News Column

FEDERAL-MOGUL HOLDINGS CORP - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

July 23, 2014

The following Management's Discussion and Analysis of financial condition and results of operations ("MD&A") should be read in conjunction with the MD&A included in the Company's Annual Report. Overview On April 15, 2014, Federal-Mogul Corporation completed a holding company reorganization (the "Reorganization"). As a result of the Reorganization, the outstanding shares of Federal-Mogul Corporation common stock were automatically converted on a one-for-one basis into shares of Federal-Mogul Holdings Corporation common stock, and all of the stockholders of Federal-Mogul Corporation immediately prior to the Reorganization automatically became stockholders of Federal-Mogul Holdings Corporation. The rights of stockholders of Federal-Mogul Holdings Corporation are generally governed by Delaware law and Federal-Mogul Holdings Corporation's certificate of incorporation and bylaws, which are the same in all material respects as those of Federal-Mogul Corporation immediately prior to the Reorganization. In addition, the board of directors of Federal-Mogul Holdings Corporation and its Audit Committee and Compensation Committee are composed of the same members as the board of directors, Audit Committee and Compensation Committee of Federal-Mogul Corporation prior to the Reorganization. Information presented herein refers to Federal-Mogul Corporation. In addition, references herein to the "Company," "Federal-Mogul," "we," "us," "our" refer to Federal-Mogul Corporation for the period prior to the effective time of the Reorganization on April 15, 2014 and to Federal-Mogul Holdings Corporation for the period after the effective time of the Reorganization. The Company is a leading global supplier of technology and innovation in vehicle and industrial products for fuel economy, emissions reduction, alternative energies, environment and safety systems. The Company serves the world's foremost original equipment manufacturers ("OEM") and servicers ("OES") of automotive, light, medium and heavy-duty commercial vehicles, off-road, agricultural, marine, rail, aerospace, power generation and industrial equipment (collectively, "OE"), as well as the worldwide aftermarket. The Company seeks to participate in both of these markets by leveraging its original equipment product engineering and development capability, manufacturing know-how, and expertise in managing a broad and deep range of replacement parts to service the aftermarket. The Company believes that it is uniquely positioned to effectively manage the life cycle of a broad range of products to a diverse customer base. The Company has established a global presence and conducts its operations through various manufacturing, distribution and technical centers that are wholly-owned subsidiaries or partially-owned joint ventures. During the six months ended June 30, 2014, the Company derived 37% of its sales in the United States and 63% internationally. The Company has operations in established markets including Australia, Belgium, France, Germany, Italy, Japan, Spain, Sweden, the United Kingdom and the United States, and emerging markets including Argentina, Brazil, China, Czech Republic, Hungary, India, Korea, Mexico, Morocco, Poland, Russia, South Africa and Thailand. The attendant risks of the Company's international operations are primarily related to currency fluctuations, changes in local economic and political conditions, and changes in laws and regulations.



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The Company offers its customers a diverse array of market-leading products for OE and replacement parts ("aftermarket") applications, including pistons, piston rings, piston pins, cylinder liners, valve seats and guides, ignition products, dynamic seals, bonded piston seals, combustion and exhaust gaskets, static gaskets and seals, rigid heat shields, engine bearings, industrial bearings, bushings and washers, brake disc pads, brake linings, brake blocks, element resistant systems protection sleeving products, acoustic shielding, flexible heat shields, brake system components, chassis products, wipers and lighting. The Company operates in an extremely competitive industry, driven by global vehicle production volumes and part replacement trends. Business is typically awarded to the supplier offering the most favorable combination of cost, quality, technology and service. Customers continue to demand periodic cost reductions that require the Company to continually assess, redefine and improve its operations, products, and manufacturing capabilities to maintain and improve profitability. Management continues to develop and execute initiatives to meet the challenges of the industry and to achieve its strategy for sustainable global profitable growth. The Company operates with two end-customer focused business segments. The Powertrain segment focuses on original equipment products for automotive, heavy duty and industrial applications. The Motorparts segment sells and distributes a broad portfolio of products in the global aftermarket, while also serving original equipment manufacturers with products including braking, chassis, wipers and other vehicle components. This organizational model allows for a strong product line focus benefitting both original equipment and aftermarket customers and enables the global Federal-Mogul teams to be responsive to customers' needs for superior products and to promote greater identification with Federal-Mogul premium brands. Additionally, this organizational model enhances management focus to capitalize on opportunities for organic or acquisition growth, profit improvement, resource utilization and business model optimization in line with the unique requirements of the two different customer bases. The Powertrain segment primarily represents the Company's OE business. About 94% of Powertrain's sales are to OEM customers, with the remaining 6% of its sales being sold directly to Motorparts for eventual distribution, by Motorparts, to customers in the independent aftermarket. Discussions about the Company's Powertrain segment or its OE business should be seen as analogous. The performance of Powertrain is therefore highly correlated to changes in regional OEM light and commercial vehicle production, together with the changes in the mix of technologies (such as between light vehicle gasoline and light vehicle diesel), and changes in demand for non-automotive and industrial applications. These drivers are enhanced by the rate at which the Company gains new programs, which is itself affected by the rate at which the OEM's make improvements to emissions and fuel economy - some in response to regional regulations.The Motorparts segment primarily represents the Company's aftermarket business. About 75% of Motorparts' sales are to the customers in the independent aftermarket. The remaining 25% of the Motorparts business is to OEM or tier 1 suppliers to OEM, and the OES market, essentially, dealer supplied replacement parts - a feature more prevalent in Europe than in North America. The OES market is subject to the same general commercial patterns as the aftermarket business. The performance of Motorparts is therefore highly correlated to the factors that variously influence the different regional replacement parts markets around the world, such as vehicle miles driven, the average age of vehicles on the road, the size of the regional vehicle parcs and levels of consumer confidence. These drivers are enhanced by the relative strength of the aftermarket brands and the breadth of the portfolio offered relative to the changing needs of the local markets. For a more detailed description of the Company's business, products, industry, operating strategy and associated risks, refer to the Annual Report.



