UNITED
STATES SECURITIES AND EXCHANGE COMMISSION


Washington,
DC 20549





FORM
10-Q




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




For
the quarterly period ended March 31, 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
                  04-3759857(State or Other Jurisdiction of
                    Incorporation or Organization)
                  (I.R.S. Employer Identification No.)14601 Highway 41 North
                    Evansville, 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 o No þ (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 o No o





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 o
            Accelerated filer £
            Non-accelerated filer þ
            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 þ





The
registrant had 1,000 shares of its $0.01 par value common stock outstanding as
of May 14, 2010.









United
Components, Inc.





Index





Part
      I
              FINANCIAL
      INFORMATIONItem
      1.
              Consolidated
      Financial Statements (unaudited)Condensed
      consolidated balance sheets — March 31, 2010 and December 31,
      2009
              3Condensed
      consolidated income statements — Three months ended March 31, 2010 and
      2009
              4Condensed
      consolidated statements of cash flows — Three months ended March 31, 2010
      and 2009
              5Condensed
      consolidated statements of changes in equity — Three months ended March
      31, 2010 and 2009
              6Notes
      to condensed consolidated financial statements
              7Item
      2.
              Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
              23Item
      3.
              Quantitative
      and Qualitative Disclosures About Market Risk
              34Item
      4.
              Controls
      and Procedures
              35Part
      II
              OTHER
      INFORMATIONItem
      1.
              Legal
      Proceedings
              36Item
      1A.
              Risk
      Factors
              36Item
      2.
              Unregistered
      Sales of Equity Securities and Use of Proceeds
              36Item
      3.
              Default
      Upon Senior Securities
              36Item
      4.
              Reserved
              36Item
      5.
              Other
      Information
              36Item
      6.
              Exhibits
              36Signatures
              
              37Exhibits
              
              38




2


PART
I


FINANCIAL
INFORMATION





Item
1. Financial Statements


United
Components, Inc.





Condensed
Consolidated Balance Sheets


(in
thousands)


March 31,
                      2010
                    
                    
                    December 31,
                      2009(unaudited)AssetsCurrent
      assetsCash
      and cash equivalents
                    
                    $
                    165,843
                    
                    
                    $
                    131,913Accounts
      receivable, net
                    
                    
                    263,753
                    
                    
                    
                    261,210Inventories,
      net
                    
                    
                    134,522
                    
                    
                    
                    133,058Deferred
      tax assets
                    
                    
                    30,932
                    
                    
                    
                    30,714Assets
      held for sale – Note N
                    
                    
                    4,637
                    
                    
                    
                    —Other
      current assets
                    
                    
                    18,314
                    
                    
                    
                    23,499Total
      current assets
                    
                    
                    618,001
                    
                    
                    
                    580,394Property,
      plant and equipment, net
                    
                    
                    142,400
                    
                    
                    
                    149,753Goodwill
                    
                    
                    241,461
                    
                    
                    
                    241,461Other
      intangible assets, net
                    
                    
                    67,099
                    
                    
                    
                    68,030Deferred
      financing costs, net
                    
                    
                    1,683
                    
                    
                    
                    1,843Restricted
      cash
                    
                    
                    9,400
                    
                    
                    
                    9,400Other
      long-term assets
                    
                    
                    5,931
                    
                    
                    
                    6,304Total
      assets
                    
                    $
                    1,085,975
                    
                    
                    $
                    1,057,185Liabilities and equityCurrent
      liabilitiesAccounts
      payable
                    
                    $
                    111,385
                    
                    
                    $
                    111,898Short-term
      borrowings
                    
                    
                    5,810
                    
                    
                    
                    3,460Current
      maturities of long-term debt
                    
                    
                    17,895
                    
                    
                    
                    17,925Accrued
      expenses and other current liabilities
                    
                    
                    118,037
                    
                    
                    
                    106,981Total
      current liabilities
                    
                    
                    253,127
                    
                    
                    
                    240,264Long-term
      debt, less current maturities
                    
                    
                    400,958
                    
                    
                    
                    400,853Pension
      and other postretirement liabilities
                    
                    
                    71,675
                    
                    
                    
                    70,802Deferred
      tax liabilities
                    
                    
                    8,492
                    
                    
                    
                    8,546Due
      to UCI Holdco
                    
                    
                    33,058
                    
                    
                    
                    30,105Other
      long-term liabilities
                    
                    
                    6,142
                    
                    
                    
                    6,672Total
      liabilities
                    
                    
                    773,452
                    
                    
                    
                    757,242Contingencies
      — Note JEquityUnited
      Components, Inc. shareholder’s equityCommon
      stock
                    
                    
                    —
                    
                    
                    
                    —Additional
      paid in capital
                    
                    
                    278,875
                    
                    
                    
                    278,756Retained
      earnings
                    
                    
                    64,212
                    
                    
                    
                    51,879Accumulated
      other comprehensive loss
                    
                    
                    (32,339
                    )
                    
                    
                    (32,502
                    )Total
      United Components, Inc. shareholder’s equity
                    
                    
                    310,748
                    
                    
                    
                    298,133Noncontrolling
      interest – Note N
                    
                    
                    1,775
                    
                    
                    
                    1,810Total
      equity
                    
                    
                    312,523
                    
                    
                    
                    299,943Total
      liabilities and equity
                    
                    $
                    1,085,975
                    
                    
                    $
                    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 March 31,2010
                
                
                2009Net
      sales
                
                $
                230,304
                
                
                $
                219,862Cost
      of sales
                
                
                173,076
                
                
                
                180,442Gross
      profit
                
                
                57,228
                
                
                
                39,420Operating
      expenseSelling
      and warehousing
                
                
                (14,295
                )
                
                
                (14,298
                )General
      and administrative
                
                
                (10,620
                )
                
                
                (11,052
                )Amortization
      of acquired intangible assets
                
                
                (1,335
                )
                
                
                (1,480
                )Restructuring
      costs (Note B)
                
                
                (2,036
                )
                
                
                (205
                )Patent
      litigation costs (Note J)
                
                
                (964
                )
                
                
                —Operating
      income
                
                
                27,978
                
                
                
                12,385Other
      expenseInterest
      expense, net
                
                
                (6,847
                )
                
                
                (7,999
                )Management
      fee expense
                
                
                (500
                )
                
                
                (500
                )Miscellaneous,
      net
                
                
                (951
                )
                
                
                (1,485
                )Income
      before income taxes
                
                
                19,680
                
                
                
                2,401Income
      tax expense
                
                
                (7,382
                )
                
                
                (1,135
                )Net
      income
                
                
                12,298
                
                
                
                1,266Less:
      Loss attributable to noncontrolling interest
                
                
                (35
                )
                
                
                (304
                )Net
      income attributable to United Components, Inc.
                
                $
                12,333
                
                
                $
                1,570





The
accompanying notes are an integral part of these statements.


4


United
Components, Inc.





Condensed Consolidated Statements of
Cash Flows(unaudited)


(in
thousands)





Three Months ended March 31,2010
                
                
                2009Cash
      flows from operating activitiesNet
      income attributable to United Components, Inc.
                
                $
                12,333
                
                
                $
                1,570Adjustments
      to reconcile net income to net cash provided by operating
      activities:Depreciation
      and amortization of other intangible assets
                
                
                8,981
                
                
                
                9,439Amortization
      of deferred financing costs and debt discount
                
                
                318
                
                
                
                404Deferred
      income taxes
                
                
                (539
                )
                
                
                405Other
      non-cash, net
                
                
                1,149
                
                
                
                355Changes
      in operating assets and liabilitiesAccounts
      receivable
                
                
                (3,533
                )
                
                
                7,061Inventories
                
                
                (3,735
                )
                
                
                11,735Other
      current assets
                
                
                4,927
                
                
                
                (198
                )Accounts
      payable
                
                
                1,836
                
                
                
                5,536Accrued
      expenses and other current liabilities
                
                
                11,661
                
                
                
                10,736Other
      long-term assets
                
                
                346
                
                
                
                287Due
      to UCI Holdco
                
                
                2,953
                
                
                
                871Other
      long-term liabilities
                
                
                873
                
                
                
                1,038Net
      cash provided by operating activities
                
                
                37,570
                
                
                
                49,239Cash
      flows from investing activitiesCapital
      expenditures
                
                
                (5,841
                )
                
                
                (4,018
                )Proceeds
      from sale of other property, plant and equipment
                
                
                77
                
                
                
