UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q


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

For the quarterly period ended September 30, 2009


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

For the transition period from to

Commission File Number: 333-107219

UNITED COMPONENTS, INC.

(Exact Name of Registrant as Specified in Its Charter)


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

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

(812) 867-4156
(Registrant’s Telephone Number, Including Area Code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes o No þ

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

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


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

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

The registrant had 1,000 shares of its $0.01 par value common stock outstanding as of November 13, 2009.

United Components, Inc.

Index


Part I FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)				3
Condensed consolidated balance sheets — September 30, 2009 and December 31, 2008				3
Condensed consolidated income statements — Three and nine months ended September 30, 2009 and 2008				4
Condensed consolidated statements of cash flows — Nine months ended September 30, 2009 and 2008				5
Condensed consolidated statements of changes in equity — Nine months ended September 30, 2009 and 2008				6
Notes to condensed consolidated financial statements				7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations				27
Item 3. Quantitative and Qualitative Disclosures About Market Risk				42
Item 4. Controls and Procedures				43

Part II OTHER INFORMATION				44
Item 1. Legal Proceedings				44
Item 1A. Risk Factors				44
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds				44
Item 3. Default Upon Senior Securities				44
Item 4. Submission of Matters to Vote of Security Holders				44
Item 5. Other Information				44
Item 6. Exhibits				44
Signatures				45
Exhibits

PART I
FINANCIAL INFORMATION


Item 1.		Financial Statements

United Components, Inc.

Condensed Consolidated Balance Sheets
(in thousands)


	September 30,			December 31,
	2009			2008
	*(unaudited)*			*(audited)*
Assets
Current assets
Cash and cash equivalents	$	115,065		$	46,612
Accounts receivable, net		271,209			261,624
Inventories, net		128,312			159,444
Deferred tax assets		26,171			24,245
Other current assets		21,285			19,452

Total current assets		562,042			511,377

Property, plant and equipment, net		154,938			167,906
Goodwill		241,461			241,461
Other intangible assets, net		68,516			74,606
Deferred financing costs, net		2,004			2,649
Restricted cash		9,400			—
Other long-term assets		6,028			1,823

Total assets	$	1,044,389		$	999,822


Liabilities and equity
Current liabilities
Accounts payable	$	105,800		$	104,416
Short-term borrowings		6,111			25,199
Current maturities of long-term debt		262			422
Accrued expenses and other current liabilities		110,425			85,730

Total current liabilities		222,598			215,767

Long-term debt, less current maturities		418,333			418,025
Pension and other postretirement liabilities		74,970			79,832
Deferred tax liabilities		6,526			3,560
Due to Holdco		26,405			17,535
Other long-term liabilities		7,970			2,540

Total liabilities		756,802			737,259

Contingencies — Note J

Equity
United Components, Inc. shareholder’s equity
Common stock		—			—
Additional paid in capital		278,648			278,430
Retained earnings		43,415			21,243
Accumulated other comprehensive loss		(36,455	)		(39,600	)

Total United Components, Inc. shareholder’s equity		285,608			260,073
Noncontrolling interest		1,979			2,490

Total equity		287,587			262,563

Total liabilities and equity	$	1,044,389		$	999,822

The accompanying notes are an integral part of these statements.

United Components, Inc.

Condensed Consolidated Income Statements (unaudited)
(in thousands)


	Three Months ended September 30,						Nine Months ended September 30,
	2009			2008			2009			2008
Net sales	$	228,913		$	218,136		$	666,197		$	676,695
Cost of sales		173,099			170,621			521,847			531,430

Gross profit		55,814			47,515			144,350			145,265
Operating expense
Selling and warehousing		(14,051	)		(15,679	)		(42,435	)		(47,210	)
General and administrative		(11,058	)		(13,028	)		(34,521	)		(38,367	)
Amortization of acquired intangible assets		(1,398	)		(1,545	)		(4,359	)		(4,802	)
Restructuring costs, net (Note B)		(394	)		(196	)		(1	)		(684	)

Operating income		28,913			17,067			63,034			54,202
Other expense
Interest expense, net		(7,220	)		(8,282	)		(23,012	)		(25,838	)
Management fee expense		(500	)		(500	)		(1,500	)		(1,500	)
Miscellaneous, net		(1,011	)		(920	)		(4,165	)		(2,429	)

Income before income taxes		20,182			7,365			34,357			24,435
Income tax expense		(7,200	)		(3,164	)		(12,696	)		(9,772	)

Net income		12,982			4,201			21,661			14,663
Less: Loss attributable to noncontrolling interest		(132	)		(239	)		(511	)		(559	)

Net income attributable to United Components, Inc.	$	13,114		$	4,440		$	22,172		$	15,222

The accompanying notes are an integral part of these statements.

United Components, Inc.

Condensed Consolidated Statements of Cash Flows (unaudited)
(in thousands)


	Nine Months ended September 30,
	2009			2008
Cash flows from operating activities
Net income attributable to United Components, Inc.	$	22,172		$	15,222
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization of other intangible assets		27,994			27,397
Amortization of deferred financing costs and debt discount		1,119			1,280
Deferred income taxes		(565	)		391
Other non-cash, net		(606	)		270
Changes in operating assets and liabilities:
Accounts receivable		(9,179	)		(8,649	)
Inventories		31,587			(26,710	)
Other current assets		(1,765	)		12,297
Accounts payable		1,128			1,022
Accrued expenses and other current liabilities		24,562			(3,326	)
Other long-term assets		711			118
Due to Holdco		8,870			5,563
Other long-term liabilities		(409	)		(324	)

Net cash provided by operating activities		105,619			24,551


Cash flows from investing activities
Capital expenditures		(10,893	)		(25,977	)
Proceeds from sale of property, plant and equipment		2,483			366
Increase in restricted cash		(9,400	)		—

Net cash used in investing activities		(17,810	)		(25,611	)


Cash flows from financing activities
Issuances of debt		9,728			22,798
Debt repayments		(29,142	)		(21,718	)

Net cash (used in) provided by financing activities		(19,414	)		1,080


Effect of currency exchange rate changes on cash		58			68

Net increase in cash and cash equivalents		68,453			88

Cash and cash equivalents at beginning of year		46,612			41,440

Cash and cash equivalents at end of period	$	115,065		$	41,528

The accompanying notes are an integral part of these statements.

United Components, Inc.

Condensed Consolidated Statements of Changes in Equity (unaudited)
(in thousands)


	United Components, Inc. Shareholder’s Equity
								Accumulated
			Additional					Other
	Common		Paid In			Retained		Comprehensive			Noncontrolling						Comprehensive
	Stock		Capital			Earnings		Income (Loss)			Interest			Total Equity			Income (Loss)
Balance at January 1, 2008	$	—	$	277,741		$	11,316	$	6,762		$	3,308		$	299,127
Recognition of stock based compensation expense				687											687
Tax effect of exercise of Holdco stock options				(144	)										(144	)
Comprehensive income
Net income (loss)							15,222					(559	)		14,663		$	14,663
Other comprehensive income
Interest rate swaps (after $3 of income taxes)									4						4			4
Foreign currency adjustment (after $(104) of income taxes)									(322	)					(322	)		(322	)

Total comprehensive income																	$	14,345

Balance at September 30, 2008	$	—	$	278,284		$	26,538	$	6,444		$	2,749		$	314,015


Balance at January 1, 2009	$	—	$	278,430		$	21,243	$	(39,600	)	$	2,490		$	262,563
Recognition of stock based compensation expense				218											218
Comprehensive income
Net income (loss)							22,172					(511	)		21,661		$	21,661
Other comprehensive income
Foreign currency adjustment (after $96 of income taxes)									711						711			711
Pension liability (after $1,505 of income taxes)									2,434						2,434			2,434

Total comprehensive income																	$	24,806

Balance at September 30, 2009	$	—	$	278,648		$	43,415	$	(36,455	)	$	1,979		$	287,587

The accompanying notes are an integral part of these statements.

United Components, Inc.

Notes to Condensed Consolidated Financial Statements (unaudited)

NOTE A — GENERAL AND BASIS OF FINANCIAL STATEMENT PRESENTATION

General

United Components, Inc. is an indirect wholly-owned subsidiary of UCI Holdco, Inc. (“Holdco”). Holdco and United Components, Inc. are corporations formed at the direction of The Carlyle Group. At September 30, 2009, affiliates of The Carlyle Group (“Carlyle”) owned 90.9% of Holdco’s common stock, and the remainder was owned by certain current and former members of United Components, Inc.’s senior management and board of directors. At September 30, 2009, Holdco had $316.7 million of Floating Rate Senior PIK Notes (the “Holdco Notes”) outstanding. While United Components, Inc. has no direct obligation under the Holdco Notes, United Components, Inc. is the sole source of cash generation for Holdco. The Holdco Notes do not appear on United Components, Inc.’s balance sheets, and the related interest expense is not included in United Components, Inc.’s income statements. See Note I.

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

Basis of Presentation

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

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States 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, 2008 consolidated balance sheet has been derived from the audited financial statements included in UCI’s annual report on Form 10-K for the year ended December 31, 2008. The financial statements at September 30, 2009 and for the three and nine months ended September 30, 2009 and 2008 are unaudited. In the opinion of UCI, these financial statements include all adjustments necessary for a fair presentation of the financial position and results of operations for such periods.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States 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. They also include estimates of cost accruals, environmental liabilities, warranty and other product returns, insurance reserves, income taxes, pensions and other postretirement benefits and other factors. Management has exercised reasonableness in deriving these estimates; however, actual results could differ from these estimates.

These financial statements should be read in conjunction with the financial statements and notes thereto included in UCI’s annual report on Form 10-K for the year ended December 31, 2008.

Operating results for the three and nine months ended September 30, 2009 are not necessarily indicative of the results that may be expected for the year ending December 31, 2009.

United Components, Inc.

Notes to Condensed Consolidated Financial Statements (unaudited)

NOTE B — RESTRUCTURING COSTS

2009 Capacity Consolidation and European Realignment Actions

To further align UCI’s cost structure with customers’ spending and current market conditions, UCI implemented restructuring plans in 2009. The restructuring plans target excess assembly and aluminum casting capacity and restructuring costs of the plan include workforce reductions, facility closures, consolidations and realignments. During the nine months ended September 30, 2009, UCI recorded asset write-offs of $1.0 million associated with this capacity consolidation, recognized a gain of $1.5 million on the sale of a facility and incurred other costs of $0.2 million.

Costs of Previously Closed Water Pump Facility

In the three and nine months ended September 30, 2009, UCI incurred $0.1 million and $0.3 million, respectively, of costs for the maintenance and security of the land and building related to a previously closed water pump facility. In the three and nine months ended September 30, 2008, these costs were $0.2 million and $0.5 million, respectively. This land and building is held for sale. In the first quarter of 2008, UCI also incurred $0.2 million of pension termination expense related to the closure of the facility.

NOTE C — SALES OF RECEIVABLES

UCI has agreements to sell undivided interests in certain of its receivables with factoring companies, which in turn have the right to sell an undivided interest to a financial institution or other third party. UCI enters into these agreements at its discretion as part of its overall cash management activities. Pursuant to these agreements, UCI sold $42.6 million and $40.5 million of receivables during the three months ended September 30, 2009 and 2008, respectively, and $165.4 million and $158.0 million for the nine months ended September 30, 2009 and 2008, respectively.

If receivables had not been sold, $134.6 million and $80.1 million of additional receivables would have been outstanding at September 30, 2009 and December 31, 2008, respectively. UCI retained no rights or interest, and has no obligations, with respect to the sold receivables. UCI does not service these receivables after they are sold.

The sales of receivables were accounted for as a sale and were removed from the balance sheet at the time of the sales. The costs of the sales were discounts to the purchase price deducted by the factoring companies. These costs were $1.0 million and $0.9 million in the three months ended September 30, 2009 and 2008, respectively, and $4.2 million and $2.4 million for the nine months ended September 30, 2009 and 2008, respectively. These costs are recorded in the income statements in “Miscellaneous, net.”

