0.3 million.  UCI recorded a
non-cash charge of $1.6 million ($1.2 million after tax). The following table
summarizes the net book value of the joint venture at the date of sale, proceeds
of the sale and the resultant loss (in millions):





Current
      assets (excluding cash sold of $0.3 million)
                  
                  $
                  3.9Long-lived
      assets
                  
                  
                  5.1Current
      liabilities
                  
                  
                  (2.6
                  )Noncurrent
      liabilities
                  
                  
                  (0.3
                  )Noncontrolling
      interest
                  
                  
                  (1.8
                  )Net
      book value of joint venture investment sold
                  
                  
                  4.3Less
      Proceeds:Liabilities
      assumed by LMC
                  
                  
                  2.4Cash
      proceeds (net of transaction costs and cash sold)
                  
                  
                  0.3Loss
      on sale of joint venture interest
                  
                  $
                  1.6




In
connection with the sale, UCI entered into a long-term supply agreement pursuant
to which LMC will supply certain components to UCI. As part of this long-term
supply agreement, LMC will purchase from UCI all the aluminum necessary to
produce aluminum parts to be supplied under the agreement.





NOTE O — GUARANTOR AND NON-GUARANTOR
FINANCIAL STATEMENTS





The
senior credit facility is secured by substantially all the assets of UCI. The
Notes are unsecured and rank equally in right of payments with any of UCI’s
future senior subordinated indebtedness. The Notes are subordinated to
indebtedness and other liabilities of UCI’s subsidiaries that are not guarantors
of the Notes. The Notes and senior credit facility borrowings are guaranteed on
a full and unconditional and joint and several basis by UCI’s domestic
subsidiaries.





The
condensed financial information that follows includes condensed financial
statements for (a) United Components, which is the issuer of the Notes and
borrower under the senior credit facility, (b) the domestic subsidiaries, which
guarantee the Notes and borrowings under the senior credit facility (the
“Guarantors”), (c) the foreign subsidiaries (the “Non-Guarantors”), and (d)
consolidated UCI. Also included are consolidating entries, which consist of
eliminations of investments in consolidated subsidiaries and intercompany
balances and transactions. All goodwill is included in UCI’s balance
sheet.





Separate
financial statements of the Guarantor subsidiaries are not presented because
their guarantees are full and unconditional and joint and several, and UCI
believes separate financial statements and other disclosures regarding the
Guarantor subsidiaries are not material to investors.





19





United
Components, Inc.


Notes
to Condensed Consolidated Financial Statements (unaudited)





Note
O (continued)





Consolidating
Condensed Balance Sheet


June
30, 2010


(in
thousands)




UCI
                        Consolidated
                      
                      
                      Eliminations
                      
                      
                      United
                        Components
                      
                      
                      Guarantors
                      
                      
                      Non-
                        GuarantorsAssetsCurrent
      assetsCash
      and cash equivalents
                      
                      $
                      174,157
                      
                      
                      $
                      —
                      
                      
                      $
                      164,324
                      
                      
                      $
                      (400
                      )
                      
                      $
                      10,233Accounts
      receivable, net
                      
                      
                      257,517
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      240,755
                      
                      
                      
                      16,762Inventories,
      net
                      
                      
                      134,234
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      114,279
                      
                      
                      
                      19,955Deferred
      tax assets
                      
                      
                      32,711
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      33,210
                      
                      
                      
                      (499
                      )Other
      current assets
                      
                      
                      16,696
                      
                      
                      
                      —
                      
                      
                      
                      1,562
                      
                      
                      
                      5,672
                      
                      
                      
                      9,462Total
      current assets
                      
                      
                      615,315
                      
                      
                      
                      —
                      
                      
                      
                      165,886
                      
                      
                      
                      393,516
                      
                      
                      
                      55,913Property,
      plant and equipment, net
                      
                      
                      140,034
                      
                      
                      
                      —
                      
                      
                      
                      199
                      
                      
                      
                      106,850
                      
                      
                      
                      32,985Investment
      in subsidiaries
                      
                      
                      —
                      
                      
                      
                      7,506
                      
                      
                      
                      (29,848
                      )
                      
                      
                      22,342
                      
                      
                      
                      —Goodwill
                      
                      
                      241,461
                      
                      
                      
                      —
                      
                      
                      
                      241,461
                      
                      
                      
                      —
                      
                      
                      
                      —Other
      intangible assets, net
                      
                      
                      65,899
                      
                      
                      
                      —
                      
                      
                      
                      6,406
                      
                      
                      
                      58,561
                      
                      
                      
                      932Deferred
      financing costs, net
                      
                      
                      1,476
                      
                      
                      
                      —
                      
                      
                      
                      1,476
                      
                      
                      
                      —
                      
                      
                      
                      —Restricted
      cash
                      
                      
                      16,790
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      16,790
                      
                      
                      
                      —Other
      long-term assets
                      
                      
                      7,061
                      
                      
                      
                      —
                      
                      
                      
                      366
                      
                      
                      
                      5,079
                      
                      
                      
                      1,616Total
      assets
                      
                      $
                      1,088,036
                      
                      
                      $
                      7,506
                      
                      
                      $
                      385,946
                      
                      
                      $
                      603,138
                      
                      
                      $
                      91,446Liabilities and equityCurrent
      liabilitiesAccounts
      payable
                      
                      $
                      113,055
                      
                      
                      $
                      —
                      
                      
                      $
                      4,186
                      
                      
                      $
                      93,605
                      
                      
                      $
                      15,264Short-term
      borrowings
                      
                      
                      6,184
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      6,184Current
      maturities of long-term debt
                      
                      
                      232
                      
                      
                      
                      —
                      
                      
                      
                      173
                      
                      
                      
                      59
                      
                      
                      
                      —Accrued
      expenses and other current liabilities
                      
                      
                      122,214
                      
                      
                      
                      —
                      
                      
                      
                      14,682
                      
                      
                      
                      101,634
                      
                      
                      
                      5,898Total
      current liabilities
                      
                      
                      241,685
                      
                      
                      
                      —
                      
                      
                      
                      19,041
                      
                      
                      
                      195,298
                      
                      
                      
                      27,346Long-term
      debt, less current maturities
                      
                      
                      401,049
                      
                      
                      
                      —
                      
                      
                      
                      400,683
                      
                      
                      
                      366
                      
                      
                      
                      —Pension
      and other postretirement liabilities
                      
                      
                      71,594
                      
                      
                      
                      —
                      
                      
                      
                      9,554
                      
                      
                      
                      61,015
                      
                      
                      
                      1,025Deferred
      tax liabilities
                      
                      
                      8,603
                      
                      
                      
                      —
                      
                      
                      
                      22,963
                      
                      
                      
                      (14,914
                      )
                      
                      
                      554Due
      to UCI International
                      
                      
                      35,653
                      
                      
                      
                      —
                      
                      
                      
                      35,653
                      
                      
                      
                      —
                      
                      
                      
                      —Other
      long-term liabilities
                      
                      
                      5,740
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      4,282
                      
                      
                      
                      1,458Intercompany
      payables (receivables)
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      (425,660
                      )
                      
                      
                      418,912
                      
                      
                      
                      6,748Total
      equity
                      
                      
                      323,712
                      
                      
                      
                      7,506
                      
                      
                      
                      323,712
                      
                      
                      
                      (61,821
                      )
                      
                      
                      54,315Total
      liabilities and equity
                      
                      $
                      1,088,036
                      
                      
                      $
                      7,506
                      
                      
                      $
                      385,946
                      
                      
                      $
                      603,138
                      
                      
                      $
                      91,446





20




United
Components, Inc.


Notes
to Condensed Consolidated Financial Statements (unaudited)





Note
O (continued)





Consolidating
Condensed Balance Sheet


December
31, 2009


(in
thousands)




UCI
                        Consolidated
                      
                      
                      Eliminations
                      
                      
                      United
                        Components
                      
                      
                      Guarantors
                      
                      
                      Non-
                        GuarantorsAssetsCurrent
      assetsCash
      and cash equivalents
                      
                      $
                      131,913
                      
                      
                      $
                      —
                      
                      
                      $
                      122,968
                      
                      
                      $
                      536
                      
                      
                      $
                      8,409Accounts
      receivable, net
                      
                      
                      261,210
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      245,606
                      
                      
                      
                      15,604Inventories,
      net
                      
                      
                      133,058
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      110,247
                      
                      
                      
                      22,811Deferred
      tax assets
                      
                      
                      30,714
                      
                      
                      
                      —
                      
                      
                      
                      (13
                      )
                      
                      
                      31,654
                      
                      
                      
                      (927
                      )Other
      current assets
                      
                      
                      23,499
                      
                      
                      
                      —
                      
                      
                      
                      6,048
                      
                      
                      
                      9,594
                      
                      
                      
                      7,857Total
      current assets
                      
                      
                      580,394
                      
                      
                      
                      
                      
                      
                      
                      129,003
                      
                      
                      
                      397,637
                      
                      
                      
                      53,754Property,
      plant and equipment, net
                      
                      
                      149,753
                      
                      
                      
                      —
                      
                      
                      
                      261
                      
                      
                      
                      109,918
                      
                      
                      
                      39,574Investment
      in subsidiaries
                      
                      
                      —
                      
                      
                      
                      39,611
                      
                      
                      
                      (68,954
                      )
                      
                      
                      29,343
                      
                      
                      
                      —Goodwill
                      
                      
                      241,461
                      
                      
                      
                      —
                      
                      
                      
                      241,461
                      
                      
                      
                      —
                      
                      
                      
                      —Other
      intangible assets, net
                      
                      
                      68,030
                      
                      
                      
                      —
                      
                      
                      
                      7,453
                      
                      
                      
                      60,087
                      
                      
                      
                      490Deferred
      financing costs, net
                      
                      
                      1,843
                      
                      
                      
                      —
                      
                      
                      
                      1,843
                      
                      
                      
                      —
                      
                      
                      
                      —Restricted
      cash
                      
                      
                      9,400
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      9,400
                      
                      
                      
                      —Other
      long-term assets
                      
                      
                      6,304
                      
                      
                      
                      —
                      
                      
                      
                      367
                      
                      
                      
                      5,759
                      
                      
                      
                      178Total
      assets
                      
                      $
                      1,057,185
                      
                      
                      $
                      39,611
                      
                      
                      $
                      311,434
                      
                      
                      $
                      612,144
                      
                      
                      $
                      93,996Liabilities and equityCurrent
      liabilitiesAccounts
      payable
                      
                      $
                      111,898
                      
                      
                      $
                      —
                      
                      
                      $
                      4,974
                      
                      
                      $
                      89,121
                      
                      
                      $
                      17,803Short-term
      borrowings
                      
                      
                      3,460
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      3,460Current
      maturities of long-term debt
                      
                      
                      17,925
                      
                      
                      
                      —
                      
                      
                      
                      17,866
                      
                      
                      
                      59
                      
                      
                      
                      —Accrued
      expenses and other current liabilities
                      
                      
                      106,981
                      
                      
                      
                      —
                      
                      
                      
                      9,242
                      
                      
                      
                      93,900
                      
                      
                      
                      3,839Total
      current liabilities
                      
                      
                      240,264
                      
                      
                      
                      —
                      
                      
                      
                      32,082
                      
                      
                      
                      183,080
                      
                      
                      
                      25,102Long-term
      debt, less current maturities
                      
                      
                      400,853
                      
                      
                      
                      —
                      
                      
                      
                      400,460
                      
                      
                      
                      393
                      
                      
                      
                      —Pension
      and other postretirement liabilities
                      
                      
                      70,802
                      
                      
                      
                      —
                      
                      
                      
                      9,716
                      
                      
                      
                      60,072
                      
                      
                      
                      1,014Deferred
      tax liabilities
                      
                      
                      8,546
                      
                      
                      
                      —
                      
                      
                      
                      21,469
                      
                      
                      
                      (13,499
                      )
                      
                      
                      576Due
      to UCI International
                      
                      
                      30,105
                      
                      
                      
                      —
                      
                      
                      
                      30,105
                      
                      
                      
                      —
                      
                      
                      
                      —Other
      long-term liabilities
                      
                      
                      6,672
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      4,739
                      
                      
                      
                      1,933Intercompany
      payables (receivables)
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      (480,531
                      )
                      
                      
                      475,936
                      
                      
                      
                      4,595Total
      equity
                      
                      
                      299,943
                      
                      
                      
                      39,611
                      
                      
                      
                      298,133
                      
                      
                      
                      (98,577
                      )
                      
                      
                      60,776Total
      liabilities and equity
                      
                      $
                      1,057,185
                      
                      
                      $
                      39,611
                      
                      
                      $
                      311,434
                      
                      
                      $
                      612,144
                      
                      
                      $
                      93,996





21




United
Components, Inc.


Notes
to Condensed Consolidated Financial Statements (unaudited)





Note
O (continued)





Consolidating
Condensed Income Statement


Three
Months Ended June 30, 2010


(in
thousands)





UCI
                    Consolidated
                  
                  
                  Eliminations
                  
                  
                  United
                    Components
                  
                  
                  Guarantors
                  
                  
                  Non-
                    GuarantorsNet
      sales
                  
                  $
                  236,198
                  
                  
                  $
                  (24,481
                  )
                  
                  $
                  —
                  
                  
                  $
                  225,612
                  
                  
                  $
                  35,067Cost
      of sales
                  
                  
                  176,228
                  
                  
                  
                  (24,481
                  )
                  
                  
                  —
                  
                  
                  
                  167,882
                  
                  
                  
                  32,827Gross
      profit
                  
                  
                  59,970
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  57,730
                  
                  
                  
                  2,240Operating
      expenseSelling
      and warehousing
                  
                  
                  (15,077
                  )
                  
                  
                  —
                  
                  
                  
                  (363
                  )
                  
                  
                  (13,195
                  )
                  
                  
                  (1,519
                  )General
      and administrative
                  
                  
                  (10,789
                  )
                  
                  
                  —
                  
                  
                  
                  (4,766
                  )
                  
                  
                  (4,499
                  )
                  
                  
                  (1,524
                  )Amortization
      of acquired intangible assets
                  
                  
                  (1,336
                  )
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  (1,336
                  )
                  
                  
                  —Restructuring
      costs
                  
                  
                  (344
                  )
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  (103
                  )
                  
                  
                  (241
                  )Patent
      litigation costs
                  
                  
                  (74
                  )
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  (74
                  )
                  
                  
                  —Operating
      income (loss)
                  
                  
                  32,350
                  
                  
                  
                  —
                  
                  
                  
                  (5,129
                  )
                  
                  
                  38,523
                  
                  
                  
                  (1,044
                  )Other
      (expense) incomeInterest
      expense, net
                  
                  
                  (6,817
                  )
                  
                  
                  —
                  
                  
                  
                  (6,794
                  )
                  
                  
                  6
                  
                  
                  
                  (29
                  )Intercompany
      interest
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  6,016
                  
                  
                  
                  (5,939
                  )
                  
                  
                  (77
                  )Management
      fee expense
                  
                  
                  (500
                  )
                  
                  
                  —
                  
                  
                  
                  (500
                  )
                  
                  
                  —
                  
                  
                  
                  —Miscellaneous,
      net
                  
                  
                  (1,352
                  )
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  (1,352
                  )
                  
                  
                  —Income
      (loss) before income taxes
                  
                  
                  23,681
                  
                  
                  
                  —
                  
                  
                  
                  (6,407
                  )
                  
                  
                  31,238
                  
                  
                  
                  (1,150
                  )Income
      tax (expense) benefit
                  
                  
                  (9,380
                  )
                  
                  
                  —
                  
                  
                  
                  2,416
                  
                  
                  
                  (11,550
                  )
                  
                  
                  (246
                  )Increase
      (decrease) before equity in earnings of subsidiaries
                  
                  
                  14,301
                  
                  
                  
                  —
                  
                  
                  
                  (3,991
                  )
                  
                  
                  19,688
                  
                  
                  
                  (1,396
                  )Equity
      in earnings of subsidiaries
                  
                  
                  —
                  
                  
                  
                  (15,950
                  )
                  
                  
                  18,294
                  
                  
                  
                  (2,344
                  )
                  
                  
                  —Net
      income (loss)
                  
                  
                  14,301
                  
                  
                  
                  (15,950
                  )
                  
                  
                  14,303
                  
                  
                  
                  17,344
                  
                  
                  
                  (1,396
                  )Less:
      Loss attributable to noncontrolling interest
                  
                  
                  (2
                  )
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  (2
                  )Net
      income (loss) attributable to United Components, Inc.
                  
                  $
                  14,303
                  
                  
                  $
                  (15,950
                  )
                  
                  $
                  14,303
                  
                  
                  $
                  17,344
                  
                  
                  $
                  (1,394
                  )





22





United
Components, Inc.


