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, 2010

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

For the transition period from to

Commission File Number: 333-147178

UCI INTERNATIONAL, INC.

(Exact Name of Registrant as Specified in Its Charter)

Delaware

16-1760186

(State or Other Jurisdiction of

Incorporation or Organization)

(I.R.S. Employer Identification No.)


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

(812) 867-4156

(Registrant’s Telephone Number, Including Area Code)

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

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

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

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

The registrant had 2,863,835 shares of its $0.01 par value common stock outstanding as of October 29, 2010, 225,560 of which were held by non-affiliates.

UCI International, Inc.

Index



Part I FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements (unaudited)
	Condensed consolidated balance sheets — September 30, 2010 and December 31, 2009	3
	Condensed consolidated income statements — Three and nine months ended September 30, 2010 and 2009	4
	Condensed consolidated statements of cash flows — Nine months ended September 30, 2010 and 2009	5
	Condensed consolidated statements of changes in equity (deficit) — Nine months ended September 30, 2010 and 2009	6
	Notes to condensed consolidated financial statements	7

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		25
Item 3. Quantitative and Qualitative Disclosures About Market Risk		47
Item 4. Controls and Procedures		48

Part II OTHER INFORMATION

Item 1. Legal Proceedings		49
Item 1A. Risk Factors		49
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		54
Item 3. Default Upon Senior Securities		54
Item 4. Reserved		54
Item 5. Other Information		54
Item 6. Exhibits		55

Signatures		56
Exhibits

PART I

FINANCIAL INFORMATION

Item 1. Financial Statements

UCI International, Inc.

Condensed Consolidated Balance Sheets

(in thousands)


	September 30, 2010			December 31, 2009
	(unaudited)			(audited)
Assets
Current assets
Cash and cash equivalents	$	170,940		$	131,942
Accounts receivable, net		290,058			261,210
Inventories, net		148,371			133,058
Deferred tax assets		35,744			31,034
Other current assets		17,272			23,499

Total current assets		662,385			580,743

Property, plant and equipment, net		138,744			149,753
Goodwill		241,461			241,461
Other intangible assets, net		64,705			68,030
Deferred financing costs, net		10,417			3,164
Restricted cash		16,290			9,400
Other long-term assets		7,103			6,304

Total assets	$	1,141,105		$	1,058,855

Liabilities and equity
Current liabilities
Accounts payable	$	127,363		$	111,898
Short-term borrowings		3,269			3,460
Current maturities of long-term debt		4,479			17,925
Accrued expenses and other current liabilities		128,484			108,147

Total current liabilities		263,595			241,430

Long-term debt, less current maturities		759,271			720,202
Pension and other postretirement liabilities		71,655			70,802
Deferred tax liabilities		10,718			8,785
Other long-term liabilities		5,703			6,672

Total liabilities		1,110,942			1,047,891

Contingencies — Note J

Equity
UCI International, Inc. shareholders’ equity
Common stock		29			29
Additional paid in capital		279,825			279,485
Retained deficit		(217,956	)		(237,858	)
Accumulated other comprehensive loss		(31,735	)		(32,502	)

Total UCI International, Inc. shareholders’ equity		30,163			9,154
Noncontrolling interest — Note O		—			1,810

Total equity		30,163			10,964

Total liabilities and equity	$	1,141,105		$	1,058,855

The accompanying notes are an integral part of these statements.

UCI International, Inc.

Condensed Consolidated Income Statements (unaudited)

(in thousands)


	Three Months Ended September 30,						Nine Months Ended September 30,
	2010			2009			2010			2009
Net sales	$	241,494		$	228,913		$	707,996		$	666,197
Cost of sales		179,508			173,657			528,812			523,796

Gross profit		61,986			55,256			179,184			142,401
Operating (expense) income
Selling and warehousing		(15,256	)		(14,051	)		(44,628	)		(42,435	)
General and administrative		(13,980	)		(10,548	)		(36,653	)		(34,328	)
Amortization of acquired intangible assets		(1,275	)		(1,398	)		(3,946	)		(4,359	)
Restructuring gains (costs), net (Note B)		279			(394	)		(2,101	)		(1	)
Patent litigation costs (Note J)		(4	)		—			(1,042	)		—

Operating income		31,750			28,865			90,814			61,278
Other expense
Interest expense, net		(15,102	)		(14,733	)		(44,828	)		(45,680	)
Management fee expense		(500	)		(500	)		(1,500	)		(1,500	)
Loss on early extinguishment of debt (Note I)		(8,662	)		—			(8,662	)		—
Miscellaneous, net		(733	)		(1,011	)		(3,036	)		(4,165	)

Income before income taxes		6,753			12,621			32,788			9,933
Income tax expense		(2,383	)		(4,582	)		(12,923	)		(4,107	)

Net income		4,370			8,039			19,865			5,826
Less: Loss attributable to noncontrolling interest		—			(132	)		(37	)		(511	)

Net income attributable to UCI International, Inc.	$	4,370		$	8,171		$	19,902		$	6,337

Earnings per share:

Basic	$	1.53		$	2.85		$	6.95		$	2.21
Diluted	$	1.49		$	2.80		$	6.78		$	2.18

The accompanying notes are an integral part of these statements.

UCI International, Inc.

Condensed Consolidated Statements of Cash Flows (unaudited)

(in thousands)


	Nine Months ended September 30,
	2010			2009
Cash flows from operating activities
Net income attributable to UCI International, Inc.	$	19,902		$	6,337
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization of other intangible assets		26,504			27,994
Amortization of deferred financing costs and debt discount		2,175			2,205
Non-cash interest expense on UCI International Notes		23,094			21,575
Loss on early extinguishment of debt		8,662			—
Deferred income taxes		(3,300	)		3,475
Other non-cash, net		3,339			(606	)
Changes in operating assets and liabilities:
Accounts receivable		(29,869	)		(9,179	)
Inventories		(17,779	)		31,587
Other current assets		7,319			(1,765	)
Accounts payable		17,717			1,128
Accrued expenses and other current liabilities		19,375			22,534
Other long-term assets		770			711
Other long-term liabilities		1,078			(409	)

Net cash provided by operating activities		78,987			105,587

Cash flows from investing activities
Capital expenditures		(17,502	)		(10,893	)
Proceeds from sale of property, plant and equipment		413			2,483
Proceeds from sale of joint venture interest (net of transaction costs and cash sold)		272			—
Increase in restricted cash		(6,890	)		(9,400	)

Net cash used in investing activities		(23,707	)		(17,810	)

Cash flows from financing activities
Issuances of debt		10,159			9,728
Debt repayments		(10,562	)		(29,142	)
Proceeds of New Term Loan (net of original issue discount of $5,375)		419,625			—
Payment of deferred financing costs and swaption premium		(9,893	)		—
Repayments of Senior Credit Facility		(190,000	)		—
Redemption of senior subordinated notes, including call premium and redemption period interest		(235,512	)		—
Proceeds from exercise of stock options		—			8

Net cash used in financing activities		(16,183	)		(19,406	)

Effect of currency exchange rate changes on cash		(99	)		58

Net increase in cash and cash equivalents		38,998			68,429

Cash and cash equivalents at beginning of year		131,942			46,655

Cash and cash equivalents at end of period	$	170,940		$	115,084

The accompanying notes are an integral part of these statements.

UCI International, Inc.

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

(in thousands)


	UCI International, Inc. Shareholder’s Equity										Noncontrolling Interest			Total Shareholders’ Equity (Deficit)			Comprehensive Income
	Common Stock		Additional Paid In Capital		Retained Deficit			Accumulated Other Comprehensive Income (Loss)			Noncontrolling Interest			Total Shareholders’ Equity (Deficit)			Comprehensive Income
Balance at January 1, 2009	$	29	$	279,141	$	(247,060	)	$	(39,600	)	$	2,490		$	(5,000	)
Recognition of stock based compensation expense				218											218
Exercise of stock options				8											8
Comprehensive income
Net income (loss)						6,337						(511	)		5,826		$	6,337
Other comprehensive income
Foreign currency adjustment (after $96 of income tax cost)									711						711			711
Pension liability (after $1,505 of income tax cost)									2,434						2,434			2,434

Total comprehensive income																	$	9,482

Balance at September 30, 2009	$	29	$	279,367	$	(240,723	)	$	(36,455	)	$	1,979		$	4,197


Balance at January 1, 2010	$	29	$	279,485	$	(237,858	)	$	(32,502	)	$	1,810		$	10,964
Recognition of stock based compensation expense				340											340
Sale of joint venture												(1,773	)		(1,773	)
Comprehensive income
Net income (loss)						19,902						(37	)		19,865		$	19,902
Other comprehensive income
Foreign currency adjustment (after $14 of income tax cost)									246						246			246
Pension liability (after $320 of income tax cost)									521						521			521

Total comprehensive income																	$	20,669

Balance at September 30, 2010	$	29	$	279,825	$	(217,956	)	$	(31,735	)	$	—		$	30,163

The accompanying notes are an integral part of these statements.

UCI International, Inc.

Notes to Condensed Consolidated Financial Statements (unaudited)

NOTE A — GENERAL AND BASIS OF FINANCIAL STATEMENT PRESENTATION

General

UCI International, Inc., formerly known as UCI Holdco, Inc., was incorporated on March 8, 2006 as a holding company for UCI Acquisition Holdings, Inc. (“UCI Acquisition”) and United Components, Inc. UCI International, Inc. owns all of the common stock of United Components, Inc. through its wholly-owned subsidiary UCI Acquisition. UCI International, Inc., UCI Acquisition and United Components, Inc. are corporations formed at the direction of The Carlyle Group (“Carlyle”). At September 30, 2010, affiliates of The Carlyle Group owned 90.8% of UCI International, Inc.’s common stock while the remainder was owned by members of UCI International, Inc.’s board of directors and certain current and former employees.

All operations of UCI International, Inc. are conducted by United Components, Inc. 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, Europe and Asia.

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements include the accounts of UCI International, Inc., its wholly-owned subsidiaries and a 51% owned joint venture (see Note O). All significant intercompany accounts and transactions have been eliminated. In these notes to the financial statements, the term “UCI International” refers to UCI International, Inc. and its subsidiaries, including UCI Acquisition and its subsidiaries. The term “UCI” refers to United Components, Inc. and its subsidiaries.

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

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

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

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

UCI International, Inc.

Notes to Condensed Consolidated Financial Statements (unaudited) — (Continued)

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

Income Statement Reclassification

Certain engineering expenses totaling $0.6 million and $2.0 million for the three and nine months ended September 30, 2009 were presented in general and administrative expenses. These engineering expenses have been reclassified to cost of sales in the condensed consolidated income statements for the three and nine months ended September 30, 2009 in order to conform to the current year presentation.

Recently Adopted Accounting Guidance

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

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

UCI International, Inc.

Notes to Condensed Consolidated Financial Statements (unaudited) — (Continued)

NOTE B — RESTRUCTURING GAINS (COSTS), NET

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


	Three Months ended September 30,					Nine Months ended September 30,
	2010		2009			2010			2009
Costs to maintain land and building held for sale	$	—	$	(0.1	)	$	(0.2	)	$	(0.3	)
Curtailment and settlement losses		—		—			(0.5	)		(0.1	)
Severance costs		—		—			(0.1	)		—
Disposition of investment in joint venture		—		—			(1.6	)		—
Gain on sale of building, net of moving costs		0.3		—			0.3			1.4
Asset impairments		—		(0.3	)		—			(1.0	)

	$	0.3	$	(0.4	)	$	(2.1	)	$	—

2010 Activities

In the three months ended September 30, 2010, UCI International recognized a gain of $0.3 million related to the sale of the land and building at a previously idled manufacturing facility. In the nine months ended September 30, 2010, UCI International incurred costs of $0.2 million to maintain the land and building. In the three and nine months ended September 30, 2009, UCI International incurred costs of $0.1 million and $0.3 million, respectively, to maintain the land and building.

In the nine months ended September 30, 2010, UCI International recorded pension curtailment and settlement losses and other severance costs related to headcount reductions at its Mexican subsidiaries totaling $0.6 million. Additionally, UCI International recorded a non-cash charge of $1.6 million related to the sale of the company’s interest in a 51% owned joint venture in the nine months ended September 30, 2010 (see Note O).