NOTE D — INVENTORIES

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


	September 30,			December 31,
	2009			2008
Raw materials	$	44.6		$	55.3
Work in process		26.0			34.6
Finished products		74.3			84.4
Valuation reserves		(16.6	)		(14.9	)

	$	128.3		$	159.4

United Components, Inc.

Notes to Condensed Consolidated Financial Statements (unaudited)

NOTE E — RESTRICTED CASH

In June 2009, UCI posted $9.4 million of cash to collateralize a letter of credit required by UCI’s workers compensation insurance carrier. Historically, assets pledged pursuant to the terms of UCI’s senior credit facility provided the collateral for the letters of credit. As a result of the termination of UCI’s revolving credit facility (see further discussion in Note I), these assets were no longer allowed to be pledged for this purpose and, accordingly, UCI was required to post the cash as collateral. This cash is recorded as “Restricted cash” and is a component of long-term assets on UCI’s balance sheet at September 30, 2009. This cash is not available for general operating purposes as long as the letter of credit remains outstanding or until alternative collateral is posted.

NOTE F — ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

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


	September 30,		December 31,
	2009		2008
Salaries and wages	$	4.4	$	2.7
Bonuses and profit sharing		6.6		3.5
Vacation pay		4.5		4.4
Product returns		36.5		32.0
Rebates, credits and discounts due customers		14.8		10.8
Insurance		12.3		11.5
Taxes payable		8.2		4.8
Interest		7.1		2.1
Other		16.0		13.9

	$	110.4	$	85.7

NOTE G — PRODUCT RETURNS LIABILITY

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

In the second quarter of 2008, UCI identified an unusually high level of warranty returns related to one category of parts. When these parts are subjected to certain conditions, they experience a higher than normal failure rate. As a result of the higher than normal failure rate, a $5.8 million warranty loss provision was recorded in the second quarter of 2008. This loss provision is included in the line captioned “Additional reductions to sales” in the table below. UCI has modified the design of these parts to eliminate this issue.

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


	Nine Months ended September 30,
	2009			2008
Beginning of year	$	32.0		$	28.1
Cost of unsalvageable parts		(37.6	)		(39.4	)
Additional reductions to sales		42.1			40.9

End of period	$	36.5		$	29.6

United Components, Inc.

Notes to Condensed Consolidated Financial Statements (unaudited)

NOTE H — PENSION

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


	Three Months ended September 30,						Nine Months ended September 30,
	2009			2008			2009			2008
Service cost	$	1.1		$	1.2		$	3.4		$	3.8
Interest cost		3.3			3.3			9.8			9.7
Expected return on plan assets		(3.6	)		(3.7	)		(10.9	)		(11.1	)
Amortization of prior service cost and unrecognized loss		0.1			—			0.4			0.1
Curtailment loss		—			—			0.2			—
Special termination benefits		—			—			—			0.2

	$	0.9		$	0.8		$	2.9		$	2.7

In the nine months ended September 30, 2009, UCI recorded $0.2 million of curtailment losses related to headcount reductions as part of specific actions taken to align UCI’s cost structure with current market conditions. In the nine months ended September 30, 2008, UCI recorded $0.2 million of expense for special pension benefits for employees terminated as a result of the closure of a former water pump manufacturing facility.

In connection with the determination of the aforementioned curtailment losses, actuarial valuations were prepared as of June 30, 2009 for the affected post employment plans. In accordance with these valuations, the following changes were recorded in the September 30, 2009 balance sheet: (i) long-term “pension and other post retirement liabilities” was decreased by $3.8 million; (ii) “deferred tax liabilities” was increased by $1.5 million; and (iii) “accumulated other comprehensive loss” was reduced by $2.3 million.

NOTE I — DEBT

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


	September 30,			December 31,
	2009			2008
Short-term borrowings	$	6.1		$	5.2
Revolving credit line borrowings		—			20.0
Capital lease obligations		1.0			1.2
Term loan		190.0			190.0
Senior subordinated notes		230.0			230.0
Unamortized debt issuance costs		(2.4	)		(2.8	)

		424.7			443.6

Less:
Short-term borrowings		6.1			5.2
Revolving credit line borrowings		—			20.0
Current maturities		0.3			0.4

Long-term debt	$	418.3		$	418.0

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

United Components, Inc.

Notes to Condensed Consolidated Financial Statements (unaudited)

Senior credit facility — The senior credit facility includes a term loan and included a revolving credit facility which terminated in June 2009.

Term loan

In the three month period ended March 31, 2008, UCI used cash on hand to voluntarily repay $10.0 million of its term loan. As a result of this voluntary early repayment, UCI recorded $0.1 million of accelerated write-offs of deferred financing costs. This cost is included in “Interest expense, net” in the income statement. Because of previous early payments of the term loan, there are no scheduled repayments due until December 2011. The term loan matures in June 2012.

While there are no scheduled repayments until December 2011, the senior credit facility does require mandatory prepayments of the term loan when UCI generates Excess Cash Flow as defined in the senior credit facility. Based upon current cash flow forecasts, UCI expects to generate Excess Cash Flow in the year ending December 31, 2009 resulting in a mandatory prepayment in the range of $10.0 to $20.0 million, payable within 95 days of December 31, 2009.

Revolving credit facility

UCI’s $75.0 million revolving credit facility terminated in June 2009. Prior to the scheduled maturity of the revolving credit facility, UCI conducted an evaluation with respect to extending the facility, analyzing the size of a commitment that could be secured against the total cost of obtaining the commitment, including the related credit facility amendment. Based upon this evaluation, UCI concluded that the size of the potential commitment did not justify the cost and, accordingly, the revolving credit facility was terminated.

At December 31, 2008, revolving credit facility borrowings were $20.0 million, all of which were repaid during the six months ended June 30, 2009. Additionally, $9.4 million of revolving credit facility capacity was used to support an outstanding letter of credit related to workers compensation insurance liabilities. Historically, the assets pledged pursuant to the terms of the senior credit facility provided the collateral for the letter of credit. As a result of the revolving credit facility termination, UCI was required to post $9.4 million of cash to collateralize the letter of credit. (See further discussion in Note E.)

Covenants and other provisions

The senior credit facility requires UCI to maintain certain financial covenants and requires mandatory prepayments upon the occurrence of certain events as defined in the agreement. Also, the facility includes certain negative covenants restricting or limiting UCI’s ability to, among other things: declare dividends or redeem stock; prepay certain debt; make loans or investments; guarantee or incur additional debt; make certain capital expenditures; engage in acquisitions or other business combinations; sell assets; and alter UCI’s business. UCI is in compliance with all of these covenants and is not currently required to make any mandatory prepayments.

Senior subordinated notes (the “Notes”) — The Notes bear interest at 9 3/8%. Interest is payable semi-annually, in arrears on June 15 and December 15 of each year. The Notes are unsecured and rank equally in right of payment with any of UCI’s future senior subordinated indebtedness. They are subordinated to indebtedness and other liabilities of UCI’s subsidiaries that are not guarantors of the Notes. They are guaranteed on a full and unconditional and joint and several basis by UCI’s domestic subsidiaries. The Notes mature on June 15, 2013.

Short-term borrowings — At September 30, 2009, short-term borrowings included $0.4 million of a Spanish subsidiary’s notes payable and $5.7 million of the Chinese subsidiaries’ notes payable to foreign credit institutions. At December 31, 2008, short-term borrowings included $2.3 million of a Spanish subsidiary’s notes payable and $2.9 million of the Chinese subsidiaries’ notes payable to foreign credit institutions. The Spanish subsidiary’s notes payable are collateralized by certain accounts receivable related to the amounts financed. The Chinese subsidiaries’ notes payable are secured by receivables.

NOTE J — CONTINGENCIES

Insurance Reserves

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

United Components, Inc.

Notes to Condensed Consolidated Financial Statements (unaudited)

Environmental

UCI is subject to a variety of federal, state, local and foreign environmental laws and regulations, including those governing the discharge of pollutants into the air or water, the management and disposal of hazardous substances or wastes, and the cleanup of contaminated sites. UCI has been identified as a potentially responsible party for contamination at two sites. One of these sites is a former facility in Edison, New Jersey (the “New Jersey Site”), where a state agency has ordered UCI to continue with the monitoring and investigation of chlorinated solvent contamination. The New Jersey Site has been the subject of litigation to determine whether a neighboring facility was responsible for contamination discovered at the New Jersey Site. A judgment has been rendered in that litigation to the effect that the neighboring facility is not responsible for the contamination. UCI has moved for reconsideration of the judgment but, while that motion is pending, UCI is analyzing what further investigation and remediation, if any, may be required at the New Jersey Site. The second site is a previously owned site in Solano County, California (the “California Site”), where UCI, at the request of the regional water board, is investigating and analyzing the nature and extent of the contamination and is conducting some remediation. Based on currently available information, management believes that the cost of the ultimate outcome of the environmental matters related to the New Jersey Site and the California Site will not exceed the $1.7 million accrued at September 30, 2009 by a material amount, if at all. However, because all investigation and analysis has not yet been completed, and because of the inherent uncertainty in such environmental matters, it is reasonably possible that the ultimate outcome of these matters could have a material adverse effect on results for a single quarter.

In addition to the two matters discussed above, UCI has been named as a potentially responsible party at a site in Calvert City, Kentucky (“the Kentucky Site”). UCI estimates settlement costs at $0.1 million for this site. Also, UCI is involved in regulated remediation at two of its manufacturing sites (the “Manufacturing Sites”). The combined cost of the remediation at such Manufacturing Sites is $0.5 million. UCI anticipates that the majority of the $0.6 million reserved for settlement and remediation costs will be spent in the next year. To date, the expenditures related to the Kentucky Site and the Manufacturing Sites have been immaterial.

Antitrust Litigation

As of April 21, 2009, United Components and its wholly-owned subsidiary, Champion Laboratories, Inc. (“Champion”), were named as two of multiple defendants in 23 complaints originally filed in the District of Connecticut, the District of New Jersey, the Middle District of Tennessee and the Northern District of Illinois alleging conspiracy violations of Section 1 of the Sherman Act, 15 U.S.C. § 1, related to aftermarket oil, air, fuel and transmission filters. Eight of the complaints also named The Carlyle Group as a defendant, but those plaintiffs voluntarily dismissed Carlyle from each of those actions without prejudice. Champion, but not United Components, was also named as a defendant in 13 virtually identical actions originally filed in the Northern and Southern Districts of Illinois, and the District of New Jersey. All of these complaints are styled as putative class actions on behalf of all persons and entities that purchased aftermarket filters in the U.S. directly from the defendants, or any of their predecessors, parents, subsidiaries or affiliates, at any time during the period from January 1, 1999 to the present. Each case seeks damages, including statutory treble damages, an injunction against future violations, costs and attorney’s fees.

United Components and Champion were also named as two of multiple defendants in 17 similar complaints originally filed in the District of Connecticut, the Northern District of California, the Northern District of Illinois and the Southern District of New York by plaintiffs who claim to be indirect purchasers of aftermarket filters. Two of these complaints also named The Carlyle Group as a defendant, but the plaintiffs in both of those actions voluntarily dismissed Carlyle without prejudice. Champion, but not United Components, was also named in 3 similar actions originally filed in the Eastern District of Tennessee, the Northern District of Illinois and the Southern District of California. These complaints allege conspiracy violations of Section 1 of the Sherman Act and/or violations of state antitrust, consumer protection and unfair competition law. They are styled as putative class actions on behalf of all persons or entities who acquired indirectly aftermarket filters manufactured and/or distributed by one or more of the defendants, their agents or entities under their control, at any time between January 1, 1999 and the present; with the exception of three complaints which each allege a class period from January 1, 2002 to the present, and one complaint which alleges a class period from the “earliest legal permissible date” to the present. The complaints seek damages, including statutory treble damages, an injunction against future violations, disgorgement of profits, costs and attorney’s fees.

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

United Components, Inc.