Notes
to Condensed Consolidated Financial Statements (unaudited)





Note
O (continued)


Consolidating
Condensed Income Statement


Three
Months Ended June 30, 2009


(in
thousands)





UCI
                  Consolidated
                
                
                Eliminations
                
                
                United
                  Components
                
                
                Guarantors
                
                
                Non-
                  GuarantorsNet
      sales
                
                $
                217,422
                
                
                $
                (25,487
                )
                
                $
                —
                
                
                $
                206,666
                
                
                $
                36,243Cost
      of sales
                
                
                169,698
                
                
                
                (25,487
                )
                
                
                —
                
                
                
                163,134
                
                
                
                32,051Gross
      profit
                
                
                47,724
                
                
                
                —
                
                
                
                —
                
                
                
                43,532
                
                
                
                4,192Operating
      (expense) incomeSelling
      and warehousing
                
                
                (14,086
                )
                
                
                —
                
                
                
                15
                
                
                
                (12,720
                )
                
                
                (1,381
                )General
      and administrative
                
                
                (11,019
                )
                
                
                —
                
                
                
                (3,641
                )
                
                
                (6,028
                )
                
                
                (1,350
                )Amortization
      of acquired intangible assets
                
                
                (1,481
                )
                
                
                —
                
                
                
                2
                
                
                
                (1,459
                )
                
                
                (24
                )Restructuring
      gain (losses)
                
                
                598
                
                
                
                —
                
                
                
                —
                
                
                
                (151
                )
                
                
                749Operating
      income (loss)
                
                
                21,736
                
                
                
                —
                
                
                
                (3,624
                )
                
                
                23,174
                
                
                
                2,186Other
      (expense) incomeInterest
      expense, net
                
                
                (7,793
                )
                
                
                —
                
                
                
                (7,733
                )
                
                
                (6
                )
                
                
                (54
                )Intercompany
      interest
                
                
                —
                
                
                
                —
                
                
                
                6,636
                
                
                
                (6,505
                )
                
                
                (131
                )Management
      fee expense
                
                
                (500
                )
                
                
                —
                
                
                
                (500
                )
                
                
                —
                
                
                
                —Miscellaneous,
      net
                
                
                (1,669
                )
                
                
                —
                
                
                
                —
                
                
                
                (1,669
                )
                
                
                —Income
      (loss) before income taxes
                
                
                11,774
                
                
                
                —
                
                
                
                (5,221
                )
                
                
                14,994
                
                
                
                2,001Income
      tax (expense) benefit
                
                
                (4,361
                )
                
                
                —
                
                
                
                1,456
                
                
                
                (4,936
                )
                
                
                (881
                )Increase
      (decrease) before equity in earnings of subsidiaries
                
                
                7,413
                
                
                
                —
                
                
                
                (3,765
                )
                
                
                10,058
                
                
                
                1,120Equity
      in earnings of subsidiaries
                
                
                —
                
                
                
                (11,866
                )
                
                
                11,253
                
                
                
                613
                
                
                
                —Net
      income (loss)
                
                
                7,413
                
                
                
                (11,866
                )
                
                
                7,488
                
                
                
                10,671
                
                
                
                1,120Less:
      Loss attributable to noncontrolling interest
                
                
                (75
                )
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                (75
                )Net
      income (loss) attributable to United Components, Inc.
                
                $
                7,488
                
                
                $
                (11,866
                )
                
                $
                7,488
                
                
                $
                10,671
                
                
                $
                1,195





23




United
Components, Inc.


Notes
to Condensed Consolidated Financial Statements (unaudited)





Note
O (continued)


Consolidating
Condensed Income Statement


Six
Months Ended June 30, 2010


(in
thousands)





UCI
                Consolidated
              
              
              Eliminations
              
              
              United
                Components
              
              
              Guarantors
              
              
              Non-
                GuarantorsNet
      sales
              
              $
              466,502
              
              
              $
              (46,835
              )
              
              $
              —
              
              
              $
              443,730
              
              
              $
              69,607Cost
      of sales
              
              
              349,304
              
              
              
              (46,835
              )
              
              
              —
              
              
              
              332,591
              
              
              
              63,548Gross
      profit
              
              
              117,198
              
              
              
              —
              
              
              
              —
              
              
              
              111,139
              
              
              
              6,059Operating
      expenseSelling
      and warehousing
              
              
              (29,372
              )
              
              
              —
              
              
              
              (651
              )
              
              
              (25,600
              )
              
              
              (3,121
              )General
      and administrative
              
              
              (21,409
              )
              
              
              —
              
              
              
              (9,437
              )
              
              
              (9,396
              )
              
              
              (2,576
              )Amortization
      of acquired intangible assets
              
              
              (2,671
              )
              
              
              —
              
              
              
              —
              
              
              
              (2,671
              )
              
              
              —Restructuring
      costs
              
              
              (2,380
              )
              
              
              —
              
              
              
              —
              
              
              
              (230
              )
              
              
              (2,150
              )Patent
      litigation costs
              
              
              (1,038
              )
              
              
              —
              
              
              
              —
              
              
              
              (1,038
              )
              
              
              —Operating
      income (loss)
              
              
              60,328
              
              
              
              —
              
              
              
              (10,088
              )
              
              
              72,204
              
              
              
              (1,788
              )Other
      (expense) incomeInterest
      expense, net
              
              
              (13,664
              )
              
              
              —
              
              
              
              (13,604
              )
              
              
              (2
              )
              
              
              (58
              )Intercompany
      interest
              
              
              —
              
              
              
              —
              
              
              
              12,132
              
              
              
              (11,967
              )
              
              
              (165
              )Management
      fee expense
              
              
              (1,000
              )
              
              
              —
              
              
              
              (1,000
              )
              
              
              —
              
              
              
              —Miscellaneous,
      net
              
              
              (2,303
              )
              
              
              —
              
              
              
              —
              
              
              
              (2,303
              )
              
              
              —Income
      (loss) before income taxes
              
              
              43,361
              
              
              
              —
              
              
              
              (12,560
              )
              
              
              57,932
              
              
              
              (2,011
              )Income
      tax (expense) benefit
              
              
              (16,762
              )
              
              
              —
              
              
              
              4,800
              
              
              
              (21,705
              )
              
              
              143Increase
      (decrease) before equity in earnings of subsidiaries
              
              
              26,599
              
              
              
              —
              
              
              
              (7,760
              )
              
              
              36,227
              
              
              
              (1,868
              )Equity
      in earnings of subsidiaries
              
              
              —
              
              
              
              (32,255
              )
              
              
              34,396
              
              
              
              (2,141
              )
              
              
              —Net
      income (loss)
              
              
              26,599
              
              
              
              (32,255
              )
              
              
              26,636
              
              
              
              34,086
              
              
              
              (1,868
              )Less:
      Loss attributable to noncontrolling interest
              
              
              (37
              )
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              (37
              )Net
      income (loss) attributable to United Components, Inc.
              
              $
              26,636
              
              
              $
              (32,255
              )
              
              $
              26,636
              
              
              $
              34,086
              
              
              $
              (1,831
              )





24




United
Components, Inc.


Notes
to Condensed Consolidated Financial Statements (unaudited)





Note
O (continued)





Consolidating
Condensed Income Statement


Six
Months Ended June 30, 2009


(in
thousands)





UCI
                Consolidated
              
              
              Eliminations
              
              
              United
                Components
              
              
              Guarantors
              
              
              Non-
                GuarantorsNet
      sales
              
              $
              437,284
              
              
              $
              (55,116
              )
              
              $
              —
              
              
              $
              415,843
              
              
              $
              76,557Cost
      of sales
              
              
              350,140
              
              
              
              (55,116
              )
              
              
              
              
              
              
              336,985
              
              
              
              68,271Gross
      profit
              
              
              87,144
              
              
              
              —
              
              
              
              —
              
              
              
              78,858
              
              
              
              8,286Operating
      (expense) incomeSelling
      and warehousing
              
              
              (28,384
              )
              
              
              —
              
              
              
              (159
              )
              
              
              (25,569
              )
              
              
              (2,656
              )General
      and administrative
              
              
              (22,071
              )
              
              
              —
              
              
              
              (7,939
              )
              
              
              (11,481
              )
              
              
              (2,651
              )Amortization
      of acquired intangible assets
              
              
              (2,961
              )
              
              
              —
              
              
              
              2
              
              
              
              (2,939
              )
              
              
              (24
              )Restructuring
      gains (costs), net
              
              
              393
              
              
              
              —
              
              
              
              —
              
              
              
              (356
              )
              
              
              749Operating
      income (loss)
              
              
              34,121
              
              
              
              —
              
              
              
              (8,096
              )
              
              
              38,513
              
              
              
              3,704Other
      (expense) incomeInterest
      expense, net
              
              
              (15,792
              )
              
              
              —
              
              
              
              (15,668
              )
              
              
              (13
              )
              
              
              (111
              )Intercompany
      interest
              
              
              —
              
              
              
              —
              
              
              
              13,048
              
              
              
              (12,757
              )
              
              
              (291
              )Management
      fee expense
              
              
              (1,000
              )
              
              
              —
              
              
              
              (1,000
              )
              
              
              —
              
              
              
              —Miscellaneous,
      net
              
              
              (3,154
              )
              
              
              —
              
              
              
              —
              
              
              
              (3,154
              )
              
              
              —Income
      (loss) before income taxes
              
              
              14,175
              
              
              
              —
              
              
              
              (11,716
              )
              
              
              22,589
              
              
              
              3,302Income
      tax (expense) benefit
              
              
              (5,496
              )
              
              
              —
              
              
              
              4,765
              
              
              
              (8,738
              )
              
              
              (1,523
              )Increase
      (decrease) before equity in earnings of subsidiaries
              
              
              8,679
              
              
              
              —
              
              
              
              (6,951
              )
              
              
              13,851
              
              
              
              1,779Equity
      in earnings of subsidiaries
              
              
              —
              
              
              
              (17,514
              )
              
              
              16,009
              
              
              
              1,505
              
              
              
              —Net
      income (loss)
              
              
              8,679
              
              
              
              (17,514
              )
              
              
              9,058
              
              
              
              15,356
              
              
              
              1,779Less:
      Loss attributable to noncontrolling interest
              
              
              (379
              )
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              (379
              )Net
      income (loss) attributable to United Components, Inc.
              
              $
              9,058
              
              
              $
              (17,514
              )
              
              $
              9,058
              
              
              $
              15,356
              
              
              $
              2,158








25





United
Components, Inc.


Notes
to Condensed Consolidated Financial Statements (unaudited)





Note
O (continued)


Consolidating
Condensed Statement of Cash Flows


Six
Months Ended June 30, 2010


(in
thousands)





UCI
                Consolidated
              
              
              Eliminations
              
              
              United
                Components
              
              
              Guarantors
              
              
              Non-
                GuarantorsNet
      cash provided by (used in) operating activities
              
              $
              76,558
              
              
              $
              —
              
              
              $
              4,554
              
              
              $
              72,275
              
              
              $
              (271
              )Cash
      flows from investing activities:Capital
      expenditures
              
              
              (11,741
              )
              
              
              —
              
              
              
              (283
              )
              
              
              (8,799
              )
              
              
              (2,659
              )Proceeds
      from sale of property, plant and equipment
              
              
              114
              
              
              
              —
              
              
              
              —
              
              
              
              29
              
              
              
              85Proceeds
      from sale of joint venture interest (net of transaction costs and cash
      sold)
              
              
              272
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              272Increase
      in restricted cash
              
              
              (7,390
              )
              
              
              —
              
              
              
              —
              
              
              
              (7,390
              )
              
              
              —Net
      cash used in investing activities
              
              
              (18,745
              )
              
              
              —
              
              
              
              (283
              )
              
              
              (16,160
              )
              
              
              (2,302
              )Cash
      flows from financing activities:Issuances
      of debt
              
              
              9,619
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              9,619Debt
      repayments
              
              
              (24,708
              )
              
              
              —
              
              
              
              (17,786
              )
              
              
              (27
              )
              
              
              (6,895
              )Change
      in intercompany indebtedness
              
              
              —
              
              
              
              —
              
              
              
              54,871
              
              
              
              (57,024
              )
              
              
              2,153Net
      cash (used in) provided by financing activities
              
              
              (15,089
              )
              
              
              —
              
              
              
              37,085
              
              
              
              (57,051
              )
              
              
              4,877Effect
      of currency exchange rate changes on cash
              
              
              (480
              )
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              (480
              )Net
      (decrease) increase in cash and cash equivalents
              
              
              42,244
              
              
              
              —
              
              
              
              41,356
              
              
              
              (936
              )
              
              
              1,824Cash
      and cash equivalents at beginning of year
              
              
              131,913
              
              
              
              —
              
              
              
              122,968
              
              
              
              536
              
              
              
              8,409Cash
      and cash equivalents at end of period
              
              $
              174,157
              
              
              $
              —
              
              
              $
              164,324
              
              
              $
              (400
              )
              
              $
              10,233




26




United
Components, Inc.


Notes
to Condensed Consolidated Financial Statements (unaudited)





Note
O (continued)





Consolidating
Condensed Statement of Cash Flows


Six
Months Ended June 30, 2009


(in
thousands)





UCI
                  Consolidated
                
                
                Eliminations
                
                
                United
                  Components
                
                
                Guarantors
                
                
                Non-
                  GuarantorsNet
      cash provided by (used in) operating activities
                
                $
                78,059
                
                
                $
                —
                
                
                $
                (4,961
                )
                
                $
                65,300
                
                
                $
                17,720Cash
      flows from investing activities:Capital
      expenditures
                
                
                (7,530
                )
                
                
                —
                
                
                
                (339
                )
                
                
                (5,180
                )
                
                
                (2,011
                )Proceeds
      from sale of property, plant and equipment
                
                
                2,436
                
                
                
                —
                
                
                
                —
                
                
                
                21
                
                
                
                2,415Increase
      in restricted cash
                
                
                (9,400
                )
                
                
                —
                
                
                
                —
                
                
                
                (9,400
                )
                
                
                —Net
      cash (used in) provided by investing activities
                
                
                (14,494
                )
                
                
                —
                
                
                
                (339
                )
                
                
                (14,559
                )
                
                
                404Cash
      flows from financing activities:Issuances
      of debt
                
                
                6,543
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                6,543Debt
      repayments
                
                
                (26,177
                )
                
                
                —
                
                
                
                (20,201
                )
                
                
                (29
                )
                
                
                (5,947
                )Change
      in intercompany indebtedness
                
                
                —
                
                
                
                —
                
                
                
                68,547
                
                
                
                (51,601
                )
                
                
                (16,946
                )Net
      cash (used in) provided by financing activities
                
                
                (19,634
                )
                
                
                —
                
                
                
                48,346
                
                
                
                (51,630
                )
                
                
                (16,350
                )Effect
      of currency exchange rate changes on cash
                
                
                102
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                102Net
      increase (decrease) in cash and cash equivalents
                
                
                44,033
                
                
                
                —
                
                
                
                43,046
                
                
                
                (889
                )
                
                
                1,876Cash
      and cash equivalents at beginning of year
                
                
                46,612
                
                
                
                —
                
                
                
                39,061
                
                
                
                860
                
                
                
                6,691Cash
      and cash equivalents at end of period
                
                $
                90,645
                
                
                $
                —
                
                
                $
                82,107
                
                
                $
                (29
                )
                
                $
                8,567




27





Item 2. Management’s Discussion and
Analysis of Financial Condition and Results of
Operations





The
following discussion of our financial condition and results of operations must
be read together with the “Item 1. Business” and “Item 7. Management’s
Discussion & Analysis of Financial Condition and Results of Operations”
sections of our 2009 Form 10-K filed March 19, 2010 and the financial statements
included herein.





Forward-Looking
Statements




This
Quarterly Report on Form 10-Q for the period ended June 30, 2010 contains
forward-looking statements. The words “believe,” “expect,” “anticipate,”
“intend,” “estimate” and other expressions that are predictions of or indicate
future events and trends and that do not relate to historical matters identify
forward-looking statements. You should not place undue reliance on these
forward-looking statements. Although forward-looking statements reflect
management’s good faith beliefs, reliance should not be placed on
forward-looking statements because they involve known and unknown risks,
uncertainties and other factors, which may cause the actual results, performance
or achievements to differ materially from anticipated future results,
performance or achievements expressed or implied by such forward-looking
statements. Forward-looking statements speak only as of the date the statements
are made. We undertake no obligation to publicly update or revise any
forward-looking statement, whether as a result of new information, future
events, changed circumstances or otherwise. These forward-looking statements are
subject to numerous risks and uncertainties, including, but not limited
to:





•
            growth
      of, or changes in, the light and heavy-duty vehicle
      aftermarket;


•
            maintaining
      existing sales levels with our current customers while attracting new
      ones;


•
            operating
      in international markets and expanding into adjacent markets while
      strengthening our market share in our existing
  markets;


•
            the
      impact of general economic conditions in the regions in which we do
      business;


•
            increases
      in costs of fuel, transportation and utilities costs and in the costs of
      labor, employment and healthcare;


•
            general
      industry conditions, including competition, consolidation, pricing
      pressure and product, raw material and energy
  prices;


•
            disruptions
      in our supply chain;


•
            initiating
      effective cost cutting initiatives;


•
            the
      introduction of new and improved products or manufacturing
      techniques;


•
            the
      impact of governmental laws and regulations and the outcome of legal
      proceedings;


•
            our
      debt levels and restrictions in our debt
  agreements;


•
            changes
      in exchange rates and currency
values;


•
            capital
      expenditure requirements;


•
            access
      to capital markets;


•
            protecting
      our intellectual property rights;


•
            our
      loss of key personnel or our inability to hire additional qualified
      personnel; and


•
            the
      risks and uncertainties described under “Risk Factors” in Part II, Item
      1.A. of this Quarterly Report on Form 10-Q and this “Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations.”




We derive
many of our forward-looking statements from our operating budgets and forecasts,
which are based upon many detailed assumptions. While we believe that our
assumptions are reasonable, we caution that it is very difficult to predict the
impact of known factors, and it is impossible for us to anticipate all factors
that could affect our actual results. Important factors that could cause actual
results to differ materially from our expectations are disclosed under “Risk
Factors” in Part II, Item 1.A. of this Quarterly Report on Form
10-Q.





