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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 2002
--------------------------------------------------
Commission file number 1-15983
----------------------------------------------------------
ArvinMeritor, Inc.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Indiana 38-3354643
- --------------------------------------------------------------------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
2135 West Maple Road, Troy, Michigan 48084-7186
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(248) 435-1000
- --------------------------------------------------------------------------------
(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 X No
-------- --------
67,940,567 shares of Common Stock, $1.00 par value, of ArvinMeritor, Inc. were
outstanding on July 31, 2002.
ARVINMERITOR, INC.
INDEX
PART I. FINANCIAL INFORMATION:
Page
Item 1. Financial Statements: No.
Statement of Consolidated Income - - Three Months
and Nine Months Ended June 30, 2002 and 2001......................... 2
Consolidated Balance Sheet - -
June 30, 2002 and September 30, 2001................................. 3
Condensed Statement of Consolidated Cash Flows - -
Nine Months Ended June 30, 2002 and 2001............................. 4
Notes to Consolidated Financial Statements........................... 5
Item 2. Management's Discussion and Analysis
of Results of Operations and Financial Condition.......................... 17
Item 3. Quantitative and Qualitative Disclosures About
Market Risk............................................................... 24
PART II. OTHER INFORMATION:
Item 2. Changes in Securities and Use of Proceeds................................. 25
Item 5. Other Information......................................................... 25
Item 6. Exhibits and Reports on Form 8-K.......................................... 26
Part I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
ARVINMERITOR, INC.
STATEMENT OF CONSOLIDATED INCOME
(In millions, except per share amounts)
Three Months Ended Nine Months Ended
June 30, June 30,
-------------------- ----------------------
2002 2001 2002 2001
------- ------- ------- --------
(Unaudited)
Sales................................................... $ 1,883 $ 1,794 $ 5,136 $ 5,240
Cost of sales........................................... (1,662) (1,604) (4,578) (4,699)
------- ------- ------- --------
GROSS MARGIN............................................ 221 190 558 541
Selling, general and administrative................... (105) (104) (297) (302)
Goodwill amortization................................. - (6) - (18)
Restructuring costs................................... - 1 (15) (54)
Gain on sale of business.............................. 6 - 6 -
------- --------- ------- --------
OPERATING INCOME........................................ 122 81 252 167
Equity in earnings (losses) of affiliates............. - - (1) 9
Interest expense, net and other....................... (26) (33) (79) (106)
------- ------- ------- --------
INCOME BEFORE INCOME TAXES.............................. 96 48 172 70
Provision for income taxes............................ (31) (16) (55) (23)
Minority interests.................................... (3) (2) (9) (6)
------- ------- ------- --------
INCOME BEFORE CUMULATIVE
EFFECT OF ACCOUNTING CHANGE........................... 62 30 108 41
Cumulative effect of accounting change................ - - (42) -
------- ------- ------- --------
NET INCOME.............................................. $ 62 $ 30 $ 66 $ 41
======= ======= ======= ========
Basic earnings per share before cumulative
effect of accounting change........................... $ 0.93 $ 0.46 $ 1.63 $ 0.62
Cumulative effect of accounting change.................. - - (0.63) -
------- ------- ------- --------
Basic earnings per share................................ $ 0.93 $ 0.46 $ 1.00 $ 0.62
======= ======= ======= ========
Diluted earnings per share before cumulative
effect of accounting change........................... $ 0.91 $ 0.46 $ 1.61 $ 0.62
Cumulative effect of accounting change.................. - - (0.62) -
------- -------- ------- --------
Diluted earnings per share.............................. $ 0.91 $ 0.46 $ 0.99 $ 0.62
======= ======= ======= ========
Basic average common shares outstanding................. 66.8 65.9 66.2 66.3
======= ======= ======= ========
Diluted average common shares outstanding............... 68.0 65.9 67.0 66.3
======= ======= ======= ========
Cash dividends per common share......................... $ 0.10 $ 0.22 $ 0.30 $ 0.66
======= ======= ======= ========
See notes to consolidated financial statements.
2
ARVINMERITOR, INC.
CONSOLIDATED BALANCE SHEET
(in millions)
June 30, September 30,
2002 2001
------------------ ------------------
ASSETS (Unaudited)
------
CURRENT ASSETS:
Cash and cash equivalents................................................... $ 134 $ 101
Receivables (less allowance for doubtful accounts:
June 30, 2002, $16 and September 30, 2001, $18) ..................... 1,087 965
Inventories................................................................. 460 457
Other current assets........................................................ 240 232
------- -------
TOTAL CURRENT ASSETS.................................................... 1,921 1,755
------- -------
NET PROPERTY..................................................................... 1,161 1,200
NET GOODWILL (less accumulated amortization:
June 30, 2002, $74 and September 30, 2001, $73) ........................ 806 835
OTHER ASSETS..................................................................... 570 572
------- -------
TOTAL ASSETS............................................................ $ 4,458 $ 4,362
======= =======
LIABILITIES AND SHAREOWNERS' EQUITY
-----------------------------------
CURRENT LIABILITIES:
Short-term debt............................................................. $ 25 $ 94
Accounts payable............................................................ 1,136 1,054
Accrued compensation and benefits........................................... 241 184
Accrued income taxes........................................................ 55 26
Other current liabilities................................................... 265 314
------- -------
TOTAL CURRENT LIABILITIES............................................... 1,722 1,672
------- -------
LONG-TERM DEBT................................................................... 1,300 1,313
ACCRUED RETIREMENT BENEFITS...................................................... 424 459
OTHER LIABILITIES................................................................ 119 141
MINORITY INTERESTS............................................................... 63 69
PREFERRED CAPITAL SECURITIES..................................................... 39 57
SHAREOWNERS' EQUITY:.............................................................
Common stock (June 30, 2002, 71.0 shares issued and 67.9 outstanding;
September 30, 2001, 71.0 shares issued
and 66.5 outstanding).................................................. 71 71
Additional paid-in capital.................................................. 549 547
Retained earnings........................................................... 496 450
Treasury stock (June 30, 2002, 3.1 shares;
September 30, 2001, 4.5 shares) ....................................... (47) (69)
Unearned compensation....................................................... (13) (12)
Accumulated other comprehensive loss........................................ (265) (336)
------- -------
TOTAL SHAREOWNERS' EQUITY............................................... 791 651
------- -------
TOTAL LIABILITIES AND SHAREOWNERS' EQUITY............................... $ 4,458 $ 4,362
======= =======
See notes to consolidated financial statements.
3
ARVINMERITOR, INC.
CONDENSED STATEMENT OF CONSOLIDATED CASH FLOWS
(In millions)
Nine Months Ended
June 30,
-----------------------------
2002 2001
--------- ------------
(Unaudited)
OPERATING ACTIVITIES
Income before cumulative effect of accounting change............................ $ 108 $ 41
Adjustments to arrive at cash provided by
operating activities:
Depreciation and other amortization........................................ 144 144
Goodwill amortization...................................................... - 18
Restructuring costs, net of expenditures................................... 7 45
Gain of sale of business................................................... (6) -
Pension and retiree medical expense........................................ 58 41
Pension and retiree medical contributions.................................. (103) (80)
Sale of receivables........................................................ 3 100
Changes in assets and liabilities, excluding effects of
acquisitions, divestitures and foreign currency adjustments.............. 40 70
----- -----
CASH PROVIDED BY OPERATING ACTIVITIES.................................. 251 379
----- -----
INVESTING ACTIVITIES
Capital expenditures............................................................ (94) (154)
Proceeds from disposition of property and business.............................. 11 18
Other investing activities...................................................... (23) (27)
----- -----
CASH USED FOR INVESTING ACTIVITIES..................................... (106) (163)
----- -----
FINANCING ACTIVITIES
Net decrease in revolving debt.................................................. (494) (154)
Proceeds from issuance of notes................................................. 394 -
Purchase of preferred capital securities........................................ (18) (10)
Proceeds from exercise of stock options......................................... 20 -
Cash dividends.................................................................. (20) (44)
Purchases of treasury stock..................................................... - (31)
----- -----
CASH USED FOR FINANCING ACTIVITIES..................................... (118) (239)
----- -----
Effect of exchange rate changes on cash......................................... 6 (9)
----- -----
CHANGE IN CASH AND CASH EQUIVALENTS............................................. 33 (32)
CASH AND CASH EQUIVALENTS
AT BEGINNING OF PERIOD....................................................... 101 116
----- -----
CASH AND CASH EQUIVALENTS AT END OF PERIOD...................................... $ 134 $ 84
===== =====
See notes to consolidated financial statements.