                24Net
      cash used in investing activities
                
                
                (5,764
                )
                
                
                (3,994
                )Cash
      flows from financing activitiesIssuances
      of debt
                
                
                5,557
                
                
                
                3,672Debt
      repayments
                
                
                (3,290
                )
                
                
                (22,391
                )Net
      cash provided by (used in) financing activities
                
                
                2,267
                
                
                
                (18,719
                )Effect
      of currency exchange rate changes on cash
                
                
                (143
                )
                
                
                (133
                )Net
      increase in cash and cash equivalents
                
                
                33,930
                
                
                
                26,393Cash
      and cash equivalents at beginning of year
                
                
                131,913
                
                
                
                46,612Cash
      and cash equivalents at end of period
                
                $
                165,843
                
                
                $
                73,005





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
                              Income (Loss)Balance
      at January 1, 2009
                            
                            $
                            —
                            
                            
                            $
                            278,430
                            
                            
                            $
                            21,243
                            
                            
                            $
                            (39,600
                            )
                            
                            $
                            2,490
                            
                            
                            $
                            262,563Recognition
      of stock based compensation expense
                            
                            
                            
                            
                            
                            
                            165
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            165Comprehensive
      incomeNet
      income (loss)
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            1,570
                            
                            
                            
                            
                            
                            
                            
                            (304
                            )
                            
                            
                            1,266
                            
                            
                            $
                            1,570Other
      comprehensive incomeForeign
      currency adjustment (after $(7) of income taxes)
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            (1,642
                            )
                            
                            
                            
                            
                            
                            
                            (1,642
                            )
                            
                            
                            (1,642
                            )Total
      comprehensive loss
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            $
                            (72
                            )Balance
      at March 31, 2009
                            
                            $
                            —
                            
                            
                            $
                            278,595
                            
                            
                            $
                            22,813
                            
                            
                            $
                            (41,242
                            )
                            
                            $
                            2,186
                            
                            
                            $
                            262,352Balance
      at January 1, 2010
                            
                            $
                            —
                            
                            
                            $
                            278,756
                            
                            
                            $
                            51,879
                            
                            
                            $
                            (32,502
                            )
                            
                            $
                            1,810
                            
                            
                            $
                            299,943Recognition
      of stock based compensation expense
                            
                            
                            
                            
                            
                            
                            119
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            119Comprehensive
      incomeNet
      income (loss)
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            12,333
                            
                            
                            
                            
                            
                            
                            
                            (35
                            )
                            
                            
                            12,298
                            
                            
                            $
                            12,333Other
      comprehensive incomePension
      liability (after$(93)
      of income taxes)
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            151
                            
                            
                            
                            
                            
                            
                            
                            151
                            
                            
                            
                            151Foreign
      currency adjustment (after $27 of income taxes)
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            12
                            
                            
                            
                            
                            
                            
                            
                            12
                            
                            
                            
                            12Total
      comprehensive income
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            $
                            12,496Balance
      at March 31, 2010
                            
                            $
                            —
                            
                            
                            $
                            278,875
                            
                            
                            $
                            64,212
                            
                            
                            $
                            (32,339
                            )
                            
                            $
                            1,775
                            
                            
                            $
                            312,523





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 Holdco, Inc.
(“Holdco”). Holdco and United Components, Inc. are corporations formed at the
direction of The Carlyle Group. At March 31, 2010, affiliates of The Carlyle
Group owned 90.8% of Holdco’s common stock, and the remainder was owned by
certain current and former members of United Components, Inc.’s senior
management and board of directors. At March 31, 2010, Holdco had $331.5 million
of Floating Rate Senior PIK Notes (the “Holdco Notes”) outstanding. While United
Components, Inc. has no direct obligation under the Holdco Notes, United
Components, Inc. is the sole source of cash generation for Holdco. The Holdco
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, and 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 March 31, 2010 and for the
three months ended March 31, 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.





Operating
results for the three months ended March 31, 2010 are not necessarily indicative
of the results that may be expected for the year ended December 31,
2010.





Income
Statement Reclassification





Certain
engineering expenses totaling $0.8 million for the three months ended March 31,
2009 were presented in general and administrative expenses.  These
engineering expenses have been reclassified to cost of sales in the condensed
consolidated income statement for the three months ended March 31, 2009 in order
to conform to the current year presentation.





7


United
Components, Inc.


Notes
to Condensed Consolidated Financial Statements (Unaudited)





Recently
Adopted Accounting Guidance





On
January 1, 2009, UCI adopted changes issued by the Financial Accounting
Standards Board (“FASB”) to consolidation accounting and reporting. These
changes establish accounting and reporting for the noncontrolling interest in a
subsidiary and for the deconsolidation of a subsidiary. This guidance defines a
noncontrolling interest, previously called a minority interest, as the portion
of equity in a subsidiary not attributable, directly or indirectly, to a parent.
These changes require, among other items: a noncontrolling interest to be
included in the consolidated statement of financial position within equity
separate from the parent’s equity; consolidated net income to be reported at
amounts inclusive of both the parent’s and noncontrolling interest’s shares and,
separately, the amounts of consolidated net income attributable to the parent
and noncontrolling interest all on the consolidated statement of operations; and
if a subsidiary is deconsolidated, any retained noncontrolling equity investment
in the former subsidiary to be measured at fair value and a gain or loss to be
recognized in net income based on such fair value. Other than the change in
presentation of noncontrolling interests, the adoption of these changes had no
impact on UCI’s financial statements. The presentation and disclosure
requirements of these changes were applied.





On
January 1, 2010, UCI adopted changes issued by the 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 sale of UCI’s 51%
owned joint venture.





NOTE
B — RESTRUCTURING COSTS





In the
first quarters of 2010 and 2009, UCI incurred $0.1 million and $0.2 million,
respectively, of costs for the maintenance and security of land and building
that is held for sale. In the first quarter of 2010, UCI recorded $0.4 million
of pension curtailment and settlement losses related to headcount reductions at
its Mexican subsidiaries and recorded a non-cash charge of $1.5 million related
to the disposition of the company’s interest in a 51% owned joint venture (see
Note N).  These costs related to the company’s capacity consolidation
activities are reported in the income statement in “Restructuring
costs.”





NOTE C — SALES OF
RECEIVABLES





UCI has
agreements to sell undivided interests in certain of its receivables with
factoring companies, which in turn have the right to sell an undivided interest
to a financial institution or other third party. UCI enters into these
agreements at its discretion as part of its overall cash management activities.
Pursuant to these agreements, UCI sold $56.1 million and $60.0 million of
receivables during the three months ended March 31, 2010 and 2009,
respectively.





If
receivables had not been factored, $132.4 million and $121.5 million of
additional receivables would have been outstanding at March 31, 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.


8


United
Components, Inc.


Notes
to Condensed Consolidated Financial Statements (Unaudited)





The sales
of receivables were accounted for as a sale 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 $1.0 million and $1.5 million in
the three months ended March 31, 2010 and 2009, respectively. These costs are
recorded in the income statements in “Miscellaneous, net.”





NOTE D —
INVENTORIES





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





March 31,
                  2010
                
                
                December 31,
                  2009Raw
      materials
                
                $
                48.2
                
                
                $
                47.5Work
      in process
                
                
                25.9
                
                
                
                27.6Finished
      products
                
                
                76.0
                
                
                
                73.1Valuation
      reserves
                
                
                (15.6
                )
                
                
                (15.1
                )$
                134.5
                
                
                $
                133.1





NOTE
E — RESTRICTED CASH





In June
2009, UCI posted $9.4 million of cash to collateralize a letter of credit
required by UCI’s workers’ compensation
insurance carrier. This cash is recorded as “Restricted cash” and is a component
of long-term assets on UCI’s balance sheet at March 31, 2010. This cash is
invested in highly liquid, high quality government securities and is not
available for general operating purposes as long as the letter of credit remains
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):





March 31,
                  2010
                
                
                December 31,
                  2009Salaries
      and wages
                
                $
                3.7
                
                
                $
                3.1Bonuses
      and profit sharing
                
                
                2.8
                
                
                
                6.1Vacation
      pay
                
                
                4.5
                
                
                
                4.4Product
      returns
                
                
                46.6
                
                
                
                42.1Rebates,
      credits and discounts due customers
                
                
                13.0
                
                
                
                13.6Insurance
                
                
                11.9
                
                
                
                9.8Taxes
      payable
                
                
                9.5
                
                
                
                7.4Interest
                
                
                6.9
                
                
                
                1.2Other
                
                
                19.1
                
                
                
                19.3$
                118.0
                
                
                $
                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.