Notes to Condensed Consolidated Financial Statements (unaudited)

On December 1, 2008, all of the indirect purchaser plaintiffs, except Gasoline and Automotive Service Dealers of America (“GASDA”), filed a Consolidated Indirect Purchaser Complaint. This complaint names Champion as one of multiple defendants, but it does not name United Components. The complaint is styled as a putative class action and alleges conspiracy violations of Section 1 of the Sherman Act and violations of state antitrust, consumer protection and unfair competition law. The indirect purchaser plaintiffs seek damages, including statutory treble damages, penalties and punitive damages where available, an injunction against future violations, disgorgement of profits, costs and attorney’s fees.

On February 2, 2009, Champion and the other defendants jointly filed a motion to dismiss the Consolidated Indirect Purchaser Complaint. On that same date, Champion, United Components and the other defendants jointly filed a motion to dismiss the GASDA complaint. On April 13, 2009, GASDA voluntarily dismissed United Components from its case without prejudice. On November 5, 2009, the U.S. District Court for the Northern District of Illinois (the “Illinois District Court”) granted the motion to dismiss the GASDA complaint. Also on November 5, 2009, the Illinois District Court denied in part and granted in part the motion to dismiss the Consolidated Indirect Purchaser Complaint. In particular, the Illinois District Court granted the defendants’ motion to dismiss Count II — the indirect purchaser plaintiffs’ nationwide claim for unjust enrichment — limited the damages periods for claims based on the antitrust laws of Nebraska, New Hampshire, Utah and Wyoming and granted the defendants’ motion to dismiss the indirect purchaser plaintiffs’ consumer protection law claims under the laws of Kansas, Maine, West Virginia, Wisconsin, New York and Rhode Island. Champion and the other defendants must file their answer to the remaining claims in the Consolidated Indirect Purchaser Complaint by December 28, 2009 and the Illinois District Court scheduled a status conference for January 13, 2010.

On January 12, 2009, Champion, but not United Components, was named as one of ten defendants in a related action filed in the Superior Court of California, for the County of Los Angeles on behalf of a purported class of direct and indirect purchasers of aftermarket filters. On March 5, 2009, one of the defendants filed a notice of removal to the U.S. District Court for the Central District of California, and then subsequently requested that the JPML transfer this case to the Northern District of Illinois for coordinated pre-trial proceedings.

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

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

The Antitrust Division of the Department of Justice (DOJ) is also investigating the allegations raised in these suits and certain current and former employees of the defendants, including Champion, have testified pursuant to subpoenas. The Company is fully cooperating with the DOJ investigation.

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

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

Value-added Tax Receivable

UCI’s Mexican operation has outstanding receivables denominated in Mexican pesos in the amount of $3.5 million from the Mexican Department of Finance and Public Credit, which are included in the balance sheet in “Other current assets”. The receivables relate to refunds of Mexican value-added tax, to which UCI believes it is entitled in the ordinary course of business. The local Mexican tax authorities have rejected UCI’s claims for these refunds, and UCI has commenced litigation in the regional federal administrative and tax courts in Monterrey to order the local tax authorities to process these refunds.

United Components, Inc.

Notes to Condensed Consolidated Financial Statements (unaudited)

Patent Litigation

Champion is a defendant in litigation with Parker-Hannifin Corporation pursuant to which Parker-Hannifin claims that certain of Champion’s products infringe a Parker-Hannifin patent. Champion has denied that it infringes the patent, and has moved for summary judgment on the grounds that the patent is invalid and that Champion does not infringe. The motion has not been decided by the court, and trial has been scheduled for November 2009. Champion is vigorously defending this matter, however there can be no assurance with respect to the outcome of litigation. No amounts, other than ongoing defense costs, have been recorded in the financial statements for this matter.

Other Litigation

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

NOTE K — GEOGRAPHIC INFORMATION

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


	Three Months ended September 30,				Nine Months ended September 30,
	2009		2008		2009		2008
United States	$	196.1	$	183.5	$	571.7	$	566.6
Mexico		6.0		6.1		18.3		22.6
Canada		7.3		7.3		21.1		23.2
United Kingdom		2.8		2.7		8.1		10.2
France		1.6		2.0		5.9		7.8
Venezuela		0.1		2.0		1.7		3.5
Germany		1.6		1.4		3.9		4.2
Spain		1.2		1.2		3.1		3.5
Other		12.2		11.9		32.4		35.1

	$	228.9	$	218.1	$	666.2	$	676.7

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


	September 30,		December 31,
	2009		2008
United States	$	198.6	$	201.5
China		30.4		33.2
Mexico		8.7		9.9
Spain		3.0		2.3
France		0.1		—
Goodwill		241.5		241.5

	$	482.3	$	488.4

United Components, Inc.

Notes to Condensed Consolidated Financial Statements (unaudited)

NOTE L — OTHER INFORMATION

At September 30, 2009, 1,000 shares of common stock were authorized, issued and outstanding. The par value of each share of common stock is $0.01 per share.

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


	Three Months ended September 30,					Nine Months ended September 30,
	2009		2008			2009		2008
Interest	$	1.6	$	2.7		$	16.9	$	20.2
Income taxes (net of refunds)		0.4		(2.0	)		1.4		(3.1	)

For federal and certain state tax purposes, UCI is included in the consolidated tax returns of Holdco. To the extent UCI’s tax on its current taxable income is offset by Holdco’s current taxable losses, UCI records that portion of its tax expense as a payable to Holdco. Other income tax liabilities and refunds receivable are reported as income taxes payable and receivable. At September 30, 2009 and December 31, 2008, income tax-related payables to Holdco were $31.0 million and $19.2 million, respectively. These amounts are included in the net “Due to Holdco” amounts in the respective balance sheets.

In the second quarter of 2009, UCI obtained exclusive customer contracts that provide for the incurrence of up-front costs and additional amounts during the remainder of the contracts. The aggregate up-front costs and additional amounts of approximately $6.4 million were capitalized and are being amortized over the life of the contracts as a reduction to sales. A corresponding amount was recorded as a liability that is being relieved as the amounts are funded. $4.3 million of the commitment to be amortized beyond one year is recorded as a component of “Other long-term assets” and $4.6 million of the commitment to be funded beyond one year is recorded as a component of “Other long-term liabilities” at September 30, 2009.

NOTE M — ADOPTION OF RECENTLY ISSUED ACCOUNTING GUIDANCE

On September 30, 2009, UCI adopted changes issued by the Financial Accounting Standards Board (FASB) to the authoritative hierarchy of accounting principles generally accepted in the United States of America (GAAP). These changes establish the FASB Accounting Standards Codification^TM (Codification) as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with GAAP. Rules and interpretive releases of the Securities and Exchange Commission (SEC) under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. The FASB will no longer issue new standards in the form of Statements, FASB Staff Positions, or Emerging Issues Task Force Abstracts; instead the FASB will issue Accounting Standards Updates. Accounting Standards Updates will not be authoritative in their own right as they will only serve to update the Codification. These changes and the Codification itself do not change GAAP. Other than the manner in which new accounting guidance is referenced, the adoption of these changes had no impact on UCI’s financial statements.

Business Combinations and Consolidation Accounting

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

On January 1, 2009, UCI adopted changes issued by the FASB to accounting for business combinations. While retaining the fundamental requirements of accounting for business combinations, including that the purchase method be used for all business combinations and for an acquirer to be identified for each business combination, these changes define the acquirer as the entity that obtains control of one or more businesses in the business combination and establishes the acquisition date as the date that the acquirer achieves control instead of the date that the consideration is transferred. These changes require an acquirer in a business combination, including business combinations achieved in stages (step acquisition), to recognize the assets acquired, liabilities assumed, and any noncontrolling interest in the acquiree at the acquisition date, measured at their fair values as of that date, with limited exceptions. This guidance also requires the recognition of assets acquired and liabilities assumed arising from certain contractual contingencies as of the acquisition date, measured at their acquisition-date fair values. Additionally, these changes require acquisition-related costs to be expensed in the period in which the costs are incurred and the services are received instead of including such costs as part of the acquisition price. The adoption of these changes will depend on the occurrence of future acquisitions, if any, by UCI.

United Components, Inc.

Notes to Condensed Consolidated Financial Statements (unaudited)

Effective January 1, 2009, UCI adopted changes issued by the FASB on April 1, 2009 to accounting for business combinations. These changes apply to all assets acquired and liabilities assumed in a business combination that arise from certain contingencies and requires (i) an acquirer to recognize at fair value, at the acquisition date, an asset acquired or liability assumed in a business combination that arises from a contingency if the acquisition-date fair value of that asset or liability can be determined during the measurement period otherwise the asset or liability should be recognized at the acquisition date if certain defined criteria are met; (ii) contingent consideration arrangements of an acquiree assumed by the acquirer in a business combination to be recognized initially at fair value; (iii) subsequent measurements of assets and liabilities arising from contingencies to be based on a systematic and rational method depending on their nature and contingent consideration arrangements to be measured subsequently; and (iv) disclosures of the amounts and measurement basis of such assets and liabilities and the nature of the contingencies. The adoption of these changes will depend on the occurrence of future acquisitions, if any, by UCI.

Fair Value Accounting

On January 1, 2009, UCI adopted changes issued by the FASB to fair value accounting and reporting as it relates to nonfinancial assets and nonfinancial liabilities that are not recognized or disclosed at fair value in the financial statements on at least an annual basis. These changes define fair value, establish a framework for measuring fair value in GAAP, and expand disclosures about fair value measurements. This guidance applies to other GAAP that require or permit fair value measurements and is to be applied prospectively with limited exceptions. The adoption of these changes, as it relates to nonfinancial assets and nonfinancial liabilities, had no impact on UCI’s financial statements. These provisions will be applied at such time a fair value measurement of a nonfinancial asset or nonfinancial liability is required, which may result in a fair value that is materially different than would have been calculated prior to the adoption of these changes.

On June 30, 2009, UCI adopted changes issued by the FASB to fair value accounting. These changes provide additional guidance for estimating fair value when the volume and level of activity for an asset or liability have significantly decreased and includes guidance for identifying circumstances that indicate a transaction is not orderly. This guidance is necessary to maintain the overall objective of fair value measurements, which is that fair value, is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date under current market conditions. The adoption of these changes had no impact on UCI’s financial statements.

On June 30, 2009, UCI adopted changes issued by the FASB to fair value disclosures of financial instruments. These changes require a publicly traded company to include disclosures about the fair value of its financial instruments whenever it issues summarized financial information for interim reporting periods. Such disclosures include the fair value of all financial instruments, for which it is practicable to estimate that value, whether recognized or not recognized in the statement of financial position; the related carrying amount of these financial instruments; and the method(s) and significant assumptions used to estimate the fair value. Other than the required disclosures (see Note O), the adoption of these changes had no impact on UCI’s financial statements.

Other

On June 30, 2009, UCI adopted changes issued by the FASB to accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued, otherwise known as “subsequent events.” Specifically, these changes set forth the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements, the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements, and the disclosures that an entity should make about events or transactions that occurred after the balance sheet date. As part of the preparation of these financial statements, management has evaluated events and transactions that occurred up to the filing date of this Form 10-Q.

United Components, Inc.

Notes to Condensed Consolidated Financial Statements (unaudited)

On January 1, 2009, UCI adopted changes issued by the FASB to accounting for intangible assets. These changes amend the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset in order to improve the consistency between the useful life of a recognized intangible asset outside of a business combination and the period of expected cash flows used to measure the fair value of an intangible asset in a business combination. The adoption of these changes had no impact on UCI’s financial statements.

On January 1, 2009, UCI adopted changes issued by the FASB to disclosures by public entities about transfers of financial assets and interests in variable interest entities. The changes require additional disclosures about transfers of financial assets. The required disclosures are intended to provide more transparency to financial statement users about a transferor’s continuing interest involvement with transferred financial assets and an enterprise’s involvement with variable interest entities and qualifying special purpose entities. UCI has agreements to sell undivided interests in certain of its receivables with factoring companies, which in turn have the right to sell an undivided interest to a financial institution or other third party. However, UCI retains no rights or interest, and has no obligations, with respect to the sold receivables. Furthermore, UCI does not service the receivables after the sales. Because of the terms of UCI’s sales of receivables, the adoption of the changes did not have an effect on UCI’s financial statements.