4
ARVINMERITOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. ArvinMeritor, Inc. (the company or ArvinMeritor) is a leading global
supplier of a broad range of integrated systems, modules and components
serving light vehicle, commercial truck, trailer and specialty original
equipment manufacturers and certain aftermarkets. The company also provides
coil coating applications to the transportation, appliance, construction
and furniture industries. The consolidated financial statements are those
of the company and its consolidated subsidiaries.
In the opinion of the company, the unaudited financial statements contain
all adjustments, consisting solely of adjustments of a normal recurring
nature, necessary to present fairly the financial position, results of
operations and cash flows for the periods presented. These statements
should be read in conjunction with the company's financial statements
included in the Annual Report on Form 10-K for the fiscal year ended
September 30, 2001. The results of operations for the three-month and
nine-month periods ended June 30, 2002 are not necessarily indicative of
the results for the full year.
It is the company's practice for each interim reporting period to make an
estimate of the effective tax rate expected to be applicable for the full
fiscal year. The rate so determined is used in providing for income taxes
on a year-to-date basis.
The company's fiscal year ends on the Sunday nearest September 30. The
company's fiscal quarters end on the Sundays nearest December 31, March 31,
and June 30. All year and quarter references relate to the company's fiscal
year and fiscal quarters unless otherwise stated.
Basic earnings per share are based upon the weighted average number of
shares outstanding during each quarter. Diluted earnings per share assumes
the exercise of common stock options when dilutive and the impact of
restricted stock.
Certain prior period amounts have been reclassified to conform with current
period presentation.
2. In August 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 144 (SFAS 144), "Accounting
for the Impairment or Disposal of Long-Lived Assets." The new standard
requires an impairment loss to be recognized if the carrying value of a
long-lived asset or asset group is greater than the future undiscounted
cash flows, and broadens the definition of discontinued operations to
include a component of a segment. SFAS 144 is effective for fiscal years
beginning after December 15, 2001, and interim periods within those fiscal
years, with early adoption encouraged. The company does not expect the
adoption of SFAS 144 to have a significant impact on its financial position
or results of operations.
5
ARVINMERITOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3. In June 2001, the FASB issued Statement of Financial Accounting Standards
No. 142 (SFAS 142), "Goodwill and Other Intangible Assets." Effective
October 1, 2001, the company adopted SFAS 142, which requires goodwill to
be subject to an annual impairment test, or more frequently if certain
indicators arise, and also eliminates goodwill amortization.
As required by this standard, the company reviewed the fair values of each
of its reporting units using discounted cash flows and market multiples. As
a result of this review, the company recorded an impairment loss on
goodwill as a cumulative effect of accounting change for its coil coating
operations (classified as "other" for segment reporting) of $42 million
($42 million after-tax, or $0.62 per diluted share) in the first quarter of
fiscal 2002. Increased competition, consolidation in the coil coating
applications industry and the struggling U. S. steel market caused a
decrease in the fair value of this business. There have been no changes in
the carrying value of goodwill since September 30, 2001, other than the
impairment loss on goodwill for the company's coil coating operations and
fluctuation due to changes in foreign currency exchange rates.
The company's income before cumulative effect of accounting change and
diluted earnings per share before cumulative effect of accounting change
would have been as follows had the company been accounting for its goodwill
under SFAS 142 for the three- and nine-month periods ended June 30, 2001
(in millions, except per share amounts):
Three Months Nine Months
Ended Ended
June 30, June 30,
--------------------- --------------------
2002 2001 2002 2001
------ ------ ------ ------
Reported income before cumulative effect of
accounting change................................. $ 62 $ 30 $ 108 $ 41
Add back goodwill amortization expense, net of tax..... - 5 - 15
----- ----- ----- -----
Adjusted income before cumulative effect of
accounting change................................. $ 62 $ 35 $ 108 $ 56
===== ===== ===== =====
Reported basic earnings per share before
cumulative effect of accounting change............ $0.93 $0.46 $1.63 $0.62
Add back goodwill amortization expense, net of tax..... - 0.07 - 0.22
----- ----- ----- -----
Adjusted basic earnings per share before
cumulative effect of accounting change............ $0.93 $0.53 $1.63 $0.84
===== ===== ===== =====
Reported diluted earnings per share before
cumulative effect of accounting change............ $0.91 $0.46 $1.61 $0.62
Add back goodwill amortization expense, net of tax..... - 0.07 - 0.22
----- ----- ----- -----
Adjusted diluted earnings per share before
cumulative effect of accounting change............ $0.91 $0.53 $1.61 $0.84
===== ===== ===== =====
Information regarding the company's other intangible assets, which includes
trademarks, patents and licenses, is included in Note 8, and goodwill by
segment is included in Note 14.
6
ARVINMERITOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
4. The company sells substantially all of the trade receivables of certain
subsidiaries to ArvinMeritor Receivables Corporation (ARC), a wholly owned
subsidiary of the company. ARC has entered into an agreement to sell an
undivided interest in up to $250 million of the receivables to a group of
banks. As of June 30, 2002 and September 30, 2001, $214 million and $211
million, respectively, of trade receivables had been sold and are excluded
from receivables in the consolidated balance sheet. The company has no
retained interest in the receivables sold, but does perform collection and
administrative functions. The receivables were sold at fair market value
and a discount on the sale was recorded in interest expense, net and other.
A discount of $1 million and $5 million was recorded, in the three- and
nine-month periods ended June 30, 2002, respectively. In the three- and
nine-month periods ended June 30, 2001, the discount recorded was $2
million. As of June 30, 2002 and September 30, 2001, the banks had a
preferential interest in $249 million and $202 million, respectively, of
the remainder of the receivables held at ARC to secure the obligation under
the asset securitization facility.
5. In the first-quarter of fiscal 2002, the company recorded a restructuring
charge of $15 million ($10 million after-tax, or $0.15 per diluted share)
for severance and other employee costs related to a net reduction of
approximately 450 employees. As of June 30, 2002, approximately 400
employees had been terminated under this restructuring action, and $7
million of restructuring reserves remained in the consolidated balance
sheet.
During fiscal 2001, the company recorded a net restructuring charge of $67
million ($45 million after-tax, or $0.68 per diluted share). The
restructuring charge was net of $4 million of restructuring reserves
established in fiscal 2000 that were reversed due to a change in
circumstances, and $12 million of restructuring reserves established in
fiscal 2001 that were reversed primarily due to actions taken to minimize
severance costs related to cost-reduction programs in Europe. The fiscal
2001 net charge includes severance and other employee costs of $48 million
related to a net reduction of approximately 1,350 employees, with the
balance primarily associated with facility related costs from the
rationalization of operations. As of June 30, 2002, approximately 1,275
employees had been terminated under this restructuring action, and $11
million of restructuring reserves remained in the consolidated balance
sheet.