28




Overview




We are a
leading supplier to the light and heavy-duty vehicle aftermarket for replacement
parts, supplying a broad range of filtration, fuel delivery systems, vehicle
electronics and cooling systems products. We believe that we maintain a leading
market position in each of our four product lines, including the #1 market
position by revenue in both fuel delivery systems and cooling systems in the
North American light vehicle aftermarket. Approximately 88% of our 2009 net
sales were generated from sales to a diverse group of aftermarket customers,
including some of the largest and fastest growing companies in our industry. We
sell into multiple sales channels, including retailers, wholesale distributors,
dealers and the heavy-duty vehicle market. Our principal end-markets include
light vehicles, commercial vehicles and construction, mining, agricultural,
marine and other industrial equipment. We have one of the most comprehensive
product lines in the aftermarket, offering approximately 47,000 part numbers
that we deliver at an industry leading average fill rate of approximately
98%.




Aftermarket
sales generally are tied to the regular replacement cycle or the natural wearing
cycle of a vehicle part; accordingly, we expect industry growth will be heavily
influenced by the following key factors: increasing global vehicle population,
aging of vehicle population, increasing vehicle miles driven and growing
heavy-duty aftermarket.





The
following is a discussion of the key line items included in our financial
statements for the periods presented below under the heading “Results of
Operations.” These are the measures that management utilizes most to assess our
results of operations and anticipate future trends and risks in our
business.





Net
Sales




Net sales
includes the gross selling price of our products sold to our customers, less
provisions for warranty costs, estimated sales returns, customer allowances and
cash discounts. In addition, up-front costs to obtain exclusive contracts and
other new business changeover costs are recorded as a reduction to gross sales
in arriving at net sales. Recording such provisions as a reduction to gross
sales is customary in our industry. Provisions for sales returns, customer
allowances and warranty costs are recorded at the time of sale based upon
historical experience, current trends and our expectations regarding future
experience. Adjustments to such sales returns, allowances and warranty costs are
made as new information becomes available.




Because
most of our sales are to the aftermarket, we believe that our sales are
primarily driven by the number of vehicles on the road, the average age of those
vehicles, the average number of miles driven per year, the mix of light trucks
to passenger cars on the road and the relative strength of our sales channels.
Historically, our sales have not been materially adversely affected by market
cyclicality, as we believe that our aftermarket sales are less dependent on
economic conditions than our sales to OEMs, due to the generally
non-discretionary nature of vehicle maintenance and repair. While many vehicle
maintenance and repair expenses are non-discretionary in nature, high gasoline
prices and difficult economic conditions can lead to a reduction in miles
driven, which then results in increased time intervals for routine maintenance
and vehicle parts lasting longer before needing replacement. Historic highs in
crude oil prices experienced in 2008 and corresponding historic highs in retail
gasoline prices at the pump impacted consumers’ driving and vehicle maintenance
habits. In addition, we believe consumers’ driving and vehicle maintenance
habits have been impacted by the generally weak economic conditions experienced
in the latter part of 2008 and through 2009. These factors, together with lower
heavy-duty aftermarket sales due to weakness in the transportation segment in
2008 and 2009, and lower OEM sales due to the significant decline in new vehicle
production, resulted in the downward trend in sales starting in the third
quarter of 2008 through the first half of 2009. More recently, our retail
channel sales have increased reflecting the growth of our retail customer base.
Additionally, heavy-duty channel sales and OEM channel sales in the six months
ended June 30, 2010 increased 12.8% and 44.0%, respectively, over the six months
ended June 30, 2009 suggesting signs of recovery in the transportation
sector.





29




Sales in
the North American light vehicle aftermarket have grown at a compounded average
annual growth rate of approximately 3.3% from 1999 through 2009. However,
aftermarket sales grew by only 0.1% in 2008 and are estimated to have declined
by 1.2% in 2009. A key metric in measuring aftermarket performance is miles
driven. For 2008, the U.S. Department of Energy reported a decrease in miles
driven of 3.2% (equaling 96 billion fewer miles). This was the first annual
decrease in miles driven since 1980. We believe that high gasoline prices and
generally weak economic conditions adversely affected our sales during the
second half of 2008 and into 2009. During 2009, retail gasoline prices were
significantly lower than the historic highs experienced at the beginning of the
third quarter of 2008. Despite the lower retail gasoline prices, the negative
trend in miles driven continued in the first quarter of 2009 (a 2.7% decrease
over the comparable quarter in 2008) due to the ongoing weak economic
conditions. The negative trend reversed in the last three quarters of 2009 as
miles driven exceeded the comparable 2008 quarters. For the full year of
2009, miles driven increased 0.2% from 2008.  Miles driven during the
first six months of 2010 increased 0.2% from the first six months of
2009.





While the
conditions described above have adversely affected our sales, other trends
resulting from the current economic conditions may have a positive impact on
sales in the future. Specifically, with new car sales remaining at low levels,
consumers are keeping their cars longer, resulting in an increased demand for
replacement parts as consumers repair their increasingly older
cars.




Management believes that we have leading market positions in our
primary product lines and we continue to expand our product and service
offerings to meet the needs of our customers. We believe that a key competitive
advantage is that we have one of the most comprehensive product offerings in the
vehicle replacement parts market, consisting of approximately 47,000 parts. This
product breadth, along with our extensive manufacturing and distribution
capabilities, product innovation, and reputation for quality and service, makes
us a leader in our industry.





However,
it is also important to note that in 2009, 2008 and 2007, approximately 30%, 29%
and 28%, respectively, of our total net sales were derived from our business
with AutoZone. Our failure to maintain a healthy relationship with AutoZone
would result in a significant decrease in our net sales. Even if we maintain our
relationship, this sales concentration with one customer increases the potential
impact to our business that could result from any changes in the economic terms
of this relationship.





Cost
of Sales




Cost of
sales includes all costs of manufacturing required to bring a product to a
ready-for-sale condition. Such costs include direct and indirect materials (net
of vendor consideration), direct and indirect labor costs (including pension,
postretirement and other fringe benefits), supplies, utilities, freight,
depreciation, insurance and other costs. Cost of sales also includes all costs
to procure, package and ship products that we purchase and resell.




During
much of 2008, the cost of commodities, including steel, aluminum, iron, plastic
and other petrochemical products, packaging materials and media, increased
significantly compared to 2007. Energy costs also increased significantly during
this period. These higher costs affected the prices we paid for raw materials
and for purchased component parts and finished products. Due to our inventory
being accounted for on the first-in, first-out method, a time lag of
approximately three months exists from the time we experience cost increases
until these increases flow through cost of sales. As a result of this time
lag, our results for the first quarter of 2009 were negatively impacted by the
higher cost of materials purchased in the latter part of 2008. During 2009,
general market prices for most commodities decreased from 2008 levels in
reaction to global economic conditions and uncertainties regarding short-term
demand. This decrease in most commodities during 2009 had a favorable impact on
our results for the six months ended June 30, 2010 in relation to the six months
ended June 30, 2009. A recovering economy, however, would likely increase
the demand for many of the commodities used in our business. While we have
been, and expect to continue to be, able to obtain sufficient quantities of
these commodities to satisfy our needs, increased demand from current levels for
these commodities could result in cost increases and may make procurement more
difficult in the future.




In
addition to the adverse impact of increasing commodities and energy costs, we
have been adversely affected by changes in foreign currency exchange rates,
primarily relating to the Mexican peso. Our Mexican operations source a
significant amount of inventory from the United States. During the period
September 30, 2008 through March 31, 2009, the U.S. dollar
strengthened against the Mexican peso by approximately 33%. During the period
March 31, 2009 through June 30, 2010, the U.S. dollar weakened against
the Mexican peso by approximately 12%, partially offsetting the trend
experienced in the prior six months. A strengthening U.S. dollar against the
Mexican peso means that our Mexican operations must pay more pesos to obtain
inventory from the United States.





30




Generally,
we attempt to mitigate the effects of cost increases and currency changes via a
combination of design changes, material substitution, global resourcing efforts
and increases in the selling prices for our products. With respect to pricing,
it should be noted that, while the terms of supplier and customer contracts and
special pricing arrangements can vary, generally a time lag exists between when
we incur increased costs and when we might recover a portion of the higher costs
through increased pricing. This time lag typically spans a fiscal quarter or
more, depending on the specific situation. During 2008, we secured customer
price increases that offset a portion of the cost increase we experienced in
2008. However, because of reductions from 2008 highs in both energy costs and
the costs of certain commodities used in our operations, we have not been able
to retain the entire effect of customer price increases secured in 2008. We
continue to pursue efforts to mitigate the effects of any cost increases;
however, there are no assurances that we will be entirely successful. To the
extent that we are unsuccessful, our profit margins will be adversely affected
and even if we are successful, our gross margin percentages will
decline.  Because of uncertainties regarding future commodities and
energy prices, and the success of our mitigation efforts, it is difficult to
estimate the impact of commodities and energy costs on future operating
results.





We
implemented a number of cost savings initiatives in late 2008 and throughout
2009 to align our cost structure with current business levels. Cost savings
initiatives included workforce reductions in both direct and indirect
manufacturing headcounts. Also, we implemented wages freezes and suspended
certain matching contributions to defined contribution and profit sharing plans,
as well as instituted tight controls over discretionary
spending.  These cost savings actions helped offset the adverse impact
of higher material costs and lower sales volumes.





Selling
and Warehousing Expenses





Selling
and warehousing expenses primarily include sales and marketing, warehousing and
distribution costs. Our major cost elements include salaries and wages, pension
and fringe benefits, depreciation, advertising and information technology
costs.





General
and Administrative Expenses





General
and administrative expenses primarily include executive, accounting and
administrative personnel salaries and fringe benefits, professional fees,
pension benefits, insurance, provision for doubtful accounts, rent and
information technology costs.





Critical
Accounting Policies and Estimates





The
methods, estimates and judgments we use in applying our most critical accounting
policies have a significant impact on the results we report in our financial
statements. We evaluate our estimates and judgments on an on-going basis. We
base our estimates on historical experience and on assumptions that we believe
to be reasonable under the circumstances. Our experience and assumptions form
the basis for our judgments about the carrying value of assets and liabilities
that are not readily apparent from other sources. Actual results may vary from
what we anticipate, and different assumptions or estimates about the future
could change our reported results.





We
believe the following accounting policies are the most critical in that they
significantly affect our financial statements, and they require our most
significant estimates and complex judgments.




Revenue
Recognition




We record
sales when title and risk of loss transfers to the customer, the sale price is
fixed and determinable, and the collection of the related accounts receivable is
reasonably assured.





31




Where we
have sales rebate programs with some of our customers, we estimate amounts due
under these sales rebate programs when the sales are recorded. Net sales
relating to any particular shipment are based upon the amounts invoiced for the
shipped goods less estimated future rebate payments. These estimates are based
upon our historical experience, current trends and our expectations regarding
future experience. Revisions to these estimates are recorded in the period in
which the facts that give rise to the revision become known.




Additionally,
we have agreements with our customers that provide for sales discounts,
marketing allowances, return allowances and performance incentives. Any
discount, allowance or incentive is treated as a reduction to sales, based on
estimates of the criteria that give rise to the discount, allowance or
incentive, such as sales volume and marketing spending. We routinely review
these criteria and our estimating process and make adjustments as facts and
circumstances change. Historically, we have not found material differences
between our estimates and actual results.




In order
to obtain exclusive contracts with certain customers, we may incur up-front
costs or assume the cost of returns of products sold by the previous supplier.
These costs are capitalized and amortized over the life of the contract. The
amortized amounts are recorded as a reduction to gross sales.




New
business changeover costs also can include the costs related to removing a new
customer’s inventory and replacing it with our inventory, commonly referred to
as a “stocklift.” Stocklift costs are recorded as a reduction to gross sales
when incurred.




Product
Returns





Our
customers have the right to return parts that are covered under our standard
warranty within stated warranty periods. Our customers also have the right, in
varying degrees, to return excess quantities of product. Credits for parts
returned under warranty and parts returned because of customer excess quantities
are estimated and recorded at the time of the related sales. These estimates are
based on historical experience, current trends and our expectations regarding
future experience. Revisions to these estimates are recorded in the period in
which the facts that give rise to the revision become known. Any significant
increase in the amount of product returns above historical levels could have a
material adverse effect on our financial results.





Inventory





We record
inventory at the lower of cost or market. Cost is principally determined using
standard cost or average cost, which approximates the first-in, first-out
method. Estimated market value is based on assumptions for future demand and
related pricing. If actual market conditions are less favorable than those
projected by management, reductions in the value of inventory may be
required.





Impairment of Intangible
Assets




Goodwill
is subject to annual review unless conditions arise that require a more frequent
evaluation. The review for impairment is based on a two-step accounting test.
The first step is to compare the estimated fair value with the recorded net book
value (including the goodwill). If the estimated fair value is higher than the
recorded net book value, no impairment is deemed to exist and no further testing
is required. If, however, the estimated fair value is below the recorded net
book value, then a second step must be performed to determine the goodwill
impairment required, if any. In this second step, the estimated fair value from
the first step is used as the purchase price in a hypothetical acquisition.
Purchase business combination accounting rules are followed to determine a
hypothetical purchase price allocation to the reporting unit’s assets and
liabilities. The residual amount of goodwill that results from this hypothetical
purchase price allocation is compared to the recorded amount of goodwill, and
the recorded amount is written down to the hypothetical amount, if
lower.





32




We
perform our annual goodwill impairment review in the fourth quarter of each year
using discounted future cash flows, unless conditions exist that would require a
more frequent evaluation. Management retains the services of an independent
valuation company in order to assist in evaluating the estimated fair value of
the Company. The process of evaluating the potential impairment of goodwill
is subjective because it requires the use of estimates and assumptions as to
future cash flows of the Company, discount rates commensurate with the risks
involved in the assets, future economic and market conditions, competition,
customer relations, pricing, raw material costs, production costs, selling,
general and administrative costs, and income and other taxes. Although we base
cash flow forecasts on assumptions that are consistent with plans and estimates
we use to manage the Company, there is significant judgment in determining the
cash flows.




Trademarks
with indefinite lives are tested for impairment on an annual basis in the fourth
quarter, unless conditions arise that would require a more frequent evaluation.
In assessing the recoverability of these assets, projections regarding estimated
discounted future cash flows and other factors are made to determine if
impairment has occurred. If we conclude that there has been impairment, we will
write down the carrying value of the asset to its fair value.




Each
year, we evaluate those trademarks with indefinite lives to determine whether
events and circumstances continue to support the indefinite useful lives. We
have concluded that events and circumstances continue to support the indefinite
lives of these trademarks.





Retirement
Benefits





Pension
obligations are actuarially determined and are affected by assumptions including
discount rate, life expectancy, annual compensation increases and the expected
rate of return on plan assets. Changes in the discount rate, and differences
between actual results and assumptions, will affect the amount of pension
expense we recognize in future periods.





Postretirement
health obligations are actuarially determined and are based on assumptions
including discount rate, life expectancy and health care cost trends. Changes in
the discount rate, and differences between actual results and assumptions, will
affect the amount of expense we recognize in future periods.





Insurance
Reserves





Our
insurance policies for workers’ compensation, automobile, product and general
liability include high deductibles (up to $0.5 million) for which we are
responsible. Deductibles for which we are responsible are recorded in accrued
expenses. Estimates of such losses involve substantial uncertainties including
litigation trends, the severity of reported claims and incurred but not yet
reported claims. External actuaries are used to assist us in estimating these
losses.





Environmental
Expenditures




Our
expenditures for environmental matters fall into two categories. The first
category is routine compliance with applicable laws and regulations related to
the protection of the environment. The costs of such compliance are based on
actual charges and do not require significant estimates.




The
second category of expenditures is for matters related to investigation and
remediation of contaminated sites. The impact of this type of expenditure
requires significant estimates by management. The estimated cost of the ultimate
outcome of these matters is included as a liability in our June 30, 2010
balance sheet. This estimate is based on all currently available information,
including input from outside legal and environmental professionals, and numerous
assumptions. Management believes that the ultimate outcome of these matters will
not exceed the $1.6 million accrued at June 30, 2010 by a material amount,
if at all. However, because all investigation and site analysis has not yet been
completed and because of the inherent uncertainty in such environmental matters
and any related litigation, there can be no assurance that the ultimate outcome
of these matters will not be significantly different than our
estimates.





33






Stock-Based
Compensation




We
recognize compensation expense for employee stock option grants using the
non-substantive vesting period approach, in which the expense (net of estimated
forfeitures) is recognized ratably over the requisite service period based on
the grant date fair value. The fair value of new stock options is estimated on
the date of grant using the Black-Scholes option pricing model. Determining the
fair value of stock options at the grant date requires judgment, including
estimates for the average risk-free interest rate, dividend yield and
volatility. These assumptions may differ significantly between grant dates
because of changes in the actual results of these inputs that occur over
time.





The terms
of our restricted stock agreement provide that the shares of restricted stock
vest only upon a change of control of UCI International, Inc., as defined in our
equity incentive plan. Due to the uncertainty surrounding the ultimate vesting
of the restricted stock, no stock-based compensation expense has been recorded.
When a change in control becomes probable, expense equal to the fair value of
the stock at that time will be recorded.




Results
of Operations





The
following table is UCI’s unaudited condensed consolidated income statements for
the three months and six months ended June 30, 2010 and 2009. The amounts are
presented in thousands of dollars.





