##### 



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549
 FORM 10-Q x
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the quarterly period ended September 30, 2004o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period from  to
 Commission File Number: 333-107219 UNITED COMPONENTS, INC.  Delaware
(State or Other Jurisdiction of
Incorporation or Organization)
    
    04-3759857
(I.R.S. Employer Identification No.)14601 Highway 41 North
Evansville, Indiana
(Address of Principal Executive Offices)
    
    47725
(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 x Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes o No x The registrant had 1,000 shares of its $0.01 par value common stock
outstanding as of November 10, 2004.




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##### 



Index United Components, Inc. Part I
    
    FINANCIAL INFORMATIONItem 1.
    
    Financial Statements (unaudited)Condensed balance sheetsSeptember 30, 2004 and December 31, 2003Condensed income statementsThree and nine months ended September 30, 2004 and 2003Condensed statements of cash flowsNine months ended September 30, 2004 and 2003Statement of changes in shareholders equityJune 20, 2003, December 31, 2003 and
September 30, 2004Notes to condensed financial statementsItem 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of OperationsItem 3.
    
    Qualitative and Quantitative Information About Market RiskItem 4.
    
    Controls and ProceduresPart II
    
    OTHER INFORMATIONItem 6.
    
    Exhibits and Reports on Form 8-KSignaturesExhibits
 FORWARD-LOOKING STATEMENTS In this periodic report on Form 10-Q, United Components. Inc. (UCI) makes
some forward-looking statements. These statements are included throughout
this report on Form 10-Q and relate to, among other things, analyses and other
information based on forecasts of future results and estimates of amounts not
yet determinable. 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 UCI
believes that the expectations reflected in its forward-looking statements are
reasonable, it does not know whether the expectations will prove correct. They
can be affected by inaccurate assumptions UCI might make or by known or unknown
risks and uncertainties. Many factors mentioned in UCIs discussion in this
report will be important in determining future results. 1




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##### 



Although UCI believes the expectations reflected in its forward-looking
statements are based upon reasonable assumptions, UCI can give no assurance
that UCI will attain these expectations or that any deviations will not be
material. Because of these factors, UCI cautions that investors should not
place undue reliance on any of these forward-looking statements. Except as otherwise required by the federal securities laws, UCI disclaims any
obligation or undertaking to publicly release any updates or revisions to any
forward-looking statement contained in this periodic report on Form 10-Q to
reflect any change in its expectations with regard thereto or any change in
events, conditions or circumstances on which any such statement is based. 2




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##### 



PART I
FINANCIAL INFORMATION Item 1. Financial Statements United Components, Inc. (UCI) Condensed Balance Sheets(in thousands) UCI
    
    UCIConsolidated
    
    ConsolidatedSept. 30, 2004
    
    Dec. 31, 2003(unaudited)AssetsCurrent assetsCash and cash equivalents
    
    $
    27,160
    
    
    $
    46,130Accounts receivable, net
    
    
    267,091
    
    
    
    230,345Inventories
    
    
    191,259
    
    
    
    168,797Deferred tax
    
    
    15,345
    
    
    
    17,756Other current assets
    
    
    14,154
    
    
    
    10,877Total current assets
    
    
    515,009
    
    
    
    473,905Property, plant and equipment, net
    
    
    214,673
    
    
    
    219,973Goodwill
    
    
    166,559
    
    
    
    163,823Other intangible assets, net
    
    
    90,449
    
    
    
    77,124Deferred financing costs
    
    
    8,437
    
    
    
    10,146Deferred tax
    
    
    
    
    
    
    13,609Pension and other assets
    
    
    10,629
    
    
    
    11,359Total assets
    
    $
    1,005,756
    
    
    $
    969,939Liabilities and shareholders equityCurrent liabilitiesAccounts payable
    
    $
    105,561
    
    
    $
    74,652Notes payable
    
    
    822
    
    
    
    752Current maturities of long-term debt
    
    
    81
    
    
    
    1,034Accrued expenses and other current liabilities
    
    
    78,533
    
    
    
    66,729Total current liabilities
    
    
    184,997
    
    
    
    143,167Long-term debt, less current maturities
    
    
    481,705
    
    
    
    520,472Pension and other postretirement liabilities
    
    
    49,594
    
    
    
    50,038Deferred tax
    
    
    2,740
    
    
    
    Other liabilities
    
    
    2,772
    
    
    
    2,172Contingencies  Note LTotal liabilities
    
    
    721,808
    
    
    
    715,849Shareholders equityCommon stock
    
    
    
    
    
    
    Additional paid in capital
    
    
    263,120
    
    
    
    261,385Retained earnings (deficit)
    
    
    19,277
    
    
    
    (8,755
    )Accumulated other comprehensive income
    
    
    1,551
    
    
    
    1,460Total shareholders equity
    
    
    283,948
    
    
    
    254,090Total liabilities and shareholders equity
    
    $
    1,005,756
    
    
    $
    969,939
 The accompanying notes are an integral part of these statements. 3




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##### 



United Components, Inc. Condensed Income Statements (unaudited)(in thousands) UCI
    
    UCIConsolidated
    
    ConsolidatedThree Months
    
    Three MonthsEnded
    
    EndedSept. 30, 2004
    
    Sept. 30, 2003Net sales
    
    $
    257,566
    
    
    $
    251,918Cost of sales
    
    
    202,834
    
    
    
    224,347Gross profit
    
    
    54,732
    
    
    
    27,571Operating expensesSelling and warehousing
    
    
    17,436
    
    
    
    17,218General and administrative
    
    
    10,201
    
    
    
    10,287Amortization of intangible assets
    
    
    1,566
    
    
    
    1,386Operating income (loss)
    
    
    25,529
    
    
    
    (1,320
    )Other income (expense)Interest income
    
    
    35
    
    
    
    86Interest expense
    
    
    (8,134
    )
    
    
    (10,525
    )Management fee expense
    
    
    (500
    )
    
    
    (506
    )Miscellaneous, net
    
    
    168
    
    
    
    80Income (loss) before income taxes
    
    
    17,098
    
    
    
    (12,185
    )Income tax expense (benefit)
    
    
    6,818
    
    
    
    (4,630
    )Net income (loss)
    
    $
    10,280
    
    
    $
    (7,555
    )
 The accompanying notes are an integral part of these statements. 4




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##### 



United Components, Inc. Condensed Income Statements (unaudited)(in thousands) UCI
    
    UCIConsolidated
    
    Consolidated
    
    Predecessor CombinedNine Months
    
    June 21, 2003
    
    January 1, 2003Ended
    
    through
    
    throughSept. 30, 2004
    
    Sept. 30, 2003
    
    June 20, 2003Net sales
    
    $
    788,329
    
    
    $
    278,097
    
    
    $
    452,467Cost of sales
    
    
    618,254
    
    
    
    247,749
    
    
    
    378,211Gross profit
    
    
    170,075
    
    
    
    30,348
    
    
    
    74,256Operating expensesSelling and warehousing
    
    
    55,823
    
    
    
    19,431
    
    
    
    33,585General and administrative
    
    
    34,400
    
    
    
    11,891
    
    
    
    18,928Amortization of intangible assets
    
    
    5,268
    
    
    
    1,386
    
    
    
    60Operating income (loss)
    
    
    74,584
    
    
    
    (2,360
    )
    
    
    21,683Other income (expense)Interest income
    
    
    148
    
    
    
    86
    
    
    
    1,712Interest expense
    
    
    (26,835
    )
    
    
    (14,385
    )
    
    
    (245
    )Management fee expense
    
    
    (1,500
    )
    
    
    (561
    )
    
    
    (18
    )Miscellaneous, net
    
    
    294
    
    
    
    191
    
    
    
    (408
    )Income (loss) before income taxes
    
    
    46,691
    
    
    
    (17,029
    )
    
    
    22,724Income tax expense (benefit)
    
    
    18,659
    
    
    
    (6,471
    )
    
    
    942Net income (loss)
    
    $
    28,032
    
    
    $
    (10,558
    )
    
    $
    21,782Pro forma (unaudited), adjusted
solely for change in income tax
filing status (Note C):Historical income (loss) before
provision for income taxes
    
    $
    46,691
    
    
    $
    (17,029
    )
    
    $
    22,724Income tax expense (benefit)
    
    
    18,659
    
    
    
    (6,471
    )
    
    
    8,544Pro forma net income (loss)
    
    $
    28,032
    
    
    $
    (10,558
    )
    
    $
    14,180
 The accompanying notes are an integral part of these statements. 5




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##### 



United Components, Inc. Condensed Statements of Cash Flow (unaudited)(in thousands) UCI
    
    UCI
    
    PredecessorConsolidated
    
    Consolidated
    
    CombinedNine Months
    
    June 21, 2003
    
    January 1, 2003Ended
    
    through
    
    throughSept. 30, 2004
    
    Sept. 30, 2003
    
    June 20, 2003Cash flows from operating activities:Net income (loss)
    
    $
    28,032
    
    
    $
    (10,558
    )
    
    $
    21,782Adjustments to reconcile net income to net cash
provided by operating activities:Depreciation
    
    
    26,705
    
    
    
    11,392
    
    
    
    12,928Amortization of intangible assets
    
    
    5,268
    
    
    
    1,386
    
    
    
    60Amortization of deferred financing fees and debt
issuance costs
    
    
    2,183
    
    
    
    771
    
    
    
    (Gain) loss on sale of assets, net
    
    
    (143
    )
    
    
    (49
    )
    
    
    242Changes in operating assets and liabilitiesAccounts receivable
    
    
    (36,746
    )
    
    
    (14,532
    )
    
    
    (18,146
    )Inventories
    
    
    (22,462
    )
    
    
    44,008
    
    
    
    18,806Other current assets
    
    
    (5,868
    )
    
    
    (9,619
    )
    
    
    (3,035
    )Accounts payable
    
    
    30,909
    
    
    
    32,995
    
    
    
    (9,425
    )Accrued expenses and other current liabilities
    
    
    18,099
    
    
    
    16,137
    
    
    
    (2,438
    )Other assets
    
    
    5,413
    
    
    
    1,393
    
    
    
    715Other liabilities
    
    
    4,210
    
    
    
    1,101
    
    
    
    2,404Net cash provided by operating activities
    
    
    55,600
    
    
    
    74,425
    
    
    
    23,893Cash flows from investing activities:Acquisition and related fees
    
    
    (8,000
    )
    
    
    (818,380
    )
    
    
    Capital expenditures
    
    
    (28,636
    )
    
    
    (8,340
    )
    
    
    (21,388
    )Proceeds from sale of assets
    
    
    399
    
    
    
    2,252
    
    
    
    215Net cash used in investing activities
    
    
    (36,237
    )
    
    
    (824,468
    )
    
    
    (21,173
    )Cash flows from financing activities:Issuances of debt
    
    
    467
    
    
    
    585,000
    
    
    
    Financing fees and debt issuance cost
    
    
    
    
    
    
    (21,871
    )
    
    
    Debt repayments
    
    
    (40,591
    )
    
    
    (5,468
    )
    
    
    (98
    )Stockholders equity contribution
    
    
    1,735
    
    
    
    261,011
    
    
    
    Dividends and transfers to UIS, Inc., net
    
    
    
    
    
    
    
    
    
    
    (28,033
    )Net cash provided by (used in) financing
activities
    
    
    (38,389
    )
    
    
    818,672
    
    
    
    (28,131
    )Effect of exchange rate changes on cash
    
    
    56
    
    
    
    (3
    )
    
    
    1,509Net increase (decrease) in cash and equivalents
    
    
    (18,970
    )
    
    
    68,626
    
    
    
    (23,902
    )Cash and cash equivalents at beginning of period
    
    
    46,130
    
    
    
    4,452
    
    
    
    28,354Cash and cash equivalents at end of period
    
    $
    27,160
    
    
    $
    73,078
    
    
    $
    4,452
 The accompanying notes are an integral part of these statements. 6




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##### 



United Components, Inc. Statements of Changes in Shareholders Equity (unaudited)(in thousands) AccumulatedAdditional
    
    Retained
    
    
    
    
    
    Other
    
    TotalPreferred
    
    Common
    
    Paid-In
    
    Earnings
    
    Division
    
    Comprehensive
    
    Shareholder's
    
    ComprehensiveStock
    
    Stock
    
    Capital
    
    (Deficit)
    
    Equity
    
    Income (Loss)
    