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Results of Operations Consolidated Results - Three Months Ended June 30, 2014 vs. Three Months Ended June 30, 2013 Net sales: Three Months Ended June 30 2014 2013 (Millions of Dollars) Powertrain $ 1,162$ 1,072 Motorparts 791 761 Inter-segment eliminations (81 ) (89 ) Total $ 1,872$ 1,744



The percentage of net sales by group and region for the three months ended June 30, 2014 and 2013 are listed below.

Powertrain Motorparts Total 2014 North America 34 % 58 % 44 % EMEA 49 % 36 % 43 % Rest of World 17 % 6 % 13 % 2013 North America 34 % 56 % 43 % EMEA 49 % 38 % 44 % Rest of World 17 % 6 % 13 %



Cost of products sold:

Three Months Ended June 30 2014 2013 (Millions of Dollars) Powertrain $ (1,013 )$ (929 ) Motorparts (643 ) (626 ) Inter-segment eliminations 81 89 Total Reporting Segment $ (1,575 )$ (1,466 )



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Table of Contents Gross margin: Three Months Ended June 30 2014 2013 (Millions of Dollars) Powertrain $ 149$ 143 Motorparts 148 135 Total Reporting Segment $ 297$ 278 Consolidated sales increased by $128 million or 7%, to $1,872 million for the second quarter of 2014 from $1,744 million in the same period of 2013 with favorable foreign currency impact of $20 million. Excluding sales directly related to the acquisition of the DZV Bearings Business of $5 million and sales from the Affinia Chassis Business Acquisition of $32 million, sales organically increased by $71 million, which is net of customer price deductions of $7 million. This organic growth is comprised of Powertrain increases of $79 million or 7% partly offset by Motorparts decreases of $8 million. By region, this organic growth is comprised of flat sales in Europe, a 6% increase in sales in North America and a 10% increase in sales in ROW. The Company's organic sales growth of $71 million is driven by an increase in the Powertrain Segment's external sales volumes, net of customer price deductions of $79 million or 7%. This increase is driven by higher sales volumes and market share gains in all regions. In Europe, Powertrain sales increased by 4% or $20 million compared to an increase in European light vehicle production of 1% and a decrease in commercial vehicle production of 6%. In North America, Powertrain sales increased by 12% or $40 million compared to flat light vehicle production and an increase in commercial vehicle production of 5%. In ROW, as Powertrain's presence in the Asian light vehicle market continued to grow, Powertrain sales increased by $19 million or 11%, compared to an increase in light vehicle production of 3% and flat commercial vehicle production in the region. When taking into account this regional and market mix of Powertrain sales, its sales therefore grew in excess of underlying market demand. Cost of products sold increased by $109 million to $1,575 million for the second quarter of 2014 compared to $1,466 million in the same period of 2013. The increase in material, labor and overheads as a direct result of the increase in external sales volumes/mix was $62 million, plus a further $30 million of such costs directly related to acquisitions. The impact from currency of $19 million, unfavorable productivity of $8 million, an increase in depreciation of $5 million, and an increase in inter-segment sales volumes of $1 million were partially offset by savings in material costs of $16 million. Gross margin increased by $19 million to $297 million, or 15.9% of sales for the second quarter of 2014 compared to $278 million, or 15.9% of sales in the same period of 2013. The positive impact on margins is due to an increase in external sales volumes was $16 million. Other factors contributing to the increased margin were favorable materials and services sourcing of $16 million, increased margins directly related to acquisitions of $7 million, and favorable currency impacts of $1 million. These increases were offset by unfavorable productivity of $8 million, unfavorable customer pricing of $7 million, increased depreciation of $5 million, and unabsorbed fixed costs on inter-segment sales of $1 million. Reporting Segment Results - Three Months Ended June 30, 2014 vs. Three Months Ended June 30, 2013 The following table provides a reconciliation of changes in sales, cost of products sold, gross margin and operational EBITDA from continuing operations for the three months ended June 30, 2014 compared with the three months ended June 30, 2013 for each of the Company's reporting segments. Operational EBITDA is defined as earnings from continuing operations before interest, income taxes, depreciation and amortization, and certain items such as restructuring and impairment charges, Chapter 11 and U.K. Administration related reorganization expenses, gains or losses on the sales of businesses, the non-service cost components of the U.S. based funded pension plan, OPEB curtailment gains or losses, the income statement impacts associated with stock appreciation rights, and loss on debt extinguishment.



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Table of Contents Total Inter-segment Reporting Total Powertrain Motorparts Elimination Segment Corporate Company (Millions of Dollars) Sales Three months ended June 30, 2013 $ 1,072$ 761$ (89 )$ 1,744 $ - $ 1,744 External sales volumes 86 (8 ) - 78 - 78 Inter-segment sales volumes (10 ) 2 8 - - - Customer pricing (7 ) - - (7 ) - (7 ) Acquisitions 5 32 - 37 - 37 Foreign currency 16 4 - 20 - 20



Three months ended June 30, 2014$ 1,162$ 791 $

(81 ) $ 1,872 $ - $ 1,872 Total Inter-segment Reporting Total Powertrain Motorparts



Elimination Segment Corporate Company Cost of Products Sold Three months ended June 30, 2013$ (929 )$ (626 ) $

89 $ (1,466 ) $ - $ (1,466 ) External sales volumes / mix (73 ) 11 - (62 ) - (62 ) Inter-segment sales volumes 9 (2 ) (8 ) (1 ) - (1 ) Productivity, net of inflation (1 ) (7 ) - (8 ) - (8 ) Materials and services sourcing 6 10 - 16 - 16 Depreciation (5 ) - - (5 ) - (5 ) Acquisitions (5 ) (25 ) - (30 ) - (30 ) Foreign currency (15 ) (4 ) - (19 ) - (19 )



Three months ended June 30, 2014$ (1,013 )$ (643 ) $

81 $ (1,575 ) $ - $ (1,575 ) Total Inter-segment Reporting Total Powertrain Motorparts



Elimination Segment Corporate Company Gross Margin Three months ended June 30, 2013$ 143$ 135 $

