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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 December 29, 2002
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Commission file number 1-15983
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ArvinMeritor, Inc.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Indiana 38-3354643
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(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
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(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
-------- --------
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes X No
-------- --------
68,480,560 shares of Common Stock, $1.00 par value, of ArvinMeritor, Inc. were
outstanding on January 31, 2002.
ARVINMERITOR, INC.
INDEX
PART I. FINANCIAL INFORMATION:
Page
Item 1. Financial Statements: No.
Statement of Consolidated Income - - Three Months
Ended December 31, 2002 and 2001.......................................... 2
Consolidated Balance Sheet - -
December 31, 2002 and September 30, 2002.................................. 3
Condensed Statement of Consolidated Cash Flows - -
Three Months Ended December 31, 2002 and 2001............................. 4
Notes to Consolidated Financial Statements................................ 5
Item 2. Management's Discussion and Analysis
of Results of Operations and Financial Condition............................. 23
Item 3. Quantitative and Qualitative Disclosures About
Market Risk.................................................................. 28
Item 4. Controls and Procedures...................................................... 28
PART II. OTHER INFORMATION:
Item 2. Changes in Securities and Use of Proceeds.................................... 29
Item 5. Other Information............................................................ 29
Item 6. Exhibits and Reports on Form 8-K............................................. 30
Signatures .................................................................................... 31
Certifications................................................................................... 32
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
ARVINMERITOR, INC.
STATEMENT OF CONSOLIDATED INCOME
(In millions, except per share amounts)
Three Months Ended
December 31,
---------------------------
2002 2001
--------- ---------
(Unaudited)
Sales............................................................................... $ 1,709 $ 1,566
Cost of sales....................................................................... (1,535) (1,412)
--------- ---------
GROSS MARGIN........................................................................ 174 154
Selling, general and administrative.............................................. (101) (91)
Restructuring costs.............................................................. - (15)
--------- ---------
OPERATING INCOME.................................................................... 73 48
Equity in earnings of affiliates................................................. 1 -
Interest expense, net and other.................................................. (25) (28)
--------- ---------
INCOME BEFORE INCOME TAXES.......................................................... 49 20
Provision for income taxes....................................................... (16) (6)
Minority interests............................................................... (1) (3)
--------- ---------
INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE................................ 32 11
Cumulative effect of accounting change........................................... - (42)
--------- ---------
NET INCOME (LOSS)................................................................... $ 32 $ (31)
========= =========
BASIC EARNINGS (LOSS) PER SHARE
Before cumulative effect of accounting change.................................... $ 0.48 $ 0.17
Cumulative effect of accounting change........................................... - (0.64)
--------- ---------
Basic earnings (loss) per share.................................................. $ 0.48 $ (0.47)
========= =========
DILUTED EARNINGS (LOSS) PER SHARE
Before cumulative effect of accounting change.................................... $ 0.47 $ 0.17
Cumulative effect of accounting change........................................... - (0.64)
--------- ---------
Diluted earnings (loss) per share................................................ $ 0.47 $ (0.47)
========= =========
Basic average common shares outstanding............................................. 66.9 65.7
========= =========
Diluted average common shares outstanding........................................... 67.4 66.0
========= =========
Cash dividends per common share..................................................... $ 0.10 $ 0.10
========= =========
See notes to consolidated financial statements.
2
ARVINMERITOR, INC.
CONSOLIDATED BALANCE SHEET
(in millions)
December 31, September 30,
2002 2002
------- -------
ASSETS (Unaudited)
CURRENT ASSETS:
Cash and cash equivalents................................................... $ 72 $ 56
Receivables (less allowance for doubtful accounts:
December 31, 2002, $20 and September 30, 2002, $18) ................. 1,150 1,251
Inventories................................................................. 499 458
Other current assets........................................................ 239 211
------- -------
TOTAL CURRENT ASSETS.................................................... 1,960 1,976
------- -------
NET PROPERTY..................................................................... 1,184 1,179
GOODWILL 817 808
OTHER ASSETS..................................................................... 696 688
------- -------
TOTAL ASSETS............................................................ $ 4,657 $ 4,651
======= =======
LIABILITIES AND SHAREOWNERS' EQUITY
CURRENT LIABILITIES:
Short-term debt............................................................. $ 9 $ 15
Accounts payable............................................................ 1,015 1,123
Accrued compensation and benefits........................................... 216 283
Accrued income taxes........................................................ 62 65
Other current liabilities................................................... 264 257
------- -------
TOTAL CURRENT LIABILITIES............................................... 1,566 1,743
------- -------
LONG-TERM DEBT................................................................... 1,500 1,435
ACCRUED RETIREMENT BENEFITS...................................................... 523 512
OTHER LIABILITIES................................................................ 133 123
MINORITY INTERESTS............................................................... 65 58
PREFERRED CAPITAL SECURITIES..................................................... 39 39
SHAREOWNERS' EQUITY:
Common stock (December 31, 2002, 71.0 shares issued and
68.5 outstanding; September 30, 2002, 71.0 shares issued
and 67.9 outstanding).................................................. 71 71
Additional paid-in capital.................................................. 555 554
Retained earnings........................................................... 555 530
Treasury stock (December 31, 2002, 2.5 shares;
September 30, 2002, 3.1 shares) ....................................... (37) (46)
Unearned compensation....................................................... (19) (12)
Accumulated other comprehensive loss........................................ (294) (356)
------- -------
TOTAL SHAREOWNERS' EQUITY............................................... 831 741
------- -------
TOTAL LIABILITIES AND SHAREOWNERS' EQUITY............................... $ 4,657 $ 4,651
======= =======
See notes to consolidated financial statements.