On January 1, 2009, UCI adopted changes issued by the FASB to disclosures about derivative instruments and hedging activities. These changes require enhanced disclosures about an entity’s derivative and hedging activities, including (i) how and why an entity uses derivative instruments, (ii) how derivative instruments and related hedged items are accounted for, and (iii) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. Because of UCI’s insignificant, if any, use of derivatives, adoption of these changes did not have an effect on UCI’s financial statements.

NOTE N — RECENTLY ISSUED ACCOUNTING GUIDANCE, NOT YET ADOPTED

In December 2008, the FASB issued changes to employers’ disclosures about postretirement benefit plan assets. These changes provide guidance on an employer’s disclosures about plan assets of a defined benefit pension or other postretirement plan. This guidance is intended to ensure that an employer meets the objectives of the disclosures about plan assets in an employer’s defined benefit pension or other postretirement plan to provide users of financial statements with an understanding of the following: how investment allocation decisions are made; the major categories of plan assets; the inputs and valuation techniques used to measure the fair value of plan assets; the effect of fair value measurements using significant unobservable inputs on changes in plan assets; and significant concentrations of risk within plan assets. These changes become effective for UCI on December 31, 2009. As these changes only require enhanced disclosures, management has determined that the adoption of these changes will not have an impact on UCI’s financial statements.

NOTE O — FAIR VALUE ACCOUNTING

Interest rate swap measured at fair value on a recurring basis

The only recurring fair value measurement reflected in UCI’s financial statements was the measurement of interest rate swaps. These interest rate swaps are described in Note 22 of the financial statements reported in UCI’s 2008 Annual Report on Form 10-K. The swaps expired in August 2008 and were not replaced.

When the swaps were outstanding, the fair value of the interest rate swaps were estimated at the present value of the difference between (i) interest payable for the duration of the swap at the swap interest rate and (ii) interest that would be payable for the duration of the swap at the relevant current interest rate at the date of measurement. The estimated fair value was based on Level 2 inputs.

Fair value of financial instruments

Cash and cash equivalents — The carrying amount of cash equivalents approximates fair value because the original maturity is less than 90 days.

United Components, Inc.

Notes to Condensed Consolidated Financial Statements (unaudited)

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

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

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

Long-term debt — The fair market value of the $190 million of term loan borrowings under the senior credit facility at September 30, 2009 and December 31, 2008 was $175.8 million and $131.1 million, respectively. The estimated fair value of the term loan is based on information provided by an independent third party who participates in the trading market for debt similar to the term loan. Due to the infrequency of trades, this input is considered to be a Level 2 input.

The fair market value of the $230 million senior subordinated notes at September 30, 2009 and December 31, 2008 was $183.7 million and $94.9 million, respectively. The estimated fair value of these notes is based on bid/ask prices, as reported by a third party bond pricing service. Due to the infrequency of trades of the senior subordinated notes, these inputs are considered to be Level 2 inputs.

Interest rate swaps — In connection with UCI’s senior credit facilities, UCI was party to an interest rate swap agreement that effectively converted $40 million of borrowings from variable to fixed rate debt for the 12-month period ended August 2008. The variable component of the interest rate on borrowings under the senior credit facilities is based on LIBOR. Under the swap agreement, UCI paid 4.4% and received the then current LIBOR on $40 million for the 12-month period ending August 2008. UCI did not replace the interest rate swap that expired in August 2008.

At the end of each quarter, UCI adjusted the carrying value of this interest rate swap derivative to its estimated fair value. The change was recorded as an adjustment to “Accumulated other comprehensive loss” in UCI’s stockholder’s equity.

NOTE P — GUARANTOR AND NON-GUARANTOR FINANCIAL STATEMENTS

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

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

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

United Components, Inc.

Notes to Condensed Consolidated Financial Statements (unaudited)

Note P (continued)

Consolidating Condensed Balance Sheet
September 30, 2009
(in thousands)


	UCI											Non-
	Consolidated		Eliminations			UCI			Guarantors			Guarantors
Assets
Current assets
Cash and cash equivalents	$	115,065	$	—		$	104,867		$	49		$	10,149
Accounts receivable, net		271,209		—			—			253,502			17,707
Inventories, net		128,312		—			—			110,787			17,525
Deferred tax assets		26,171		—			255			26,294			(378	)
Other current assets		21,285		—			3,956			8,823			8,506

Total current assets		562,042		—			109,078			399,455			53,509
Property, plant and equipment, net		154,938		—			812			114,451			39,675
Investment in subsidiaries		—		(297,626	)		268,388			29,238			—
Goodwill		241,461		—			241,461			—			—
Other intangible assets, net		68,516		—			7,403			60,945			168
Deferred financing costs, net		2,004		—			2,004			—			—
Restricted cash		9,400		—			—			9,400			—
Other long-term assets		6,028		—			367			5,464			197

Total assets	$	1,044,389	$	(297,626	)	$	629,513		$	618,953		$	93,549

Liabilities and equity
Current liabilities
Accounts payable	$	105,800	$	—		$	2,632		$	87,492		$	15,676
Short-term borrowings		6,111		—			—			—			6,111
Current maturities of long-term debt		262		—			203			59			—
Accrued expenses and other current liabilities		110,425		—			16,532			88,223			5,670

Total current liabilities		222,598		—			19,367			175,774			27,457
Long-term debt, less current maturities		418,333		—			417,925			408			—
Pension and other postretirement liabilities		74,970		—			10,506			63,279			1,185
Deferred tax liabilities		6,526		—			20,613			(14,656	)		569
Due to Holdco		26,405		—			26,405			—			—
Other long-term liabilities		7,970		—			—			6,115			1,855
Intercompany payables (receivables)		—		—			(150,911	)		144,766			6,145
Total equity		287,587		(297,626	)		285,608			243,267			56,338

Total liabilities and equity	$	1,044,389	$	(297,626	)	$	629,513		$	618,953		$	93,549

United Components, Inc.

Notes to Condensed Consolidated Financial Statements (unaudited)

Note P (continued)

Consolidating Condensed Balance Sheet
December 31, 2008
(in thousands)


	UCI											Non-
	Consolidated		Eliminations			UCI			Guarantors			Guarantors
Assets
Current assets
Cash and cash equivalents	$	46,612	$	—		$	39,061		$	860		$	6,691
Accounts receivable, net		261,624		—			—			246,101			15,523
Inventories, net		159,444		—			—			133,900			25,544
Deferred tax assets		24,245		—			255			23,479			511
Other current assets		19,452		—			648			8,602			10,202

Total current assets		511,377		—			39,964			412,942			58,471

Property, plant and equipment, net		167,906		—			1,006			123,579			43,321
Investment in subsidiaries		—		(253,698	)		225,275			28,423			—
Goodwill		241,461		—			241,461			—			—
Other intangible assets, net		74,606		—			9,025			65,378			203
Deferred financing costs, net		2,649		—			2,649			—			—
Other long-term assets		1,823		—			365			1,292			166

Total assets	$	999,822	$	(253,698	)	$	519,745		$	631,614		$	102,161


Liabilities and equity
Current liabilities
Accounts payable	$	104,416	$	—		$	4,140		$	86,407		$	13,869
Short-term borrowings		25,199		—			20,003			—			5,196
Current maturities of long-term debt		422		—			363			59			—
Accrued expenses and other current liabilities		85,730		—			8,356			73,448			3,926

Total current liabilities		215,767		—			32,862			159,914			22,991

Long-term debt, less current maturities		418,025		—			417,573			452			—
Pension and other postretirement liabilities		79,832		—			10,336			68,276			1,220
Deferred tax liabilities		3,560		—			18,406			(15,500	)		654
Due to Holdco		17,535		—			17,535			—			—
Other long-term liabilities		2,540		—			—			1,732			808
Intercompany payables (receivables)		—		—			(237,040	)		207,173			29,867
Total equity		262,563		(253,698	)		260,073			209,567			46,621

Total liabilities and equity	$	999,822	$	(253,698	)	$	519,745		$	631,614		$	102,161

United Components, Inc.

Notes to Condensed Consolidated Financial Statements (unaudited)

Note P (continued)

Consolidating Condensed Income Statement
Three Months Ended September 30, 2009
(in thousands)


	UCI												Non-
	Consolidated			Eliminations			UCI			Guarantors			Guarantors
Net sales	$	228,913		$	(25,466	)	$	—		$	217,992		$	36,387
Cost of sales		173,099			(25,466	)		—			166,876			31,689

Gross profit		55,814			—			—			51,116			4,698
Operating (expense) income
Selling and warehousing		(14,051	)		—			(251	)		(12,317	)		(1,483	)
General and administrative		(11,058	)		—			(3,944	)		(5,929	)		(1,185	)
Amortization of acquired intangible assets		(1,398	)		—			(2	)		(1,420	)		24
Restructuring costs		(394	)		—			—			(93	)		(301	)

Operating income (loss)		28,913			—			(4,197	)		31,357			1,753
Other (expense) income
Interest expense, net		(7,220	)		—			(7,169	)		(6	)		(45	)
Intercompany interest		—			—			6,334			(6,221	)		(113	)
Management fee expense		(500	)		—			(500	)		—			—
Miscellaneous, net		(1,011	)		—			—			(1,011	)		—

Income (loss) before income taxes		20,182			—			(5,532	)		24,119			1,595
Income tax (expense) benefit		(7,200	)		—			1,749			(8,057	)		(892	)

Increase (decrease) before equity in earnings of subsidiaries		12,982			—			(3,783	)		16,062			703
Equity in earnings of subsidiaries		—			(17,958	)		16,897			1,061			—

Net income (loss)		12,982			(17,958	)		13,114			17,123			703
Less: Loss attributable to noncontrolling interest		(132	)		—			—			—			(132	)

Net income (loss) attributable to United Components, Inc.	$	13,114		$	(17,958	)	$	13,114		$	17,123		$	835

United Components, Inc.

Notes to Condensed Consolidated Financial Statements (unaudited)

Note P (continued)

Consolidating Condensed Income Statement
Nine Months Ended September 30, 2009
(in thousands)


	UCI												Non-
	Consolidated			Eliminations			UCI			Guarantors			Guarantors
Net sales	$	666,197		$	(80,582	)	$	—		$	633,835		$	112,944
Cost of sales		521,847			(80,582	)		—			502,469			99,960

Gross profit		144,350			—			—			131,366			12,984
Operating (expense) income
Selling and warehousing		(42,435	)		—			(410	)		(37,886	)		(4,139	)
General and administrative		(34,521	)		—			(11,883	)		(18,802	)		(3,836	)
Amortization of acquired intangible assets		(4,359	)		—			—			(4,359	)		—
Restructuring gains (costs), net		(1	)		—			—			(449	)		448

Operating income (loss)		63,034			—			(12,293	)		69,870			5,457
Other (expense) income
Interest expense, net		(23,012	)		—			(22,837	)		(19	)		(156	)
Intercompany interest		—			—			19,382			(18,978	)		(404	)
Management fee expense		(1,500	)		—			(1,500	)		—			—
Miscellaneous, net		(4,165	)		—			—			(4,165	)		—

Income (loss) before income taxes		34,357			—			(17,248	)		46,708			4,897
Income tax (expense) benefit		(12,696	)		—			6,514			(16,795	)		(2,415	)

Increase (decrease) before equity in earnings of subsidiaries		21,661			—			(10,734	)		29,913			2,482
Equity in earnings of subsidiaries		—			(35,472	)		32,906			2,566			—

Net income (loss)		21,661			(35,472	)		22,172			32,479			2,482
Less: Loss attributable to noncontrolling interest		(511	)		—			—			—			(511	)

Net income (loss) attributable to United Components, Inc.	$	22,172		$	(35,472	)	$	22,172		$	32,479		$	2,993

United Components, Inc.