7
ARVINMERITOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
A summary of the restructuring activity as of June 30, 2002 is as follows
(in millions):
Employee
Termination Asset
Benefits Impairment Other Total
------------ ----------- --------- ----------
Fiscal 2001 original charge................. $ 60 $ 19 $ 4 $ 83
Reversal of charge in fiscal 2001........... (12) - - (12)
Write-down of assets........................ - (19) - (19)
Cash payments through 6/30/02............... (37) - (4) (41)
--------- --------- --------- ---------
Subtotal.............................. 11 - - 11
--------- --------- --------- ---------
Fiscal 2002 first quarter charge............ 15 - - 15
Cash payments through 6/30/02............... (8) - - (8)
--------- --------- --------- ---------
Subtotal.............................. 7 - - 7
--------- --------- --------- ---------
Reserve balance at 6/30/02.................. $ 18 $ - $ - $ 18
========= ========= ========= =========
In fiscal 2001, the company also recorded $34 million of restructuring
costs that were incurred as a result of the ArvinMeritor merger. These
costs include $17 million related to a net reduction of approximately 1,200
employees, with the balance primarily associated with facility related
costs from the rationalization of operations. As of June 30, 2002,
approximately 1,175 employees had been terminated under this restructuring
action, and $3 million of reserves remained in the consolidated balance
sheet.
All restructuring actions related to the fiscal 2001 and 2002 restructuring
charges were substantially complete as of June 30, 2002.
6. Inventories are summarized as follows (in millions):
June 30, September 30,
2002 2001
------------------ --------------------
Finished goods.............................................. $ 221 $ 238
Work in process............................................. 129 118
Raw materials, parts and supplies........................... 161 152
--------- ----------
Total.................................................. 511 508
Less allowance to adjust the carrying value of
certain inventories to a LIFO basis....................... (51) (51)
--------- ----------
Inventories........................................... $ 460 $ 457
========= ==========
8
ARVINMERITOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
7. Other Current Assets are summarized as follows (in millions):
June 30, September 30,
2002 2001
---------- -------------
Current deferred income taxes............. $ 132 $ 138
Customer tooling.......................... 37 30
Asbestos-related recoveries............... 24 24
Prepaid and other......................... 47 40
--------- ----------
Other Current Assets................. $ 240 $ 232
========= ==========
8. Other Assets are summarized as follows (in millions):
June 30, September 30,
2002 2001
---------- -------------
Investments in affiliates................. $ 161 $ 186
Long-term deferred income taxes........... 121 119
Prepaid pension costs..................... 97 87
Net capitalized computer software costs... 43 42
Asbestos-related recoveries............... 33 36
Trademarks................................ 23 23
Fair value of interest rate swaps......... 18 -
Patents and licenses (less accumulated
amortization: June 30, 2002, $4 and
September 30, 2001, $3)................. 12 13
Other..................................... 62 66
--------- ----------
Other Assets......................... $ 570 $ 572
========= ==========
The company's trademarks, which were determined to have an indefinite life,
are not amortized, and patents and licenses are amortized over their
contractual lives. The company anticipates amortization expense for patents
and licenses of approximately $2 million per year for fiscal years 2002
through 2004 and approximately $1 million per year for fiscal years 2005
through 2007.
9
ARVINMERITOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
9. Other Current Liabilities are summarized as follows (in millions):
June 30, September 30,
2002 2001
-------- ------------
Accrued product warranties................ $ 77 $ 94
Accrued taxes other than income taxes..... 40 48
Accrued interest expense.................. 29 6
Asbestos-related reserves................. 24 24
Accrued restructuring .................... 21 46
Environmental reserves.................... 8 18
Other..................................... 66 78
--------- ----------
Other Current Liabilities............ $ 265 $ 314
========= ==========
10. Other Liabilities are summarized as follows (in millions):
June 30, September 30,
2002 2001
--------- ------------
Asbestos-related reserves................. $ 42 $ 47
Environmental reserves.................... 25 25
Deferred payments......................... 18 29
Other..................................... 34 40
--------- ----------
Other Liabilities.................... $ 119 $ 141
========= ==========
11. Long-Term Debt, net of discount where applicable, is summarized as follows
(in millions):
June 30, September 30,
2002 2001
--------- ------------
6 3/4 percent notes due 2008.............. $ 100 $ 100
7 1/8 percent notes due 2009.............. 150 150
6.8 percent notes due 2009................ 498 498
8 3/4 percent notes due 2012.............. 400 -
Bank revolving credit facilities.......... 122 495
Lines of credit and other................. 37 164
Fair value adjustment of notes............ 18 -
--------- -----------
Subtotal............................... 1,325 1,407
Less: current maturities................. (25) (94)
--------- -----------
Long-Term Debt................... $ 1,300 $ 1,313
========= ===========
10
ARVINMERITOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The company has two unsecured credit facilities: a three-year, $400-million
revolving credit facility and a five-year, $750-million revolving credit
facility. Both facilities mature on June 27, 2005.
The company also has $50 million of unsecured lines of credit and a
commercial paper program with authorized borrowings of up to $1 billion.
Interest rates applicable to the company's commercial paper borrowings are
currently higher than the cost of other available sources of financing, and
no commercial paper borrowings were outstanding as of June 30, 2002 or
September 30, 2001. Included in lines of credit and other at June 30, 2002
and September 30, 2001 were approximately $10 million and $50 million,
respectively, of borrowings from a non-consolidated affiliate.
On April 12, 2001, the company filed a shelf registration statement with
the Securities and Exchange Commission registering $750 million aggregate
principal amount of debt securities that may be offered in one or more
series on terms to be determined at the time of sale. On February 26, 2002,
the company completed a public offering of debt securities under the shelf
registration consisting of $400 million 10-year fixed-rate 8 3/4 percent
notes due March 1, 2012. The notes were offered to the public at 100
percent of their principal amount, and the proceeds, net of underwriting
discounts and commissions, were used to repay existing indebtedness under
the company's revolving credit facilities. On July 1, 2002, the company
completed a second public offering of debt securities under the shelf
registration consisting of $200 million 5-year fixed-rate 6 5/8 percent
notes due June 15, 2007. The notes were offered to the public at 99.684
percent of their principal amount, and the proceeds, net of underwriting
discounts and commissions, were used to repay outstanding indebtedness
under the company's revolving credit facilities and for general corporate
purposes.
The company entered into two interest rate swap agreements in March 2002.
These swap agreements, in effect, converted $300 million notional amount of
the company's 8 3/4 percent notes and $100 million notional amount of the
company's 6.8 percent notes to variable interest rates. The swaps have been
designated as fair value hedges and the impact of the changes in their fair
values is offset by an equal and opposite change in the carrying value of
the related notes. The fair value of the swaps was $18 million as of June
30, 2002, and is recorded in other assets, with an offsetting amount
recorded in long-term debt. Under the terms of the swap agreements, the
company receives a fixed rate of interest of 8.75 percent and 6.8 percent
on notional amounts of $300 million and $100 million, respectively, and
pays variable rates based on 3-month LIBOR plus a weighted-average spread
of 2.51 percent. The payments under the agreements coincide with the
interest payment dates on the hedged debt instruments, and the difference
between the amounts paid and received is included in interest expense, net
and other.