3
ARVINMERITOR, INC.
CONDENSED STATEMENT OF CONSOLIDATED CASH FLOWS
(In millions)
Three Months Ended
December 31,
----------------------------
2002 2001
--------- --------
(Unaudited)
OPERATING ACTIVITIES
Income before cumulative effect of accounting change............................... $ 32 $ 11
Adjustments to arrive at cash provided by (used for) operating activities:
Depreciation and amortization..................................................... 50 48
Restructuring costs, net of expenditures.......................................... - 14
Pension and retiree medical expense............................................... 24 18
Pension and retiree medical contributions......................................... (22) (31)
Changes in receivable securitization.............................................. (5) (13)
Changes in assets and liabilities, excluding effects of
acquisitions, divestitures and foreign currency adjustments..................... (102) 32
--------- --------
CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES................................... (23) 79
--------- --------
INVESTING ACTIVITIES
Capital expenditures.............................................................. (26) (34)
Proceeds from disposition of assets............................................... 13 -
Other investing activities........................................................ (2) (8)
--------- --------
CASH USED FOR INVESTING ACTIVITIES................................................. (15) (42)
--------- --------
FINANCING ACTIVITIES
Net increase (decrease) in revolving debt......................................... 54 (7)
Purchase of preferred capital securities.......................................... - (18)
Cash dividends.................................................................... (7) (7)
--------- --------
CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES................................... 47 (32)
--------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH............................................ 7 1
--------- --------
CHANGE IN CASH AND CASH EQUIVALENTS................................................ 16 6
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD................................... 56 101
--------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD......................................... $ 72 $ 107
========= ========
See notes to consolidated financial statements.
4
ARVINMERITOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
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, 2002. The results of operations for the three-month period
ended December 31, 2002, are not necessarily indicative of the results for
the full year.
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. The first quarter of fiscal 2003 and 2002 ended on December
29, 2002, and December 30, 2001, respectively. All year and quarter
references relate to the company's fiscal year and fiscal quarters unless
otherwise stated.
For each interim reporting period the company makes 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.
Certain prior period amounts have been reclassified to conform with current
period presentation.
2. Earnings per Share
Basic earnings per share are based upon the weighted average number of
shares outstanding during each period. Diluted earnings per share assumes
the exercise of common stock options and the impact of restricted stock
when dilutive.
A reconciliation of basic average common shares outstanding to diluted
average common shares outstanding at December 31, is as follows (in
millions):
2002 2001
------ ------
Basic average common shares outstanding................... 66.9 65.7
Impact of restricted stock................................ 0.5 0.2
Impact of stock options................................... - 0.1
------ ------
Diluted average common shares outstanding................. 67.4 66.0
====== ======
5
ARVINMERITOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3. New Accounting Standards
In October 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 one model of accounting for long-lived assets to be disposed of,
and broadens the definition of discontinued operations to include a
component of a segment. The company adopted this standard effective October
1, 2002. The adoption of SFAS 144 did not have a significant impact on the
company's financial position or results of operations.
In June 2002, the FASB issued Statement of Financial Accounting Standards
No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities," which nullifies Emerging Issues Task Force Issue No. 94-3,
"Liability Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity (Including Certain Costs Incurred in
Restructuring)." The new standard requires a liability for a cost
associated with an exit or disposal activity to be recognized and measured
initially at its fair value in the period in which the liability is
incurred, rather than at the time of commitment to an exit plan. The
standard is effective for exit or disposal activities initiated after
December 31, 2002.
In November 2002, the FASB issued FASB Interpretation No. 45 (FIN 45),
"Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others (an interpretation
of FASB Statements 5, 57 and 107 and rescission of FASB Interpretation No.
34)." FIN 45 requires a guarantor to disclose its obligations under certain
guarantees and to recognize at the inception of a guarantee the fair value
of the guarantee obligation. The interpretation also requires disclosure of
the accounting policy and methodology used in determining product warranty
liabilities, in addition to a reconciliation of the changes in the
liability during the period. The disclosure requirements of FIN 45 are
effective for financial statements of interim or annual periods ended after
December 15, 2002, and the recognition and measurement provisions are
effective for all guarantees issued after December 31, 2002. Disclosure
related to the company's product warranties is included in Note 11, and
disclosure of residual value guarantees related to the company's leases is
included in Note 13.
6
ARVINMERITOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
In January 2003, the FASB issued FASB Interpretation No. 46 (FIN 46),
"Consolidation of Variable Interest Entities, an interpretation of
Accounting Research Bulletin No. 51, Consolidated Financial Statements."
This interpretation provides guidance on the identification of variable
interest entities, some of which may require consolidation based on factors
beyond a majority voting interest. A variable interest entity is defined in
FIN 46 as an entity in which either the equity investors (if any) do not
have a controlling financial interest or the equity investment at risk is
insufficient to finance that entity's activities without receiving
additional subordinated financial support from other parties. FIN 46
applies immediately to variable interest entities created after January 31,
2003, and in the first fiscal year or interim period beginning after June
15, 2003, to variable interest entities in which an enterprise holds a
variable interest that it acquired before February 1, 2003. The company is
currently in the process of determining if certain entities, that are
related to the company's accounts receivable securitization program and
certain leases are variable interest entities. The company has complied
with the disclosure requirements defined in the Interpretation for the
period ended December 31, 2002. Disclosure related to the company's
accounts receivable securitization program is included in Note 7, and
disclosure related to the company's leases is included in Note 13.
