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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1998
COMMISSION FILE NUMBER 1-13093
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MERITOR AUTOMOTIVE, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 38-3354643
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
2135 WEST MAPLE ROAD 48084-7186
TROY, MICHIGAN (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
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REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (248) 435-1000
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
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TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
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Common Stock, $1 Par Value New York Stock Exchange
(including the associated Preferred
Share Purchase Rights)
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SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
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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 if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [X]
The aggregate market value of the registrant's voting stock held by
non-affiliates of the registrant on November 30, 1998 was approximately $1.22
billion.
69,076,028 shares of the registrant's Common Stock, par value $1 per share,
were outstanding on November 30, 1998.
DOCUMENTS INCORPORATED BY REFERENCE
(1) Certain information contained in the Annual Report to Shareowners of the
registrant for the fiscal year ended September 30, 1998 is incorporated by
reference into Part I, Part II and Part IV.
(2) Certain information contained in the Proxy Statement for the Annual Meeting
of Shareowners of the registrant to be held on February 10, 1999 is
incorporated by reference into Part III.
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PART I
ITEM 1. BUSINESS.
Meritor Automotive, Inc. (the "Company" or "Meritor"), headquartered in
Troy, Michigan, is a leading global supplier of a broad range of components and
systems for use in commercial, specialty and light vehicles. The Company was
incorporated in Delaware in May 1997 in connection with the September 30, 1997
distribution by Rockwell International Corporation, a Delaware corporation and
Meritor's former parent company ("Rockwell"), to Rockwell shareowners on a pro
rata basis of all of the issued and outstanding shares of the Company (the
"Distribution"). In the Distribution, Rockwell shareowners received one share of
Company Common Stock for every three shares of Rockwell Common Stock owned on
September 17, 1997, the record date for the Distribution. Prior to the
Distribution, Rockwell transferred substantially all of its operations, assets
and liabilities related to the automotive businesses then owned and operated by
Rockwell (the "Automotive Business") (including liabilities relating to former
operations) to the Company or to subsidiaries of the Company. As used herein,
the terms "Company" or "Meritor" include subsidiaries and predecessors unless
the context indicates otherwise.
Whenever an item of this Annual Report on Form 10-K refers to information
under specific captions of the 1998 Annual Report to Shareowners of the Company
(the "1998 Annual Report") or to information in the Proxy Statement for the
Annual Meeting of Shareowners of the Company to be held on February 10, 1999
(the "1999 Proxy Statement"), the information is incorporated in that item by
reference.
References in this Annual Report on Form 10-K to the Company's being a
leading supplier or the world's leading supplier, and other similar statements
as to the Company's relative market position, are based principally on
calculations made by the Company based on information collected by the Company,
including Company and industry sales data obtained from internal and available
external sources, as well as Company estimates. In addition to such quantitative
data, the Company's statements are based on other competitive factors such as
the Company's technological capabilities, its research and development efforts
and innovations and the quality of its products and services, in each case
relative to that of its competitors in its addressed markets.
Meritor serves a broad range of original equipment manufacturer ("OEM")
customers worldwide, including truck OEMs, light vehicle OEMs, semi-trailer
producers and off-highway and specialty vehicle manufacturers. Its ten largest
customers accounted for approximately 60% of total fiscal 1998 sales. The
Company operates 46 manufacturing facilities around the world. Sales outside
North America accounted for approximately 38% of total sales in fiscal 1998.
The Company serves its customers worldwide through Heavy Vehicle Systems
("HVS") and Light Vehicle Systems ("LVS"). HVS, which had fiscal 1998 sales of
approximately $2.36 billion, supplies drivetrain systems and components to OEMs
as well as to the aftermarket, including axles, brakes, transmissions, clutches
and drivelines, for heavy-duty and medium-duty trucks, trailers, off-highway
equipment, buses and coaches, as well as other specialty and military vehicles.
LVS, which had fiscal 1998 sales of approximately $1.48 billion, supplies
electromechanical and other components and systems, including roof, door, access
control, suspension and seat adjusting systems and wheel products for passenger
cars, light trucks and sport utility vehicles.
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The Company's sales by product class for the three fiscal years ended
September 30, 1998 were as follows:
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FISCAL YEAR
ENDED SEPTEMBER 30,
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1998 1997 1996
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(IN MILLIONS)
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Heavy Vehicle Systems:*
Truck and Trailer Products............................. $1,759 $1,441 $1,360
Off-Highway, Specialty and Military Vehicle Products... 602 516 467
Light Vehicle Systems.................................... 1,475 1,352 1,317
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Total.......................................... $3,836 $3,309 $3,144
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* HVS sales include aftermarket sales of $313 million in 1998, $290 million in
1997 and $261 million in 1996.
The following tables depict HVS and LVS sales by product and geographic
region for the fiscal year ended September 30, 1998:
1998 SALES BY PRODUCT
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Heavy Vehicle Systems:
Truck and Trailer Axles and Brakes........................ 39%
Off-Highway, Specialty and Military Vehicle Products...... 16
Transmissions, Clutches, Drivelines and Other............. 6
Light Vehicle Systems:
Door Systems.............................................. 13
Roof Systems.............................................. 10
Access Control Systems.................................... 5
Suspension Systems........................................ 5
Wheel Products............................................ 4
Seat Adjusting Systems.................................... 2
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Total............................................. 100%
===
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1998 SALES BY GEOGRAPHIC REGION
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HEAVY VEHICLE SYSTEMS LIGHT VEHICLE SYSTEMS COMBINED
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North America...................... 77% 39% 62%
Europe............................. 16 48 29
South America...................... 5 9 6
Asia/Pacific....................... 2 4 3
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Meritor began operations separate from Rockwell on October 1, 1997 and,
accordingly, does not have an operating history as an independent company prior
to that date. The combined financial information included or incorporated by
reference in this Annual Report on Form 10-K as of and for periods prior to
September 30, 1997 may not necessarily be indicative of the results of
operations, financial position and cash flows of the Company had it been a
separate, independent company during these periods. The consolidated financial
statements for periods after September 30, 1997 are those of the Company and its
subsidiaries.
INDUSTRY TRENDS
The automotive industry is experiencing several significant trends that
present opportunities and challenges to industry suppliers. These trends, which
influence the Company's business strategies, include the
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globalization of OEMs and their suppliers, increased outsourcing by OEMs,
increased demand for modules and systems by OEMs and the consolidation of
suppliers worldwide.
As OEMs expand geographically to access new markets, they are able to
achieve significant cost savings and enhanced product quality and consistency by
sourcing from the most capable full-service global suppliers. OEMs and suppliers
also have the opportunity to take advantage of economies of scale through global
sourcing of components and systems and by designing platforms that can be used
in different geographic markets, but still be adapted to local preferences.
OEMs are responding to global competitive pressures to improve quality and
reduce manufacturing costs and related capital investments by outsourcing
products which they historically have engineered and manufactured internally.
Outsourcing enables OEMs to focus on their core design, assembly and marketing
capabilities. In markets addressed by LVS, this increased outsourcing trend has
extended not only to components, but to entire modules and systems, requiring
suppliers to provide a higher level of engineering, design, electromechanical
and systems integration expertise in order to remain competitive. Increased
outsourcing by light vehicle OEMs has produced higher overall per vehicle sales
by independent suppliers. Such increased outsourcing can result in supplier
sales growth independent of the overall automotive industry growth trend.
OEMs also are reducing their total number of suppliers and are more
frequently entering into supply arrangements with the most capable global
suppliers. Increasingly, the criteria for selection include not only quality,
cost and responsiveness, but also certain full-service capabilities, including
design and engineering. This trend and the globalization trend described above
have contributed to the consolidation of automotive suppliers into larger, more
efficient and more capable companies.
BUSINESS STRATEGIES
Meritor has developed leadership market positions as it has grown into a
global supplier of a broad range of components and systems for use in
commercial, specialty and light vehicles worldwide. Meritor seeks to enhance its
leadership positions and capitalize on its existing customer, product and
geographic strengths, as well as the industry trends described above, and to
increase its sales, earnings and profitability by employing the following
business strategies:
Continuously Improve Core Business Processes. The Company is continuously
seeking to improve its core business processes, through investment in
information technology and capital equipment, rationalization of production
among facilities, deintegration of non-core processes, establishment of flexible
assembly sites and simplification and increased commonality of products. The
goal of these actions is to reduce product costs, improve product quality and
lower required asset investment levels, which should result in reduced product
development times and more flexibility to meet customer needs.
Capitalize on Customer Outsourcing Activities. A significant growth
strategy of the Company is to provide lower cost and higher quality products to
customers in connection with their increasing outsourcing activities. Management
believes truck and trailer OEMs in Europe will increasingly outsource in order
to achieve cost and efficiency advantages. The Company works closely with
current and prospective customers worldwide to identify and implement mutually
beneficial outsourcing opportunities. The Company has sought and will continue
to seek to utilize its broad product line and its design, engineering and
manufacturing expertise by expanding its sales of higher value modules and
systems. The Company will seek to utilize its leadership positions in the supply
of electromechanical systems to light vehicle OEMs and its ability to provide
drivetrain systems to truck and specialty vehicle OEMs to capitalize on this
anticipated customer demand.
Leverage Geographic Strengths. Geographic expansion to meet the global
sourcing needs of customers and to address new markets will continue to be an
important element of the Company's growth strategy. Management believes
opportunities exist to increase further the Company's presence in the North
American light vehicle markets, where its sales of light vehicle products
increased from approximately $466 million in fiscal 1997 to approximately $576
million in fiscal 1998. The Company also believes there are opportunities to
increase sales to heavy-duty and medium-duty commercial vehicle OEMs in Europe,
building on established
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customer relationships with their North American affiliates and the Company's
existing manufacturing presence in Europe. Emerging markets such as the
Asia-Pacific region and South America could also present growth opportunities if
demand for commercial, specialty and light vehicles increases in these areas. In
evaluating opportunities in these emerging markets, the Company will continue to
assess the economic situation in these regions and its potential effect on the
Company's businesses and served markets.
Introduce New Systems and Technologies. Meritor plans to continue
investing in new technologies, including electronics, and product development.
Meritor also plans to continue working closely with its customers to develop and
implement design, engineering, manufacturing and quality improvements. The
Company will draw upon the engineering resources of its Technical Center in
Troy, Michigan and its engineering centers of expertise in the United States,
Brazil, Canada, France, Germany and the United Kingdom, as well as its ongoing
relationship with the Rockwell Science Center. See "Research and Development."
Management believes that its strategy of continuing to introduce new and
improved systems and technologies will be an important factor in its efforts to
achieve its growth objectives.
Expand Aftermarket Business. Meritor intends to pursue growth of its
aftermarket business, which historically has generated higher profit margins
than those associated with original equipment sales. The Company's fiscal 1998
aftermarket sales were $313 million, representing sales of components and
services principally to HVS North American customers. The Company will seek to
expand its aftermarket business by utilizing its advanced distribution center in
Florence, Kentucky, and by leveraging its existing aftermarket channels with new
products, both those manufactured by the Company and those manufactured by
others and sold by the Company under distribution agreements.
On December 7, 1998, the Company signed a definitive agreement to acquire
the assets and assume substantially all of the liabilities of Euclid Industries.
Euclid is a leading North American supplier and manufacturer of aftermarket
replacement parts for a wide range of medium- and heavy-duty vehicles and has
been a major participant in the North American heavy-duty aftermarket. The
transaction is expected to close in December 1998, subject to receipt of
necessary regulatory approvals.
Selectively Pursue Strategic Opportunities. The Company regularly
evaluates various strategic and business development opportunities, including
license agreements, marketing arrangements, joint ventures, acquisitions and
dispositions. The Company intends to continue selectively to pursue alliances
and acquisitions that would allow it to gain access to new customers and
technologies, penetrate new geographic markets and enter new product markets,
and to review the prospects of its existing businesses to determine whether any
of them should be modified, sold or otherwise discontinued. See
"Products -- Heavy Vehicle Systems -- Truck and Trailer Products -- Truck Axles"
and "-- Brakes" below for information on agreements by the Company to purchase
the heavy truck axle manufacturing operations of Volvo Truck Corporation and the
heavy vehicle braking business of LucasVarity plc. See "-- Expand Aftermarket
Business" above for information on an agreement by the Company to acquire Euclid
Industries.
PRODUCTS
Meritor designs, develops, manufactures, markets, distributes, sells,
services and supports a broad range of products for use in commercial, specialty
and light vehicles. In addition to sales to the OEM market, the Company provides
its truck and trailer products and off-highway and specialty products to OEMs,
dealers, distributors, fleets and other end-users in the aftermarket. Principal
products of the Company include the following:
Heavy Vehicle Systems
Truck and Trailer Products
Truck Axles. Meritor is one of the world's leading independent suppliers
of axles for heavy-duty commercial vehicles. The Company's five axle
manufacturing facilities located in the United States, Brazil, England and Italy
produce axles for heavy-duty and medium-duty commercial vehicles. The Company's
extensive truck axle product line includes a wide range of drive and non-drive
front steer axles and single and tandem rear drive axles, which can include
driver-controlled differential lock for extra traction, aluminum
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carriers to reduce weight and pressurized filtered lubrication systems for
longer life. The Company's front steer and rear drive axles can be equipped with
the Company's cam, wedge or air disc brakes, automatic slack adjusters and
anti-lock braking systems.
On December 4, 1998, Meritor and Volvo Truck Corporation signed a
definitive agreement under which Meritor will acquire Volvo's heavy truck axle
manufacturing operations based in Lindesberg, Sweden, for a purchase price of
approximately $135 million in cash, $44 million of which is deferred. Under the
terms of the agreement, Meritor will become the primary supplier of heavy duty
axles for Volvo's global heavy truck operations. The transaction is expected to
close in December 1998, subject to receipt of regulatory approvals and other
customary closing conditions. Meritor believes that this acquisition will
enhance its position as a global leader in commercial axle production.
Brakes. The Company is a leading independent supplier of air brakes to
heavy-duty and medium-duty commercial vehicle manufacturers in North America.
Through four manufacturing facilities located in the United States, Canada,
England and Italy the Company manufactures a broad range of foundation air
brakes as well as automatic slack adjusters for brake systems. The Company's
foundation air brake products include cam drum brakes, which offer improved
lining life and tractor/trailer interchangeability, air disc brakes, which
provide fade resistant braking for demanding applications, and wedge drum
brakes, which are lightweight and provide automatic internal wear adjustment.