Three Months Ended June 30,
                    
                    
                    Six Months Ended June 30,2010
                    
                    
                    2009
                    
                    
                    2010
                    
                    
                    2009Net
      sales
                    
                    $
                    236,198
                    
                    
                    $
                    217,422
                    
                    
                    $
                    466,502
                    
                    
                    $
                    437,284Cost
      of sales
                    
                    
                    176,228
                    
                    
                    
                    169,698
                    
                    
                    
                    349,304
                    
                    
                    
                    350,140Gross
      profit
                    
                    
                    59,970
                    
                    
                    
                    47,724
                    
                    
                    
                    117,198
                    
                    
                    
                    87,144Operating
      (expense) incomeSelling
      and warehousing
                    
                    
                    (15,077
                    )
                    
                    
                    (14,086
                    )
                    
                    
                    (29,372
                    )
                    
                    
                    (28,384
                    )General
      and administrative
                    
                    
                    (10,789
                    )
                    
                    
                    (11,019
                    )
                    
                    
                    (21,409
                    )
                    
                    
                    (22,071
                    )Amortization
      of acquired intangible assets
                    
                    
                    (1,336
                    )
                    
                    
                    (1,481
                    )
                    
                    
                    (2,671
                    )
                    
                    
                    (2,961
                    )Restructuring
      gains (costs), net
                    
                    
                    (344
                    )
                    
                    
                    598
                    
                    
                    
                    (2,380
                    )
                    
                    
                    393Patent
      litigation costs
                    
                    
                    (74
                    )
                    
                    
                    
                    
                    
                    
                    (1,038
                    )Operating
      income
                    
                    
                    32,350
                    
                    
                    
                    21,736
                    
                    
                    
                    60,328
                    
                    
                    
                    34,121Other
      expenseInterest
      expense, net
                    
                    
                    (6,817
                    )
                    
                    
                    (7,793
                    )
                    
                    
                    (13,664
                    )
                    
                    
                    (15,792
                    )Management
      fee expense
                    
                    
                    (500
                    )
                    
                    
                    (500
                    )
                    
                    
                    (1,000
                    )
                    
                    
                    (1,000
                    )Miscellaneous,
      net
                    
                    
                    (1,352
                    )
                    
                    
                    (1,669
                    )
                    
                    
                    (2,303
                    )
                    
                    
                    (3,154
                    )Income
      before income taxes
                    
                    
                    23,681
                    
                    
                    
                    11,774
                    
                    
                    
                    43,361
                    
                    
                    
                    14,175Income
      tax expense
                    
                    
                    (9,380
                    )
                    
                    
                    (4,361
                    )
                    
                    
                    (16,762
                    )
                    
                    
                    (5,496
                    )Net
      income
                    
                    
                    14,301
                    
                    
                    
                    7,413
                    
                    
                    
                    26,599
                    
                    
                    
                    8,679Less:
      Loss attributable to noncontrolling interest
                    
                    
                    (2
                    )
                    
                    
                    (75
                    )
                    
                    
                    (37
                    )
                    
                    
                    (379
                    )Net
      income attributable to United Components, Inc.
                    
                    $
                    14,303
                    
                    
                    $
                    7,488
                    
                    
                    $
                    26,636
                    
                    
                    $
                    9,058





Three Months Ended June 30, 2010
compared with the Three Months Ended June 30, 2009





Net
Sales





Net sales
of $236.2 million in the second quarter of 2010 increased $18.8 million, or
8.6%, compared to net sales in the second quarter of 2009. In connection with
obtaining new business, net sales included reductions of $0.3 million in the
second quarter of 2010 and $1.1 million in the second quarter of
2009.  These reductions  resulted from accepting returns of
inventory of our customers’ previous suppliers.  Excluding the effects
of obtaining new business from both quarters, sales were 8.2% higher in the
second quarter of 2010 compared to the second quarter of 2009.


34





Automotive
aftermarket net sales, which comprised approximately 86% of our net sales in the
second quarter of 2010, increased approximately 7.0% compared to the second
quarter of 2009. Within the automotive aftermarket channel, our retail channel
net sales increased approximately 5.2%, our traditional channel net sales
increased approximately 3.0%, our OES channel net sales increased approximately
19.3% and our heavy duty channel net sales increased approximately 20.7%. The
increased net sales in our retail, traditional and OES channels primarily
reflect the sales growth experienced by our customer base. The increased net
sales in our heavy duty channel resulted from a general improved market trend in
the transportation sector.  Our OEM channel sales in the second
quarter of 2010 increased approximately 45.0% over the second quarter of 2009
also due to the recovery from the difficult economic environment in early
2009.





Gross
Profit




Gross
profit, as reported, was $60.0 million for the second quarter of 2010 and $47.7
million for the second quarter of 2009. Both periods included special items
which are presented in the following table along with a comparison of adjusted
gross profit after excluding these special items.  Adjusted gross
profit is a non-GAAP financial measurement of our performance which is not in
accordance with, or a substitute for, GAAP measures. It is intended to
supplement the presentation of our financial results that are prepared in
accordance with GAAP. We use adjusted gross profit as presented to evaluate and
manage our operations internally.




Three Months Ended June 30,2010
                
                
                2009(amounts
      in millions)Gross
      profit, as reported
                
                $
                60.0
                
                
                $
                47.7Add
      back special items:New
      business changeover and sales commitment costs
                
                
                0.3
                
                
                
                1.1Allowance
      for disputed non-trade receivable
                
                
                1.4
                
                
                
                —Severance
      costs
                
                
                —
                
                
                
                0.3Costs
      to establish additional manufacturing in China
                
                
                —
                
                
                
                0.1Adjusted
      gross profit
                
                $
                61.7
                
                
                $
                49.2





The $0.3
million and the $1.1 million of “new business changeover and sales commitment
costs” in the second quarter of 2010 and second quarter of 2009, respectively,
were up-front costs incurred to obtain new business and to extend existing
long-term sales commitments.




During
the three months ended June 30, 2010, we recorded a $1.4 million provision due
to uncertainties of collection of refunds of Mexican value-added tax from the
Mexican Department of Finance and Public Credit.  See further
discussion under Contingencies – Valued-Added Tax Receivable.




The $0.3
million of “severance costs” in the second quarter of 2009 related to actions
taken to further align our cost structure with customers’ spending and current
market conditions.  The actions included, among other actions,
workforce reductions with related severance costs.




The $0.1
million of “costs to establish additional manufacturing in China” in the second
quarter of 2009 related to start-up costs to establish two new factories in
China.




Excluding
the adverse effects of these special items, adjusted gross profit increased to
$61.7 million in the second quarter of 2010 from $49.2 million in the second
quarter of 2009, and the related gross margin percentage increased to 26.1% in
the second quarter of 2010 from 22.5% in the second quarter of
2009.  The adjusted gross margin percentage is based on sales before
the effects of obtaining new business, which are discussed in the net sales
comparison above.


35


Higher
sales volume in the second quarter of 2010 was a significant factor in our gross
profit increase year over year. The 2010 results were also positively affected
by the favorable effects of cost reduction initiatives implemented to align our
cost structure with our customers’ spending and current market conditions, lower
commodity and energy costs and favorable trends in our insurance costs. The cost
reduction initiatives included workforce reductions and other employee cost
saving actions, as well as the institution of tight controls over discretionary
spending.  Partially offsetting these factors were the effects of
customer price concessions and higher estimated product returns.





Selling and Warehousing
Expenses





Selling
and warehousing expenses were $15.1 million in the second quarter of 2010, $1.0
million higher than the second quarter of 2009. Selling and warehousing expenses
were 6.4% of net sales in the second quarter of 2010 and 6.5% in the 2009
quarter.  Shipping and warehousing expenses increased $0.3 million to
support the increased sales volume.  Selling and marketing expenses
increased $0.7 million related to higher variable selling costs associated with
our higher sales volume and investments in our growth initiatives including
staffing and other costs.





General and Administrative
Expenses





General
and administrative expenses were $10.8 million in the second quarter of 2010,
$0.2 million lower than the second quarter of 2009. This reduction includes the
favorable effect of lower employee expenses in the second quarter of 2010 due to
headcount reductions in 2009, inclusive of severance related to the headcount
reductions, lower legal fees (excluding legal fees related to our antitrust
litigation) and cost control initiatives.  Partially offsetting these
items were $2.1 million of higher costs incurred in connection with our
antitrust litigation (discussed in Note J to the financial statements included
in this Form 10-Q) and higher incentive compensation.





Restructuring Gains (Costs),
Net





In the
three months ended June 30, 2010, we recorded $0.2 million of pension
curtailment and settlement losses and $0.1 million of severance related to
headcount reductions at our Mexican subsidiaries.





In the
three months ended June 30, 2009, we implemented restructuring plans to further
align our cost structure with customers’ spending and current market conditions.
The restructuring plans targeted excess assembly and aluminum casting capacity
and restructuring costs of the plan included workforce reductions, facility
closures, consolidations and realignments.





We idled
a Mexican aluminum casting operation in the three months ended June 30, 2009 and
consolidated the capacity into our Chinese casting operation. During that
period, we also relocated a small amount of filter manufacturing capacity which
resulted in idling a small amount of equipment with no alternative use. In
connection with the capacity consolidation, we recorded asset write-offs of $0.7
million incurred post employment benefit plans curtailment costs of $0.1
million.





In order
to accommodate expected growth in Europe, our Spanish distribution operation was
relocated to a new leased facility resulting in the idling and subsequent sale
of an owned facility. We recognized a gain of $1.5 million on the sale of this
facility. We incurred other costs of $0.1 million associated with the relocation
of the facility.





These
costs related to our capacity consolidation activities are reported in the
income statement in “Restructuring gains (costs) net.”





Interest Expense,
Net





Net
interest expense was $1.0 million lower in the second quarter of 2010 compared
to the second quarter of 2009. This decrease was due to lower average borrowings
during the second quarter of 2010 resulting from both the $17.7 million
mandatory prepayment on our term loan in April 2010 and the repayment of
revolver credit facility borrowings of $20.0 million in June
2009.  Also contributing to the decrease were lower interest rates on
our variable debt in the second quarter of 2010.


36


Miscellaneous,
Net






Miscellaneous
expense which consists of costs associated with the sale of receivableswas $0.3 million lower in
the second quarter of 2010 compared to the second quarter of 2009 due to lower
selling costs, partially offset by higher sales of receivables in 2010 versus
2009.





Income
Tax Expense





Income
tax expense in the second quarter of 2010 was $5.0 million higher than in the
second quarter of 2009, due to higher pre-tax income in the 2010 quarter and a
higher effective tax rate.  The effective tax rate for the second
quarter of 2010 was 39.6% compared to 37.0% for the second quarter of
2009.  The higher effective tax rate relates primarily to foreign
income taxes.





Net Income





Due to
the factors described above, we reported a net income of $14.3 million for the
second quarter of 2010 and $7.4 million for the second quarter of
2009.





Net Income Attributable to United
Components, Inc.





After
deducting losses attributable to a noncontrolling interest, net income
attributable to United Components, Inc. was $14.3 million in the second quarter
of 2010 compared to $7.5 million in the second quarter of 2009.





Six
Months Ended June 30, 2010 compared with the Six Months Ended June 30,
2009





Net
Sales





Net sales
of $466.5 million for the six months ended June 30, 2010 increased $29.2
million, or 6.7%, compared to net sales for the six months ended June 30, 2009.
In connection with obtaining new business, net sales included reductions of $0.9
million in the six months ended June 30, 2010 and $3.5 million in the six months
ended June 30, 2009. Excluding the effects of obtaining new business from both
six month periods, net sales were 6.0% higher in the first half of 2010 compared
to the first half of 2009.





Automotive
aftermarket net sales, which comprised approximately 86% of our net sales in the
six months ended June 30, 2010, increased approximately 4.7% compared to the six
months ended June 30, 2009. Within the automotive aftermarket channel, our
retail channel net sales increased approximately 5.0%, our traditional channel
net sales increased approximately 2.0%, our OES channel net sales increased
approximately 4.7% and our heavy duty channel net sales increased approximately
12.8%. The increased net sales in our retail, traditional and OES channels
primarily reflect the sales growth experienced by our customer base. The
increased net sales in our heavy duty channel resulted from a general improved
market trend in the transportation sector.  Our OEM channel sales in
the six months ended June 30,  2010 increased approximately 44.0% over
the six months ended June 30, 2009 due to recovery from the difficult economic
environment in 2008 and early 2009.





Gross
Profit




Gross
profit, as reported, was $117.2 million for the first half of 2010 and $87.1
million for the first half of 2009. Both periods included special items which
are presented in the following table along with a comparison of adjusted gross
profit after excluding these special items.  Adjusted gross profit is
a non-GAAP financial measurement of our performance which is not in accordance
with, or a substitute for, GAAP measures. It is intended to supplement the
presentation of our financial results that are prepared in accordance with GAAP.
We use adjusted gross profit as presented to evaluate and manage our operations
internally.


37




Six Months Ended June 30,2010
                
                
                2009(amounts
      in millions)Gross
      profit, as reported
                
                $
                117.2
                
                
                $
                87.1Add
      back special items:New
      business changeover and sales commitment costs
                
                
                0.9
                
                
                
                3.5Allowance
      for disputed non-trade receivable
                
                
                1.4
                
                
                
                —Severance
      costs
                
                
                —
                
                
                
                0.6Costs
      to establish additional manufacturing in China
                
                
                —
                
                
                
                0.2Adjusted
      gross profit
                
                $
                119.5
                
                
                $
                91.4





The $0.9
million and the $3.5 million of “new business changeover and sales commitment
costs” in the six months ended June 30, 2010 and 2009, respectively, were
up-front costs incurred to obtain new business and to extend existing long-term
sales commitments.




During
the six months ended June 30, 2010, we recorded a $1.4 million provision due to
uncertainties of collection of refunds of Mexican value-added tax from the
Mexican Department of Finance and Public Credit.  See further
discussion under Contingencies – Valued-Added Tax Receivable.




The $0.6
million of “severance costs” in the six months ended June 30, 2009 related to
actions taken to further align our cost structure with customers’ spending and
current market conditions.  The actions included, among other actions,
workforce reductions with related severance costs.




The $0.2
million of “costs to establish additional manufacturing in China” in the six
months ended June 30, 2009 related to start-up costs to establish two new
factories in China.





Excluding
the adverse effects of these special items, adjusted gross profit increased to
$119.5 million in the six months ended June 30, 2010 from $91.4 million in the
six months ended June 30, 2009, and the related gross margin percentage
increased to 25.6% in the six months ended June 30, 2010 from 20.7% in the six
months ended June 30, 2009. The adjusted gross margin percentage is based on
sales before the effects of obtaining new business, which are discussed in the
net sales comparison above.





Higher
net sales volume in the six months ended June 30, 2010 was a significant factor
in our gross profit increase year over year. The 2010 results were also
positively affected by the favorable effects of cost reduction initiatives to
align our cost structure with our customers’ spending and current market
conditions, lower commodity and energy costs and favorable exchange rates. The
cost reduction initiatives included workforce reductions and other employee cost
saving actions, as well as the institution of tight controls over discretionary
spending.  Partially offsetting these factors were the effect of price
concessions and higher product returns.





Selling and Warehousing
Expenses





Selling
and warehousing expenses were $29.4 million in the six months ended June 30,
2010, $1.0 million higher than the six months ended June 30, 2009. Shipping and
warehousing expenses increased $0.5 million to support the increased sales
volume.  Selling and marketing expenses increased $0.5 million related
to higher variable selling costs associated with our higher sales volume and
investments in our growth initiatives including staffing and other
costs.  Selling and warehousing expenses were 6.3% of net sales in the
six months ended June 30, 2010 and 6.5% in the six months ended June 30,
2009.  The improvement in selling and warehousing expenses as a
percentage of net sales despite the increased spending level is the result of
the cost reduction actions taken during 2009.


38


General and Administrative
Expenses





General
and administrative expenses were $21.4 million in the six months ended June 30,
2010, $0.7 million lower than the six months ended June 30, 2009. This reduction
includes the favorable effect of lower employee expenses in the six months ended
June 30, 2010 due to headcount reductions in 2009, inclusive of severance
related to the headcount reductions, lower legal fees (excluding legal fees
related to our antitrust litigation) and cost control
initiatives.  Partially offsetting these items were $2.5 million of
higher costs incurred in connection with our antitrust litigation (discussed in
Note J to the financial statements included in this Form 10-Q) and higher
incentive compensation.





Restructuring Gains (Costs),
Net





In the
six months ended June 30, 2010, we incurred $0.2 million of costs for the
maintenance and security of land and a building that is held for sale. Also in
the six months ended June 30, 2010, we recorded $0.5 million of pension
curtailment and settlement losses and $0.1 million of severance related to
headcount reductions at our Mexican subsidiaries.  During this period,
we also recorded a non-cash charge of $1.6 million related to the disposition of
our interest in a 51% owned joint venture.





In the
six months ended June 30, 2009, we implemented restructuring plans to further
align our cost structure with customers’ spending and current market conditions.
The restructuring plans targeted excess assembly and aluminum casting capacity
and restructuring costs of the plan included workforce reductions, facility
closures, consolidations and realignments.





We idled
a Mexican aluminum casting operation in the six months ended June 30, 2009 and
consolidated the capacity into our Chinese casting operation. During that
period, we also relocated a small amount of filter manufacturing capacity which
resulted in the idling of certain equipment with no alternative use. In
connection with this capacity consolidation, we recorded asset impairments of
$0.7 million and incurred post employment benefit plans curtailment costs of
$0.1 million.





In order
to accommodate expected growth in Europe, our Spanish distribution operation was
relocated to a new leased facility resulting in the idling and subsequent sale
of an owned facility. We recognized a gain of $1.5 million on the sale of this
facility. We incurred other costs of $0.1 million associated with the relocation
of the facility.