Notes to Condensed Consolidated Financial Statements (unaudited)

Note P (continued)

Consolidating Condensed Income Statement
Three Months Ended September 30, 2008
(in thousands)


	UCI												Non-
	Consolidated			Eliminations			UCI			Guarantors			Guarantors
Net sales	$	218,136		$	(23,368	)	$	—		$	207,878		$	33,626
Cost of sales		170,621			(23,368	)		—			161,387			32,602

Gross profit		47,515			—			—			46,491			1,024
Operating expense
Selling and warehousing		(15,679	)		—			(299	)		(14,002	)		(1,378	)
General and administrative		(13,028	)		—			(4,428	)		(6,993	)		(1,607	)
Amortization of acquired intangible assets		(1,545	)		—			—			(1,545	)		—
Restructuring costs		(196	)		—			—			(196	)		—

Operating income (loss)		17,067			—			(4,727	)		23,755			(1,961	)
Other (expense) income
Interest expense, net		(8,282	)		—			(8,271	)		(7	)		(4	)
Intercompany interest		—			—			6,511			(6,304	)		(207	)
Management fee expense		(500	)		—			(500	)		—			—
Miscellaneous, net		(920	)		—			—			(945	)		25

Income (loss) before income taxes		7,365			—			(6,987	)		16,499			(2,147	)
Income tax (expense) benefit		(3,164	)		—			2,494			(5,913	)		255

Increase (decrease) before equity in earnings of subsidiaries		4,201			—			(4,493	)		10,586			(1,892	)
Equity in earnings of subsidiaries		—			(7,462	)		8,933			(1,471	)		—

Net income (loss)		4,201			(7,462	)		4,440			9,115			(1,892	)
Less: Loss attributable to noncontrolling interest		(239	)		—			—			—			(239	)

Net income (loss) attributable to United Components, Inc.	$	4,440		$	(7,462	)	$	4,440		$	9,115		$	(1,653	)

United Components, Inc.

Notes to Condensed Consolidated Financial Statements (unaudited)

Note P (continued)

Consolidating Condensed Income Statement
Nine Months Ended September 30, 2008
(in thousands)


	UCI												Non-
	Consolidated			Eliminations			UCI			Guarantors			Guarantors
Net sales	$	676,695		$	(70,530	)	$	—		$	641,645		$	105,580
Cost of sales		531,430			(70,530	)		—			499,758			102,202

Gross profit		145,265			—			—			141,887			3,378
Operating expense
Selling and warehousing		(47,210	)		—			(739	)		(42,262	)		(4,209	)
General and administrative		(38,367	)		—			(13,115	)		(20,824	)		(4,428	)
Amortization of acquired intangible assets		(4,802	)		—			—			(4,802	)		—
Restructuring costs		(684	)		—			—			(684	)		—

Operating income (loss)		54,202			—			(13,854	)		73,315			(5,259	)
Other (expense) income
Interest expense, net		(25,838	)		—			(25,715	)		(22	)		(101	)
Intercompany interest		—			—			20,822			(20,190	)		(632	)
Management fee expense		(1,500	)		—			(1,500	)		—			—
Miscellaneous, net		(2,429	)		—			—			(2,428	)		(1	)

Income (loss) before income taxes		24,435			—			(20,247	)		50,675			(5,993	)
Income tax (expense) benefit		(9,772	)		—			7,639			(18,708	)		1,297

Increase (decrease) before equity in earnings of subsidiaries		14,663			—			(12,608	)		31,967			(4,696	)
Equity in earnings of subsidiaries		—			(22,702	)		27,830			(5,128	)		—

Net income (loss)		14,663			(22,702	)		15,222			26,839			(4,696	)
Less: Loss attributable to noncontrolling interest		(559	)		—			—			—			(559	)

Net income (loss) attributable to United Components, Inc.	$	15,222		$	(22,702	)	$	15,222		$	26,839		$	(4,137	)

United Components, Inc.

Notes to Condensed Consolidated Financial Statements (unaudited)

Note P (continued)

Consolidating Condensed Statement of Cash Flows
Nine Months Ended September 30, 2009
(in thousands)


	UCI											Non-
	Consolidated			Eliminations		UCI			Guarantors			Guarantors
Net cash provided by operating activities	$	105,619		$	—	$	666		$	78,106			26,847


Cash flows from investing activities:
Capital expenditures		(10,893	)		—		(704	)		(7,127	)		(3,062	)
Proceeds from sale of property, plant and equipment		2,483			—		—			61			2,422
Increase in restricted cash		(9,400	)		—		—			(9,400	)		—

Net cash used in investing activities		(17,810	)		—		(704	)		(16,466	)		(640	)


Cash flows from financing activities:
Issuances of debt		9,728			—		—			—			9,728
Debt repayments		(29,142	)		—		(20,285	)		(44	)		(8,813	)
Change in intercompany indebtedness		—			—		86,129			(62,407	)		(23,722	)

Net cash (used in) provided by financing activities		(19,414	)		—		65,844			(62,451	)		(22,807	)


Effect of currency exchange rate changes on cash		58			—		—			—			58

Net increase (decrease) in cash and cash equivalents		68,453			—		65,806			(811	)		3,458
Cash and cash equivalents at beginning of year		46,612			—		39,061			860			6,691

Cash and cash equivalents at end of period	$	115,065		$	—	$	104,867		$	49		$	10,149

United Components, Inc.

Notes to Condensed Consolidated Financial Statements (unaudited)

Note P (continued)

Consolidating Condensed Statement of Cash Flows
Nine Months Ended September 30, 2008
(in thousands)


	UCI											Non-
	Consolidated			Eliminations		UCI			Guarantors			Guarantors
Net cash provided by (used in) operating activities	$	24,551		$	—	$	5,593		$	24,656		$	(5,698	)

Cash flows from investing activities:
Capital expenditures		(25,977	)		—		(271	)		(16,406	)		(9,300	)
Proceeds from sale of property, plant and equipment		366			—		—			94			272

Net cash used in investing activities		(25,611	)		—		(271	)		(16,312	)		(9,028	)


Cash flows from financing activities:
Issuances of debt		22,798			—		20,003			—			2,795
Debt repayments		(21,718	)		—		(10,289	)		(46	)		(11,383	)
Change in intercompany indebtedness		—			—		(15,169	)		(10,055	)		25,224

Net cash (used in) provided by financing activities		1,080			—		(5,455	)		(10,101	)		16,636


Effect of currency exchange rate changes on cash		68			—		—			—			68

Net increase (decrease) in cash and cash equivalents		88			—		(133	)		(1,757	)		1,978
Cash and cash equivalents at beginning of year		41,440			—		36,684			1,234			3,522

Cash and cash equivalents at end of period	$	41,528		$	—	$	36,551		$	(523	)	$	5,500


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

The following discussion of our financial condition and results of operations must be read together with the “Item 1. Business” and “Item 7. Management’s Discussion & Analysis of Financial Condition and Results of Operations” sections of our Annual Report on Form 10-K for the year ended December 31, 2008, filed with the Securities and Exchange Commission (the “SEC”) March 31, 2009 and the financial statements included herein.

Forward-Looking Statements

In this Quarterly Report on Form 10-Q for the period ended September 30, 2009, United Components, Inc. (“UCI”) makes some “forward-looking” statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933, as amended. These statements are included throughout this report on Form 10-Q and relate to analyses and other information based on forecasts of future results and estimates of amounts not yet determinable. These forward-looking statements are identified by their use of terms and phrases such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “predict,” “project,” “will,” “continue,” and other similar terms and phrases, including references to assumptions.

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

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

Overview

Sales. We are among North America’s largest and most diversified companies servicing the vehicle replacement parts market, or the aftermarket. We supply a broad range of filtration products, fuel and cooling systems, and engine management systems to the automotive, trucking, marine, mining, construction, agricultural and industrial vehicle markets. We estimate that over 87% and 88% of our net sales in 2008 and the first nine months of 2009, respectively, were made in the aftermarket, comprised of a diverse customer base that includes some of the largest and fastest growing companies servicing the aftermarket. Sales in the aftermarket, excluding tires, grew at an average annual rate of approximately 3.9% from 1998 through 2007, with the lowest year of growth during that period, approximately 2.1%, occurring in 1998. In 2008, however, aftermarket sales grew by only 0.2%.

Our sales to General Motors Corporation (GM) comprise less than 7% of our consolidated sales. More than 85% of our sales to GM are to dealerships in the original equipment service (OES) channel, with the remainder to the original equipment manufacturing (OEM) sales channel for inclusion in new vehicle production. Our sales to Chrysler LLC (Chrysler) comprise less than 1% of our consolidated sales and are largely to the service organization in the OES channel. Both GM and Chrysler filed petitions under chapter 11 of the U.S. Bankruptcy Code in the Southern District of New York during the three months ended June 30, 2009, with both emerging from bankruptcy in the third quarter of 2009. GM and Chrysler have assumed all contracts with UCI companies. As widely publicized, GM and Chrysler’s reorganization plans include substantial reductions to the dealership base. Given that the majority of our sales to GM and Chrysler are to dealerships in the OES channel, the closure of these dealerships could result in lower UCI sales to these customers. To date there has been no material change in our post-bankruptcy sales levels to GM and Chrysler, however there can be no assurance as to the level of demand for our products from those customers in the future.

Because most of our sales are to the aftermarket, we believe that our sales are primarily driven by the number of vehicles on the road, the average age of those vehicles, the average number of miles driven per year, the mix of light trucks to passenger cars on the road and the relative strength of our sales channels. Historically, our sales have not been materially adversely affected by market cyclicality, as we believe that our aftermarket sales are less dependent on economic conditions than our sales to OEMs, due to the generally non-discretionary nature of vehicle maintenance and repair. While many vehicle maintenance and repair expenses are non-discretionary in nature, high gasoline prices and difficult economic conditions can lead to a reduction in miles driven, which then results in increased time intervals for routine maintenance and vehicle parts lasting longer before needing replacement. Historic highs in crude oil prices experienced in 2008 and corresponding historic highs in retail gasoline prices at the pump impacted consumers’ driving and vehicle maintenance habits. In addition, we believe consumers’ driving and vehicle maintenance habits have been impacted by the generally weak economic conditions experienced in the latter part of 2008 and through 2009.

A key metric in measuring aftermarket performance is miles driven. For 2008, the U.S. Department of Energy reported a decrease in miles driven of 3.2% (equaling 96 billion fewer miles). This was the first annual decrease in miles driven since 1980. We believe that high gasoline prices and generally weak economic conditions adversely affected our sales during the second half of 2008 and into 2009. During 2009, retail gasoline prices were significantly lower than the historic highs experienced at the beginning of the third quarter of 2008. Despite the lower retail gasoline prices, general economic conditions continue to be weak in 2009, and the negative trend in miles driven continued in the first quarter of 2009, with a 2.7% decrease over the comparable quarter in 2008. The negative trend reversed in the second and third quarters of 2009 as miles driven exceeded the comparable 2008 quarters by 0.6% and 1.7%, respectively.

While the conditions described above have adversely affected our sales, other trends resulting from the current economic conditions may have a positive impact on sales in the future. Specifically, with new car sales remaining at historically low levels, consumers are keeping their cars longer, resulting in an increased demand for replacement parts as consumers repair their increasingly older cars. In addition, a significant number of new car dealers have closed in recent months, either voluntarily or as a result of the Chrysler and GM restructurings. This decline in the number of dealerships has the potential of sending more consumers to our customers in other channels of the aftermarket for their replacement parts.

Recently, the U.S. Congress acted to stimulate new car sales in the U.S. by enacting the so-called “Cash for Clunkers” legislation. This legislation financially incentivized consumers to purchase new more fuel-efficient vehicles in exchange for scrapping their older less fuel-efficient vehicles. Due to the ultimate size of the program in relation to the entire U.S. vehicle population, the “Cash for Clunkers” program did not have a material impact on our financial condition or results of operations during the nine months ended September 30, 2009.

Management believes that we have leading market positions in our primary product lines. We continue to expand our product and service offerings to meet the needs of our customers. We believe that a key competitive advantage is that we offer one of the most comprehensive lines of products in the vehicle replacement parts market, consisting of over 43,000 parts. This product breadth, along with our extensive manufacturing and distribution capabilities, product innovation, and reputation for quality and service, makes us a leader in our industry.

However, it is also important to note that in 2008, 2007 and 2006, approximately 29%, 28% and 24%, respectively, of our total net sales were derived from our business with AutoZone, Inc. Our failure to maintain a healthy relationship with AutoZone would result in a significant decrease in our net sales. Even if we maintain our relationship, this sales concentration with one customer increases the potential adverse impact to our business that could result from any changes in the economic terms of this relationship.