Through its 50%-owned joint venture with WABCO Automotive Products
("WABCO"), a wholly-owned subsidiary of American Standard, Inc., the Company is
the leading supplier of anti-lock braking systems ("ABS") and a supplier of
other electronic and pneumatic control systems for North American heavy-duty
commercial vehicles. Through the joint venture the Company also supplies
hydraulic ABS to the North American medium-duty truck market.
In 1995, federal regulations were adopted requiring that new heavy-duty and
medium-duty vehicles sold in the United States be equipped with ABS. Under these
regulations truck-tractors were required to be ABS equipped effective in March
1997, and ABS was required on all trailers, single-unit trucks and buses with
air brakes manufactured after March 1, 1998. In addition, ABS will be required
on all trucks and buses with hydraulic brakes manufactured after March 1, 1999.
On November 22, 1998, the Company signed a definitive agreement to acquire
the heavy vehicle braking systems ("HVBS") business of LucasVarity plc for $390
million in cash. The products of LucasVarity's HVBS business include air drum
and disc brakes, hydraulic brakes, wheel end components and aftermarket
products, which complement the Company's brake system products. The transaction
is expected to close in January 1999, subject to receipt of regulatory approvals
and other customary closing conditions. The Company believes that the
acquisition will enhance its position as a leading provider of brakes in Europe
and will enable it to provide North American OEM and aftermarket customers with
a comprehensive offering of drivetrain products.
Trailer Products. Meritor believes it is the world's leading manufacturer
of heavy-duty trailer axles, with leadership positions in North America and in
Europe. The Company's trailer axles are available in over 40 models in
capacities from 20,000 to 30,000 pounds for virtually all heavy trailer
applications and are available with the Company's broad range of brake products,
including ABS. In addition, the Company supplies trailer air suspension
products, for which it has strong market positions in Europe and growing market
presence in North America.
Transmissions. The Company introduced its transmission product line in
1989, enabling it to supply a complete drivetrain system to heavy-duty
commercial vehicle manufacturers in North America. The Company's range of
transmission models includes its Engine Synchro Shift(TM) transmission for
heavy-duty trucks that is designed to reduce gear shifting effort for drivers
and reduce wear on clutches and other drivetrain components in a cost efficient
manner by synchronizing engine speed to road speed shifts without use of the
clutch. See "Item 3. Legal Proceedings" for information with respect to a patent
infringement lawsuit filed against the Company by Eaton Corporation and an
adverse judgment in the case.
Clutches, Drivelines and Other Products. Meritor also supplies universal
joints and driveline components, as well as clutches, including diaphragm-spring
clutches. The Company believes that its Permalube(TM)
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universal joint is currently the only permanently lubricated universal joint
used in the high mileage on-highway market. The Company also supplies
Tripmaster(R) on-board computers (which provide trip and vehicle diagnostics) to
truck OEMs and fleet operators.
Off-Highway, Specialty and Military Vehicle Products
Off-Highway Vehicle Products. The Company supplies heavy-duty axles,
brakes and drivelines for use in numerous off-highway vehicle applications,
including construction, material handling, agriculture, mining and forestry, in
North America, South America, Europe and China. These products are designed to
tolerate high tonnages and operate under extreme conditions.
Specialty Vehicle Products. The Company supplies axles, brakes and
transfer cases for use in buses, coaches and recreational, fire and other
specialty vehicles in North America and Europe, and is the leading supplier of
bus and coach axles and brakes in North America.
Military Vehicle Products. The Company supplies axles, brakes, brake
system components including ABS, trailer products, transfer cases and drivelines
for use in medium-duty and heavy-duty military tactical wheeled vehicles,
principally in North America.
Light Vehicle Systems
Roof Systems. Meritor is one of the world's leading independent suppliers
of sunroofs and roof systems products, including its Golde(R) brand sunroofs,
for use in passenger cars, light trucks and sport utility vehicles. The Company
has roof system manufacturing facilities in North America, Europe and the
Asia-Pacific region. Meritor's North American sunroof sales increased in fiscal
1997 and 1998, reflecting increased demand in North America. However, demand for
sunroofs in the European light vehicle market decreased in fiscal 1997 and 1998
due to increasing popularity of air conditioning. This trend, which may
continue, had a negative impact on the Company's European sales in those
periods.
Door Systems. The Company is the world's leading supplier of manual and
power window regulators and a leading supplier of integrated door modules and
systems. In fiscal 1998, the Company manufactured approximately 29.2 million
window regulators at plants in North America, South America, Europe and the
Asia-Pacific region for light vehicle and heavy-duty commercial vehicle
manufacturers. The Company's wide range of power and manual door system products
utilize numerous technologies and offer the Company's own electric motors, which
are designed for individual applications and to maximize operating efficiency
and reduce noise levels.
Access Control Systems. Meritor supplies manual and power activated latch
systems to light vehicle and heavy-duty commercial vehicle manufacturers, with
leadership market positions in Europe and a growing market presence in North
America and the Asia-Pacific region. The Company's access control products
include modular and integrated door latches, actuators, trunk and hood latches
and fuel flap locking devices. The Company manufactured approximately 22.4
million latches and 23.1 million actuators in fiscal 1998 in access control
systems manufacturing facilities in North America, Europe and the Asia-Pacific
region.
Seat Adjusting Systems. The Company supplies manual and power seat
adjusting systems for passenger cars, light trucks and sport utility vehicles,
principally in North America. The Company's seat adjusting system products,
first introduced in 1994, feature systems with integrated electronic memory and
electric motors manufactured by the Company which are designed with speed and
power capabilities to meet the specific requirements of each vehicle platform.
Suspension Products. Through its 57%-owned joint venture with Mitsubishi
Steel Mfg. Co., the Company is one of the leading independent suppliers of
products used in suspension systems for passenger cars, light trucks and sport
utility vehicles in North America. The Company's suspension system products,
which are manufactured at three facilities in the United States and Canada,
include coil springs, stabilizer bars and torsion bars. This business has
experienced significant sales growth over the past five years as light vehicle
OEMs have increased their outsourcing of suspension system products and the
light vehicle market has grown.
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Wheel Products. Meritor is a leading supplier of wheel products to the
light vehicle OEM market, principally in North and South America. The Company's
wheel manufacturing facilities in Brazil and Mexico produced approximately 13.0
million wheels in fiscal 1998.
CUSTOMERS; SALES AND MARKETING
Meritor has numerous customers worldwide and has developed long-standing
business relationships with many of these customers. The Company markets and
sells its products principally to OEMs. In North America, the Company also
markets its truck and trailer products directly to dealers, fleets and other
end-users, who may designate the components and systems of a particular supplier
for installation in the vehicles they purchase from OEMs. Most of the Company's
sales to OEMs, consistent with industry practice, are made through open purchase
orders, which do not require the purchase of a minimum number of products and
typically may be canceled by the customer on reasonable notice without penalty.
The Company also sells products to certain customers under long-term
arrangements that require the Company to provide annual cost reductions (through
price reductions or other cost benefits for the OEMs) by certain percentages
each year. If the Company were unable to generate sufficient production cost
savings in the future to offset such price reductions, the Company's gross
margins could be adversely affected. In addition to sales to the OEM market, the
Company provides its truck and trailer products and off-highway and specialty
products to OEMs, dealers and distributors in the aftermarket.
The Company is dependent upon large OEM customers with substantial
bargaining power, including with respect to price and other commercial terms.
Although the Company believes that it generally enjoys good relations with its
OEM customers, loss of all or a substantial portion of the Company's sales to
any of its large volume customers for whatever reason (including, but not
limited to, loss of contracts, reduced or delayed customer requirements or
strikes or other work stoppages affecting production by such customers) could
have a significant adverse effect on the Company's financial results.
Daimler-Benz A.G. (which owns Mercedes-Benz A.G. and Freightliner Corporation,
including the heavy truck business formerly owned by Ford Motor Company which
was acquired by Freightliner) accounted for approximately 16% of total sales of
the Company for fiscal 1998. Daimler-Benz A.G. and Chrysler Corporation merged
on November 12, 1998, and together they accounted for approximately 23% of the
Company's total fiscal 1998 sales.
On September 18, 1998, the Company and Freightliner entered into a
multi-year extension of their existing drivetrain supply agreement. The
agreement provides that the Company's products, which are already standard on
some Freightliner models, will become standard on several additional models. The
agreement includes front steer and rear drive axles, air brakes, automatic slack
adjusters, clutches, transmissions, ABS, on-board diagnostic computing systems
and aftermarket parts. As a result of this contract, the Company expects that
Freightliner will account for more of the Company's sales in fiscal 1999 than it
did in fiscal 1998.
Except as noted above with respect to the North American market for
heavy-duty trucks, the Company generally competes for new business from OEMs
both at the beginning of the development of new vehicle platforms and upon the
redesign of existing platforms. New platform development generally begins two to
four years prior to start-up of production. Once a supplier has been designated
to supply products to a new platform, an OEM will generally continue to purchase
those products from the supplier for the life of the platform, which typically
lasts four to six years.
COMPETITION
The Company operates in a highly competitive environment. Principal
competitive factors are price, quality, service, product performance, design and
engineering capabilities, new product innovation and timely delivery. The
Company competes worldwide with a number of United States and international
manufacturers that are both larger and smaller than the Company in terms of
resources and market shares. In addition, certain OEMs manufacture for their own
use products of the type supplied by the Company. In North America, the major
competitors of HVS are Eaton Corporation and Dana Corporation. LVS has numerous
competitors across its various product lines worldwide.
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RAW MATERIALS AND SUPPLIES
The Company believes it has adequate sources for the supply of raw
materials and components for its manufacturing needs with suppliers located
around the world. The Company does, however, concentrate its purchases of
certain raw materials and parts over a limited number of suppliers and is
dependent upon the ability of its suppliers to meet performance and quality
specifications and delivery schedules. Although the Company historically has not
experienced any significant difficulties in obtaining an adequate supply of raw
materials and components necessary for its manufacturing operations, the loss of
a significant supplier or the inability of a supplier to meet performance and
quality specifications or delivery schedules could have an adverse effect on the
Company.
JOINT VENTURES
As the automotive industry has become more globalized, joint ventures and
other cooperative arrangements have become an important element of the business
strategies of the Company. The Company currently has interests in 13 joint
ventures with operations in the United States, Australia, Brazil, Canada, China,
India, Japan, Mexico and Turkey. In accordance with generally accepted
accounting principles, operating results of the seven joint ventures more than
50% owned are consolidated in the financial statements of the Company. Joint
ventures of the Company include its 50%-owned joint venture with WABCO for the
manufacture and supply of ABS systems for heavy-duty commercial vehicles and its
57%-owned joint venture with Mitsubishi Steel Mfg. Co. for the manufacture and
supply of suspension products for passenger cars, light trucks and sport utility
vehicles.
ACQUISITIONS AND DISPOSITIONS
Meritor regularly considers various strategic and business opportunities,
including license agreements, marketing arrangements and acquisitions, and
reviews the prospects of its existing businesses to determine whether any of
them should be modified, sold or otherwise discontinued. Although no assurance
can be given as to whether or when any acquisitions or dispositions will be
consummated, if agreement with respect to any acquisitions were to be reached,
the Company could finance such acquisitions by issuance of additional debt or
equity securities. The additional debt from any acquisitions, if consummated,
would increase the Company's debt to capitalization ratio. See
"Products -- Heavy Vehicle Systems -- Truck and Trailer Products -- Truck Axles"
and "-- Brakes" above for information on agreements by the Company to purchase
the heavy truck axle manufacturing operations of Volvo Truck Corporation and the
heavy vehicle braking business of LucasVarity plc. See "Business
Strategies -- Expand Aftermarket Business" above for information on an agreement
by the Company to acquire Euclid Industries.
The industry in which the Company operates is experiencing significant
consolidation among suppliers, due in part to globalization and increased
outsourcing of product engineering and manufacturing by OEMs, and in part to
OEMs more frequently awarding long-term, sole-source or preferred supplier
contracts to the most capable global suppliers, thereby reducing the total
number of suppliers from whom components and systems are purchased. The Company
will consider acquisitions as a means of further expansion, but cannot predict
whether its participation, or lack of participation, in industry consolidation
will ultimately be beneficial to the Company.
RESEARCH AND DEVELOPMENT
The Company has significant research, development, engineering and product
design capabilities. The Company spent approximately $54 million, $54 million
and $51 million in fiscal 1998, 1997 and 1996, respectively, on research and
development. At September 30, 1998, the Company employed approximately 608
professional engineers and scientists. Pursuant to a transitional services
agreement entered into with Rockwell in connection with the Distribution,
Rockwell's Science Center continues to provide assistance to the Company in the
development of various technological and product advancements.
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PATENTS AND TRADEMARKS
Numerous United States and foreign patents and patent applications are
owned or licensed by the Company in its manufacturing operations and other
activities. While in the aggregate the patents and licenses of the Company are
considered important to the operation of its business, management does not
consider them of such importance that the loss or termination of any one of them
would materially affect the Company. See "Item 3. Legal Proceedings."
The Company's name, its registered trademark "Meritor" and its symbol are
important to its business. Other significant trademarks owned by the Company
include Golde(R) (sunroofs), Fumagalli(TM) (wheels) and ROR(TM) (trailer axles).
Under the terms of the Distribution Agreement (the "Distribution Agreement")
entered into with Rockwell in connection with the Distribution, the Company may
continue to apply the "Rockwell" brand name to its products until September 30,
2007.
EMPLOYEES
At September 30, 1998, the Company had approximately 16,900 full-time
employees. Approximately 3,688 Company employees in the United States and Canada
are covered by collective bargaining agreements. The Company believes its
relationship with unionized employees is satisfactory. No significant work
stoppages have occurred in the past five years.
ENVIRONMENTAL MATTERS
In connection with the Distribution, the Company assumed all liabilities in
respect of environmental matters related to current and former operations of the
Automotive Business.
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 had 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 have been
accomplished without material effect on the Company's liquidity and capital
resources, competitive position or financial statements.
Meritor has been designated as a potentially responsible party at three
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 fully
determined. Management estimates the total reasonably possible costs the Company
could incur for the remediation of Superfund sites at September 30, 1998 to be
approximately $16 million, of which $10 million had been accrued.
Various other lawsuits, claims, and proceedings have been asserted against
the Company alleging violation 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 September 30, 1998 to be approximately $39 million. The
Company had recorded environmental accruals for these matters of $14 million.