    Equity
    
    Income (Loss)Predecessor combined balance at January 1, 2003
    
    $
    13
    
    
    $
    4,289
    
    
    $
    44,940
    
    
    $
    467,376
    
    
    $
    67,929
    
    
    $
    (16,512
    )
    
    $
    568,035Dividends paid
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (17,913
    )
    
    
    
    
    
    
    
    
    
    
    (17,913
    )Liability to UIS contributed to capital
    
    
    
    
    
    
    
    
    
    
    20,271
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    20,271Transfers with UIS, Inc., net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (56,630
    )
    
    
    (10,120
    )
    
    
    
    
    
    
    (66,750
    )Comprehensive incomeNet earnings
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,650
    
    
    
    15,132
    
    
    
    
    
    
    
    21,782
    
    
    $
    21,782Other comprehensive incomeForeign currency adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,125
    
    
    
    4,125
    
    
    
    4,125Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    25,907Predecessor combined balance at June 20, 2003
    
    $
    13
    
    
    $
    4,289
    
    
    $
    65,211
    
    
    $
    399,483
    
    
    $
    72,941
    
    
    $
    (12,387
    )
    
    $
    529,550UCI consolidated balance at June 20, 2003
    
    $
    
    
    
    $
    
    
    
    $
    260,000
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    260,000Additions to paid-in capital
    
    
    
    
    
    
    
    
    
    
    1,385
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,385Comprehensive incomeNet loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (8,755
    )
    
    
    
    
    
    
    
    
    
    
    (8,755
    )
    
    $
    (8,755
    )Other comprehensive lossInterest rate swaps
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (114
    )
    
    
    (114
    )
    
    
    (114
    )Foreign currency adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,574
    
    
    
    1,574
    
    
    
    1,574Total comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (7,295
    )UCI consolidated balance at December 31, 2003
    
    $
    
    
    
    $
    
    
    
    $
    261,385
    
    
    $
    (8,755
    )
    
    $
    
    
    
    $
    1,460
    
    
    $
    254,090UCI consolidated balance at December 31, 2003
    
    $
    
    
    
    $
    
    
    
    $
    261,385
    
    
    $
    (8,755
    )
    
    $
    
    
    
    $
    1,460
    
    
    $
    254,090Additions to paid-in capital
    
    
    
    
    
    
    
    
    
    
    1,735
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,735Comprehensive incomeNet earnings
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    28,032
    
    
    
    
    
    
    
    
    
    
    
    28,032
    
    
    $
    28,032Other comprehensive incomeInterest rate swaps
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (497
    )
    
    
    (497
    )
    
    
    (497
    )Foreign currency adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    588
    
    
    
    588
    
    
    
    588Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    28,123UCI consolidated balance at Sept. 30, 2004
    
    $
    
    
    
    $
    
    
    
    $
    263,120
    
    
    $
    19,277
    
    
    $
    
    
    
    $
    1,551
    
    
    $
    283,948
 The accompanying notes are an integral part of these statements. 7




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##### 



United Components, Inc. Notes to Condensed Financial Statements (unaudited) NOTE A  GENERAL AND BASIS OF FINANCIAL STATEMENT PRESENTATION General United Components, Inc. is a wholly owned subsidiary of UCI Acquisition
Holdings, Inc. UCI Acquisition Holdings, Inc. and United Components, Inc. are
corporations formed at the direction of The Carlyle Group (Carlyle).
Affiliates of Carlyle own 98.6% of UCI Acquisition Holdings, Inc.s common
stock, and the remainder is owned by certain members of senior management and
the Companys Board of Directors. On June 20, 2003, United Components, Inc. (UCI) purchased, from UIS, Inc. and
UIS Industries, Inc. (together UIS), the vehicle parts business of UIS,
consisting of all of the issued and outstanding common stock or other equity
interests in Champion Laboratories, Inc., Wells Manufacturing Corporation,
Neapco Inc., Pioneer, Inc., Wells Manufacturing Canada Limited, UIS Industries
Ltd. (which is the owner of 100% of the capital stock of Flexible Lamps, Ltd.
and Airtex Products Ltd.), Mid-South Mfg., Inc., Airtex Products S.A., Airtex
Products, Inc. (currently, Airtex Mfg., Inc.), Talleres Mecanicos Montserrat
S.A. de C.V., Brummer Seal de Mexico, S.A. de C.V., Brummer Mexicana en Puebla,
S.A. de C.V., Automotive Accessory Co. Ltd. and Airtex Products, LLC, a limited
liability company that owns the assets of the Airtex Products business of UIS,
Inc. (See Note B.) The Company operates in one business segment through its subsidiaries. The
Company manufactures and distributes vehicle parts, primarily servicing the
vehicle replacement parts market in North America and Europe. Basis of Presentation The accompanying consolidated financial statements include the accounts of UCI
and its subsidiaries. The accompanying combined financial statements include
the accounts of the vehicle parts businesses of UIS, consisting of the
aforementioned entities, which are collectively referred to in these financial
statements as the Predecessor Company or Predecessor. In these notes to
the financial statements, the term the Company refers to both UCI and the
Predecessor Company. The aforementioned June 20, 2003 acquisition is referred
to in these notes to the financial statements as the Acquisition. The accompanying unaudited condensed consolidated and combined 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 for complete financial statements. The December 31, 2003 consolidated balance sheet has been derived from the
audited financial statements included in the Companys annual report on Form
10-K for the year ended December 31, 2003. The December 31, 2003 consolidated
balance sheet reflects the preliminary allocation of the June 20, 2003
Acquisition purchase price. The September 30, 2004 consolidated balance sheet
has been reclassified to reflect the impact of the final allocation of the June
20, 2003 Acquisition purchase price. Such changes had no impact on previously
reported results of operations. The financial statements at September 30, 2004 and for the three and nine month
periods ended September 30, 2004 and 2003 are unaudited. In the opinion of
management, these financial statements include all adjustments necessary for a
fair presentation of the financial position and results of operations for such
periods. All significant intercompany transactions and balances have been
eliminated. 8




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##### 



United Components, Inc. Notes to Condensed Financial Statements (unaudited) The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America 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 collectibility of accounts
receivable and the realizability of inventory, goodwill and other intangible
assets, cost accruals, insurance reserves, income taxes 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 the Companys annual report on Form
10-K for the year ended December 31, 2003. Operating results for the three and nine month periods ended September 30, 2004
are not necessarily indicative of the results that may be expected for the year
ended December 31, 2004. Reclassifications The December 31, 2003 consolidated balance sheet reflects the preliminary
allocation of the June 20, 2003 Acquisition purchase price. The September 30,
2004 consolidated balance sheet has been reclassified to reflect the impact of
the final allocation of the June 20, 2003 Acquisition purchase price. Such
changes had no impact on previously reported results of operations. The income
statement for the 2003 period has been reclassified to conform to the 2004
presentation. NOTE B  ACQUISITION Overview On June 20, 2003, UCI purchased from UIS the vehicle parts businesses of UIS,
consisting of all of the issued and outstanding common stock or other equity
interests of the Predecessor Company. The acquisition purchase price was $808 million. In addition, the Company
assumed $2 million of debt and capital lease obligations. Fees and expenses
associated with the acquisition (excluding financing fees) were $18.2 million
and are accounted for as additional purchase price. Financing for the
acquisition was comprised of a $260 million equity contribution by Carlyle,
proceeds from $585 million of debt, and an $8 million accrued liability, which
was paid in January 2004. In addition to funding the purchase price, proceeds
from the borrowings were also used to pay for the aforementioned $18.2 million
of acquisition-related fees and expenses and $21.6 million of financing fees. Change in Income Tax Filing Status As discussed in Note C, the Predecessor Company had elected for certain of its
subsidiaries to be taxed as S corporations pursuant to the Internal Revenue
Code. In connection with the Acquisition, the Company terminated its S
corporation elections and became a C corporation and, consequently, became
subject to Federal and additional state and local income taxes. As part of the
allocation of the Acquisition purchase price, net deferred tax assets have been
calculated based on UCIs higher effective tax rate. The pro forma information
presented below includes adjustments for, among other things, the change in the
Companys income tax filing status. The pro forma income tax amount includes
income taxes as if the Company had been filing as a C corporation for the
entire period. 9




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##### 



United Components, Inc. Notes to Condensed Financial Statements (unaudited) Allocation of the Acquisition Purchase Price and Pro Forma Information The Acquisition is accounted for under the purchase method of accounting, and
accordingly, the results of operations of the acquired companies are included
in the results of UCI beginning on the June 20, 2003 acquisition date. The following table summarizes the estimated fair value of the assets acquired
and liabilities assumed at the date of acquisition. (in millions)Current assets
    
    $
    474Property, plant and equipment
    
    
    214Goodwill
    
    
    167Other intangible assets
    
    
    97Deferred taxes
    
    
    7Other long term assets
    
    
    3Total assets acquired
    
    
    962Current liabilities
    
    
    93Long-term debt, excluding borrowings to fund the
Acquisition purchase price and related
transaction fees
    
    
    2Pension and other postretirement liabilities
    
    
    37Other long-term liabilities
    
    
    4Total liabilities assumed
    
    
    136Net assets acquired
    
    $
    826
 Of the $97 million of acquired intangible assets, approximately $40 million was
assigned to trademarks that are not subject to amortization, $50 million was
assigned to customer relationships and $7 million was assigned to technologies.
The estimated useful lives of the technologies and customer relationships are
10  15 years. For the three and nine months ended September 30, 2004,
amortization expense was $1.5 and $5.3 million. Accumulated amortization at
September 30, 2004 was $8.4 million. The $167 million of goodwill resulting from the transaction and all but
approximately $10 million of the written-up values of the other assets are
deductible for income tax purposes. Below is unaudited pro forma data for the nine months ended September 30, 2003,
after giving effect to the Acquisition as if it had occurred on January 1,
2003. The pro forma adjustments give effect to (i) the allocation of the June
20, 2003 Acquisition purchase price, (ii) the Companys capital structure
immediately after the Acquisition, (iii) the Carlyle management fee (see Note
K), and (iv) income tax expense based on a C corporation filing status. The
pro forma earnings data does not purport to represent what the results of
operations would have been if the Acquisition had occurred as of the dates
indicated above, or what the results will be in future periods. Pro Forma DataNine Months EndedSept. 30, 2003(in thousands)Net sales
    
    $
    730,564Operating loss
    
    
    (13,034
    )Net loss
    
    
    (31,930
    )
 10




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##### 



United Components, Inc. Notes to Condensed Financial Statements (unaudited) NOTE C  INCOME TAXES Prior to June 21, 2003, the subsidiaries comprising the Predecessor Company
were treated as disregarded entities for U.S. tax purposes (Qualified
Subchapter S subsidiaries, or Q subs). As Q subs of UIS, the subsidiaries were
included in the U.S. Federal and certain state S corporation income tax returns
of UIS. As such, the income taxes on the earnings of the Predecessor Company
were paid by the sole shareholder of UIS pursuant to an election for Federal
income tax purposes not to be taxed as a corporation. No tax sharing
arrangement existed for the subsidiaries comprising the Predecessor Company.
Accordingly, no provision has been made in the accompanying financial
statements for Federal income taxes on the net earnings of these companies for
the periods prior to June 21, 2003. A provision for certain state franchise
and income taxes has been made. The Q sub status and the S corporation status terminated effective with the
Acquisition. (See Note B) On the Acquisition date, the Company became a C
corporation and became subject to both Federal and state income taxes. UCIs
effective tax rate has increased accordingly. As part of the allocation of the
Acquisition purchase price, net deferred tax assets have been established and
calculated based on UCIs higher effective tax rate. NOTE D  SALE OF RECEIVABLES In the third quarter of 2004, UCI entered into agreements to sell undivided
interests in certain of its receivables to a factoring company, which in turn
has the right to sell an undivided interest to a financial institution or other
third party. UCI enters these agreements at its discretion when it determines
that the cost of factoring is less than the cost of servicing its receivables
with existing debt. Pursuant to these agreements, UCI sold $9 million of
receivables. UCI retained no rights or interest, and has no obligations, with
respect to the sold receivables. UCI will not service the receivables after
the sale. The sales of receivables were accounted for as a sale in accordance with
Statement of Financial Accounting Standards No. 140, Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities. The
sold receivables were removed from the balance sheet at the time of sale. The
costs of the sales were a 0.25% agents fee and a discount deducted by the
factoring company, which is calculated based on LIBOR plus 1.5%. These costs
were $42,000 in the third quarter of 2004. NOTE E  INVENTORIES The components of inventory consist of the following (in thousands): September 30,
    