9


United
Components, Inc.


Notes
to Condensed Consolidated Financial Statements (Unaudited)





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





Three Months ended March 31,2010
                
                
                2009Beginning
      of year
                
                $
                42.1
                
                
                $
                32.0Cost
      of unsalvageable parts
                
                
                (10.1
                )
                
                
                (12.0
                )Additional
      reductions to sales
                
                
                14.6
                
                
                
                11.7End
      of period
                
                $
                46.6
                
                
                $
                31.7





NOTE H — PENSION





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





Three Months ended March 31,2010
                
                
                2009Service
      cost
                
                $
                1.1
                
                
                $
                1.1Interest
      cost
                
                
                3.3
                
                
                
                3.3Expected
      return on plan assets
                
                
                (3.7
                )
                
                
                (3.6
                )Amortization
      of prior service cost and unrecognized loss
                
                
                0.2
                
                
                
                0.1Curtailment
      and settlement losses recognized
                
                
                0.4
                
                
                
                —$
                1.3
                
                
                $
                0.9





In 2010,
UCI recorded $0.4 million of curtailment and settlement losses related to
headcount reductions at its Mexican subsidiaries.





NOTE I — DEBT





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





March
      31,
                  2010
                
                
                December 31,
                  2009Short-term
      borrowings
                
                $
                5.8
                
                
                $
                3.5Capital
      lease obligations
                
                
                0.9
                
                
                
                0.9Term
      loan
                
                
                190.0
                
                
                
                190.0Senior
      subordinated notes
                
                
                230.0
                
                
                
                230.0Unamortized
      debt issuance costs
                
                
                (2.0
                )
                
                
                (2.2
                )424.7
                
                
                
                422.2Less:Short-term
      borrowings
                
                
                5.8
                
                
                
                3.5Term
      loan
                
                
                17.7
                
                
                
                17.7Current
      maturities
                
                
                0.2
                
                
                
                0.2Long-term
      debt
                
                $
                401.0
                
                
                $
                400.8





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





Senior
credit facility — The senior credit facility includes a term loan and,
until its termination in June 2009, included a revolving credit
facility.





As a
result of previous prepayments there are no scheduled repayments of the term
loan before December 2011.  While there are no scheduled repayments
before December 2011, the senior credit facility does require mandatory
prepayments of the term loan 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,
payable within 95 days of December 31, 2009.  In accordance with this
provision, UCI made the $17.7 million mandatory prepayment, reducing the amount
outstanding under the term loan to $172.3 million, on April 1, 2010. This
mandatory prepayment is presented as a component of “Current maturities of
long-term debt” in the March 31, 2010 balance sheet.   The term loan
matures in June 2012.


10


United
Components, Inc.


Notes
to Condensed Consolidated Financial Statements (Unaudited)





The
senior credit facility requires UCI to maintain certain financial covenants and
requires mandatory prepayments under certain events as defined in the
agreement.  Also, the facility 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 is in compliance with all of these covenants and is not
required to make any mandatory prepayments other than the $17.7 million
mandatory excess cash flow prepayment discussed above.





Senior
subordinated notes (the “Notes”)— The Notes bear interest at
9 3/8% with interest 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. The Notes mature on June 15,
2013.





Short-term
borrowings — At March 31, 2010, short-term borrowings included $1.6
million of a Spanish subsidiary’s notes payable and $4.2 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.”





Environmental





UCI is
subject to a variety of federal, state, local and foreign environmental 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 has been identified as a potentially
responsible party for contamination at two 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. The second site is 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 $1.4 million accrued at March 31, 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 has been named as a potentially
responsible party at a 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.




11


United
Components, Inc.


Notes
to Condensed Consolidated Financial Statements (Unaudited)





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.





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 United
Components.  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
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.  On December 10, 2009 the
plaintiffs filed their first sets of interrogatories and requests for production
of documents.  On January 11, 2010, all defendants filed a number of
discovery requests to plaintiffs and third parties.  The parties
submitted their initial objections and responses to these discovery requests on
February 16, 2010.  On January 21, 2010, the Court entered a
scheduling order for discovery.  Under this order, discovery related
to class certification will proceed immediately, with document production
scheduled to be completed no later than June 21, 2010.  Class
certification briefing will follow the completion of document production, and
expert discovery on merits-related issues follow the court’s ruling on
plaintiffs’ motions for class certification.


12


United
Components, Inc.


Notes
to Condensed Consolidated Financial Statements (Unaudited)





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.





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.




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 $3.7 million 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
in Monterrey to order the local tax authorities to process these
refunds.




13


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 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. UCI has recorded a $6.5 million liability in the
financial statements for this matter included in “Accrued expenses and other
current liabilities” at March 31, 2010.  During the first quarter of
2010, UCI incurred post-trial costs of $1.0 million.





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 March 31,2010
                
                
                2009United
      States
                
                $
                195.9
                
                
                $
                190.7Mexico
                
                
                6.0
                
                
                
                5.9Canada
                
                
                7.1
                
                
                
                6.5United
      Kingdom
                
                
                2.9
                
                
                
                1.8France
                
                
                2.9
                
                
                
                1.9Germany
                
                
                1.7
                
                
                
                1.2China
                
                
                1.7
                
                
                
                1.9Spain
                
                
                1.1
                
                
                
                0.8Other
                
                
                11.0
                
                
                
                9.2$
                230.3
                
                
                $
                219.9





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





March 31,
                  2010
                
                
                December 31,
                  2009United
      States
                
                $
                190.2
                
                
                $
                192.9China
                
                
                23.4
                
                
                
                29.7Mexico
                
                
                9.1
                
                
                
                8.9Spain
                
                
                3.8
                
                
                
                3.8Goodwill
                
                
                241.5
                
                
                
                241.5$
                468.0
                
                
                $
                476.8




14


United
Components, Inc.


Notes
to Condensed Consolidated Financial Statements (Unaudited)





NOTE L — OTHER
INFORMATION





At March
31, 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 in the first quarters of 2010 and 2009 were $0.8 million
and $2.6 million, respectively. Cash payments (net of refunds) for income taxes
for the first quarters of 2010 and 2009 were $0.4 million and $0.4 million,
respectively.





For
federal and for certain state tax purposes, UCI is included in the consolidated
tax returns of Holdco. 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 Holdco’s current taxable losses, UCI records
that portion of its tax expense as a payable to Holdco. Other income tax
liabilities and refunds receivable are reported as income taxes payable and
receivable. At March 31, 2010 and December 31, 2009, income tax-related payables
to Holdco were $38.0 million and $34.9 million, respectively. These amounts are
included in the net “Due to Holdco” amounts in the respective balance
sheets.





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
  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 three months ended March 31, 2010 and 2009, no assets were adjusted to their
fair values on a nonrecurring basis.





Fair
value of financial instruments





Cash and cash equivalents -
The carrying amount of cash equivalents ($152.4 million) approximates fair value
because the original maturity is less than 90 days.





Restricted cash– The
carrying amount of restricted cash ($9.4 million) 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 March 31, 2010 and December 31, 2009 balance
sheets (in millions):




Fair Value Measurements using
                        Quoted Prices in Active Markets for Identical Assets
                        (Level 1)March 31, 2010
                      
                      
                      December 31, 2009Cash
      equivalents
                      
                      $
                      156.6
                      
                      
                      $
                      122.7Restricted
      cash
                      
                      $
                      9.4
                      
                      
                      $
                      9.4
  15


United
Components, Inc.


Notes
to Condensed Consolidated Financial Statements (Unaudited)





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 $190 million of term loan borrowings under the senior credit
facility at March 31, 2010 and December 31, 2009 was $182.4 million and $176.7
million, respectively. 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.





The fair
value of the $230 million senior subordinated notes at March 31, 2010 and
December 31, 2009 was $230.3 million and $221.1 million, respectively. The
estimated fair value of these notes was based on bid/ask prices, as reported by
a third party bond pricing service. Due to the infrequency of trades of the
senior subordinated 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 $2.2 million, less
estimated transaction costs.  Based upon the terms of the transaction, UCI
recorded a non-cash charge of $1.5 million ($1.2 million after
tax).  UCI deconsolidated the Chinese joint venture and the net
estimated realizable value of $2.9 million is recorded in the March 31, 2010
balance sheet as follows (in millions):





Current
      assets
                  
                  $
                  3.8Long-lived
      assets
                  
                  
                  3.9Current
      liabilities
                  
                  
                  (2.8
                  )Noncurrent
      liabilities
                  
                  
                  (0.3
                  )Assets
      held for sale
                  
                  
                  4.6Noncontrolling
      interest
                  
                  
                  (1.7
                  )$
                  2.9





In
connection with the sale, UCI entered into a long-term supply agreement pursuant
to which LMC will supply certain water pump 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 payment 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) UCI, 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.