At September 30, 1998, there were no receivables from third parties related
to environmental matters.
Based on its assessment and after consulting with David W. Greenfield,
Esq., General Counsel of the Company, 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 liquidity and capital resources, competitive
position or financial statements. Management cannot assess the possible effect
of compliance with future requirements.
GEOGRAPHIC INFORMATION
The Company conducts operations in the United States and in 14 foreign
countries. Approximately 44% of Meritor's total assets and 38% of sales for the
year ended September 30, 1998 were outside North America, primarily in France,
the United Kingdom, Germany, Brazil and Italy. Selected financial information by
major
9
<PAGE> 11
geographic area for the three years ended September 30, 1998 is contained in
Note 19 of Notes to Consolidated Financial Statements in the 1998 Annual Report.
The Company's international operations are subject to a number of risks
inherent in operating abroad, including, but not limited to, risks with respect
to currency exchange rate fluctuations, local economic and political conditions,
disruptions of capital and trading markets, restrictive governmental actions
(such as restrictions on transfer of funds and trade protection measures,
including export duties and quotas and customs duties and tariffs), changes in
legal or regulatory requirements, import or export licensing requirements,
limitations on the repatriation of funds, difficulty in obtaining distribution
and support, nationalization, the laws and policies of the United States
affecting trade, foreign investment and loans, and tax laws. There can be no
assurance that these factors will not have a material adverse impact on the
Company's ability to increase or maintain its foreign sales or on its financial
condition or results of operations.
The Company enters into foreign currency forward exchange contracts to
manage risks associated with currency exchange rate fluctuations that could
affect foreign currency commitments entered into in the ordinary course of
business. The Company has not experienced nor does it anticipate any material
adverse effect on its results of operations or financial condition related to
these foreign currency forward exchange contracts. The Company has not entered
into foreign currency forward exchange contracts for other purposes, and the
Company's financial condition and results of operations could be affected
(negatively or positively) by currency fluctuations.
On January 1, 1999, the Euro will become the common currency of eleven
countries of the European Union. During a three-year transition period, the
present national currencies of these eleven countries will become sub-units of
the Euro at fixed exchange rates. The European Union's current plans call for
the transition period to be completed by July 1, 2002, at which time the Euro
will become the sole legal tender in participating countries.
The Company is engaged in business in some of the countries that will
participate in the European Monetary Union, and sales for fiscal 1998 in these
countries were approximately 21% of the Company's total sales. In addition, the
Company enters into foreign currency forward exchange contracts with respect to
several of the existing currencies that will be subsumed into the Euro, and has
borrowings in several of the participating currencies primarily under its bank
revolving credit arrangements. The Company has analyzed the potential effects of
the Euro conversion on competitive conditions, information technology and other
systems, currency risks, financial instruments and contracts, and has examined
the tax and accounting consequences of Euro conversion, and believes that the
conversion will not have a material adverse effect on its business, operations
and financial condition.
The Company has begun making the necessary adjustments to accommodate the
conversion, including modifications to its information technology systems and
programs, pricing schedules and financial instruments. The Company expects that
all necessary actions will be completed within budget and in a timely manner,
and that the costs associated with the conversion to the Euro will not be
material.
SEASONALITY; CYCLICALITY
The Company may experience seasonal variations in the demand for its
products to the extent automotive vehicle production fluctuates. Historically,
such demand has been somewhat lower in the Company's first and fourth fiscal
quarters (the fourth and third calendar quarters, respectively) when OEM plants
may close during model changeovers and vacation and holiday periods.
In addition, the industry in which the Company operates has been
characterized historically by periodic fluctuations in overall demand for
trucks, passenger cars and other vehicles for which the Company supplies
products, resulting in corresponding fluctuations in demand for products of the
Company. Cycles in the major automotive industry markets of North America and
Europe are not necessarily concurrent or related. The cyclical nature of the
automotive industry is outside the control of the Company and cannot be
predicted with certainty. The Company has sought and will continue to seek to
expand its operations globally to mitigate the effect of periodic fluctuations
in demand of the automotive industry in one or more particular countries.
10
<PAGE> 12
The following table sets forth vehicle production in principal markets
served by the Company for the last five fiscal years:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED SEPTEMBER 30,
------------------------------------
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Heavy Vehicles (in thousands):
North America, Heavy-Duty Trucks...................... 215 243 203 201 245
North America, Medium-Duty Trucks..................... 125 150 125 138 141
North America, Trailers............................... 271 327 266 252 316
Europe, Trailers...................................... 77 86 91 81 108
Light Vehicles (in millions):
North America......................................... 14.9 15.0 15.1 15.2 15.4
South America......................................... 1.9 1.7 1.8 2.1 2.1
Europe................................................ 13.1 14.0 14.5 15.2 16.1
Asia-Pacific (calendar year data)..................... 15.2 15.2 16.6 17.1 15.6
</TABLE>
- ---------------
Source: Automotive industry publications and management estimates.
YEAR 2000 READINESS DISCLOSURE
The Company initiated a Company-wide year 2000 project to determine whether
the Company's information technology ("IT") and non-IT systems are year 2000
compliant and to identify and implement the remedial actions necessary to effect
compliance. None of the Company's other IT projects have been delayed
significantly due to the year 2000 project. The year 2000 project also includes
assessment of compliance at the supplier and service provider level in order to
minimize supply disruptions (see "Raw Materials and Supplies" above for
information on the Company's dependence on obtaining adequate supplies of raw
materials and components to support its manufacturing needs). In addition,
certain of the Company's locations are implementing Enterprise Resource Planning
systems. The Company anticipates that these systems will be in place in early
1999 and will be year 2000 compliant. Because the Company's customer base is
diverse, fewer resources of the project have been directed to the area of
customer compliance.
The project is divided into four major sections: business and engineering,
factory floor, IT infrastructure (hardware and software) and supply chain. Each
section involves three phases: phase one -- identification of risks; phase
two -- defining the scope of necessary corrections, preparation of related plans
and cost estimates and development of contingency plans; and phase
three -- implementation of decisions to repair, replace or retire the systems in
question.
The consulting firm of Keane, Inc. was engaged to coordinate the year 2000
project for all four major sections and to provide more direct assistance with
respect to the business and engineering section and the IT infrastructure
section. In addition, the Company engaged outside consultants to assist in risk
identification, analysis and remediation planning for factory floor operations
and to assist in implementing repair and remediation projects at local sites.
The business and engineering section of the project includes manufacturing,
financial applications and remediation projects, critical core business system
validation testing, aftermarket systems and supplemental systems. The factory
floor section includes shop floor controls and facility systems. The IT
infrastructure section includes PC/LAN hardware, software and peripherals;
mainframe, midrange and UNIX systems; engineering workstations; and
telecom/global carriers. The supply chain section includes formal communication
with the Company's significant customers, suppliers and critical service
providers. The Company estimates that all four areas will be year 2000 compliant
by June 30, 1999, with follow-up reviews scheduled through the remainder of
1999.
11
<PAGE> 13
The following chart summarizes the status of completion by section for each
phase of the project at September 30, 1998.
<TABLE>
<CAPTION>
APPROXIMATE PERCENTAGE COMPLETED
--------------------------------
PHASE 1 PHASE 2 PHASE 3
-------- -------- --------
<S> <C> <C> <C>
Business/Engineering.................................. 100 55-100 * 15-90 *
Factory floor......................................... 100 40-80 * 15
IT infrastructure..................................... 100 40-100 * 25
Supply chain.......................................... 45-100 * 20-60 * 0-8 *
</TABLE>
- ---------------
* Percentage of completion varies by location and by separate project within
each section.
The Company is in the initial stage of developing contingency plans
designed to minimize any adverse effects that would result if timely compliance
were not achieved, either internally or at the third party level. The planning
process will include identification of the areas of the Company's business and
suppliers with the greatest potential for non-compliance, and arrangements for
alternate suppliers, backup systems or stockpiling of components in the affected
areas. The Company expects to complete its analysis and have contingency
arrangements in place by September 30, 1999.
The Company currently estimates that the aggregate cost of the year 2000
project will be approximately $26 million. This amount excludes employee expense
and computer equipment and upgrades that would have been purchased regardless of
the year 2000 project. During fiscal 1998 and fiscal 1997, the Company spent
$10.2 million and $0.7 million, respectively, on the project. In fiscal 1998,
approximately $6.6 million of expenditures related to business and engineering
systems and IT infrastructure and approximately $3.6 million was expended in
relation to the factory floor. These costs are being expensed as incurred and
are being funded through operating cash flows. They do not include costs that
may be incurred as a result of failure of third parties, including suppliers, to
become year 2000 compliant, or costs to implement contingency plans.
The Company currently estimates that the costs incurred in connection with
the Enterprise Resource Planning systems will be approximately $35 million,
including costs of internal employees dedicated to the project. The Company
anticipates that approximately $30 million of the total costs will be
capitalized and amortized over five years.
Incomplete or untimely resolution of the year 2000 issue by the Company,
key suppliers, customers and other parties could have a material adverse effect
on the Company's results of operations, financial condition and cash flows. The
year 2000 project is expected to reduce significantly the Company's level of
uncertainty about year 2000 issues. The Company believes that completed and
planned modifications and conversions of its internal IT and non-IT systems will
allow it to be year 2000 compliant in a timely manner. However, due to the
general uncertainty inherent with year 2000 compliance, the Company is unable to
determine at this time whether the consequences of year 2000 failures by third
parties will have a material impact on the Company.
CAUTIONARY STATEMENT
This Annual Report on Form 10-K 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. Actual results may differ materially from those projected as
a result of various risks and uncertainties, including but not limited to global
economic and market conditions, such as the demand for commercial, specialty and
light vehicles for which the Company supplies products; risks inherent in
operating abroad; 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; and
competitive product and pricing pressures, as well as other risks and
uncertainties, including those detailed herein and from time to time in other
filings of the Company with the Securities and Exchange Commission. See also
"Customers; Sales and Marketing," "Competition," "Raw Materials and Supplies,"
"Acquisitions and Dispositions," "Geographic Information," "Seasonality;
12
<PAGE> 14
Cyclicality" and "Year 2000 Readiness Disclosure" in this Annual Report on Form
10-K, and Chief Financial Officer's Review -- Management's Discussion and
Analysis in the 1998 Annual Report.
ITEM 2. PROPERTIES.
At September 30, 1998, the Company operated 46 manufacturing facilities
throughout the United States and in Europe, Brazil, Canada, Mexico, Australia
and the Far East. It also had 19 engineering facilities, sales offices,
warehouses and service centers. These facilities had an aggregate floor space of
approximately 11 million square feet, substantially all of which is in use. Of
this floor space, approximately 90% was owned by the Company and approximately
10% was leased. There are no major encumbrances (other than financing
arrangements which in the aggregate are not material) on any of the Company's
plants or equipment. In the opinion of management, the Company's properties have
been well maintained, are in sound operating condition and contain all equipment
and facilities necessary to operate at present levels. A summary of floor space
of these facilities at September 30, 1998 is as follows:
<TABLE>
<CAPTION>
OWNED LEASED
LOCATION FACILITIES FACILITIES TOTAL
- -------- ---------- ---------- ------
(IN THOUSANDS OF SQUARE FEET)
<S> <C> <C> <C>
United States........................................... 4,431 256 4,687
Canada.................................................. 691 38 729
Europe.................................................. 2,956 276 3,232
Asia-Pacific............................................ 272 525 797
Latin America........................................... 1,441 15 1,456
----- ----- ------
Total......................................... 9,791 1,110 10,901
===== ===== ======
</TABLE>
ITEM 3. LEGAL PROCEEDINGS.
On July 17, 1997 Eaton Corporation filed suit against Rockwell in the U.S.
District Court in Wilmington, Delaware, asserting infringement of Eaton's U.S.
Patent No. 4850236, which covers certain aspects of heavy-duty truck
transmissions, by the Company's Engine Synchro Shift(TM) transmission for
heavy-duty trucks, and seeking damages and injunctive relief. Meritor was joined
as a defendant on June 11, 1998, and trial in this matter began on June 23,
1998. On July 1, 1998, the jury rendered a verdict in favor of Eaton, finding
that Meritor had infringed Eaton's patent and awarding compensatory damages in
the amount of $1.25 million, and a judgment was entered on July 17, 1998.
Because the jury found the infringement to be willful, the judge in the case has
discretion to increase the damages to an amount up to three times the amount of
the award. Eaton's request for a permanent injunction is pending. A separate
trial has been scheduled for February 8-10, 1999, with respect to the Company's
allegations of inequitable conduct by Eaton in obtaining its patent, and the
judge is not expected to take action with respect to Eaton's request for a
permanent injunction or the damage issue until after this trial is completed.
Meritor is evaluating the jury's verdict and the judgment and is considering
further actions, including post-trial motions and an appeal to the United States
Court of Appeals for the Federal Circuit. Based on advice of M. Lee Murrah,
Esq., Assistant General Counsel of the Company, management believes the
Company's truck transmissions do not infringe Eaton's patent. The Company
intends to continue to defend this suit vigorously.
Various other lawsuits, claims and proceedings have been or may be
instituted or asserted against Rockwell or the Company or their respective
subsidiaries relating to the conduct of the Company's business, including those
pertaining to product liability, intellectual property, environmental, 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, based on its evaluation of matters which are pending or asserted and
after consulting with David W. Greenfield, Esq., General Counsel of the Company,
management believes the disposition of such matters will not have a material
adverse effect on the Company's financial statements.
13
<PAGE> 15
Pursuant to the terms of the Distribution Agreement, the Company assumed
responsibility for all litigation (including environmental proceedings) against
Rockwell or its subsidiaries in respect of the Automotive Business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders during the fourth
quarter of fiscal 1998.
ITEM 4A. EXECUTIVE OFFICERS OF THE COMPANY.
The name, age, positions and offices held with the Company and principal
occupations and employment during the past five years of each of the executive
officers of the Company as of December 18, 1998 are as follows:
LARRY D. YOST, 60 -- Chairman of the Board and Chief Executive Officer of
Meritor since May 1997; Acting President, Light Vehicle Systems since January
1998. Senior Vice President, President, Automotive and Acting President, Heavy
Vehicle Systems of Rockwell (electronic controls and communications) from March
1997 to September 1997; President, Heavy Vehicle Systems of Rockwell from
November 1994 to March 1997; Senior Vice President, Operations of Allen-Bradley
Company, LLC (automation), a subsidiary of Rockwell, prior to November 1994.