2009 Capacity Consolidation and European Realignment Actions

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

UCI International idled a Mexican aluminum casting operation in the nine months ended September 30, 2009 and consolidated the capacity into its Chinese casting operation. During that period, UCI International also relocated a small amount of filter manufacturing capacity which resulted in the idling of certain equipment with no alternative use. In connection with these capacity consolidations, UCI International recorded asset impairments of $0.3 million and $1.0 million, respectively, in the three and nine months ended September 30, 2009 and incurred post employment benefit plans curtailment costs of $0.1 million in the nine months ended September 30, 2009.

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

UCI International, Inc.

Notes to Condensed Consolidated Financial Statements (unaudited) — (Continued)

NOTE C — SALES OF RECEIVABLES

UCI International has factoring agreements arranged by four customers with eight banks. Under these agreements, UCI International has the ability to sell undivided interests in certain of its receivables to the banks which in turn have the right to sell an undivided interest to a financial institution or other third party. UCI International enters into these relationships at its discretion as part of its overall customer agreements and cash management activities. Pursuant to these relationships, UCI International sold $40.3 million and $42.6 million of receivables during the three months ended September 30, 2010 and 2009, respectively, and $176.2 million and $165.4 million during the nine months ended September 30, 2010 and 2009, respectively.

If receivables had not been factored, $128.3 million and $121.5 million of additional receivables would have been outstanding at September 30, 2010 and December 31, 2009, respectively. UCI International retained no rights or interest, and has no obligations, with respect to the sold receivables. UCI International does not service the receivables after the sales.

The sales of receivables were accounted for as sales and were removed from the balance sheet at the time of the sales. The costs of the sales were discounts deducted from the sales proceeds by the banks. These costs were $0.7 million and $1.0 million in the three months ended September 30, 2010 and 2009, respectively, and $3.0 million and $4.2 million for the nine months ended September 30, 2010 and 2009, respectively. These costs are recorded in the income statements in “Miscellaneous, net.”

NOTE D — INVENTORIES

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


	September 30, 2010			December 31, 2009
Raw materials	$	54.1		$	47.5
Work in process		29.0			27.6
Finished products		82.0			73.1
Valuation reserves		(16.7	)		(15.1	)

	$	148.4		$	133.1

NOTE E — RESTRICTED CASH

During the second quarter of 2010, UCI International posted $7.4 million of cash to collateralize a letter of credit required to appeal the judgment in the patent litigation discussed in more detail in Note J. During 2009, UCI International also posted $9.4 million of cash to collateralize a letter of credit required by its workers compensation insurance carrier. During the three months ended September 30, 2010, the letter of credit requirement with the workers compensation insurance carrier was reduced by $0.5 million and that amount of the cash collateral was returned. The cash collateral totaling $16.3 million is recorded as “Restricted cash” as a component of long-term assets on the balance sheet at September 30, 2010. This cash is invested in highly liquid, high quality government securities and is not available for general operating purposes as long as the letters of credit remain outstanding or until alternative collateral is posted.

UCI International, Inc.

Notes to Condensed Consolidated Financial Statements (unaudited) — (Continued)

NOTE F — ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

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


	September 30, 2010		December 31, 2009
Salaries and wages	$	4.3	$	3.1
Bonuses and profit sharing		7.3		6.1
Vacation pay		4.4		4.4
Product returns		50.8		42.1
Rebates, credits and discounts due customers		17.4		13.6
Insurance		10.6		9.8
Taxes payable		8.1		7.0
Interest		2.5		2.4
Other		23.1		19.6

	$	128.5	$	108.1

NOTE G — PRODUCT RETURNS LIABILITY

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

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


	Nine Months Ended September 30,
	2010			2009
Beginning of year	$	42.1		$	32.0
Cost of unsalvageable parts		(39.9	)		(37.6	)
Reductions to sales, net of salvage		48.6			42.1

End of period	$	50.8		$	36.5

UCI International, Inc.

Notes to Condensed Consolidated Financial Statements (unaudited) — (Continued)

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,
	2010			2009			2010			2009
Service cost	$	1.1		$	1.1		$	3.3		$	3.4
Interest cost		3.3			3.3			10.0			9.8
Expected return on plan assets		(3.7	)		(3.6	)		(11.0	)		(10.9	)
Amortization of prior service cost and unrecognized loss		0.3			0.1			0.7			0.4
Curtailment and settlement losses		—			—			0.5			0.2

	$	1.0		$	0.9		$	3.5		$	2.9

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

NOTE I — DEBT

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


	September 30, 2010			December 31, 2009
UCI International floating rate senior PIK notes	$	347.1		$	324.1
UCI New Term Loan		425.0			—
UCI New Revolving Credit Facility		—			—
UCI Senior Credit Facility term loan		—			190.0
UCI senior subordinated notes		—			230.0
UCI short-term borrowings		3.3			3.5
UCI capital lease obligations		0.7			0.9
Unamortized original issue discount		(9.1	)		(6.9	)

		767.0			741.6
Less:
UCI short-term borrowings		3.3			3.5
UCI Senior Credit Facility term loan		—			17.7
UCI current maturities		4.5			0.2

Long-term debt	$	759.2		$	720.2

UCI International’s floating rate senior PIK notes (the “UCI International Notes”) — The UCI International Notes are due in 2013. Interest on the UCI International Notes will be paid by issuing new notes until December 2011 and therefore, will not affect UCI International’s cash flow through 2011. Thereafter, all interest will be payable in cash. Commencing on March 15, 2012 and each quarter thereafter, UCI International is required to redeem for cash a portion of each note, to the extent required to prevent the UCI International Notes from being treated as an applicable high yield discount obligation. The redemption price for the portion of each UCI International Note so redeemed will be 100% of the principal amount of such portion plus any accrued interest at the date of redemption.

UCI International, Inc.

Notes to Condensed Consolidated Financial Statements (unaudited) — (Continued)

UCI International currently has the option to redeem all or part of the UCI International Notes at 102% of their aggregate principal amount and, on or after December 15 of the following years, UCI International will have the option to redeem all or part of the UCI International Notes at the following redemption prices (expressed as percentages of principal amount):


Twelve Months Beginning December 15:	Percentage
2010		101	%
2011 and thereafter		100	%

The UCI International Notes are unsecured and will rank pari passu with any future senior indebtedness of UCI International and will rank senior to any future subordinated indebtedness of UCI International. The UCI International Notes are effectively subordinated to future secured indebtedness to the extent of the value of the collateral securing such indebtedness and to all existing and future indebtedness and other liabilities of UCI International’s subsidiaries (other than indebtedness or other liabilities owed to UCI International, Inc., excluding its subsidiaries).

The indenture governing the UCI International Notes contains covenants that restrict UCI International’s ability to: incur or guarantee additional debt; pay dividends or redeem stock; make certain investments; sell assets; merge or consolidate with other entities; and enter into transactions with affiliates. Management believes that as of September 30, 2010, UCI International was in compliance with such covenants.

New Credit Agreement — On September 23, 2010, UCI International, UCI Acquisition and UCI entered into a credit agreement, with UCI, as borrower, and with UCI International and UCI Acquisition and UCI’s domestic subsidiaries, as guarantors (the “Credit Agreement”). The Credit Agreement provides for borrowings of up to $500.0 million, consisting of a term loan facility in an aggregate principal amount of $425.0 million (the “New Term Loan”), which was fully funded on the closing date of the Credit Agreement, and a revolving credit facility in an aggregate principal amount of $75.0 million (the “New Revolving Credit Facility”), none of which was drawn on the closing date of the Credit Agreement. Approximately $23.7 million was available under the New Revolving Credit Facility at September 30, 2010 due to certain restrictions under the UCI International Notes.

The proceeds of the New Term Loan were used to (i) repay existing borrowings under UCI’s senior credit facility term loan, (ii) redeem UCI’s existing Notes and (iii) pay transaction costs. The following table summarizes the sources and uses of the proceeds at closing (in millions):


Sources
New Revolving Credit Facility	$	—
New Term Loan		425.0
Cash on balance sheet		4.0

Total Sources	$	429.0


Uses
Accrued interest payment	$	6.4
Repay UCI Senior Credit Facility		172.3
Redeem UCI Notes		230.0
Transaction costs and original issue discount		20.3

Total Uses	$	429.0

UCI International, Inc.

Notes to Condensed Consolidated Financial Statements (unaudited) — (Continued)

The Credit Agreement was sold at a 1.0% discount of the principal amount of the New Term Loan and at a 1.5% discount of the commitment under the New Revolving Credit Facility. The original issue discount totaled $5.4 million. The following table provides an overview of the significant terms of the Credit Agreement:


Borrower:		UCI

Facilities:		New Revolving Credit Facility: $75.0 million (letter of credit sublimit of $25.0 million) New Term Loan: $425.0 million

Guarantors:		UCI International, UCI Acquisition and UCI’s domestic subsidiaries

Security:		First priority lien on substantially all tangible and intangible assets, as well as outstanding capital stock of UCI and its domestic subsidiaries and 65% of the voting equity interests in first-tier foreign subsidiaries

Term (Maturity Date):		New Revolving Credit Facility: 5 years – September 23, 2015 New Term Loan: 6.5 years – March 23, 2017 Springing Maturity: If the UCI International Notes are not repaid, satisfied or discharged ninety days prior to their scheduled maturity on December 15, 2013, maturity date of Credit Agreement is September 15, 2013

Interest:		At UCI’s option, Eurodollar Rate (subject to a floor of 1.75%) or Base Rate plus, in each case, an applicable margin, adjusted based upon Consolidated Leverage Ratio



Fees:	Unused Revolving Credit Facility Commitment Fee: 0.75% per annum, step down to 0.50% when Consolidated Leverage ratio is less than 3.0x Letter of Credit Fees: Issuance Fee – 0.25%, Outstanding Letter of Credit Fee – 4.5% per annum, step down to 4.0% when Consolidated Leverage is less than 3.0x

Amortization:	New Revolving Credit Facility: None New Term Loan: 1% per annum, paid quarterly beginning December 31, 2010, balance due March 23, 2017

Optional Prepayments:	Call premium of 101% in year 1, par thereafter

Mandatory Prepayments:	•	100% of net cash proceeds of asset sales (subject to certain exceptions)

	•	100% of debt issuances (not otherwise permitted by the New Facility)

	•	50% of excess cash flow with step downs to 25% when Consolidated Leverage Ratio is less than 3.0x and 0% when Consolidated Leverage Ratio is less than 2.0x

Financial Covenants:	(i) Maximum Consolidated Leverage Ratio; (ii) Minimum Consolidated Interest Coverage Ratio; and (iii) Maximum Capital Expenditures

Negative Covenants:	The Credit Agreement includes certain negative covenants restricting or limiting UCI’s ability to, among other things: declare dividends or redeem stock; repay certain debt; make loans or investments; guarantee or incur additional debt; incur liens; engage in acquisitions or other business combinations; sell assets; and alter UCI’s business

UCI International, Inc.

Notes to Condensed Consolidated Financial Statements (unaudited) — (Continued)

UCI’s senior credit facility (the “Senior Credit Facility”) — In connection with the entry by UCI into the Credit Agreement, UCI’s Senior Credit Facility was terminated and all obligations existing under the Senior Credit Facility were repaid in full using a portion of the proceeds of the New Term Loan. The Senior Credit Facility was scheduled to expire on June 30, 2012; there were no penalties for early termination.

The Senior Credit Facility included a term loan pursuant to which, as a result of previous prepayments, no scheduled repayments were due before December 2011. Mandatory prepayments of the term loan were required, however, when UCI generated Excess Cash Flow as defined in the Senior Credit Facility. UCI generated Excess Cash Flow in the year ending December 31, 2009, resulting in a mandatory prepayment of $17.7 million which was made on April 1, 2010 reducing the amount outstanding under the term loan to $172.3 million. The $172.3 million was paid in full with the proceeds of the New Term Loan on September 23, 2010.