    December 31,2004
    
    2003Raw material
    
    $
    32,937
    
    
    $
    29,305Work in process
    
    
    56,103
    
    
    
    47,056Finished products
    
    
    123,870
    
    
    
    116,176Valuation reserves
    
    
    (21,651
    )
    
    
    (23,740
    )$
    191,259
    
    
    $
    168,797
 Inventories are stated at the lower of cost or market. Cost is principally
determined using the first-in, first-out method. Inventories are reduced by an
allowance for excess and obsolete inventories, based on the Companys
assessment of on-hand inventories. The expense of inventory write-downs is
included in cost of sales. 11




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##### 



United Components, Inc. Notes to Condensed Financial Statements (unaudited) NOTE F  ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES Accrued expenses and other current liabilities consist of the following (in
thousands): Sept. 30,
    
    December 31,2004
    
    2003Salaries and wages
    
    $
    3,380
    
    
    $
    2,464Bonuses
    
    
    5,183
    
    
    
    5,712Vacation pay
    
    
    5,821
    
    
    
    5,252Pension and other postretirement liabilities
    
    
    2,747
    
    
    
    3,174Profit sharing
    
    
    879
    
    
    
    1,546Product returns
    
    
    14,507
    
    
    
    13,999Rebates and discounts due customers
    
    
    6,713
    
    
    
    4,902Other credits due customers
    
    
    2,090
    
    
    
    4,518Insurance
    
    
    9,551
    
    
    
    1,687Taxes payable
    
    
    2,407
    
    
    
    768Interest
    
    
    7,415
    
    
    
    1,882Final payment of Acquisition purchase price
    
    
    
    
    
    
    8,000Other
    
    
    17,840
    
    
    
    12,825$
    78,533
    
    
    $
    66,729
 NOTE G  PRODUCT RETURNS LIABILITY The product returns liability is included in accrued expenses and other current
liabilities. It includes accruals for parts returned due to manufacturing
defect and for certain parts returned because of customer excess quantities.
The changes in the Companys product returns liability are as follows (in
thousands): Nine Months
    
    Nine MonthsEnded
    
    EndedSept. 30, 2004
    
    Sept. 30, 2003Liability, beginning of period
    
    $
    13,999
    
    
    $
    4,252Returned parts expense
    
    
    (27,894
    )
    
    
    (26,181
    )Additional loss provision
    
    
    28,402
    
    
    
    26,123Allocation of acquisition purchase
price adjustments
    
    
    
    
    
    
    9,600Liability, end of period
    
    $
    14,507
    
    
    $
    13,794
 12




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##### 



United Components, Inc. Notes to Condensed Financial Statements (unaudited) NOTE HEMPLOYEE BENEFIT PLANS The following are the components of net periodic pension expense (in
thousands): UCI ConsolidatedThree MonthsEnded Sept. 30,
    
    Nine MonthsEnded
    
    PredecessorCombinedSix MonthsEnded2004
    
    2003
    
    Sept. 30, 2004
    
    June 30, 2003Service cost
    
    $
    2,035
    
    
    $
    1,636
    
    
    $
    6,104
    
    
    $
    3,483Interest cost
    
    
    2,922
    
    
    
    2,383
    
    
    
    8,816
    
    
    
    5,071Expected return on plan assets
    
    
    (3,321
    )
    
    
    (2,641
    )
    
    
    (10,074
    )
    
    
    (6,684
    )Amortization of transition asset
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (88
    )Amortization of prior service cost
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    270Amortization of unrecognized gain
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (93
    )$
    1,636
    
    
    $
    1,378
    
    
    $
    4,846
    
    
    $
    1,959
 The Medicare Prescription Drug Improvement and Modernization Act of 2003 (the
Act) was signed into law in December 2003. The Act introduces a prescription
drug benefit under Medicare (Medicare Part D) as well as a federal subsidy to
sponsors of retiree health care benefit plans that provide a benefit that is at
least equivalent to Medicare Part D. The Company will recognize the effects of
the Act in its next measurement of plan assets and obligations, which is
January 1, 2005. The effects of the Act on retiree medical costs and the
recorded liability for retiree health care benefits will be immaterial. NOTE I  STOCK OPTION The Company uses the disclosure only provision of SFAS 123. Accordingly,
stock options are accounted for by the intrinsic value method of APB Opinion
No. 25. Below is a reconciliation to the pro forma after tax effect of
compensation expense for the stock options had such expense been determined in
accordance with the fair value method prescribed by SFAS No. 123 (in
thousands): Three Months
    
    Nine MonthsEnded
    
    EndedSept. 30, 2004
    
    Sept. 30, 2004Net income as reported
    
    $
    10,280
    
    
    $
    28,032Stock option cost included in net income as reported, net of tax
    
    
    
    
    
    
    Stock option cost that would have been reported using the
fair value method, net of tax
    
    
    (528
    )
    
    
    (1,568
    )Pro forma net income had the fair value method been used
    
    $
    9,752
    
    
    $
    26,464
 13




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##### 



United Components, Inc. Notes to Condensed Financial Statements (unaudited) NOTE J  GEOGRAPHIC INFORMATION The Company had the following sales by country (in thousands): Three Months Ended
    
    Nine Months EndedSept. 30, 2004
    
    Sept. 30, 2003
    
    Sept. 30, 2004
    
    Sept. 30, 2003United States
    
    $
    214,083
    
    
    $
    206,422
    
    
    $
    652,265
    
    
    $
    605,823Canada
    
    
    8,138
    
    
    
    7,277
    
    
    
    25,638
    
    
    
    22,427United Kingdom
    
    
    8,004
    
    
    
    9,360
    
    
    
    28,923
    
    
    
    27,898Mexico
    
    
    6,361
    
    
    
    6,704
    
    
    
    19,279
    
    
    
    18,507Germany
    
    
    3,015
    
    
    
    2,400
    
    
    
    9,860
    
    
    
    8,429Spain
    
    
    766
    
    
    
    778
    
    
    
    2,728
    
    
    
    2,373Belgium
    
    
    1,480
    
    
    
    1,489
    
    
    
    5,134
    
    
    
    4,672France
    
    
    3,812
    
    
    
    1,972
    
    
    
    7,855
    
    
    
    6,042Other
    
    
    11,907
    
    
    
    15,516
    
    
    
    36,647
    
    
    
    34,393$
    257,566
    
    
    $
    251,918
    
    
    $
    788,329
    
    
    $
    730,564
 For all periods after the June 20, 2003 Acquisition, the above sales are those
of United Components, Inc. Approximately 62% of the sales for the nine months
ended September 30, 2003, are those of the Predecessor company. Net long-lived assets by country are presented below (in thousands): Sept. 30,
    
    December 31,2004
    
    2003United States
    
    $
    271,185
    
    
    $
    140,003United Kingdom
    
    
    35,936
    
    
    
    32,207Mexico
    
    
    12,936
    
    
    
    9,528Spain
    
    
    3,821
    
    
    
    3,362Canada
    
    
    310
    
    
    
    301Goodwill only for September 30, 2004
    
    
    166,559
    
    
    
    Preliminary allocation of the June 20, 2003 acquisition
purchase price, not yet allocated to operating entities
as of December 31, 2003
    
    
    
    
    
    
    310,633$
    490,747
    
    
    $
    496,034
 14




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##### 



United Components, Inc. Notes to Condensed Financial Statements (unaudited) NOTE K  RELATED PARTY TRANSACTIONS UIS maintained workers compensation, general liability, product liability and
comprehensive automobile insurance for all of its subsidiaries, including the
Predecessor Company. UIS allocated premium expense to each subsidiary based on
rates charged by the insurance carrier and predicated and adjusted on estimated
losses. UIS is liable for the settlement of all claims on these policies. As
of the Acquisition date, the Company is no longer covered by UIS. The Predecessor Company extended financing to UIS. Interest income from UIS
was $1.4 million for the nine months ended September 30, 2003. This income is
recorded as interest income. The Company has employment agreements with certain of its executive officers
providing for annual compensation amounting to approximately $0.7 million per
annum plus bonuses (as defined in the employment agreements) and severance pay
under certain circumstances (as defined in the employment agreements). In connection with the Acquisition, the Company entered into a management
agreement with TC Group, L.L.C., an affiliate of Carlyle, for management and
financial advisory services and oversight to be provided to the Company and its
subsidiaries. Pursuant to this agreement, the Company will pay an annual
management fee to Carlyle of $2 million and out-of-pocket expenses, and the
Company may pay Carlyle additional fees associated with financial advisory and
other future transactions. Carlyle also received a one-time transaction fee of
$10 million upon consummation of the Acquisition. The agreement also provides
for indemnification of Carlyle against liabilities and expenses arising out of
Carlyles performance of services under the agreement. The agreement
terminates either when Carlyle or its affiliates own less than 10% of the
Companys equity interest or when the company and Carlyle mutually agree to
terminate the agreement. NOTE L  CONTINGENCIES Environmental The Company is subject to contingencies pursuant to environmental laws and
regulations that in the future may require the Company to take action to
correct the effects on the environment of prior disposal practices or releases
of chemical or petroleum substances by the Company or other parties. The
Company has been identified as a potentially responsible party for
contamination at several sites. As a result, the Company has accrued
liabilities for certain environmental testing and remediation activities
included in the accrued expenses and other current liabilities line and the
other liabilities line on the balance sheet. While there is inherent
uncertainty in such matters, in managements opinion, the amounts accrued are
appropriate based on the facts and circumstances that are currently known. The
Company believes that the ultimate outcome of these matters will not have a
material adverse effect on the financial position of the Company or results of
operations for a full year. However, adjustment to the ultimate outcome of the
matters could have a material adverse effect on the results for a single
quarter. Litigation The Company is subject to various other contingencies, including routine legal
proceedings and claims arising out of its 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, the
Company believes that the outcome of any currently existing proceedings, even
if determined adversely, would not have a material adverse effect on its
business, financial condition and results of operations. 15




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##### 



United Components, Inc. Notes to Condensed Financial Statements (unaudited) NOTE M  NEW ACCOUNTING PRONOUNCEMENTS In December 2003, SFAS No. 132R, Employers Disclosure about Pensions and
Other Postretirement Benefits was issued. SFAS No. 132R requires additional
disclosures about defined benefit pension plans and other postretirement
benefit plans. The standard requires, among other things, additional
disclosures about the assets held in employer sponsored pension plans,
disclosures relating to plan asset investment policy and practices, disclosure
of expected contributions to be made to the plans and expected benefit payments
to be made by the plans. Annual disclosures applicable to the Companys U.S.
pension and postretirement plans were required to be made in its financial
statements for the year ended December 31, 2003. The Company has adopted this
pronouncement as of December 31, 2003 for all of its U.S. plans. Annual
disclosures relating to its non-U.S. plans will be adopted for the year ending
December 31, 2004. Interim disclosures relating to its non-U.S. plans will be
adopted for the year ending December 31, 2005. In March 2004, the FASBs Emerging Issues Task Force concluded its discussion
of Issue No. 03-01, The Meaning of Other-Than-Temporary Impairments and Its
Application to Certain Investments(EITF 03-01). EITF 03-01 provides
guidance regarding the determination of when an impairment of debt and
marketable equity securities and investments, which are accounted for under the
cost method, should be considered other-than-temporary and recognized in
earnings. EITF 03-01 also requires annual disclosures of certain quantitative
and qualitative factors of debt and marketable equity securities that are
classified as available-for-sale or held-to-maturity and are in an unrealized
loss position at the balance sheet date, but for which an other-than-temporary
impairment has not been recognized. The disclosure requirements of EITF 03-01
were effective December 31, 2003 and had no effect on the Companys financial
statements. In the third quarter of 2004, the accounting guidance of EITF
03-01 became effective and had no effect on the Companys financial statements. In May 2004, the FASB issued FASB Staff Position No. 106-2 (FSP 106-2), which
provides guidance regarding the accounting and disclosure related to the
Medicare Prescription Drug Improvement and Modernization Act of 2003 (the Act)
that was signed into law in December 2003. FSP 106-2 is effective for interim
and annual periods beginning after June 15, 2004. The Act introduces a
prescription drug benefit under Medicare (Medicare Part D) as well as a federal
subsidy to sponsors of retiree health care benefit plans that provide a benefit
that is at least equivalent to Medicare Part D. The Company has concluded that
enactment of the Act is not a significant event as defined in SFAS No. 106,
Employers Accounting for Postretirement Benefits Other Than Pensions.
Therefore, in accordance with FSP 106-2, the Company will recognize the effects
of the Act in its next measurement of plan assets and obligations, which is
January 1, 2005. The effects of the Act on retiree medical costs and the
recorded liability for retiree health care benefits will be immaterial. 16