GARY L. COLLINS, 52 -- Senior Vice President, Human Resources of Meritor
since August 1997. Vice President -- Human Resources and Government Relations,
Automotive of Rockwell from September 1991 to September 1997.
GLENN J. EGGERT, 55 -- Senior Vice President, Operations of Meritor since
September 1998. Senior Vice President -- Operations, Heavy Vehicle Systems of
Meritor from September 1997 to September 1998; Vice President -- Operations,
Heavy Vehicle Systems of Rockwell from May 1996 to September 1997; Vice
President -- Operations, Industrial Controls Group of Allen-Bradley Company, LLC
(automation), a subsidiary of Rockwell, from 1990 to April 1996.
DAVID W. GREENFIELD, 48 -- Senior Vice President, General Counsel and
Secretary of Meritor since May 1997. Associate General Counsel of Rockwell from
July 1995 to September 1997; Assistant General Counsel of Rockwell prior to July
1995.
THOMAS J. JOYCE, 51 -- Vice President and Treasurer of Meritor since May
1997. Vice President, Investor and Community Relations of Rockwell from May 1989
to September 1997.
SUSAN P. KAMPE, 41 -- Senior Vice President and Chief Information Officer
of Meritor since September 1997. Vice President -- Information Technology, Heavy
Vehicle Systems of Rockwell from August 1996 to September 1997; Director of
Global Information Systems and Services, Safety Restraints Business of
Allied-Signal Automotive (automotive component supplier) from August 1994 to
August 1996; Manager, Manufacturing Systems, North America of ITT Automotive,
Inc. (automotive component supplier) prior to August 1994.
THOMAS A. MADDEN, 45 -- Senior Vice President and Chief Financial Officer
of Meritor since May 1997. Vice President and Senior Vice President -- Finance,
Automotive of Rockwell from March 1997 to September 1997; Vice President,
Corporate Development of Rockwell from September 1996 to March 1997; Vice
President -- Finance & Administration, Light Vehicle Systems of Rockwell from
May 1996 to September 1996; Vice President -- Finance & Administration,
Automotive of Rockwell from October 1994 to May 1996; Assistant Controller of
Rockwell prior to October 1994.
PRAKASH R. MULCHANDANI, 54 -- Senior Vice President and President, Heavy
Vehicle Systems of Meritor since January 1998. Senior Vice President and
President, Worldwide Truck and Trailer Systems of Meritor from September 1997 to
December 1997; President -- Worldwide Truck and Trailer Systems, Heavy Vehicle
Systems of Rockwell from April 1996 to September 1997; President -- North
American Truck Systems, Automotive of Rockwell from June 1994 to April 1996;
General Manager -- Trailer Products, Automotive of Rockwell prior to June 1994.
14
<PAGE> 16
S. CARL SODERSTROM, 45 -- Senior Vice President, Engineering, Quality and
Procurement of Meritor since February 1998. Vice President, Engineering and
Quality, Heavy Vehicle Systems of Meritor from September 1997 to February 1998;
Vice President, Engineering and Quality, Heavy Vehicle Systems of Rockwell from
October 1996 to September 1997; Director of Development -- Operator Interface
and Logic Division of Allen-Bradley Company, LLC (automation), a subsidiary of
Rockwell, from 1993 to October 1996.
DIANE M. STELFOX, 41 -- Vice President and Controller of Meritor since
September 1998. Assistant Controller of Meritor from January 1998 to September
1998; Controller -- Body Systems N.A. of ITT Automotive, Inc. (automotive
component supplier) from 1995 to 1997; Controller -- Aftermarket N.A. of ITT
Automotive from 1992 to 1995.
RODNEY J. WALTER, 47 -- Senior Vice President, Business Development and
Communications of Meritor since September 1997. Vice President -- Business
Development, Heavy Vehicle Systems of Rockwell from June 1995 to September 1997;
Director -- Business Development of Rockwell prior to June 1995.
There are no family relationships, as defined in Item 401 of Regulation
S-K, between any of the above executive officers. No officer of the Company was
selected pursuant to any arrangement or understanding between him or her and any
person other than the Company. All executive officers are elected annually.
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's Common Stock, par value $1 per share, is listed on the New
York Stock Exchange and trades under the symbol "MRA." On December 14, 1998,
there were 52,325 shareowners of record of the Company's Common Stock. The high
and low sale prices for each quarter in fiscal year 1998 were as follows:
<TABLE>
<CAPTION>
QUARTER ENDED HIGH LOW
------------- ---- ---
<S> <C> <C>
December 31, 1997........................................ $25 1/4 $20 11/16
March 31, 1998........................................... 27 3/16 19 1/8
June 30, 1998............................................ 28 3/8 21 7/8
September 30, 1998....................................... 24 15
</TABLE>
The Company's Common Stock began trading "regular way" on the New York
Stock Exchange on October 1, 1997. Prior to the Distribution, the Company's
Common Stock traded on a "when-issued" basis from September 15, 1997 to
September 30, 1997.
Four quarterly cash dividends, each in the amount of 10.5 cents per share
of Common Stock, were declared and paid in fiscal 1998. Prior to the
Distribution, the Company paid a cash dividend to Rockwell, then the Company's
sole shareowner, in the amount of $359.4 million.
On July 1, 1998, the Company issued 370 and 185 shares of Common Stock to
Donald R. Beall and Martin D. Walker, respectively, non-employee directors of
the Company, pursuant to the terms of the Company's Directors Stock Plan, in
lieu of cash payment of all or a portion of the quarterly retainer fees for
board service. The issuance of these securities was exempt from registration
under the Securities Act of 1933, as amended, as a transaction not involving a
public offering under Section 4(2) of the Act.
ITEM 6. SELECTED FINANCIAL DATA.
See the information in the table captioned Selected Financial Data in the
1998 Annual Report.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
See the discussion and analysis under the caption Chief Financial Officer's
Review -- Management's Discussion and Analysis in the 1998 Annual Report.
15
<PAGE> 17
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
See Chief Financial Officer's Review -- Management's Discussion and
Analysis -- Quantitative and Qualitative Disclosures About Market Risk in the
1998 Annual Report.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See Consolidated Balance Sheet, Statement of Consolidated Income, Statement
of Consolidated Cash Flows, Statement of Consolidated Shareowners' Equity, Notes
to Consolidated Financial Statements, and Independent Auditors' Report in the
1998 Annual Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY.
See the information under the captions Election of Directors and
Information as to Nominee for Director and Continuing Directors in the 1999
Proxy Statement. No nominee for director was selected pursuant to any
arrangement or understanding between the nominee and any person other than the
Company pursuant to which such person is or was to be selected as a director or
nominee. See also the information with respect to executive officers of the
Company under Item 4a of Part I.
ITEM 11. EXECUTIVE COMPENSATION.
See the information under the captions Compensation of Directors, Executive
Compensation and Retirement Benefits in the 1999 Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
See the information under the captions Voting Securities and Ownership by
Management of Equity Securities in the 1999 Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
See the information under the caption Certain Transactions and Other
Relationships in the 1999 Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) Financial Statements, Financial Statement Schedules and Exhibits.
(1) Financial Statements (all financial statements listed below are those
of the Company and its consolidated subsidiaries and are incorporated by
reference in Item 8 from the 1998 Annual Report):
Consolidated Balance Sheet, September 30, 1998 and 1997.
Statement of Consolidated Income, years ended September 30, 1998, 1997
and 1996.
Statement of Consolidated Cash Flows, years ended September 30, 1998,
1997 and 1996.
Statement of Consolidated Shareowners' Equity, years ended September 30,
1998, 1997 and 1996.
Notes to Consolidated Financial Statements.
Independent Auditors' Report.
16
<PAGE> 18
(2) Financial Statement Schedule for the years ended September 30, 1998,
1997 and 1996.
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report................................ S-1
Schedule II -- Valuation and Qualifying Accounts............ S-2
</TABLE>
Schedules not filed with this Annual Report on Form 10-K are omitted
because of the absence of conditions under which they are required or because
the information called for is shown in the financial statements or related
notes.
(3) Exhibits
<TABLE>
<S> <C>
3-a-1 Restated Certificate of Incorporation of the Company, filed
as Exhibit 4.1 to the Company's Registration Statement on
Form S-8 (Registration No. 333-35403), is incorporated by
reference.
3-b-1 By-laws of the Company, filed as Exhibit 4.2 to the
Company's Registration Statement on Form S-8 (Registration
No. 333-35403), is incorporated by reference.
4-a-1 Rights Agreement, dated as of September 8, 1997, by and
between the Company and First Chicago Trust Company of New
York, as Rights Agent, filed as Exhibit 4.3 to the Company's
Registration Statement on Form S-8 (Registration No.
333-35403), is incorporated by reference.
4-b-1 Indenture, dated as of April 1, 1998, between the Company
and The Chase Manhattan Bank as trustee, filed as Exhibit 4
to the Company's Registration Statement on Form S-3
(Registration No. 333-49777), is incorporated by reference.
*10-a-1 The Company's 1997 Long-Term Incentives Plan, filed as
Exhibit 10-a-1 to the Company's Annual Report on Form 10-K
for the fiscal year ended September 30, 1997 (File No.
1-13093) ("1997 Form 10-K"), is incorporated by reference.
*10-a-2 Form of Restricted Stock Agreement under the Company's 1997
Long-Term Incentives Plan, filed as Exhibit 10-a-2 to the
1997 Form 10-K, is incorporated by reference.
*10-a-3 Form of Option Agreement under the Company's 1997 Long-Term
Incentives Plan, filed as Exhibit 10(a) to the Company's
Quarterly Report on Form 10-Q for the quarterly period ended
March 31, 1998 (File No. 1-13093), is incorporated by
reference.
*10-b-1 The Company's Directors Stock Plan, filed as Exhibit 10-b-1
to the 1997 Form 10-K, is incorporated by reference.
*10-b-2 Form of Restricted Stock Agreement under the Company's
Directors Stock Plan, filed as Exhibit 10-b-2 to the 1997
Form 10-K, is incorporated by reference.
*10-b-3 Form of Option Agreement under the Company's Directors Stock
Plan, filed as Exhibit 10(b) to the Company's Quarterly
Report on Form 10-Q for the quarterly period ended March 31,
1998 (File No. 1-13093), is incorporated by reference.
*10-c-1 The Company's Incentive Compensation Plan, filed as Exhibit
10-c-1 to the 1997 Form 10-K, is incorporated by reference.
*10-d-1 Copy of resolution of the Board of Directors of the Company,
adopted on September 8, 1997, providing for its Deferred
Compensation Policy for Non-Employee Directors, filed as
Exhibit 10-d-1 to the 1997 Form 10-K, is incorporated by
reference.
*10-e-1 The Company's Deferred Compensation Plan.
10-f-1 Credit Agreement dated as of August 21, 1997 among the
Company, the lenders from time to time party to the
agreement, Morgan Guaranty Trust Company of New York, as
Administrative Agent, and NBD Bank, as Documentation Agent,
filed as Exhibit 10.5 to the Company's Registration
Statement on Form 10 (File No. 1-13093), is incorporated by
reference.
</TABLE>
17
<PAGE> 19
<TABLE>
<S> <C>
10-g-1 Distribution Agreement dated as of September 30, 1997 by and
between Rockwell and the Company, filed as Exhibit 2.1 to
the Company's Current Report on Form 8-K dated October 10,
1997, is incorporated by reference.
10-h-1 Employee Matters Agreement dated as of September 30, 1997 by
and between Rockwell and the Company, filed as Exhibit 2.2
to the Company's Current Report on Form 8-K dated October
10, 1997, is incorporated by reference.
10-i-1 Tax Allocation Agreement dated as of September 30, 1997 by
and between Rockwell and the Company, filed as Exhibit 2.3
to the Company's Current Report on Form 8-K dated October
10, 1997, is incorporated by reference.
12 Computation of Ratios of Earnings to Fixed Charges for the
Twelve Months Ended September 30, 1998.
13 Portions of the 1998 Annual Report to Shareowners.
21 List of Subsidiaries of the Company.
23-a Consent of M. Lee Murrah, Esq., Assistant General Counsel of
the Company.
23-b Consent of David W. Greenfield, Esq., Senior Vice President,
General Counsel and Secretary of the Company.
23-c Independent auditors' consent.
24 Power of Attorney authorizing certain persons to sign this
Annual Report on Form 10-K on behalf of certain directors
and officers of the Company.
27 Financial Data Schedule.
</TABLE>
- ---------------
* Management contract or compensatory plan or arrangement.
(b) Reports on Form 8-K.
The Company filed a Current Report on Form 8-K, dated August 6, 1998,
filing as exhibits under Item 7 the consents of M. Lee Murrah, Esq., and David
W. Greenfield, Esq., to references to them in the Prospectus Supplement, dated
August 6, 1998, to the Prospectus, dated June 4, 1998, in Registration No.
333-49777.
18
<PAGE> 20
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
MERITOR AUTOMOTIVE, INC.
By
------------------------------------
David W. Greenfield
Senior Vice President, General
Counsel
and Secretary
Dated: December 18, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below on the 18th day of December, 1998 by the following
persons on behalf of the registrant and in the capacities indicated.
<TABLE>
<C> <S>
Larry D. Yost* Chairman of the Board and Chief Executive
Officer (principal executive officer) and
Director
Joseph B. Anderson, Jr.* Director
Donald R. Beall* Director
John J. Creedon* Director
Charles H. Harff* Director
Harold A. Poling* Director
Martin D. Walker* Director
Thomas A. Madden* Senior Vice President and Chief Financial
Officer (principal financial officer)
Diane M. Stelfox* Vice President and Controller
(principal accounting officer)
*By:
------------------------------------------------
David W. Greenfield, Attorney-in-fact**
**By authority of powers of attorney filed herewith
</TABLE>
19
<PAGE> 21
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareowners
of Meritor Automotive, Inc.