UCI’s 9 ³/8% senior subordinated notes (the “Notes”) — On September 23, 2010, UCI discharged the Notes in accordance with the terms of the indenture governing the Notes by depositing with the trustee all outstanding amounts due under the Notes and instructing the trustee to provide holders of all the Notes with an irrevocable notice of redemption. The redemption date was October 25, 2010 (the “Redemption Date”). As of September 23, 2010, the aggregate outstanding principal amount of the Notes was approximately $228.2 million, net of unamortized original issue discount of $1.8 million. Pursuant to the terms of the indenture, all the Notes outstanding on the Redemption Date were redeemed on the Redemption Date at 101.563% of their principal amount plus accrued and unpaid interest thereon to, but not including, the Redemption Date.

Loss on early extinguishment of Senior Credit Facility and Notes — UCI International recorded a loss of $8.7 million on the early extinguishment of the Senior Credit Facility and the Notes. The components of the loss on early extinguishment were as follows (in millions):


UCI Notes call premium	$	3.6
Write-off unamortized original issue discount		1.8
UCI Notes redemption period interest		1.9
Write-off unamortized deferred financing costs		1.4

	$	8.7

UCI’s short-term borrowings — At September 30, 2010, short-term borrowings included $0.3 million of a Spanish subsidiary’s notes payable and $3.0 million of Chinese subsidiaries’ notes payable to foreign credit institutions. At December 31, 2009, short-term borrowings included $0.3 million of a Spanish subsidiary’s notes payable and $3.2 million of 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.

Swaption agreement — On September 28, 2010, in connection with the Credit Agreement, UCI entered into a “swaption” agreement providing UCI with the right but not the obligation to enter into an interest rate swap on or about March 23, 2012. If UCI exercises the swaption, UCI would effectively convert $212.5 million of variable rate debt under the Credit Agreement into fixed rate debt with a Eurodollar rate of 2.75% plus the applicable margin under the Credit Agreement for a two-year period ending March 23, 2014. The cost of entering into the swaption was $0.5 million. While UCI considers the swaption to be an effective economic hedge of interest rate risks, UCI did not designate or account for the swaption as a hedge. Changes in the market value of the swaption are recognized currently in income as a component of “Miscellaneous, net.”

UCI International, Inc.

Notes to Condensed Consolidated Financial Statements (unaudited) — (Continued)

Scheduled maturities — Following is a schedule of required future repayments of all debt outstanding on September 30, 2010 (in millions).


Remainder of 2010	$	2.9
2011		5.9
2012		116.5
2013		239.3
2014		4.3
Thereafter		407.2

	$	776.1

NOTE J — CONTINGENCIES

Insurance Reserves

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

Environmental; Health and Safety

UCI International is subject to a variety of federal, state, local and foreign environmental; health and safety laws and regulations, including those governing the discharge of pollutants into the air or water, the management and disposal of hazardous substances or wastes, and the cleanup of contaminated sites. UCI International or its predecessors have been identified as a potentially responsible party, or is otherwise currently responsible, for contamination at five sites. One of these sites is a former facility in Edison, New Jersey (the “New Jersey Site”), where a state agency has ordered UCI International 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 International is analyzing what further investigation and remediation, if any, may be required at the New Jersey Site. UCI International is also responsible for a portion of chlorinated solvent contamination at a previously owned site in Solano County, California (the “California Site”), where UCI International, 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 $1.2 million accrued at September 30, 2010 by a material amount, if at all. However, because all investigation and analysis has not yet been completed and due to inherent uncertainty in such environmental matters, it is possible that the ultimate outcome of these matters could have a material adverse effect on results for a single quarter.

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

UCI International, Inc.

Notes to Condensed Consolidated Financial Statements (unaudited) — (Continued)

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

Starting in 2008, UCI and its wholly owned subsidiary, Champion Laboratories, Inc., or Champion, were named as defendants in numerous antitrust complaints originally filed in courts around the country. The complaints allege that several defendant filter manufacturers engaged in price fixing for aftermarket automotive filters in violation of Section 1 of the Sherman Act and/or state law. Some of these complaints are putative class actions on behalf of all persons that purchased aftermarket filters in the U.S. directly from the defendants, from 1999 to the present. Others are putative class actions on behalf of all persons who acquired indirectly aftermarket filters manufactured and/or distributed by one or more of the defendants, from 1999 to the present. The complaints seek treble damages, an injunction against future violations, costs and attorney’s fees.

On August 18, 2008, the Judicial Panel on Multidistrict Litigation, or JPML, transferred these cases to the United States District Court for the Northern District of Illinois for coordinated and consolidated pretrial proceedings.

On November 26, 2008, the direct purchaser plaintiffs filed a Consolidated Amended Complaint. This complaint names Champion as one of multiple defendants, but it does not name UCI. The complaint is a putative class action and alleges violations of Section 1 of the Sherman Act in connection with the sale of light duty (i.e., automotive and light truck) oil, air and fuel filters for sale in the aftermarket. The direct purchaser plaintiffs seek treble damages, an injunction against future violations, costs and attorney’s fees.

On June 30, 2010, the indirect purchaser plaintiffs filed a Third Amended Consolidated Indirect Purchaser Complaint. This complaint names Champion as one of multiple defendants, but it does not name UCI. The complaint is a putative class action and alleges violations of Section 1 of the Sherman Act and violations of state antitrust, consumer protection and unfair competition law related to the sale of replacement motor vehicle oil, fuel and engine air filters. The indirect purchaser plaintiffs seek treble damages, penalties and punitive damages where available, an injunction against future violations, disgorgement of profits, costs and attorney’s fees.

On January 12, 2009, Champion, but not UCI, was named as one of ten defendants in a related action filed in the Superior Court of California, for the County of Los Angeles on behalf of a purported class of direct and indirect purchasers of aftermarket filters. This case has been removed to federal court and transfered to the Northern District of Illinois for coordinated pre-trial proceedings. On February 25, 2010, the California plaintiffs filed an amended complaint on behalf of a putative class of operators of service stations in California who indirectly purchased for resale oil, air, transmission, and fuel filters from defendants.

In 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. On April 16, 2009, the Florida Attorney General filed a complaint against Champion and eight other defendants in the Northern District of Illinois. The complaint alleges violations of Section 1 of the Sherman Act and Florida law related to the sale of aftermarket filters. The complaint asserts direct and indirect purchaser claims on behalf of Florida governmental entities and Florida consumers. It seeks treble damages, penalties, fees, costs and an injunction. The Florida Attorney General action is being coordinated with the rest of the filters cases pending in the Northern District of Illinois.

UCI International, Inc.

Notes to Condensed Consolidated Financial Statements (unaudited) — (Continued)

On August 9, 2010, the County of Suffolk, New York, filed a related complaint in the United States District Court for the Eastern District of New York against Champion and nine other defendants on behalf of a purported class of indirect aftermarket filter purchasers. The JPML transferred this case to the Northern District of Illinois for coordinated pre-trial proceedings.

The parties substantially completed their production of documents on or around September 20, 2010. Depositions shall commence on a schedule to be set. Any plaintiff seeking certification of a class shall file their motions for class certification and any related expert reports by February 25, 2011. Expert discovery on merits-related issues will follow the court’s ruling on plaintiffs’ motions for class certification.

On December 21, 2009, William G. Burch filed a related complaint under seal in the United States District Court for the Northern District of Oklahoma against Champion and other defendants on behalf of the United States pursuant to the False Claims Act. On June 10, 2010, the United States filed a Notice of the United States’ Election to Decline Intervention. On June 17, 2010, the court ordered the complaint unsealed and directed Burch to serve it on the defendants which he has done. The JPML transferred this action to the Northern District of Illinois for coordinated pre-trial proceedings with the other aftermarket filters matters pending there.

Champion, but not UCI, was also named as one of five defendants in a class action filed in Quebec, Canada in 2008. This action alleges conspiracy violations under the Canadian Competition Act and violations of the obligation to act in good faith related to the sale of aftermarket filters. The plaintiff seeks joint and several liability against the five defendants in the amount of $5 million in compensatory damages and $1 million in punitive damages. The plaintiff is seeking authorization to have the matter proceed as a class proceeding, which motion has not yet been ruled on.

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

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

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

We intend to vigorously defend against these claims. No amounts have been reserved in our financial statements for these matters, as management does not believe a loss is probable. During the three and nine months ended September 30, 2010, we incurred $2.2 million and $5.4 million, respectively, defending against these claims. During the three and nine months ended September 30, 2009, we incurred $0.2 million and $0.9 million, respectively. These amounts are included in “General and administrative expenses” in the income statement.

UCI International, Inc.

Notes to Condensed Consolidated Financial Statements (unaudited) — (Continued)

Value-Added Tax Receivable

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

Patent Litigation

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

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

Other Litigation

UCI International 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 International believes that the outcome of any currently existing proceedings, even if determined adversely, would not have a material adverse effect on UCI International’s financial condition or results of operations.

NOTE K — SHAREHOLDERS’ EQUITY AND EARNINGS PER SHARE

Shareholders’ Equity

At September 30, 2010, 5,000,000 shares of common stock were authorized and 2,863,460 were issued and outstanding. The par value of each share of common stock is $0.01 per share.

UCI International, Inc.

Notes to Condensed Consolidated Financial Statements (unaudited) — (Continued)

Earnings per Share

UCI International presents both basic and diluted earnings per share (“EPS”) amounts. Basic EPS is calculated by dividing net income by the weighted average number of common shares outstanding during the reporting period. Diluted EPS is calculated by dividing net income by the weighted average number of common shares and common equivalent shares outstanding during the reporting period calculated using the treasury stock method for stock options. The treasury stock method assumes that UCI International uses the proceeds from the exercise of options to repurchase common stock at the average market price during the period. No market currently exists for UCI International’s common stock. UCI International estimates the average market price of its common stock by using the estimated fair value of UCI International as determined using periodic outside third-party valuations adjusted for subsequent changes using the S&P 500 as an index. The assumed proceeds under the treasury stock method include the purchase price that the optionee will pay in the future, compensation cost for future service that UCI International has not yet recognized and any tax benefits that would be credited to additional paid-in capital when the exercise generates a tax deduction.

The terms of UCI International’s restricted stock agreements provide that the shares of restricted stock vest only upon a change of control, as defined, of UCI International. Due to the uncertainty surrounding the ultimate vesting of the restricted stock, these contingently issuable shares are excluded from the computation of basic EPS and diluted EPS.

The following table reconciles the numerators and denominators used to calculate basic EPS and diluted EPS and presents basic EPS and diluted EPS (in thousands, except per share data):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2010		2009		2010		2009
Net income attributable to UCI International, Inc.	$	4,370	$	8,171	$	19,902	$	6,337

Weighted Average Shares of Common Stock Outstanding:
Basic weighted average shares of common stock outstanding		2,863		2,863		2,864		2,861
Dilutive effect of stock-based awards		74		56		72		40

Diluted weighted average shares of common stock outstanding		2,937		2,919		2,936		2,901

Earnings Per Share:
Basic earnings per share	$	1.53	$	2.85	$	6.95	$	2.21

Diluted earnings per share	$	1.49	$	2.80	$	6.78	$	2.18

Options to purchase 4,000 shares of common stock at a weighted average exercise price of $81.90 per share were not included in the computation of diluted EPS for the three and nine months ended September 30, 2010 because they were anti-dilutive. Options to purchase 8,750 shares of common stock at a weighted average exercise price of $81.75 and 64,050 shares of common stock at a weighted average exercise price of $28.42 were not included in the computation of diluted EPS for the three and nine months ended September 30, 2009, respectively, because they were anti-dilutive.

UCI International, Inc.