4. Accounting for Stock Options
Effective October 1, 2002, the company voluntarily changed to the fair
value method of accounting for its stock-based compensation plans and began
expensing the fair value of stock options. In December 2002, the FASB
issued Statement of Financial Accounting Standards No. 148 (SFAS 148),
"Accounting for Stock-Based Compensation - Transition and Disclosure, an
amendment of FASB Statement No. 123." SFAS 148 provides alternative methods
of transition for a voluntary change to the fair value method. The company
has elected the modified prospective method, which allows for the
recognition of compensation expense for the non-vested portion of
previously issued stock options, as well as for new grants of stock
options. In the first quarter of fiscal 2003, the company recorded
compensation expense for stock options of $1 million ($1 million after-tax,
or $0.01 per diluted share). For fiscal 2003, the company expects to record
compensation expense for stock options of $7 million ($5 million after-tax,
or $0.07 per diluted share). If the fair value method had been applied in
the first quarter of fiscal 2002 there would have been no change to
reported net loss or basic and diluted loss per share.
5. Goodwill Impairment
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, or more frequently, if certain indicators arise, and also eliminated
goodwill amortization. Upon adoption of SFAS 142 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 $0.64 per diluted share) in the
first quarter of fiscal 2002. There have been no changes in the carrying
value of goodwill since September 30, 2002, other than fluctuations due to
changes in foreign currency exchange rates.
7
ARVINMERITOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
6. Restructuring Costs
In the first quarter of fiscal 2002, the company recorded a restructuring
charge of $15 million ($10 million after-tax, or $0.15 per basic and
diluted share) for severance and other employee costs related to a net
reduction of approximately 450 employees. All employees have been
terminated under this restructuring action, and $3 million of restructuring
reserves relating to severance payments remained in the consolidated
balance sheet at December 31, 2002.
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 approximately $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 included 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 December 31, 2002, all employees had
been terminated under this restructuring action, and $2 million of
restructuring reserves relating to severance payments remained in the
consolidated balance sheet.
In fiscal 2001, the company also recorded approximately $34 million of
restructuring costs that were incurred as a result of the July 2000 merger
of Arvin Industries, Inc. and Meritor Automotive, Inc. into ArvinMeritor.
The merger was accounted for utilizing the purchase method of accounting,
and these restructuring costs were reflected in the purchase price
allocation. These costs include approximately $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. All employees have been terminated under this restructuring
action, and $1 million of restructuring reserves relating to remaining
severance payments remained in the consolidated balance sheet at December
31, 2002.
8
ARVINMERITOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
A summary of restructuring charges and merger-related restructuring
reserves as of December 31, 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 2001................. (12) - - (12)
Write-down of assets....................... - (19) - (19)
Cash payments through 12/31/02............. (46) - (4) (50)
--------- --------- --------- ---------
Subtotal.............................. 2 - - 2
--------- --------- --------- ---------
Fiscal 2001 merger-related reserves........ 17 17 - 34
Cash payments through 12/31/02............. (16) - - (16)
Write-down of assets....................... - (17) - (17)
--------- --------- --------- ---------
Subtotal.............................. 1 - - 1
--------- --------- --------- ---------
Fiscal 2002 charge......................... 15 - - 15
Cash payments through 12/31/02............. (12) - - (12)
--------- --------- --------- ---------
Subtotal.............................. 3 - - 3
--------- --------- --------- ---------
Reserve balance at 12/31/02................ $ 6 $ - $ - $ 6
========= ========= ========= =========
7. Asset Securitization
The company sells substantially all of the trade receivables of certain
subsidiaries to ArvinMeritor Receivables Corporation (ARC), a wholly owned,
bankruptcy-remote, special purpose subsidiary. ARC has entered into an
agreement to sell an undivided interest in up to $250 million of eligible
receivables, as defined, to certain bank conduits that fund their purchases
through the issuance of commercial paper. As of December 31, 2002 and
September 30, 2002, $100 million and $105 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 $2 million was recorded, in the fiscal quarters ended December 31, 2002
and 2001, respectively. As of December 31, 2002 and September 30, 2002, the
banks had a preferential interest in $197 million and $201 million,
respectively, of the remainder of the receivables held at ARC to secure the
obligation under the asset securitization facility. The gross amount of
proceeds received from the sale of receivables under this program was
approximately $350 million and $570 million for the three months ended
December 31, 2002 and 2001, respectively. The accounts receivable
securitization program matures in September 2003.
9
ARVINMERITOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 December 31, 2002, the company
was in compliance with all covenants.
8. Inventories
Inventories are summarized as follows (in millions):
December 31, September 30,
2002 2002
------------ -------------
Finished goods.............................................. $ 228 $ 207
Work in process............................................. 136 131
Raw materials, parts and supplies........................... 186 171
---------- ----------
Total.................................................. 550 509
Less: allowance to adjust the carrying value of
certain inventories to a LIFO basis....................... (51) (51)
---------- ----------
Inventories........................................... $ 499 $ 458
========== ==========
9. Other Current Assets
Other Current Assets are summarized as follows (in millions):
December 31, September 30,
2002 2002
------------ -------------
Current deferred income taxes............................... $ 121 $ 116
Customer reimbursable tooling and engineering............... 45 33
Asbestos-related recoveries................................. 20 20
Prepaid and other........................................... 53 42
---------- ----------
Other Current Assets................................... $ 239 $ 211
========== ==========
10
ARVINMERITOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
10. Other Assets
Other Assets are summarized as follows (in millions):
December 31, September 30,
2002 2002
------------ -------------
Long-term deferred income taxes............................. $ 190 $ 187
Investments in affiliates................................... 150 167
Prepaid pension costs....................................... 102 98
Fair value of interest rate swaps........................... 54 48
Asbestos-related recoveries................................. 47 39
Net capitalized software costs.............................. 43 44
Trademarks.................................................. 23 23
Patents and licenses (less accumulated
amortization: December 31, 2002, $5 and
September 30, 2002, $5)................................... 11 11
Other....................................................... 76 71
---------- ----------
Other Assets........................................... $ 696 $ 688
========== ==========
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 2003
through 2004 and approximately $1 million per year for fiscal years 2005
through 2007.