16


United
Components, Inc.


Notes
to Condensed Consolidated Financial Statements (Unaudited)


Note
O (continued)





Consolidating
Condensed Balance Sheet


March
31, 2010


(in
thousands)





UCI
                      Consolidated
                    
                    
                    Eliminations
                    
                    
                    UCI
                    
                    
                    Guarantors
                    
                    
                    Non-
                      GuarantorsAssetsCurrent
      assetsCash
      and cash equivalents
                    
                    $
                    165,843
                    
                    
                    $
                    —
                    
                    
                    $
                    157,809
                    
                    
                    $
                    (592
                    )
                    
                    $
                    8,626Accounts
      receivable, net
                    
                    
                    263,753
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    247,307
                    
                    
                    
                    16,446Inventories,
      net
                    
                    
                    134,522
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    114,905
                    
                    
                    
                    19,617Deferred
      tax assets
                    
                    
                    30,932
                    
                    
                    
                    —
                    
                    
                    
                    (13
                    )
                    
                    
                    31,751
                    
                    
                    
                    (806
                    )Assets
      held for sale
                    
                    
                    4,637
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    4,637Other
      current assets
                    
                    
                    18,314
                    
                    
                    
                    —
                    
                    
                    
                    1,543
                    
                    
                    
                    8,023
                    
                    
                    
                    8,748Total
      current assets
                    
                    
                    618,001
                    
                    
                    
                    —
                    
                    
                    
                    159,339
                    
                    
                    
                    401,394
                    
                    
                    
                    57,268Property,
      plant and equipment, net
                    
                    
                    142,400
                    
                    
                    
                    —
                    
                    
                    
                    194
                    
                    
                    
                    107,969
                    
                    
                    
                    34,237Investment
      in subsidiaries
                    
                    
                    —
                    
                    
                    
                    16,356
                    
                    
                    
                    (45,963
                    )
                    
                    
                    29,607
                    
                    
                    
                    —Goodwill
                    
                    
                    241,461
                    
                    
                    
                    —
                    
                    
                    
                    241,461
                    
                    
                    
                    —
                    
                    
                    
                    —Other
      intangible assets, net
                    
                    
                    67,099
                    
                    
                    
                    —
                    
                    
                    
                    6,927
                    
                    
                    
                    59,932
                    
                    
                    
                    240Deferred
      financing costs, net
                    
                    
                    1,683
                    
                    
                    
                    —
                    
                    
                    
                    1,683
                    
                    
                    
                    —
                    
                    
                    
                    —Restricted
      cash
                    
                    
                    9,400
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    9,400
                    
                    
                    
                    —Other
      long-term assets
                    
                    
                    5,931
                    
                    
                    
                    —
                    
                    
                    
                    367
                    
                    
                    
                    5,423
                    
                    
                    
                    141Total
      assets
                    
                    $
                    1,085,975
                    
                    
                    $
                    16,356
                    
                    
                    $
                    364,008
                    
                    
                    $
                    613,725
                    
                    
                    $
                    91,886Liabilities and equityCurrent
      liabilitiesAccounts
      payable
                    
                    $
                    111,385
                    
                    
                    $
                    —
                    
                    
                    $
                    3,460
                    
                    
                    $
                    94,564
                    
                    
                    $
                    13,361Short-term
      borrowings
                    
                    
                    5,810
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    5,810Current
      maturities of long-term debt
                    
                    
                    17,895
                    
                    
                    
                    —
                    
                    
                    
                    17,836
                    
                    
                    
                    59
                    
                    
                    
                    —Accrued
      expenses and other current liabilities
                    
                    
                    118,037
                    
                    
                    
                    —
                    
                    
                    
                    16,296
                    
                    
                    
                    99,319
                    
                    
                    
                    2,422Total
      current liabilities
                    
                    
                    253,127
                    
                    
                    
                    —
                    
                    
                    
                    37,592
                    
                    
                    
                    193,942
                    
                    
                    
                    21,593Long-term
      debt, less current maturities
                    
                    
                    400,958
                    
                    
                    
                    —
                    
                    
                    
                    400,577
                    
                    
                    
                    381
                    
                    
                    
                    —Pension
      and other postretirement liabilities
                    
                    
                    71,675
                    
                    
                    
                    —
                    
                    
                    
                    9,635
                    
                    
                    
                    61,011
                    
                    
                    
                    1,029Deferred
      tax liabilities
                    
                    
                    8,492
                    
                    
                    
                    —
                    
                    
                    
                    22,215
                    
                    
                    
                    (14,293
                    )
                    
                    
                    570Due
      to Holdco
                    
                    
                    33,058
                    
                    
                    
                    —
                    
                    
                    
                    33,058
                    
                    
                    
                    —
                    
                    
                    
                    —Other
      long-term liabilities
                    
                    
                    6,142
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    4,552
                    
                    
                    
                    1,590Intercompany
      payables (receivables)
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    (449,817
                    )
                    
                    
                    442,590
                    
                    
                    
                    7,227Total
      equity
                    
                    
                    312,523
                    
                    
                    
                    16,356
                    
                    
                    
                    310,748
                    
                    
                    
                    (74,458
                    )
                    
                    
                    59,877Total
      liabilities and equity
                    
                    $
                    1,085,975
                    
                    
                    $
                    16,356
                    
                    
                    $
                    364,008
                    
                    
                    $
                    613,725
                    
                    
                    $
                    91,886




17


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
                      
                      
                      UCI
                      
                      
                      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
                      
                      
                      —
                      
                      
                      
                      39,612
                      
                      
                      
                      (68,955
                      )
                      
                      
                      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
                      
                      
                      $
                      39,612
                      
                      
                      $
                      311,433
                      
                      
                      $
                      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 Holdco
                      
                      
                      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
                      
                      
                      
                      39,612
                      
                      
                      
                      298,132
                      
                      
                      
                      (98,577
                      )
                      
                      
                      60,776Total
      liabilities and equity
                      
                      $
                      1,057,185
                      
                      
                      $
                      39,612
                      
                      
                      $
                      311,433
                      
                      
                      $
                      612,144
                      
                      
                      $
                      93,996




18


United
Components, Inc.


Notes
to Condensed Consolidated Financial Statements (Unaudited)





Note
O (continued)


Consolidating
Condensed Income Statement


Three
Months Ended March 31, 2010


(in
thousands)





UCI
                  Consolidated
                
                
                Eliminations
                
                
                UCI
                
                
                Guarantors
                
                
                Non-
                  GuarantorsNet
      sales
                
                $
                230,304
                
                
                $
                (22,354
                )
                
                $
                —
                
                
                $
                218,119
                
                
                $
                34,539Cost
      of sales
                
                
                173,076
                
                
                
                (22,354
                )
                
                
                —
                
                
                
                164,709
                
                
                
                30,721Gross
      profit
                
                
                57,228
                
                
                
                —
                
                
                
                —
                
                
                
                53,410
                
                
                
                3,818Operating
      expenseSelling
      and warehousing
                
                
                (14,295
                )
                
                
                —
                
                
                
                (288
                )
                
                
                (12,405
                )
                
                
                (1,602
                )General
      and administrative
                
                
                (10,620
                )
                
                
                —
                
                
                
                (4,671
                )
                
                
                (4,897
                )
                
                
                (1,052
                )Amortization
      of acquired intangible assets
                
                
                (1,335
                )
                
                
                —
                
                
                
                —
                
                
                
                (1,335
                )
                
                
                —Restructuring
      costs
                
                
                (2,036
                )
                
                
                —
                
                
                
                —
                
                
                
                (127
                )
                
                
                (1,909
                )Patent
      litigation costs
                
                
                (964
                )
                
                
                —
                
                
                
                —
                
                
                
                (964
                )
                
                
                —Operating
      income (loss)
                
                
                27,978
                
                
                
                —
                
                
                
                (4,959
                )
                
                
                33,682
                
                
                
                (745
                )Other
      expenseInterest
      expense, net
                
                
                (6,847
                )
                