Notes to Condensed Consolidated Financial Statements (unaudited) — (Continued)

NOTE L — GEOGRAPHIC AND PRODUCT LINES INFORMATION

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


	Three Months Ended September 30,				Nine Months Ended September 30,
	2010		2009		2010		2009
United States	$	205.7	$	196.1	$	601.9	$	571.7
Canada		7.9		7.3		23.6		21.1
Mexico		5.2		6.0		17.2		18.3
United Kingdom		3.8		2.8		11.1		8.1
France		2.7		1.6		8.1		5.9
Germany		2.0		1.6		5.1		3.9
China		1.7		2.7		3.9		5.0
Spain		1.2		1.2		3.4		3.1
Other		11.3		9.6		33.7		29.1

	$	241.5	$	228.9	$	708.0	$	666.2

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


	September 30, 2010		December 31, 2009
United States	$	199.8	$	194.2
China		25.0		29.7
Mexico		8.4		8.9
Spain		4.0		3.8
Goodwill		241.5		241.5

	$	478.7	$	478.1

Net sales for the three and nine months ended September 30, 2010 and 2009 for UCI International’s four product lines were as follows:


	Three Months Ended September 30,
	2010		%			2009		%
	(in millions, except percentages)
Filtration	$	91.2		38	%	$	88.3		39	%
Fuel delivery systems		70.0		29	%		60.8		26	%
Vehicle electronics		45.4		19	%		40.7		18	%
Cooling systems		34.9		14	%		39.1		17	%

	$	241.5		100	%	$	228.9		100	%


	Nine Months Ended September 30,
	2010		%			2009		%
	(in millions, except percentages)
Filtration	$	267.5		38	%	$	262.3		39	%
Fuel delivery systems		196.8		28	%		165.4		25	%
Vehicle electronics		133.9		19	%		120.7		18	%
Cooling systems		109.8		15	%		117.8		18	%

	$	708.0		100	%	$	666.2		100	%

UCI International, Inc.

Notes to Condensed Consolidated Financial Statements (unaudited) — (Continued)

NOTE M — OTHER INFORMATION

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


	Three Months Ended September 30,				Nine Months Ended September 30,
	2010		2009		2010		2009
Interest	$	7.5	$	1.6	$	20.2	$	16.9
Income taxes (net of refunds)		6.1		0.4		10.0		1.4

UCI International sells vehicle parts to a wide base of customers primarily in the automotive aftermarket. UCI International has outstanding receivables owed by these customers and to date has experienced no significant collection problems. Sales to a single customer, AutoZone, approximated 31% and 29% of total net sales for the nine months ended September 30, 2010 and 2009, respectively. No other customer accounted for more than 10% of total net sales for nine months ended September 30, 2010 and 2009.

NOTE N — FAIR VALUE ACCOUNTING

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


Level 1 —		Quoted market prices in active markets for identical assets or liabilities
Level 2 —		Inputs other than Level 1 inputs that are either directly or indirectly observable
Level 3 —		Unobservable inputs developed using UCI International’s estimates and assumptions, which reflect those that market participants would use when valuing an asset or liability

Assets measured at fair value on a nonrecurring basis

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

Fair value of financial instruments

Cash equivalents — The carrying amount of cash equivalents ($159.5 million at September 30, 2010 and $122.7 million at December 31, 2009) approximates fair value because the original maturity is less than 90 days.

Restricted cash — The carrying amount of restricted cash ($16.3 million at September 30, 2010 and $9.4 million at December 31, 2009) approximates fair value because the original maturity is less than 90 days.

UCI International, Inc.

Notes to Condensed Consolidated Financial Statements (unaudited) — (Continued)

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


	Fair Value Measurements using Quoted Prices in Active Markets for Identical Assets (Level 1)
	September 30, 2010		December 31, 2009
Cash equivalents	$	159.5	$	122.7
Restricted cash	$	16.3	$	9.4

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

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

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

Long-term debt — As discussed in Note I, UCI’s term loan borrowing under the senior credit facility was repaid with the proceeds of the Credit Agreement. The fair value of the $190.0 million of UCI’s term loan borrowings under the senior credit facility at December 31, 2009 was $176.7 million. The estimated fair value of the term loan was based on information provided by an independent third party who participates in the trading market for debt similar to the term loan. Due to the infrequency of trades, this input is considered to be a Level 2 input.

As discussed in Note I, the Notes were redeemed in the nine months ended September 30, 2010 with the proceeds of the Credit Agreement. The fair value of UCI’s $230 million Notes at December 31, 2009 was $221.1 million. The estimated fair value of the Notes was based on bid/ask prices, as reported by a third party bond pricing service. Due to the infrequency of trades of the Notes, these inputs are considered to be Level 2 inputs.

The fair value of the $425.0 million New Term Loan at September 30, 2010 was $426.7 million. The estimated fair value of the term loan was based on bid/ask prices provided by an independent third party who participates in the trading market for debt similar to the term loan. Due to the infrequency of trades, this input is considered to be a Level 2 input.

The fair value of the UCI International Notes at September 30, 2010 and December 31, 2009 was $335.3 million (principal balance of $347.1 million) and $274.2 million (principal balance of $324.1 million), respectively. The estimated fair value of these notes was based on the bid/ask prices, as reported by a third party bond pricing service. Due to the infrequency of trades of these notes, these inputs are considered to be Level 2 inputs.

Swaption — The estimated fair value of the swaption was $0.4 million at September 30, 2010. The estimated fair value of the swaption was based on information provided by an independent third party who participates in the trading market for financial instruments similar to the swaption. Due to the infrequency of trades of similar financial instruments, these inputs are considered to be Level 2 inputs.

UCI International, Inc.

Notes to Condensed Consolidated Financial Statements (unaudited) — (Continued)

NOTE O — JOINT VENTURE SALE

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

The following table summarizes the net book value of the joint venture at the date of sale, proceeds of the sale and the resultant loss (in millions):


Current assets (excluding cash sold of $0.3 million)	$	3.9
Long-lived assets		5.1
Current liabilities		(2.6	)
Noncurrent liabilities		(0.3	)
Noncontrolling interest		(1.8	)

Net book value of joint venture investment sold		4.3
Less proceeds:
Liabilities assumed by LMC		2.4
Cash proceeds (net of transaction costs and cash sold)		0.3

Loss on sale of joint venture interest	$	1.6

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

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

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

Forward-Looking Statements

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

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

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

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

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

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

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

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disruptions in our supply chain;

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initiating effective cost cutting initiatives;

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the introduction of new and improved products or manufacturing techniques;

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

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our debt levels and restrictions in our debt agreements;

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changes in exchange rates and currency values;

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capital expenditure requirements;

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access to capital markets;

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protecting our intellectual property rights;

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

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

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

Overview

We are a leading supplier to the light and heavy-duty vehicle aftermarket for replacement parts, supplying a broad range of filtration, fuel delivery systems, vehicle electronics and cooling systems products. We believe, based on management estimates, that we maintain a leading market position in each of our four product lines, including the #1 market position by revenue in both fuel delivery systems and cooling systems in the North American light vehicle aftermarket. Approximately 87% of our net sales for the nine months ended September 30, 2010 were generated from sales to a diverse group of aftermarket customers, including some of the largest and fastest growing companies in our industry. We have developed a global and low-cost manufacturing, sourcing and distribution platform and we sell into multiple sales channels, including retailers, wholesale distributors, dealers and the heavy-duty vehicle market. Our principal end-markets include light vehicles, commercial vehicles and construction, mining, agricultural, marine and other industrial equipment. We have one of the most comprehensive product lines in the aftermarket, offering approximately 47,000 part numbers that we deliver at an industry leading average fill rate of approximately 98%.

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

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

Net Sales

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

Because most of our sales are to the aftermarket, we believe that our sales are primarily driven by the number of vehicles on the road, the average age of those vehicles, the average number of miles driven per year, the mix of light trucks to passenger cars on the road and the relative strength of our sales channels. Historically, our sales have not been materially adversely affected by market cyclicality, as we believe that our aftermarket sales are less dependent on economic conditions than our sales to OEMs, due to the generally non-discretionary nature of vehicle maintenance and repair. While many vehicle maintenance and repair expenses are non-discretionary in nature, high gasoline prices and difficult economic conditions can lead to a reduction in miles driven, which then results in increased time intervals for routine maintenance and vehicle parts lasting longer before needing replacement. Historic highs in crude oil prices experienced in 2008 and corresponding historic highs in retail gasoline prices at the pump impacted consumers’ driving and vehicle maintenance habits. In addition, we believe consumers’ driving and vehicle maintenance habits were impacted by the generally weak economic conditions experienced in the latter part of 2008 and through 2009. These factors, together with lower heavy-duty aftermarket sales due to weakness in the transportation segment in 2008 and 2009, and lower OEM sales due to the significant decline in new vehicle production, resulted in the downward trend in sales starting in the third quarter of 2008 through the first half of 2009. More recently, our retail channel sales in the nine months ended September 30, 2010 have increased 5.8% over the nine months ended September 30, 2009 reflecting the growth of our retail customer base. Additionally, heavy-duty channel sales and OEM channel sales in the nine months ended September 30, 2010 increased 11.1% and 29.7%, respectively, over the nine months ended September 30, 2009 suggesting signs of recovery in the transportation sector.

Sales in the North American light vehicle aftermarket have grown at a compounded average annual growth rate of approximately 3.3% from 1999 through 2009. However, aftermarket sales grew by only 0.1% in 2008 and

declined by 1.7% in 2009. A key metric in measuring aftermarket performance is miles driven. For 2008, the U.S. Department of Energy reported a decrease in miles driven of 3.2% (equaling 96 billion fewer miles). This was the first annual decrease in miles driven since 1980. We believe that high gasoline prices and generally weak economic conditions adversely affected our sales during the second half of 2008 and into 2009. During 2009, retail gasoline prices were significantly lower than the historic highs experienced at the beginning of the third quarter of 2008. Despite the lower retail gasoline prices, the negative trend in miles driven continued in the first quarter of 2009 (a 2.7% decrease over the comparable quarter in 2008) due to the ongoing weak economic conditions. The negative trend reversed in the last three quarters of 2009 as miles driven exceeded the comparable 2008 quarters. For the full year of 2009, miles driven increased 0.2% from 2008. Miles driven during the first nine months of 2010 increased 0.25% from the first nine months of 2009.

While the conditions described above in general have adversely affected our sales in 2008 and early 2009, other trends resulting from the current economic conditions may have a positive impact on sales in the future. Specifically, with new car sales remaining at low levels, consumers are keeping their cars longer, resulting in an increased demand for replacement parts as consumers repair their increasingly older cars.

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

However, it is also important to note that in 2009, 2008 and 2007, approximately 30%, 29% and 28%, respectively, of our total net sales were derived from our business with AutoZone. AutoZone is considered to be a leader in the North American aftermarket and, like all of our customers, we make significant investments in our relationship to add value beyond just the supply of parts. Our failure to maintain a healthy relationship with AutoZone would result in a significant decrease in our net sales. Even if we maintain our relationship, this sales concentration with one customer increases the potential impact to our business that could result from any changes in the economic terms of this relationship.

Cost of Sales

Cost of sales includes all costs of manufacturing required to bring a product to a ready-for-sale condition. Such costs include direct and indirect materials, direct and indirect labor and related benefit costs, supplies, utilities, freight, depreciation, insurance and other costs. Cost of sales also includes all costs to procure, package and ship products that we purchase and resell.

During much of 2008, the cost of commodities, including steel, aluminum, iron, plastic and other petrochemical products, packaging materials and media, increased significantly compared to 2007. Energy costs also increased significantly during that period. The higher costs affected the prices we paid for raw materials and for purchased component parts and finished products. Due to our inventory being accounted for on the first-in, first-out method, a time lag of approximately three months exists from the time we experience cost increases until these increases flow through cost of sales. As a result of this time lag, our results for the first quarter of 2009 were negatively impacted by the higher cost of materials purchased in the latter part of 2008. During 2009, general market prices for most commodities moderated from 2008 levels in reaction to global economic conditions and uncertainties regarding short-term demand. This moderation in most commodities during 2009 had a favorable impact on our results for the nine months ended September 30, 2009. During 2010, we have been experiencing increases in certain commodity costs as the result of suppliers reducing capacity and a slight recovery in the general economy. More recently, we have experienced longer lead times and expedited freight costs due to logistics constraints shipping product from China. A further economic recovery would likely increase the demand for many of the commodities used in our business. While we have been, and expect to continue to be, able to obtain sufficient quantities of these commodities to satisfy our needs, increased demand from current levels for these commodities could result in further cost increases and may make procurement more difficult in the future.