- $ 278 $ - $ 278 External sales volumes / mix 13 3 - 16 - 16 Inter-segment sales volumes - - - - - - Unabsorbed fixed costs on inter-segment sales (1 ) - - (1 ) - (1 ) Customer pricing (7 ) - - (7 ) - (7 ) Productivity, net of inflation (1 ) (7 ) - (8 ) - (8 ) Materials and services sourcing 6 10 - 16 - 16 Depreciation (5 ) - - (5 ) - (5 ) Acquisitions - 7 - 7 - 7 Foreign currency 1 - - 1 - 1



Three months ended June 30, 2014$ 149$ 148 $

- $ 297 $ - $ 297



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Table of Contents Total Inter-segment Reporting Total Powertrain Motorparts



Elimination Segment Corporate Company Operational EBITDA Three months ended June 30, 2013$ 105$ 57 $

- $ 162 $ - $ 162 External sales volumes / mix

13 3 - 16 - 16 Unabsorbed fixed costs on inter-segment sales (1 ) - - (1 ) - (1 ) Customer pricing (7 ) - - (7 ) - (7 ) Productivity, cost of products sold (1 ) (7 ) - (8 ) - (8 ) Productivity, SG&A 2 2 - 4 - 4 Productivity, other - - - - - - Sourcing, cost of products sold 6 10 - 16 - 16 Sourcing, SG&A - 1 - 1 - 1 Equity earnings in non-consolidated affiliates 2 1 - 3 - 3 Acquisitions 1 2 - 3 - 3 Foreign currency - (1 ) - (1 ) - (1 ) Other (3 ) (5 ) - (8 ) - (8 )



Three months ended June 30, 2014$ 117$ 63 $

- $ 180 $ - $ 180 Depreciation and amortization

(82 ) Interest expense, net (31 ) Restructuring expense, net (30 ) Loss on debt extinguishment (24 ) Non-service cost components associated with the U.S. based funded pension plan 2 Adjustment of assets to fair value (2 ) Stock appreciation rights 1 Income tax expense (15 ) Other (2 ) Net income $ (3 ) Powertrain Sales increased by $90 million, or 8%, to $1,162 million for the second quarter of 2014 from $1,072 million in the same period of 2013. The Powertrain segment generates approximately 70% of its sales outside the United States and the resulting currency movements increased sales by $16 million. Excluding currency movements and sales directly related to the acquisition of the DZV Bearings Business of $5 million, external sales volumes increased by $79 million, net of $7 million from customer price decreases, or 7%. This increase is driven by higher sales volumes and market share gains in all regions. In Europe, Powertrain sales increased by 4% or $20 million compared to an increase in European light vehicle production of 1% and a decrease in commercial vehicle production of 6%. In North America, Powertrain sales increased by 12% or $40 million compared to flat light vehicle production and an increase in commercial vehicle production of 5%. In ROW, as Powertrain's presence in the Asian light vehicle market continued to grow, Powertrain sales increased by $19 million or 11%, compared to an increase in light vehicle production of 3% and flat commercial vehicle production in the region. When taking into account this regional and market mix of Powertrain sales, its sales therefore grew in excess of underlying market demand. Cost of products sold increased by $84 million to $1,013 million for the second quarter of 2014 compared to $929 million in the same period of 2013. The increase in materials, labor and overhead as a direct result of external sales volumes/mix was $73 million, plus a further $5 million of such costs directly related to acquisitions. The increase from foreign currency impacts of $15 million and increased depreciation of $5 million were partially offset by a decrease in materials, labor and overhead from a decrease in inter-segment sales volumes of $9 million and savings in material costs of $6 million.



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Gross margin increased by $6 million to $149 million, or 12.8% of sales for the second quarter of 2014 from $143 million, or 13.3% of sales in the same period of 2013. Margin increased by $13 million directly related to the increase in external sales volumes/mix . Material and services sourcing savings improved margins by $6 million. Gross margin was negatively impacted by unfavorable customer pricing of $7 million, and increased depreciation of $5 million. Operational EBITDA increased by $12 million to $117 million for the second quarter of 2014 from $105 million in the same period of 2013. The increase is attributable to $13 million of net favorable impact from external sales volumes/mix, savings from materials and services sourcing of $6 million, a $2 million increase in earnings from non-consolidated affiliates, favorable productivity of $1 million, and a $1 million increase from acquisitions. These increases were partially offset by unfavorable customer pricing of $7 million, an increase in unabsorbed fixed costs on inter-segment sales of $1 million, and other reductions of $3 million.



Motorparts

Sales increased by $30 million, or 4%, to $791 million for the second quarter of 2014 from $761 million in the same period of 2013. When excluding sales directly related to the Affinia Chassis Business Acquisition of $32 million and favorable foreign currency impacts of $4 million, external sales decreased by $8 million. This sales decrease was driven by a decline in Europe due to continued softness in the region as well as lower export sales, mainly into Venezuela. These decreases were partially offset by stronger sales in the US and Canada aftermarket business where sales increased by 4% as well as an increase in sales in the ROW of 8% driven by stronger aftermarket demand. Cost of products sold increased by $17 million to $643 million for the second quarter of 2014 compared to $626 million in the same period of 2013. The increase in materials, labor and overhead as a direct result of acquisitions was $25 million. Productivity of $7 million, foreign currency impact of $4 million, and costs related to the increase in inter-segment sales of $2 million were offset by reduced external sales volumes combined with positive mix impacts of $11 million and materials and services sourcing savings of $10 million. Gross margin increased by $13 million to $148 million, or 18.7% of sales, for the second quarter of 2014 compared to $135 million or 17.7% of sales, in the same period of 2013. This increase is attributable to the net favorable impact of external sales volumes/mix of $3 million with a further $7 million directly related to acquisitions. Materials and sourcing savings of $10 million,were partially offset by unfavorable productivity of $7 million. Operational EBITDA increased by $6 million to $63 million for the second quarter of 2014 from $57 million in the same period of 2013. The increase is attributable to $3 million of net favorable impact of external sales volumes/mix, savings in materials and sourced products of $11 million, an increase of $2 million from acquisitions, and increased equity earnings in non-consolidated affiliates of $1 million. These increases were partially offset by project costs of $5 million and other reductions of $5 million, primarily related to weaker performance in the wiper business. Selling, General and Administrative Expenses Selling, general and administrative expenses ("SG&A") were $195 million, or 10.4% of net sales, for the second quarter of 2014 as compared to $184 million, or 10.6% of net sales, for the same quarter of 2013. The increase in SG&A costs is primarily attributable to the addition of SG&A costs from the Affinia Chassis Business Acquisition as well as project costs associated with strategic initiatives in Motorparts. The Company maintains technical centers throughout the world designed to integrate the Company's leading technologies into advanced products and processes, to provide engineering support for all of the Company's manufacturing sites, and to provide technological expertise in engineering and design development providing solutions for customers and bringing new, innovative products to market. Included in SG&A were research and development ("R&D") costs, including product and validation costs, of $46 million for the second quarter of 2014 compared with $42 million for the same period of 2013. Interest Expense, Net Net interest expense was $31 million for the second quarter of 2014 compared to $24 million for the second quarter of 2013. This increase is attributable to the refinancing of the Company's term loans in April 2014.