Troy, Michigan
We have audited the consolidated and combined financial statements of
Meritor Automotive, Inc. and subsidiaries (formerly the automotive businesses of
Rockwell International Corporation -- see Note 1) as of September 30, 1998 and
1997, and for each of the three years in the period ended September 30, 1998,
and have issued our report thereon dated November 11, 1998; such financial
statements and report are included in your 1998 Annual Report to Shareowners and
are incorporated herein by reference. Our audits also included the financial
statement schedule of Meritor Automotive, Inc. and subsidiaries, listed in Item
14(a)(2). This financial statement schedule is the responsibility of the
Company's management. Our responsibility is to express an opinion based on our
audits. In our opinion, such financial statement schedule, when considered in
relation to the basic financial statements taken as a whole, presents fairly in
all material respects the information set forth therein.
DELOITTE & TOUCHE LLP
Detroit, Michigan
November 11, 1998
S-1
<PAGE> 22
SCHEDULE II
MERITOR AUTOMOTIVE, INC.
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED SEPTEMBER 30, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO BALANCE AT
BEGINNING COSTS AND END OF
DESCRIPTION OF YEAR(A) EXPENSES DEDUCTIONS YEAR(A)
----------- ---------- ---------- ---------- ----------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Year ended September 30, 1998:
Allowance for doubtful accounts............... $11.6 $ 3.2 $1.0(b) $13.8
Year ended September 30, 1997:
Allowance for doubtful accounts............... 16.9 2.3 7.6(b) 11.6
Year ended September 30, 1996:
Allowance for doubtful accounts............... 10.1 10.5 3.7(b) 16.9
</TABLE>
- ---------------
(a) Includes allowances for trade and other long-term receivables.
(b) Uncollectible accounts written off.
S-2
<PAGE> 1
EXHIBIT 10-e-1
MERITOR AUTOMOTIVE, INC.
DEFERRED COMPENSATION PLAN
THIS PLAN is established by Meritor Automotive, Inc., effective as of
September 1997, for the benefit of certain employees of the Corporation in
executive, managerial or professional capacities so as to enhance the
Corporation's ability to attract and retain outstanding employees who are
expected to contribute to its success. It shall remain in effect, as it may be
amended from time to time, until termination as provided in Article VII of the
Plan.
ARTICLE I
DEFINITIONS
For the purposes of the Plan, the following words and phrases shall mean:
1.010 Account. The bookkeeping or accounting records maintained (having and
requiring no segregation or holding of any assets) by Meritor pursuant to
Article IV with respect to and resulting from a Participant's Deferral Election.
1.020 Affiliate.
(a) Any corporation incorporated under the laws of one of the United
States of America of which Meritor owns, directly or indirectly, eighty
percent (80%) or more of the combined voting power of all classes of stock
or eighty percent (80%) or more of the total value of the shares of all
classes of stock (all within the meaning of section 1563 of the Code);
(b) any partnership or other business entity organized under such
laws, in which Meritor owns, directly or indirectly:
(i) eighty percent (80%) or more of the total capital or profits
interest of such partnership, or
(ii) eighty percent (80%) or more of the total value of such
other business entity (all within the meaning of section 414(c) of the
Code); and
(c) any other company designated as an Affiliate by the Board of
Directors of Meritor.
<PAGE> 2
1.030 Base Compensation. Salary paid by the Corporation to an Executive for
services as an employee of the Corporation, including Compensation Deferral
Contributions as defined in Section 1.13 of the Savings Plan, but excluding
other contributions by Meritor to any pension, profit sharing, employee stock
ownership or other similar plan, compensation for overtime, bonuses and other
incentive compensation, payments under Meritor's Performance Award Plan; foreign
service premiums, differentials and allowances; tuition payments, relocation
payments, imputed income on employee benefits; patent awards and such other
similar awards or payments as the Committee may determine.
1.040 Beneficiary. The person, persons or entity entitled under Article VI
to receive any Plan Benefits payable after a Participant's death.
1.050 Board. The Board of Directors of Meritor.
1.055 Change in Control means a change of control of the Corporation of a
nature that would be required to be reported in a proxy statement pursuant to
Section 14(a) of the Securities Exchange Act of 1934, as amended (the "Act") or
in a Form 8-K pursuant to Section 13 of the Act (or in any similar form or
schedule under either of those provisions or any successor provision), whether
or not the Corporation is then subject to such reporting requirement, unless
prior to the occurrence thereof the Board of Directors shall have approved the
event or events that would otherwise constitute a change of control by vote of
at least two-thirds of its members; provided, however, that, without limitation,
a Change in Control shall be deemed to have occurred (unless prior thereto the
Board of Directors shall have given its aforementioned approval) if:
(a) any "person" (as such term is used in Sections 13(d) and 14(d) of
the Act) is or becomes the "beneficial owner" (as defined in Rule 13d-3
under the Act), directly or indirectly, of securities of the Corporation
representing 20% or more of the combined voting power of the Corporation's
then outstanding securities;
(b) the Corporation is a party to a merger, consolidation, sale of
assets or other reorganization, or a proxy contest, as a consequence of
which members of the Board of Directors in office immediately prior to such
transaction or event constitute less than a majority of the Board of
Directors immediately thereafter; or
(c) during any period of two consecutive years, individuals who at the
beginning of such period constituted the Board of Directors (including for
this purpose any new director whose election or nomination for election by
the Corporation's stockholders was approved by a vote of at least
two-thirds of the directors then still in office who were directors at the
beginning of such period) cease for any reason to constitute at least a
majority of the Board of Directors.
1.070 Code. The Internal Revenue Code of 1986, as amended.
1.080 Committee. The Compensation and Management Development Committee of
the Board.
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<PAGE> 3
1.090 Corporate Officer. Any Executive who has been elected by the Board as
an officer of Meritor.
1.100 Corporation. Meritor or an Affiliate of Meritor.
1.110 Deferral Election. An election pursuant to Article III by an
Executive to defer receipt of all or part of his Incentive Compensation.
1.120 Deferred Compensation. The portion of Incentive Compensation which an
Executive elects to defer pursuant to a Participation Agreement.
1.130 Determination Date. The last day of each calendar quarter; that is
March 31, June 30, September 30 and December 31.
1.140 Director. The Corporate Director of Compensation.
1.150 Effective Date. September, 1997, the effective date of the
establishment of the Plan.
1.160 Executive. A person in the full time active salaried employ of the
Corporation in Salary Grade 14 or above on Meritor's Executive Payroll.
1.170 Financial Hardship. A severe financial hardship to the Participant
resulting from a sudden and unexpected illness or accident of the Participant or
of a dependent (as defined in section 152(a) of the Code) of the Participant,
loss of the Participant's property due to casualty, or other similar
extraordinary and unforeseeable circumstance arising as a result of events
beyond the control of the Participant. In case of the Participant's death, the
word "Beneficiary or other person or entity entitled to receive a Plan Benefit"
shall be substituted for the word "Participant" wherever the latter appears in
this Section.
1.180 Incentive Compensation. Any award payable to an Executive under
Meritor's Incentive Compensation Plan that, but for a Deferral Election under
the Plan, would be paid to the Executive and considered to be "wages" for
purposes of United States federal income tax withholding.
1.190 Incentive Compensation Plan. Meritor's Incentive Compensation Plan as
approved by the Board and as amended from time to time.
1.200 Installment Payment Sub-Account. A Sub-Account of a Participant's
Account established pursuant to Section 4.030 to which Deferred Compensation
under a single Deferral Election, and all interest accrued thereon, as to which
the Participant has elected payment of his Plan Benefit in installments is
credited.
1.210 Interest Rate. One-twelfth of the annual interest rate for quarterly
compounding that
-3-
<PAGE> 4
is 120% of the "applicable Federal long-term rate" determined by the Secretary
of the Treasury pursuant to Section 1274(d) of the Code, or any successor
provision, as applicable for each of the months in the three-month period ending
on each Determination Date.
1.220 Lump Sum Payment Sub-Account. A Sub-Account of a Participant's
Account established pursuant to Section 4.030 to which Deferred Compensation
under all Deferral Elections, and all interest accrued thereon, as to which the
Plan Benefit is payable only in the form of a lump sum payment is credited.
1.230 Participant. An Executive who has elected to participate in the Plan
and has executed and filed with Meritor a Participation Agreement as provided in
Article III; provided, however, that such term shall include a person who no
longer has an effective Deferral Election so long as he retains, under the Plan,
an interest in an Account under the Plan.
1.240 Participant Agreement. An agreement between Meritor and a Participant
setting forth the Participant's Deferral Election.
1.250 Plan. This Deferral Compensation Plan, as it may be amended from time
to time.
1.260 Plan Benefit. The benefit payable to a Participant in accordance with
Article V hereof.
1.270 Plan Year. Each of the twelve (12) month periods ending December 31
and occurring while the Plan remains in effect beginning with the twelve (12)
month period ending December 31, 1997. The term "Plan Year" shall also include
the period beginning on the Effective Date and ending December 31, 1997, and any
period of less than twelve (12) months beginning January 1 and ending on the
date the Plan is terminated.
1.280 Meritor. Meritor Automotive, Inc., a Delaware corporation.
1.290 Savings Plan. The Meritor Automotive, Inc. Savings Plan, as from time
to time amended.
1.300 Securities Exchange Act means the Securities Exchange Act of 1934, as
amended.
1.310 Sub-Account. An Installment Payment Sub-Account or a Lump Sum Payment
Sub-Account.
1.320 Termination of Employment. Any severance of a Participant from
full-time active salaried employment by the Corporation for any reason.
ARTICLE II
ADMINISTRATION
-4-
<PAGE> 5
2.010 Administrators. The Plan shall be administered by the Committee and
the Director.
2.020 Committee. The Committee shall have the authority:
(a) to make, amend, interpret and enforce all rules and regulations
for the administration of the Plan and
(b) to decide all questions, including interpretation of the Plan, as
may arise in connection with the Plan insofar as it is applicable to
Executives
(i) who are Corporate Officers or whose annual Base Compensation
shall require the approval of the Board or the Committee, or
(ii) with respect to whom questions are referred to the Committee
by the Director. A majority of the members of the Committee shall
constitute a quorum. The Committee may act by a vote of a majority of
a quorum at a meeting, or by a writing signed by a majority of the
members of the Committee.
2.030 Director. The Director shall administer the Plan in accordance with
the terms of the Plan and the rules and regulations of the Plan as established
by the Committee. The Director shall have the authority to decide all questions,
including interpretations of the Plan, as may arise in connection with the Plan
insofar as it is applicable to Executives other than those described in Section
2.020(b)(i); provided, however, that the Director shall follow precedents
established by the Committee under Section 2.020(b) in deciding all subsequent
questions arising in connection with the Plan. The Director may, in his
discretion, decline to decide any question presented to him and refer such
question to the Committee for decision.
ARTICLE III
PARTICIPATION
3.010 Participation.
(a) Subject to the limitations set forth in this Article III, any
person who is an Executive on the last date in any Plan Year specified for
filing Deferral Elections under this Section may participate in the Plan by
executing and filing with the Director a Participation Agreement.
(b) In each Participation Agreement, the Executive shall specify the
percentage of Incentive Compensation in respect of a specified Meritor
fiscal year to be deferred and, subject to the limitations of Section 5.010
or 5.012, as applicable, the form of Plan Benefit.
3.020 Deferral Elections. Any Executive may elect to defer any percentage
of his Incentive Compensation; provided, however, that each Deferral Election,
to be effective, must result in deferral of a minimum of $1,000 and the amount
deferred shall be rounded to the nearest $100.
-5-
<PAGE> 6
3.030 Modification of Deferral Election. By written notice to Meritor, a
Deferral Election filed in any Plan Year may be modified or revoked at any time
prior to October 1 of such Plan Year. Thereafter, a Deferral Election specified
in a Participation Agreement shall be irrevocable, except that the Committee or
the Director, as appropriate under Article II, may permit a Participant at any
time to reduce the designated percentage to be deferred upon a finding, based
upon uniform standards established by the Committee, that the Participant has
suffered a Financial Hardship.
ARTICLE IV
DEFERRED COMPENSATION
4.010 Deferred Compensation. The amount of Incentive Compensation deferred
pursuant to a Deferral Election shall be withheld in a single lump sum at the
time such Incentive Compensation, but for a Deferral Election, would be paid.
4.020 Withholding of Taxes. Any withholding of taxes or other amounts which
is required by any federal, state, or local law shall be withheld from the
Participant's remaining undeferred Incentive Compensation, if any. If necessary
in order to comply with any federal, state or local law, the amount of Incentive
Compensation deferred may be reduced by an amount equal to any required
withholding. Otherwise, such withholding may be made from any of the
Participant's other compensation payable by the Corporation, or, at the election
of the Director, a Participant may be permitted to pay to the Corporation the
amount of any such required withholding at or prior to the time such withholding
would otherwise be required to be made.
4.030 Accounts. For recordkeeping purposes only, a separate Account shall
be established and maintained by Meritor for each Participant to which his
Deferred Compensation and interest accrued thereon pursuant to Section 4.040
shall be credited. Each such Account shall be divided into the following
Sub-Accounts for purposes of Section 5.010:
(a) a Lump-Sum Payment Sub-Account to which there shall be credited
all Incentive Compensation deferred (and all interest thereon) pursuant to
all Deferral Elections under which a Plan Benefit is payable only in the
form of a lump sum; and
(b) a separate Installment Payment Sub-Account for each Deferral
Election under which the Participant has elected that his Plan Benefit be
payable in installments (if he qualifies therefor under Section 5.012, to
which the Incentive Compensation deferred (and all interest thereon)
pursuant to such Deferral Election shall be credited.
For administrative purposes, all Installment Payment Sub-Accounts under which
the number of installment payments selected is the same may be combined into a
single Installment Payment Sub-Account.
-6-
<PAGE> 7
4.040 Determination of Account. The value of each Participant's Account as
of each Determination Date shall be the total of the Participant's Lump Sum
Payment and Installment Payment Sub-Accounts. The value of each such Sub-Account
shall consist of:
(a) the balance of such Sub-Account as of the last preceding
Determination Date, plus
(b) any Deferred Compensation credited to such Sub-Account since the
last preceding Determination date, plus
(c) the sum of the three monthly amounts determined by multiplying the
average daily balance of such Sub-Account during each of the three calendar
months since the last preceding Determination Date by the Interest Rate
applicable to such month, less
(d) the amount of all Plan Benefits, if any, paid during the period
since the last preceding Determination Date.
Interest, determined as provided in (c) above, shall be credited to each such
Sub-Account as of the Determination Date as of which such Sub-Account is valued.