In addition to the adverse impact of increasing commodities and energy costs, we have been adversely affected by changes in foreign currency exchange rates, primarily relating to the Mexican peso and the recent changes in currency policy by the Chinese government. Our Mexican operations source a significant amount of inventory from the United States. During the period September 30, 2008 through March 31, 2009, the U.S. dollar strengthened against the Mexican peso by approximately 33%. During the period March 31, 2009 through September 30, 2010, the U.S. dollar weakened against the Mexican peso by approximately 15%, 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. In addition to the negative impacts of the Mexican peso, the value of the Chinese yuan has recently increased as a result of the Chinese government changing its policy on “pegging” the yuan against the U.S. dollar during the third quarter of 2010. The result of this action is that the cost of goods imported from China will increase as the Chinese yuan strengthens against the U.S. dollar.

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

We implemented a number of cost savings initiatives in late 2008 and throughout 2009 to align our cost structure with current business levels. Cost savings initiatives included workforce reductions in both direct and indirect manufacturing headcounts. Also, we implemented wages freezes and suspended certain matching contributions to defined contribution and profit sharing plans, as well as instituted tight controls over discretionary spending. As of September 30, 2010, the wage freeze and suspension of certain matching contributions were still in effect. Additionally, the same tight control over discretionary spending has continued into 2010 and is expected to continue. These cost savings actions helped offset the adverse impact of higher material costs and lower sales volumes.

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

Selling and Warehousing Expenses

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

General and Administrative Expenses

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

Critical Accounting Policies and Estimates

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

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

Revenue Recognition

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

Some agreements with our customers 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, incentive or rebate, such as sales volume and marketing spending. We routinely review these criteria and our estimating process and make adjustments as facts and circumstances change.

In order to obtain exclusive contracts with certain customers, we may incur up-front costs or assume the cost of returns of products sold by the previous supplier. These costs are capitalized and amortized over the life of the contract. The amortized amounts are recorded as a reduction to sales. New business changeover costs also can include the costs related to removing a new customer’s inventory and replacing it with our inventory, commonly referred to as a “stocklift.” Stocklift costs are recorded as a reduction to sales when incurred.

Our customers have the right to return parts that are covered under our standard warranty within stated warranty periods. Our customers also have the right, in varying degrees, to return excess quantities of product. Credits for parts returned under warranty and parts returned because of customer excess quantities are estimated and recorded as a reduction of sales at the time of the related sales. These estimates are based on historical experience, current trends and our expectations regarding future experience. Revisions to these estimates are recorded in the period in which the facts and circumstances 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. Our product returns accrual was $50.8 million at September 30, 2010. A hypothetical 10% increase in product returns would decrease our pre-tax earnings by $5.1 million.

The table below provides a summary reconciliation of reductions from sales to net sales as reported in our consolidated income statement (in millions):


	Three Months ended September 30,						Nine Months ended September 30,
	2010			2009			2010			2009
Sales	$	276.6		$	259.6		$	805.5		$	757.2
Provision for warranty costs and sales returns		(19.6	)		(17.3	)		(53.8	)		(48.4	)
Provision for customer contracted sales deductions		(13.2	)		(11.8	)		(37.2	)		(33.7	)
New business costs and other		(2.3	)		(1.6	)		(6.5	)		(8.9	)

Net sales	$	241.5		$	228.9		$	708.0		$	666.2

Inventory

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

Impairment of Intangible Assets

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

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

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

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

Retirement Benefits

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

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

Insurance Reserves

Our insurance policies for workers’ compensation, automobile, product and general liability include high deductibles (up to $0.5 million) for which we are responsible. Deductibles for which we are responsible are recorded in accrued expenses. Estimates of such losses involve substantial uncertainties including litigation trends, the severity of reported claims and incurred but not yet reported claims. External actuaries are used to assist us in estimating these losses. Our self-insured insurance reserves were $10.6 million at September 30, 2010. A hypothetical 10% increase in the insurance reserve would decrease our pre-tax earnings by $1.1 million.

Environmental Expenditures

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

The second category of expenditures is for matters related to investigation and remediation of contaminated sites. The impact of this type of expenditure requires significant estimates by management. The estimated cost of the ultimate outcome of these matters is included as a liability in our September 30, 2010 balance sheet. This estimate is based on all currently available information, including input from outside legal and environmental professionals, and numerous assumptions. Management believes that the ultimate outcome of these matters will not exceed the $1.5 million accrued at September 30, 2010 by a material amount, if at all. However, because all investigation and site analysis has not yet been completed and because of the inherent uncertainty in such environmental matters and any related litigation, there can be no assurance that the ultimate outcome of these matters will not be significantly different than our estimates.

Stock-Based Compensation

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

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

Results of Operations

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


	Three Months Ended September 30,						Nine Months Ended September 30,
	2010			2009			2010			2009
Net sales	$	241,494		$	228,913		$	707,996		$	666,197
Cost of sales		179,508			173,657			528,812			523,796

Gross profit		61,986			55,256			179,184			142,401
Operating (expense) income
Selling and warehousing		(15,256	)		(14,051	)		(44,628	)		(42,435	)
General and administrative		(13,980	)		(10,548	)		(36,653	)		(34,328	)
Amortization of acquired intangible assets		(1,275	)		(1,398	)		(3,946	)		(4,359	)
Restructuring gains (costs), net		279			(394	)		(2,101	)		(1	)
Patent litigation costs		(4	)		—			(1,042	)		—

Operating income		31,750			28,865			90,814			61,278
Other expense
Interest expense, net		(15,102	)		(14,733	)		(44,828	)		(45,680	)
Management fee expense		(500	)		(500	)		(1,500	)		(1,500	)
Loss on early extinguishment of debt		(8,662	)		—			(8,662	)		—
Miscellaneous, net		(733	)		(1,011	)		(3,036	)		(4,165	)

Income before income taxes		6,753			12,621			32,788			9,933
Income tax expense		(2,383	)		(4,582	)		(12,923	)		(4,107	)

Net income		4,370			8,039			19,865			5,826
Less: Loss attributable to noncontrolling interest		—			(132	)		(37	)		(511	)

Net income attributable to UCI International, Inc.	$	4,370		$	8,171		$	19,902		$	6,337

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

Net Sales

Net sales of $241.5 million in the third quarter of 2010 increased $12.6 million, or 5.5%, compared to net sales in the third quarter of 2009. Automotive aftermarket net sales, which comprised approximately 87% of our net sales in the third quarter of 2010, increased approximately 4.0% compared to the third quarter of 2009. Within the automotive aftermarket channel, our retail channel net sales increased approximately 7.3%, our traditional channel net sales increased approximately 2.9% and our heavy duty channel net sales increased approximately 8.5%. Our OES channel net sales in the third quarter of 2010 decreased approximately 14.5% from the third quarter of 2009. The increased net sales in our retail and traditional channels primarily reflected the sales growth experienced by our customer base. The increased net sales in our heavy duty channel resulted from a general improved market trend in the transportation sector. The decreased sales in our OES channel were due primarily to timing of replenishment orders by our OES channel customers. Our OEM channel sales in the third quarter of 2010 increased approximately 16.4% over the third quarter of 2009 due to the recovery of new car sales from the difficult economic environment in 2009 and recent new business wins.

Net sales for the three months ended September 30, 2010 and 2009 for our four product lines are as follows:


	Three Months Ended September 30,
	2010		%			2009		%
	(in millions, except percentages)
Filtration	$	91.2		38	%	$	88.3		39	%
Fuel delivery systems		70.0		29	%		60.8		26	%
Vehicle electronics		45.4		19	%		40.7		18	%
Cooling systems		34.9		14	%		39.1		17	%

	$	241.5		100	%	$	228.9		100	%

Each of our product lines, except cooling systems, experienced increased net sales in the three months ended September 30, 2010, reflecting the sales growth of our customer base. Our fuel delivery systems sales have also been positively impacted by market share gains. Our cooling systems product line experienced sales growth with existing customers; however the increase was more than offset by market share losses.

Gross Profit

Gross profit, as reported, was $62.0 million for the third quarter of 2010 and $55.3 million for the third quarter of 2009. Gross profit as a percentage of sales increased to 25.7% in the third quarter of 2010 from 24.1% in the third quarter of 2009.

Higher sales volume in the third quarter of 2010 was a significant factor in our gross profit increase year over year accounting for $6.0 million of the increase. The 2010 results were also positively affected by the favorable effects of cost reduction initiatives implemented to align our cost structure with our customers’ spending and current market conditions, lower commodity and energy costs of approximately $3.0 million and favorable trends in our insurance costs of approximately $0.5 million. The cost reduction initiatives included workforce reductions and other employee cost saving actions, as well as the continued emphasis on tight controls over discretionary spending. Partially offsetting these factors were the effects of higher estimated product returns, customer price concessions and product mix of approximately $2.8 million.

Selling and Warehousing Expenses

Selling and warehousing expenses were $15.3 million in the third quarter of 2010, $1.2 million higher than the third quarter of 2009. Selling and warehousing expenses were 6.3% of net sales in the third quarter of 2010 and 6.1% in the 2009 quarter. Selling and marketing expenses increased $1.2 million related to higher variable selling costs associated with our higher sales volume and investments in our growth initiatives including staffing and other costs. Shipping and warehousing expenses in the third quarter of 2010 were flat with the third quarter of 2009 as increased costs to support the increased sales volume were offset by cost containment actions.

General and Administrative Expenses

General and administrative expenses were $14.0 million in the third quarter of 2010, $3.4 million higher than the third quarter of 2009. This increase was the result of $1.9 million of higher costs incurred in connection with our antitrust litigation (discussed in Note J to the financial statements included in this Form 10-Q), nonrecurring professional fees related to evaluating strategic capital structure and merger and acquisition related activities and higher incentive compensation. Partially offsetting these items were reductions in overhead spending including the favorable effect of lower employee expenses in the quarter which were due to headcount reductions in 2009 and cost control initiatives.

Restructuring Gains (Costs), Net

In the third quarter of 2010, we completed the sale of a previously idled manufacturing facility and recognized a gain of $0.3 million. In the third quarter of 2009, we incurred costs of $0.1 million to maintain the land and building, and we recorded $0.3 million of asset impairment losses.

Interest Expense, Net

Net interest expense was $0.4 million higher in the third quarter of 2010 compared to the third quarter of 2009. This increase was due to higher average borrowings of approximately $13.9 million during the third quarter of 2010 as compared to the third quarter of 2009, partially offset by lower interest rates on our variable rate debt. The higher average borrowings were the result of the increased outstanding balance of the UCI International Notes due to the quarterly payment of interest through the issuance of new notes, partially offset by lower borrowings under UCI’s previous term loan resulting from the $17.7 million mandatory prepayment on our term loan made in April 2010.

Loss on Early Extinguishment of Debt

We recorded a loss of $8.7 million in the third quarter of 2010 on the early extinguishment of our previous term loan and the Notes. See further discussion in Note I to the financial statements included in this Form 10-Q. The components of the loss on early extinguishment were as follows (in millions):


UCI Notes call premium	$	3.6
Write-off unamortized debt discount		1.8
UCI Notes redemption period interest		1.9
Write-off unamortized deferred financing costs		1.4

	$	8.7

Miscellaneous, Net

Miscellaneous expense which consists primarily of costs associated with the sale of receivables was $0.3 million lower in the third quarter of 2010 compared to the third quarter of 2009. The lower expense was due to lower selling discount costs and lower sales of receivables in 2010 versus 2009. Miscellaneous expense for the third quarter of 2010 also included $0.1 million related to changes in market value of our swaption agreement.

Income Tax Expense

Income tax expense in the third quarter of 2010 was $2.2 million lower than in the third quarter of 2009, due to lower pre-tax income in the 2010 quarter, partially offset by a lower effective tax rate. The effective tax rate for the third quarter of 2010 was 35.3% compared to 36.3% for the third quarter of 2009. The lower effective rate relates primarily to foreign income taxes.

Net Income

Due to the factors described above, we reported a net income of $4.4 million for the third quarter of 2010 and $8.0 million for the third quarter of 2009.

Net Income Attributable to UCI International, Inc.

After deducting losses attributable to a noncontrolling interest, net income attributable to UCI International, Inc. was $4.4 million in the third quarter of 2010 compared to $8.2 million in the third quarter of 2009.

Nine Months Ended September 30, 2010 compared with the Nine Months Ended September 30, 2009

Net Sales

Net sales of $708.0 million for the nine months ended September 30, 2010 increased $41.8 million, or 6.3%, compared to net sales for the nine months ended September 30, 2009. In connection with obtaining new business, net sales included reductions of $1.4 million and $3.7 million in the nine months ended September 30, 2010 and 2009, respectively. Excluding the effects of obtaining new business from both nine month periods, net sales were 5.9% higher in the nine months ended September 30, 2010 compared to the nine months ended September 30, 2009.