11. Other Current Liabilities
Other Current Liabilities are summarized as follows (in millions):
December 31, September 30,
2002 2002
------------ -------------
Accrued product warranties.................................. $ 85 $ 89
Accrued taxes other than income taxes....................... 33 37
Accrued interest expense.................................... 28 12
Asbestos-related reserves................................... 20 20
Accrued restructuring ...................................... 6 9
Environmental reserves...................................... 6 8
Other....................................................... 86 82
---------- ----------
Other Current Liabilities.............................. $ 264 $ 257
========== ==========
11
ARVINMERITOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Accruals for product warranty costs are recorded at the time of shipment of
products to customers. Accruals for product recall campaigns are recorded
at the time the company's obligation is known and can be reasonably
estimated. Warranty reserves are based on several factors including past
claims experience, sales history, product manufacturing and engineering
changes, industry developments and various other considerations. As of
December 31, 2002 and September 30, 2002, accrued product warranties
included a liability related to a recall campaign associated with TRW model
20-EDL tie rod ends (see Note 16).
The change in accrued product warranties for the three months ended
December 31, 2002 and 2001 is as follows (in millions):
2002 2001
---------- ----------
Balance at September 30................................... $ 89 $ 92
Accruals for new product warranties....................... 5 3
Accruals for reimbursement of customer warranty........... 4 2
Payments made............................................. (14) (14)
Change in estimates....................................... 1 (1)
---- ----
Balance at December 31...................................... $ 85 $ 82
==== ====
12. Other Liabilities
Other Liabilities are summarized as follows (in millions):
December 31, September 30,
2002 2002
----------- -------------
Asbestos-related reserves................................... $ 54 $ 46
Environmental reserves...................................... 26 26
Other....................................................... 53 51
---------- ----------
Other Liabilities...................................... $ 133 $ 123
========== ==========
12
ARVINMERITOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
13. Long-Term Debt
Long-Term Debt, net of discount where applicable, is summarized as follows
(in millions):
December 31, September 30,
2002 2002
------------ -------------
6 5/8 percent notes due 2007................................ $ 199 $ 199
6 3/4 percent notes due 2008................................ 100 100
7 1/8 percent notes due 2009................................ 150 150
6.8 percent notes due 2009.................................. 499 499
8 3/4 percent notes due 2012................................ 400 400
Bank revolving credit facilities............................ 80 27
Lines of credit and other................................... 27 27
Fair value adjustment of notes.............................. 54 48
--------- ---------
Subtotal................................................. 1,509 1,450
Less: current maturities................................... (9) (15)
--------- ---------
Long-Term Debt..................................... $ 1,500 $ 1,435
========= =========
Credit Facilities and Lines of Credit
The company has two unsecured credit facilities, which mature on June 27,
2005: a three-year, $400-million revolving credit facility and a five-year,
$750-million revolving credit facility. Borrowings are subject to interest
based on quoted LIBOR rates plus a margin, and a facility fee, both of
which are based upon the company's credit rating. At December 31, 2002, the
margin over the LIBOR rate was 105 basis points, and the facility fee was
20 basis points. The company also has a $50-million uncommitted line of
credit.
Interest Rate Swap Agreements
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
6.8 percent notes to variable interest rates. The fair value of the swaps
was $54 million and $48 million as of December 31, 2002 and September 30,
2002, respectively, and is recorded in Other Assets, with an offsetting
amount recorded in Long-Term Debt. 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.
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
three-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.
13
ARVINMERITOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Leases
The company has entered into agreements to lease certain manufacturing and
administrative facilities as well as aircraft. These assets are held by
special purpose entities, which were established and are owned by
independent third parties who provide financing through debt and equity
participation. These leases are accounted for as operating leases, and the
lease payments are charged to operating income. Under current accounting
principles generally accepted in the United States, the assets and the
related obligations are excluded from the consolidated balance sheet, and
the special purpose entities are not consolidated. At December 31, 2002 and
September 30, 2002, the original cost of the assets under such arrangements
was $122 million and $120 million, respectively.
Certain of these leases contain residual value guarantees that obligate the
company, not the third party owners, to absorb the majority of the losses
of the special purpose entities. The agreements also provide the company
with the right to receive any residual returns of the special purpose
entities if they occur. According to FIN 46 (see Note 3), these conditions
may indicate these entities are variable interest entities, which may
require them to be consolidated in the fourth quarter of fiscal 2003. The
company is in the process of making this determination.
At December 31, 2002, the company's residual value guarantees associated
with these leases, which represent the maximum exposure to loss, are $52
million. The company has a residual value guarantee of $4 million
associated with a lease which is not held by a special purpose entity.
Covenants
The credit facilities require the company to maintain 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. In addition, certain
operating leases require the company to maintain financial ratios that are
similar to those required under the company's credit facilities. At
December 31, 2002, the company was in compliance with all covenants.
14. Financial Instruments
The company's financial instruments include cash and cash equivalents,
short-term debt, long-term debt, preferred capital securities, interest
rate swaps, and foreign exchange contracts. The company uses derivatives
for hedging and non-trading purposes in order to manage its interest rate
and foreign exchange rate exposures. The company's interest rate swap
agreements are discussed in Note 13.