11
ARVINMERITOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
12. Accrued Retirement Benefits consisted of the following (in millions):
June 30, September 30,
2002 2001
-------- -------------
Accrued retirement medical costs .......... $ 311 $ 318
Accrued pension costs ..................... 131 158
Other ..................................... 32 33
----- -----
Subtotal .............................. 474 509
Less: current liability ................... (50) (50)
----- -----
Accrued Retirement Benefits......... $ 424 $ 459
===== =====
13. The company uses foreign exchange contracts to offset the effect of
exchange rate fluctuations on foreign currency denominated payables and
receivables. These contracts help minimize the risk of loss from changes in
exchange rates, and are generally of short duration (less than three
months). The foreign currency denominated payables and receivables are
remeasured on a quarterly basis and the foreign exchange contracts are
utilized to help offset the earnings impact of the remeasurement. The
company has elected not to designate the foreign exchange contracts as
hedges. Therefore, change in the fair value of the foreign exchange
contracts is recognized in operating income. The net income impact of
recording these items in the three- and nine-month periods ended June 30,
2002 and 2001 did not have a significant effect on the results of
operations.
Foreign exchange forward contracts were also utilized to hedge the purchase
of equipment payable in foreign currency and were designated as fair value
hedges of the firm commitment. The fair value of the firm commitment was
recorded as an asset, the value of the forward contracts was recorded as a
liability, and there was no impact to earnings during the three- and
nine-month periods ended June 30, 2002 and 2001. The value of both the firm
commitment and the foreign exchange forward contracts are determined using
the foreign exchange forward rates, with all other critical terms of the
forward contracts and the hedged transaction being the same. Therefore, the
company has determined the change in fair value attributable to the risk
being hedged is expected to be completely offset by the change in fair
value of the forward contracts. Future assessments of hedge effectiveness
will include verifying and documenting if the critical terms of the forward
contracts and the firm commitment have changed.
The company's financial instruments include cash and cash equivalents,
short- and long-term debt, interest rate swaps and foreign exchange
contracts. As of June 30, 2002, the carrying values of the company's
financial instruments approximated their fair values based on prevailing
market prices and rates. The notional amount of outstanding foreign
exchange contracts aggregated $59 million at June 30, 2002 and $68 million
at September 30, 2001. It is the policy of the company not to enter into
derivative instruments for speculative purposes.
12
ARVINMERITOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
14. ArvinMeritor has three reportable operating segments: Light Vehicle Systems
(LVS), Commercial Vehicle Systems (CVS), and Light Vehicle Aftermarket
(LVA). LVS is a major supplier of aperture systems (primarily roof, door
and access control systems and motion control products), undercarriage
systems (primarily suspension, ride control and wheel products) and air and
emission systems for passenger cars, light trucks and sport utility
vehicles to original equipment manufacturers. CVS is a leading supplier of
drivetrain systems and components, including axles, brakes, drivelines and
ride control products, for medium- and heavy-duty trucks, trailers and
off-highway equipment and specialty vehicles. LVA supplies exhaust, ride
control, filter products and accessories to the light vehicle aftermarket.
Business units that are not focused on automotive products are classified
as "Other." The company's coil coating operation is the primary component
of this classification.
Segment information is summarized as follows (in millions):
Three Months Ended Nine Months Ended
June 30, June 30,
------------------ -----------------
2002 2001 2002 2001
---- ---- ---- ----
Sales:
Light Vehicle Systems ..................... $ 992 $ 961 $ 2,757 $ 2,782
Commercial Vehicle Systems ................ 622 559 1,637 1,694
Light Vehicle Aftermarket ................. 226 235 625 648
Other ..................................... 43 39 117 116
------- ------- ------- -------
Total ...................... $ 1,883 $ 1,794 $ 5,136 $ 5,240
======= ======= ======= =======
Operating Income:
Light Vehicle Systems ..................... $ 60 $ 61 $ 157 $ 175
Commercial Vehicle Systems ................ 35 4 62 26
Light Vehicle Aftermarket ................. 19 17 40 28
Other ..................................... 2 (2) 2 (8)
------- ------- ------- -------
Segment operating income ... 116 80 261 221
Restructuring costs ....................... - 1 (15) (54)
Gain on sale of business .................. 6 - 6 -
------- ------- ------- -------
Operating income ........... 122 81 252 167
Equity in earnings (losses) of affiliates.. - - (1) 9
Interest expense, net and other............ (26) (33) (79) (106)
------- ------- ------- -------
Income before income taxes ................ 96 48 172 70
Provision for income taxes ................ (31) (16) (55) (23)
Minority interests ........................ (3) (2) (9) (6)
------- ------- ------- -------
Income before cumulative effect of
accounting change ....................... $ 62 $ 30 $ 108 $ 41
======= ======= ======= =======
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ARVINMERITOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The carrying value of goodwill for the company's segments is summarized
as follows (in millions):
June 30, September 30,
2002 2001
--------- -------------
Light Vehicle Systems..................... $ 225 $ 221
Commercial Vehicle Systems................ 407 400
Light Vehicle Aftermarket................. 174 172
Other..................................... - 42
--------- ----------
Net Goodwill......................... $ 806 $ 835
========= ==========
15. Comprehensive income (loss) is summarized as follows (in millions):
Three Months Ended Nine Months Ended
June 30, June 30,
------------------ -----------------
2002 2001 2002 2001
---- ---- ---- ----
Net income................................ $ 62 $ 30 $ 66 $ 41
Foreign currency translation.............. 75 (28) 71 (61)
------ ------ ------ -----
Comprehensive income (loss)............... $ 137 $ 2 $ 137 $ (20)
====== ====== ====== =====
16. Federal, state and local requirements relating to the discharge of
substances into the environment, the disposal of hazardous wastes and other
activities affecting the environment have, and will continue to have, an
impact on the manufacturing operations of the company. Thus far, compliance
with environmental requirements and resolution of environmental claims has
been accomplished without material effect on the company's business,
financial condition or results of operations.
The company has been designated as a potentially responsible party at 8
Superfund sites, excluding sites as to which the company's records disclose
no involvement or as to which the company's potential liability has been
finally determined. Management estimates the total, reasonably possible
costs the company could incur for the remediation of Superfund sites at
June 30, 2002, to be approximately $32 million, of which $12 million is
recorded as a liability. In addition to the Superfund sites, various other
lawsuits, claims and proceedings have been asserted against the company,
alleging violations of federal, state and local environmental protection
requirements, or seeking remediation of alleged environmental impairments,
principally at previously disposed-of properties. For these matters,
management has estimated the total, reasonably possible costs the company
could incur at June 30, 2002, to be approximately $48 million, of which $21
million is recorded as a liability. A portion of the total $33 million
environmental-related reserves is included in current liabilities with the
majority recorded in noncurrent liabilities (see Notes 9 and 10).
14
ARVINMERITOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Based on its assessment, management believes that the company's
expenditures for environmental capital investment and remediation necessary
to comply with present regulations governing environmental protection and
other expenditures for the resolution of environmental claims will not have
a material adverse effect on the company's business, financial condition or
results of operations. Management cannot assess the possible effect of
compliance with future requirements.
Maremont Corporation ("Maremont", a subsidiary of the company) and many
other companies are defendants in suits brought by individuals claiming
personal injuries as a result of exposure to asbestos-containing products.
Maremont manufactured friction products containing asbestos from 1953
through 1977, when it sold its friction product business. Arvin acquired
Maremont in 1986. During fiscal years 1996 through 2001, Maremont paid
approximately $40 million to address asbestos-related claims, substantially
all of which were reimbursed by insurance.