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##### 



United Components, Inc. Notes to Condensed Financial Statements (unaudited) NOTE N  OTHER INFORMATION Cash payments for interest and income taxes (net of refunds) (in thousands): UCI
    
    UCI
    
    UCI
    
    UCI
    
    PredecessorConsolidated
    
    Consolidated
    
    Consolidated
    
    Consolidated
    
    CombinedThree Months
    
    Three Months
    
    Nine Months
    
    June 21, 2003
    
    Jan. 1, 2003Ended
    
    Ended
    
    Ended
    
    to
    
    toSept. 30, 2004
    
    Sept. 30, 2003
    
    Sept. 30, 2004
    
    Sept. 30, 2003
    
    June 20, 2003Interest
    
    $
    3,079
    
    
    $
    4,018
    
    
    $
    18,916
    
    
    $
    4,018
    
    
    $
    323Income taxes
    
    
    10,828
    
    
    
    275
    
    
    
    13,383
    
    
    
    275
    
    
    
    1,973Noncash transactions:Dividends recorded
as a reduction to
the receivable
from UIS
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    56,630Additions to
capital stock of
subsidiaries
through
capitalization of
amounts due to UIS
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    20,271
 On March 1, 2004, the Company made a voluntary prepayment of $40 million of
outstanding senior credit facility term loan borrowings. At September 30, 2004, 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. In the 2004 third quarter, the Company recorded $433,000 pre-tax expense for
losses associated with the closure of certain distribution facilities that have
been closed as of September 30, 2004. The pre-tax expense includes $57,000 of
employee severance costs and $376,000 for lease commitments, net of estimated
sublease income. Such lease commitments are for distribution facilities that
will not be used by the Company for the remaining term. NOTE O  GUARANTOR AND NONGUARANTOR FINANCIAL STATEMENTS The senior credit facilities are secured by substantially all the assets of the
Company. The senior subordinated notes (the Notes) are unsecured and rank
equally in right of payment with any of the Company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 borrowings under the senior credit facilities are guaranteed on a
full and unconditional and joint and several basis by UCIs domestic
subsidiaries. The condensed financial information, which follows, includes the consolidated
results of UCI subsequent to the June 20, 2003 Acquisition date and the
combined results of the Predecessor Company prior to the Acquisition. This
information includes condensed financial statements for (a) UCI, which is the
issuer of the Notes and borrower under the senior credit facilities, (b) the
domestic subsidiaries, which guarantee the Notes and borrowings under the
senior credit facilities (the Guarantors), (c) the foreign subsidiaries (the
Non-Guarantors), and (d) a consolidated UCI or a combined Predecessor
Company, as applicable. Also included are consolidating entries, which
principally consist of eliminations of investments in consolidated subsidiaries
and intercompany balances and transactions. All goodwill is included in UCIs
balance sheet. 17




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##### 



United Components, Inc. Notes to Condensed Financial Statements (unaudited) The September 30, 2004 UCI Consolidated, UCI, Guarantor and Non-Guarantor
condensed balance sheets that follow in this Note O include the final
allocation of the June 20, 2003 Acquisition purchase price. The UCI
Consolidated, UCI, Guarantor and Non-Guarantor condensed income statements for
the 2004 periods include the effects of the allocation of the June 20, 2003
Acquisition purchase price. For all 2003 condensed balance sheets and income
statements that follow in this Note O, step-up amounts resulting from the
preliminary allocation of the Acquisition purchase price are included with UCI
and were not allocated to its subsidiaries. Consequently, the 2003 Guarantor
and Non-Guarantor financial statements are reported on the Predecessors
historical basis. Preliminary purchase price allocations were based on
preliminary estimates of the fair value of assets acquired and liabilities
assumed. Separate financial statements of the Guarantor subsidiaries are not presented
because their guarantees are full and unconditional and joint and several, and
the Company believes separate financial statements and other disclosures
regarding the Guarantor subsidiaries are not material to investors. 18




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##### 



United Components, Inc. Notes to Condensed Financial Statements (unaudited) NOTE O (continued) Consolidating Condensed Balance Sheet
September 30, 2004 (unaudited)(in thousands) UCI
    
    
    
    
    
    
    
    
    
    
    
    
    
    Non-Consolidated
    
    Eliminations
    
    UCI
    
    Guarantor
    
    GuarantorAssetsCurrent assetsCash and cash equivalents
    
    $
    27,160
    
    
    $
    
    
    
    $
    17,411
    
    
    $
    2,608
    
    
    $
    7,141Accounts receivable, net
    
    
    267,091
    
    
    
    
    
    
    
    
    
    
    
    245,721
    
    
    
    21,370Inventories
    
    
    191,259
    
    
    
    
    
    
    
    
    
    
    
    174,971
    
    
    
    16,288Deferred tax
    
    
    15,345
    
    
    
    
    
    
    
    (1,242
    )
    
    
    15,288
    
    
    
    1,299Other current assets
    
    
    14,154
    
    
    
    
    
    
    
    3,582
    
    
    
    4,154
    
    
    
    6,418Total current assets
    
    
    515,009
    
    
    
    
    
    
    
    19,751
    
    
    
    442,742
    
    
    
    52,516Property, plant and equipment, net
    
    
    214,673
    
    
    
    
    
    
    
    1,098
    
    
    
    167,288
    
    
    
    46,287Intercompany receivables
    
    
    
    
    
    
    (135,532
    )
    
    
    
    
    
    
    132,372
    
    
    
    3,160Investment in subsidiaries
    
    
    
    
    
    
    (715,095
    )
    
    
    703,930
    
    
    
    11,165Goodwill
    
    
    166,559
    
    
    
    
    
    
    
    166,559Other intangible assets, net
    
    
    90,449
    
    
    
    
    
    
    
    1,730
    
    
    
    86,296
    
    
    
    2,423Deferred financing costs
    
    
    8,437
    
    
    
    
    
    
    
    8,437Deferred tax
    
    
    Pension and other assets
    
    
    10,629
    
    
    
    
    
    
    
    220
    
    
    
    10,265
    
    
    
    144Total assets
    
    $
    1,005,756
    
    
    $
    (850,627
    )
    
    $
    901,725
    
    
    $
    850,128
    
    
    $
    104,530Liabilities and shareholders equityCurrent liabilitiesAccounts payable
    
    $
    105,561
    
    
    $
    
    
    
    $
    476
    
    
    $
    91,542
    
    
    $
    13,543Notes payable
    
    
    822
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    822Current maturities of long-term debt
    
    
    81
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    81Accrued expenses and other current liabilities
    
    
    78,533
    
    
    
    
    
    
    
    9,781
    
    
    
    61,791
    
    
    
    6,961Total current liabilities
    
    
    184,997
    
    
    
    
    
    
    
    10,257
    
    
    
    153,333
    
    
    
    21,407Long-term debt, less current maturities
    
    
    481,705
    
    
    
    
    
    
    
    481,483
    
    
    
    
    
    
    
    222Pension and other postretirement liabilities
    
    
    49,594
    
    
    
    
    
    
    
    459
    
    
    
    34,598
    
    
    
    14,537Deferred tax
    
    
    2,740
    
    
    
    
    
    
    
    4,263
    
    
    
    (686
    )
    
    
    (837
    )Other liabilities
    
    
    2,772
    
    
    
    
    
    
    
    
    
    
    
    2,772Intercompany payables
    
    
    
    
    
    
    (135,532
    )
    
    
    121,315
    
    
    
    2,676
    
    
    
    11,541Total shareholders equity
    
    
    283,948
    
    
    
    (715,095
    )
    
    
    283,948
    
    
    
    657,435
    
    
    
    57,660Total liabilities and shareholders equity
    
    $
    1,005,756
    
    
    $
    (850,627
    )
    
    $
    901,725
    
    
    $
    850,128
    
    
    $
    104,530
 19




---



##### 



United Components, Inc. Notes to Condensed Financial Statements (unaudited) NOTE O (continued) Consolidating Condensed Balance Sheet
December 31, 2003(in thousands) UCI
    
    
    
    
    
    
    
    
    
    
    
    
    
    Non-Consolidated
    
    Eliminations
    
    UCI
    
    Guarantor
    
    GuarantorAssetsCurrent assetsCash and cash equivalents
    
    $
    46,130
    
    
    $
    
    
    
    $
    33,164
    
    
    $
    4,448
    
    
    $
    8,518Accounts receivable, net
    
    
    230,345
    
    
    
    
    
    
    
    
    
    
    
    208,762
    
    
    
    21,583Inventories
    
    
    168,797
    
    
    
    
    
    
    
    471
    
    
    
    152,506
    
    
    
    15,820Deferred tax
    
    
    17,756
    
    
    
    
    
    
    
    36,010
    
    
    
    (19,472
    )
    
    
    1,218Other current assets
    
    
    10,877
    
    
    
    
    
    
    
    (336
    )
    
    
    5,275
    
    
    
    5,938Total current assets
    
    
    473,905
    
    
    
    
    
    
    
    69,309
    
    
    
    351,519
    
    
    
    53,077Property, plant and equipment, net
    
    
    219,973
    
    
    
    
    
    
    
    54,055
    
    
    
    124,977
    
    
    
    40,941Intercompany receivables
    
    
    
    
    
    
    (124,033
    )
    
    
    
    
    
    
    124,033Investment in subsidiaries
    
    
    
    
    
    
    (566,026
    )
    
    
    553,055
    
    
    
    12,971Goodwill
    
    
    163,823
    
    
    
    
    
    
    
    163,823Other intangible assets, net
    
    
    77,124
    
    
    
    
    
    
    
    76,574
    
    
    
    550Deferred financing costs
    
    
    10,146
    
    
    
    
    
    
    
    10,146Deferred tax
    
    
    13,609
    
    
    
    
    
    
    
    13,609Pension and other assets
    
    
    11,359
    
    
    
    
    
    
    
    (4,301
    )
    
    
    14,380
    
    
    
    1,280Total assets
    
    $
    969,939
    
    
    $
    (690,059
    )
    
    $
    936,270
    
    
    $
    628,430
    
    
    $
    95,298Liabilities and shareholders equityCurrent liabilitiesAccounts payable
    
    $
    74,652
    
    
    $
    
    
    
    $
    
    
    
    $
    63,456
    
    
    $
    11,196Notes payable
    
    
    752
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    752Current maturities of long-term debt
    
    
    1,034
    
    
    
    
    
    
    
    750
    
    
    
    
    
    
    
    284Accrued expenses and other current liabilities
    
    
    66,729
    
    
    
    
    
    
    
    19,072
    
    
    
    41,895
    
    
    
    5,762Total current liabilities
    
    
    143,167
    
    
    
    
    
    
    
    19,822
    
    
    
    105,351
    
    
    
    17,994Long-term debt, less current maturities
    
    
    520,472
    
    
    
    
    
    
    
    520,258
    
    
    
    
    
    
    
    214Pension and other postretirement liabilities
    
    
    50,038
    
    
    
    
    
    
    
    31,965
    
    
    
    18,073Deferred tax
    
    
    
    
    
    
    
    
    
    
    (4,050
    )
    
    
    699
    
    
    
    3,351Other liabilities
    
    
    2,172
    
    
    
    
    
    
    
    
    
    
    
    2,172Intercompany payables
    
    
    
    
    
    
    (124,033
    )
    
    
    114,185
    
    
    
    
    
    
    
    9,848Total shareholders equity
    
    
    254,090
    
    
    
    (566,026
    )
    
    
    254,090
    
    
    
    502,135
    
    
    
    63,891Total liabilities and shareholders equity
    
    $
    969,939
    
    
    $
    (690,059
    )
    
    $
    936,270
    
    
    $
    628,430
    
    
    $
    95,298
 20




---



##### 



United Components, Inc. Notes to Condensed Financial Statements (unaudited) NOTE O (continued) Consolidating Condensed Income Statement
Three Months Ended September 30, 2004 (Unaudited)(in thousands) UCI Consolidated
    