14
ARVINMERITOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Foreign Exchange Contracts
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 company has elected not to designate the foreign exchange
contracts as hedges, therefore, changes in the fair value of the foreign
exchange contracts are recognized in operating income. The net income
impact of recording these contracts at fair value in the three months ended
December 31, 2002 did not have a significant effect on the company's
results of operations. As of December 31, 2002 and September 30, 2002, the
fair value of foreign exchange contracts was not material. It is the policy
of the company not to enter into derivative instruments for speculative
purposes.
Fair Value
Fair values of financial instruments are summarized as follows (in
millions):
December 31, September 30,
2002 2002
------------------------ -----------------------
Carrying Fair Carrying Fair
Value Value Value Value
----- ----- ----- -----
Cash and cash equivalents....................... $ 72 $ 72 $ 56 $ 56
Short-term debt................................. 9 9 15 15
Long-term debt.................................. 1,500 1,503 1,435 1,433
Preferred capital securities.................... 39 39 39 40
Interest rate swaps - asset..................... 54 54 48 48
Cash and cash equivalents - All highly liquid investments purchased with
maturity of three months or less are considered to be cash equivalents. The
carrying value approximates fair value because of the short maturity of
these instruments.
Short-term debt - The carrying value of short-term debt approximates fair
value because of the short maturity of these borrowings.
Long-term debt and preferred capital securities - Fair values are based on
the company's current incremental borrowing rate for similar types of
borrowing arrangements.
Interest rate swaps - Fair values are estimated by obtaining quotes from
external sources.
15
ARVINMERITOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
15. Accrued Retirement Benefits
Accrued Retirement Benefits consisted of the following (in millions):
December 31, September 30,
2002 2002
------------ -------------
Accrued retirement medical liability........................ $ 306 $ 309
Accrued pension liability................................... 243 231
Other....................................................... 34 32
--------- ----------
Subtotal................................................ 583 572
Less: current liability..................................... (60) (60)
--------- ----------
Accrued Retirement Benefits.......................... $ 523 $ 512
========= ==========
16. Contingencies
Environmental
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. The process of
estimating environmental liabilities is complex and dependent on physical
and scientific data at the site, uncertainties as to remedies and
technologies to be used and the outcome of discussions with regulatory
agencies. The company records liabilities for environmental issues in the
accounting period in which its responsibility is established and the cost
can be reasonably estimated. At environmental sites in which more than one
potentially responsible party has been identified, the company records a
liability for its allocable share of costs related to its involvement with
the site, as well as an allocable share of costs related to insolvent
parties or unidentified shares. At environmental sites in which
ArvinMeritor is the only potentially responsible party, the company records
a liability for the total estimated costs of remediation before
consideration of recovery from insurers or other third parties.
16
ARVINMERITOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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
December 31, 2002, to be approximately $35 million, of which $13 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 December 31, 2002, to be approximately $48 million, of which
$19 million is recorded as a liability. Following are the components of the
Superfund and Non-Superfund environmental reserve (in millions):
December 31, September 30,
2002 2002
------------ -------------
Superfund sites........................................... $ 13 $ 13
Non-Superfund sites....................................... 19 21
-------- --------
Total environmental reserves.............................. $ 32 $ 34
======== ========
A portion of the total environmental reserves is included in current
liabilities with the majority of the amounts recorded in noncurrent
liabilities (see Notes 11 and 12).
The actual amount of costs or damages for which the company may be held
responsible could materially exceed the foregoing estimates because of
uncertainties, including the financial condition of other potentially
responsible parties, the success of the remediation and other factors that
make it difficult to accurately predict actual costs. However, based on
management's assessment, the company believes that its 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. In addition, in future periods, new laws and
regulations, advances in technology and additional information about the
ultimate clean up remedy could significantly change the company's
estimates. Management cannot assess the possible effect of compliance with
future requirements.
Asbestos
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 1997 through 2002, Maremont paid
approximately $52 million to address asbestos-related claims, substantially
all of which was reimbursed by insurance.
17
ARVINMERITOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Maremont's asbestos-related reserves and corresponding asbestos-related
recoveries are summarized as follows (in millions):
December 31, September 30,
2002 2002
------------ -------------
Unbilled committed settlements.............................. $ 9 $ 9
Pending claims.............................................. 58 50
Shortfall and other......................................... 7 7
---------- ----------
Total asbestos-related reserves.......................... $ 74 $ 66
========== ==========
Asbestos-related recoveries................................. $ 67 $ 59
========== ==========
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 9 through 12).
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 February 1, 2001, Maremont has hired its own litigation counsel and
is committed to examining the merits of each asbestos-related claim. For
purposes of establishing reserves for pending asbestos-related claims,
Maremont estimates its defense and indemnity costs based on the history and
nature of filed claims to date and Maremont's experience since February 1,
2001. Maremont had approximately 45,600 and 37,500 pending asbestos related
claims at December 31, 2002 and September 30, 2002, 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.
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.
18
ARVINMERITOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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.
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, ArvinMeritor 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.
19
ARVINMERITOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
ArvinMeritor 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. 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. The company
has recorded a liability and offsetting receivable for the estimated cost
of the recall campaign, which is not covered by TRW's recall campaign. The
company has recorded a receivable from TRW for $17 million as of December
31, 2002 and September 30, 2002. The company has also accrued product
warranty reserves of $13 million and $15 million, net of claims paid to
date as of December 31, 2002 and September 30, 2002, respectively. In
addition, as of December 31, 2002 and September 30, 2002 the company has
recorded a $5 million and $4 million receivable, respectively, from TRW for
reimbursement of customer claims paid to date that are covered by TRW's
recall campaign.
Other
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.