These
costs related to our capacity consolidation activities are reported in the
income statement in “Restructuring gains (costs) net.”





Interest Expense,
Net





Net
interest expense was $2.1 million lower in the six months ended June 30, 2010
compared to the six months ended June 30, 2009.  This decrease is due
to lower average borrowings during the six months ended June 30, 2010 resulting
from both the $17.7 million mandatory prepayment on our term loan made in April
2010 and the repayment of revolver credit facility borrowings of $20.0 million
in June 2009 and lower interest rates on our variable debt in the six months
ended June 30, 2010 as compared to the six months ended June 30,
2009.





Miscellaneous,
Net





Miscellaneous
expense which consists of costs associated with the sale of receivableswas $0.9 million lower in
the six months ended June 30, 2010 compared to the six months ended June 30,
2009 due to lower selling costs, partially offset by higher sales of receivables
in 2010 versus 2009.





Income Tax
Expense





Income
tax expense in the six months ended June 30, 2010 was $11.3 million higher than
in the six months ended June 30, 2009 due to higher pre-tax income in the 2010
quarter.  The effective tax rate for the six months ended June 30,
2010 was 38.7% compared to 38.8% for the six months ended June 30,
2009.


39


Net Income




Due to
the factors described above, we reported a net income of $26.6 million in the
six months ended June 30, 2010 and $8.7 million in the six months ended June 30,
2009.





Net
Income Attributable to United Components, Inc.





After
deducting losses attributable to a noncontrolling interest, net income
attributable to United Components, Inc. was $26.6 million in the six months
ended June 30, 2010 compared to $9.1 million in the six months ended June 30,
2009.





Liquidity
and Capital Resources





Net
Cash Provided by Operating Activities





Six Months Ended June 30,
2010





Net cash
provided by operating activities for the six months ended June 30, 2010 was
$76.6 million. Net income, excluding non-cash income and expense items, was
$45.0 million. A decrease in accounts receivable resulted in a generation of
cash of $1.9 million. The decrease in accounts receivable was primarily due to
an increase in net sales, partially offset by increased factoring of accounts
receivable during the six months ended June 30, 2010. Factored accounts
receivable totaled $128.6 million and $121.5 million at June 30, 2010 and
December 31, 2009, respectively. An increase in inventory resulted in a use of
cash of $4.5 million.  The increase in inventory was due primarily to
inventory builds to support the higher sales levels and support cost reduction
initiatives. An increase in accounts payable resulted in a generation of cash of
$3.9 million due primarily to the higher inventory levels. Our cash flow was
also positively affected by an increase in our liability to UCI International of
$5.5 million, due primarily to our use of UCI International’s taxable losses to
offset our income taxes that would otherwise be payable in cash. Changes in all
other assets and liabilities netted to a $24.8 million increase in cash. This
change primarily related to the timing of tax payments ($9.7 million), increases
in product returns and other amounts due customers ($8.0 million), decreases in
prepaid insurance ($1.3 million) and changes in other assets and accrued
expenses.





Six Months Ended June 30,
2009





Net cash
provided by operating activities for the six months ended June 30, 2009 was
$78.1 million. Net income, excluding non-cash income and expense items, was
$27.2 million. A decrease in accounts receivable and inventory resulted in a
generation of cash of $12.5 million and $22.4 million, respectively. The
decrease in accounts receivable was primarily due to increased factoring of
accounts receivable during the six months ended June 30, 2009, partially offset
by an increase in sales of $15.4 million in the six months ended June 30, 2009,
as compared to the third and fourth quarters of 2008, and the impact of the
higher mix of retail and traditional channel sales in relation to OEM / OES
channel sales. Accounts receivable dating terms with OEM and OES customers are
significantly shorter than retail and traditional customers. As a result of the
higher mix of retail and traditional channel sales, gross account receivable
days sales outstanding has increased. Factored accounts receivable totaled
$135.6 million and $80.1 million at June 30, 2009 and December 31, 2008,
respectively. The decrease in inventory was due to (i) focused efforts to reduce
inventory investments through improved inventory turns, (ii) higher sales in the
three months ended June 30, 2009 over the fourth quarter of 2008 and (iii)
reduced material costs resulting from decreases in costs of certain commodities
used in our operations experienced in the latter part of 2008 and in the first
half of 2009. An increase in accounts payable resulted in a generation of cash
of $0.6 million. The increase in accounts payable was due to initiatives with
our vendors to reduce our working capital investment levels, which offset
reductions in accounts payable related to the significantly lower inventory
balances at June 30, 2009 compared to December 31, 2008. UCI’s cash flow was
also positively affected by $2.6 million because of an increase in UCI’s
liability to UCI International, due primarily to UCI’s use of UCI
International’s taxable losses to offset UCI taxes that would otherwise be
payable in cash. Changes in all other assets and liabilities netted to a $12.7
million increase in cash. This amount consisted primarily of timing of payment
of employee-related accrued liabilities, including salaries and wages and
insurance, and timing of product returns and customer rebates and
credits.


40





Net Cash Used in Investing
Activities





Historically,
net cash used in investing activities has been for capital expenditures,
including routine expenditures for equipment replacement and efficiency
improvements, offset by proceeds from the disposition of property, plant and
equipment. Capital expenditures for the six months ended June 30, 2010 and June
30, 2009 were $11.7 million and $7.5 million, respectively, used primarily for
cost reduction and maintenance activities.  The higher capital
expenditures in 2010 are primarily the result of funding specific targeted cost
reduction opportunities as part of the Product Source Optimization initiative,
or PSO.  See further discussion of our PSO initiative under
“Management’s Action Plan and Outlook.”





Proceeds
from the sale of property, plant and equipment for the six months ended June 30,
2010 and June 30, 2009 were $0.1 million and $2.4 million, respectively.
Proceeds from the sale of our joint venture interest in China, net of
transaction costs and cash sold totaled approximately $0.3
million.  See Note N to the condensed consolidated financial
statements.  During the six months ended June 30, 2009, our Spanish
operation was relocated to a new leased facility in order to accommodate
expected growth in the European market resulting in the idling of an owned
facility. Proceeds for the six months ended June 30, 2009 primarily related to
the sale of this facility in Spain.





During
the six months ended June 30, 2010, we posted $7.4 million of cash to
collateralize a letter of credit required to appeal the judgment in the patent
litigation discussed in more detail under “Contingencies.”  During the
six months ended June 30, 2009, we posted $9.4 million of cash to collateralize
a letter of credit required by our workers compensation insurance
carrier.  This cash totaling $16.8 million is recorded as “Restricted
cash” as a component of long-term assets on our balance sheet at June 30, 2010.
This cash is invested in highly liquid, high quality government securities and
is not available for general operating purposes as long as the letters of credit
remain outstanding or until alternative collateral is posted.





Net
Cash Used in Financing Activities





Net cash
used in financing activities in the six months ended June 30, 2010 was $15.8
million compared to $19.6 million in the six months ended June 30,
2009.





Borrowings
of $9.6 and $6.5 million during the six months ended June 30, 2010 and 2009,
respectively, consisted solely of short-term borrowings payable to foreign
credit institutions.





During
the six months ended June 30, 2010, we made the $17.7 million mandatory
prepayment on the term loan of our senior credit facility. Additionally, during
the six months ended June 30, 2010, our Spanish and Chinese subsidiaries repaid
short-term notes borrowings to foreign credit institutions in the amount of $6.9
million.





During
the six months ended June 30, 2009, we repaid the $20.0 million of outstanding
borrowings under our revolving credit facility. Additionally, during the six
months ended June 30, 2009, our Spanish and Chinese subsidiaries repaid
short-term notes borrowings to foreign credit institutions in the amount of $5.9
million.


41




Current
Debt Capitalization and Scheduled Maturities





At June
30, 2010 and December 31, 2009, we had $174.2 million and $131.9 million of cash
and cash equivalents, respectively. Outstanding debt was as follows (in
millions):





June 30,
                        2010
                      
                      
                      December 31,
                        2009Short-term
      borrowings
                      
                      $
                      6.2
                      
                      
                      $
                      3.5Capitalized
      lease obligations
                      
                      
                      0.8
                      
                      
                      
                      0.9Term
      loan
                      
                      
                      172.3
                      
                      
                      
                      190.0Senior
      subordinated notes
                      
                      
                      230.0
                      
                      
                      
                      230.0Amount
      of debt requiring repayment
                      
                      
                      409.3
                      
                      
                      
                      424.4Unamortized
      debt discount
                      
                      
                      (1.9
                      )
                      
                      
                      (2.2
                      )$
                      407.4
                      
                      
                      $
                      422.2





Below is
a schedule of required future repayments of all debt outstanding on June 30,
2010. The amounts are presented in millions of dollars.





Remainder
      of 2010
                  
                  $
                  4.82011
                  
                  
                  29.02012
                  
                  
                  145.22013
                  
                  
                  230.12014
                  
                  
                  0.1Thereafter
                  
                  
                  0.1$
                  409.3





Short-term
borrowings are routine short-term borrowings by our foreign
operations.





Because
of previous prepayments of our term loan, we do not have any required repayments
of the senior credit facility term loans until December 2011. The term loan
matures in June 2012. Our $230.0 million senior subordinated notes are due in
2013.





In
addition to the debt discussed above, our parent, UCI International, has $339.2
million in Floating Rate Senior PIK Notes (the “UCI International Notes”)
outstanding at June 30, 2010. The UCI International Notes do not appear on our
balance sheet and the related interest expense is not included in our income
statement. While we have no direct obligation under the UCI International Notes,
we are the sole source of cash generation for UCI International. The interest on
the UCI International Notes is payable “in kind” until December 2011 and
therefore, no cash interest is payable until after that date. Accordingly, the
UCI International Notes will not have any material effect on our cash flow or
liquidity until after that date. In addition, the covenants contained in the UCI
International Notes indenture are substantially the same as those contained in
the senior subordinated notes indenture, so we expect that the UCI International
Notes will have no effect on our current operations of UCI.





The terms
of our senior credit facility permit us to repurchase from time to time up to
$75 million in aggregate principal amount of senior subordinated notes. As of
August 11, 2010, we had not repurchased any of the senior subordinated notes,
although we or UCI International may, under appropriate market conditions, do so
in the future through cash purchases or exchange offers, in open market,
privately negotiated or other transactions. Similarly, we or UCI International
may from time to time seek to repurchase or retire the UCI International Notes.
We will evaluate any such transactions in light of then-existing market
conditions, taking into account contractual restrictions, our current liquidity
and prospects for future access to capital. The amounts involved may be
material.


42





Our
significant debt service obligation is an important factor when assessing our
liquidity and capital resources. At our June 30, 2010 debt level and borrowing
rates, annual interest expense, including amortization of deferred financing
costs and debt discount, was approximately $27.3 million. An increase of 0.25
percentage points (25 basis points) on our variable interest rate debt would
increase our annual interest cost by $0.4 million.





Covenant
Compliance





Our
senior credit facility requires us to maintain certain financial covenants and
require mandatory prepayments under certain events as defined in the agreement.
Also, the facility includes certain negative covenants restricting or limiting
our ability to, among other things: declare dividends or redeem stock; prepay
certain debt; make loans or investments; guarantee or incur additional debt;
make capital expenditures; engage in acquisitions or other business
combinations; sell assets; and alter our business. In addition, the senior
credit facility contains the following financial covenants: a maximum leverage
ratio and a minimum interest coverage ratio. The financial covenants are
calculated on a trailing four consecutive quarters basis. As of June 30, 2010,
we were in compliance with all of these covenants.





Our
covenant compliance levels and actual ratios for the quarter ended June 30, 2010
were as follows:





Covenant
                          Compliance Level
                        
                        
                        Actual
                          RatioMinimum
      Adjusted EBITDA tointerest
      expense ratio
                        
                        
                        3.00x
                        
                        
                        
                        6.03xMaximum
      total debt to AdjustedEBITDA
      ratio
                        
                        
                        3.75x
                        
                        
                        
                        2.52x





For the
quarter ending September 30, 2010 through the remainder of the term of the
senior credit facility, the minimum Adjusted EBITDA to interest expense ratio
covenant compliance level remains at 3.00x and the maximum leverage ratio
covenant level decreases to 3.50x.





Adjusted
EBITDA is used to determine our compliance with many of the covenants contained
in our senior credit facility. Adjusted EBITDA is defined as EBITDA (earnings
before interest, taxes, depreciation and amortization) further adjusted to
exclude unusual items and other adjustments permitted by our lenders in
calculating covenant compliance under our senior credit facility.





We
believe that the inclusion of debt covenant related adjustments to EBITDA
applied in presenting Adjusted EBITDA is appropriate to provide additional
information to investors to demonstrate compliance with our financing
covenants.





A breach
of covenants in our senior credit facility that is tied to ratios based on
Adjusted EBITDA could result in a default under the facility and the lenders
could elect to declare all amounts borrowed due and payable. Any such
acceleration would also result in a default under our senior subordinated
notes.





EBITDA
and Adjusted EBITDA are not recognized terms under U.S. GAAP (Accounting
Principles Generally Accepted in the United States) and do not purport to be
alternatives to net income as a measure of operating performance. Additionally,
EBITDA and Adjusted EBITDA are not intended to be measures of free cash flow for
management’s discretionary use, as they do not consider certain cash
requirements such as interest payments, tax payments and debt service
requirements.


43


The
following table reconciles net income, the most directly comparable financial
measure and presented in accordance with U.S. GAAP to EBITDA and Adjusted EBITDA
(dollars in millions):




Three Months
                  Ended
                  June 30, 2010
                
                
                Trailing Four
                  Quarters
                  Ended
                  June 30, 2010Net
      income attributable to United Components, Inc.
                
                $
                14.3
                
                
                $
                48.1Interest,
      net of noncontrolling interest
                
                
                6.8
                
                
                
                27.8Income
      tax expense, net of noncontrolling interest
                
                
                9.4
                
                
                
                27.8Depreciation,
      net of noncontrolling interest
                
                
                6.6
                
                
                
                27.2Amortization
                
                
                2.1
                
                
                
                8.3EBITDA
                
                
                39.2
                
                
                
                139.2Special
      items:Restructuring
      costs
                
                
                0.3
                
                
                
                4.6Allowance
      for disputed non-trade receivable
                
                
                1.4
                
                
                
                1.4Patent
      litigation costs
                
                
                0.1
                
                
                
                8.0Cost
      of defending class action litigation
                
                
                2.4
                
                
                
                4.0New
      business changeover cost and sales commitment costs
                
                
                0.3
                
                
                
                2.4Non-cash
      stock options expense
                
                
                0.1
                
                
                
                0.5Management
      fee
                
                
                0.5
                
                
                
                2.0Adjusted
      EBITDA
                
                $
                44.3
                
                
                $
                162.1




Management’s
Action Plan and Outlook





Our
primary sources of liquidity are cash on hand, cash flow from operations and
accounts receivable factoring arrangements.  At June 30, 2010, we had
$174.2 million of cash and cash equivalents on hand.





Accounts Receivable
Factoring




Factoring
of customer trade accounts receivable is a significant part of our liquidity and
is related to extended terms provided to certain customers. Subject to certain
limitations, our senior credit facility agreement permits sales of and liens on
receivables, which are being sold pursuant to non-recourse factoring agreements
between certain of our customers and a number of banks. At June 30, 2010,
we had factoring relationships arranged by four customers with eight banks. The
terms of these relationships are such that the banks are not obligated to factor
any amount of receivables. Because of the current challenging capital markets,
it is possible that these banks may not have the capacity or willingness to fund
these factoring arrangements at the levels they have in the past, or at all, and
our customers may not continue to offer such programs in the
future.





We sold
approximately $135.8 million and $122.8 million of receivables during the six
months ended June 30, 2010 and 2009, respectively. If receivables had not
been factored, $128.6 million and $121.5 million of additional receivables would
have been outstanding at June 30, 2010 and December 31, 2009,
respectively. If we had not factored these receivables, we would have had to
finance these receivables in some other way, renegotiate terms with customers or
reduce cash on hand. Our short-term cash projections assume a level of factored
accounts receivable in a range of $120.0 million to $135.0 million at any given
time based upon our current customer contracts.


44




Short-Term Liquidity
Outlook





Our
ability to make scheduled payments of principal or interest on, or to refinance,
our indebtedness or to fund capital expenditures will depend on our ability to
generate cash from operations and from factoring arrangements as discussed
previously. Such cash generation is subject to general economic, financial,
competitive, legislative, regulatory and other factors that are beyond our
control.  Further, we terminated our revolving credit facility in June
2009 as we determined that the cost to extend the facility was not
justified.  The lack of a revolving credit facility may further reduce
our ability to meet liquidity needs.





Our
capital spending levels were lower in 2009 than historical spending levels. As
part of our plans to conserve cash, 2009 capital spending was limited to
expenditures necessary to maintain current operations and projects that had
short payback periods. Capital expenditures for the full year 2010 are expected
to be in the range of $30 million to $33 million. This increase over 2009
relates to funding specific targeted cost reduction opportunities as part of the
PSO initiative discussed below and incremental growth initiatives.





Based on
our forecasts, we believe that cash flow from operations and available cash and
cash equivalents will be adequate to service debt, meet liquidity needs and fund
necessary capital expenditures for the next twelve months.





Long-Term Liquidity
Outlook





As
presently structured, UCI would be the sole source of cash for the payment of
cash interest and any other payments on the UCI International Notes beginning in
2012, and we can give no assurance that the cash for those payments will be
available. In the future, we may also need to refinance all or a portion of the
principal amount of the senior subordinated notes and/or senior credit facility
borrowings, on or prior to maturity. If refinancing is necessary, there can be
no assurance that we will be able to secure such financing on acceptable terms,
or at all.