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Restructuring Activities The following is a summary of the Company's consolidated restructuring liabilities and related activity as of and for the quarter ended June 30, 2014: Total Reporting Total Powertrain Motorparts Segment Corporate Company (Millions of Dollars) Balance at March 31, 2014 $ 8$ 12$ 20$ 2$ 22 Provisions 19 11 30 - 30 Payments (3 ) (5 ) (8 ) (1 ) (9 ) Balance at June 30, 2014 $ 24$ 18$ 42$ 1$ 43 OPEB Curtailment Gain During the second quarter of 2013, the Company ceased operations at one of its U.S. manufacturing locations. As this location participated in the Company's U.S. Welfare Benefit Plan, the Company had this plan re-measured due to its curtailment implications. The resulting reduction in the average remaining future service period to the full eligibility date of the remaining active plan participants in the Company's U.S. Welfare Benefit Plan triggered the recognition of a $19 million OPEB curtailment gain, which was recognized in the consolidated statements of operations during the three months ended June 30, 2013. Other (Expense) Income, Net The specific components of "Other (expense) income, net" for the three months ended June 30, are as follows: Three Months Ended June 30 2014 2013 (Millions of Dollars) Foreign currency exchange $ (2 )$ (4 ) Adjustment of Chapter 11 accrual - 4 Losses on sales of account receivables (2 ) (2 ) Third-party royalty income 1 2 Other (1 ) (1 ) $ (4 )$ (1 ) Income Taxes For the three months ended June 30, 2014, the Company recorded income tax expense of $(15) million on income from continuing operations before income taxes of $12 million. This compares to an income tax expense of $(13) million on income from continuing operations before income taxes of $76 million in the same period of 2013. The income tax expenses for the three months ended June 30, 2014 differs from the U.S. statutory rate due primarily to pre-tax losses with no tax benefits, partially offset by pre-tax income taxed at rates lower than the U.S. statutory rate and income in jurisdictions with no tax expense due to offsetting valuation allowance changes. The income tax expense for the three months ended June 30, 2013 differs from the U.S. statutory rate due primarily to pre-tax income taxed at rates lower than the U.S. statutory rate and income in jurisdictions with no tax expense due to offsetting valuation allowance changes, partially offset by pre-tax losses with no tax benefits.



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Discontinued Operations In connection with its strategic planning process, the Company assesses its operations for market position, product technology and capability, and profitability. Those businesses determined by management not to have a sustainable competitive advantage are considered non-core and may be considered for divestiture or other exit activities. During 2013, the Company divested its sintered components operations located in France (first quarter event), its connecting rod manufacturing facility located in Canada (second quarter event), its camshaft foundry located in the United Kingdom (second quarter event) and its fuel pump business, which included an aftermarket business component and a manufacturing and research and development facility located in the United States (third quarter event). These divestitures have been presented as discontinued operations in the consolidated statements of operations. The Company recognized a loss from discontinued operations of $5 million (no income tax impact) during the three months ended June 30, 2013. Consolidated Results - Six Months Ended June 30, 2014 vs. Six Months Ended June 30, 2013 Net sales: Six Months Ended June 30 2014 2013 (Millions of Dollars) Powertrain $ 2,300$ 2,100 Motorparts 1,510 1,475



Inter-segment eliminations (159 ) (172 ) Total

$ 3,651$ 3,403



The percentage of net sales by group and region for the six months ended June 30, 2014 and 2013 are listed below.

Powertrain Motorparts Total 2014 North America 34 % 57 % 43 % EMEA 49 % 37 % 44 % Rest of World 17 % 6 % 13 % 2013 North America 34 % 57 % 43 % EMEA 49 % 37 % 44 % Rest of World 17 % 6 % 13 %



Cost of products sold:

Six Months Ended June 30 2014 2013 (Millions of Dollars) Powertrain $ (2,003 )$ (1,832 ) Motorparts (1,236 ) (1,216 ) Inter-segment eliminations 159 172 Total Reporting Segment $ (3,080 )$ (2,876 ) 42