17. Comprehensive Income (Loss)
Comprehensive income (loss) is summarized as follows (in millions):
Three Months Ended
December 31,
------------------------------
2002 2001
----------- ----------
Net income................................................ $ 32 $ (31)
Foreign currency translation.............................. 62 11
----- -----
Comprehensive income (loss)............................... $ 94 $ (20)
===== =====
20
ARVINMERITOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
18. Business Segment Information
The company has three reportable operating segments: Light Vehicle Systems
(LVS), Commercial Vehicle Systems (CVS), and Light Vehicle Aftermarket
(LVA). LVS is a major supplier of air and emission systems, aperture
systems (roof and door systems and motion control products), and
undercarriage systems (suspension and ride control systems and wheel
products) for passenger cars, light trucks and sport utility vehicles to
original equipment manufacturers. CVS supplies drivetrain systems and
components, including axles and drivelines, braking systems, suspension
systems and exhaust, ride control and filtration products, for medium- and
heavy-duty trucks, trailers and off-highway equipment and specialty
vehicles. LVA supplies exhaust, ride control and filter products 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 included in this classification.
Segment information is summarized as follows (in millions):
Three Months Ended
December 31,
-----------------------------
2002 2001
------- -------
Sales:
Light Vehicle Systems.................................. $ 903 $ 846
Commercial Vehicle Systems............................. 572 483
Light Vehicle Aftermarket.............................. 197 200
Other.................................................. 37 37
------- -------
Sales...................................... $ 1,709 $ 1,566
======= =======
Operating Income:
Light Vehicle Systems.................................. $ 42 $ 44
Commercial Vehicle Systems............................. 24 11
Light Vehicle Aftermarket.............................. 6 9
Other.................................................. 1 (1)
------- -------
Segment operating income................... 73 63
Restructuring costs....................................... - (15)
------- -------
Operating income........................... 73 48
Equity in earnings of affiliates.......................... 1 -
Interest expense, net and other........................... (25) (28)
------- -------
Income before income taxes................................ 49 20
Provision for income taxes................................ (16) (6)
Minority interests........................................ (1) (3)
------- -------
Income before cumulative effect of
accounting change....................................... $ 32 $ 11
======= =======
21
ARVINMERITOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The carrying value of goodwill for the company's segments is summarized as
follows (in millions):
December 31, September 30,
2002 2002
------------ -------------
Light Vehicle Systems....................................... $ 227 $ 225
Commercial Vehicle Systems.................................. 413 408
Light Vehicle Aftermarket................................... 177 175
Other....................................................... - -
------- -------
Goodwill............................................... $ 817 $ 808
======= =======
19. Subsequent Events
In the second quarter of fiscal 2003, the company's CVS segment completed
the sale of net assets related to the manufacturing and distribution of its
non-core off-highway planetary axle products of approximately $35 million.
Sales of the off-highway planetary axle products were approximately $90
million in fiscal 2002.
In 1998, the company acquired a 49-percent interest in a German joint
venture, Zeuna Starker GmbH & Co. KG, an air and emissions systems company.
The company entered into agreements to purchase the remaining 51-percent
interest for a purchase price of approximately $75 million. The transaction
was completed in the second quarter of fiscal 2003. The company expects
incremental sales in fiscal 2003 of approximately $500 million.
22
ARVINMERITOR, INC.
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
RESULTS OF OPERATIONS
Three Months Ended
December 31,
-----------------------------
2002 2001
------- -------
Sales:
Light Vehicle Systems.......................................... $ 903 $ 846
Commercial Vehicle Systems..................................... 572 483
Light Vehicle Aftermarket...................................... 197 200
Other.......................................................... 37 37
------- -------
SALES.......................................................... $ 1,709 $ 1,566
======= =======
Operating Income:
Light Vehicle Systems.......................................... $ 42 $ 44
Commercial Vehicle Systems..................................... 24 11
Light Vehicle Aftermarket...................................... 6 9
Other.......................................................... 1 (1)
------- -------
SEGMENT OPERATING INCOME....................................... 73 63
Restructuring costs............................................... - (15)
------- -------
OPERATING INCOME.................................................. 73 48
Equity in earnings of affiliates.................................. 1 -
Interest expense, net and other................................... (25) (28)
------- -------
INCOME BEFORE INCOME TAXES........................................ 49 20
Provision for income taxes........................................ (16) (6)
Minority interests................................................ (1) (3)
------- -------
INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE.............. 32 11
Cumulative effect of accounting change ........................ - (42)
------- -------
NET INCOME (LOSS) ................................................ $ 32 $ (31)
======= =======
DILUTED EARNINGS (LOSS) PER SHARE:
Before cumulative effect of accounting change.................. $ 0.47 $ 0.17
Cumulative effect of accounting change......................... - (0.64)
------- -------
Diluted earnings (loss) per share.............................. $ 0.47 $ (0.47)
======= ========
DILUTED AVERAGE COMMON SHARES OUTSTANDING......................... 67.4 66.0
======= =======
23
ARVINMERITOR, INC.
Fiscal 2003 First Quarter Compared to Fiscal 2002 First Quarter
Total Company
Sales for the first quarter of fiscal 2003 were $1,709 million, an increase of
$143 million, or nine percent, as compared to last year's first quarter results.
Sales of the company's Commercial Vehicle Systems (CVS) segment increased by $89
million. CVS sales benefited from higher heavy-duty (also referred to as Class
8) truck production in North America. The company's Light Vehicle Systems (LVS)
segment sales increased by $57 million. The stronger euro and new business
contributed to the increase in sales. (See discussion under Business Segments
below.)