On-Going
Operational Initiatives





We
implemented a number of measures to improve the level of cash generated by our
operations in order to increase our liquidity and to align our cost structure
with our customers’ spending and current market conditions. These restructuring
activities included:




·
            Employment
      cost savings. We
      implemented hourly and salaried workforce reductions across all overhead
      and selling, general and administrative cost centers throughout 2009 and
      2010 to align staffing levels with current business levels. As a result of
      these reductions, we had approximately 3,850 employees at June 30,
      2010 as compared to approximately 4,900 at December 31, 2008.
      Additionally in 2009, we implemented wage freezes, suspended certain
      matching contributions to defined contribution and profit sharing plans
      and other cost reduction activities. As of June 30, 2010, the wage
      freeze and suspension of certain matching contributions were still in
      effect.




·
            Additional
      cost savings. In 2009, we
      critically evaluated overall overhead and selling, general and
      administrative discretionary spending and have instituted tight controls
      over discretionary spending, requiring additional approvals for all such
      spending across the Company. The same tight control over discretionary
      spending has continued into 2010.





More
recently, we have launched our new PSO initiative.  PSO utilizes our
existing global footprint and unique category management insights to optimize
the mix of products manufactured versus sourced, and to determine the optimal
manufacturing or vendor location. We expect that PSO will allow us to deliver a
high-quality, low-cost product by assembling certain products in the markets
where they are sold, assembling certain products specifically in low-cost
countries, and procuring certain products from selected low-cost country
suppliers.


45





Additionally,
we will continue to aggressively manage our investment in working capital and
our disciplined capital investment strategy.






CONTINGENCIES




Environmental;
Health and Safety





We are
subject to a variety of federal, state, local and foreign environmental; health
and safety laws and regulations, including those governing the discharge of
pollutants into the air or water, the management and disposal of hazardous
substances or wastes, and the cleanup of contaminated sites. We or our
predecessors have been identified as a potentially responsible party, or is
otherwise currently responsible, for contamination at five sites. One of these
sites is a former facility in Edison, New Jersey (the “New Jersey Site”), where
a state agency has ordered us to continue with the monitoring and investigation
of chlorinated solvent contamination. The New Jersey Site has been the subject
of litigation to determine whether a neighboring facility was responsible for
contamination discovered at the New Jersey Site. A judgment has been rendered in
that litigation to the effect that the neighboring facility is not responsible
for the contamination. We are analyzing what further investigation and
remediation, if any, may be required at the New Jersey Site. We are also
responsible for a portion of chlorinated solvent contamination at a previously
owned site in Solano County, California (the “California Site”), where we, at
the request of the regional water board, are investigating and analyzing the
nature and extent of the contamination and are conducting some remediation.
Based on currently available information, management believes that the cost of
the ultimate outcome of the environmental matters related to the New Jersey Site
and the California Site will not exceed the $1.3 million accrued at June 30,
2010 by a material amount, if at all. However, because all investigation and
analysis has not yet been completed and due to inherent uncertainty in such
environmental matters, it is possible that the ultimate outcome of these matters
could have a material adverse effect on results for a single
quarter.





In
addition to the two matters discussed above, we or our predecessors have been
named as a potentially responsible party at a third-party waste disposal site in
Calvert City, Kentucky (the “Kentucky Site”). We estimate settlement costs at
$0.1 million for this site. Also, we are involved in regulated remediation at
two of our manufacturing sites (the “Manufacturing Sites”). The combined cost of
the remaining remediation at such Manufacturing Sites is $0.2 million. We
anticipate that the majority of the $0.3 million reserved for settlement and
remediation costs will be spent in the next year. To date, the expenditures
related to the Kentucky Site and the Manufacturing Sites have been
immaterial.





Antitrust
Litigation





We are
subject to litigation and investigation related to pricing of aftermarket oil,
air, fuel and transmission filters, as described in Note J to the Consolidated
Financial Statements in Part I Item 1 of this Form 10-Q.





We intend
to vigorously defend against these claims. It is too soon to assess the possible
outcome of these proceedings. No amounts, other than ongoing defense costs, have
been recorded in the financial statements for these matters.





Patent
Litigation





Champion
is a defendant in litigation with Parker-Hannifin Corporation pursuant to which
Parker-Hannifin claims that certain of Champion’s products infringe a
Parker-Hannifin patent. On December 11, 2009, following trial, a jury verdict
was reached, finding in favor of Parker-Hannifin with damages of approximately
$6.5 million.  On May 3, 2010, the court entered a partial judgment in this
matter, awarding Parker-Hannifin $6.5 million in damages and a permanent
injunction.  Both parties have filed post-trial
motions.  Parker-Hannifin is seeking treble damages and attorneys’
fees.  Champion is seeking a judgment as a matter of law on the issues
of infringement and patent invalidity.  Champion continues to
vigorously defend this matter; however, there can be no assurance with respect
to the outcome of litigation. Champion has recorded a $6.5 million liability in
the financial statements for this matter.  The $6.5 million liability
for this patent litigation is included in “Accrued expenses and other current
liabilities” at June 30, 2010.  During the three and six months ended
June 30, 2010, Champion incurred post-trial costs of $0.1 million and $1.0
million, respectively.


46





In order
to appeal the judgment in this matter, we posted a letter of credit in the
amount of $7.4 million.  The issuer of the letter of credit required
us to cash collateralize the letter of credit.  This cash is recorded
as “Restricted cash” and is a component of long-term assets on the balance sheet
at June 30, 2010.





Value-Added
Tax Receivable





Our
Mexican operation has outstanding receivables denominated in Mexican pesos in
the amount of $2.2 million, net of allowances, from the Mexican Department of
Finance and Public Credit. The receivables relate to refunds of Mexican
value-added tax, to which we believe we are entitled in the ordinary course of
business. The local Mexican tax authorities have rejected our claims for these
refunds, and we have commenced litigation in the regional federal administrative
and tax courts to order the local tax authorities to process these
refunds.  During the three months ended June 30, 2010, we recorded a
$1.4 million provision due to uncertainties of collection of these
receivables.





Other
Litigation





We are
subject to various other contingencies, including routine legal proceedings and
claims arising out of the normal course of business. These proceedings primarily
involve commercial claims, product liability claims, personal injury claims and
workers’ compensation claims. The outcome of these lawsuits, legal proceedings
and claims cannot be predicted with certainty. Nevertheless, we believe that the
outcome of any currently existing proceedings, even if determined adversely,
would not have a material adverse effect on our financial condition or results
of operations.





Recently
Adopted Accounting Guidance





See the
Recently Adopted Accounting Guidance section of Note A to the Consolidated
Financial Statements in Part I Item 1 of this Form 10-Q.





Item 3.  Quantitative and
Qualitative Disclosures about Market Risk





Our
exposure to market risk consists of foreign currency exchange rate fluctuations
and changes in interest rates.





Foreign
Currency Exposure





Currency translation. As a
result of international operating activities, we are exposed to risks associated
with changes in foreign exchange rates, principally exchange rates between the
U.S. dollar and the Mexican peso, British pound and the Chinese yuan. The
results of operations of our foreign subsidiaries are translated into U.S.
dollars at the average exchange rates for each relevant period, except for our
Chinese subsidiaries, where cost of sales is translated primarily at historical
exchange rates. This translation has no impact on our cash flow. However, as
foreign exchange rates change, there are changes to the U.S. dollar equivalent
of sales and expenses denominated in foreign currencies. In 2009, approximately
8% of our net sales were made by our foreign subsidiaries and our total non-U.S.
net sales represented approximately 14.7% of our total net sales. Their combined
net income was not material. While these results, as measured in U.S. dollars,
are subject to foreign exchange rate fluctuations, we do not consider the
related risk to be material to our financial condition or results of
operations.


47


Except
for the Chinese subsidiaries, the balance sheets of foreign subsidiaries are
translated into U.S. dollars at the closing exchange rates as of the relevant
balance sheet date. Any adjustments resulting from the translation are recorded
in accumulated other comprehensive income (loss) on our statements of
changes in shareholder’s equity.  For our Chinese subsidiaries,
non-monetary assets and liabilities are translated into U.S. dollars at
historical rates and monetary assets and liabilities are translated into U.S.
dollars at the closing exchange rate as of the relevant balance sheet date.
Adjustments resulting from the translation of the balance sheets of our Chinese
subsidiaries are recorded in our income statements.





Currency transactions.
Currency transaction exposure arises where actual sales and purchases are made
by a company in a currency other than its own functional currency. In 2010, we
expect to source approximately $112 million of components from China. To the
extent possible, we structure arrangements where the purchase transactions are
denominated in U.S. dollars as a means to minimize near-term exposure to foreign
currency fluctuations.  Since June 30, 2008, the relationship of the
U.S. dollar to the Chinese yuan has remained stable.





A
weakening U.S. dollar means that we may be required to pay more U.S. dollars to
obtain components from China, which equates to higher cost of sales. If we are
unable to negotiate commensurate price decreases from our Chinese suppliers,
these higher prices would eventually translate into higher cost of sales. In
that event we would attempt to obtain corresponding price increases from our
customers, but there are no assurances that we would be successful.





Our
Mexican operations source a significant amount of inventory from the United
States. During the period September 30, 2008 through March 31, 2009, the U.S.
dollar strengthened against the Mexican peso by approximately 33%. During the
period March 31, 2009 through June 30, 2010, the U.S. dollar weakened against
the Mexican peso by approximately 12%, partially offsetting the trend
experienced in the prior six months. A strengthening U.S. dollar against the
Mexican peso means that our Mexican operations must pay more pesos to obtain
inventory from the United States. These higher prices translate into higher cost
of sales for our Mexican operations. We are attempting to obtain corresponding
price increases from our customers served by our Mexican operations, but the
weakness in the Mexican economy has limited the ability to entirely offset the
higher cost of sales.





We will
continue to monitor our transaction exposure to currency rate changes and may
enter into currency forward and option contracts to limit the exposure, as
appropriate. Gains and losses on contracts are deferred until the transaction
being hedged is finalized. As of June 30, 2010, we had no foreign currency
contracts outstanding. We do not engage in speculative activities.





Interest
Rate Risk





We
utilize, and we will continue to utilize, sensitivity analyses to assess the
potential effect of our variable rate debt. At our June 30, 2010 debt level
and borrowing rates, annual interest expense including amortization of deferred
financing costs and debt discount would be approximately $27.3 million. If
variable interest rates were to increase by 0.25% per annum, the net impact
would be a decrease of approximately $0.3 million of our net income and cash
flow.





Treasury
Policy





Our
treasury policy seeks to ensure that adequate financial resources are available
for the development of our businesses while managing our currency and interest
rate risks. Our policy is to not engage in speculative transactions. Our
policies with respect to the major areas of our treasury activity are set forth
above.





Item 4. Controls and
Procedures





The
Company maintains disclosure controls and procedures that are designed to ensure
that information required to be disclosed in the Company’s Exchange Act reports
is recorded, processed, summarized and reported within the time periods
specified in the Securities and Exchange Commission’s rules and forms and that
such information is accumulated and communicated to the Company’s management,
including its Chief Executive Officer and Chief Financial Officer, as
appropriate, to allow for timely decisions regarding required disclosure. In
designing and evaluating the disclosure controls and procedures, management
recognizes that any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving the desired control
objectives, and management is required to apply its judgment in evaluating the
cost-benefit relationship of possible controls and procedures.


48





As
required by Rule 13a-15 under the Exchange Act, management has evaluated, with
the participation of our Chief Executive Officer and Chief Financial Officer,
the effectiveness of our disclosure controls and procedures as of June 30, 2010,
the end of the period covered by this Quarterly Report on Form 10-Q. Based on
the foregoing, our Chief Executive Officer and Chief Financial Officer have
concluded, based on this evaluation, that as of June 30, 2010, the end of the
period covered by this Quarterly Report on Form 10-Q, our disclosure controls
and procedures were effective at a reasonable assurance level.





Further,
management determined that, as of June 30, 2010, there were no changes in our
internal control over financial reporting that occurred during the three months
then ended that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.


49





PART
II





OTHER
INFORMATION





Item 1. Legal
Proceedings





The
information required by this Item is incorporated by reference to Note J –
Contingencies – Environmental; Antitrust Litigation; Value-Added Tax Receivable;
Patent Litigation; Other Litigation to the unaudited condensed consolidated
financial statements under Part I of this report.





Item 1.A. Risk
Factors





Continued
volatility in and disruption to the global economic environment may materially
and adversely affect our business, financial condition and results of
operations.





The
global economy has continued to experience a period of significant uncertainty,
characterized by very weak or negative economic growth, high unemployment,
reduced spending by consumers and businesses, the bankruptcy, failure, collapse
or sale of various businesses and financial institutions and a considerable
level of intervention from the U.S. federal government and various foreign
governments. Demand for automotive products such as ours is linked to consumer
demand for automobiles, which has been, and may continue to be, adversely
impacted by the continuing uncertain economic environment.





First,
consumers’ driving habits are impacted by deteriorating economic conditions,
leading to a reduction in miles driven thereby increasing the periods between
maintenance and repairs.  In the latter part of 2008 and 2009, consumers’
driving habits were impacted by deteriorating economic conditions.  U.S.
Department of Energy statistics indicate that miles driven in the United States
for the year 2008 were 3.2% lower than for 2007.  Miles driven in 2009
increased only slightly from 2008.  If total miles driven were to continue
to decrease and consumers extend the mileage interval for routine maintenance,
we could experience a decline in demand for our products due to a reduction in
the need for replacement parts.  Further, as economic conditions result in
a reduction in discretionary spending for auto repair by the end users of our
products, our results of operations could be impacted.





Second,
difficult economic conditions may cause changes to the business models,
products, financial condition or consumer financing and rebate programs of the
OEMs, adversely affecting the number of cars produced and purchased. North
American light vehicle sales reached their lowest point in nearly three decades
in 2009 and the number of light vehicle registrations remained flat from 2008 to
2009. The effect of fewer cars being sold and fewer cars on the road adversely
affected the demand for our products, reducing purchases by our customers in the
aftermarket and by the OEMs.





If
economic conditions continue to deteriorate or do not show signs of improvement,
we may experience material adverse impacts to our business and operating
results.





The
current economic environment and adverse credit market conditions may
significantly affect our ability to meet liquidity needs and may materially and
adversely affect the financial soundness of our customers and
suppliers.





The
capital and credit markets have been experiencing extreme volatility and
disruption since the latter part of 2008 and as a result, the markets have
exerted downward pressure on the availability of liquidity and credit capacity
for many issuers.  While currently these conditions have not materially
impaired our ability to operate our business, there can be no assurance that
there will not be a further deterioration in financial markets and confidence in
major economies, which could increase the cost of financing.


50





We need
liquidity to pay our operating expenses, interest on our debt and capital
expenditures.  Without sufficient liquidity, we will be forced to curtail
our operations, and our business will suffer.  Our primary sources of
liquidity are cash on hand, cash flow from operations and factoring of customer
trade accounts receivable.  Subject to certain limitations, UCI’s credit
agreement for its senior credit facility permits sales of and liens on
receivables, which are being sold pursuant to factoring arrangements arranged
for us by certain customers with a number of banks.  At June 30, 2010, we
had factoring relationships arranged by four customers with eight banks. 
The terms of these relationships are such that the banks are not obligated to
factor any amount of receivables.  Because of the current challenging
capital markets, it is possible that these banks may not have the capacity or
willingness to fund these factoring arrangements at the levels they have in the
past, or at all, or our customers could discontinue their participation in the
arrangements, which could have a material adverse impact on our liquidity. 
Further, we terminated our revolving credit facility in June 2009.  While
we determined at the time that the cost to extend the facility was not
justified, the lack of a revolving credit facility may further reduce our
ability to meet liquidity needs.




In
addition to the potential liquidity risks we face, some of our customers and
suppliers are likely to experience serious cash flow problems and, as a
result, may find it difficult to obtain financing, if financing is available at
all. As a result, our customers’ need for and ability to purchase our products
or services may decrease, and our suppliers may increase their prices, reduce
their output or change their terms of sale. Any inability of customers to pay us
for our products and services, or any demands by suppliers for different payment
terms, may materially and adversely affect our earnings and cash flow. 
Furthermore, our suppliers may not be successful in generating sufficient
revenue or securing alternate financing arrangements, and therefore may no
longer be able to supply goods and services to us.  In that event, we would
need to find alternate sources of these goods and services, and there is no
assurance that we would be able to find such alternate sources on favorable
terms, if at all. Any such disruption in our supply chain could adversely affect
our ability to manufacture and deliver our products on a timely basis, and
thereby affect our results of operations.




Our
relationship with AutoZone creates risks associated with a concentrated net
sales source.




We
generate a large percentage of our net sales from our business with AutoZone,
but we cannot be assured that AutoZone will continue to purchase from
us.  Net sales to AutoZone accounted for approximately 30% of our
total net sales in fiscal 2009 and 29% of our total net sales in 2008,
respectively.  Several of our competitors are likely to pursue
business opportunities with this customer and threaten our current
position.  If we fail to maintain this relationship, our net sales
will be significantly diminished.  Even if we maintain our
relationship, our net sales concentration as a result of this relationship
increases the potential impact to our business that could result from any
changes in the economic terms of this relationship.  Any change in the
terms of our sales to this customer could have a material impact on our
financial position and results of operations.  Further, to the extent
AutoZone’s overall business or market share decreases, or does not increase as
anticipated, we may be adversely impacted.




Our
contracts with our customers are generally short-term and do not require the
purchase of a minimum amount.