Maremont's asbestos-related reserves and corresponding asbestos-related
recoveries are summarized as follows (in millions):
June 30, September 30,
2002 2001
-------- -------------
Unbilled committed settlements............ $ 10 $ 12
Pending claims............................ 47 48
Shortfall and other....................... 9 11
-------- --------
Total asbestos-related reserves........ $ 66 $ 71
======== ========
Asbestos-related recoveries............... $ 57 $ 60
======== ========
A portion of the asbestos-related recoveries and reserves are included in
current assets and liabilities, with the majority of the amounts recorded
in noncurrent assets and liabilities (see Notes 7 through 10).
The unbilled committed settlements reserve relates to committed settlements
that Maremont agreed to pay when Maremont participated in the Center for
Claims Resolution (the "CCR"). Maremont shared in the payments of defense
and indemnity costs of asbestos-related claims with other CCR members. The
CCR handled the resolution and processing of asbestos claims on behalf of
its members until February 1, 2001, when it was reorganized and
discontinued negotiating shared settlements. Since that time, Maremont has
hired its own litigation counsel and is committed to examining the merits
of each asbestos-related claim. In addition, Maremont now utilizes Peterson
Asbestos Claims Enterprise for claims processing and insurance invoicing.
15
ARVINMERITOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Maremont had approximately 34,700 and 27,500 pending asbestos-related
claims at June 30, 2002 and September 30, 2001, respectively. Although
Maremont has been named in these cases, in the cases where actual injury
has been alleged, very few claimants have established that a Maremont
product caused their injuries. For purposes of establishing reserves for
pending asbestos-related claims, Maremont estimates its defense costs and
indemnity based on the history and nature of filed claims to date and
Maremont's experience since February 1, 2001.
Several former members of the CCR have filed for bankruptcy protection, and
these members have failed, or may fail, to pay certain financial
obligations with respect to settlements that were reached while they were
CCR members. Maremont is subject to claims for payment of a portion of
these defaulted member shares ("shortfall"). In an effort to resolve the
affected settlements, Maremont has entered into negotiations with
plaintiffs' attorneys, and an estimate of Maremont's obligation for the
shortfall is included in the total asbestos-related reserves. In addition,
Maremont and its insurers are engaged in legal proceedings to determine
whether existing insurance coverage should reimburse any potential
liability related to this issue.
Maremont has insurance that reimburses a substantial portion of the costs
incurred defending against asbestos-related claims. The coverage also
reimburses Maremont for any indemnity paid on those claims. The coverage is
provided by several insurance carriers based on the insurance agreements in
place. Based on its assessment of the history and nature of filed claims to
date, and of Maremont's insurance carriers, management believes that
existing insurance coverage is adequate to cover substantially all costs
relating to pending and future asbestos-related claims.
The amounts recorded for the asbestos-related reserves and recoveries from
insurance companies are based upon assumptions and estimates derived from
currently known facts. All such estimates of liabilities for
asbestos-related claims are subject to considerable uncertainty because
such liabilities are influenced by variables that are difficult to predict.
If the assumptions with respect to the nature of pending claims, the cost
to resolve claims and the amount of available insurance prove to be
incorrect, the actual amount of Maremont's liability for asbestos-related
claims, and the effect on the company, could differ materially from current
estimates.
Maremont has not accrued reserves for unknown claims that may be asserted
against it in the future. Maremont does not have sufficient information to
make a reasonable estimate of its potential liability for asbestos-related
claims that may be asserted against Maremont in the future.
Various other lawsuits, claims and proceedings have been or may be
instituted or asserted against the company, relating to the conduct of its
business, including those pertaining to product liability, intellectual
property, safety and health, and employment matters. Although the outcome
of litigation cannot be predicted with certainty, and some lawsuits, claims
or proceedings may be disposed of unfavorably to the company, management
believes the disposition of matters that are pending will not have a
material adverse effect on the company's business, financial condition or
results of operations.
16
ARVINMERITOR, INC.
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
RESULTS OF OPERATIONS
Fiscal 2002 Third Quarter Compared to Fiscal 2001 Third Quarter
Sales for the third quarter of fiscal 2002 were $1,883 million, an increase of
$89 million, or 5 percent, as compared to last year's third quarter results. The
sales increase was driven primarily by the Commercial Vehicle Systems (CVS)
segment, which benefited from stronger build rates for Class 8 trucks in the
U.S. and Canada during the third quarter.
Effective October 1, 2001, the company adopted Statement of Financial Accounting
Standards No. 142 (SFAS 142), "Goodwill and Other Intangible Assets," which
requires goodwill to be subject to an annual impairment test and also
eliminates goodwill amortization. The adoption of the new accounting standard
eliminated goodwill amortization expense of $6 million ($5 million after-tax, or
$0.07 per diluted share) for the third quarter of fiscal 2002.
Third-quarter fiscal 2002 operating income was $122 million, compared to $81
million in the third quarter of fiscal 2001. Operating income includes a gain on
the sale of the company's exhaust accessories manufacturing operations of $6
million ($4 million after-tax, or $0.06 per diluted share) for the third quarter
of fiscal 2002 and a net favorable adjustment of $1 million ($1 million
after-tax, or $0.02 per diluted share) relating to the company's restructuring
actions for the third quarter of fiscal 2001.
Operating income for the third quarter of fiscal 2002 was $116 million, before
the gain on the sale of a business, compared to $80 million, before
restructuring costs, for the same period last year, an increase of 45 percent.
After adjusting for goodwill amortization expense of $6 million in 2001,
operating income increased by $30 million, from $86 million. Operating margin
before the gain on the sale of a business and restructuring costs, improved to
6.2 percent, up from 4.5 percent in the prior year's third quarter (4.8 percent
after adjusting for goodwill amortization expense). Contributing to the margin
increase was the favorable impact of higher volumes and cost-reduction and
restructuring activities that have lowered the company's fixed-cost structure.
Equity in earnings of affiliates was zero for the third quarter of fiscal 2002
and fiscal 2001. Interest expense, net and other was $26 million for the third
quarter of fiscal 2002, a decrease of $7 million from the same period last year,
primarily due to reduced debt levels and the favorable interest rate
environment.
The third-quarter effective tax rate was 32 percent. The company expects the
full-year effective tax rate to approximate the third-quarter rate, which is up
slightly from the full-year effective tax rate for fiscal year 2001 of 31
percent, as adjusted to remove the effects of goodwill amortization.
Net income for the third quarter of fiscal 2002 was $62 million, or $0.91 per
diluted share, compared to $30 million, or $0.46 per diluted share, in the same
period last year ($35 million, or $0.53 per diluted share adjusted to exclude
goodwill amortization expense). Before the gain on the sale of a business,
discussed above, net income for fiscal 2002 was $58 million, or $0.85 per
diluted share, up from $29 million (before the net favorable adjustment relating
to restructuring actions discussed above), or $0.44 per diluted share, for the
same period last year ($34 million, or $0.51 per diluted share adjusted to
exclude goodwill amortization expense).
17
ARVINMERITOR, INC.
Light Vehicle Systems (LVS) sales were $992 million, up $31 million, or 3
percent, from the third quarter of fiscal 2001. Stronger light vehicle
production in North America contributed to the sales increase. Operating income
was $60 million, a decrease of $1 million from last year's third quarter.
Operating margin fell to 6.0 percent from 6.3 percent in last year's third
quarter (6.6 percent after excluding goodwill amortization expense of $2
million). LVS continues to implement cost-reduction initiatives to offset the
pricing pressures from the vehicle manufacturers. The pace of implementing
planned engineering cost-reductions, however, has lagged behind recent price
reductions. Higher engineering costs, associated with new product development,
also contributed to the operating margin decline.