Effective October 1, 2002, the company voluntarily changed to the fair value
method of accounting for its stock-based compensation plans and began expensing
the fair value of stock options. In December 2002, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 148 (SFAS
148), "Accounting for Stock-Based Compensation - Transition and Disclosure, an
amendment of FASB Statement No. 123." SFAS 148 provides alternative methods of
transition for a voluntary change to the fair value method. The company has
elected the modified prospective method, which allows for the recognition of
compensation expense for the non-vested portion of previously issued stock
options, as well as for new grants of stock options. In the first quarter of
fiscal 2003, the company recorded compensation expense for stock options of $1
million ($1 million after-tax, or $0.01 per diluted share). For fiscal 2003, the
company expects to record compensation expense for stock options of $7 million
($5 million after-tax, or $0.07 per diluted share).
Operating income for the first quarter of fiscal 2003 was $73 million, compared
to $48 million in the same period last year. A restructuring charge of $15
million was recorded in operating income in the first quarter of fiscal year
2002. Restructuring costs attributable to LVS, CVS, Light Vehicle Aftermarket
(LVA) and Other were $7 million, $6 million, $1 million and $1 million,
respectively. For additional information concerning the company's restructuring
program, see Note 6 of the Notes to the Consolidated Financial Statements.
Operating margin improved to 4.3 percent, up from 3.1 percent in the first
quarter of fiscal year 2002. The CVS segment drove the operating margin
improvement.
Equity in earnings of affiliates for the first quarter of fiscal 2003 was up $1
million compared to the same period last year. Interest expense, net and other
of $25 million was down slightly from $28 million in last year's first quarter.
The effective tax rate was 32 percent in the first quarter of fiscal years 2003
and 2002.
Income before cumulative effect of accounting change was $32 million for the
first quarter of fiscal 2003, an increase of $21 million compared to the first
quarter of fiscal 2002. Effective October 1, 2001, the company adopted Statement
of Financial Accounting Standards No. 142 (SFAS 142), "Goodwill and Other
Intangible Assets." Upon adoption of SFAS 142, the company recorded an
impairment loss on goodwill as a cumulative effect of accounting change of $42
million ($42 million after-tax, or $0.64 per diluted share) in the first quarter
of fiscal 2002. Net income was $32 million in the first quarter of fiscal 2003,
compared to a net loss of $31 million, in last year's first quarter.
24
ARVINMERITOR, INC.
Business Segments
LVS sales were $903 million, up $57 million, or seven percent, from the first
quarter of fiscal 2002. Favorable currency translation of approximately $29
million and new business drove the increase in sales. Operating income was $42
million, a decrease of $2 million from last year's first quarter. Higher steel
prices, as well as premium freight and other costs associated with steel
shortages, negatively impacted operating income by $5 million in the first
quarter of fiscal 2003. LVS operating margin declined to 4.7 percent from 5.2
percent in last year's first quarter.
CVS sales were $572 million, up $89 million, or 18 percent, from last year's
first quarter. Higher North American Class 8 truck production, which increased
24 percent on a quarter-over-quarter basis, was the major factor behind the
sales increase. Favorable currency translation added approximately $14 million
to sales. CVS operating income increased to $24 million, compared to $11 million
in the first quarter of fiscal 2002, and operating margin improved to 4.2
percent, up from 2.3 percent in last year's first quarter. Higher sales levels
and savings from cost-reduction actions drove the operating margin improvement.
LVA sales were $197 million, down slightly from $200 million in last year's
first quarter. These results include sales of $6 million from the consolidation
of a joint venture in Venezuela as of October 1, 2002. LVA operating income was
$6 million, compared to $9 million in last year's first quarter. The decrease
was principally driven by higher changeover expense. Operating margin fell to
3.0 percent, from 4.5 percent in the prior year's first quarter.
OUTLOOK
The company's fiscal 2003 outlook for light vehicle production is 16.0 million
vehicles in North America and 16.5 million vehicles in Western Europe. The
company expects North American Class 8 truck production to decline five percent
in fiscal 2003 to 161,000 units. Western European heavy- and medium-duty truck
production is estimated at 337,000 units for fiscal 2003.
In January 2003, the company announced a workforce reduction of approximately
300 salaried employees and a facility closure affecting an additional 275 hourly
employees in its LVS business. These measures follow the recent management
realignment of the company's LVS businesses. The company expects costs, net of
savings, of $9 million ($6 million after-tax, or $0.09 per diluted share) in the
second fiscal quarter and $4 million ($3 million after-tax, or $0.04 per diluted
share) for the full year of fiscal 2003 related to these actions. The company
expects annual pretax savings as a result of these actions of approximately $25
million.
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 experiencing rising steel
prices and currently expects higher steel costs of approximately $20 million in
fiscal 2003.
25
ARVINMERITOR, INC.
FINANCIAL CONDITION
See Condensed Statement of Consolidated Cash Flow for additional detail on the
company's cash flows.
Operating Activities -- Cash used for operating activities for the first three
months of fiscal 2003 was $23 million, a decrease of $102 million, compared to
cash provided by operating activities of $79 million for the first three months
of fiscal 2002. The decrease in operating cash flow is largely attributable to
higher working capital levels. In particular, accounts payable levels decreased
as a result of lower volumes in the latter part of the first quarter of fiscal
2003. Working capital as a percentage of sales was 6.3 percent, as compared to
4.3 percent in the first quarter of fiscal 2002. In computing this ratio, the
company included the receivables sold under the securitization program and
excluded short-term debt and cash and cash equivalents.
Investing Activities -- Cash used for investing activities was $15 million for
the first quarter of fiscal 2003 compared to $42 million in the same period last
year. Capital expenditures were $26 million in the first three months of fiscal
2003, compared to $34 million in the first three months of fiscal 2002.
Investing activities included proceeds of $13 million from the disposition of
assets. Cash used for other investing activities was $2 million and $8 million
in the first quarters of fiscal 2003 and 2002, respectively.