    Eliminations
    
    UCI
    
    Guarantor
    
    Non-GuarantorNet sales
    
    $
    257,566
    
    
    $
    (3,294
    )
    
    $
    
    
    
    $
    231,682
    
    
    $
    29,178Cost of sales
    
    
    202,834
    
    
    
    (3,294
    )
    
    
    
    
    
    
    181,380
    
    
    
    24,748Gross profit
    
    
    54,732
    
    
    
    
    
    
    
    
    
    
    
    50,302
    
    
    
    4,430Operating expensesSelling and warehousing
    
    
    17,436
    
    
    
    
    
    
    
    26
    
    
    
    15,650
    
    
    
    1,760General and administrative
    
    
    10,201
    
    
    
    
    
    
    
    2,564
    
    
    
    5,507
    
    
    
    2,130Amortization of intangibles
    
    
    1,566
    
    
    
    
    
    
    
    
    
    
    
    1,566Operating income (loss)
    
    
    25,529
    
    
    
    
    
    
    
    (2,590
    )
    
    
    27,579
    
    
    
    540Other income (expense)Interest income
    
    
    35
    
    
    
    (130
    )
    
    
    7
    
    
    
    120
    
    
    
    38Interest expense
    
    
    (8,134
    )
    
    
    130
    
    
    
    (8,150
    )
    
    
    (24
    )
    
    
    (90
    )Management fee expense
    
    
    (500
    )
    
    
    
    
    
    
    (500
    )Miscellaneous, net
    
    
    168
    
    
    
    
    
    
    
    
    
    
    
    188
    
    
    
    (20
    )Income (loss) before income taxes
    
    
    17,098
    
    
    
    
    
    
    
    (11,233
    )
    
    
    27,863
    
    
    
    468Income tax expense (benefit)
    
    
    6,818
    
    
    
    
    
    
    
    (4,979
    )
    
    
    11,550
    
    
    
    247Increase (decrease) before equity
in earnings of subsidiaries
    
    
    10,280
    
    
    
    
    
    
    
    (6,254
    )
    
    
    16,313
    
    
    
    221Equity in earnings of subsidiaries
    
    
    
    
    
    
    (16,326
    )
    
    
    16,534
    
    
    
    (208
    )Net income (loss)
    
    $
    10,280
    
    
    $
    (16,326
    )
    
    $
    10,280
    
    
    $
    16,105
    
    
    $
    221
 21




---



##### 



United Components, Inc. Notes to Condensed Financial Statements (unaudited) NOTE O (continued) Consolidating Condensed Income Statement
Three Months Ended September 30, 2003 (unaudited)(in thousands) Predecessor
    
    
    
    
    
    
    
    
    
    
    
    
    
    Non-Combined
    
    Eliminations
    
    UCI
    
    Guarantor
    
    GuarantorNet sales
    
    $
    251,918
    
    
    $
    (2,607
    )
    
    $
    
    
    
    $
    227,323
    
    
    $
    27,202Cost of sales
    
    
    224,347
    
    
    
    (2,607
    )
    
    
    25,146
    
    
    
    181,012
    
    
    
    20,796Gross profit (loss)
    
    
    27,571
    
    
    
    
    
    
    
    (25,146
    )
    
    
    46,311
    
    
    
    6,406Operating expensesSelling and warehousing
    
    
    17,218
    
    
    
    
    
    
    
    
    
    
    
    15,645
    
    
    
    1,573General and administrative
    
    
    10,287
    
    
    
    
    
    
    
    2,058
    
    
    
    4,105
    
    
    
    4,124Amortization of intangible assets
    
    
    1,386
    
    
    
    
    
    
    
    1,252
    
    
    
    134Operating income (loss)
    
    
    (1,320
    )
    
    
    
    
    
    
    (28,456
    )
    
    
    26,427
    
    
    
    709Other income (expense)Interest income
    
    
    86
    
    
    
    (125
    )
    
    
    9
    
    
    
    145
    
    
    
    57Interest expense
    
    
    (10,525
    )
    
    
    125
    
    
    
    (10,518
    )
    
    
    (15
    )
    
    
    (117
    )Management fee expense
    
    
    (506
    )
    
    
    
    
    
    
    (500
    )
    
    
    32
    
    
    
    (38
    )Miscellaneous, net
    
    
    80
    
    
    
    
    
    
    
    110
    
    
    
    (150
    )
    
    
    120Income (loss) before income taxes
    
    
    (12,185
    )
    
    
    
    
    
    
    (39,355
    )
    
    
    26,439
    
    
    
    731Income tax expense (benefit)
    
    
    (4,630
    )
    
    
    
    
    
    
    (16,196
    )
    
    
    11,038
    
    
    
    528Increase (decrease) before equity
in earnings of subsidiaries
    
    
    (7,555
    )
    
    
    
    
    
    
    (23,159
    )
    
    
    15,401
    
    
    
    203Equity in earnings of subsidiaries
    
    
    
    
    
    
    (15,604
    )
    
    
    15,604Net income (loss)
    
    $
    (7,555
    )
    
    $
    (15,604
    )
    
    $
    (7,555
    )
    
    $
    15,401
    
    
    $
    203
 22




---



##### 



United Components, Inc. Notes to Condensed Financial Statements (unaudited) NOTE O (continued) Consolidating Condensed Income Statement
Nine Months Ended September 30, 2004 (unaudited)(in thousands) UCI
    
    
    
    
    
    
    
    
    
    
    
    
    
    Non-Consolidated
    
    Eliminations
    
    UCI
    
    Guarantor
    
    GuarantorNet sales
    
    $
    788,329
    
    
    $
    (11,035
    )
    
    $
    
    
    
    $
    705,015
    
    
    $
    94,349Cost of sales
    
    
    618,254
    
    
    
    (11,035
    )
    
    
    
    
    
    
    551,510
    
    
    
    77,779Gross profit
    
    
    170,075
    
    
    
    
    
    
    
    
    
    
    
    153,505
    
    
    
    16,570Operating expensesSelling and warehousing
    
    
    55,823
    
    
    
    
    
    
    
    
    
    
    
    50,372
    
    
    
    5,451General and administrative
    
    
    34,400
    
    
    
    
    
    
    
    7,718
    
    
    
    18,829
    
    
    
    7,853Amortization of intangible assets
    
    
    5,268
    
    
    
    
    
    
    
    
    
    
    
    5,268Operating income (loss)
    
    
    74,584
    
    
    
    
    
    
    
    (7,718
    )
    
    
    79,036
    
    
    
    3,266Other income (expense)Interest income
    
    
    148
    
    
    
    (361
    )
    
    
    16
    
    
    
    342
    
    
    
    151Interest expense
    
    
    (26,835
    )
    
    
    361
    
    
    
    (26,822
    )
    
    
    (64
    )
    
    
    (310
    )Management fee expense
    
    
    (1,500
    )
    
    
    
    
    
    
    (1,500
    )Miscellaneous, net
    
    
    294
    
    
    
    
    
    
    
    
    
    
    
    257
    
    
    
    37Income (loss) before income taxes
    
    
    46,691
    
    
    
    
    
    
    
    (36,024
    )
    
    
    79,571
    
    
    
    3,144Income tax expense (benefit)
    
    
    18,659
    
    
    
    
    
    
    
    (14,836
    )
    
    
    31,748
    
    
    
    1,747Increase (decrease) before equity
in earnings of subsidiaries
    
    
    28,032
    
    
    
    
    
    
    
    (21,188
    )
    
    
    47,823
    
    
    
    1,397Equity in earnings of subsidiaries
    
    
    
    
    
    
    (47,560
    )
    
    
    49,220
    
    
    
    (1,660
    )Net income (loss)
    
    $
    28,032
    
    
    $
    (47,560
    )
    
    $
    28,032
    
    
    $
    46,163
    
    
    $
    1,397
 23




---



##### 



United Components, Inc. Notes to Condensed Financial Statements (unaudited) NOTE O (continued) Consolidating Condensed Income Statement
June 21, 2003 to September 30, 2003 (Unaudited) UCI
    
    
    
    
    
    
    
    
    
    
    
    
    
    Non-Consolidated
    
    Eliminations
    
    UCI
    
    Guarantor
    
    Guarantor(in thousands)Net sales
    
    $
    278,097
    
    
    $
    (2,965
    )
    
    $
    
    
    
    $
    250,622
    
    
    $
    30,440Cost of sales
    
    
    247,749
    
    
    
    (2,965
    )
    
    
    28,219
    
    
    
    199,649
    
    
    
    22,846Gross profit
(loss)
    
    
    30,348
    
    
    
    
    
    
    
    (28,219
    )
    
    
    50,973
    
    
    
    7,594Operating expensesSelling and warehousing
    
    
    19,431
    
    
    
    
    
    
    
    
    
    
    
    17,716
    
    
    
    1,715General and administrative
    
    
    11,891
    
    
    
    
    
    
    
    2,543
    
    
    
    4,582
    
    
    
    4,766Amortization of other intangibles
    
    
    1,386
    
    
    
    
    
    
    
    1,356
    
    
    
    30Operating income (loss)
    
    
    (2,360
    )
    
    
    
    
    
    
    (32,118
    )
    
    
    28,645
    
    
    
    1,113Other income (expense)Interest income
    
    
    86
    
    
    
    (359
    )
    
    
    23
    
    
    
    372
    
    
    
    50Interest expense
    
    
    (14,385
    )
    
    
    359
    
    
    
    (14,390
    )
    
    
    (221
    )
    
    
    (133
    )Management fee expense
    
    
    (561
    )
    
    
    
    
    
    
    (500
    )
    
    
    (24
    )
    
    
    (37
    )Miscellaneous, net
    
    
    191
    
    
    
    
    
    
    
    
    
    
    
    54
    
    
    
    137Income (loss) before income taxes
    
    
    (17,029
    )
    
    
    
    
    
    
    (46,985
    )
    
    
    28,826
    
    
    
    1,130Income tax expense (benefit)
    
    
    (6,471
    )
    
    
    
    
    
    
    (18,045
    )
    
    
    11,040
    
    
    
    534Increase
(decrease) before equity in earnings of
subsidiaries
    
    
    (10,558
    )
    
    
    
    
    
    
    (28,940
    )
    
    
    17,786
    
    
    
    596Equity in earnings of subsidiaries
    
    
    
    
    
    
    (18,382
    )
    
    
    18,382Net income (loss)
    
    $
    (10,558
    )
    
    $
    (18,382
    )
    
    $
    (10,558
    )
    
    $
    17,786
    
    
    $
    596
 24




---



##### 



United Components, Inc. Notes to Condensed Financial Statements (unaudited) NOTE O (continued) Combining Condensed Income Statement
January 1 to June 20, 2003 (unaudited)(in thousands) Predecessor
    
    
    
    
    
    
    
    
    
    
    
    
    
    Non-Combined
    
    Eliminations
    
    UCI
    
    Guarantor
    
    GuarantorNet sales
    
    $
    452,467
    
    
    $
    (6,912
    )
    
    $
    
    
    
    $
    405,003
    
    
    $
    54,376Cost of sales
    
    
    378,211
    
    
    
    (6,912
    )
    
    
    
    
    
    
    344,218
    
    
    
    40,905Gross profit
    
    
    74,256
    
    
    
    
    
    
    
    
    
    
    
    60,785
    
    
    
    13,471Operating expensesSelling and warehousing
    
    
    33,585
    
    
    
    
    
    
    
    
    
    
    
    30,216
    
    
    
    3,369General and administrative
    
    
    18,928
    
    
    
    
    
    
    
    
    
    
    
    10,526
    
    
    
    8,402Amortization of intangible assets
    
    
    60
    
    
    
    
    
    
    
    
    
    
    
    60Operating income
    
    
    21,683
    
    
    
    
    
    
    
    
    
    
    
    19,983
    
    
    
    1,700Other income (expense)Interest income
    
    
    1,712
    
    
    
    
    
    
    
    
    
    
    
    1,449
    
    
    
    263Interest expense
    
    
    (245
    )
    
    
    
    
    
    
    
    
    
    
    73
    
    
    
    (318
    )Management fee expense
    
    
    (18
    )
    
    
    
    
    
    
    
    
    
    
    9
    
    
    
    (27
    )Miscellaneous, net
    
    
    (408
    )
    
    
    
    
    
    
    
    
    
    
    (7
    )
    