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Table of Contents Gross margin: Six Months Ended June 30 2014 2013 (Millions of Dollars) Powertrain $ 297$ 268 Motorparts 274 259 Total Reporting Segment $ 571$ 527 Consolidated sales increased by $248 million or 7%, to $3,651 million for the six months ended June 30, 2014 from $3,403 million in the same period of 2013. The impact of foreign currency increased sales by $26 million, resulting in a constant dollar sales increase of $222 million. Sales increased by $9 million related to the acquisition the DZV Bearings Business and $32 million related to the Affinia Chassis Business Acquisition. Therefore the organic sales growth was $181 million or 5% including the impact of customer price reductions of $21 million. This organic growth is comprised of an increase in Powertain's external sales volumes of $185 million or 9% including customer price reductions of $15 million, partly offset by a decrease in Motorparts external sales of $4 million including customer price reductions of $6 million. By region, this organic growth is comprised of a 3% increase in sales in Europe , a 6% increase in sales in North America and a 12% increase in sales in ROW. The Company's organic sales growth of $181 million is driven by an increase in Powertain's external sales volumes, net of customer price decreases of $185 million or 9%. This increase is driven by higher sales volumes and market share gain in all regions. In Europe, Powertain sales increased by 6% or $63 million compared to an increase in European light vehicle of 4% and a decrease in commercial vehicle production of 3%. In North America, Powertain sales increased by 12% or $79 million compared to an increase in both light vehicle and commercial vehicle production of 2% and 11% respectively. In ROW, as Powertain's presence in the emerging light vehicle market continued to grow, Powertrain sales increased by $43 million or 13%, compared to an increase in both light vehicle and commercial vehicle production of 4% and 5%, respectively. When taking into account this regional and market mix of Powertrain sales, its sales therefore grew in excess of underlying market demand. Cost of products sold increased by $204 million to $3,080 million for the six months ended June 30, 2014 compared to $2,876 million in the same period of 2013. The increase in materials, labor and overhead as a direct result of external sales volumes/mix was $141 million, plus a further $33 million of such costs directly related to acquisitions. The impact from foreign currency of $25 million, unfavorable productivity of $18 million, an increase in depreciation of $11 million, and a decline in inter-segment sales volumes of $2 million were partially offset by savings in material costs of $26 million. Gross margin increased by $44 million to $571 million, or 15.6% of sales, for the six months ended June 30, 2014 compared to $527 million, or 15.5% of sales in the same period of 2013. The favorable impact on margins due to external sales volumes/mix was $61 million, representing a conversion of 30% on the incremental sales. Unfavorable customer pricing of $21 million, unfavorable productivity of $18 million, increased depreciation of $11 million, and unabsorbed fixed costs on inter-segment sales of $2 million were partially offset by favorable materials and services sourcing savings of $26 million, increased margin of $8 million directly related to acquisitions, and currency impacts of $1 million. Reporting Segment Results - Six Months Ended June 30, 2014 vs. Six Months Ended June 30, 2013 The following table provides a reconciliation of changes in sales, cost of products sold, gross margin and operational EBITDA from continuing operations for the six months ended June 30, 2014 compared with the six months ended June 30, 2013 for each of the Company's reporting segments. Operational EBITDA is defined as earnings from continuing operations before interest, income taxes, depreciation and amortization, and certain items such as restructuring and impairment charges, Chapter 11 and U.K. Administration related reorganization expenses, gains or losses on the sales of businesses, the non-service cost components of the U.S. based funded pension plan, OPEB curtailment gains or losses, the income statement impacts associated with stock appreciation rights, and loss on debt extinguishment.



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Table of Contents Total Inter-segment Reporting Total Powertrain Motorparts Elimination Segment Corporate Company (Millions of Dollars) Sales Six months ended June 30, 2013 $ 2,100$ 1,475$ (172 )$ 3,403 $ - $ 3,403 External sales volumes 200 2 - 202 - 202 Inter-segment sales volumes (15 ) 2 13 - - - Customer pricing (15 ) (6 ) - (21 ) - (21 ) Acquisitions 9 32 - 41 - 41 Foreign currency 21 5 - 26 - 26



Six months ended June 30, 2014$ 2,300$ 1,510 $

(159 ) $ 3,651 $ - $ 3,651 Total Inter-segment Reporting Total Powertrain Motorparts



Elimination Segment Corporate Company Cost of Products Sold Six months ended June 30, 2013$ (1,832 )$ (1,216 ) $

172 $ (2,876 ) $ - $ (2,876 ) External sales volumes / mix (148 ) 7 - (141 ) - (141 ) Inter-segment sales volumes 13 (2 ) (13 ) (2 ) - (2 ) Productivity, net of inflation (8 ) (10 ) - (18 ) - (18 ) Materials and services sourcing 10 16 - 26 - 26 Pension - - - - - - Depreciation (10 ) (1 ) - (11 ) - (11 ) Acquisitions (8 ) (25 ) - (33 ) - (33 ) Foreign currency (20 ) (5 ) - (25 ) - (25 )



Six months ended June 30, 2014$ (2,003 )$ (1,236 ) $

159 $ (3,080 ) $ - $ (3,080 ) Total Inter-segment Reporting Total Powertrain Motorparts



Elimination Segment Corporate Company Gross Margin Six months ended June 30, 2013$ 268$ 259 $

- $ 527 $ - $ 527 External sales volumes / mix 52 9 - 61 - 61 Inter-segment sales volumes - - - - - - Unabsorbed fixed costs on inter-segment sales (2 ) - - (2 ) - (2 ) Customer pricing (15 ) (6 ) - (21 ) - (21 ) Productivity, net of inflation (8 ) (10 ) - (18 ) - (18 ) Materials and services sourcing 10 16 - 26 - 26 Pension - - - - - - Depreciation (10 ) (1 ) - (11 ) - (11 ) Acquisitions 1 7 - 8 - 8 Foreign currency 1 - - 1 - 1



Six months ended June 30, 2014$ 297$ 274 $

- $ 571 $ - $ 571



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Table of Contents Total Inter-segment Reporting Total Powertrain Motorparts



Elimination Segment Corporate Company Operational EBITDA Six months ended June 30, 2013$ 192$ 108 $

- $ 300 $ - $ 300 External sales volumes / mix 52 8 - 60 - 60 Unabsorbed fixed costs on inter-segment sales (2 ) - - (2 ) - (2 ) Customer pricing (15 ) (6 ) - (21 ) - (21 ) Productivity, cost of products sold (8 ) (10 ) - (18 ) - (18 ) Productivity, SG&A 9 1 - 10 - 10 Productivity, other (1 ) - - (1 ) - (1 ) Sourcing, cost of products sold 10 16 - 26 - 26 Sourcing, SG&A - 1 - 1 - 1 Equity earnings in non-consolidated affiliates 5 2 - 7 - 7 Acquisitions 2 2 - 4 - 4 Foreign currency (6 ) 1 - (5 ) - (5 ) Other (5 ) (9 ) - (14 ) - (14 )