                
                —
                
                
                
                (6,810
                )
                
                
                (8
                )
                
                
                (29
                )Intercompany
      interest
                
                
                —
                
                
                
                —
                
                
                
                6,116
                
                
                
                (6,028
                )
                
                
                (88
                )Management
      fee expense
                
                
                (500
                )
                
                
                —
                
                
                
                (500
                )
                
                
                —
                
                
                
                —Miscellaneous,
      net
                
                
                (951
                )
                
                
                —
                
                
                
                —
                
                
                
                (951
                )
                
                
                —Income
      (loss) before income taxes
                
                
                19,680
                
                
                
                —
                
                
                
                (6,153
                )
                
                
                26,695
                
                
                
                (862
                )Income
      tax (expense) benefit
                
                
                (7,382
                )
                
                
                —
                
                
                
                2,384
                
                
                
                (10,155
                )
                
                
                389Increase
      (decrease) before equity in earnings of subsidiaries
                
                
                12,298
                
                
                
                —
                
                
                
                (3,769
                )
                
                
                16,540
                
                
                
                (473
                )Equity
      in earnings of subsidiaries
                
                
                —
                
                
                
                (16,305
                )
                
                
                16,102
                
                
                
                203
                
                
                
                —Net
      income (loss)
                
                
                12,298
                
                
                
                (16,305
                )
                
                
                12,333
                
                
                
                16,743
                
                
                
                (473
                )Less:
      loss attributable to noncontrolling interest
                
                
                (35
                )
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                (35
                )Net
      income (loss) attributable to United Components, Inc.
                
                $
                12,333
                
                
                $
                (16,305
                )
                
                $
                12,333
                
                
                $
                16,743
                
                
                $
                (438
                )




19


United
Components, Inc.


Notes
to Condensed Consolidated Financial Statements (Unaudited)





Note
O (continued)


Consolidating
Condensed Income Statement


Three
Months Ended March 31, 2009


(in
thousands)





UCI
                  Consolidated
                
                
                Eliminations
                
                
                UCI
                
                
                Guarantors
                
                
                Non-
                  GuarantorsNet
      sales
                
                $
                219,862
                
                
                $
                (29,629
                )
                
                $
                —
                
                
                $
                209,177
                
                
                $
                40,314Cost
      of sales
                
                
                180,442
                
                
                
                (29,629
                )
                
                
                —
                
                
                
                173,851
                
                
                
                36,220Gross
      profit
                
                
                39,420
                
                
                
                —
                
                
                
                —
                
                
                
                35,326
                
                
                
                4,094Operating
      expenseSelling
      and warehousing
                
                
                (14,298
                )
                
                
                —
                
                
                
                (174
                )
                
                
                (12,849
                )
                
                
                (1,275
                )General
      and administrative
                
                
                (11,052
                )
                
                
                —
                
                
                
                (4,298
                )
                
                
                (5,453
                )
                
                
                (1,301
                )Amortization
      of acquired intangible assets
                
                
                (1,480
                )
                
                
                —
                
                
                
                —
                
                
                
                (1,480
                )
                
                
                —Restructuring
      costs
                
                
                (205
                )
                
                
                —
                
                
                
                —
                
                
                
                (205
                )
                
                
                —Operating
      income (loss)
                
                
                12,385
                
                
                
                —
                
                
                
                (4,472
                )
                
                
                15,339
                
                
                
                1,518Other
      expenseInterest
      expense, net
                
                
                (7,999
                )
                
                
                —
                
                
                
                (7,935
                )
                
                
                (7
                )
                
                
                (57
                )Intercompany
      interest
                
                
                
                
                
                
                —
                
                
                
                6,412
                
                
                
                (6,252
                )
                
                
                (160
                )Management
      fee expense
                
                
                (500
                )
                
                
                —
                
                
                
                (500
                )
                
                
                —
                
                
                
                —Miscellaneous,
      net
                
                
                (1,485
                )
                
                
                —
                
                
                
                —
                
                
                
                (1,485
                )
                
                
                —Income
      (loss) before income taxes
                
                
                2,401
                
                
                
                —
                
                
                
                (6,495
                )
                
                
                7,595
                
                
                
                1,301Income
      tax (expense) benefit
                
                
                (1,135
                )
                
                
                —
                
                
                
                3,309
                
                
                
                (3,802
                )
                
                
                (642
                )Increase
      (decrease) before equity in earnings of subsidiaries
                
                
                1,266
                
                
                
                —
                
                
                
                (3,186
                )
                
                
                3,793
                
                
                
                659Equity
      in earnings of subsidiaries
                
                
                —
                
                
                
                (5,648
                )
                
                
                4,756
                
                
                
                892
                
                
                
                —Net
      income (loss)
                
                
                1,266
                
                
                
                (5,648
                )
                
                
                1,570
                
                
                
                4,685
                
                
                
                659Less:
      loss attributable to noncontrolling interest
                
                
                (304
                )
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                (304
                )Net
      income (loss) attributable to United Components, Inc.
                
                $
                1,570
                
                
                $
                (5,648
                )
                
                $
                1,570
                
                
                $
                4,685
                
                
                $
                963




20




United
Components, Inc.


Notes
to Condensed Consolidated Financial Statements (Unaudited)





Note
O (continued)


Consolidating
Condensed Statement of Cash Flows


Three
Months Ended March 31, 2010


(in
thousands)





UCI
                    Consolidated
                  
                  
                  Eliminations
                  
                  
                  UCI
                  
                  
                  Guarantors
                  
                  
                  Non-
                    GuarantorsNet
      cash provided by (used by) operating activities
                  
                  $
                  37,570
                  
                  
                  $
                  —
                  
                  
                  $
                  4,312
                  
                  
                  $
                  36,715
                  
                  
                  $
                  (3,457
                  )Cash
      flows from investing activities:Capital
      expenditures
                  
                  
                  (5,841
                  )
                  
                  
                  —
                  
                  
                  
                  (114
                  )
                  
                  
                  (4,506
                  )
                  
                  
                  (1,221
                  )Proceeds
      from sale of other property, plant and equipment
                  
                  
                  77
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  21
                  
                  
                  
                  56Net
      cash used in investing activities
                  
                  
                  (5,764
                  )
                  
                  
                  —
                  
                  
                  
                  (114
                  )
                  
                  
                  (4,485
                  )
                  
                  
                  (1,165
                  )Cash
      flows from financing activities:Issuances
      of debt
                  
                  
                  5,557
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  5,557Debt
      repayments
                  
                  
                  (3,290
                  )
                  
                  
                  —
                  
                  
                  
                  (71
                  )
                  
                  
                  (12
                  )
                  
                  
                  (3,207
                  )Change
      in intercompany indebtedness
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  30,714
                  
                  
                  
                  (33,346
                  )
                  
                  
                  2,632Net
      cash generated by (used in) financing activities
                  
                  
                  2,267
                  
                  
                  
                  —
                  
                  
                  
                  30,643
                  
                  
                  
                  (33,358
                  )
                  
                  
                  4,982Effect
      of currency exchange rate changes on cash
                  
                  
                  (143
                  )
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  (143
                  )Net increase
      (decrease) in cash and cash equivalents
                  
                  
                  33,930
                  
                  
                  
                  —
                  
                  
                  
                  34,841
                  
                  
                  
                  (1,128
                  )
                  
                  
                  217Cash
      and cash equivalents at beginning of year
                  
                  
                  131,913
                  
                  
                  
                  —
                  
                  
                  
                  122,968
                  
                  
                  
                  536
                  
                  
                  
                  8,409Cash
      and cash equivalents at end of period
                  
                  $
                  165,843
                  
                  
                  $
                  —
                  
                  
                  $
                  157,809
                  
                  
                  $
                  (592
                  )
                  
                  $
                  8,626




21




United
Components, Inc.