    
    (401
    )Income before income taxes
    
    
    22,724
    
    
    
    
    
    
    
    
    
    
    
    21,507
    
    
    
    1,217Income tax expense
    
    
    942
    
    
    
    
    
    
    
    
    
    
    
    493
    
    
    
    449Net income
    
    $
    21,782
    
    
    $
    
    
    
    $
    
    
    
    $
    21,014
    
    
    $
    768
 25




---



##### 



United Components, Inc. Notes to Condensed Financial Statements (unaudited) NOTE O (continued) Consolidating Condensed Statement of Cash Flows
Nine months ended September 30, 2004 (unaudited)(in thousands) UCI
    
    
    
    
    
    
    
    
    
    
    
    
    
    Non-Consolidated
    
    Eliminations
    
    UCI
    
    Guarantor
    
    GuarantorNet cash provided by operating activities
    
    $
    55,600
    
    
    $
    
    
    
    $
    27,281
    
    
    $
    20,376
    
    
    $
    7,943Cash flows from investing activities:Final payment of Acquisition purchase price
    
    
    (8,000
    )
    
    
    
    
    
    
    (8,000
    )Capital expenditures
    
    
    (28,636
    )
    
    
    
    
    
    
    (2,101
    )
    
    
    (22,348
    )
    
    
    (4,187
    )Proceeds from the sale of assets
    
    
    399
    
    
    
    
    
    
    
    
    
    
    
    132
    
    
    
    267Net cash
used in investing activities
    
    
    (36,237
    )
    
    
    
    
    
    
    (10,101
    )
    
    
    (22,216
    )
    
    
    (3,920
    )Cash flows from financing activities:Issuance of debt
    
    
    467
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    467Debt repayments
    
    
    (40,591
    )
    
    
    
    
    
    
    (40,000
    )
    
    
    
    
    
    
    (591
    )Stockholders equity contribution
    
    
    1,735
    
    
    
    
    
    
    
    1,735Dividends
    
    
    
    
    
    
    
    
    
    
    5,332
    
    
    
    
    
    
    
    (5,332
    )Net cash used in financing activities
    
    
    (38,389
    )
    
    
    
    
    
    
    (32,933
    )
    
    
    
    
    
    
    (5,456
    )Effect of exchange rate changes on cash
    
    
    56
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    56Net decrease in cash and cash equivalents
    
    
    (18,970
    )
    
    
    
    
    
    
    (15,753
    )
    
    
    (1,840
    )
    
    
    (1,377
    )Cash and cash equivalents at beginning of period
    
    
    46,130
    
    
    
    
    
    
    
    33,164
    
    
    
    4,448
    
    
    
    8,518Cash and cash equivalents at end of period
    
    $
    27,160
    
    
    $
    
    
    
    $
    17,411
    
    
    $
    2,608
    
    
    $
    7,141
 26




---



##### 



United Components, Inc. Notes to Condensed Financial Statements (unaudited) NOTE O (continued) Combining Condensed Statement of Cash Flows
June 21 to September 30, 2003 (unaudited)(in thousands) Predecessor
    
    
    
    
    
    
    
    
    
    
    
    
    
    Non-Combined
    
    Eliminations
    
    UCI
    
    Guarantor
    
    GuarantorNet cash provided by operating activities
    
    $
    74,425
    
    
    $
    
    
    
    $
    63,967
    
    
    $
    5,627
    
    
    $
    4,831Cash flows from investing activities:Acquisition and related fees
    
    
    (818,380
    )
    
    
    
    
    
    
    (818,380
    )Capital expenditures
    
    
    (8,340
    )
    
    
    
    
    
    
    (30
    )
    
    
    (6,684
    )
    
    
    (1,626
    )Proceeds from sale of assets
    
    
    2,252
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,252Net cash
provided by (used in) investing
activities
    
    
    (824,468
    )
    
    
    
    
    
    
    (818,410
    )
    
    
    (6,684
    )
    
    
    626Cash flows from financing activities:Issuance of debt
    
    
    585,000
    
    
    
    
    
    
    
    585,000Financing fees and debt issuance cost
    
    
    (21,871
    )
    
    
    
    
    
    
    (21,871
    )Stockholders equity contribution
    
    
    261,011
    
    
    
    
    
    
    
    261,011Debt repayments
    
    
    (5,468
    )
    
    
    
    
    
    
    (5,000
    )
    
    
    
    
    
    
    (468
    )Net cash
provided by (used in) financing activities
    
    
    818,672
    
    
    
    
    
    
    
    819,140
    
    
    
    
    
    
    
    (468
    )Effect of exchange rate changes on cash
    
    
    (3
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3
    )Net increase
(decrease) in cash and cash equivalents
    
    
    68,626
    
    
    
    
    
    
    
    64,697
    
    
    
    (1,057
    )
    
    
    4,986Cash and cash equivalents at beginning of
period
    
    
    4,452
    
    
    
    
    
    
    
    
    
    
    
    2,368
    
    
    
    2,084Cash and cash equivalents at end of period
    
    $
    73,078
    
    
    $
    
    
    
    $
    64,697
    
    
    $
    1,311
    
    
    $
    7,070
 27




---



##### 



United Components, Inc. Notes to Condensed Financial Statements (unaudited) NOTE O (continued) Combining Condensed Statement of Cash Flows
January 1 to June 20, 2003 (unaudited)(in thousands) Predecessor
    
    
    
    
    
    
    
    
    
    
    
    
    
    Non-Combined
    
    Eliminations
    
    UCI
    
    Guarantor
    
    GuarantorNet cash provided by operating activities
    
    $
    23,893
    
    
    $
    
    
    
    $
    
    
    
    $
    21,650
    
    
    $
    2,243Cash flows from investing activities:Capital expenditures
    
    
    (21,388
    )
    
    
    
    
    
    
    
    
    
    
    (16,026
    )
    
    
    (5,362
    )Proceeds from sale of assets
    
    
    215
    
    
    
    
    
    
    
    
    
    
    
    34
    
    
    
    181Net cash used in investing
activities
    
    
    (21,173
    )
    
    
    
    
    
    
    
    
    
    
    (15,992
    )
    
    
    (5,181
    )Cash flows from financing activities:Debt repayments
    
    
    (98
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (98
    )Dividends and transfers to UIS, Inc., net
    
    
    (28,033
    )
    
    
    
    
    
    
    
    
    
    
    (10,527
    )
    
    
    (17,506
    )Net cash used in financing activities
    
    
    (28,131
    )
    
    
    
    
    
    
    
    
    
    
    (10,527
    )
    
    
    (17,604
    )Effect of exchange rate changes on cash
    
    
    1,509
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,509Net decrease in cash and equivalents
    
    
    (23,902
    )
    
    
    
    
    
    
    
    
    
    
    (4,869
    )
    
    
    (19,033
    )Cash and cash equivalents at beginning of
period
    
    
    28,354
    
    
    
    
    
    
    
    
    
    
    
    7,237
    
    
    
    21,117Cash and cash equivalents at end of period
    
    $
    4,452
    
    
    $
    
    
    
    $
    
    
    
    $
    2,368
    
    
    $
    2,084
 28




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##### 



Item 2. Managements Discussion and Analysis of Financial Condition and
Results of Operations Overview Sales.United Components, which we also refer to as the Company, is
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 and cooling systems, engine management systems,
driveline components and lighting systems to the automotive, trucking, marine,
mining, construction, agricultural and industrial vehicle markets. We estimate
that about 80% of our net sales in 2003 were made in the aftermarket, to a
customer base that includes some of the largest and fastest growing companies
servicing the aftermarket. The aftermarket has grown at an annual rate of
approximately 4.1% from 1997 to 2003. We believe it will continue to grow, at
least in the near term. We believe we are well positioned to participate in
that growth. We believe 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, and we believe that we offer one of the most comprehensive lines of
products in the vehicle replacement parts market, consisting of approximately
60,000 part numbers. We believe our breadth of product offering is a key
competitive advantage. 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. We have
established a network of manufacturing facilities, distribution centers and
offices located in the United States, Europe, Mexico and China, with a global
work force of approximately 6,700 employees as of September 30, 2004. 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 number of
miles driven per year, the average age of the vehicle, 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 non-discretionary nature
of vehicle maintenance and repair. However, it is also important to note that in 2003 and 2002, 23% of our
revenues were derived from our business with AutoZone, and 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, our net sales
concentration as a result of this relationship increases the potential impact
to our business that could result from any changes in the economic terms of
this relationship. Any change in the terms of sales to this customer could
have a material impact on our financial position and results of operations.
Any changes could, for example, result in an increase in the time it takes for
us to record net sales and collect on receivables. AutoZone has publicly
announced its intent to transition its suppliers to a program where suppliers
are paid when an AutoZone customer purchases the suppliers product. Cost of Sales. Cost of sales includes all costs of manufacturing
required to bring a product to a ready-for-sale condition. Such costs include
direct and indirect materials (net of vendor consideration), direct and
indirect labor including fringe benefits, supplies, warranty costs, utilities,
freight, depreciation, insurance, pension and postretirement benefits,
information technology costs and other costs. Cost of sales also includes all
costs to procure, package and ship products that we purchase and resell. The
two largest components of our cost of sales are steel and labor. In 2004, global demand for steel is high and is resulting in supplier-imposed
price increases and/or surcharges for this raw material. While we have been,
and expect to continue to be, able to obtain sufficient quantities to satisfy
our needs, we have been required to pay significantly higher prices for the
material. The Company has implemented price increases on certain products with
high steel content and is considering the implementation of additional price
increases on its high steel content products. Existing price increases, as
well as any future increases, have not and may not be sufficient to offset all
of the steel cost increases. The higher cost of steel, net of UCI price increases,
adversely affected pre-tax income by approximately $0.8 million in the third
quarter of 2004. The adverse effect in the fourth quarter of 2004 is expected
to be significantly higher. 29




---



##### 



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. Management intends
to increase promotional spending to selectively expand the Companys customer
base and products. General and Administrative Expenses. General and administrative
expenses primarily include executive, accounting and legal personnel salaries
and fringe benefits, professional fees, pension benefits, insurance, provision
for doubtful accounts and rent. In the long run, management thinks that general and administrative expenses, as
well as selling and warehousing expenses, as a percentage of sales are key
measures. Management is working to reduce these percentages. Cash Generation.Net cash from operating activities was $55.6 million.
Capital expenditures were $28.6 million. The net cash generated from these
activities was $27.0 million. Critical Accounting Policies 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 to us,
because they are important to our financial statements and they require our
most complex judgments in the preparation of the financial statements. Accounts receivable. We maintain allowances for doubtful accounts for
estimated losses resulting from the inability of our customers to make required
payments. These allowances are based on a combination of an aging analysis and
our analyses of our history of write-offs. In addition, we evaluate allowance
requirements if the financial condition of a particular customer were to
deteriorate. Inventory. We record inventory at the lower of cost or market. Cost is
determined using the first-in, first-out (FIFO) 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. Revenue recognition. We record sales upon transfer of title of product,
which occurs upon shipment to the customer. Because we enter into sales rebate
programs with some of our customers that require us to make rebate payments to
them from time to time, we estimate amounts due under these sales rebate
programs at the time of shipment. Net sales relating to any particular
shipment are based upon the amount invoiced for the shipped goods less
estimated future rebate payments. These estimates are based upon our
historical experience. Revisions to these estimates are recorded in the period
in which the facts that give rise to the revision become known.
Additionally, we enter into formal and informal agreements with our customers
that provide for sales discounts, marketing allowances, provided return
allowances and performance incentives. The discounts, allowances and
incentives are expensed as a reduction to sales, based on estimates of the
criteria that give rise to the discount or allowance, 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. 30