CVS sales were $622 million, up $63 million, or 11 percent, from last year's
third quarter. The increase in Class 8 truck production in the U.S. and Canada
was the major factor in the sales increase. Operating income increased to $35
million, compared to $4 million in the third quarter of fiscal 2001, and
operating margin improved to 5.6 percent, up from 0.7 percent in last year's
third quarter (1.3 percent after excluding goodwill amortization expense of $3
million). A lower fixed-cost structure resulting from restructuring programs and
other cost-reduction actions, coupled with the higher sales, drove the
significant operating margin improvement.
Light Vehicle Aftermarket (LVA) sales were $226 million, down $9 million, or 4
percent, from last year's third quarter. LVA continues to experience lower
demand in exhaust and shock absorber product lines. Improved pricing and ongoing
cost-reduction activities have allowed LVA to increase its operating margin to
8.4 percent, as compared to 7.2 percent in the prior year's third quarter (7.7
percent after excluding goodwill amortization expense of $1 million).
Nine Months Ended June 30, 2002 Compared to Nine Months Ended June 30, 2001
For the first nine months of fiscal 2002, sales were $5,136 million, a decrease
of $104 million, or 2 percent, compared to the same period last year. The sales
decline was driven primarily by lower build rates in the CVS segment.
The adoption of SFAS 142 eliminated goodwill amortization expense of $18 million
($15 million after-tax, or $0.22 per diluted share) for the first nine months of
fiscal year 2002 and will eliminate $24 million ($20 million after-tax, or $0.30
per diluted share) for the full year.
18
ARVINMERITOR, INC.
Operating income for the first nine months of fiscal 2002 was $252 million,
compared to $167 million in the same period last year. Operating income for the
first nine months of fiscal 2002 included restructuring costs of $15 million
($10 million after-tax, or $0.15 per diluted share) and a gain on the sale of
the company's exhaust accessories manufacturing operations of $6 million ($4
million after-tax, or $0.06 per diluted share). Operating income for the first
nine months of fiscal 2001 included net restructuring charges of $54 million
($35 million after-tax, or $0.53 per diluted share).
The first-quarter fiscal 2002 restructuring charge of $15 million was related to
employee and other severance costs for approximately 450 salaried employees. The
company expects to recover these costs in less than one year and estimates these
actions, when fully implemented, will reduce annual operating costs by
approximately $24 million ($16 million after-tax). The company's LVS business is
expected to account for approximately 50 percent of the annual savings, CVS
business about 42 percent, and LVA and other about 8 percent.
Operating income before the gain on the sale of a business and restructuring
costs, discussed above, was $261 million for the first nine months of fiscal
2002, an increase of $40 million, compared to $221 million for the same period
last year. This reflects an operating margin of 5.1 percent, up from 4.2 percent
last year (4.6 percent after excluding goodwill amortization expense). The
company has been able to improve its operating margins, despite a decline in
sales, through savings generated by cost-reduction initiatives and restructuring
programs.
Equity in losses of affiliates for the first nine months of fiscal 2002 was $1
million, a decline of $10 million, compared to the same period last year,
primarily due to lower earnings from commercial vehicle affiliates. Interest
expense, net and other, was $79 million for the first nine months of fiscal
2002, a decrease of $27 million, or 25 percent, compared to the same period last
year, as a result of reduced debt levels and the favorable interest rate
environment. The company has used cash of $118 million to reduce debt levels
since September 30, 2001.
The effective tax rate for the first nine months of fiscal 2002 was 32 percent.
The company expects the full-year effective tax rate to approximate this rate,
which is up slightly from the full-year effective tax rate for fiscal year 2001
of 31 percent, as adjusted to exclude the effects of goodwill amortization.
As required by SFAS 142, "Goodwill and Other Intangible Assets," the company
reviewed the fair values of each of its reporting units using discounted cash
flows and market multiples. As a result of this review, the company recorded an
impairment loss on goodwill as a cumulative effect of accounting change for its
coil coating operations (classified as "other" for segment reporting) of $42
million ($42 million after-tax, or $0.62 per diluted share) in the first quarter
of fiscal 2002. Increased competition, consolidation in the coil coating
applications industry and the struggling U.S. steel market caused a decrease in
the fair value of this business.
Income before cumulative effect of accounting change was $108 million for the
first nine months of fiscal 2002, or $1.61 per diluted share, as compared to $41
million or $0.62 per diluted share ($56 million, or $0.84 per diluted share
adjusted to exclude goodwill amortization expense). Net income before the gain
on the sale of a business, restructuring costs and the cumulative effect of
accounting change, was $114 million, or $1.70 per diluted share, for the nine
months ended June 30, 2002, as compared to net income of $76 million, or $1.15
per diluted share, for the same period last year ($91 million, or $1.37 per
diluted share, adjusted to exclude goodwill amortization expense).
19
ARVINMERITOR, INC.
LVS sales were $2,757 million, down $25 million, or 1 percent, from the first
nine months of fiscal 2001, and operating income was $157 million, a decrease of
$18 million from the same period last year. Operating margin fell to 5.7 percent
from 6.3 percent for the same period last year (6.5 percent after excluding
goodwill amortization expense of $5 million). Continued pricing pressures from
the vehicle manufacturers contributed to the operating margin decline. LVS
continues to implement cost-reduction initiatives to offset the pricing
pressures from the vehicle manufacturers. The pace of implementing planned
engineering cost-reductions, however, has lagged behind recent price reductions.
In addition, start-up costs of approximately $6 million associated with a new
Detroit manufacturing facility and higher engineering costs also contributed to
the margin decline.
CVS sales were $1,637 million, down $57 million, or 3 percent, compared to last
year's first nine months. The decline in North American trailer production was
the major factor in the sales decrease. Operating income was $62 million,
compared to $26 million in the same period last year. CVS operating margin was
3.8 percent, compared to 1.5 percent in the first nine months of fiscal 2001
(2.1 percent after excluding goodwill amortization expense of $9 million). CVS
has been able to improve its operating margin by lowering its fixed-cost
structure through restructuring programs and other cost-reduction activities.
LVA sales were $625 million, down $23 million, or 4 percent, compared to the
first nine months of fiscal 2001. Operating income increased to $40 million from
$28 million for the same period last year. LVA operating margin increased to 6.4
percent in the first nine months of fiscal 2002, up from 4.3 percent in fiscal
2001 (4.8 percent after excluding goodwill amortization expense of $3 million).
While the markets remained weak for aftermarket parts, LVA was able to increase
its operating margin as a result of improved pricing and the impact of ongoing
cost reductions.
OUTLOOK
The company expects Class 8 truck production in the U.S. and Canada to increase
about 10 percent, to 154,000 units, compared to fiscal year 2001. The company
believes the stronger Class 8 truck demand is partially due to the pre-buy
before new U.S. emission standards go into effect on October 1, 2002. As a
result, the company anticipates Class 8 truck demand in the U.S. and Canada will
fall in the first half of fiscal year 2003, and total production will remain
relatively flat for the full fiscal year. Western European heavy- and
medium-duty truck production is estimated at 373,000 units for fiscal year 2002,
down 6 percent from fiscal year 2001. In the light vehicle original equipment
markets, current expectations for fiscal year 2002 are a 3 percent increase in
North American production, to 16.1 million vehicles, and a 3 percent decline in
Western European production, to 16.4 million vehicles. The company expects the
light vehicle replacement market to remain weak for the remainder of fiscal year
2002.