Notes
to Condensed Consolidated Financial Statements (Unaudited)





Note
O (continued)


Consolidating
Condensed Statement of Cash Flows


Three
Months Ended March 31, 2009


(in
thousands)





UCI
                    Consolidated
                  
                  
                  Eliminations
                  
                  
                  UCI
                  
                  
                  Guarantors
                  
                  
                  Non-
                    GuarantorsNet
      cash provided by operating activities
                  
                  $
                  49,239
                  
                  
                  $
                  —
                  
                  
                  $
                  207
                  
                  
                  $
                  35,238
                  
                  
                  $
                  13,794Cash
      flows from investing activities:Capital
      expenditures
                  
                  
                  (4,018
                  )
                  
                  
                  —
                  
                  
                  
                  (194
                  )
                  
                  
                  (2,993
                  )
                  
                  
                  (831
                  )Proceeds
      from sale of other property, plant and equipment
                  
                  
                  24
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  15
                  
                  
                  
                  9Net
      cash used in investing activities
                  
                  
                  (3,994
                  )
                  
                  
                  —
                  
                  
                  
                  (194
                  )
                  
                  
                  (2,978
                  )
                  
                  
                  (822
                  )Cash
      flows from financing activities:Issuances
      of debt
                  
                  
                  3,672
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  3,672Debt
      repayments
                  
                  
                  (22,391
                  )
                  
                  
                  —
                  
                  
                  
                  (20,103
                  )
                  
                  
                  (15
                  )
                  
                  
                  (2,273
                  )Change
      in intercompany indebtedness
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  47,857
                  
                  
                  
                  (32,425
                  )
                  
                  
                  (15,432
                  )Net
      cash provided by (used in) financing activities
                  
                  
                  (18,719
                  )
                  
                  
                  —
                  
                  
                  
                  27,754
                  
                  
                  
                  (32,440
                  )
                  
                  
                  (14,033
                  )Effect
      of currency exchange rate changes on cash
                  
                  
                  (133
                  )
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  (133
                  )Net 
      increase (decrease) in cash and cash equivalents
                  
                  
                  26,393
                  
                  
                  
                  —
                  
                  
                  
                  27,767
                  
                  
                  
                  (180
                  )
                  
                  
                  (1,194
                  )Cash
      and cash equivalents at beginning of year
                  
                  
                  46,612
                  
                  
                  
                  —
                  
                  
                  
                  39,061
                  
                  
                  
                  860
                  
                  
                  
                  6,691Cash
      and cash equivalents at end of period
                  
                  $
                  73,005
                  
                  
                  $
                  —
                  
                  
                  $
                  66,828
                  
                  
                  $
                  680
                  
                  
                  $
                  5,497  22




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 and therein.





Forward-Looking
Statements





In this
Quarterly Report on Form 10-Q for the period ended March 31, 2010, United
Components, Inc. (“UCI”) makes some “forward-looking” statements within the
meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and
Section 27A of the Securities Act of 1933, as amended. These statements are
included throughout this report on Form 10-Q and relate to analyses and other
information based on forecasts of future results and estimates of amounts not
yet determinable, including but not limited to, demand for vehicle replacement
parts, retail gasoline price and economic conditions. These forward-looking
statements are identified by their use of terms and phrases such as
“anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,”
“predict,” “project,” “will,” “continue,” and other similar terms and phrases,
including references to assumptions.





These
forward-looking statements are based on UCI’s expectations and beliefs
concerning future events affecting UCI. They are subject to uncertainties and
factors relating to UCI’s operations and business environment, all of which are
difficult to predict and many of which are beyond UCI’s control. Although we
believe that the expectations reflected in our forward-looking statements are
reasonable, we do not know whether our expectations will prove correct. They can
be affected by inaccurate assumptions we make or by known or unknown risks and
uncertainties. Many factors mentioned in our discussion in this report will be
important in determining future results. UCI cautions the reader that these
uncertainties and factors, including those discussed in Item 1A of our Annual
Report on Form 10-K and in other SEC filings, could cause UCI’s actual results
to differ materially from those stated in the forward-looking
statements.





Although
we believe the expectations reflected in our forward-looking statements are
based upon reasonable assumptions, we can give no assurance that we will attain
these expectations or that any deviations will not be material. Except as
otherwise required by the federal securities laws, we disclaim any obligation or
undertaking to publicly release any updates or revisions to any forward-looking
statement contained in this Quarterly Report on Form 10-Q or any other SEC
filings to reflect any change in our expectations with regard thereto or any
change in events, conditions or circumstances on which any such statement is
based.





Overview





Sales. We are among North
America’s largest and most diversified companies servicing the vehicle
replacement parts market, or the aftermarket. We supply a broad range of
filtration products, fuel delivery and cooling systems, and engine management
systems to the automotive, trucking, marine, mining, construction, agricultural
and industrial vehicle markets. We estimate that approximately 88% of our net
sales in 2009 were made in the aftermarket, to a diverse customer base that
includes some of the largest and fastest growing companies servicing the
aftermarket. Sales in the North American light vehicle aftermarket, excluding
tires, have grown at a compounded average annual growth rate of approximately
3.5% from 1998 through 2009.  However, aftermarket sales grew by only
0.1% in 2008 and are estimated to have declined by 1.2% in 2009.





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.





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 0.1% from 2008.  However, during the first quarter of 2010
miles driven decreased 1.3% as compared to the first quarter of
2009.





23


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. 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 over 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, 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 (FIFO) 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 first quarter of 2010
in relation to the first quarter of 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
March 31, 2010, the U.S. dollar weakened against the Mexican peso by
approximately 16%, 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.





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.
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.




24




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.





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 of sales.





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




25


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.





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 for workers’ compensation, automobile, product and general liability
include deductibles (less than $1 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 March 31, 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 $1.7 million accrued at March 31, 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 related litigation, there can be no assurance that the ultimate outcome of
these matters will not be significantly different than our
estimates.




26


Results
of Operations





The
following table is UCI’s unaudited condensed consolidated income statements for
the three months ended March 31, 2010 and 2009. The amounts are presented in
thousands of dollars.





Three Months ended March 31,2010
                
                
                2009Net
      sales
                
                $
                230,304
                
                
                $
                219,862Cost
      of sales
                
                
                173,076
                
                
                
                180,442Gross
      profit
                
                
                57,228
                
                
                
                39,420Operating
      expenseSelling
      and warehousing
                
                
                (14,295
                )
                
                
                (14,298
                )General
      and administrative
                
                
                (10,620
                )
                
                
                (11,052
                )Amortization
      of acquired intangible assets
                
                
                (1,335
                )
                
                
                (1,480
                )Restructuring
      costs
                
                
                (2,036
                )
                
                
                (205
                )Patent
      litigation costs
                
                
                (964
                )
                
                
                —Operating
      income
                
                
                27,978
                
                
                
                12,385Other
      expenseInterest
      expense, net
                
                
                (6,847
                )
                
                
                (7,999
                )Management
      fee expense
                
                
                (500
                )
                
                
                (500
                )Miscellaneous,
      net
                
                
                (951
                )
                
                
                (1,485
                )Income
      before income taxes
                
                
                19,680
                
                
                
                2,401Income
      tax expense
                
                
                (7,382
                )
                
                
                (1,135
                )Net
      income
                
                
                12,298
                
                
                
                1,266Less:
      Loss attributable to noncontrolling interest
                
                
                (35
                )
                
                
                (304
                )Net
      income attributable to United Components, Inc.
                
                $
                12,333
                
                
                $
                1,570




Three Months Ended March 31, 2010
compared with the Three Months Ended March 31, 2009





Net sales. Net sales of
$230.3 million in the first quarter of 2010 increased $10.4 million, or 4.7%,
compared to net sales in the first quarter of 2009. In connection with obtaining
new business, sales were reduced by $0.6 million in the first quarter of 2010
and $2.4 million in the first quarter of 2009. These reductions were the result
of accepting returns of the inventory of our customers’ previous
suppliers.





Excluding
the effects of obtaining new business from both quarters, sales were 3.9% higher
in the first quarter of 2010 compared to the first quarter of 2009. Automotive
aftermarket sales, which comprised approximately 86% of our sales in the first
quarter of 2010, increased approximately 2.6% compared to the first quarter of
2009. Within the automotive aftermarket channel, our retail channel sales
increased approximately 5.6%, while the traditional channel was flat and the OES
channel decreased approximately 8.2%. The increased sales in the retail channel
reflects the sales growth experienced by our retail customer base. The lower OES
channel sales relates primarily to the closure of dealerships in connection with
the Chrysler bankruptcy in the second quarter of 2009.  Additionally,
heavy duty channel sales and OEM channel sales in the first quarter of 2010
increased approximately 5.2% and 43.0%, respectively, over the first quarter of
2009 suggesting signs of recovery in the transportation sector.