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

During much of 2008, the cost of commodities, including steel, aluminum, iron, plastic and other petrochemical products, packaging materials and media, increased significantly compared to 2007. Energy costs also increased significantly during this period. These higher costs affected the prices we paid for raw materials and for purchased component parts and finished products. During the first nine months of 2009, general market prices for most commodities decreased from 2008 levels in reaction to global economic conditions and uncertainties regarding short-

term demand. While we have been, and expect to continue to be, able to obtain sufficient quantities of these commodities to satisfy our needs, increased demand from current levels for these commodities could result in cost increases and may make procurement more difficult in the future. Due to our inventory being accounted for on the first-in, first-out (FIFO) method, a time lag of approximately three months exists from the time we experience cost increases or decreases until these increases or decreases flow through cost of sales.

In addition to the adverse impact of increasing commodities and energy costs, we have been adversely affected by changes in foreign currency exchange rates, primarily relating to the Mexican peso. Our Mexican operations source a significant amount of inventory from the United States. In 2008, our Mexican operations sourced approximately $11.7 million from the United States. During the period September 30, 2008 through March 31, 2009, the U.S. dollar strengthened against the Mexican peso by approximately 33%. In the second and third quarters of 2009 combined, the U.S. dollar weakened against the Mexican peso by approximately 6%, partially offsetting the trend experienced in the prior six months. A strengthening U.S. dollar against the Mexican peso means that our Mexican operations must pay more pesos to obtain inventory from the United States.

When comparing our results of operations for the first six months of 2009 with the first six months of 2008, the easing of market prices in most of the commodities used in our operations, together with our mitigation efforts discussed below, have largely offset the negative effects of the higher commodity and energy costs and unfavorable currency exchange rates experienced in the second half of 2008. For the third quarter of 2009, the impact of lower commodity and energy costs and the benefit of our mitigation efforts, partially offset by currency exchange rates, was an approximate $3.3 million pre-tax improvement in our results of operations over the third quarter of 2008. However, there are no assurances that these favorable commodity and energy cost trends will continue in the future.

Generally, we attempt to mitigate the effects of cost increases and currency changes via a combination of design changes, material substitution, global resourcing efforts and increases in the selling prices for our products. With respect to pricing, it should be noted that, while the terms of supplier and customer contracts and special pricing arrangements can vary, generally a time lag exists between when we incur increased costs and when we might recover a portion of the higher costs through increased pricing. This time lag typically spans a fiscal quarter or more, depending on the specific situation. During 2008, we secured customer price increases that offset a portion of the cost increase we experienced in 2008. However, because of reductions from 2008 highs in both energy costs and the costs of certain commodities used in our operations, we have not been able to retain the entire effect of customer price increases secured in 2008. We continue to pursue efforts to mitigate the effects of any cost increases; however, there are no assurances that we will be entirely successful. To the extent that we are unsuccessful, our profit margins will be adversely affected. Because of uncertainties regarding future commodities and energy prices, and the success of our mitigation efforts, it is difficult to estimate the impact of commodities and energy costs on future operating results. However, we currently expect the fourth quarter of 2009 to show improvement over the fourth quarter of 2008. This forecast is based on the aforementioned 2009 Capacity Consolidation and European Realignment Actions, management’s 2009 cost reduction efforts and assumptions regarding the future cost of commodities and our ability to mitigate these costs. Actual events could vary significantly from our assumptions and the actual effect could be significantly different than our forecast.

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

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

Critical Accounting Policies and Estimates

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

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

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

Revenue recognition. We record sales when title transfers to the customer, the sale price is fixed and determinable, and the collection of the related accounts receivable is reasonably assured. In the case of sales to the aftermarket, we recognize revenue when these conditions are met for our direct customers, which are the aftermarket retailers and distributors.

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

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

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

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

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

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

We perform our annual goodwill impairment review in the fourth quarter of each year using discounted future cash flows. The process of evaluating the potential impairment of goodwill is subjective because it requires the use of estimates and assumptions as to future cash flows of the company, discount rates commensurate with the risks involved in the assets, future economic and market conditions, competition, customer relations, pricing, raw material costs, production costs, selling, general and administrative costs, and income and other taxes. Although we base cash flow forecasts on assumptions that are consistent with plans and estimates we use to manage our company, there is significant judgment in determining the cash flows.

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

Each year, we evaluate our trademarks with indefinite lives to determine whether events and circumstances continue to support the indefinite useful lives.

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

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

Insurance reserves. Our insurance for workers’ compensation, automobile, product and general liability include high deductibles (less than $1 million) for which we are responsible. Deductibles for which we are responsible are recorded in accrued expenses. Estimates of such losses involve substantial uncertainties including litigation trends, the severity of reported claims and incurred but not yet reported claims. External actuaries are used to assist us in estimating these losses.

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

The second category of expenditures is for matters related to investigation and remediation of contaminated sites. The impact of this type of expenditure requires significant estimates by management. The estimated cost of the ultimate outcome of these matters is included as a liability in UCI’s September 30, 2009 balance sheet. This estimate is based on all currently available information, including input from outside legal and environmental professionals, and numerous assumptions. Management believes that the ultimate outcome of these matters will not exceed the $2.3 million accrued at September 30, 2009 by a material amount, if at all. However, because all investigation and site analysis has not yet been completed and because of the inherent uncertainty in such environmental matters, there can be no assurance that the ultimate outcome of these matters will not be significantly different than our estimates.

Results of Operations

The following table is UCI’s unaudited condensed consolidated income statements for the three months and nine months ended September 30, 2009 and 2008. The amounts are presented in thousands of dollars.


	Three Months ended September 30,						Nine Months ended September 30,
	2009			2008			2009			2008
Net sales	$	228,913		$	218,136		$	666,197		$	676,695
Cost of sales		173,099			170,621			521,847			531,430

Gross profit		55,814			47,515			144,350			145,265
Operating expense
Selling and warehousing		(14,051	)		(15,679	)		(42,435	)		(47,210	)
General and administrative		(11,058	)		(13,028	)		(34,521	)		(38,367	)
Amortization of acquired intangible assets		(1,398	)		(1,545	)		(4,359	)		(4,802	)
Restructuring costs, net		(394	)		(196	)		(1	)		(684	)

Operating income		28,913			17,067			63,034			54,202
Other expense
Interest expense, net		(7,220	)		(8,282	)		(23,012	)		(25,838	)
Management fee expense		(500	)		(500	)		(1,500	)		(1,500	)
Miscellaneous, net		(1,011	)		(920	)		(4,165	)		(2,429	)

Income before income taxes		20,182			7,365			34,357			24,435
Income tax expense		(7,200	)		(3,164	)		(12,696	)		(9,772	)

Net income		12,982			4,201			21,661			14,663
Less: Loss attributable to noncontrolling interest		(132	)		(239	)		(511	)		(559	)

Net income attributable to United Components, Inc.	$	13,114		$	4,440		$	22,172		$	15,222

Three Months Ended September 30, 2009 compared with the Three Months Ended September 30, 2008

Net sales. Net sales of $228.9 million in the third quarter of 2009 increased $10.8 million, or 4.9%, compared to net sales in the third quarter of 2008. In connection with obtaining new business, sales were reduced by $0.2 million in the third quarter of 2009 and $2.0 million in the third quarter of 2008 as a result of accepting returns of the inventory of our customers’ previous suppliers.

Excluding the effects of obtaining new business from both quarters, sales were 4.1% higher in the third quarter of 2009 compared to the third quarter of 2008. Within the aftermarket channel, our retail and traditional channel sales both increased approximately 8.2%, respectively, while sales to dealerships in the OES channel were flat with the prior year quarter. The increased sales in the retail and traditional channels reflected the sales growth experienced by our retail and traditional customer base. OEM sales, which comprise only 6% of our sales, were only slightly higher compared to the third quarter of 2008 due to the continued weakness in the automotive and construction industries. After several quarters of declining sales to the OEM and OES channels, the slightly higher sales from the third quarter of 2008 to the third quarter of 2009 might indicate the stabilizing of sales in these channels. Our heavy-duty aftermarket sales decreased approximately 3.8% from the third quarter of 2008.

Gross profit. Gross profit, as reported, was $55.8 million for the third quarter of 2009 compared to $47.5 million for the third quarter of 2008. Both quarters included special items: the adverse effects of obtaining new business, a $0.2 million cost in the third quarter of 2009 compared to a $2.0 million cost in the third quarter of 2008. The 2008 quarter also included a special item of $0.3 million of costs related to establishing two new factories in China.

Excluding the adverse effects of these special items, adjusted gross profit increased to $56.0 million in the third quarter of 2009 from $49.8 million in the third quarter of 2008, and the related gross margin percentage increased to 24.4% in the third quarter of 2009 from 22.6% in the third quarter of 2008. The 2009 and 2008 gross margin percentages are based on sales before the effects of obtaining new business, which is discussed in the net sales comparison above.

The higher gross profit was due to the higher sales volume in the third quarter of 2009 as compared to the third quarter of 2008, lower commodity costs, price increases and the favorable effect of cost reduction initiatives to align our cost structure with our customers’ spending and current market conditions. The cost reduction initiatives included workforce reductions and other employee cost saving actions, as well as the institution of tight controls over discretionary spending. These reductions were partially offset by higher product return expenses and price reductions.

Selling and warehousing expenses. Selling and warehousing expenses were $14.1 million in the third quarter of 2009, $1.6 million lower than the third quarter of 2008. The decrease, despite higher sales volume, was the result of cost saving initiatives to reduce headcount and a general containment of discretionary spending. Selling and warehousing expenses were 6.1% of sales in the 2009 quarter and 7.2% in the 2008 quarter.

General and administrative expenses. General and administrative expenses were $11.1 million in the third quarter of 2009, $2.0 million lower than the third quarter of 2008. This reduction was primarily attributable to the fact that the 2009 quarter included $0.3 million of costs incurred in connection with our antitrust litigation (discussed in Note J to the financial statements in this Form 10-Q) compared to $1.7 million in the 2008 quarter. The 2009 quarter also benefited from lower salary expense due to headcount reductions and lower other litigation costs. These items were partially offset by higher other employee costs related to matters other than headcount.

Restructuring costs, net. See Note B to the financial statements included in this Form 10-Q.

Interest expense, net. Net interest expense was $1.1 million lower in the third quarter of 2009 compared to the third quarter of 2008. This decrease was due to lower debt levels and lower interest rates in the third quarter of 2009.

Miscellaneous, net. Miscellaneous expense was $0.1 million higher in the third quarter of 2009 compared to the third quarter of 2008. This increase was due to higher costs of selling accounts receivable resulting from higher levels of factored accounts receivable.

Income tax expense. Income tax expense in the third quarter of 2009 was $4.0 million higher than in the third quarter of 2008, due to higher pre-tax income in the 2009 quarter partially offset by a lower effective tax rate. The decrease in the effective tax rate resulted primarily from the reversal of certain tax reserves in the current period due to the expiration of applicable statutes of limitation and changes in taxes related to foreign operations.

Net income. Due to the factors described above, we reported a net income of $13.0 million for the third quarter of 2009 and $4.2 million for the third quarter of 2008.

Net income attributable to United Components, Inc. After deducting losses attributable to a noncontrolling interest, net income attributable to United Components, Inc. was $13.1 million in the third quarter of 2009 compared to $4.4 million in the third quarter of 2008.

Nine Months Ended September 30, 2009 compared with the Nine Months Ended September 30, 2008

Net sales. Net sales of $666.2 million in the first nine months of 2009 decreased $10.5 million, or 1.6%, compared to net sales in the first nine months of 2008. In connection with obtaining new business, sales were reduced by $3.7 million in the first nine months of 2009 and $3.9 million in the first nine months of 2008 as a result of accepting returns of the inventory of our customers’ previous suppliers. Sales in 2008 were also reduced by the $5.8 million loss provision resulting from an unusually high level of warranty returns related to a category of parts.