Other factors that could affect the company's results for the full fiscal year
include the impact of currency fluctuations on sales and operating income, which
is difficult to predict. In addition, the company is beginning to experience
rising steel prices and spot shortages of certain steel products.
20
ARVINMERITOR, INC.
FINANCIAL CONDITION
Cash provided by operating activities for the first nine months of fiscal 2002
was $251 million, a decrease of $128 million, compared to the first nine months
of fiscal 2001 (a decrease of $31 million excluding the proceeds from the sale
of receivables under the company's accounts receivable securitization facility,
discussed below). Depreciation and other amortization expense was $144 million
for the first nine months of fiscal 2002. The company anticipates depreciation
and other amortization expense to be approximately $190 million to $200 million
for the full fiscal year.
Capital expenditures were $94 million in the first nine months of fiscal 2002,
compared to $154 million in the first nine months of fiscal 2001. The decrease
was driven by the company's fiscal 2002 cost-reduction initiatives, which
included limitations on capital spending and salaried workforce reductions
(discussed previously). The company anticipates full-year fiscal 2002 capital
expenditures of approximately $180 million to $190 million, which includes the
purchase of a facility and related equipment that is currently leased for $35
million. Investing activities included proceeds from the sale of the company's
exhaust manufacturing accessories business in the third quarter of fiscal 2002
of $11 million. Investing activities in the first nine months of fiscal 2001
included proceeds of $18 million from the sale of the company's investment in a
joint venture. Cash used for other investing activities in fiscal 2002 and
fiscal 2001 consists primarily of deferred payments associated with acquisitions
made in prior years and additional investment in the company's affiliates.
Cash used for financing activities in the first nine months of fiscal 2002
included a net reduction in debt of $118 million. Included in the net reduction
in debt were net proceeds of $394 million from the issuance of notes (see
below), and the purchase of preferred capital securities of $18 million.
Financing activities also included payments of $20 million for cash dividends
and proceeds of $20 million from the exercise of stock options. The company's
third-quarter dividend of $0.10 per share was paid on June 10, 2002, to
shareowners of record on May 20, 2002. Cash used for financing activities for
the first nine months of fiscal 2001 included a decrease in revolving debt of
$154 million, the purchase of preferred capital securities of $10 million,
purchases of the company's common stock of $31 million and cash dividends of $44
million.
LIQUIDITY
Long-Term Debt
The company has two unsecured credit facilities: a three-year, $400-million
revolving credit facility and a five-year, $750-million revolving credit
facility. Both facilities mature on June 27, 2005. The company also has $50
million of unsecured lines of credit and a commercial paper program with
authorized borrowings of up to $1 billion. Interest rates applicable to the
company's commercial paper borrowings are currently higher than the cost of
other available sources of financing, and no commercial paper borrowings were
outstanding as of June 30, 2002, or September 30, 2001.
21
ARVINMERITOR, INC.
The company's credit facilities require the company to maintain ratios,
specified in financial covenants, as of the end of each quarter. These ratios,
as defined in the agreements, include a total net debt to earnings before
interest, taxes, depreciation and amortization ("EBITDA") ratio of 3.25x, and a
minimum fixed charge coverage ratio (EBITDA less capital expenditures to
interest expense) of 1.50x. Non-compliance with these covenants would constitute
an event of default, and could allow lenders to suspend additional borrowings
and accelerate repayment of outstanding borrowings. At June 30, 2002, the
company was in compliance with all covenants and there have been no events of
default. In addition, if the company's credit ratings are reduced from current
investment grade levels, the downgrade would result in increased interest costs
and facility fees in connection with these facilities.
On April 12, 2001, the company filed a shelf registration statement with the
Securities and Exchange Commission registering $750 million aggregate principal
amount of debt securities that may be offered in one or more series on terms to
be determined at the time of sale. On February 26, 2002, the company completed a
public offering of debt securities under the shelf registration consisting of
$400 million 10-year fixed-rate 8 3/4 percent notes due March 1, 2012. The notes
were offered to the public at 100 percent of their principal amount, and the
proceeds, net of underwriting discounts and commissions, were used to repay
existing indebtedness under the company's revolving credit facilities. On July
1, 2002, the company completed a second public offering of debt securities under
the shelf registration consisting of $200 million 5-year fixed-rate 6 5/8
percent notes due June 15, 2007. The notes were offered to the public at 99.684
percent of their principal amount, and the proceeds, net of underwriting
discounts and commissions, were used to repay outstanding indebtedness under the
company's revolving credit facilities and for general corporate purposes.
As discussed in Note 11 to the Consolidated Financial Statements, the company
entered into two interest rate swap agreements in March 2002 and, in effect,
converted $400 million total notional amount of the company's fixed rate notes
to variable interest rates. The company pays variable rates based on 3-month
LIBOR, plus a spread.
The company's total debt to capitalization ratio decreased to 61 percent at June
30, 2002, down from 67 percent at September 30, 2001.
Other Financing Arrangements
Accounts Receivable Securitization Facility
As discussed in Note 4 to the Consolidated Financial Statements, the company
participates in an accounts receivable securitization facility to improve
financial flexibility and lower interest costs. ArvinMeritor Receivables
Corporation (ARC), a wholly owned subsidiary of the company, has entered into an
agreement to sell an undivided interest in up to $250 million of trade
receivables to a group of banks. The accounts receivable sold are reflected as a
reduction to accounts receivable in the consolidated balance sheet. As of June
30, 2002 and September 30, 2001, the company had utilized $214 million and $211
million, respectively, of the accounts receivable securitization facility.
22
ARVINMERITOR, INC.
Although the facility allows for the sale of up to $250 million, this is
predicated on the amount of qualifying receivables. As of June 30, 2002,
ArvinMeritor had sold the maximum amount that was available based on its
qualifying receivables. If the company's credit ratings are reduced to certain
levels, or if certain receivables performance-based covenants are not met, it
would constitute a termination event, which, at the option of the banks, could
result in termination of the facility. At June 30, 2002, the company was in
compliance with all covenants.
Leases
The company has entered into agreements to lease certain assets. These assets
are held by special purpose entities ("SPEs"), which were established and are
owned by independent third parties. In accordance with Statement of Financial
Accounting Standards No. 13, "Accounting for Leases," the lease agreements are
accounted for as operating leases, and the lease payments are charged to
operating income. Under current accounting principles generally accepted in the
U.S., the assets and the related obligations are excluded from the consolidated
balance sheet, and the company does not consolidate the SPEs, due to ownership
by independent third parties. As of June 30, 2002, the original cost of the
assets leased under such arrangements was $153 million. Several of these leases
require the company to maintain at the end of each quarter financial ratios that
are similar to those required by the company's revolving credit agreements.
Non-compliance with these covenants could result in termination of the
agreements and acceleration of the company's obligation. At June 30, 2002, the
company was in compliance with all covenants. In July 2002, the company
purchased a facility and related equipment for $35 million that was leased under
one of these agreements.
Product Recall Campaign
The company has recalled certain of its commercial vehicle axles equipped with
TRW model 20-EDL tie rod ends because of potential safety-related defects in
those ends. TRW, Inc. ("TRW") manufactured the affected tie rod ends from June
1999 through June 2000 and supplied them to the company for incorporation into
its axle products.
TRW commenced recall campaigns in August 2000 and June 2001, covering 24 weeks
of production, due to a purported manufacturing anomaly identified by TRW.