Gross profit.Gross profit,
as reported, was $57.2 million for the first quarter of 2010 and $39.4 million
for the first quarter of 2009. Both periods included special costs associated
with the effects of obtaining new business, with a $0.6 million cost in the
first quarter of 2010 and a $2.4 million cost in the first quarter of 2009.
Additionally gross profit for the first quarter of 2009 included $0.4 million of
costs related to establishing two new factories in China and $0.4 million of
severance expense incurred in connection with cost saving initiatives to reduce
headcount.





Excluding
the adverse effects of these special items, adjusted gross profit increased to
$57.8 million in the first quarter of 2010 from $42.6 million in the first
quarter of 2009, and the related gross margin percentage increased to 25.1% in
the first quarter of 2010 from 19.2% in the first quarter of 2009. The gross
margin percentage is based on sales before the effects of obtaining new
business, which are discussed in the net sales comparison above.





Higher
sales volume in the first 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 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.





27


Selling and warehousing
expenses. Selling and warehousing expenses were $14.3 million in both the
first quarter of 2010 and the first quarter of 2009. Selling and warehousing
expenses were 6.2% of sales in the 2010 quarter and 6.5% in the 2009
quarter.  Shipping and warehousing expenses increased $0.3 million to
support the increased sales volume.  The higher shipping and
warehousing costs were offset by lower selling and marketing expenses resulting
from cost control initiatives.





General and administrative
expenses. General and administrative expenses were $10.6 million in the
first quarter of 2010, $0.4 million lower than the first quarter of 2009. This
reduction includes the favorable effect of lower employee expenses in the first
quarter of 2010 due to headcount reductions in 2009, inclusive of severance
related to the headcount reductions and cost control
initiatives.  Partially offsetting these items were higher bad debt
expense (the first quarter of 2009 included the collection of accounts
receivable amounts previously written down), $0.4 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 costs. See Note
B to the financial statements included in this Form 10-Q.





Patent litigation costs. See
Note J to the financial statements included in this Form 10-Q.





Interest expense, net. Net
interest expense was $1.2 million lower in the first quarter of 2010 compared to
the first quarter of 2009. This decrease is due to lower interest rates in the
first quarter of 2010 and lower average debt levels in the 2010
quarter.





Miscellaneous, net.Miscellaneous expense which consists of costs associated with the sale of
receivables was $0.5 million lower in the first quarter of 2010 compared to the
first quarter of 2009. This decrease is due to the lower level of receivables we
sold in the first quarter of 2010 in relation to the first quarter of
2009.





Income tax expense. Income
tax expense in the first quarter of 2010 was $6.2 million higher than the first
quarter of 2009, due to higher pre-tax income in the 2010
quarter.  The effective tax rate for the first quarter of 2010 was
37.5% as compared to 47.2% for the first quarter of 2009.  The lower
effective tax rate relates primarily to foreign income taxes.





Net income. Due to the
factors described above, we reported net income of $12.3 million for the first
quarter of 2010 and $1.3 million for the first quarter of 2009.





Net income attributable to
UCI. After deducting losses attributable to a noncontrolling interest,
net income attributable to UCI was  $12.3 million for the first
quarter of 2010 compared to $1.6 million for the first quarter of
2009.




Liquidity
and Capital Resources





Historical
Cash Flows





Net cash provided by operating
activities.





Three Months Ended March 31,
2010





Net cash
provided by operating activities for the three months ended March 31, 2010 was
$37.6 million. Profits, before deducting depreciation and amortization, and
other non-cash items, generated $22.2 million. An increase in accounts
receivable and inventory resulted in a use of cash of $3.5 million and $3.7
million, respectively. The increase in accounts receivable was primarily due to
an increase in sales of $11.5 million in the three months ended March 31, 2010
as compared to the fourth quarter of 2009, partially offset by increased
factoring of accounts receivable during the three months ended March 31, 2010.
Factored accounts receivable totaled $132.4 million and $121.5 million at March
31, 2010 and December 31, 2009, respectively. The increase in inventory was due
primarily to inventory builds to support customers annual restocking programs.
An increase in accounts payable resulted in a generation of cash of $1.8 million
due to the higher inventory levels. An increase in interest payable, which will
reverse in the second quarter of 2010 when interest on our senior subordinated
notes is paid, had a $5.7 million positive effect on cash. UCI’s cash flow was
also positively affected by $3.0 million because of an increase in UCI’s
liability to Holdco, due primarily to UCI’s use of Holdco’s taxable losses to
offset UCI taxes that would otherwise be payable in cash. Changes in all other
assets and liabilities netted to a $12.1 million increase in cash. This change
primarily related to the timing of income tax payments and other accrued
expenses.





28


Three Months Ended March 31,
2009





Net cash
provided by operating activities for the three months ended March 31, 2009 was
$49.2 million. Profits, before deducting depreciation and amortization, and
other non-cash items, generated $12.2 million. A decrease in accounts receivable
and inventory resulted in a generation of cash of $7.1 million and $11.7
million, respectively. The decrease in accounts receivable was primarily due to
increased factoring of accounts receivable during the three months ended March
31, 2009, partially offset by an increase in sales of $16.3 million in the three
months ended March 31, 2009 as compared to the fourth quarter of 2008. Factored
accounts receivable totaled $105.4 million and $80.1 million at March 31, 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 March 31, 2009 over the
fourth quarter of 2008 and (iii) reduced material costs resulting from decreases
in costs of certain of the commodities used in our operations experienced in the
latter part of 2008 and in the first quarter of 2009. An increase in accounts
payable resulted in a generation of cash of $5.5 million. The increase in
accounts payable was due to initiatives with our vendors to reduce our working
capital investment levels. An increase in interest payable, which will reverse
in the second quarter when interest on our senior subordinated notes is paid,
had a $5.1 million positive effect on cash. UCI’s cash flow was also positively
affected by $0.9 million because of an increase in UCI’s liability to Holdco,
due primarily to UCI’s use of Holdco’s taxable losses to offset UCI taxes that
would otherwise be payable in cash. Changes in all other assets and liabilities
netted to a $6.8 million increase in cash. This amount included timing of
payment of employee-related accrued liabilities, including salaries and wages
and insurance, and timing of product returns.





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 three months
ended March 31, 2010 and March 31, 2009 were $5.8 million and $4.0 million,
respectively, used primarily for cost reduction and maintenance
activities.





Net cash provided by / used in
financing activities. Net cash provided by financing activities in the
three months ended March 31, 2010 was $2.3 million compared to net cash used in
financing activities in the three months ended March 31, 2009 of $18.7
million.





Borrowings
of $5.6 and $3.7 million during the three months ended March 31, 2010 and 2009,
respectively, consisted solely of short-term borrowings payable to foreign
credit institutions.





During
the three months ended March 31, 2010, our Spanish and Chinese subsidiaries
repaid short-term notes borrowings to foreign credit institutions in the amount
of $3.3 million.





During
the three months ended March 31, 2009, we repaid the $20.0 million of
outstanding borrowings under our revolving credit facility. Additionally during
the three months ended March 31, 2009, our Spanish and Chinese subsidiaries
repaid short-term notes borrowings to foreign credit institutions in the amount
of $2.3 million.




Current
Debt Capitalization and Scheduled Maturities





At March
31, 2010 and December 31, 2009, UCI had $165.8 million and $131.9 million of
cash and cash equivalents, respectively. Outstanding debt was as follows (in
millions):





March 31,
                      2010
                    
                    
                    December 31,
                      2009Short-term
      borrowings
                    
                    $
                    5.8
                    
                    
                    $
                    3.5Capitalized
      lease obligations
                    
                    
                    0.9
                    
                    
                    
                    0.9Term
      loan
                    
                    
                    190.0
                    
                    
                    
                    190.0Senior
      subordinated notes
                    
                    
                    230.0
                    
                    
                    
                    230.0Amount
      of debt requiring repayment
                    
                    
                    426.7
                    
                    
                    
                    424.4Unamortized
      debt discount
                    
                    
                    (2.0
                    )
                    
                    
                    (2.2
                    )$
                    424.7
                    
                    
                    $
                    422.2




29


Below is
a schedule of required future repayments of all debt outstanding on March 31,
2010. The amounts are presented in millions of dollars.