Automotive aftermarket net sales, which comprised approximately 87% of our net sales in the nine months ended September 30, 2010, increased approximately 4.8% compared to the nine months ended September 30, 2009. Within the automotive aftermarket channel, our retail channel net sales increased approximately 5.8%, our traditional channel net sales increased approximately 2.3%, our OES channel net sales increased approximately 1.0% and our heavy duty channel net sales increased approximately 11.1%. The increased net sales in our retail, traditional and OES channels primarily reflected the sales growth experienced by our customer base. The increased net sales in our heavy duty channel resulted from a general improved market trend in the transportation sector. Our OEM channel sales in the nine months ended September 30, 2010 increased approximately 29.7% over the nine months ended September 30, 2009 due to the recovery of new car sales from the difficult economic environment in 2008 and early 2009 and recent new business wins.

Net sales for the nine months ended September 30, 2010 and 2009 for our four product lines were as follows:


	Nine Months Ended September 30,
	2010		%			2009		%
	(in millions, except percentages)
Filtration	$	267.5		38	%	$	262.3		39	%
Fuel delivery systems		196.8		28	%		165.4		25	%
Vehicle electronics		133.9		19	%		120.7		18	%
Cooling systems		109.8		15	%		117.8		18	%

	$	708.0		100	%	$	666.2		100	%

Each of our product lines, except cooling systems, experienced increased net sales in the nine months ended September 30, 2010, reflecting the sales growth of our customer base. Our fuel delivery systems sales have also been positively impacted by market share gains. Our cooling systems product line experienced sales growth with existing customers; however the increase was more than offset by market share losses.

Gross Profit

Gross profit, as reported, was $179.2 million for the nine months ended September 30, 2010 and $142.4 million for the nine months ended September 30, 2009. Both periods included special items which are presented in the following table along with a comparison of adjusted gross profit after excluding these special items. Adjusted gross profit is a non-GAAP financial measurement of our performance which is not in accordance with, or a substitute for, GAAP measures. It is intended to supplement the presentation of our financial results that are prepared in accordance with GAAP. We use adjusted gross profit as presented to evaluate and manage our operations internally.


	Nine Months Ended September 30,
	2010		2009
	(amounts in millions)
Gross profit, as reported	$	179.2	$	142.4
Add back special items:
New business changeover and sales commitment costs		1.4		3.7
Allowance for disputed non-trade receivable		1.4		—
Severance costs		—		0.6
Costs to establish additional manufacturing in China		—		0.5

Adjusted gross profit	$	182.0	$	147.2

The $1.4 million and the $3.7 million of “new business changeover and sales commitment costs” in the nine months ended September 30, 2010 and 2009, respectively, were up-front costs incurred to obtain new business and to extend existing long-term sales commitments.

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

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

The $0.5 million of “costs to establish additional manufacturing in China” in the nine months ended September 30, 2009 related to start-up costs to establish two new factories in China.

Excluding the adverse effects of these special items, adjusted gross profit increased to $182.0 million in the nine months ended September 30, 2010 from $147.2 million in the nine months ended September 30, 2009, and the related gross margin percentage increased to 25.7% in the nine months ended September 30, 2010 from 22.0% in the nine months ended September 30, 2009. The adjusted gross margin percentage is based on sales before the effects of obtaining new business, which are discussed in the net sales comparison above.

Higher net sales volume in the nine months ended September 30, 2010 was a significant factor in our gross profit increase year over year, accounting for $18.0 million of the increase. The 2010 results were also positively affected by the favorable effects of cost reduction initiatives to align our cost structure with our customers’ spending and current market conditions, lower commodity and energy costs of approximately $19.0 million and favorable trends in our insurance costs of approximately $3.0 million. The cost reduction initiatives included workforce reductions and other employee cost saving actions, as well as the institution of tight controls over discretionary spending. Partially offsetting these factors were the effects of higher estimated product returns, customer price concession and product mix of approximately $5.2 million.

Selling and Warehousing Expenses

Selling and warehousing expenses were $44.6 million in the nine months ended September 30, 2010, $2.2 million higher than the nine months ended September 30, 2009. Selling and marketing expenses increased $1.6 million related to higher variable selling costs associated with our higher sales volume and investments in our growth initiatives including staffing and other costs. Shipping and warehousing expenses increased $0.6 million to support the increased sales volume. Selling and warehousing expenses were 6.3% of net sales in the nine months ended September 30, 2010 and 6.4% in the nine months ended September 30, 2009. The improvement in selling and warehousing expenses as a percentage of net sales despite the increased spending levels related to investments in growth initiatives was the result of the cost reduction actions taken during 2009.

General and Administrative Expenses

General and administrative expenses were $36.7 million in the nine months ended September 30, 2010; $2.3 million higher than the nine months ended September 30, 2009. This increase was the result of $4.5 million of higher costs incurred in connection with our antitrust litigation (discussed in Note J to the financial statements included in this Form 10-Q) and higher incentive compensation. Partially offsetting these items were reductions in overhead spending including the favorable effect of lower employee expenses in the nine months ended September 30, 2010 due to headcount reductions in 2009, inclusive of severance in 2009 related to the headcount reductions, and cost control initiatives.

Restructuring Gains (Costs), Net

In the nine months ended September 30, 2010, we completed the sale of a previously idled manufacturing facility and recognized a gain of $0.3 million on the sale of the facility. In the nine months ended September 30, 2010 and 2009, we incurred costs of $0.2 million and $0.3 million, respectively, to maintain the land and building.

In the nine months ended September 30, 2010, we recorded pension curtailment and settlement losses and other severance costs related to headcount reductions at our Mexican subsidiaries totaling $0.6 million. Additionally, we recorded a non-cash charge of $1.6 million related to the sale of our interest in a 51% owned joint venture in the nine months ended September 30, 2010.

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

We idled a Mexican aluminum casting operation in the nine months ended September 30, 2009 and consolidated the capacity into our Chinese casting operation. During that period, we also relocated a small amount of filter manufacturing capacity which resulted in the idling of certain equipment with no alternative use. In connection with these capacity consolidations, we recorded asset impairments of $1.0 million in the nine months ended September 30, 2009 and incurred post employment benefit plans curtailment costs of $0.1 million in the nine months ended September 30, 2009.

In order to accommodate expected growth in Europe, our Spanish distribution operation was relocated to a new leased facility resulting in the idling and subsequent sale of an owned facility. We recognized a gain of $1.5 million on the sale of this facility in the nine months ended September 30, 2009.

Interest Expense, Net

Net interest expense was $0.9 million lower in the nine months ended September 30, 2010 compared to the nine months ended September 30, 2009. This decrease was due to lower interest rates on our variable debt in the nine months ended September 30, 2010 as compared to the nine months ended September 30, 2009 which resulted in a reduction of interest expense of approximately $2.0 million, partially offset by interest on higher average borrowings of $6.8 million during the nine months ended September 30, 2010. The increased outstanding balance of the UCI International Notes due to the quarterly payment of interest through the issuance of new notes more than offset the lower level of borrowings under UCI’s previous term loan resulting from both the $17.7 million mandatory prepayment on our term loan made in April 2010 and the repayment of revolver credit facility borrowings of $20.0 million in June 2009.

Loss on Early Extinguishment of Debt

We recorded a loss of $8.7 million in the nine months ended September 30, 2010 on the early extinguishment of our previous term loan and the Notes. See further discussion in Note I to the financial statements included in this Form 10-Q. The components of the loss on early extinguishment were as follows (in millions):


UCI Notes call premium	$	3.6
Write-off unamortized debt discount		1.8
UCI Notes redemption period interest		1.9
Write-off unamortized deferred financing costs		1.4

	$	8.7

Miscellaneous, Net

Miscellaneous expense which consists primarily of costs associated with the sale of receivables was $1.1 million lower in the nine months ended September 30, 2010 compared to the nine months ended September 30, 2009. The lower expense was due to lower selling discount costs, partially offset by higher sales of receivables in 2010 versus 2009. Miscellaneous expense for the nine months ended September 30, 2010 also included $0.1 million related to changes in market value of our swaption agreement.

Income Tax Expense

Income tax expense in the nine months ended September 30, 2010 was $8.8 million higher than in the nine months ended September 30, 2009 due to higher pre-tax income in the 2010 quarter. The effective tax rate for the nine months ended September 30, 2010 was 39.4% compared to 41.3% for the nine months ended September 30, 2009. The lower effective rate relates primarily to foreign income taxes.

Net Income

Due to the factors described above, we reported a net income of $19.9 million in the nine months ended September 30, 2010 compared to net income of $5.8 million in the nine months ended September 30, 2009.

Net Income Attributable to UCI International, Inc.

After deducting losses attributable to a noncontrolling interest, net income attributable to UCI International, Inc. was $19.9 million in the nine months ended September 30, 2010 compared to net income attributable to UCI International, Inc. of $6.3 million in the nine months ended September 30, 2009.

Liquidity and Capital Resources

Debt Refinancing

On September 23, 2010, UCI International, UCI Acquisition and UCI entered into a credit agreement, with UCI, as borrower, and with UCI International and UCI Acquisition and UCI’s domestic subsidiaries, as guarantors (the “Credit Agreement”). The Credit Agreement provides for borrowings of up to $500.0 million, consisting of a term loan facility in an aggregate principal amount of $425.0 million (the “New Term Loan”), which was fully funded on the closing date of the Credit Agreement, and a revolving credit facility in an aggregate principal amount of $75.0 million (the “New Revolving Credit Facility”), none of which was drawn as of September 30, 2010. Approximately $23.7 million was available under the New Revolving Credit Facility at September 30, 2010 due to certain restrictions under the UCI International Notes. The maturity date for the New Term Loan facility and the New Revolving Credit Facility are 6.5 years and 5 years, respectively, from the date of the Credit Agreement.

The proceeds of the New Term Loan were used to (i) repay existing borrowings under UCI’s term loan, (ii) redeem UCI’s existing senior subordinated notes and (iii) pay transaction costs. The following table summarizes the sources and uses of the proceeds at closing (in millions):


Sources
New Revolving Credit Facility	$	—
New Term Loan		425.0
Cash on Balance Sheet		4.0

Total Sources	$	429.0


Uses
Accrued Interest Payment	$	6.4
Repay UCI Previous Credit Agreement		172.3
Redeem UCI Notes		230.0
Transaction Costs and original issue discount		20.3

Total Uses	$	429.0

In connection with the entry by UCI into the Credit Agreement, UCI’s senior credit facility (the “Previous Credit Agreement”) was terminated and all obligations existing under the Previous Credit Agreement were repaid in full using a portion of the proceeds of the New Term Loan. The Previous Credit Agreement was scheduled to expire on June 30, 2012; there were no penalties for early termination.

The Previous Credit Agreement included a term loan pursuant to which, as a result of previous prepayments, no scheduled repayments were due before December 2011. Mandatory prepayments of the term loan were required, however, when UCI generated Excess Cash Flow as defined in the Previous Credit Agreement. UCI generated Excess Cash Flow in the year ending December 31, 2009, resulting in a mandatory prepayment of $17.7 million which was made on April 1, 2010 reducing the amount outstanding under the term loan to $172.3 million. The remaining $172.3 million was paid in full with the proceeds of the New Term Loan.

On September 23, 2010, UCI discharged the Notes in accordance with the terms of the indenture governing the Notes by depositing with the trustee all outstanding amounts due under the Notes and instructing the trustee to provide holders of all the Notes with an irrevocable notice of redemption. The redemption date was October 25, 2010 (the “Redemption Date”). As of September 23, 2010, the aggregate outstanding principal amount of the Notes was approximately $228.2 million, net of unamortized original issue discount of $1.8 million. Pursuant to the terms of the indenture, all the Notes outstanding on the Redemption Date were redeemed on the Redemption Date at 101.563% of their principal amount plus accrued and unpaid interest thereon to, but not including, the Redemption Date.