4.050 Statement of Accounts. Meritor shall submit to each Participant,
within one hundred twenty (120) days after the close of each Plan Year and at
such other times as determined by the Committee, a statement setting forth the
total balance of the Participant's Account, and the balance of each Sub-Account
thereof, as of the last day of such Plan Year and as of the immediately
preceding Plan Year, the Deferred Compensation and interest credited to each
Sub-Account during the Plan Year and the payments of Plan Benefits from each
Sub-Account during the Plan.
ARTICLE V
PLAN BENEFITS
5.010 Plan Benefit Payable on Termination of Employment.
(a) Subject to the provisions of Section 5.015, upon Termination of
Employment, a Participant shall receive the Plan Benefit attributable to
his Deferral Elections in the number of annual installments (not exceeding
ten (10)) specified by him in those Deferral Elections. Each annual
installment payable out of an Installment Payment Sub-Account shall be paid
during the period January 2 through January 5 in each calendar year
commencing with the calendar year
-7-
<PAGE> 8
next following the Participant's Termination of Employment. Each such
installment shall be based on the unpaid balance of such Installment
Payment Sub-Account as of the immediately preceding December 31, including
interest credited pursuant to Section 4.040 through such date, and shall be
in an amount determined by dividing such unpaid balance by the number of
then remaining unpaid installments.
(b) In the event that a Participant's Termination of Employment occurs
because of his death, his Beneficiary or, if no designated Beneficiary
shall survive him, his estate shall receive the Plan Benefit attributable
to the Participant's Deferral Elections in the manner provided with respect
to the Plan Benefit attributable to his Deferral Elections. Notwithstanding
the foregoing, if such surviving spouse shall die prior to complete
distribution of all Plan Benefits, the balance then remaining in such
Installment Payment Sub-Account or Sub-Accounts shall be paid to the estate
of such surviving spouse or to such entity for the benefit of such
surviving spouse, as the case may be, in a lump sum on the forty-fifth
(45th) day following such spouse's death, with interest on the balance of
such Sub-Account or Sub-Accounts from the Determination Date immediately
preceding such spouse's death to the date of payment at a daily simple
interest rate equivalent to the Interest Rate during such period.
5.015 Form of Plan Benefit Payable in Connection With a Change in Control.
Notwithstanding any election to the contrary previously made by a Participant or
beneficiary (including, for purposes of this Section, a Participant or
beneficiary who is currently receiving installment payments from this Plan) such
Participant or beneficiary may elect to have his Plan Benefit paid in a lump sum
in the event of the occurrence of a Change in Control, subject to the following:
(a) To be effective, the election of a Participant or beneficiary
pursuant to this Section must be made in writing and filed with the
Corporation's Vice President of Corporate Compensation and Benefits prior
to the occurrence of a Change in Control.
(b) An election made hereunder shall be revocable by the Participant
or his beneficiary until such time as a Change in Control shall have
occurred at which point the said election shall be irrevocable.
(c) Plan Benefits paid in a single lump sum pursuant to this Section
shall be paid within forty-five (45) days following the Participant's
retirement, termination of employment or death; provided, however, that
lump sum payments which are to be made under this Section to Participants
or beneficiaries who are currently receiving annual installment payments
pursuant to Section 5.010 at the time of a Change in Control shall be made
within forty-five (45) days following the Change in Control.
-8-
<PAGE> 9
5.020 Withdrawal of Plan Benefit. No Plan Benefit shall be payable prior to
the Participant's Termination of Employment, except that the Committee or the
Director, as appropriate under Article II, may permit a Participant or, after a
Participant's death, a Participant's Beneficiary or other person or entity
entitled to receive such Plan Benefit:
(a) to withdraw from the Participant's Account an amount necessary to
meet a Financial Hardship, or
(b) to withdraw his entire account balance prior to the Participant's
Termination of Employment with interest at the Interest Rate for the period
from the immediately preceding Determination Date to the date of payment if
a Participant's Account shall exceed the amount of $100,000 determined as
of the immediately preceding Determination Date.
Either type of withdrawal shall be requested by written notice to Meritor and
the amount of the withdrawal shall be paid within forty-five (45) days after
receipt of the written notice. If a Participant does make such withdrawal other
than for Financial Hardship, the Participant shall forfeit all further rights to
participate in the Plan, and any previously executed election with respect to
the deferral of Incentive Compensation that has not yet been transferred to the
Plan shall be void.
5.030 Withholding; Payroll Taxes. Meritor shall withhold from Plan Benefits
payable under the Plan any taxes required to be withheld from an employee's
wages for the federal or any state or local governments.
5.040 Full Payment of Benefits. Notwithstanding any other provision of the
Plan, all Plan Benefits shall be paid to the Participant no later than the
January 5 next preceding the Participant's eightieth (80th) birthday.
ARTICLE VI
BENEFICIARY DESIGNATION
6.010 Beneficiary Designation. Each Participant shall have the right, at
any time, to designate any person or persons as his Beneficiary (both principal
as well as contingent) to whom payment under the Plan shall be made in the event
of his death prior to complete distribution of all Plan Benefits due him under
the Plan. Any Beneficiary designation shall be made in writing on a form
prescribed by the Committee and shall become effective only when filed with the
Director. Notwithstanding the foregoing, if a Participant's Incentive
Compensation is community property, any designation (other than of the
Participant's spouse) made by a Participant then married shall not be valid or
effective unless the Participant's spouse is specified to receive at least fifty
percent (50%) of such Participant's aggregate Plan Benefits or unless the spouse
shall approve such designation in writing and in accordance with such other
requirements as may be established by the Committee.
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<PAGE> 10
6.020 Amendments. Subject to the limitations of Section 6.010, any
Beneficiary designation may be changed by a Participant only by written notice
of such change to the Director on a form prescribed by the Committee. The filing
of a new Beneficiary designation form will cancel all prior Beneficiary
designations.
6.030 Absence of Effective Beneficiary Designation. If a Participant fails
to designate a Beneficiary as provided above or if all designated Beneficiaries
predecease the Participant or die prior to complete distribution of the
Participant's Plan Benefit, the Participant's remaining Plan Benefit shall be
paid to his estate.
6.040 Effect of Payment. Payment to the Beneficiary designated pursuant to
Sections 6.010 and 6.020 or to the Participant's estate pursuant to Section
6.030 shall completely discharge Meritor's obligations under the Plan.
ARTICLE VII
AMENDMENT AND TERMINATION OF PLAN
7.010 Amendment. The Committee shall have the power in its sole discretion
to amend, suspend or terminate the Plan at any time, except that no such action
shall adversely affect rights with respect to any Account without the consent of
the person affected.
ARTICLE VIII
MISCELLANEOUS
8.010 Unfunded Plan. The Plan is an unfunded plan maintained by Meritor
primarily to provide Deferred Compensation benefits for a select group of the
management or highly compensated employees of the Corporation.
8.020 Unsecured General Creditor. Participants and their Beneficiaries,
estates, heirs, successors and assigns shall have no legal or equitable rights,
interest or claims in any property or assets of Meritor. Such assets of Meritor
shall not be held under any trust or in any other way as collateral security for
the fulfillment of the obligations of Meritor under the Plan. Any and all of
Meritor's assets shall be, and remain, the general, unpledged, unrestricted
assets of Meritor. Meritor's sole obligation under the Plan shall be merely that
of an unfunded and unsecured promise of Meritor to pay money in the future.
8.030 Nonassignability. Neither a Participant nor any other person shall
have any right to commute, sell, assign, transfer, pledge, anticipate, mortgage
or otherwise encumber, transfer, hypothecate or convey, in advance of actual
receipt, any Plan Benefit. Plan Benefits and all rights to Plan Benefits are and
shall be nonassignable and nontransferable prior to actual payment as provided
by the Plan. Any such attempted assignment or transfer shall be ineffective with
respect to Meritor, and Meritor's sole obligation shall be to pay Plan Benefits
to the Participant, his
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<PAGE> 11
Beneficiary or his estate as appropriate. No part of any Plan Benefit shall,
prior to actual payment as provided by the Plan, be subject to seizure or
sequestration for the payment of any debts, judgments, alimony or separate
maintenance owed by a Participant or any other person; nor shall any Plan
Benefit be transferable by operation of law in the event of a Participant's or
any other person's bankruptcy or insolvency, except as required by law.
8.040 Not a Contract of Employment. Neither the terms and conditions of the
Plan nor those of any Participation Agreement shall be deemed to constitute a
contract of employment between the Corporation and the Participant, and neither
the Participant, his Beneficiary nor his estate shall have any rights against
Meritor under the Plan except as may otherwise be specifically provided in the
Plan. Moreover, nothing in the Plan shall be deemed to give a Participant the
right to be retained in the service of the Corporation or to interfere with the
right of the Corporation to discipline, discharge or change the status of a
Participant at any time.
8.050 Protective Provisions. A Participant will cooperate with Meritor by
furnishing any and all information requested by Meritor in order to facilitate
the payment of Plan Benefits under the Plan, and by taking such other action as
may be reasonably requested by Meritor.
8.060 Terms. Whenever any words are used in the Plan in the masculine, they
shall be construed as though they were used in the feminine in all cases where
they would so apply; and wherever any words are used in the Plan in the singular
or in the plural, they shall be construed as though they were used in the plural
or the singular, as the case may be, in all cases where they would so apply.
8.070 Captions. The captions of the articles and sections of the Plan are
for convenience only and shall not control or affect the meaning or construction
of any of its provisions.
8.080 Governing Law. The provisions of the Plan shall be construed and
interpreted according to the laws of the State of Delaware.
8.090 Validity. In case any provision of the Plan shall be held illegal or
invalid for any reason, said illegality or invalidity shall not affect the
remaining provisions of the Plan, and the Plan shall be construed and enforced
as if such illegal or invalid provision were not included in the Plan.
8.100 Notice or Filing. Any notice or filing required or permitted to be
given to Meritor or a Participant under the Plan shall be sufficient if in
writing and hand delivered, or sent by regular mail or by registered or
certified mail, to the principal office of Meritor or to the last known address
of the Participant, as the case may be. Such notice or filing shall be deemed
given or made
(a) when hand delivered to the residence or offices of the recipient,
(b) as of five (5) days after the date of mailing if delivery is made
by regular mail, or
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<PAGE> 12
(c) as of five (5) days after the date shown on the postmark on the
receipt for registration or certification provided to the sender at the
time of mailing, if by registered or certified mail.
8.110 Successors. The provisions of the Plan shall bind and obligate
Meritor and any successors. The term "successors" as used in this Section shall
include any corporate or other business entity which shall, whether by merger,
consolidation, purchase or otherwise acquire all or substantially all of the
business and assets of Meritor, and successors of any such corporation or other
business entity.
8.120 Insurance. Meritor may elect at any time to acquire for its own
benefit such forms of insurance on the life of any Participant as it in its sole
discretion believes to be in the best interests of Meritor. If Meritor so elects
to acquire insurance, and if the acquisition of such insurance shall not in any
way adversely affect the Participant, the Participant shall complete and
authenticate such insurance applications and other forms, and assist Meritor in
any and all matters Meritor may reasonably request to enable Meritor to acquire
such desired insurance. In no event shall the Participants or their
Beneficiaries, heirs or estates have any legal or equitable right, interest or
claim in any such life insurance policy, annuity contract or the proceeds
therefrom owned or acquired by Meritor pursuant to this Section.
8.130 Expenses and Costs. Meritor shall bear all expenses and costs in
connection with the operation of the Plan.
8.140 Reliance on Certified Public Accountants. Meritor, the Board, the
Committee, the Director and any employee of Meritor shall be fully protected in
relying in good faith on the computations and reports made pursuant to or in
connection with the Plan by the independent certified public accountants who
audit Meritor's accounts.
ARTICLE IX
CLAIMS PROCEDURE
9.010 Claim. Any person claiming a Plan Benefit, requesting an
interpretation or ruling under the Plan, or requesting information under the
Plan shall present the request in writing to the Director who
(a) shall respond in writing within ninety (90) days following his
receipt of the request or
(b) in the case of a claimant who is a person described in Section
2.020(b)(i), shall refer the claim with his recommended response to the
Committee, which shall respond in writing within one hundred twenty (120)
days following the Director's receipt of the request.
9.020 Denial of Claim. If the claim or request is denied, the written
notice of denial shall state
(a) the reasons for denial;
-12-
<PAGE> 13
(b) a description of any additional material or information required
and an explanation of why it is necessary; and
(c) an explanation of the Plan's claim review procedure.
9.030 Review of Claim. Any person whose claim or request is denied may make
a second request for review by notice given in writing to the Director. The
claim or request shall be reviewed further by the Director or the Committee, as
appropriate, and he or it may, but shall not be required to, grant the claimant
a hearing.
9.040 Final Decision. A decision on such second request shall normally be
made within sixty (60) days after the date of the second request. If an
extension of time is required for a hearing or other special circumstances, the
claimant shall be notified and the time limit shall be one hundred twenty (120)
days from the date of the second request. The decision shall be in writing and,
whether made by the Director or the Committee, shall be final and bind all
parties concerned.
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<PAGE> 1
EXHIBIT 12
MERITOR AUTOMOTIVE, INC.
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
YEAR ENDED SEPTEMBER 30, 1998
(Amounts in millions of dollars, except ratios)
<TABLE>
<S> <C>
Earnings Available for Fixed Charges:
Pre-tax income from continuing operations $ 245
Adjustments:
Undistributed income of affiliates (28)
Minority interest in loss of subsidiaries 11
-----
228
Add fixed charges included in earnings:
Interest expense 43
Interest element of rentals 8
-----
Total 51
Total earnings available for fixed charges: $ 279
-----
Fixed charges:
Fixed charges included in earnings $ 51
Capitalized interest 0
-----
Total fixed charges $ 51
Ratio of earnings to fixed charges (1) 5.5
</TABLE>
(1) "Earnings" are defined as pre-tax income from continuing operations,
adjusted for income or loss attributable to minority interest in subsidiaries,
undistributed earnings of less-than-majority-owned subsidiaries, and fixed
charges excluding capitalized interest. "Fixed charges" are defined as interest
on borrowings (whether expensed or capitalized) and that portion of rental
expense applicable to interest.