Remainder
      of 2010
                
                $
                23.72011
                
                
                27.52012
                
                
                145.22013
                
                
                230.12014
                
                
                0.1Thereafter
                
                
                0.1$
                426.7





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 scheduled
repayments of the senior credit facility term loan until December 2011. While
there are no scheduled repayments until December 2011, the senior credit
facility does require mandatory prepayments of the term loan when we generate
Excess Cash Flow as defined in the senior credit facility. We generated Excess
Cash Flow in the year ending December 31, 2009 resulting in a mandatory
prepayment of $17.7 million, payable within 95 days of December 31, 2009. This
mandatory prepayment is presented as a component of “Current maturities of
long-term debt” in our balance sheet at March 31, 2010 and is included in the
“Remainder of 2010” amount in the maturities table above.  On April 1,
2010, we made the $17.7 million mandatory prepayment, reducing the amount
outstanding under the term loan to $172.3 million.  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 Holdco, has $331.5 million
in Floating Rate Senior PIK Notes (the “Holdco Notes”) outstanding at March 31,
2010. The Holdco Notes do not appear on our balance sheet and the related
interest expense is not included in our income statement. While UCI has no
direct obligation under the Holdco Notes, UCI is the sole source of cash
generation for UCI Holdco. The interest on the Holdco Notes is payable “in kind”
until December 2011, so no cash interest is payable until after that date.
Accordingly, the Holdco Notes will not have any material effect on the cash flow
or liquidity of UCI until after that date. In addition, the covenants contained
in the Holdco Notes indenture are substantially the same as those contained in
the senior subordinated notes indenture, so we expect that the Holdco Notes will
have no effect on the current operations of UCI.





The terms
of UCI’s senior credit facility permit UCI to repurchase from time to time up to
$75 million in aggregate principal amount of senior subordinated notes. As of
May 14, 2010, we had not repurchased any of the senior subordinated notes,
although we or Holdco 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 Holdco may from time to time
seek to repurchase or retire the Holdco 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.





Our
significant debt service obligation is an important factor when assessing UCI’s
liquidity and capital resources. At our March 31, 2010 debt level and borrowing
rates, annual interest expense, including amortization of deferred financing
costs and debt discount, is approximately $27.4 million. An increase of 0.25
percentage points (25 basis points) on our variable interest rate debt would
increase our annual interest cost by $0.5 million.





Covenant
Compliance





Our
senior credit facility requires us to maintain certain financial covenants and
requires 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 March 31, 2010,
we were in compliance with all of these covenants.





Our
covenant compliance levels and actual ratios for the quarter ended March 31,
2010 are as follows:





Covenant
                    Compliance Level
                  
                  
                  Actual
                    RatioMinimum
      Adjusted EBITDA to interest expense ratio
                  
                  
                  3.00
                  x
                  
                  
                  5.37
                  xMaximum
      total debt to Adjusted EBITDA ratio
                  
                  
                  3.75
                  x
                  
                  
                  2.86
                  x




30




The
minimum interest coverage ratio and maximum leverage ratio levels become
increasingly more restrictive over time. The senior credit facility provides for
a minimum Adjusted EBITDA to interest expense ratio and a maximum total debt to
Adjusted EBITDA ratio as set forth opposite the corresponding fiscal
quarter.





Minimum
                      Adjusted
                      EBITDA
                      to
                      Interest
                      Expense
                      Covenant
                      Compliance
                      Level
                    
                    
                    Maximum
                      Total Debt
                      to
                      Adjusted
                      EBITDA
                      Covenant
                      Compliance
                      LevelQuarter
      ending June 30, 2010
                    
                    
                    3.00
                    x
                    
                    
                    3.75
                    xQuarter
      ending September 30, 2010 and thereafter
                    
                    
                    3.00
                    x
                    
                    
                    3.50
                    x





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 are 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 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.





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 (in
millions):


Three Months
                    ended
                    Mar. 31, 2010
                  
                  
                  Trailing Four
                    Quarters
                    ended
                    Mar. 31, 2010Net
      income attributable to United Components, Inc.
                  
                  $
                  12.3
                  
                  
                  $
                  41.4Interest,
      net of noncontrolling interest
                  
                  
                  6.9
                  
                  
                  
                  28.8Income
      tax expense, net of noncontrolling interest
                  
                  
                  7.4
                  
                  
                  
                  22.7Depreciation,
      net of noncontrolling interest
                  
                  
                  6.8
                  
                  
                  
                  27.6Amortization
                  
                  
                  2.0
                  
                  
                  
                  8.4EBITDA
                  
                  
                  35.4
                  
                  
                  
                  128.9Special
      items:Restructuring
      costs
                  
                  
                  2.1
                  
                  
                  
                  3.1Reduction
      in force severance
                  
                  
                  —
                  
                  
                  
                  1.8Patent
      litigation costs
                  
                  
                  1.0
                  
                  
                  
                  8.0Cost
      of defending class action litigation
                  
                  
                  0.9
                  
                  
                  
                  1.9New
      business changeover cost and sales commitment costs
                  
                  
                  0.6
                  
                  
                  
                  3.2Establishment
      of new facilities in China
                  
                  
                  —
                  
                  
                  
                  0.1Non-cash
      charges (stock options expense)
                  
                  
                  0.1
                  
                  
                  
                  0.3Management
      fee
                  
                  
                  0.5
                  
                  
                  
                  2.0Adjusted
      EBITDA
                  
                  $
                  40.6
                  
                  
                  $
                  149.3




31


Management’s
Action Plan and Outlook





Historically,
our primary sources of liquidity have been cash on hand, cash flow from
operations and accounts receivable factoring arrangements.  At March
31, 2010, we had $165.8 million of cash and cash equivalents on
hand.





Accounts Receivable
Factoring





Factoring
of customer trade accounts receivable is a significant part of our liquidity.
Subject to certain limitations, UCI’s senior credit facility agreement permits
sales of and liens on receivables, which are being sold pursuant to factoring
arrangements. At March 31, 2010, we had factoring relationships 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.





We sold
approximately $56.1 million and $60.0 million of receivables during the three
months ended March 31, 2010 and 2009, respectively. If receivables had not been
factored, $132.4 million, $121.5 million and $105.4 million of additional
receivables would have been outstanding at March 31, 2010, December 31, 2009 and
March 31, 2009, respectively. If we had not factored these receivables, we would
have had to finance these receivables in some other way 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.





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.





In
addition to the increased level of factoring previously discussed, 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 4,400
      employees at March 31, 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.  The wage freeze and
      suspension of certain matching contributions continues into
      2010.


•
            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 controls over discretionary spending
      continue into 2010.





More
recently, we have launched a new initiative called Product Source Optimization
(“PSO”).  PSO builds upon our operational excellence and market and
product knowledge to help us make key business decisions, including what parts
we make versus buy, where we locate manufacturing, sourcing and distribution of
our product, and when and how we introduce new products.  We expect
that the PSO initiative 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.  We expect
to generate significant savings over the next several years due to this PSO
initiative.





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. 2010 capital expenditures 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.





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





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.




32


Long-Term Liquidity
Outlook





As
presently structured, UCI would be the sole source of cash for the payment of
cash interest on the Holdco Notes beginning in 2012, and we can give no
assurance that the cash for those interest 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.





Contingencies





Environmental





UCI is
subject to a variety of federal, state, local and foreign environmental 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 has been identified as a potentially
responsible party for contamination at two 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. The second site is 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 $1.4 million accrued at March 31, 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 has been named as a potentially
responsible party at a 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





We are
subject to litigation and investigation related to pricing of aftermarket oil,
air, fuel and transmission filters, as described in “Part II, Item 1. Legal
Proceedings” in 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 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. UCI 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 March 31, 2010.  During the first quarter of 2010, UCI
incurred post-trial costs of $1.0 million.




33


Value-added
Tax Receivable





UCI’s
Mexican operation has outstanding receivables denominated in Mexican pesos in
the amount of $3.7 million 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
in Monterrey to order the local tax authorities to process these
refunds.





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.





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. 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.





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 March 31, 2010, the U.S. dollar weakened against
the Mexican peso by approximately 16%, 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.





34




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 March 31, 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. 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.





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 March 31,
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 March 31, 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 March 31, 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.


35


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; Patent Litigation; Other
Litigation to the unaudited condensed consolidated financial statements under
Part I of this report.





Item 1.A. Risk
Factors





There
have been no material changes from the risk factors previously disclosed in
UCI’s Annual Report on Form 10-K for the year ended December 31,
2009.





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





None.





Item
3. Default Upon Senior Securities





None.





Item
4. Reserved





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, as
    amended.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, as
    amended.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
      certification 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.


36


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:
      May 14, 2010
              By:
              /s/ MARK P. BLAUFUSSName:
              Mark
      P. BlaufussTitle:
              Chief
      Financial Officer and Authorized
Representative




37