However, after an analysis of field returns and customer reports of excessive
wear, the company concluded that the defect was based on the design of a bearing
used in the ball socket, which is part of the tie rod end, and not on the
purported anomaly in the manufacturing process. The company reported its finding
to the National Highway Transportation Safety Administration in April 2002 and
expanded the recall campaign to cover all of its axle products that had
incorporated TRW model 20-EDL tie rod ends.
The company estimates the cost of recalling all TRW Model 20-EDL tie rod ends to
be approximately $30 million, of which approximately $13 million is estimated to
be covered by TRW's recall campaigns. The company believes that it is entitled
to reimbursement by TRW for its costs associated with the campaigns. As of June
30, 2002, the company has not recorded a liability for the expanded recall
campaign, and has recorded a $4-million receivable from TRW for reimbursement
of customer claims paid to date. On May 6, 2002, the company filed suit against
TRW in the U.S. District Court for the Eastern District of Michigan, claiming
breach of contract and breach of warranty, and seeking compensatory and
consequential damages in connection with the recall campaign.
23
ARVINMERITOR, INC.
CRITICAL ACCOUNTING POLICIES
The company's critical accounting policies are discussed in Notes 2, 16, 17 and
20 to the Consolidated Financial Statements as filed on Form 10-K for the year
ended September 30, 2001, and Note 16 to the Consolidated Financial Statements
in this filing for the quarter ended June 30, 2002.
INTERNATIONAL OPERATIONS
On January 1, 2002, the euro became the sole legal tender in twelve countries of
the European Union. The company is engaged in business in many of the countries
that participate in the European Monetary Union, and sales for fiscal 2001 in
these countries were approximately 18 percent of the company's total sales. In
addition, the company enters into foreign exchange contracts denominated in the
euro and has borrowings in participating countries.
The company has made the necessary adjustments to accommodate the euro
conversion, including modifications to its information technology systems and
programs, pricing schedules and financial instruments, and believes that the
conversion has not had and will not have a material adverse effect on its
business, financial condition or results of operations.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The company is exposed to foreign currency exchange rate risk related to its
transactions denominated in currencies other than the U.S. dollar and interest
rate risk associated with the company's debt.
The company enters into foreign exchange forward contracts to minimize
the risk of unanticipated gains and losses from currency rate fluctuations on
foreign currency commitments entered into in the ordinary course of business
(See Note 13 to the Consolidated Financial Statements for information on
accounting for these contracts). It is the policy of the company not to enter
into derivative financial instruments for speculative purposes.
The company has performed a sensitivity analysis assuming a hypothetical 10-
percent adverse movement in foreign currency exchange rates and interest rates
applied to the underlying exposures described above. As of June 30, 2002, the
analysis indicated that such market movements would not have a material effect
on the company's business, financial condition or results of operations. Actual
gains or losses in the future may differ significantly from that analysis,
however, based on changes in the timing and amount of interest rate and foreign
currency exchange rate movements and the company's actual exposures.
As discussed in Note 11 to the Consolidated Financial Statements, the company
entered into two interest rate swap agreements in March 2002 and, in effect,
converted $400 million total notional amount of the company's fixed-rate notes
to variable interest rates. The company pays variable rates based on 3-month
LIBOR, plus a spread.
24
ARVINMERITOR, INC.
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
On April 1, 2002, the company issued 626 shares of Common Stock to two
non-employee directors of the company, pursuant to the terms of the
company's Directors Stock Plan, in lieu of cash payment of the quarterly
retainer fee for board service. The issuance of these securities was exempt
from registration under the Securities Act of 1933, as a transaction not
involving a public offering under Section 4(2).
Item 5. Other Information.
Cautionary Statement
This Quarterly Report on Form 10-Q contains statements relating to future
results of the company (including certain projections and business trends)
that are "forward-looking statements" as defined in the Private Securities
Litigation Reform Act of 1995. Forward-looking statements are typically
identified by words or phrases such as "believe," "expect," "anticipate,"
"estimate," "should," "are likely to be" and similar expressions. Actual
results may differ materially from those projected as a result of certain
risks and uncertainties, including but not limited to global economic and
market conditions; the demand for commercial, specialty and light vehicles
for which the company supplies products; risks inherent in operating
abroad, including foreign currency exchange rates; the availability and
cost of raw materials; OEM program delays; demand for and market acceptance
of new and existing products; successful development of new products;
reliance on major OEM customers; labor relations of the company, its
customers and suppliers; successful integration of acquired or merged
businesses; achievement of the expected annual savings and synergies from
past and future business combinations; competitive product and pricing
pressures; the amount of the company's debt; the ability of the company to
access capital markets; the credit ratings of the company's debt; the
outcome of existing and any future legal proceedings, including any
litigation with respect to environmental or asbestos-related matters; as
well as other risks and uncertainties, including but not limited to those
detailed herein and from time to time in other filings of the company with
the Securities and Exchange Commission. See also "Management's Discussion
and Analysis of Results of Operations and Financial Condition" and
"Quantitative and Qualitative Disclosures about Market Risk" herein. These
forward-looking statements are made only as of the date hereof, and the
company undertakes no obligation to update or revise the forward-looking
statements, whether as a result of new information, future events or
otherwise.
25
ARVINMERITOR, INC.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
10a -- Amendment No. 3, dated as of June 26, 2002, to the Amended
and Restated 5-Year Revolving Credit Agreement dated as of June
27, 2001, among the company, the foreign subsidiary borrowers and
lenders from time to time party to the agreement, Bank One, NA, as
Administrative Agent, JP Morgan Chase Bank, as Syndication Agent,
and Bank of America, N.A., and Citicorp USA, Inc., as
Documentation Agents.
10b -- 3-Year Revolving Credit Agreement, dated as of June 26,
2002, among the company, the lenders from time to time party to
the agreement, Bank One, NA, as Administrative Agent, JP Morgan
Chase Bank, as Syndication Agent, and Deutsche Bank Securities
Inc., Citicorp USA, Inc., and UBS Warburg LLC, as Documentation
Agents.
12 -- Computation of ratio of earnings to fixed charges.
99a -- Certification of Chief Executive Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
99b -- Certification of the Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K.
The company did not file any Current Reports on Form 8-K during
the quarter ended June 30, 2002.
26
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.
ARVINMERITOR, INC.
-------------------
(Registrant)
Date August 14, 2002 By /S/V.G. Baker, II
--------------------------- --------------------------------
V.G. Baker, II
Senior Vice President and
General Counsel
(For the Registrant)
Date August 14, 2002 By /S/D.S. Bullock
--------------------------- --------------------------------
D. S. Bullock
Vice President and Controller
(Principal Accounting Officer)
27
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
(a) Exhibits.
10a -- Amendment No. 3, dated as of June 26, 2002, to the Amended
and Restated 5-Year Revolving Credit Agreement dated as of June
27, 2001, among the company, the foreign subsidiary borrowers and
lenders from time to time party to the agreement, Bank One, NA, as
Administrative Agent, JP Morgan Chase Bank, as Syndication Agent,
and Bank of America, N.A., and Citicorp USA, Inc. as Documentation
Agents.
10b -- 3-Year Revolving Credit Agreement, dated as of June 26,
2002, among the company, the lenders from time to time party to
the agreement, Bank One, NA, as Administrative Agent, JP Morgan
Chase Bank, as Syndication Agent, and Deutsche Bank Securities
Inc., Citicorp USA, Inc., and UBS Warburg LLC, as Documentation
Agents.
12 -- Computation of ratio of earnings to fixed charges.
99a -- Certification of Chief Executive Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 90b of the
Sarbanes-Oxley Act of 2002.
99b -- Certification of the Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 90b of the
Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K.
The company did not file any Current Reports on Form 8-K during the quarter
ended June 30, 2002.