<PAGE> 1
EXHIBIT 13
CHIEF FINANCIAL OFFICER'S REVIEW
MANAGEMENT'S DISCUSSION AND ANALYSIS(1)
OVERVIEW AND OUTLOOK
Meritor's first year as a publicly-held company produced
record results and exceeded expectations. Fiscal 1998 sales were $3.8 billion, a
16 percent increase over last year's sales of $3.3 billion. Net income for the
year was $147 million, or $2.13 per share, an increase of 48 percent as compared
with 1997 pro forma net income of $99 million, or $1.44 per share. Operating
earnings of $299 million, reflecting operating margins of 7.8 percent, increased
$78 million from fiscal 1997 pro forma operating earnings of $221 million before
restructuring and spin-off costs, or operating margins of 6.7 percent. Our cash
flow from operations increased to $278 million, up $70 million or 34 percent
from a year ago. The increase in cash flow has allowed us to reduce our debt
significantly, improving our long-term debt to capitalization ratio to 51
percent at September 30, 1998 from 71 percent at September 30, 1997.
The trends in the automotive supplier industry present both challenges
and opportunities. OEMs are becoming increasingly global and are expanding their
utilization of outsourcing. In addition, the manufacturing process is moving
towards systems and modules. The supplier base is being consolidated both by
merger and acquisition activity and by the decision of OEMs to reduce the number
of suppliers they utilize. There continue to be opportunities in emerging
markets. As a global manufacturer with diverse products, customers and
geographic base, technical leadership in core products and financial strength,
Meritor is well positioned to take full advantage of these trends. Meritor's
envisioned future is to be the partner of choice for those customers who value
exceptional service and to be an outstanding provider of quality automotive
systems and technology solutions worldwide.
Enhancing the company's position as an increasingly broad-based
supplier in the global automotive components industry, the company recently
announced the signing of three definitive agreements for acquisitions. These
acquisitions reflect our efforts to
1
<PAGE> 2
expand our presence in Europe and to provide HVS OEM and Worldwide Aftermarket
customers with a comprehensive offering of drivetrain systems and components.
The company signed a definitive agreement to acquire the Heavy Vehicle
Braking Systems (HVBS) business of LucasVarity plc for $390 million in cash on
November 22, 1998. The LucasVarity HVBS components include air drum and disc
brakes, hydraulic brakes, wheel end components and aftermarket products which
complement the company's brake systems products. For the fiscal year ended
January 31, 1998 the HVBS business of LucasVarity had net sales of
approximately $290 million. We expect the HVBS acquisition to add annual sales
of approximately $400 million. The transaction is subject to regulatory
approvals in the U.S. and Europe and is expected to close in January 1999.
On December 4, 1998, the company signed a definitive agreement with
Volvo Truck Corporation to acquire Volvo's heavy truck axle manufacturing
operations based in Lindesberg, Sweden. Under the terms of the agreement, the
company will become the primary supplier of heavy duty axles for Volvo's heavy
truck operations. The transaction is expected to add annual sales of
approximately $200 million with a purchase price of approximately $135 million
in cash, $44 million of which is deferred. The transaction is expected to close
in December 1998.
The company also signed a definitive agreement to acquire Euclid
Industries on December 7, 1998. Euclid is a leading North American supplier and
manufacturer of aftermarket replacement parts for a wide range of medium- and
heavy-duty vehicles and has been a premier participant in the North American
heavy duty aftermarket. For the fiscal year ended August 31, 1998, Euclid
generated sales of more than $100 million. The transaction is subject to
regulatory approvals and is expected to close in December 1998.
Based on our results and the success of our first year, we believe that
the company is well-positioned to achieve our stated long-term financial goals
to grow internally, on an average annual basis, sales by 8 percent and earnings
per share by 15 percent, as well as to improve our long-term debt to
capitalization ratio to 45 percent, excluding acquisition activities.
- ----------
(1) See Note 1 of Notes to Consolidated Financial Statements for the
definitions of capitalized terms used and not otherwise defined in this
section.
2
<PAGE> 3
These long-term goals have been established with the recognition that
the industry in which the company operates has been characterized historically
by periodic fluctuations in overall demand for commercial, specialty and light
vehicles for which the company supplies products, resulting in corresponding
fluctuations in demand for products of the company. Accordingly, the company
will measure its performance against these long-term financial goals over a
multi-year period. Our markets are currently strong, and looking to the first
half of fiscal 1999 the outlook remains the same. However, beyond this horizon
the outlook is less clear and economic uncertainties around the world may make
1999 a challenging year in many of our global markets. As a result of the
diversity and balance of our product portfolio and served markets, we expect to
perform well in this environment.
Meritor began operations separate from Rockwell on September 30, 1997.
The financial information included in this annual report for periods prior to
September 30, 1997 may not necessarily be indicative of the results of
operations, financial position and cash flows of the company had it been a
separate, independent company during such periods.
FINANCIAL CONDITION
Cash flow from operations for fiscal 1998 was $278 million, an increase
of 34 percent over the prior year, reflecting the company's strong emphasis on
cash generation. Cash flow from operations was $208 million in fiscal 1997 and
$197 million in fiscal 1996. Sales growth related to both Heavy Vehicle Systems
and Light Vehicle Systems products resulted in an increase in accounts
receivables, inventories and accounts payables at the end of each fiscal year.
The strong cash flows have allowed the company to fund capital
expenditures of $139 million in fiscal 1998, $126 million in fiscal 1997 and
$144 million in fiscal 1996, as the company continued to invest in the property,
plant and equipment needed for future business requirements. Capital
expenditures in fiscal 1998 included equipment to support new product
introductions, capacity expansion and new production processes. The company
expects to spend approximately $150 million for capital expenditures in fiscal
1999.
3
<PAGE> 4
Increased cash flow has enabled the company to reduce debt and improve
its long-term debt to capitalization ratio by 20 percentage points, to 51
percent at September 30, 1998, from 71 percent a year ago. Pre-tax interest
coverage was 7.4x for the year ended September 30, 1998, excluding the interest
rate settlement cost of $31 million (see discussion in Results of Operations -
1998 Compared to 1997).
Standard & Poors and Moody's have assigned "BBB/Baa2" credit ratings,
respectively, to the company's debt as of September 30, 1998. On April 9, 1998
the company filed a shelf Registration Statement with the Securities and
Exchange Commission covering up to $500 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. The Registration Statement became effective on
June 4, 1998. Except as may otherwise be determined at the time of any sales,
the net proceeds of any offering would be added to the company's general funds
which would be available for general corporate purposes, including the repayment
of existing indebtedness, working capital needs, capital expenditures and
acquisitions. No debt securities have been issued under the shelf registration
at September 30, 1998.
In fiscal 1998, net cash used for investing activities consisted of the
capital expenditures described above, $8 million used to acquire sunroof patents
and technologies and to further invest in the company's Chinese heavy axle joint
venture with Xuzhou Construction Machinery Axle and Case Co., offset by $17
million of proceeds received from the sale of a long-term note receivable and
other property. In fiscal 1997, the $16 million in acquisition of businesses and
investments consisted primarily of investments in the company's Chinese heavy
axle joint venture. In fiscal 1996, the $101 million of net cash used for
investing activities included, in addition to capital expenditures, proceeds of
$58 million from the disposition of property and businesses primarily related to
the sale of Brazilian assets, and $15 million used for investments in joint
ventures.
Net cash used for financing activities was $216 million in 1998. This
amount reflects payments of $222 million to reduce debt under the company's
revolving Credit Facility, partially offset by a $93 million increase in other
borrowings. In addition, the
4
<PAGE> 5
company made net payments of $58 million related to certain Canadian tax
obligations incurred in connection with the transfer of assets prior to the
Distribution and payments of $29 million of cash dividends, or $.42 per share.
In November 1998, the Board of Directors declared a $.105 per share quarterly
dividend payable in December 1998. Net cash used for financing activities for
fiscal 1997 was comprised primarily of $445 million of proceeds from borrowings
under the Credit Facility used to fund the Pre-Distribution Payment to Rockwell.
In addition, $58 million in cash was provided by Rockwell to fund the Canadian
tax obligations described above and the company paid $84 million in cash
distributions to Rockwell. Net cash used for financing activities was $84
million in 1996, primarily related to cash distributions to Rockwell.
The company has retirement medical and pension plans which cover most
of its United States and certain non-United States employees (see Notes 12 and
13 of Notes to Consolidated Financial Statements). Retirement medical plan
payments aggregated $36 million in fiscal 1998, $36 million in fiscal 1997 and
$35 million in fiscal 1996 and are expected to approximate $36 million in fiscal
1999. The company made pension plan contributions of $28 million in fiscal 1998,
$5 million in fiscal 1997 and $2 million in fiscal 1996. Management expects to
fund at least the minimum pension plan contributions required by government
regulations for the various plans in fiscal 1999 and anticipates that pension
plan funding will be approximately $25 million.
The company regularly considers various strategic and business
opportunities, including acquisitions. Although no assurance can be given as to
whether or when any acquisitions will be consummated, if agreement were to be
reached, the company could finance such acquisitions by issuance of additional
debt or equity securities. The additional debt from any acquisitions, if
consummated, would increase the company's debt to capitalization ratio. See
Overview and Outlook for information on certain acquisition activities.
RESULTS OF OPERATIONS
The following sets forth the sales, operating earnings and net income
of the company for the years ended September 30, 1998, 1997 and 1996, as well as
pro forma
5
<PAGE> 6
amounts for the year ended September 30, 1997 (dollars in millions, except per
share amounts):
6
<PAGE> 7
<TABLE>
<CAPTION>
Pro Forma(1) Year Ended
Year Ended Year Ended September 30,
September 30, September 30, --------------------------
1998 1997 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Sales
Heavy Vehicle Systems $ 2,361 $ 1,957 $ 1,957 $ 1,827
Light Vehicle Systems 1,475 1,352 1,352 1,317
------- ------- ------- -------
Total sales $ 3,836 $ 3,309 $ 3,309 $ 3,144
======= ======= ======= =======
Gross margin $ 547 $ 438 $ 438 $ 397
======= ======= ======= =======
Operating earnings $ 299 $ 192(2) 181(2) $ 146(2)
Other income-net 20 15 15 46
Interest rate settlement cost (31) -- -- --
Interest expense (43) (38) (10) (10)
Provision for income taxes (98) (70) (77) (68)
------- ------- ------- -------
Net income $ 147 $ 99 $ 109 $ 114
======= ======= ======= =======
Basic and Diluted Earnings Per Share $ 2.13 $ 1.44(2)
======= =======
Basic and Diluted Earning Per Share $ 2.40 $ 1.74
Before Special Items(3) ======= =======
Shares Outstanding (in millions) 69.0 68.9
======= =======
</TABLE>
(1) Pro forma information reflects (a) the 68.9 million shares of common
stock issued at the date of the spin-off from Rockwell, (b)
management's estimate that corporate costs would have been $11 million
lower on a stand-alone basis for the year ended September 30, 1997 than
those allocated by Rockwell to its automotive businesses, and (c) $28
million of interest expense at 6 percent for the year ended September
30, 1997 related to the debt incurred by the company in connection with
the $445 million Pre-Distribution Payment to Rockwell.
(2) Operating earnings for pro forma and actual fiscal 1997 include
restructuring and spin-off costs of $29 million ($21 million after-tax
or $.30 per share on a pro forma basis) and for fiscal 1996 include
restructuring costs of $36 million ($24 million after-tax).
(3) Special items include the interest rate settlement cost of $31 million
($19 million after-tax or $.27 per share) recorded in the fourth
quarter of fiscal 1998 and restructuring and spin-off costs of $29
million ($21 million after-tax or $.30 per share on a pro forma basis)
recorded in the fourth quarter of fiscal 1997.
7
<PAGE> 8
The following charts demonstrate the strength, diversity and balance of
our product mix, geographic presence and served markets for the fiscal year
ended September 30, 1998.
[1998 Sales by Product Pi Chart]
[1998 Sales by Geographic Region Pi Chart]
[1998 Sales by Market Pi Chart]
1998 COMPARED TO 1997
Sales for fiscal 1998 were $3.8 billion, up $527 million, or 16
percent, above fiscal 1997.
Heavy Vehicle Systems sales grew to a record $2.4 billion in fiscal
1998, an increase of $404 million, or 21 percent over 1997. Sales increased
across all of the company's heavy truck and trailer products, including axles,
transmissions, clutches, drivelines and brake systems, primarily as a result of
the strong North American heavy truck market, greater market penetration and
improved volumes in the aftermarket. Sales also increased in Heavy Vehicle
Systems off-highway, government and specialty product lines.
Light Vehicle Systems also reported record sales for the year of $1.5
billion, an increase of $123 million, or 9 percent over 1997. The sales growth
was driven by penetration gains in the door, suspension, access control and seat
adjusting systems and wheel product lines and somewhat by higher industry
volumes in Europe. This growth was negatively affected by lower European sunroof
demand and the adverse impact of currency translation on European sales.
Gross margin for fiscal 1998 improved $109 million, or 25 percent, over
fiscal 1997. Fiscal 1998 operating earnings of $299 million were up 56 percent
over pro forma fiscal 1997. Excluding the restructuring and spin-off costs of
$29 million recorded in 1997, operating earnings were up 35 percent over the
prior year's pro forma operating earnings of $221 million. Operating margins for
fiscal 1998 improved to 7.8 percent from last year's pro forma 6.7 percent
excluding restructuring and spin-off costs (5.8 percent in fiscal 1997 including
restructuring and spin-off costs). This growth reflects the ongoing successful
implementation of the company's productivity and cost improvement programs, the
strength of the company's global markets and the penetration gains across nearly
all of the company's product range.
8
<PAGE> 9
The company's productivity and cost improvement programs relate to (i)
purchasing, which includes outsourcing non-core manufacturing and using lower
cost global sourcing of materials and supply base management; and (ii)
manufacturing, which includes shifting production to lower cost facilities,
consolidating common processes, improving material flow and investing in capital
and systems.
Selling, general and administrative expenses as a percentage of sales
improved slightly from 6.6 percent pro forma in 1997 to 6.5 percent in 1998,
despite planned increased investments in information technology. Other income
for 1998 was up $5 million over last year primarily due to higher equity income
from joint ventures pertaining to the heavy truck and trailer markets.
In the fourth quarter of fiscal 1998, the company recorded a one-time
charge of $31 million ($19 million after-tax) or $.27 per share in connection
with the settlement of interest rate agreements. These agreements were entered
into in April 1998 to secure interest rates in anticipation of offering debt
securities. The planned issuance of these debt securities did not occur,
initially due to the consideration of a major acquisition and, subsequently,
the instability in the U.S. corporate bond market. These agreements were
settled and paid in October 1998 resulting in the charge discussed above.