Six months ended June 30, 2014$ 233$ 114 $

- $ 347 $ - $ 347 Depreciation and amortization

(162 ) Interest expense, net (53 ) Restructuring expense, net (38 ) Loss on debt extinguishment (24 ) Non-service cost components associated with the U.S. based funded pension plan 3 Adjustment of assets to fair value (2 ) Stock appreciation rights 2 Income tax expense (33 ) Other (2 ) Net income $ 38 Powertrain Sales increased by $200 million, or 10%, to $2,300 million for the six months ended June 30, 2014 from $2,100 million in the same period of 2013. This increase is inclusive of $9 million of sales directly related to acquisitions. The Powertrain segment generates approximately 70% of its sales outside the United States and the resulting currency movements increased sales by $21 million. External sales volumes increased by $185 million, net of $15 million from customer price decreases, or 9%. This increase is driven by higher sales volumes and market share gain in all regions. In Europe, Powertrain sales increased by 6% or $63 million compared to an increase in European light vehicle of 4% and a decrease in commercial vehicle production of 3%. In North America, Powertrain sales increased by 12% or $79 million compared to an increase in both light vehicle and commercial vehicle production of 2% and 11% respectively. In ROW, as Powertrain's presence in the emerging light vehicle market continued to grow, Powertrain sales increased by $43 million or 13%, compared to an increase in both light vehicle and commercial vehicle production of 4% and 5%, respectively. When taking into account this regional and market mix of Powertrain sales, its sales therefore grew in excess of underlying market demand. Cost of products sold increased by $171 million to $2,003 million for the six months ended June 30, 2014 compared to $1,832 million in the same period of 2013. The increase in materials, labor and overhead as a direct result of external and inter-segment sales volumes/mix was $135 million plus a further $8 million of such costs related to acquisitions. The increase from foreign currency impacts of $20 million, increased depreciation of $10 million and unfavorable productivity of $8 million were partially offset by savings in materials and services sourcing costs of $10 million.



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Gross margin increased by $29 million to $297 million, or 12.9% of sales for the six months ended June 30, 2014 from $268 million, or 12.8% of sales in the same period of 2013. The favorable impact on margins due to external sales volumes/mix was $52 million, representing a conversion of 26% on the incremental sales. Unfavorable customer pricing of $15 million, increased depreciation of $10 million, unfavorable productivity of $8 million and an increase of unabsorbed fixed costs on inter-segment sales of $2 million were partially offset by savings from materials and services sourcing of $10 million, increased margin of $1 million from acquisitions and currency impacts of $1 million. Operational EBITDA increased by $41 million to $233 million or 10.1% of revenue for the six months ended June 30, 2014 from $192 million or 9.1% of revenue in the same period of 2013. The increase is attributable to $52 million of net favorable impact of external sales volumes/mix, savings from materials and services sourcing of $10 million, a $5 million increase in earnings from non-consolidated affiliates, and $2 million from acquisitions. These increases were partially offset by unfavorable customer pricing of $15 million, foreign currency of $6 million, unabsorbed fixed costs on inter-segment sales of $2 million and other reductions of $5 million.



Motorparts

Sales increased by $35 million, or 2%, to $1,510 million for the six months ended June 30, 2014 from $1,475 million in the same period of 2013. This increase is inclusive of $32 million directly related to the Affinia Chassis Business Acquisition. Excluding sales from the acquisition and favorable foreign currency impacts of $5 million, external sales volumes increased by $2 million, which was offset by customer price reductions of $6 million. On a regional basis, sales in North America increased by 1% which was driven by increased sales in the US and Canada aftermarket of 5%. This was partially offset by a decline in Mexico and export aftermarket sales as a result of general softness in those markets as well as a decline in OE sales in the region due to the planned exit of a customer supply contract. In Europe, sales decreased by 3% driven by lower demand in the aftermarket and service channels. Sales in ROW increased by 4% versus 2013 driven by stronger aftermarket demand. Cost of products sold increased by $20 million to $1,236 million for the six months ended June 30, 2014 compared to $1,216 million in the same period of 2013. Increases in materials, labor and overhead consist of $25 million from acquisitions, unfavorable productivity of $10 million, currency movements of $5 million, and increased depreciation of $1 million, were partially offset by materials and services sourcing savings of $16 million and $5 million as a direct result of external and inter-segment sales volumes/mix. Gross margin increased by $15 million to $274 million, or 18.1% of sales, for the six months ended June 30, 2014 compared to $259 million or 17.6% of sales, in the same period of 2013. Materials and services sourcing savings of $16 million, the favorable impact of sales volumes/mix of $9 million, and $7 million from acquisitions were partially offset by decreased productivity of $10 million, unfavorable customer pricing of $6 million, and increased depreciation of $1 million. Operational EBITDA increased by $6 million to $114 million for the six months ended June 30, 2014 from $108 million in the same period of 2013. Savings in materials and sourced products of $17 million, the favorable impact of sales volumes/mix of $8 million, increased equity earnings in non-consolidated affiliates of $2 million, $2 million from acquisitions, and currency movements of $1 million were partially offset by unfavorable productivity of $9 million, unfavorable customer pricing of $6 million, and other reductions of $9 million, primarily related to weaker performance in the wiper business. Selling, General and Administrative Expenses Selling, general and administrative expenses ("SG&A") were $376 million, or 10.3% of net sales, for the six months ended June 30, 2014 as compared to $368 million, or 10.8% of net sales, for the same period of 2013. The increase in SG&A costs is primarily attributable to the addition of SG&A costs from the Affinia Chassis Business Acquisition as well as project costs associated with strategic initiatives in Motorparts. The Company maintains technical centers throughout the world designed to integrate the Company's leading technologies into advanced products and processes, to provide engineering support for all of the Company's manufacturing sites, and to provide technological expertise in engineering and design development providing solutions for customers and bringing new, innovative products to market. Included in SG&A were research and development ("R&D") costs, including product and validation costs, of $93 million for the six months ended June 30, 2014 compared with $87 million for the same period of 2013. Interest Expense, Net Net interest expense was $53 million for the six months ended June 30, 2014 and 2013.