---



##### 



Impairment of intangible assets and tangible fixed assets. Our
intangible assets and tangible fixed assets are held at historical cost, net of
depreciation and amortization, less any provision for impairment. We
periodically evaluate the realizability of our intangible or tangible fixed
assets. We also perform a review of these assets if an indicator of impairment
exists, such as an operating loss or cash outflow from operating activities or
a significant adverse change in the business or market place. Estimates of
future cash flows used to test the asset for impairment are based on current
operating projections extended to the useful life of the asset group and are,
by their nature, subjective. In accordance with SFAS 142, we stopped amortizing goodwill on January 1, 2002.
In lieu of amortization, we perform impairment analysis of our goodwill.
Based on this analysis in the fourth quarters of 2003 and 2002, we have
concluded that there has not been an impairment. If we determine that goodwill
has been impaired, we will record the impairment as a charge against income.
Estimates of future discounted cash flows used in the impairment test are based
on current operating projections, which are by their nature subjective. 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 from actual results for each assumption,
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 from actual results for
each assumption, will affect the amount of expense we recognize in future
periods. A one percent increase or decrease in the assumed health care cost
trends would result in an approximate $40,000 annual increase or decrease in
annual postretirement health costs. Insurance Reserves. Prior to the Acquisition, the Company had insurance
under UISs master policies for group, workers compensation, automobile,
product and general liability. These policies were subject to retrospective
rating adjustments for which we were responsible. These adjustments were
predicated upon paid losses, reserves and expenses. The projections involved
in this estimate were subject to substantial uncertainty because of several
factors which are difficult to predict, including actual claims experience,
regulatory changes, litigation trends and changes in inflation. As of the June 20, 2003 Acquisition, the Company is no longer covered by the
UIS master insurance policies. As of that date, the Company has purchased
insurance, which does not include retrospective rating adjustments but does
include high deductibles for which the Company is responsible. Consequently,
the Company is subject to the same substantial uncertainties as those described
in the preceding paragraph. Unpaid estimated losses, for which the Company is
responsible, are recorded in accrued expenses in the September 30, 2004 and
December 31, 2003 balance sheets. Environmental Expenditures. Our aggregate expenditures (both capital
and operating) for compliance with laws and regulations related to the
protection of the environment were approximately $1.0 million in 2003, $0.8
million in 2002 and $0.7 million in 2001. The majority of our environmental
expenditures relate to the proper disposal of environmentally sensitive waste.
Management does not expect this disposal cost to change significantly in the
near term, other than for volume fluctuations. Also, management does not
expect capital spending on environmental matters to increase materially over
the near term; however, changes in environmental regulations, or the outcome of
litigation, could result in additional requirements that could necessitate
increased spending. 31




---



##### 



Results of Operations The following table was derived from the United Components, Inc. consolidated
income statements for the 2004 periods presented and from the United
Components, Inc. consolidated and the Predecessor Company combined income
statements for the 2003 periods. To enable meaningful comparisons, the
consolidated results of United Components, Inc., after the June 20, 2003
Acquisition, and the combined results of the Predecessor Company before the
June 20, 2003 Acquisition, have been combined. The amounts are presented in
millions of dollars. Three Months
    
    Nine MonthsEnded
    
    EndedSept. 30,
    
    Sept. 30,2004
    
    2003
    
    2004
    
    2003Net sales
    
    $
    257.6
    
    
    $
    251.9
    
    
    $
    788.3
    
    
    $
    730.6Cost of sales
    
    
    202.9
    
    
    
    224.3
    
    
    
    618.2
    
    
    
    626.0Gross profit
    
    
    54.7
    
    
    
    27.6
    
    
    
    170.1
    
    
    
    104.6Operating expensesSelling and warehousing
    
    
    17.4
    
    
    
    17.2
    
    
    
    55.8
    
    
    
    53.0General and administrative
    
    
    10.2
    
    
    
    10.3
    
    
    
    34.4
    
    
    
    30.9Amortization of intangible assets
    
    
    1.6
    
    
    
    1.4
    
    
    
    5.3
    
    
    
    1.4Operating
income (loss)
    
    
    25.5
    
    
    
    (1.3
    )
    
    
    74.6
    
    
    
    19.3Interest, net
    
    
    (8.1
    )
    
    
    (10.4
    )
    
    
    (26.7
    )
    
    
    (12.8
    )Management fee expense
    
    
    (.5
    )
    
    
    (0.5
    )
    
    
    (1.5
    )
    
    
    (0.6
    )Miscellaneous, net
    
    
    .2
    
    
    
    
    
    
    
    .3
    
    
    
    (0.2
    )Income
(loss) before income taxes
    
    
    17.1
    
    
    
    (12.2
    )
    
    
    46.7
    
    
    
    5.7Income tax expense (benefit)
    
    
    6.8
    
    
    
    (4.6
    )
    
    
    18.7
    
    
    
    (5.5
    )Net income
(loss)
    
    $
    10.3
    
    
    $
    (7.6
    )
    
    $
    28.0
    
    
    $
    11.2Pro forma
net income (loss), adjusted only
for change in tax filing status (1)
    
    $
    10.3
    
    
    $
    (7.6
    )
    
    $
    28.0
    
    
    $
    3.6
   (1)
    
    Prior to the Acquisition, the subsidiaries of UIS that we acquired
operated as S corporations for Federal and state income tax purposes.
The historical combined financial statements do not include a provision
for Federal and certain state income taxes for such periods. A
provision for state income taxes has been made for those states not
recognizing S corporation status. Pro forma net income has been
computed as if we had been fully subject to Federal and state income
taxes based on the tax laws in effect during the respective periods.
See Notes B and C to the financial statements. 32




---



##### 



Three Months Ended September 30, 2004 Compared with the Three Months Ended
September 30, 2003 Net sales. Net sales increased $5.7 million, or 2.3%, from $251.9
million in the 2003 quarter to $257.6 million in the 2004 quarter. The
increases were in the retail, heavy duty and original equipment sales and
service channels. Cost of sales.Cost of sales was $202.9 million in the 2004 quarter
compared to $224.3 million in the 2003 quarter. The 2004 amount includes the
cost associated with the higher 2004 volume. Both quarters were adversely
affected by non-cash Acquisition-related charges, which totaled $1.2 million in
the 2004 quarter and $25.3 million in the 2003 quarter. The non-cash Acquisition-related charges include: (i) $22.6
million of cost in the 2003 quarter due to the sale of inventory that was
written-up above cost to market as part of the allocation of the Acquisition
purchase price; and (ii) higher depreciation expense of $1.2 million in the 2004
quarter and $2.7 million in the 2003 quarter resulting from the
Acquisition-related step-up of property, plant and equipment. The higher
depreciation will continue in the long-term. The additional cost of selling
the stepped-up inventory on-hand at the Acquisition date stopped adversely
affecting results in the first quarter of 2004, when the last of such inventory
was sold. Excluding the non-recurring Acquisition-related $22.6 million inventory charge,
gross profit in the 2003 quarter would have been $50.2 million, or 19.9% of
sales. This compares to $54.7 million, or 21.2%, in the 2004 quarter. Of
the 1.3 percentage point improvement, 0.6 is due to lower 2004 depreciation of
the Acquisition-related step-up of property, plant and equipment. The
remaining improvement is due to cost reductions, which resulted in a 1.0
percentage point improvement, partially offset by the 0.3 percentage point
adverse effect of higher steel costs. The cost reductions were primarily from
the savings due to improved procurement of materials and reduced insurance
costs. The higher steel cost is the result of worldwide steel shortages and
price increases. This cost increase was partially offset by price increases to
our customers on UCIs high steel content products. Selling and warehousing expenses. Selling and warehousing expenses of
$17.4 million for the 2004 quarter were $0.2 million higher than the 2003
quarter. In both the 2004 and 2003 quarters, this cost was 6.8% of sales. General and administrative expenses. General and administrative
expenses for the 2004 quarter were $10.2 million compared to $10.3 million in
the 2003 quarter. Expense for the third quarter of 2003 includes $1.5 million
of unusual costs incurred in connection with the transition to a new, more
strategically focused stand-alone company. Expenses for the third quarter of
2004 include (i) the higher cost of operating as a stand-alone company after
the Acquisition; and (ii) the Companys investment in processes and management
talent necessary to drive improvements in future operational efficiency. Interest, net. Net interest expense of $8.1 million in the 2004 quarter
compares to $10.4 million in the 2003 quarter. The $2.3 million reduction is
due to lower debt levels and lower interest rates in 2004 and 2004 interest
capitalization related to a large 2004 capital project. The Company attained
lower interest rates on its senior credit facilities borrowings by achieving
certain financial ratio targets. Income taxes. The change in income taxes is primarily due to the change
from a pre-tax loss in 2003 to pre-tax income in 2004. Net Income. Due to the factors described above, net income increased
$17.9 million from a $7.6 million net loss in the 2003 quarter to $10.3 million
of net income in the 2004 quarter. 33




---



##### 



Nine Months Ended September 30, 2004 Compared with the Nine Months Ended
September 30, 2003 Net sales. Net sales increased $57.7 million, or 7.9%, from $730.6
million in the first nine months of 2003 to $788.3 million in the first nine
months of 2004. The increase is primarily volume driven, with increases in all
market channels. Cost of sales.Cost of sales was $618.2 million in the first nine
months of 2004 compared to $626.0 million in the 2003 first nine months. The
2004 amount includes the cost associated with the higher 2004 sales volume.
The 2003 amount includes $21.3 million of one-time cost adjustments. Both
periods were adversely affected by non-cash Acquisition-related charges, which
totaled $4.2 million in the first nine months of 2004 and $28.2 million in the
first nine months of 2003. The aforementioned $21.3 million one-time adjustments in 2003 include:
inventory valuation adjustments  ($12.6 million); provisions for
environmental issues  ($4.6 million), and provisions for patent disputes,
product line relocations, costs relating to the upgrade of the Albion, Illinois
manufacturing facility, and cost associated with the consolidation of our
European filtration manufacturing operations  ($4.1 million). The aforementioned non-cash Acquisition-related charges include: (i) cost of
$0.5 million in the first nine months of 2004 and $25.2 million in the first
nine months of 2003, due to the sale of inventory that was written-up above
cost to market value, as part of the allocation of the Acquisition purchase
price; and (ii) higher depreciation expense of $3.7 million in the first
nine months of 2004 and $3.0 million in the first nine months of 2003 resulting
from the Acquisition-related step-up of property, plant and equipment. The
higher depreciation expense will continue in the long-term. All of the
additional cost of selling the stepped-up inventory on-hand at the Acquisition
date was realized in full by the end of first quarter of 2004. Excluding the $0.5 million of non-cash Acquisition-related costs resulting from
the sale of the written-up inventory, gross profit for the first nine months of
2004 would have been $170.6 million, or 21.6% of sales. Excluding the $21.3
million of one-time adjustments and the $25.2 million of non-cash
Acquisition-related costs resulting from the sale of the written-up inventory,
gross profit in the first nine months of 2003 would have been $151.1 million,
or 20.7% of sales. The 0.9 percentage point improvement in gross margin in
2004 is due to gains in manufacturing efficiency, increased sales volume,
savings due to improved procurement of material, and reduced insurance costs. Selling and warehousing expenses. Selling and warehousing expenses of
$55.8 million for the first nine months of 2004 are $2.8 million higher than
the first nine months of 2003. In the 2004 nine month period, this cost was
7.1% of sales compared to 7.3% in the first nine months of 2003. General and administrative expenses. General and administrative
expenses for the first nine months of 2004 were $34.4 million compared to $30.9
million in the first nine months of 2003. The 2003 nine month period includes
a $1.6 million higher provision for bad debt expense and $1.5 million of
unusual costs incurred in connection with the transition to a new, more
strategically focused stand-alone company. Costs in the 2004 nine month period
include (i) the higher cost of operating as a stand-alone company after the
Acquisition; and (ii) the Companys investment in processes and management
talent necessary to drive improvements in future operational efficiency. Interest, net. Net interest expense increased from $12.8 million in the
first nine months of 2003 to $26.7 million in the first nine months of 2004.
The $13.9 million increase included: (i) $0.6 million of accelerated write-off
of debt issuance costs due to voluntary prepayments of debt; (ii) $12.5 million
of interest expense on Acquisition-related debt; and (iii) $1.4 million lower
interest income on loans to the Predecessor Companys previous owner, which
were canceled in connection with the Acquisition. These increases were
partially offset by $0.6 million of interest capitalization related to a large
2004 capital project. Income taxes. The change in income taxes is driven by changes in
pre-tax income plus the effects of the Companys transition from S corporation filing status before the June 20,2003 Acquisition to C corporation filing
status after the Acquisition. 34