Net Cash Provided by Operating Activities

Nine Months Ended September 30, 2010

Net cash provided by operating activities for the nine months ended September 30, 2010 was $79.0 million compared to $105.6 million for the nine months ended September 30, 2009. The decrease in cash provided by operating activities in relation to the prior year was the result of increased use of cash for working capital purposes, partially offset by higher net income, excluding non-cash income and expense items, during the nine months ended September 30, 2010. Net income, excluding non-cash income and expense items, was $80.4 million for the nine months ended September 30, 2010 compared to $61.0 million for the nine months ended September 30, 2009. A more detailed discussion of the other components of cash provided by operating activities in the nine months ended September 30, 2010 and the significant factors behind the impact on cash follows.

Increases in accounts receivable and inventories resulted in uses of cash of $29.9 million and $17.8 million, respectively. The increase in accounts receivable was primarily due to higher sales of $477.7 million in the second and third quarters of 2010 compared to $447.7 million in the third and fourth quarters of 2009, a $30.0 million increase, and timing of factoring of accounts receivable. Factored accounts receivable totaled $128.3 million and $121.5 million at September 30, 2010 and December 31, 2009, respectively. The increase in inventory was due to (i) inventory builds to

support the higher sales levels, as well as to support customers’ periodic restocking program orders, (ii) temporary buffer stock while manufacturing is transferred between manufacturing locations as part of our PSO initiatives, (iii) longer lead times on some inventories resourced to our low cost country manufacturing locations, (iv) material cost increases and (v) foreign exchange rates. An increase in accounts payable resulted in a generation of cash of $17.7 million due primarily to the higher inventory levels.

Changes in all other assets and liabilities netted to a $28.6 million increase in cash. This change primarily related to increases in product returns and other amounts due customers ($12.5 million), timing of tax payments ($6.4 million), changes in accrued salaries and incentive compensation ($2.4 million), decreases in prepaid insurance ($1.1 million) and changes in other assets and accrued expenses.

Nine Months Ended September 30, 2009

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 $61.0 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.

Changes in all other assets and liabilities netted to a $21.1 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 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, 2010 and September 30, 2009 were $17.5 million and $10.9 million, respectively, used primarily for cost reduction and maintenance activities. The higher capital expenditures in 2010 were primarily the result of funding specific targeted cost reduction opportunities as part of the PSO initiative.

Proceeds from the sale of property, plant and equipment for the nine months ended September 30, 2010 and September 30, 2009 were $0.4 million and $2.5 million, respectively. Proceeds from the sale of our joint venture interest in China, net of transaction costs and cash sold totaled approximately $0.3 million. See Note O to the condensed consolidated financial statements. 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 nine months ended September 30, 2010, we posted $7.4 million of cash to collateralize a letter of credit required to appeal the judgment in the patent litigation discussed in more detail under “Contingencies.” During the nine months ended September 30, 2009, we posted $9.4 million of cash to collateralize a letter of credit required by our workers compensation insurance carrier. During the three months ended September 30, 2010, the letter of credit requirement with the workers compensation insurance carrier was reduced by $0.5 million and this amount of the cash collateral was returned. The cash collateral totaling $16.3 million is recorded as “Restricted cash” as a component of long-term assets on UCI International’s balance sheet at September 30, 2010. This cash is invested in highly liquid, high quality government securities and is not available for general operating purposes as long as the letters of credit remain outstanding or until alternative collateral is posted.

Net Cash Used in Financing Activities

Net cash used in financing activities in the nine months ended September 30, 2010 was $16.2 million compared to $19.4 million in the nine months ended September 30, 2009.

Borrowings during the nine months ended September 30, 2010 included the $419.6 million proceeds of the New Term Loan, net of original issue discount of $5.4 million, and $10.2 million of short-term borrowings payable to foreign credit institutions. 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, 2010, we made the $17.7 million mandatory prepayment on the term loan of the Previous Credit Agreement reducing the amount outstanding under the term loan to $172.3 million. The remaining $172.3 million was paid in full with the proceeds of the New Term Loan. Also during the nine months ended September 30, 2010, we used cash of $235.5 million, representing the $230.0 million principal, the $3.6 million call premium and $1.9 million of interest during the redemption period, to redeem the Notes. Additionally, during the nine months ended September 30, 2010, our Spanish and Chinese subsidiaries repaid short-term notes borrowings to foreign credit institutions in the amount of $10.6 million.

During the nine months ended September 30, 2009, we repaid the $20.0 million of outstanding borrowings under UCI's 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, 2010, we paid $9.3 million of deferred financing costs associated with entering into the Credit Agreement and we paid a $0.5 million premium related to a swaption agreement we entered into related to the Credit Agreement.

Current Debt Capitalization and Scheduled Maturities

At September 30, 2010 and December 31, 2009, UCI International had $170.9 million and $131.9 million of cash and cash equivalents, respectively. Our outstanding debt was as follows (in millions):


	September 30, 2010			December 31, 2009
UCI International Notes	$	347.1		$	324.1
UCI New Term Loan		425.0			—
UCI New Revolving Credit Facility		—			—
UCI Previous Credit Agreement term loan		—			190.0
UCI Notes		—			230.0
UCI short-term borrowings		3.3			3.5
UCI capital lease obligations		0.7			0.9
Unamortized original issue discount		(9.1	)		(6.9	)

		767.0			741.6
Less:
UCI short-term borrowings		3.3			3.5
UCI term loan		—			17.7
UCI current maturities		4.5			0.2

Long-term debt	$	759.2		$	720.2

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


Remainder of 2010	$	2.9
2011		5.9
2012		116.5
2013		239.3
2014		4.3
Thereafter		407.2

	$	776.1

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

The UCI International Notes are due in 2013. Interest on the UCI International Notes will be paid in kind by issuing new notes until December 2011 and, therefore will not affect our cash flow through 2011. Thereafter, all interest will be payable in cash. On March 15, 2012 and each quarter thereafter, we are required to redeem for cash a portion of each note, to the extent required to prevent the UCI International Notes from being treated as an applicable high yield discount obligation. The redemption price for the portion of each UCI International Note so redeemed will be 100% of the principal amount of such portion plus any accrued interest at the date of redemption. In the schedule above, the $112.1 million of UCI International Notes that were issued in lieu of cash interest through September 30, 2010 have been included in the 2012 debt repayment amount. Depending on the circumstances, a portion of this $112.1 million may be paid after 2012.

As of October 29, 2010, we had not repurchased any of the UCI International Notes, although we may, under appropriate market conditions, do so in the future through cash purchases or exchange offers, in open market, privately negotiated or other transactions. 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, 2010 debt level and borrowing rates, annual interest expense, including amortization of deferred financing costs and debt discount, was approximately $62.8 million. An increase of 0.25 percentage points (25 basis points) on our variable interest rate debt would increase our annual interest cost by $1.9 million.

Covenant Compliance

UCI’s Credit Agreement requires us to maintain certain financial covenants and requires mandatory prepayments under certain events as defined in the agreement. Also, the Credit Agreement 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 Credit Agreement contains the following financial covenants beginning with the fiscal quarter ending December 31, 2010: a minimum interest coverage ratio, a maximum leverage ratio and a maximum level of capital expenditures. The financial covenants are calculated on a trailing four consecutive quarters basis.

The minimum interest coverage ratio and maximum leverage ratio levels become increasingly more restrictive over time. The Credit Agreement provides for minimum interest coverage ratio and a maximum leverage ratio levels as set forth opposite the corresponding fiscal quarter.


	Minimum Interest Coverage Ratio Level		Maximum Leverage Ratio Level
Quarters ending December 31, 2010 – September 30, 2011		1.85x		5.00x
Quarters ending December 31, 2011 – September 30, 2012		1.95x		4.75x
Quarters ending December 31, 2012 – September 30, 2013		2.25x		4.25x
Quarters ending December 31, 2013 – September 30, 2014		2.50x		3.75x
Quarters ending December 31, 2014 – September 30, 2015		2.75x		3.25x
Quarter ending December 31, 2015 and thereafter		2.75x		2.75x

Credit Agreement Adjusted EBITDA is used to determine UCI’s compliance with the covenants discussed above. Credit Agreement Adjusted EBITDA is defined as EBITDA (earnings before interest, taxes, depreciation and amortization) further adjusted to exclude unusual items and other adjustments permitted by the Credit Agreement in calculating covenant compliance. For purposes of calculating the Consolidated Interest Coverage ratio, interest expense includes interest expense on the UCI International Notes. Similarly, for purposes of calculating the Consolidated Leverage ratio, leverage includes the UCI International Notes.

A breach of covenants in the Credit Agreement that are tied to ratios based on Credit Agreement Adjusted EBITDA could result in a default under the Credit Agreement and the lenders could elect to declare all amounts borrowed due and payable. Any such acceleration would also result in a default under the UCI International Notes.

Management’s Action Plan and Outlook

Our primary sources of liquidity are cash on hand, cash flow from operations, available borrowing capacity under our New Revolving Credit Facility and accounts receivable factoring arrangements. At September 30, 2010, we had $170.9 million of cash and cash equivalents on hand.

Accounts Receivable Factoring

Factoring of customer trade accounts receivable is a significant part of our liquidity and is related to extended terms provided to certain customers. Subject to certain limitations, the Credit Agreement permits sales of and liens on receivables which are being sold pursuant to non-recourse factoring agreements between certain of our customers and a number of banks. At September 30, 2010, we had factoring relationships arranged by four customers with eight banks. The terms of these relationships are such that the banks are not obligated to factor any amount of receivables. Due to factors beyond our control, it is possible that these banks may not have the capacity or willingness to fund these factoring

arrangements at the levels they have in the past, or at all, and our customers may not continue to offer such programs in the future.

We sold approximately $176.2 million and $165.4 million of receivables during the nine months ended September 30, 2010 and 2009, respectively. If receivables had not been factored, $128.3 million and $121.5 million of additional receivables would have been outstanding at September 30, 2010 and December 31, 2009, respectively. If we had not factored these receivables, we would have had to finance these receivables in some other way, renegotiate terms with customers or reduce cash on hand. Our short-term cash projections assume a level of factored accounts receivable in a range of $120.0 million to $135.0 million at any given time based upon our current customer contracts.

Short-Term Liquidity Outlook

Our ability to make scheduled payments of principal or interest on, or to refinance, our indebtedness or to fund working capital requirements, capital expenditures and other current obligations will depend on our ability to generate cash from operations and from factoring arrangements as discussed above. Such cash generation is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control.

Our capital spending levels were lower in 2009 than historical spending levels. As part of our plans to conserve cash, 2009 capital spending was limited to expenditures necessary to maintain current operations and projects that had short payback periods. Capital expenditures for the full year 2010 are expected to be in the range of $25 million to $28 million. This increase over 2009 relates to funding specific targeted cost reduction opportunities as part of the PSO initiative discussed below and incremental growth initiatives.

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

Long-Term Liquidity Outlook

UCI International is a holding company with no business operations or assets other than the capital stock of UCI Acquisition. UCI Acquisition also is a holding company and has no operations or assets other than the capital stock of UCI. Consequently, UCI International is dependent on loans, dividends and other payments from UCI to make payments of cash interest or any other payments on the UCI International Notes beginning in 2012. We can give no assurance that the cash for those payments will be available.

CONTRACTUAL OBLIGATIONS

As a result of the debt refinancing discussed previously, our contractual cash obligations for debt repayments and related interest repayments changed significantly. The following table is a summary of contractual cash obligations for debt and interest repayments at September 30, 2010 (in millions):


	Payments Due by Period
	Remainder of 2010		2011-2012		2013-2014		2015 and After		Total
Debt repayments (excluding interest)	$	2.9	$	10.4	$	243.6	$	407.1	$	664.0
Interest payments		6.9		188.5		73.7		52.4		321.5

(1)	Debt repayments exclude $112.1 million of UCI International Notes which were issued in lieu of cash interest as of September 30, 2010. See (2) below for a discussion of the catch-up interest payment.

(2)

Estimated interest payments are based on the assumption that (i) September 30, 2010 interest rates will prevail throughout all future periods, (ii) debt is repaid on its due date and (iii) no new debt is issued. Commencing on March 15, 2012 and each quarter thereafter, we are required to redeem for cash a portion of each note, to the extent required to prevent the UCI International Notes from being treated as an applicable high yield discount obligation. As a result, we are required to make cash payments for all accumulated PIK interest on the UCI International Notes in 2012 or in some combination of 2012 and 2013, depending on certain circumstances. In the above table, the entire cash payment of $112.1 million is presented in 2012.