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Restructuring Activities The following is a summary of the Company's consolidated restructuring liabilities and related activity as of and for six months ended June 30, 2014: Total Reporting Total Powertrain Motorparts Segment Corporate Company (Millions of Dollars) Balance at January 1, 2014 $ 8$ 14$ 22$ 2$ 24 Provisions 3 4 7 1 $ 8 Payments (3 ) (6 ) (9 ) (1 ) $ (10 ) Balance at March 31, 2014 $ 8$ 12$ 20$ 2$ 22 Provisions 19 11 30 - 30 Payments (3 ) (5 ) (8 ) (1 ) (9 ) Balance at June 30, 2014 $ 24$ 18$ 42$ 1$ 43 In February 2013, the Company's Board of Directors approved evaluation of restructuring opportunities in order to improve operating performance. As such, the Company has initiated several programs and will continue to evaluate alternatives to align its business with executive management's strategy. During the second quarter of 2014, the Company continued consultation with works council for one of its French facilities to potentially cease operations. The Company has recorded a restructuring charge which is included in restructuring expense for three and six months ended June 30, 2014. Other (Expense) Income, Net The specific components of "Other (expense) income, net" for the six months ended June 30, 2014 are as follows: Six Months Ended June 30 2014 2013 (Millions of Dollars) Foreign currency exchange $ (5 )$ (2 ) Losses on sales of account receivables (3 ) (3 ) Adjustment of Chapter 11 accrual - 4 Third-party royalty income 3 4 Other (5 ) - $ (10 )$ 3 Income Taxes For the six months ended June 30, 2014, the Company recorded income tax expense of $(33) million on income from continuing operations before income taxes of $71 million. This compares to an income tax expense of $(24) million on income from continuing operations before income taxes of $106 million in the same period of 2013. Income tax expense for the six months ended June 30, 2014 differs from the U.S. statutory rate due primarily to pre-tax losses with no tax benefits, partially offset by pre-tax income taxed at rates lower than the U.S. statutory rate and income in jurisdictions with no tax expense due to offsetting valuation allowance changes. The income tax expense for the six months ended June 30, 2013 differs from the U.S. statutory rate due primarily to pre-tax income taxed at rates lower than the U.S. statutory rate and income in jurisdictions with no tax expense due to offsetting valuation allowance changes, partially offset by pre-tax losses with no tax benefits. During the three months ended March 31, 2014, the Company effectively settled tax positions through examination. As a result, $20 million of unrecognized tax benefits were resolved unfavorably with the taxing authority. On July 11, 2013, the Company became part of an affiliated group of corporations as defined in Section 1504 of the Internal Revenue Code of 1986, as amended, of which American Entertainment Properties Corp. ("AEP"), a wholly owned subsidiary of Icahn Enterprises, is the common parent. The Company subsequently entered into a Tax Allocation Agreement (the "Tax Allocation



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Agreement") with AEP. Pursuant to the Tax Allocation Agreement, AEP and the Company have agreed to the allocation of certain income tax items. The Company will join AEP in the filing of AEP's federal consolidated return and certain state consolidated returns. In those jurisdictions where the Company is filing consolidated returns with AEP, the Company will pay to AEP any tax it would have owed had it continued to file separately. To the extent that the AEP consolidated group is able to reduce its tax liability as a result of including the Company in its consolidated group, AEP will pay the Company an amount equal to 20% of such reduction and the Company will carryforward for its own use under the Tax Allocation Agreement 80% of the items that caused the tax reduction (the "Excess Tax Benefits"). While a member of the AEP affiliated group the Company will reduce the amounts it would otherwise owe AEP by the Excess Tax Benefits. Moreover, if the Company should ever become deconsolidated from AEP, AEP will reimburse the Company for any tax liability in post-consolidation years the Company would not have paid had it actually had the Excess Tax Benefits for its own use. The cumulative payments to the Company by AEP post-consolidation cannot exceed the cumulative reductions in tax to the AEP group resulting from its use of the Excess Tax Benefits. Separate return methodology will be used in determining income taxes Discontinued Operations In connection with its strategic planning process, the Company assesses its operations for market position, product technology and capability, and profitability. Those businesses determined by management not to have a sustainable competitive advantage are considered non-core and may be considered for divestiture or other exit activities. During 2013, the Company divested its sintered components operations located in France (first quarter event), its connecting rod manufacturing facility located in Canada (second quarter event), its camshaft foundry located in the United Kingdom (second quarter event) and its fuel pump business, which included an aftermarket business component and a manufacturing and research and development facility located in the United States (third quarter event). These divestitures have been presented as discontinued operations in the consolidated statements of operations. The Company recognized a loss from discontinued operations of $56 million (no income tax impact) during the six months ended June 30, 2013. Litigation and Environmental Contingencies For a summary of material litigation and environmental contingencies, refer to Note 15, Commitments and Contingencies, of the consolidated financial statements. Liquidity and Capital Resources Cash Flow Cash flow provided from operating activities was $161 million for the six months ended June 30, 2014 compared to cash flow used by operating activities of $116 million for the comparable period of 2013. The $45 million year-over-year increase is primarily attributable to a $26 million decrease in working capital outflow. The working capital improvement is primarily attributable to a year-over-year improvement in inventory of $41 million due to increased focus on the management of inventory levels. Cash flow used by investing activities was $335 million for the six months ended June 30, 2014 compared to $215 million for the comparable period of 2013. Capital expenditures of $173 million and $186 million for the six months ended June 30, 2014 and 2013, respectively, were required to support future sales growth and productivity improvements. During the six months ended June 30, 2014, there were $165 million of payments to acquire businesses, net of cash acquired, $17 million of which was paid to acquire the DZV Bearings Business and $140 million of which was paid for the Affinia Chassis Business Acquisition. The Company assumed $10 million of pre-existing debt associated with the DZV Bearings Business acquisition. During the six months ended June 30, 2013, there were $25 million of net payments related to business dispositions. Cash flow used by financing activities was $37 million for the six months ended June 30, 2014 compared to cash flow provided from financing activities of $26 million for the comparable period of 2013.