Financing Activities -- Cash provided by financing activities in the first three
months of fiscal 2003 was $47 million, which included a net increase in
revolving debt of $54 million, offset by payments of cash dividends of $7
million. Cash used for financing activities in the first three months of fiscal
2002 included a net decrease in revolving debt and preferred capital securities
of $25 million and payments of cash dividends of $ 7 million.
LIQUIDITY
The company is contractually obligated to make certain payments as disclosed in
Item 7, Management's Discussion and Analysis of Financial Condition and Results
of Operation -- Liquidity in the company's Annual Report on Form 10-K for the
fiscal year ended September 30, 2002, which is incorporated in this Form 10-Q by
reference.
Revolving and Other Debt -- As discussed in Note 13 of the Notes to Consolidated
Financial Statements, the company has two unsecured credit facilities, which
mature on June 27, 2005: a three-year, $400-million revolving credit facility
and a five-year, $750-million revolving credit facility. The company also has a
$50-million uncommitted line of credit.
The credit facilities require the company to maintain 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
December 31, 2002, the company was in compliance with all covenants.
26
ARVINMERITOR, INC.
Under a shelf registration filed with the SEC in April 2001, the company has
$150 million of debt securities remaining unissued.
Leases -- As discussed in Note 13 of the Notes to Consolidated Financial
Statements, certain operating leases require the company to maintain 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 obligations. At December 31,
2002, the company was in compliance with all covenants.
Accounts Receivable Securitization Facility -- As discussed in Note 7 of the
Notes to 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 certain bank conduits. As
of December 31, 2002 and September 30, 2002, the company had utilized $100
million and $105 million, respectively, of the accounts receivable
securitization facility. The accounts receivable securitization program matures
in September 2003 and the company expects to renew the facility at that time.
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 December 31, 2002, the company was in compliance
with all covenants.
CRITICAL ACCOUNTING POLICIES
See the information concerning the company's critical accounting policies
included under Item 7, Management's Discussion and Analysis of Financial
Condition and Results of Operation -- Critical Accounting Policies in the
company's Annual Report on Form 10-K for the fiscal year ended September 30,
2002, which is incorporated in this Form 10-Q by reference.
NEW ACCOUNTING PRONOUNCEMENTS
New accounting pronouncements are discussed in Notes 3 through 5 of the Notes to
Consolidated Financial Statements.
27
ARVINMERITOR, INC.
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 impact the euro and other currencies will have on the company's sales and
operating income is difficult to predict in the upcoming year. The company uses
foreign exchange contracts to offset the effect of exchange rate fluctuations on
foreign currency denominated payables and receivables to help minimize the risk
of loss from changes in exchange rates (see Note 14 of the Notes to Consolidated
Financial Statements). The company also uses interest rate swaps to offset the
effects on interest rate fluctuations on the fair value of its debt portfolio
(see Note 13 of the Notes to Consolidated Financial Statements). It is the
policy of the company not to enter into derivative instruments for speculative
purposes, and therefore the company holds no derivative instruments for trading
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 December 31, 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.
Item 4. Controls and Procedures
As required by Rule 13a-15 under the Securities Exchange Act of 1934, within the
90 days prior to the date of this report, the company carried out an evaluation
under the supervision and with the participation of ArvinMeritor's management,
including Larry D. Yost, Chairman of the Board and Chief Executive Officer, and
S. Carl Soderstrom, Jr., Senior Vice President and Chief Financial Officer, of
the effectiveness of the design and operation of the company's disclosure
controls and procedures. Based upon that evaluation, the Chief Executive Officer
and the Chief Financial Officer have concluded that the company's disclosure
controls and procedures are effective to ensure that information required to be
disclosed in the reports the company files or submits under the Securities
Exchange Act is recorded, processed, summarized and reported, within the time
periods specified in the Securities and Exchange Commission's rules and forms.
There have been no significant changes in ArvinMeritor's internal controls or in
other factors that could significantly affect these controls subsequent to the
date of that evaluation.
In connection with the rule, the company is in the process of further reviewing
and documenting its disclosure controls and procedures, including the company's
internal controls and procedures for financial reporting, and may from time to
time make changes aimed at enhancing their effectiveness and ensuring that the
company's systems evolve with the business.
28
ARVINMERITOR, INC.
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
On October 1, 2002, the company issued 1,033 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. In each case, 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, except as otherwise required by law.
29
ARVINMERITOR, INC.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
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 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 December 31, 2002.
30
ARVINMERITOR, INC.
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.
Date: February 12, 2003 By: /s/ V. G. Baker, II
-------------------
V. G. Baker, II
Senior Vice President
and General Counsel
(For the registrant)
Date: February 12, 2003 By: /s/ D. S. Bullock
-----------------
D. S. Bullock
Vice President and Controller
(Chief Accounting Officer)
31
ARVINMERITOR, INC.
CERTIFICATIONS
I, Larry, D. Yost, Chairman of the Board and Chief Executive Officer of
ArvinMeritor, Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of ArvinMeritor, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: February 11, 2003
/s/ Larry D. Yost
------------------------------------
Larry D. Yost, Chairman of the Board
and Chief Executive Officer
32
ARVINMERITOR, INC.
I, S. Carl Soderstrom, Jr., Senior Vice President and Chief Financial
Officer of ArvinMeritor, Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of ArvinMeritor, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: February 11, 2003
/s/ S. Carl Soderstrom, Jr.
---------------------------
S. Carl Soderstrom, Jr.
Senior Vice President and Chief Financial Officer
33
10-Q EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
EX-12 Computation of Earnings to fixed charges -- Quarter ended
December 31, 2002
EX-99.a Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
EX-99.b Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002