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Net Income. Due to the factors described above, net income increased
$16.8 million from $11.2 million in the 2003 nine month period to $28.0 million
of net income in the 2004 nine month period. Liquidity and Capital Resources At December 31, 2003, the Company had $46.1 million of cash and $528.3 million
of debt outstanding. (The difference between this debt amount and the amount
on the balance sheet is $6 million of unamortized debt issuance cost.) The
Companys December 31, 2003 debt included $297 million of senior credit
facility term loans and its $230 million senior subordinated notes. On March
1, 2004, the Company made a voluntary prepayment of $40 million of term loan
borrowings. The Company funded this $40 million prepayment with cash generated
from operations. At September 30, 2004, the Company had $27.2 million of cash
and $488.1 million of debt outstanding (before netting unamortized debt
issuance cost). At the $488.1 million debt level, annual interest expense, including
amortization of deferred financing costs and debt issuance cost, is
approximately $35.2 million at September 30, 2004 borrowing rates. A 0.25%
increase in the variable interest rate would have increased the annual interest
cost by $0.3 million. The Companys significant debt service obligations
could, under certain circumstances, have material consequences. The Companys primary source of liquidity is cash flow from operations and
borrowings under its $75 million revolving credit facility. Borrowings under
the revolving credit facility are available to fund the Companys working
capital requirements, capital expenditures and other general corporate
purposes. At September 30, 2004 there were no outstanding revolving credit
borrowings; however, $5.8 million of revolving credit borrowing capacity has
been used to support outstanding letters of credit. On May 27, 2004, the Company amended its credit agreement to permit sales of
and liens on receivables which are being sold pursuant to factoring
arrangements, subject to certain limitations. The Company intends to factor
its receivables when it is economically beneficial to do so. The Company has
established a factoring relationship with one of its customers, which has
resulted in the sale of approximately $6 million of receivables that would
otherwise have been outstanding at September 30, 2004 and which is expected to
increase this amount to $9 million by year-end. The Company is evaluating
other factoring arrangements which, if implemented, would increase the amount
of receivables sold by year-end 2004. Because of voluntary prepayments, the Company does not have any required
repayments of its senior credit facility term loans until December 2005. The
$230 million senior subordinated notes are due in 2013. The Companys
ability to make scheduled payments of principal on, or to pay interest on, or
to refinance, its indebtedness or to fund planned capital expenditures will
depend on its ability to generate cash in the future. Such cash generation is
subject to general economic, financial, competitive, legislative, regulatory
and other factors that are beyond its control. Based on the current level of operations, the Company believes that cash flow
from operations and available cash, together with available borrowings under
its revolving credit facility, will be adequate to meet liquidity needs and
fund planned capital expenditures for the next two years. The Company may,
however, 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, to meet liquidity needs in later years. If it is determined that
refinancing is necessary, and the Company is unable to secure such financing on
acceptable terms, then the Company may have insufficient liquidity to carry on
its operations and meet its obligations at such time. The Company can give no assurance that its business will generate sufficient
cash flow from operations, that any revenue growth or operating improvements will be realized, or that future borrowings will be available under its
revolving credit facilities in an amount sufficient to enable it to service its
indebtedness or to fund other liquidity needs. In addition, the Company can
give no assurance that it will be able to refinance any of its indebtedness,
including its senior credit facilities and the senior subordinated notes, on
commercially reasonable terms or at all. 35




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Net cash provided by operating activities Net cash provided by operating activities for the nine months ended September
30, 2004 was $55.6 million. Profits, before deducting depreciation and
amortization, generated $62.2 million. Increased receivables resulted in a $37
million use of cash. This increase in receivables was primarily due to
significantly higher sales in the third quarter of 2004 compared to the fourth
quarter of 2003. The increased sales resulted in about $29 million of the $37
million increase. The remaining $8 million increase is due to the combined
effect of normal receivables fluctuations, selective extensions of customer
payment terms, and factoring of receivables. Increases in inventory resulted
in a $22.5 million use of cash. Inventory was increased to fund the
significantly higher cost of steel, to support expanded product offerings, and
to build temporary buffer stock in advance of production changes that will
lower our manufacturing costs and reduce inventory levels in the long run. The
receivables and inventory working capital changes were partially offset by the
favorable effect of $30.9 million due to an increase in accounts payable. The
increase in payables is due primarily to extending payment timeframes with our
suppliers, as well as expenditures to support the inventory build. Changes in
other assets and liabilities netted to a $21.9 million positive effect on cash.
This $21.9 million includes: (i) a $5.5 million increase in interest payable,
which will be paid down in the fourth quarter; (ii) $5.5 million of higher book
versus tax return tax expenses, which will not require payment in the near
term; and (iii) $7.9 million of self-insurance expense accruals, which will not
require payment in the near term. Net cash used in investing activities Historically, net cash used in investing activities has been for capital
expenditures, offset by proceeds from the disposition of property, plant and
equipment. Capital expenditures for the nine months ended September 30, 2004
and 2003 were $28.6 million and $29.7 million, respectively. Approximately
$12.6 and $10.5 million of the 2004 and 2003 nine month capital expenditures
were related to the long-term capital investment plan to increase capacity and
reduce cost at our filtration facilities. The 2004 amount includes $2.6
million for the initial implementation stages of a new, fully integrated
information technology system, which will support financial reporting and
operations. Capital expenditures for the 2003 full year were $43.4 million.
For the full year 2004, capital expenditures are expected to be approximately
$44 to $46 million. Impact of the Acquisition and Related Financing Transactions The Company incurred significant indebtedness in connection with the
Acquisition. Accordingly, our interest expense is higher than it was prior to
the Acquisition. As a result of the Acquisition, our assets and liabilities
were adjusted to their estimated fair value as of the closing of the
Acquisition. The excess of the total purchase price over the value of our net
assets at closing of the Acquisition was allocated to goodwill and other
intangible assets. These long-lived assets are subject to annual impairment
review. See Note B to the Condensed Financial Statements for information
regarding the allocation of the Acquisition purchase price and the impact of
the Acquisition and the financing thereof. Recent Accounting Pronouncements In December 2003, SFAS No. 132R, Employers Disclosure about Pensions and
Other Postretirement Benefits was issued. SFAS No. 132R requires additional
disclosures about defined benefit pension plans and other postretirement benefit plans. The standard requires, among other things,
additional disclosures about the assets held in employer sponsored pension plans, disclosures relating to plan asset investment policy and practices,
disclosure of expected contributions to be made to the plans and expected
benefit payments to be made by the plans. Annual disclosures applicable to the
Companys U.S. pension and postretirement plans were required to be made in its
financial statements for the year ended December 31, 2003. The Company has
adopted this pronouncement as of December 31, 2003 for all of its U.S. plans.
Annual disclosures relating to its non-U.S. plans will be adopted for the year
ending December 31, 2004. Interim disclosures relating to its non-U.S. plans
will be adopted for the year ending December 31, 2005. 36




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In March 2004, the FASBs Emerging Issues Task Force concluded its discussion
of Issue No. 03-01, The Meaning of Other-Than-Temporary Impairments and Its
Application to Certain Investments(EITF 03-01). EITF 03-01 provides
guidance regarding the determination of when an impairment of debt and
marketable equity securities and investments, that are accounted for under the
cost method, should be considered other-than-temporary and recognized in
earnings. EITF 03-01 also requires annual disclosures of certain quantitative
and qualitative factors of debt and marketable equity securities that are
classified as available-for-sale or held-to-maturity and are in an unrealized
loss position at the balance sheet date, but for which an other-than-temporary
impairment has not been recognized. The disclosure requirements of EITF 03-01
were effective December 31, 2003 and had no effect on the Companys financial
statements. The accounting guidance of EITF 03-01 will be effective in the
third quarter of 2004 and is not expected to have a material effect on the
Companys financial statements. In May 2004, the FASB issued FASB Staff Position No. 106-2 (FSP 106-2), which
provides guidance regarding the accounting and disclosure related to the
Medicare Prescription Drug Improvement and Modernization Act of 2003 (the Act)
that was signed into law in December 2003. FSP 106-2 is effective for interim
and annual periods beginning after June 15, 2004. The Act introduces a
prescription drug benefit under Medicare (Medicare Part D) as well as a federal
subsidy to sponsors of retiree health care benefit plans that provide a benefit
that is at least equivalent to Medicare Part D. The Company has concluded that
enactment of the Act is not a significant event as defined in SFAS No. 106,
Employers Accounting for Postretirement Benefits Other Than Pensions.
Therefore, in accordance with FSP 106-2, the Company will recognize the effects
of the Act in its next measurement of plan assets and obligations, which is
January 1, 2005. The effects of the Act on retiree medical costs and the
recorded liability for retiree health care benefits will be immaterial. 37




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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 exposure. 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,
Euro, Canadian dollar and British pound. The results of operations of our
foreign subsidiaries are translated into U.S. dollars at the average exchange
rates for each relevant period. 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.
During 2003, approximately 12% of our business was transacted in local
currencies of foreign countries. While our international results of operations
as measured in dollars are subject to foreign exchange fluctuations, we do not
consider the related risk to be material to our financial condition or results
of operations. If the exchange rate between the foreign currencies and the
U.S. dollar were to decrease by 10%, our annual net income would have been
lower by $0.3 million in 2003 due to the reduction in reported results from our
foreign operations. 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 as other comprehensive
income on our statement of shareholders equity. In the past, the vehicle
parts businesses of UIS have attempted to manage, and in the future we expect
to continue to manage, this exposure primarily by balancing monetary assets and
liabilities and maintaining cash positions only at levels necessary for
operating purposes in those countries. Currency transaction exposure.Currency transaction exposure arises where
actual sales and purchases are made by a business in a currency other than its
own functional currency. The majority of our businesses source raw materials
and sell their products within their local markets currencies and, therefore,
have limited transaction exposure. In the future, we expect to continue to monitor our transaction exposure to
currency rate changes and 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 September 30, 2004, we
had no outstanding foreign currency contracts. We do not engage in any
speculative activities. Interest rate risk Borrowings under our senior credit facilities bear variable rates of interest.
Under our senior credit facilities, we are required to provide interest rate
protection on approximately $118 million of our senior term loan facilities
borrowings. In August 2003, we entered into an interest rate swap for $118
million. This swap effectively converts $118 million of variable rate debt to
fixed rate debt for the two years ended August 2005. The variable component of
the interest rate on borrowings under the senior credit facilities is based on
LIBOR. Under the swap, we will pay 1.94% and will receive the then-current
LIBOR on $118 million of debt. We utilize, and we will continue to utilize, sensitivity analyses to assess the
potential effect of our variable rate debt. If the variable interest rate were
to increase by 0.25% per annum, the net impact would be a decrease of
approximately $0.2 million on our annual net income and cash flow. 38




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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 not to 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 additional controls and
procedures. As required by SEC Rule 13a-15(b), the Company carried out an evaluation, under
the supervision and with the participation of the Companys management,
including the Companys Chief Executive Officer and the Companys Chief
Financial Officer, of the effectiveness of the design and operation of the
Companys disclosure controls and procedures as of the end of the quarter
covered by this report. Based on the foregoing, the Companys Chief Executive
Officer and Chief Financial Officer concluded that, as of the end of the
quarter covered by this report, the Companys disclosure controls and
procedures were effective at the reasonable assurance level. There has been no change in the Companys internal controls over financial
reporting during the Companys most recent fiscal quarter that has materially
affected, or is reasonably likely to materially affect, the Companys internal
controls over financial reporting. 39




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PART II
OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (a) Exhibits Exhibit 31.1
    
    Certification of Periodic Report by the Chief Executive
Officer pursuant to Rule 13a-14(a) of the Securities
Exchange Act of 1934.Exhibit 31.2
    
    Certification of Periodic Report by the Chief Financial
Officer pursuant to Rule 13a-14(a) of the Securities
Exchange Act of 1934.Exhibit 32
    
    Certification of Periodic Report by the Chief Executive
Officer and Chief Financial Officer pursuant to 18 U.S.C.
1350, as created by Section 906 of the Sarbanes-Oxley Act
of 2002.*
 * This certificate is being furnished solely to accompany the report pursuant
to 18 U.S.C. 1350 and is not being filed for purposes of Section 18 of the
Securities Exchange Act of 1934, as amended, and is not to be incorporated by
reference into any filing of the Company, whether made before or after the date
hereof, regardless of any general incorporation language in such filing. (b) Reports on Form 8-K filed during the quarter ended September 30, 2004. The Company filed a current report on Form 8-K dated August 10, 2004 with
respect to announcing financial results for the quarter ended June 30, 2004
(Items 7 and 12). 40




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SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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:   November 12, 2004
    By:
    /s/ Charles T. DicksonName:
    Charles T. DicksonTitle:
    Chief Financial Officer 41