We do not
typically enter into firm, long-term agreements with customers for the sale of
our products.  Instead, our products are sold through a series of
purchase orders based on our customers’ current or projected needs. By not
entering into long-term agreements we risk losing customers, or sales of a
certain product to any particular customer, on relatively short
notice.  The loss of a significant customer, or a significant
reduction in sales to a particular customer, could have a material impact on our
financial position and results of operations.


51


Increases
in our raw materials and component costs or the loss of a number of our
suppliers could adversely affect our financial health.




We depend
on third parties for the raw materials and components used in our manufacturing
processes.  We generally purchase our materials on the open
market.  However, in certain situations we have found it advantageous
to enter into long-term contracts for certain commodities
purchases.  During much of 2008, the cost of commodities, including
steel, aluminum, iron, plastic and other petrochemical products, packaging
materials and media, increased significantly compared to 2007.  Energy
costs also increased significantly during this period.  These higher
costs affected the prices we paid for raw materials and for purchased component
parts and finished products.  The prices of these commodities have
fluctuated significantly in recent years and such volatility in the prices of
these commodities could increase the costs of manufacturing our products and
providing our services.  We may not be able to pass on these costs to
our customers and this could have a material adverse effect on our financial
condition, results of operations or cash flows.  Even in the event
that increased costs can be passed through to customers, our gross margin
percentages would decline. While we currently maintain alternative sources for
steel and other raw materials, our business is subject to the risk of additional
price fluctuations and periodic delays in the delivery of our raw
materials.  Any such price fluctuations or delays, if material, could
harm our profitability or operations.  In addition, the loss of a
substantial number of suppliers could result in material cost increases or
reduce our production capacity.  We are also significantly affected by
the cost of natural gas used for fuel and the cost of
electricity.  Natural gas and electricity prices have historically
been volatile.




We
monitor sources of supply to attempt to assure that adequate raw materials and
other supplies needed in manufacturing processes are
available.  However, we do not typically enter into hedge transactions
to reduce our exposure to price risks and cannot assure you that we will be
successful in passing on these attendant costs if these risks were to
materialize.  In addition, if we are unable to continue to purchase
our required quantities of raw materials on commercially reasonable terms, or at
all, if we are unable to maintain or enter into purchasing contracts for
commodities, or if delivery of materials from suppliers is delayed or
non-conforming, our operations could be disrupted or our profitability could be
adversely impacted.




We
face competition in our markets.




We
operate in some very competitive and fragmented markets, and we compete against
numerous different types of businesses, some of which have greater financial or
other resources than we do.  Although we have significant market
positions in each of our product lines within the aftermarket, we cannot be
assured that we will be able to maintain our current market share.  In
the OEM sales channel, some of our competitors have achieved substantially
greater market penetration in many of the product lines which we
offer.  Competition is based on a number of considerations, including
product performance, quality of customer service and support, timely delivery
and price.  Our customers increasingly demand a broad product range,
and we must continue to develop our expertise in order to manufacture and market
these products successfully.  To remain competitive, we will need to
invest continuously in manufacturing, working capital, customer service and
support, marketing and our distribution networks.  We cannot be
assured that we will have sufficient resources to continue to make such
investments or that we will maintain our competitive position within each of the
markets we serve.  As a result of competition, we have experienced
pricing pressure.  There can be no guarantee that this downward price
pressure will not continue, and we may be forced to adjust the prices of some of
our products to stay competitive, or not compete at all in some markets,
possibly giving rise to revenue loss.




The trend
toward consolidation and bankruptcies among automotive parts suppliers is
resulting in fewer, larger suppliers who benefit from purchasing and
distribution economies of scale. If we cannot achieve cost savings and
operational improvements sufficient to allow us to compete favorably in the
future with these larger companies, our financial condition and results of
operations could be adversely affected due to a reduction of, or inability to
increase, sales.


52


We
are subject to increasing pricing pressure from import activity, particularly
from Asia.




Price
competition from light vehicle aftermarket suppliers, particularly based in Asia
and other locations with lower production costs, have historically played a role
and may play an increasing role in the aftermarket channels in which we
compete.  Pricing pressures have historically been more prevalent with
respect to our filter products than our other products.  While
aftermarket manufacturers in these locations have historically competed
primarily in markets for less technologically advanced products and manufactured
a limited number of products, they are expanding their manufacturing
capabilities to move toward producing a broad range of lower cost, higher
quality products and providing an expanded product
offering.  Partially in response to these pressures, we opened two new
factories in China in 2008.  In the future, competitors in Asia may be
able to effectively compete in our premium markets and produce a wider range of
products, which may force us to move additional manufacturing capacity offshore
and/or lower our prices, reducing our margins and/or decreasing our net
sales.




Our
international operations are subject to uncertainties that could affect our
operating results.




Our
business is subject to certain risks associated with doing business
internationally.  Our non-U.S. sales represented approximately 14.7%
of our total net sales for the year ended December 31, 2009.  In
addition, we operate seven manufacturing facilities outside of the United
States.  Accordingly, our future results could be harmed by a variety
of factors, including:




·
              fluctuations
      in currency exchange rates;


·
              geopolitical
      instability;


·
              exchange
      controls;


·
              compliance
      with U.S. Department of Commerce export
  controls;


·
              tariffs
      or other trade protection measures and import or export licensing
      requirements;


·
              potentially
      negative consequences from changes in tax
laws;


·
              fluctuations
      in interest rates;


·
              unexpected
      changes in regulatory
requirements;


·
              differing
      labor regulations;


·
              enforceability
      of contracts in the People’s Republic of
China;


·
              requirements
      relating to withholding taxes on remittances and other payments by
      subsidiaries;


·
              restrictions
      on our ability to own or operate subsidiaries, make investments or acquire
      new businesses in these
jurisdictions;


·
              restrictions
      on our ability to repatriate dividends from our
    subsidiaries;


·
              exposure
      to liabilities under the U.S. Foreign Corrupt Practices
    Act;


·
              difficulty
      of enforcing judgments or other remedies in foreign
      jurisdictions;


·
              diminished
      protection for intellectual property outside of the United States;
      and


·
              the
      potential for terrorism against U.S.
interests.





In
addition, we may face obstacles in the People’s Republic of China, including a
cumbersome bureaucracy and significant political, economic and legal risks which
may adversely affect our operations in that country.





As we
continue to expand our business globally, our success will depend, in large
part, on our ability to anticipate and effectively manage these and other risks
associated with our international operations.  However, any of these
factors could adversely affect our international operations and, consequently,
our operating results.




We
could be materially adversely affected by changes or imbalances in currency
exchange and other rates.




As a
result of increased international production and sourcing of components and
completed parts for resale, we are exposed to risks related to the effects of
changes in foreign currency exchange rates, principally exchange rates between
the U.S. dollar and the Chinese yuan and the U.S. dollar and the Mexican
peso.  The currency exchange rate from Chinese yuan to U.S. dollars
has historically been stable, in large part due to the economic policies of the
Chinese government.  However, there are no assurances that this
currency exchange rate will continue to be as stable in the
future.  The U.S. government has stated that the Chinese government
should reduce its influence over the currency exchange rate and let market
conditions control.  Less influence by the Chinese government will
most likely result in the Chinese yuan strengthening against the U.S.
dollar.  An increase in the Chinese yuan against the dollar means that
we will have to pay more in U.S. dollars for our purchases from
China.  If we are unable to negotiate commensurate price decreases
from our Chinese suppliers, these higher prices would eventually translate into
higher costs of sales.  In that event, we would attempt to obtain
corresponding price increases from our customers, but there are no assurances
that we would be successful.


53


Our
Mexican operations source a significant amount of inventory from the United
States.  During the period September 30, 2008 through March 31, 2009,
the U.S. dollar strengthened against the Mexican peso by approximately
33%.  During the period March 31, 2009 through June 30, 2010, the U.S.
dollar weakened against the Mexican peso by approximately 12%, partially
offsetting the trend experienced in the prior six months.  A
strengthening U.S. dollar against the Mexican peso means that our Mexican
operations must pay more in pesos to obtain inventory from the United States,
which translates into higher cost of sales for the Mexican
operations.  We are attempting to obtain price increases from our
customers for the products sold by our Mexican operations, but there are no
assurances that we will be successful.




We
currently do not enter into foreign exchange forward contracts to hedge certain
transactions in major currencies and even if we wished to do so in the future,
we may not be able, or it may not be cost-effective, to enter into contracts to
hedge our foreign currency exposure.




If
the North American light vehicle aftermarket adopts more expansive return
policies or practices such as extended payment terms, our cash flow and results
of operations could be harmed.




We are
subject to returns from customers, some of which may manage their excess
inventory through returns.  In line with industry practices,
arrangements with customers typically include provisions that permit them to
return specified levels of their purchases.  Returns have historically
represented approximately 3% to 5% of our gross sales.  If returns
from our customers significantly increase, for reasons such as obsolescence or
changes in inventory management by our customers, our profitability may be
adversely affected.  Further, certain of our products may not be
reused or resold upon return.  In addition, some customers in the
North American light vehicle aftermarket are pursuing ways to shift their costs
of working capital, including extending payment terms.  To the extent
customers extend payment terms, our cash flow may be adversely
affected.




The
introduction of new and improved products and services poses a potential threat
to the aftermarket for light vehicle parts.




Improvements
in technology and product quality are extending the longevity of light vehicle
parts and delaying aftermarket sales.  In particular, the introduction
of oil change indicators and the use of synthetic motor oils may extend oil
filter replacement cycles.  The introduction of electric, fuel cell
and hybrid light vehicles may pose a long-term risk to our business because
these vehicles are unlikely to utilize many of our existing product
lines.  The introduction of new and improved service initiatives by
OEMs also poses a risk to our market share in the light vehicle replacement
parts market.  In particular, we face market share risk from general
automakers, which have introduced increased warranty and maintenance service
initiatives, which are gaining popularity.  These service initiatives
have the potential to decrease the demand on aftermarket sales of our products
in the traditional and retail sales channels.




The
consolidation of our customers can have adverse effects on our
business.




Our
financial condition and results of operations could also be adversely affected
because the customer base for automotive parts is decreasing in both the OEM
channel and aftermarket. As a result, we are competing for business from fewer
customers. Due to the growing market share of these major customers, we have
been, and expect to continue to be, requested to reduce prices. We cannot be
certain that we will be able to generate cost savings and operational
improvements in the future that are sufficient to offset price reductions
requested by existing customers and necessary to win additional
business.


54




Our
lean manufacturing and other cost saving plans may not be
effective.




Our
strategy includes goals such as improvement of inventory management and customer
delivery and plant and distribution facility consolidation.  While we
have and will continue to implement these strategies, there can be no assurance
that we will be able to do so successfully or that we will realize the projected
benefits of these and other cost saving plans.  If we are unable to
realize these anticipated cost reductions, our financial health may be adversely
affected.  Moreover, our continued implementation of cost saving plans
and facilities integration may disrupt our operations and
performance.




It
may be difficult for us to recruit and retain the types of highly-skilled
employees we need to remain competitive.




Our
continued success depends in part on our ability to recruit, retain and motivate
highly-skilled sales, marketing and engineering
personnel.  Competition for persons in our industry is intense, and we
may not be able to successfully recruit, train or retain qualified
personnel.  If we fail to retain and recruit the necessary personnel,
our business and our ability to obtain new customers and retain existing
customers, develop new products and provide acceptable levels of customer
service could suffer.  We have entered into employment agreements with
certain of our key personnel.  However, we cannot be assured that
these individuals will stay with us.  If any of these persons were to
leave our company, it could be difficult to replace him or her, and our
operations and ability to manage day-to-day aspects of our business may be
materially adversely affected.




We
may be subject to work stoppages at our facilities, or our customers may be
subjected to work stoppages, either of which could negatively impact the
profitability of our business.




As of
June 30, 2010, we had approximately 3,850 employees, with union affiliations and
collective bargaining agreements at two of our facilities, representing
approximately 12% of our workforce.  The bargaining agreement for our
Fairfield, Illinois plant expires in August 2010 and we are currently in the
process of renegotiating that agreement. Since 1984, we have had only one work
stoppage, which lasted for three days at our Fairfield, Illinois
plant.  Although we believe that our relations with our employees are
currently good, if our unionized workers were to engage in a strike, work
stoppage or other slowdown in the future, we could experience a disruption of
our operations, which could interfere with our ability to deliver products on a
timely basis and could have other negative effects, such as decreased
productivity and increased labor costs.  We may also incur increased
labor costs in the event our work force becomes more unionized or as a result of
any renegotiation of our existing labor arrangements.  In addition,
many of our direct and indirect customers and vendors have unionized work
forces.  Strikes, work stoppages or slowdowns experienced by these
customers or vendors or their other suppliers could result in slowdowns or
closings of assembly plants that use our products or supply materials for use in
the production of our products.  Organizations responsible for
shipping our products may also be impacted by occasional strikes.  Any
interruption in the delivery of our products could reduce demand for our
products and could have a material adverse effect on us.




Increased
crude oil and energy prices and overall economic conditions could reduce global
demand for and use of automobiles, which could have an adverse effect on our
profitability.




Material
increases in the price of crude oil have, historically, been a contributing
factor to the periodic reduction in the global demand for and use of
automobiles.  A significant increase in the price of crude oil could reduce
global demand for and use of automobiles and shift customer demand away from
larger cars and light trucks, including SUVs, which we believe have more
frequent replacement intervals for our products, which could have an adverse
effect on our profitability.  For example, historic highs in crude oil
prices and corresponding historic highs in gasoline prices at the pump in 2008
impacted consumers’ driving habits.  See “—Continued volatility in and
disruption to the global economic environment may materially and adversely
affect our business, financial condition and results of
operations.” Further, higher gasoline prices may result in a reduction in
discretionary spending for auto repair by the end users of our products, which
could materially adversely impact our results of operations.  A reduction
in discretionary spending can also result in a decrease in the number of new
cars purchased, which adversely affects the demand for our products by our
customers in the aftermarket and by the OEMs.  Additionally, higher energy
costs may increase our freight expenses associated with the shipping of our
products to customers.


55




Environmental,
health and safety laws and regulations may impose significant compliance costs
and liabilities on us.




We are
subject to many environmental, health and safety laws and regulations governing
emissions to air, discharges to water, the generation, handling and disposal of
waste and the cleanup of contaminated properties.  Compliance with
these laws and regulations is costly.  We have incurred and expect to
continue to incur significant costs to maintain or achieve compliance with
applicable environmental, health and safety laws and
regulations.  Moreover, if these environmental, health and safety laws
and regulations become more stringent in the future, we could incur additional
costs.  We cannot assure we are in full compliance with all
environmental, health and safety laws and regulations.  Our failure to
comply with applicable environmental, health and safety laws and regulations and
permit requirements could result in civil or criminal fines, penalties or
enforcement actions, third-party claims for property damage and personal injury,
requirements to clean up property or to pay for the costs of cleanup or
regulatory or judicial orders enjoining or curtailing operations or requiring
corrective measures, including the installation of pollution control equipment
or remedial actions.




We may be
subject to liability under the Comprehensive Environmental Response,
Compensation and Liability Act and similar state or foreign laws for
contaminated properties that we currently own, lease or operate or that we or
our predecessors have previously owned, leased or operated, and sites to which
we or our predecessors sent hazardous substances.  Such liability may
be joint and several so that we may be liable for more than our share of
contamination and any such liability may be determined without regard to
causation or knowledge of contamination.  We or our predecessors have
been named potentially responsible parties at contaminated sites from time to
time in the past.  We are currently investigating and/or remediating,
or are otherwise currently responsible for, contamination at six sites, for
which management believes it has made adequate reserves.  In addition,
we occasionally evaluate various alternatives with respect to our facilities,
including possible dispositions or closings.  Investigations
undertaken in connection with these activities may lead to discoveries of
contamination that must be remediated, and closings of facilities may trigger
remediation requirements that are not applicable to operating
facilities.  We may also face lawsuits brought by third parties that
either allege property damage or personal injury as a result of, or seek
reimbursement for costs associated with, such contamination.




If
the products we manufacture or distribute are found to be defective, we could
incur significant costs and our reputation could be adversely
affected.




We face a
business risk of exposure to product liability claims in the event that the use
of our products has, or is alleged to have, resulted in injury, death or other
adverse effects.  We currently maintain product liability insurance
coverage, but we cannot be assured that we will be able to obtain such insurance
on acceptable terms in the future, if at all, or that any such insurance will
provide adequate coverage against potential claims.  Product liability
claims can be expensive to defend and can divert the attention of management and
other personnel for long periods of time, regardless of the ultimate
outcome.  An unsuccessful product liability defense could have a
material adverse effect on our business, financial condition, results of
operations or prospects.  If one of our products is determined to be
defective, we may face substantial warranty costs and may be responsible for
significant costs associated with a product recall or a redesign.  In
addition, our business depends on the strong brand reputation we have
developed.  In the event that our reputation is damaged, we may face
difficulty in maintaining our pricing positions with respect to some of our
products or have reduced demand for our products, which could negatively impact
our net sales and profitability.


56




Weare subject to class action
lawsuits alleging conspiracy violations of Section 1 of the Sherman Act, 15
U.S.C. § 1 and state law, related to aftermarket oil, air, fuel and transmission
filters and lawsuits alleging violations of the Canadian Competition
Act.  If the plaintiffs in these lawsuits against us are successful,
our financial condition, results of operations and liquidity, as well as our
reputation may be materially and adverselyaffected.