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Financing Activities On April 15, 2014, Federal-Mogul Holdings Corporation entered into a new tranche B term loan facility (the "New Tranche B Facility") and a new tranche C term loan facility (the "New Tranche C Facility," and together with the New Tranche B Facility, the "New Term Facilities"), which were arranged by Citigroup Global Markets Inc. and Credit Suisse Securities (USA) LLC (the "Term Arrangers"), and assumed all of the obligations of Federal-Mogul Corporation with respect to the Replacement Revolving Facility under the Credit Agreement (both defined below). The New Term Facilities were entered into, and the Replacement Revolving Facility was assumed, by Federal-Mogul Holdings Corporation pursuant to an amendment dated as of April 15, 2014 to the previously existing Term Loan and Revolving Credit Agreement dated December 27, 2007 among Federal-Mogul Corporation, the lenders party thereto, the Term Arrangers, Citibank, N.A., as Revolving Administrative Agent, Citibank, N.A., as Tranche B Term Administrative Agent, Credit Suisse AG, as Tranche C Term Administrative Agent, Citigroup Global Markets Inc., Credit Suisse Securities (USA) LLC and Wells Fargo Bank, N.A., as Joint Lead Arrangers and Joint Bookrunners with respect to the Revolving Facility and Wells Fargo Bank, N.A., as sole Documentation Agent with respect to the Revolving Facility (as amended, the "Credit Agreement"). Immediately following the closing of the New Term Facilities, Federal-Mogul Holdings Corporation contributed all of the net proceeds from the New Facilities to Federal-Mogul Corporation, and Federal-Mogul Corporation repaid its existing outstanding indebtedness as a borrower under the tranche B and tranche C term loan facilities. In accordance with FASB ASC Topic No. 405, Extinguishments of Liabilities, the Company recognized a $ 24 million non-cash loss on the extinguishment of debt attributable to the write-off of the unamortized fair value adjustment and unamortized debt issuance costs which is recorded in the line item "Loss on Debt Extinguishment" in the Company's Condensed Consolidated Statements of Operations. The New Term Facilities, among other things, (i) provides for aggregate commitments under the New Tranche B Facility of $700 million with a maturity date of April 15, 2018, (ii) provides for aggregate commitments under the New Tranche C Facility of $1.9 billion with a maturity date of April 15, 2021, (iii) increases the interest rates applicable to the New Facilities as described below, (iv) provides that for all outstanding letters of credit there is a corresponding decrease in borrowings available under the Replacement Revolving Facility, (v) provides that in the event that as of a particular determination date more than $700 million aggregate principal amount of existing term loans and certain related refinancing indebtedness will become due within 91 days of such determination date, the Replacement Revolving Facility will mature on such determination date, (vi) provides for additional incremental indebtedness, secured on a pari passu basis, of an unlimited amount of additional indebtedness if the Company meets a financial covenant incurrence test, and (vii) amends certain other restrictive covenants. Pursuant to the New Term Facilities, Federal-Mogul Holdings Corporation assumed all of the obligations of Federal-Mogul Corporation with respect to the Replacement Revolving Facility under the Credit Agreement. Advances under the New Tranche B Facility generally bear interest at a variable rate per annum equal to (i) the Alternate Base Rate plus a margin of 2.00% or (ii) the Adjusted LIBOR Rate plus a margin of 3.00%, subject, in each case, to a floor of 1.00%. Advances under the New Tranche C Facility generally bear interest at a variable rate per annum equal to (i) the Alternate Base Rate plus a margin of 2.75% or (ii) the Adjusted LIBOR Rate plus a margin of 3.75%, subject, in each case, to a minimum rate of 1.00% plus the applicable margin. Due to the refinancing of the Company's term loans, the backstop commitment letter provided to the Company on December 6, 2013 from High River Limited Partnership, an affiliate of Mr. Carl C. Icahn and the Company's largest stockholder, was terminated. On December 6, 2013, the Company entered into an amendment (the "Replacement Revolving Facility") of its Term Loan and Revolving Credit Agreement dated as of December 27, 2007 (as amended, the "Credit Agreement"), among the Company, the lenders party thereto, Citicorp USA, Inc., as Administrative Agent, JPMorgan Chase Bank, N.A., as Syndication Agent, and Wachovia Capital Finance Corporation and Wells Fargo Foothill, LLC, as Co-Documentation Agents, to amend its existing revolving credit facility to provide for a replacement revolving credit facility (the "Replacement Revolving Facility"). The Replacement Revolving Facility, among other things, (i) increased the aggregate commitments available under the Replacement Revolving Facility from $540 million to $550 million, (ii) extended the maturity date of the Replacement Revolving Facility to December 6, 2018, subject to certain limited exceptions described below, and (iii) amended the Company's borrowing base to provide the Company with additional liquidity. Advances under the Replacement Revolving Facility generally bear interest at a variable rate per annum equal to (i) the Alternate Base Rate (as defined in the Credit Agreement) plus an adjustable margin of 0.50% to 1.00% based on the average monthly availability under the Replacement Revolving Facility or (ii) Adjusted LIBOR Rate (as defined in the Credit Agreement) plus a margin of 1.50% to 2.00% based on the average monthly availability under the Replacement Revolving Facility. An unused commitment fee of 0.375% also is payable under the terms of the Replacement Revolving Facility.



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Due to the refinancing of the Company's term loans, the backstop commitment letter provided to the Company on December 6, 2013 from High River Limited Partnership, an affiliate of Mr. Carl C. Icahn and the Company's largest stockholder, was terminated. The Company's ability to obtain cash adequate to fund its needs depends generally on the results of its operations, restructuring initiatives, and the availability of financing. Management believes that cash on hand, cash flow from operations, and available borrowings under its New Facilities and its Replacement Revolving Facility will be sufficient to fund capital expenditures and meet its operating obligations through the end of 2014. In the longer term, the Company believes that its base operating potential, supplemented by the benefits from its announced restructuring programs, will provide adequate long-term cash flows. However, there can be no assurance that such initiatives are achievable in this regard. Off Balance Sheet Arrangements The Company does not have any material off-balance sheet arrangements. Other Liquidity and Capital Resource Items Federal-Mogul subsidiaries in Brazil, France, Germany, Italy and the United States are party to accounts receivable factoring and securitization facilities. Amounts factored under these facilities consist of the following:


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