Excluding the effects of obtaining new business from both nine month periods and the 2008 $5.8 million warranty loss provision, sales were 2.4% lower in the first nine months of 2009 compared to the first nine months of 2008. Within the aftermarket channel, our retail and traditional channel sales increased approximately 6.2% and approximately 4.9%, respectively, while sales to dealerships in the OES channel decreased approximately 10.9%. The increased sales in the retail and traditional channels reflects the sales growth experienced by our retail and traditional customer base. The overall uncertainty surrounding GM and Chrysler leading up to their bankruptcy proceedings initiated during the second quarter of 2009 resulted in the decreased OES channel sales. Our heavy-duty aftermarket sales also decreased approximately 17.3% due

to weakness in the transportation segment. OEM sales, which comprise only 6% of our sales, decreased approximately 26.8% compared to the first nine months of 2008 due to the significant downturn in the automotive industry. We believe that the sales decline was due primarily to general economic conditions in the United States and a reduction in vehicles manufactured.

Gross profit. Gross profit, as reported, was $144.4 million for the first nine months of 2009 and $145.3 million for the first nine months of 2008. Both periods included special items. Both nine month periods included the adverse effects of obtaining new business, a $3.7 million cost in the first nine months of 2009 and a $3.9 million cost in the first nine months of 2008. The 2009 and 2008 nine month periods included $0.5 million and $2.7 million, respectively, of costs related to establishing two new factories in China. The 2008 nine month period included the aforementioned adverse affect of the $5.8 million provision for warranty returns.

Excluding the adverse effects of these special items, adjusted gross profit decreased to $149.2 million in the first nine months of 2009 from $157.7 million in the first nine months of 2008, and the related gross margin percentage decreased to 22.3% in the first nine months of 2009 from 23.0% in the first nine months of 2008. The 2009 gross margin percentage is based on sales before the effects of obtaining new business, which are discussed in the net sales comparison above. The 2008 gross margin percentage is based on sales before the effects of obtaining new business and before deducting the special $5.8 million warranty loss provision discussed above.

The lower gross profit was primarily due to the lower sales volume in the first nine months of 2009 as compared to the first half of 2008, higher commodity costs, higher product returns expense (excluding the aforementioned special $5.8 million charge in 2008) and a higher percentage of third-party sourced products which have lower margins than manufactured product. Partially offsetting these factors were the favorable effects of cost reduction initiatives to align our cost structure with our customers’ spending and current market conditions and price increases. The cost reduction initiatives included workforce reductions and other employee cost saving actions, as well as the institution of tight controls over discretionary spending.

Selling and warehousing expenses. Selling and warehousing expenses were $42.4 million in the first nine months of 2009, $4.8 million lower than the first nine months of 2008. The reduction was driven by lower sales, cost saving initiatives to reduce headcount, and a general containment of discretionary spending. Selling and warehousing expenses were 6.4% of sales in the 2009 nine month period and 7.0% in the 2008 nine month period.

General and administrative expenses. General and administrative expenses were $34.5 million in the first nine months of 2009, $3.8 million lower than the first nine months of 2008. This reduction was partially attributable to the fact that the first nine months of 2009 included $1.1 million of costs incurred in connection with our antitrust litigation (discussed in Note J to the financial statements included in this Form 10-Q) compared to $3.2 million in the first nine months of 2008. The 2009 reduction also included the favorable effects of lower salary expense due to headcount reductions and lower bad debt expense due to the unanticipated collection of a receivable that was previously written down. The reduction in 2009 compared to 2008 was also attributable to 2008 costs associated with establishing two factories in China. These cost reductions were partially offset by $2.3 million of higher severance expense in 2009 and higher other employee costs related to matters other than headcount.

Restructuring costs, net. See Note B to the financial statements included in this Form 10-Q.

Interest expense, net. Net interest expense was $2.8 million lower in the first nine months of 2009 compared to the first nine months of 2008. This decrease was due to lower interest rates in the first nine months of 2009, partially offset by higher average debt levels in the 2009 nine month period. Results for the first nine months of 2008 included $0.1 million of accelerated amortization of deferred financing costs associated with the voluntary prepayments of debt.

Miscellaneous, net. Miscellaneous expense was $1.7 million higher in the first nine months of 2009 compared to the first nine months of 2008. This increase was due to higher costs of selling accounts receivable resulting from higher levels of factored accounts receivable.

Income tax expense. Income tax expense in the first nine months of 2009 was $2.9 million higher than in the first nine months of 2008, due to higher pre-tax income in the 2009 period partially offset by a lower effective tax rate.

The decrease in the effective tax rate resulted primarily from the reversal of certain tax reserves in the current period due to the expiration of applicable statutes of limitation and changes in taxes related to foreign operations.

Net income. Due to the factors described above, we reported a net income of $21.7 million for the first nine months of 2009 and $14.7 million for the first nine months of 2008.

Net income attributable to United Components, Inc. After deducting losses attributable to a noncontrolling interest, net income attributable to United Components, Inc. was $22.2 million in the first nine months of 2009 compared to $15.2 million in the first nine months of 2008.

Liquidity and Capital Resources

Historical Cash Flows

Net cash provided by operating activities. Net cash provided by operating activities for the nine months ended September 30, 2009 was $105.6 million. Profits, before deducting depreciation and amortization, and other non-cash items, generated $50.1 million. A decrease in inventory resulted in a generation of cash of $31.6 million. The decrease in inventory was due to (i) focused efforts to reduce inventory investments through improved inventory turns, (ii) higher sales in the three months ended September 30, 2009 compared to the fourth quarter of 2008 and (iii) reduced material costs as compared to December 31, 2008 resulting from decreases in costs of certain commodities used in our operations. An increase in accounts payable resulted in a generation of cash of $1.1 million. The increase in accounts payable was due to initiatives with our vendors to reduce our working capital investment levels, which offset reductions in accounts payable related to the significantly lower inventory balances at September 30, 2009 compared to December 31, 2008. An increase in accounts receivable resulted in a use of cash of $9.2 million. The increase in accounts receivable was due to an increase in sales of $29.2 million in the second and third quarters of 2009, as compared to the third and fourth quarters of 2008, and the impact of the higher mix of retail and traditional channel sales in relation to OEM and OES channels. Accounts receivable dating terms with OEM and OES customers are significantly shorter than retail and traditional customers. As a result of the higher mix of retail and traditional channel sales, gross account receivable days sales outstanding has increased. The effect of higher sales and channel mix changes was partially offset by an increase in factored accounts receivable during the nine months ended September 30, 2009. Factored accounts receivable totaled $134.6 million and $80.1 million at September 30, 2009 and December 31, 2008, respectively.

UCI’s cash flow was also positively affected by $8.9 million because of an increase in UCI’s liability to Holdco, due primarily to UCI’s use of Holdco’s taxable losses to offset UCI taxes that would otherwise be payable in cash. Changes in all other assets and liabilities netted to a $23.1 million increase in cash. This amount consisted primarily of timing of payment of employee-related accrued liabilities, including salaries and wages, incentive compensation and employee insurance, timing of product returns and customer rebates and credits, timing of income tax payments and the timing of interest payments on our senior subordinated notes and term debt.

Net cash used in investing activities. Historically, net cash used in investing activities has been for capital expenditures, including routine expenditures for equipment replacement and efficiency improvements, offset by proceeds from the disposition of property, plant and equipment. Capital expenditures for the nine months ended September 30, 2009 and September 30, 2008 were $10.9 million and $26.0 million, respectively. The 2008 expenditures included $3.3 million for our two new factories in China. The lower capital expenditures in 2009 are the result of capital spending being limited to expenditures necessary to maintain current operations and projects that have short payback periods.

Proceeds from the sale of property, plant and equipment for the nine months ended September 30, 2009 and September 30, 2008 were $2.5 million and $0.4 million, respectively. During the nine months ended September 30, 2009, our Spanish operation was relocated to a new leased facility in order to accommodate expected growth in the European market resulting in the idling of an owned facility. Proceeds for the nine months ended September 30, 2009 primarily related to the sale of this facility in Spain.

During the second quarter of 2009, we posted $9.4 million of cash to collateralize a letter of credit required by our workers’ compensation insurance carrier. Historically, assets pledged pursuant to the terms of our senior credit facility provided the collateral for the letters of credit. As a result of the revolving credit facility termination, we were required to post $9.4 million of cash to collateralize the letter of credit. This

cash is recorded as “Restricted cash” as a component of long-term assets on UCI’s balance sheet at September 30, 2009. This cash is not available for general operating purposes as long as the letter of credit remains outstanding or until alternative collateral is posted.

Net cash (used in) provided by financing activities. Net cash used in financing activities in the nine months ended September 30, 2009 was $19.4 million compared to net cash provided by financing activities of $1.1 million in the nine months ended September 30, 2008.

Borrowings of $9.7 million during the nine months ended September 30, 2009 consisted solely of short-term borrowings payable to foreign credit institutions.

During the nine months ended September 30, 2008, we borrowed $20.0 million under our revolving credit facility. The remainder of our borrowings during the nine months ended September 30, 2008 were short-term borrowings payable to foreign credit institutions.

During the second quarter of 2009, we repaid the $20.0 million of outstanding borrowings under our revolving credit facility. Additionally, during the nine months ended September 30, 2009, our Spanish and Chinese subsidiaries repaid short-term notes borrowings to foreign credit institutions in the amount of $8.8 million.

During the nine months ended September 30, 2008, we used cash on hand to voluntarily repay $10.0 million of our term loan. Additionally, during the nine months ended September 30, 2008, our Spanish and Chinese subsidiaries repaid short-term notes borrowings to foreign credit institutions in the amount of $11.4 million.

Current Debt Capitalization and Scheduled Maturities

At September 30, 2009 and December 31, 2008, UCI had $115.1 million and $46.6 million of cash, respectively. Outstanding debt was as follows (in millions):


	September 30,			December 31,
	2009			2008
Short-term borrowings	$	6.1		$	5.2
Revolving credit line borrowings		—			20.0
Capitalized leases		1.0			1.2
Term loan		190.0			190.0
Senior subordinated notes		230.0			230.0

Amount of debt requiring repayment		427.1			446.4
Unamortized debt discount		(2.4	)		(2.8	)

	$	424.7		$	443.6

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

Because of previous prepayments of our term loan, we do not have any scheduled repayments of the senior credit facility term loan until December 2011. While there are no scheduled repayments until December 2011, the senior credit facility does require mandatory prepayments of the term loan when the company generates Excess Cash Flow as defined in the senior credit facility. Based upon current cash flow forecasts, the company expects to generate Excess Cash Flow in the year ending December 31, 2009 resulting in a mandatory prepayment in the range of $10.0 to $20.0 million, payable within 95 days of December 31, 2009. The term loan matures in June 2012. Our $230.0 million senior subordinated notes are due in 2013.

In addition to the debt discussed above, our parent, UCI Holdco, has $316.7 million in Floating Rate Senior PIK Notes (the “Holdco Notes”) outstanding at September 30, 2009. The Holdco Notes do not appear on our balance sheet and the related interest expense is not included in our income statement. While UCI has no direct obligation under the Holdco Notes, UCI is the sole source of cash generation for UCI Holdco. The interest on the Holdco Notes is payable “in kind” until December 2011, so no cash interest is payable until after that date. Accordingly, the Holdco Notes will not have any material affect on the cash flow or liquidity of UCI until after that date. In addition, the covenants contained in the Holdco Notes indenture are substantially the same as those contained in the senior subordinated notes indenture, so we expect that the

Holdco Notes will have no effect on the current operations of UCI.

Below is a schedule of required future repayments of all debt outstanding on September 30, 2009. The amounts are presented in millions of dollars.


Remainder of 2009	$	6.2
2010		0.2
2011		45.2
2012		145.2
2013		230.1
Thereafter		0.2

	$	427.1

The terms of UCI’s senior credit facility permit UCI to repurchase from time to time up to $75 million in aggregate principal amount of senior subordinated notes. As of November 13, 2009, we had not repurchased any of the senior subordinated notes, although we or Holdco may, under appropriate market conditions, do so in the future through cash purchases or exchange offers, in open market, privately negotiated or other transactions. Similarly, we or Holdco may from time to time seek to repurchase or retire the Holdco Notes. We will evaluate any such transactions in light of then-existing market conditions, taking into account contractual restrictions, our current liquidity and prospects for future access to capital. The amounts involved may be material.