UCI’s
wholly-owned subsidiary, Champion Laboratories, Inc., or Champion, has been
named as one of multiple defendants in three consolidated amended complaints
alleging conspiracy violations of Section 1 of the Sherman Act, 15 U.S.C. §
1 and state law, related to aftermarket oil, air, fuel and transmission
filters.  The complaints are styled as putative class
actions.  One asserts claims on behalf of a putative class of direct
filter purchasers, one asserts claims on behalf of a putative class of indirect
end user filter purchases and one asserts claims on behalf of a class of
operators of service stations in California who indirectly purchased filters
from defendants for resale.  All three complaints seek damages,
including statutory treble damages, an injunction against future violations,
costs and attorney’s fees.  Champion was also named as one of multiple
defendants in a related complaint filed by William G. Burch in the United States
District Court for the Northern District of Oklahoma on behalf of the United
States pursuant to the False Claims Act, 31 U.S.C. § 3730.  The United
States declined to intervene in that case.  Champion was also named as
one of five defendants in a putative class action filed in Quebec,
Canada.  This action alleges conspiracy violations of the Canadian
Competition Act and violations of the obligation to act in good faith (contrary
to art. 6 of the Civil Code of Quebec) related to the sale of aftermarket
filters.  The plaintiff seeks compensatory damages against the five
defendants in the amount of $5 million and $1 million in punitive
damages.  Champion, but not UCI, was also named as one of 14
defendants in a putative class action filed in Ontario, Canada.  This
action alleges civil conspiracy, intentional interference with economic
interests, and conspiracy violations under the Canadian Competition Act related
to the sale of aftermarket filters.  The plaintiff seeks $150 million
in general damages against the 14 defendants and $15 million in punitive
damages.  The Offices of the Attorney Generals for the State of
Florida and the State of Washington are also investigating the allegations
raised in these suits.  We are fully cooperating with the Florida and
Washington Attorney General investigations.  The Florida Attorney
General filed a complaint against Champion and eight other defendants in the
Northern District of Illinois.  The complaint alleges violations of
Section 1 of the Sherman Act and Florida law related to the sale of aftermarket
filters.  The complaint asserts direct and indirect purchaser claims
on behalf of Florida governmental entities and Florida consumers.  It
seeks damages, including statutory treble damages, penalties, fees, costs and an
injunction.




The
Antitrust Division of the Department of Justice, or DOJ, investigated the
allegations raised in these suits, and certain current and former employees of
the defendants, including Champion, testified pursuant to
subpoenas.  On January 21, 2010, DOJ sent a letter to counsel for
Champion stating that “the Antitrust Division’s investigation into possible
collusion in the replacement auto filters industry is now officially
closed.”




We intend
to vigorously defend against these claims.  However, the outcome of
these class actions, like other litigation proceedings, is
uncertain.  Also, litigation and other steps taken to defend these
lawsuits can be costly, and we may incur substantial costs and expenses in doing
so.  Multidistrict litigation is particularly complex and can extend
for a protracted time, which can substantially increase the cost of such
litigation.  The defense of these lawsuits is also expected to divert
the efforts and attention of some of our key management and personnel from the
normal business operations of our company.  As a result, our defense
of this litigation, regardless of its eventual outcome, will likely be costly
and time consuming.  If the plaintiffs in these lawsuits against us
are successful, it may result in substantial monetary damages, which could have
a material adverse effect on our business, financial condition, results of
operations, and liquidity as well as our reputation.


57


Entering
new markets poses commercial risks.




We have
recently made significant investments as part of our strategy to expand into new
markets.  Maintaining continued expansion requires significant
investment and resources and we cannot be assured these resources will continue
to be available as needed.  We also cannot guarantee that our
expansion into any new market will be successful, or whether we will be able to
meet the needs of new customers or compete favorably in any new
market.  Therefore, we may be unable to recover the costs associated
with such efforts.




If
we are unable to meet future capital requirements, our business may be adversely
affected.




We
periodically make capital investments to, among other things, maintain and
upgrade our facilities and enhance our production processes.  As we
grow, we may have to incur capital expenditures.  Historically, we
have been able to fund these expenditures through cash flow from operations and
borrowings under our senior credit facilities.  However, our senior
credit facilities contain limitations that could affect our ability to fund our
future capital expenditures and other capital requirements.  In
addition, the revolving credit facility of our senior credit facility terminated
in June 2009.  We cannot be assured that we will have, or be able to
obtain, adequate funds to make all necessary capital expenditures when required,
or that the amount of future capital expenditures will not be materially in
excess of our anticipated or current expenditures.  If we are unable
to make necessary capital expenditures, our product line may become dated, our
productivity may be decreased and the quality of our products may be adversely
affected, which, in turn, could reduce our net sales and
profitability.




We
are subject to risks associated with changing manufacturing techniques, which
could place us at a competitive disadvantage.




The
successful implementation of our business strategy requires us to continuously
evolve our existing products and introduce new products to meet customers’ needs
in the industries we serve.  Our products are characterized by
stringent performance and specification requirements that mandate a high degree
of manufacturing and engineering expertise.  If we fail to meet these
requirements, our business could be at risk.  We believe that our
customers rigorously evaluate their suppliers on the basis of a number of
factors, including:




·
              product
      quality;


·
              technical
      expertise and development
capability;


·
              new
      product innovation;


·
              reliability
      and timeliness of delivery;


·
              price
      competitiveness;


·
              product
      design capability;


·
              manufacturing
      expertise;


·
              operational
      flexibility;


·
              customer
      service; and


·
              overall
      management.





Our
success will depend on our ability to continue to meet our customers’ changing
specifications with respect to these criteria.  We cannot be assured
that we will be able to address technological advances or introduce new products
that may be necessary to remain competitive within our
businesses.  Furthermore, we cannot be assured that we can adequately
protect any of our own technological developments to produce a sustainable
competitive advantage.




We
may not be able to continue to grow through acquisitions of, or investments in,
other companies.




In the
past we have grown through acquisitions and partnership opportunities and we may
engage in similar transactions in the future.  Such transactions,
however, involve significant risks including the integration of the newly
acquired business, the diversion of management’s attention from other business
concerns and effects on our business relationships with customers and
suppliers.  We cannot be assured we will successfully identify
suitable acquisition or partnership opportunities in the future, and in the
event we do commence with such transactions, we cannot assure we will be
successful at integrating the newly acquired businesses or that they will
perform as anticipated.  Any such failure could have a material and
adverse effect on our business.


58




Our
intellectual property may be misappropriated or subject to claims of
infringement.




We
attempt to protect our intellectual property rights through a combination of
patent, trademark, copyright and trade secret protection, as well as licensing
agreements and third-party nondisclosure and assignment
agreements.  The costs associated with the protection of our
intellectual property are ongoing and in some instances may be
substantial.  We cannot be assured that any of our applications for
protection of our intellectual property rights will be approved or that others
will not infringe or challenge our intellectual property rights.  We
currently do, and may continue in the future to, rely on unpatented proprietary
technology.  It is possible that our competitors will independently
develop the same or similar technology or otherwise obtain access to our
unpatented technology.  To protect our trade secrets and other
proprietary information, we require employees, consultants and advisors to
maintain the confidentiality of our trade secrets and proprietary
information.  We cannot be assured that these measures will provide
meaningful protection for our trade secrets, know-how or other proprietary
information in the event of any unauthorized use, misappropriation or
disclosure.  If we are unable to maintain the proprietary nature of
our technologies, our ability to sustain margins on some or all of our products
may be affected, which could reduce our sales and profitability.




In
addition, from time to time, we pursue and are pursued in potential litigation
relating to the protection of certain intellectual property rights, including
with respect to some of our more profitable products.  In some
instances, we may be found to have infringed on the intellectual property rights
of others.  In such a case, we may incur significant costs or losses
and may be subject to an injunction that would prevent us from selling a product
found to infringe. For example, in December of 2009, a jury determined that
Champion, our wholly-owned subsidiary, had infringed on a competitor’s patent
and the court entered a partial judgment in this matter, awarding the plaintiff
$6.5 million in damages and a permanent injunction.  The plaintiff is
currently seeking treble damages and attorneys’ fees.  See Note J —
Contingencies to the condensed consolidated financial statements included in
Part I of this Quarterly Report on Form 10-Q.




An
impairment in the carrying value of goodwill or other assets could negatively
affect our consolidated results of operations and net worth.




Pursuant
to accounting principles generally accepted in the United States, we are
required to annually assess our goodwill, intangibles and other long-lived
assets to determine if they are impaired.  In addition, interim
reviews must be performed whenever events or changes in circumstances indicate
that impairment may have occurred.  If the testing performed indicates
that impairment has occurred, we are required to record a non-cash impairment
charge for the difference between the carrying value of the goodwill or other
intangible assets and the implied fair value of the goodwill or other intangible
assets in the period the determination is made.  Disruptions to our
business, end market conditions, protracted economic weakness and unexpected
significant declines in operating results may result in charges for goodwill and
other asset impairments.  We assess the potential impairment of
goodwill on an annual basis, as well as when interim events or changes in
circumstances indicate that the carrying value may not be
recoverable.  We assess definite lived intangible assets when events
or changes in circumstances indicate that the carrying value may not be
recoverable.  Our annual goodwill impairment test resulted in no
goodwill impairment.  Although our analysis regarding the fair value
of goodwill indicates that it exceeds its carrying value, materially different
assumptions regarding the future performance of our businesses could result in
goodwill impairment losses.




Our
pension obligations could adversely impact our business.




We
sponsor defined benefit plans that were underfunded by $61.1 million at December
31, 2009.  If the performance of the assets in the pension plans does
not meet our expectations or actuarial assumptions, our required contributions
may be significantly greater than we currently expect.  In such an
event, our cash flows may be insufficient to make such a payment or otherwise be
negatively impacted.




59




Our
substantial indebtedness could adversely affect our financial
health.




As of
June 30, 2010, we and our subsidiaries had total indebtedness of $407.4 million
(not including intercompany indebtedness).




Our
substantial indebtedness could have important consequences to
you.  For example, it could:




·
              require
      us to dedicate a substantial portion of our cash flow from operations to
      payments on our indebtedness, thereby reducing the availability of our
      cash flow to fund acquisitions, working capital, capital expenditures,
      research and development efforts and other general corporate
      purposes;


·
              increase
      our vulnerability to and limit our flexibility in planning for, or
      reacting to, changes in our business and the industry in which we
      operate;


·
              expose
      us to the risk of increased interest rates as borrowings under our senior
      credit facilities are subject to variable rates of
    interest;


·
              place
      us at a competitive disadvantage compared to our competitors that have
      less debt;


·
              limit
      our ability to borrow additional funds;
and


·
              could
      make us more vulnerable to a general economic downturn than a company that
      is less leveraged.





In
addition, the indenture governing our senior subordinated notes, as well as the
agreement governing our senior credit facility, contain financial and other
restrictive covenants that limit our ability to engage in activities that may be
in our long-term best interests.  Our failure to comply with those
covenants could result in an event of default which, if not cured or waived,
could result in the acceleration of all of our debts.




To
service our indebtedness, we will require a significant amount of
cash.  Our ability to generate cash depends on many factors beyond our
control.




Our cash
interest expense for fiscal year 2009 was $28.7 million.  Our ability
to make payments on and to refinance our indebtedness, and to fund planned
capital expenditures will depend on our ability to generate cash in the
future.  This, to a certain extent, is subject to general economic,
financial, competitive, legislative, regulatory and other factors that are
beyond our control.




We cannot
be assured that our business will generate sufficient cash flow from operations
or that future borrowings will be available to us in an amount sufficient to
enable us to pay our indebtedness, including our senior credit facility and
senior subordinated notes, or to fund our other liquidity needs.  In
such circumstances, we may need to refinance all or a portion of our
indebtedness on or before maturity, and we cannot be assured that we will be
able to refinance any of our indebtedness including our senior credit facility
and senior subordinated notes, on commercially reasonable terms or at
all.  If we cannot service our indebtedness, we may have to take
actions such as selling assets, seeking additional equity or reducing or
delaying capital expenditures, strategic acquisitions, investments and
alliances.  We cannot be assured that any such actions, if necessary,
could be effected on commercially reasonable terms or at all.  Even in
the event these actions are taken, we cannot be assured that we will generate
sufficient cash flow to enable us to pay our indebtedness.  In
addition, the indenture governing our senior subordinated notes and the
agreement governing our senior credit facility limit our ability to sell assets
and will also restrict the use of proceeds from any such
sale.  Furthermore, our senior credit facility is secured by
substantially all of our assets.  Therefore, we may not be able to
sell assets quickly enough or for sufficient amounts to enable us to meet our
debt service obligations. If we fail to make scheduled payments on our debt,
such a failure to pay would be an event of default and would likely result in a
cross default under other debt instruments enabling our lenders to declare all
outstanding principal and interest due and payable. Further, if we are unable to
repay debt, lenders having secured obligations could proceed against the
collateral securing that debt. As a result of such a default or action against
the collateral, we may be forced into bankruptcy or liquidation, which may
result in a partial or total loss of your investment.


60




Despite
current indebtedness levels, we and our subsidiaries may still be able to incur
substantially more debt.  This could further exacerbate the risks
associated with our substantial financial leverage.




We and
our subsidiaries may be able to incur substantial additional indebtedness in the
future because the terms of the indentures governing our senior subordinated
notes and the agreement governing our senior credit facility do not fully
prohibit us or our subsidiaries from doing so.  If new debt is added
to our and our subsidiaries’ current debt levels, the related risks that we and
they now face could intensify.




Restrictive
covenants in the indenture governing our debt may restrict our ability to pursue
our business strategies.




The
indenture governing our senior subordinated notes and the agreement governing
our senior credit facility limit our ability and the ability of our restricted
subsidiaries, among other things, to:




·
              pay
      dividends and make distributions, investments or other restricted
      payments;


·
              incur
      additional indebtedness;


·
              sell
      assets, including capital stock of restricted
  subsidiaries;


·
              agree
      to payment restrictions affecting our restricted
    subsidiaries;


·
              consolidate,
      merge, sell or otherwise dispose of all or substantially all of our
      assets;


·
              enter
      into transactions with our
affiliates;


·
              incur
      liens; and


·
              designate
      any of our subsidiaries as unrestricted
  subsidiaries.





In
addition, as of the end of any given quarter, our senior credit facility
requires us to maintain a maximum consolidated leverage ratio and a minimum
consolidated interest coverage ratio, covering the previous four quarters,
through the term of the senior credit facility.  At June 30, 2010, we
were required to maintain a maximum consolidated leverage ratio and a minimum
consolidated interest coverage ratio of 3.75 to 1 and 3.0 to 1,
respectively.  These ratio requirements change quarterly under the
terms of our senior credit facility.  Our ability to comply with these
ratios may be affected by events beyond our control.




The
restrictions contained in the indenture governing our senior subordinated notes
and the agreement governing our senior credit facility could limit our ability
to plan for or react to market conditions, meet capital needs or make
acquisitions or otherwise restrict our activities or business
plans.




The
breach of any of these covenants or restrictions could result in a default under
the indenture governing our senior subordinated notes and the agreement
governing our senior credit facility.  An event of default under the
indenture or our senior credit facility would permit some of our lenders to
declare all amounts borrowed from them to be due and payable, and there is no
assurance that we would have sufficient assets to repay our
indebtedness.  An event of default under the indenture or our senior
credit facility would likely result in a cross default under the other
instrument.  If we are unable to repay debt, lenders having secured
obligations could proceed against the collateral securing that
debt.  As a result of such a default or action against collateral, we
may be forced into bankruptcy or liquidation, which may result in a partial or
total loss of your investment.




We
are controlled by Carlyle, whose interests in our business may be different than
yours.




As of
June 30, 2010, Carlyle Partners III, L.P. and CP III Coinvestment, L.P., both of
which are affiliates of The Carlyle Group, owned 90.8% of our equity and are
able to control our affairs in all cases.  Our entire board has been
designated by the affiliates of Carlyle and a majority of the board is
associated with Carlyle.  In addition, the affiliates of Carlyle
control the appointment of our management, the entering into of mergers, sales
of substantially all of our assets and other extraordinary
transactions.  The interests of Carlyle and its affiliates could
conflict with yours.  In addition, Carlyle or its affiliates may in
the future own businesses that directly compete with ours.


61




Item 2. Unregistered Sales of Equity
Securities and Use of Proceeds





None.





Item 3. Default Upon Senior
Securities





None.





Item 4. Reserved





None.





Item 5. Other
Information





None.





Item
6.  Exhibits





Exhibit
      31.1
                  Certification
      of Periodic Report by the Chief Executive Officer pursuant to Rule
      13a-14(a) of the Securities Exchange Act of 1934.Exhibit
      31.2
                  Certification
      of Periodic Report by the Chief Financial Officer pursuant to Rule
      13a-14(a) of the Securities Exchange Act of 1934.Exhibit
      32
                  Certification
      of Periodic Report by the Chief Executive Officer and Chief Financial
      Officer pursuant to 18 U.S.C. 1350, as created by Section 906 of the
      Sarbanes-Oxley Act of
2002.*





*
            This
      certificate is being furnished solely to accompany the report pursuant to
      18 U.S.C. 1350 and is not being filed for purposes of Section 18 of the
      Securities Exchange Act of 1934, as amended, and is not to be incorporated
      by reference into any filing of UCI, whether made before or after the date
      hereof, regardless of any general incorporation language in such
      filing.




62





SIGNATURES





Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.





UNITED
      COMPONENTS, INC.Date:
      August 11, 2010
              By:
              /s/ MARK P. BLAUFUSSName:
      Mark P. BlaufussTitle:
      Chief Financial Officer and Authorized
  Representative


63