CONTINGENCIES

Environmental; Health and Safety

We are subject to a variety of federal, state, local and foreign environmental; health and safety laws and regulations, including those governing the discharge of pollutants into the air or water, the management and disposal of hazardous substances or wastes, and the cleanup of contaminated sites. We or our predecessors have been identified as a potentially responsible party, or is otherwise currently responsible, for contamination at five sites. One of these sites is a former facility in Edison, New Jersey (the “New Jersey Site”), where a state agency has ordered us to continue with the monitoring and investigation of chlorinated solvent contamination. The New Jersey Site has been the subject of litigation to determine whether a neighboring facility was responsible for contamination discovered at the New Jersey Site. A judgment has been rendered in that litigation to the effect that the neighboring facility is not responsible for the contamination. We are analyzing what further investigation and remediation, if any, may be required at the New Jersey Site. We are also responsible for a portion of chlorinated solvent contamination at a previously owned site in Solano County, California (the “California Site”), where we, at the request of the regional water board, are investigating and analyzing the nature and extent of the contamination and are conducting some remediation. Based on currently available information, management believes that the cost of the ultimate outcome of the environmental matters related to the New Jersey Site and the California Site will not exceed the $1.2 million accrued at September 30, 2010 by a material amount, if at all. However, because all investigation and analysis has not yet been completed and due to inherent uncertainty in such environmental matters, it is possible that the ultimate outcome of these matters could have a material adverse effect on results for a single quarter.

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

Antitrust Litigation

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

We intend to vigorously defend against these claims. It is too soon to assess the possible outcome of these proceedings. No amounts, other than ongoing defense costs, have been recorded in the financial statements for these matters and management does not believe a loss is probable. During the three and nine months ended September 30, 2010, we incurred $2.2 million and $5.4 million, respectively, defending against these claims. During the three and nine months ended September 30, 2009, we incurred $0.2 million and $0.9 million, respectively.

Patent Litigation

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

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

Value-Added Tax Receivable

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

Other Litigation

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

Recently Adopted Accounting Guidance

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

Item 3. Quantitative and Qualitative Disclosures about Market Risk

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

Foreign Currency Exposure

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

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

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

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

Our Mexican operations source a significant amount of inventory from the United States. During the period September 30, 2008 through March 31, 2009, the U.S. dollar strengthened against the Mexican peso by approximately 33%. During the period March 31, 2009 through September 30, 2010, the U.S. dollar weakened against the Mexican peso by approximately 15%, 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, 2010, we had no foreign currency contracts outstanding. We do not engage in speculative activities.

Interest Rate Risk

We periodically enter into interest rate agreements to manage interest rate risk on borrowing activities. On September 28, 2010, in connection with the Credit Agreement, we entered into a “swaption” agreement providing us with the right but not the obligation to enter into an interest rate swap on or about March 23, 2012. If we exercise the swaption, we would effectively convert $212.5 million of variable rate debt under the Credit Agreement into fixed rate debt with a Eurodollar rate of 2.75% plus the applicable margin under the Credit Agreement for a two-year period ending March 23, 2014. The cost of entering into the swaption was $0.5 million. While we consider the swaption to be an effective economic hedge of interest rate risks, we did not designate or account for the swaption as a hedge. Changes in the market value of the swaption are recognized currently in income as a component of “Miscellaneous, net.”

We utilize, and we will continue to utilize, sensitivity analyses to assess the potential effect of our variable rate debt. At our September 30, 2010 debt level and borrowing rates, annual interest expense including amortization of deferred financing costs and debt discount would be approximately $62.8 million. If variable interest rates were to increase by 0.25% per annum, the net impact would be a decrease of approximately $1.1 million of our net income and cash flow.

Treasury Policy

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

Item 4. Controls and Procedures

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

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

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

PART II

OTHER INFORMATION

Item 1. Legal Proceedings

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

Item 1.A. Risk Factors

Except as set forth below, there have been no material changes from the risk factors previously disclosed in UCI International’s annual report on Form 10-K for the fiscal year ended December 31, 2009 and its quarterly report on Form 10-Q for the quarterly period ended June 30, 2010.

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

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

We need liquidity to pay our operating expenses, interest on our debt and capital expenditures. Without sufficient liquidity, we will be forced to curtail our operations, and our business will suffer. Our primary sources of liquidity are cash on hand, cash flow from operations, factoring of customer trade accounts receivable and available borrowing capacity under the Credit Agreement. Subject to certain limitations, UCI’s Credit Agreement permits sales of and liens on receivables, which are being sold pursuant to factoring arrangements arranged for us by certain customers with a number of banks. At September 30, 2010, we had factoring relationships arranged by four customers with eight banks. The terms of these relationships are such that the banks are not obligated to factor any amount of receivables. Because of the current challenging capital markets, it is possible that these banks may not have the capacity or willingness to fund these factoring arrangements at the levels they have in the past, or at all, or our customers could discontinue their participation in the arrangements, which could have a material adverse impact on our liquidity.

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

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

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

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fluctuations in currency exchange rates;

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geopolitical instability;

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exchange controls;

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

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

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transport availability and cost;

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potentially negative consequences from changes in tax laws;

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fluctuations in interest rates;

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unexpected changes in regulatory requirements;

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differing labor regulations;

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

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

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

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restrictions on our ability to repatriate dividends from our subsidiaries;

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

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difficulty of enforcing judgments or other remedies in foreign jurisdictions;

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

•

the potential for terrorism against U.S. interests.

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

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

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

As a result of increased international production and sourcing of components and completed parts for resale, we are exposed to risks related to the effects of changes in foreign currency exchange rates, principally exchange rates between the U.S. dollar and the Chinese yuan and the U.S. dollar and the Mexican peso. The currency exchange rate from Chinese yuan to U.S. dollars has historically been fairly stable, in large part due to the economic policies of the Chinese government. However, the value of the yuan has recently increased as a result of the Chinese government changing its policy on “pegging” the yuan against the U.S. dollar during the third quarter of 2010. An increase in the Chinese yuan against the dollar means that we will have to pay more in U.S. dollars for our purchases from China. If we are unable to negotiate commensurate price decreases from our Chinese suppliers, these higher prices would eventually translate into higher costs of sales. In that event, we would attempt to obtain corresponding price increases from our customers, but there are no assurances that we would be successful.

Our Mexican operations source a significant amount of inventory from the United States. During the period September 30, 2008 through March 31, 2009, the U.S. dollar strengthened against the Mexican peso by approximately 33%. During the period March 31, 2009 through September 30, 2010, the U.S. dollar weakened against the Mexican peso by approximately 15%, partially offsetting the trend experienced in the prior six months. A strengthening U.S. dollar against the Mexican peso means that our Mexican operations must pay more in pesos to obtain inventory from the United States, which translates into higher cost of sales for the Mexican operations. We are attempting to obtain price increases from our customers for the products sold by our Mexican operations, but there are no assurances that we will be successful.

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

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

As of September 30, 2010, we had approximately 3,900 employees, with union affiliations and collective bargaining agreements at two of our facilities, representing approximately 11% of our workforce. The bargaining agreements for our Fond du Lac, Wisconsin plant and our Fairfield, Illinois plant expire in 2012 and 2013, respectively. Since 1984, we have had only one work stoppage, which lasted for three days at our Fairfield, Illinois plant. Although we believe that our relations with our employees are currently good, if our unionized workers were to engage in a strike, work stoppage or other slowdown in the future, we could experience a disruption of our operations, which could interfere with our ability to deliver products on a timely basis and could have other negative effects, such as decreased productivity and increased labor costs. We may also incur increased labor costs in the event our work force becomes more unionized or as a result of any renegotiation of our existing labor arrangements. In addition, many of our direct and indirect customers and vendors have unionized work forces. Strikes, work stoppages or slowdowns experienced by these customers or vendors or their other suppliers could result in slowdowns or closings of assembly plants that use our products or supply materials for use in the production of our products. Organizations responsible for shipping our products may also be impacted by occasional strikes. Any interruption in the delivery of our products could reduce demand for our products and could have a material adverse effect on us.

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

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

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

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

We periodically make capital investments to, among other things, maintain and upgrade our facilities and enhance our production processes. As we grow, we may have to incur capital expenditures. Historically, we have been able to fund these expenditures through cash flow from operations and borrowings under UCI’s previous senior credit facility and expect to continue to do so under the Credit Agreement. However, UCI’s Credit Agreement contains

limitations that could affect our ability to fund our future capital expenditures and other capital requirements. We cannot be assured that we will have, or be able to obtain, adequate funds to make all necessary capital expenditures when required, or that the amount of future capital expenditures will not be materially in excess of our anticipated or current expenditures. If we are unable to make necessary capital expenditures, our product line may become dated, our productivity may be decreased and the quality of our products may be adversely affected, which, in turn, could reduce our net sales and profitability.

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

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

In addition, from time to time, we pursue and are pursued in potential litigation relating to the protection of certain intellectual property rights, including with respect to some of our more profitable products. In some instances, we may be found to have infringed on the intellectual property rights of others. In such a case, we may incur significant costs or losses and may be subject to an injunction that would prevent us from selling a product found to infringe. For example, in December of 2009, a jury determined that Champion, our wholly-owned subsidiary, had infringed on a competitor’s patent and, on May 3, 2010, the court entered a partial judgment in this matter, awarding the plaintiff $6.5 million in damages and a permanent injunction. The plaintiff is currently seeking treble damages and attorneys’ fees.

Our substantial indebtedness could adversely affect our financial health.

As of September 30, 2010, we and our subsidiaries had total indebtedness of $767.0 million (not including intercompany indebtedness), of which $116.5 million and $239.3 million is due in 2012 and 2013, respectively.

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

•

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

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

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expose us to the risk of increased interest rates as our UCI International Notes and borrowings under UCI’s Credit Agreement are subject to variable rates of interest;

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

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limit our ability to borrow additional funds; and

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

Since a significant amount of our indebtedness is due in 2013, the above factors could be accelerated or magnified and we may not be able to repay such indebtedness or refinance such indebtedness on attractive terms, if at all.

In addition, the indenture governing our UCI International Notes due 2013, as well as UCI’s Credit Agreement, contain financial and other restrictive covenants that limit our ability to engage in activities that may be in our long-term best interests. Our failure to comply with those covenants could result in an event of default which, if not cured or waived, could result in the acceleration of all of our debts.

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

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

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

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

We and our subsidiaries may be able to incur substantial additional indebtedness in the future because the terms of the indenture governing our UCI International Notes and UCI’s Credit Agreement do not fully prohibit us or our subsidiaries from doing so. If new debt is added to our and our subsidiaries’ current debt levels, the related risks that we and they now face could intensify.

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

The indenture governing our UCI International Notes and UCI’s Credit Agreement limit our ability and the ability of our restricted subsidiaries, among other things, to:

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

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incur additional indebtedness;

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sell assets, including capital stock of restricted subsidiaries;

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agree to payment restrictions affecting our restricted subsidiaries;

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

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enter into transactions with our affiliates;

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incur liens; and

•

designate any of our subsidiaries as unrestricted subsidiaries.

In addition, as of the end of any given quarter, UCI’s Credit Agreement requires us to maintain a maximum consolidated leverage ratio and a minimum consolidated interest coverage ratio, covering the previous four quarters, through the term of the Credit Agreement. These ratio requirements change annually under the terms of the Credit Agreement. Our ability to comply with these ratios may be affected by events beyond our control.

The restrictions contained in the indenture governing our UCI International Notes and UCI’s Credit Agreement could limit our ability to plan for or react to market conditions, meet capital needs or make acquisitions or otherwise restrict our activities or business plans.

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

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

None.

Item 3. Default Upon Senior Securities

None.

Item 4. Reserved

None.

Item 5. Other Information

None.

Item 6. Exhibits



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

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

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

This certificate is being furnished solely to accompany the report pursuant to 18 U.S.C. 1350 and is not being filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and is not to be incorporated by reference into any filing of UCI International, 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.

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UCI International, Inc. 10-Q