Our significant debt service obligation is an important factor when assessing our liquidity and capital resources. At our September 30, 2009 debt level and borrowing rates, annual interest expense, including amortization of deferred financing costs and debt discount, is approximately $28.3 million. An increase of 0.25 percentage points (25 basis points) on our variable interest rate debt would increase our annual interest cost by $0.5 million.

Management’s Action Plan and Outlook

Historically, our primary sources of liquidity have been cash on hand, cash flow from operations, accounts receivable factoring arrangements and borrowings under the revolving credit facility that terminated in June 2009.

Revolving Credit Facility

UCI’s senior credit facility included a $75.0 million revolving credit facility, which terminated in June 2009. Given the current capital markets environment, we believed that it would be difficult to extend our revolver commitment. We conducted an evaluation with respect to extending the facility, analyzing the size of a commitment that could be secured against the total cost of obtaining the commitment, including the related credit facility amendment. We had productive conversations with key lenders in the revolver group and a core group of lenders were committed to extending. However, a number of the existing revolving credit facility lenders had effectively left the revolving credit facility market. Based upon our evaluation, we concluded that the size of the potential commitment did not justify the cost and, accordingly, the revolving credit facility was terminated.

At December 31, 2008, revolving credit facility borrowings were $20.0 million, all of which were repaid during the nine months ended September 30, 2009. Additionally, $9.4 million of revolving credit facility capacity was used to support an outstanding letter of credit related to our workers’ compensation insurance liabilities. Historically, the assets pledged pursuant to the terms of the senior credit facility provided the collateral for the letter of credit. As a result of the revolving credit facility termination, we were required to post $9.4 million of cash to collateralize the letter of credit. This cash is recorded as “Restricted cash” as a component of long-term assets on UCI’s balance sheet at September 30, 2009. This cash is not available for general business purposes as long as the letter of credit remains outstanding or until alternative collateral is posted.

Accounts Receivable Factoring

Factoring of customer trade accounts receivable is a significant part of our liquidity and is common in the automotive aftermarket industry. Subject to certain limitations, UCI’s senior credit facility agreement permits sales of and liens on receivables, which are being sold pursuant to factoring arrangements. At September 30, 2009, we had factoring relationships with eight banks. The terms of these relationships are such that the banks are not obligated to purchase any amount of receivables. Because of the current challenging capital markets, it is possible that

these banks may not have the capacity or willingness to fund these factoring arrangements at the levels they have in the past, or at all.

We sold approximately $165.4 million and $158.0 million of receivables during the nine months ended September 30, 2009 and 2008, respectively. If those receivables had not been sold, $134.6 million and $80.1 million of additional receivables would have been outstanding at September 30, 2009 and December 31, 2008, respectively. If we had not sold these receivables, we would have had to finance these receivables in some other way, including borrowings and reducing cash on hand.

Short-Term Liquidity Outlook

As a result of the termination of the revolving credit facility, our ability to make scheduled payments of principal or interest on, or to refinance, our indebtedness or to fund capital expenditures will depend on our ability to generate cash from operations and from factoring arrangements as discussed previously. Such cash generation is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control.

In addition to the increased level of factoring previously discussed, we have implemented a number of measures to improve the level of cash generated by our operations in order to increase our liquidity. Specific actions taken include activities to align our cost structure with our customers’ spending and current market conditions. These restructuring activities include:

•

Employment cost savings — We have implemented hourly and salaried workforce reductions across all overhead and selling, general and administrative cost centers to align staffing levels with current business levels. At September 30, 2009, we had approximately 4,400 employees as compared to approximately 4,900 at December 31, 2008. Additionally, we have implemented wage freezes, suspended certain matching contributions to defined contribution and profit sharing plans and other cost reduction activities.

•

Additional cost savings — We have critically evaluated overall overhead and selling, general and administrative discretionary spending and have instituted tight controls over discretionary spending, requiring additional approvals for all such spending across the Company.

2007 and 2008 capital spending levels were higher than 2009 estimated spending levels. Spending levels in 2007 and 2008 included $5.3 million for our two new facilities in China which are substantially complete, as well as funds to support other strategic initiatives. As part of our plans to conserve cash, 2009 capital spending will continue to be limited to expenditures necessary to maintain current operations and projects that have short payback periods. 2009 capital expenditures are expected to be in the range of $15 million to $20 million.

Additionally, we have implemented initiatives to reduce our investment in working capital. These reductions are expected to be achieved through focus on inventory reductions and initiatives related to accounts payable.

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

Long-Term Liquidity Outlook

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

Covenant Compliance

Our senior credit facility requires us to maintain certain financial covenants and requires mandatory prepayments upon the occurrence of certain events as defined in the agreement. Also, the facility includes certain negative covenants restricting or limiting our ability to, among other things: declare dividends or redeem stock; prepay certain debt; make loans or investments; guarantee or incur additional debt; make capital expenditures; engage in acquisitions or other business combinations; sell assets; and alter our business. In addition, the senior credit

facility contains the following financial covenants: a maximum leverage ratio and a minimum interest coverage ratio. The financial covenants are calculated on a trailing four consecutive quarters basis. As of September 30, 2009, we were in compliance with all of these covenants.

Our covenant compliance levels and actual ratios for the quarter ended September 30, 2009 are as follows:


	Covenant		Actual
	Compliance Level		Ratio
Minimum Adjusted EBITDA to interest expense ratio		2.75x		3.68
Maximum total debt to Adjusted EBITDA ratio		4.40x		3.81

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


	Minimum
	Adjusted	Maximum
	EBITDA	Total Debt
	to	to
	Interest	Adjusted
	Expense	EBITDA
	Covenant	Covenant
	Compliance	Compliance
	Level	Level
Quarter ending December 31, 2009	2.80x	4.10x
Quarter ending March 31, 2010	3.00x	3.75x
Quarter ending June 30, 2010	3.00x	3.75x
Quarter ending September 30, 2010 and thereafter	3.00x	3.50x

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

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

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

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

The following table reconciles net income to EBITDA and Adjusted EBITDA (dollars in millions):


			Trailing Four
	Nine Months		Quarters
	ended		ended
	September 30, 2009		September 30, 2009
Net income attributable to United Components, Inc.	$	22.2	$	16.9
Interest, net of noncontrolling interest		23.0		31.4
Income tax expense, net of noncontrolling interest		12.8		10.8
Depreciation, net of noncontrolling interest		21.1		28.3
Amortization		6.4		8.6

EBITDA		85.5		96.0
Special items:
Restructuring costs, net		—		1.7
Reduction in force severance		2.6		2.7
Establishment of new facilities in China		0.5		1.1
Cost to defend antitrust litigation		1.1		1.9
Trademark impairment loss		—		0.5
One-time warranty expense		—		0.9
New business changeover costs and sales commitment costs		3.7		4.8
Non-cash charges (stock options expense)		0.2		0.4
Management fee		1.5		2.0

Adjusted EBITDA	$	95.1	$	112.0

CONTINGENCIES

Environmental

In addition to the two matters discussed above, UCI has been named as a potentially responsible party at a site in Calvert City, Kentucky (the “Kentucky Site”). UCI estimates settlement costs at $0.1 million for this site. Also, UCI is involved in regulated remediation at two of its manufacturing sites (the “Manufacturing Sites”). The combined cost of the remediation at such Manufacturing Sites is $0.5 million. UCI anticipates that the majority of the $0.6 million reserved for settlement and remediation costs will be spent in the next year. To date, the expenditures related to the Kentucky Site and the Manufacturing Sites have been immaterial.

Antitrust and Patent Litigation

We are subject to litigation and investigation related to pricing of aftermarket oil, air, fuel and transmission filters and patent litigation, as described in “Part II, Item 1. Legal Proceedings” in this Form 10-Q.

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

Value-added Tax Receivable

Other Litigation

RECENTLY ISSUED ACCOUNTING GUIDANCE, NOT YET ADOPTED


Item 3.		Quantitative and Qualitative Disclosures about Market Risk

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

Foreign Currency Exposure

Currency translation. As a result of international operating activities, we are exposed to risks associated with changes in foreign exchange rates, principally exchange rates between the U.S. dollar and the Mexican peso, British pound and the Chinese yuan. The results of operations of our foreign subsidiaries are translated into U.S. dollars at the average exchange rates for each relevant period, except for our Chinese subsidiaries, where cost of sales is translated primarily at historical exchange rates. This translation has no impact on our cash flow. However, as foreign exchange rates change, there are changes to the U.S. dollar equivalent of sales and expenses denominated in foreign currencies. In 2008, approximately 8% of our net sales were made by our foreign subsidiaries. Their combined net income was not material. While these results, as measured in U.S. dollars, are subject to foreign exchange rate fluctuations, we do not consider the related risk to be material to our financial condition or results of operations.

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

Currency transactions. Currency transaction exposure arises where actual sales and purchases are made by a business or company in a currency other than its own functional currency. In 2009, we expect to source approximately $70 million of components from China. During the period from December 31, 2007 through June 30, 2008, the Chinese yuan strengthened against the U.S. dollar by approximately 6%. Since June 30, 2008, the relationship of the U.S. dollar to the Chinese yuan has remained stable.

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

Our Mexican operations source a significant amount of inventory from the United States. During the period September 30, 2008 through March 31, 2009, the U.S. dollar strengthened against the Mexican peso by approximately 33%. In the second and third quarters of 2009 combined, the U.S. dollar weakened against the Mexican peso by approximately 6%, partially offsetting the trend experienced in the prior six months. A strengthening U.S. dollar against the Mexican peso means that our Mexican operations must pay more pesos to obtain inventory

from the United States. These higher prices translate into higher cost of sales for our Mexican operations. We are attempting to obtain corresponding price increases from our customers served by our Mexican operations, but the weakness in the Mexican economy has limited the ability to entirely offset the higher cost of sales.

We will continue to monitor our transaction exposure to currency rate changes and may enter into currency forward and option contracts to limit the exposure, as appropriate. Gains and losses on contracts are deferred until the transaction being hedged is finalized. As of September 30, 2009, we had no foreign currency contracts outstanding. We do not engage in speculative activities.

Interest Rate Risk

We utilize, and we will continue to utilize, sensitivity analyses to assess the potential effect of our variable rate debt. If variable interest rates were to increase by 0.25% per annum, the net impact would be a decrease of approximately $0.3 million of our net income and cash flow.

Treasury Policy

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


Item 4.		Controls and Procedures

We maintain disclosure controls and procedures that are designed to provide reasonable assurance to our management and board of directors regarding the preparation and fair presentation of published financial statements. As required by Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended, we conducted an evaluation under the supervision and with the participation of the Company’s management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of September 30, 2009. Based on that evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that, as of the end of the quarter covered by this report, our disclosure controls and procedures were effective at the reasonable assurance level.

There has been no change in UCI’s internal controls over financial reporting during UCI’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, UCI’s internal controls over financial reporting.

PART II

OTHER INFORMATION


Item 1.		Legal Proceedings

The information required by this Item is incorporated herein by reference to Note J — Contingencies — Environmental; Antitrust Litigation; Patent Litigation; Other Litigation to the unaudited condensed consolidated financial statements under Part I, Item 1 of this report.


Item 1.A.		Risk Factors

There have been no material changes from the risk factors previously disclosed in UCI’s Annual Report on Form 10-K for the year ended December 31, 2008.


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

None.


Item 3.		Default Upon Senior Securities

None.


Item 4.		Submission of Matters to Vote of Security Holders

None.


Item 5.		Other Information

None.


Item 6.		Exhibits


Exhibit 31.1		Certification of Periodic Report by the Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934.

Exhibit 31.2		Certification of Periodic Report by the Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934.

Exhibit 32		Certification of Periodic Report by the Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002.*


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

SIGNATURES

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


	UNITED COMPONENTS, INC.
Date: November 13, 2009	By:	/s/ MARK P. BLAUFUSS
	Name:		Mark P. Blaufuss
	Title:		Chief Financial Officer and Authorized Representative

UNITED COMPONENTS INC 10-Q