1997 COMPARED TO 1996
Sales for fiscal 1997 of $3.3 billion were up by $165 million, or 5
percent, above fiscal 1996.
Heavy Vehicle Systems product sales grew to nearly $2 billion in fiscal
1997, an increase of $130 million, or 7 percent, over fiscal 1996. This sales
growth was driven largely by increased sales in North America which benefited
from higher sales in the aftermarket as well as greater market penetration by
our truck drivetrain products and trailer axle and brake products. Sales also
increased in emerging markets including Brazil and China, while sales declined
in Europe, where industry volumes were lower.
Light Vehicle Systems product sales in fiscal 1997 of $1.4 billion
increased $35 million, or 3 percent, over fiscal 1996. The sales performance was
linked to ongoing growth in North America, offset somewhat by a decline in
European sales, due principally to the currency translation impact of a strong
U. S. dollar in fiscal 1997 and decreased
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<PAGE> 10
sunroof demand. North American sales growth of 13 percent in generally flat
light vehicle markets was chiefly the result of stronger market penetration in
door, suspension, seat adjusting systems and wheel products.
Gross margin for fiscal 1997 improved $41 million, or 10 percent, over
fiscal 1996. Operating earnings for fiscal 1997 increased $35 million, or 24
percent, over fiscal 1996. Excluding restructuring and spin-off costs of $29
million recorded in fiscal 1997 and restructuring costs of $36 million recorded
in fiscal 1996, operating earnings for fiscal 1997 increased $28 million, or 15
percent, over fiscal 1996. This growth in gross margin and operating earnings
was due principally to the fiscal 1996 restructuring program as well as other
productivity and cost improvement programs (previously described).
In fiscal 1997, the company recorded a $21 million ($16 million
after-tax) restructuring charge related to workforce reductions and other
manufacturing cost reduction programs, mostly outside the United States. The
provision included severance and other employee costs of $16 million and other
facility-related costs of $5 million. The company also recorded an $8 million
($5 million after-tax) charge in fiscal 1997 related to costs associated with
its spin-off from Rockwell including costs for communications, brand
advertising, recruitment and other professional services. Operating margins
before the restructuring and spin-off costs were 6.3 percent in fiscal 1997, as
compared to 5.8 percent in fiscal 1996, principally due to increased sales of
higher margin aftermarket products, continued improvement in production
processes and cost improvements from the 1996 restructuring, which offset
investments in new product development, continuing launch costs related to seat
adjusting systems products and higher engineering costs. Selling, general and
administrative expenses in fiscal 1997 increased $13 million, or 6 percent over
fiscal 1996, due to increased sales volume and increased spending on information
technology projects.
Other income in fiscal 1997 decreased $31 million from fiscal 1996,
primarily due to one-time gains in fiscal 1996 which included a $14 million ($10
million after-tax) gain on the sale of Brazilian assets and $15 million ($9
million after-tax) from the settlement of certain environmental insurance
claims.
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<PAGE> 11
INCOME TAXES
The company's effective income tax rate in fiscal 1998 was 40.0 percent
compared to 41.3 percent in fiscal 1997 and 37.6 percent in fiscal 1996. The tax
rate decline in fiscal 1998 was primarily due to changes in the mix of foreign
income. The higher tax rate in fiscal 1997 was due primarily to a lower level of
foreign net operating loss utilization in fiscal 1997 and a refund of certain
foreign income taxes in fiscal 1996.
ENVIRONMENTAL MATTERS
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 had 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 have been
accomplished without material effect on the company's liquidity and capital
resources, competitive position, or financial statements. In connection with the
Distribution, the company assumed all liabilities in respect of environmental
matters related to current and former operations of Rockwell's automotive
businesses.
The company has been designated as a potentially responsible party at
three 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 fully determined. Management estimates the total reasonably possible costs
the company could incur for the remediation of Superfund sites at September 30,
1998 to be approximately $16 million, of which $10 million has been accrued.
Various other lawsuits, claims and proceedings have been asserted
against the company alleging violation 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 September 30, 1998 to be approximately $39 million. The
company has recorded environmental accruals for these matters of $14 million.
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<PAGE> 12
At September 30, 1998, there were no receivables recorded from third
parties related to environmental matters.
Based on its assessment and after consulting with the general counsel
of the company, 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 liquidity and capital resources, competitive position or
financial statements. Management cannot assess the possible effect of compliance
with future requirements.
INTERNATIONAL OPERATIONS
Nearly one-half of the company's total assets and 38 percent of sales
for the year ended September 30, 1998 were outside North America, primarily in
France, the United Kingdom, Germany, Brazil and Italy. Borrowings under the
company's revolving Credit Facility have been principally in the United States,
Canada, Italy and the United Kingdom. Management believes that international
operations have significantly benefited the financial performance of the
company. However, the company's international operations are subject to a number
of risks inherent in operating abroad. There can be no assurance that these
risks will not have a material adverse impact on the company's ability to
increase or maintain its foreign sales or on its financial condition or results
of operations.
On January 1, 1999, the Euro will become the common currency of eleven
countries of the European Union. During a three-year transition period, the
present national currencies of these eleven countries will become sub-units of
the Euro at fixed exchange rates. The European Union's current plans call for
the transition period to be completed by July 1, 2002, at which time the Euro
will become the sole legal tender in those participating countries.
The company is engaged in business in some of the countries that will
participate in the European Monetary Union, and sales for fiscal 1998 in these
countries were approximately 21 percent of the company's total sales. In
addition, the company enters into foreign currency forward exchange contracts
with respect to several of the existing
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<PAGE> 13
currencies that will be subsumed into the Euro and has borrowings in
participating currencies primarily under its revolving Credit Facility. The
company has analyzed the potential effects of the Euro conversion on competitive
conditions, information technology and other systems, currency risks, financial
instruments and contracts, and has examined the tax and accounting consequences
of Euro conversion, and believes that the conversion will not have a material
adverse effect on its business, operations and financial condition.
The company has begun making the necessary adjustments to accommodate
the conversion, including modifications to its information technology systems
and programs, pricing schedules and financial instruments. The company expects
that all necessary actions will be completed within budget and in a timely
manner, and that the costs associated with the conversion to the Euro will not
be material.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The company is exposed to foreign currency exchange rate risk inherent
in its sales and assets and liabilities denominated in currencies other than the
U.S. dollar and interest rate risk associated with the company's debt. The
company does enter into foreign currency forward exchange contracts to minimize
risk of loss from currency rate fluctuations on firm and identifiable foreign
currency commitments entered into in the ordinary course of business. Also, the
company may, from time to time, use interest rate agreements in the management
of interest rate exposure on selected debt issuances. 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
September 30, 1998, the analysis indicated that such market movements would not
have a material effect on the company's consolidated financial position, results
of operations or cash flows. 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.
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<PAGE> 14
YEAR 2000 READINESS DISCLOSURE
BACKGROUND
The company initiated a company-wide year 2000 project to determine
whether the company's Information Technology ("IT") and non-IT systems are year
2000 compliant and to identify and implement the remedial actions necessary to
effect compliance. None of the company's other IT projects have been
significantly delayed due to the year 2000 project. The year 2000 project also
includes an assessment of compliance at the supplier and service provider level
in order to minimize supply disruptions. In addition, certain of the company's
locations are implementing Enterprise Resource Planning systems. It is
anticipated that these systems will be in place in early 1999 and will be year
2000 compliant. Because the company's customer base is diverse, fewer resources
of the project have been directed to the area of customer compliance.
COMPANY'S STATE OF READINESS
The project is divided into four major sections - business and
engineering, factory floor, IT infrastructure (hardware and software) and supply
chain. Each section involves three phases: phase one - identification of risks;
phase two - defining the scope of necessary corrections, preparation of related
plans and cost estimates and development of contingency plans; and phase three -
implementation of decisions to repair, replace or retire the systems in
question.
The consulting firm of Keane, Inc. was engaged to coordinate the year
2000 project for all four major sections and to provide more direct assistance
with respect to the business and engineering section and the IT infrastructure
section. In addition, the company engaged outside consultants to assist in risk
identification, analysis and remediation planning for factory floor operations
and to assist in implementing repair and remediation projects at local sites.
The business and engineering section includes manufacturing, financial
applications and remediation projects, critical core business system validation
testing, aftermarket systems and supplemental systems. The factory floor section
includes shop floor controls and facility systems. The IT infrastructure section
includes PC/LAN hardware, software and peripherals; mainframe, midrange and UNIX
systems;
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<PAGE> 15
engineering workstations; and telecom/global carriers. The supply chain section
includes formal communication with the company's significant customers,
suppliers and critical service providers. The company estimates that all four
areas will be year 2000 compliant by June 30, 1999, with follow-up reviews
scheduled through the remainder of 1999.
The following chart summarizes the status of completion by section for
each phase of the project at September 30, 1998:
<TABLE>
<CAPTION>
Approximate Percentage Completed
------------------------------------
Phase 1 Phase 2 Phase 3
------- ------- -------
<S> <C> <C> <C>
Business and Engineering 100 55-100* 15-90*
Factory floor 100 40-80* 15
IT Infrastructure 100 40-100* 25
Supply Chain 45-100* 20-60* 0-8*
</TABLE>
* Percentage of completion varies by location and by separate project
within each section
CONTINGENCY PLANS
The company is in the initial stage of developing contingency plans
designed to minimize any adverse effects that would result if timely compliance
were not achieved, either internally or at the third party level. The planning
process will include identification of the areas of the company's business and
suppliers with the greatest potential of non-compliance and arrangements for
alternate suppliers, backup systems or stockpiling of components in the affected
areas. The company expects to complete its analysis and have contingency
arrangements in place by September 30, 1999.
COSTS
The company currently estimates that the aggregate cost of the year
2000 project will be approximately $26 million. These amounts exclude employee
expense and computer equipment and upgrades that would have been purchased
regardless of the year 2000 project. During fiscal 1998 and fiscal 1997, the
company spent $10.2 million and $.7 million, respectively on the project. In
fiscal 1998, approximately $6.6 million of expenditures related to business and
engineering systems and IT infrastructure and approximately $3.6 million related
to the factory floor. These costs are being expensed as incurred and are being
funded through operating cash flows and do not include costs that
15
<PAGE> 16
may be incurred as a result of the failure of third parties, including
suppliers, to become year 2000 compliant or costs to implement contingency
plans.
The company currently estimates that the costs incurred in connection
with the Enterprise Resource Planning systems will be approximately $35 million,
including costs of internal employees dedicated to the project. The company
anticipates that approximately $30 million of the total costs will be
capitalized and amortized over five years.
RISKS
Incomplete or untimely resolution of the year 2000 issue by the
company, key suppliers, customers and other parties could have a material
adverse effect on the company's results of operations, financial condition and
cash flows. The year 2000 project is expected to reduce significantly the
company's level of uncertainty about year 2000 issues. The company believes that
completed and planned modifications and conversions of its internal IT and
non-IT systems will allow it to be year 2000 compliant in a timely manner.
However, due to the general uncertainty inherent with year 2000 compliance, the
company is unable to determine at this time whether the consequences of year
2000 failures by third parties will have a material impact on the company.
Forward-looking statements contained in this section should be read in
conjunction with the company's disclosures under the heading: Cautionary
Statement following this disclosure.
CAUTIONARY STATEMENT
This Management's Discussion and Analysis as well as other sections of
this Annual Report contain 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.
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; OEM program
delays; demand for and market acceptance of new and existing products;
successful development of new products; reliance on major OEM
16
<PAGE> 17
customers; labor relations of the company, its customers and suppliers; and
competitive product and pricing pressures, as well as other risks and
uncertainties, such as those described under Overview and Outlook, Environmental
Matters, International Operations, Quantitative and Qualitative Disclosures
About Market Risk and Year 2000 Readiness Disclosure and those detailed herein
and from time to time in the filings of the company with the Securities and
Exchange Commission.
17
<PAGE> 18
Independent Auditors Report
To the Board of Directors and Shareowners of Meritor Automotive, Inc.:
We have audited the accompanying consolidated balance sheets of Meritor
Automotive, Inc. and subsidiaries (formerly the automotive businesses of
Rockwell International Corporation -- see Note 1) as of September 30, 1998 and
1997, and the related consolidated and combined statements of income,
shareowners' equity and cash flows for each of the three years in the period
ended September 30, 1998. These financial statements are the responsibility of
the company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated and combined financial statements present
fairly, in all material respects, the financial position of Meritor Automotive,
Inc. and subsidiaries at September 30, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
September 30, 1998 in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Detroit, Michigan
November 11, 1998
<PAGE> 19
MERITOR AUTOMOTIVE, INC.
STATEMENT OF CONSOLIDATED INCOME
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-----------------------------------
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Sales $ 3,836 $ 3,309 $ 3,144
Cost of sales 3,289 2,871 2,747
------- ------- -------
GROSS MARGIN 547 438 397
Selling, general and administrative 248 228 215
Restructuring and spin-off costs -- 29 36
------- ------- -------
OPERATING EARNINGS 299 181 146
Other income-net 20 15 46
Interest rate settlement cost (31) -- --
Interest expense (43) (10) (10)
------- ------- -------
INCOME BEFORE INCOME TAXES 245 186 182
Provision for income taxes 98 77 68
------- ------- -------
NET INCOME $ 147 $ 109 $ 114
======= ======= =======
Basic and diluted earnings per share $ 2.13
=======
Average common shares outstanding --
basic and diluted 69.0
=======
</TABLE>
See notes to consolidated financial statements.
1
<PAGE> 20
MERITOR AUTOMOTIVE, INC.
CONSOLIDATED BALANCE SHEET
(IN MILLIONS)
<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------------
ASSETS 1998 1997
- ------ ---- ----
<S> <C> <C>
CURRENT ASSETS
Cash $ 65 $ 133
Receivables (less allowance for doubtful
accounts: 1998, $11; 1997, $9) 638 563
Inventories 360 327
Other current assets 153 128
------- -------
Total current assets 1,216 1,151
------- -------
NET PROPERTY 666 635
OTHER ASSETS 204 216
------- -------
TOTAL ASSETS $ 2,086 $ 2,002
======= =======
LIABILITIES AND SHAREOWNERS' EQUITY
CURRENT LIABILITIES
Short-term debt $ 34 $ 21
Accounts payable 636 501
Accrued compensation and benefits 142 129
Accrued income taxes 13 88
Other current liabilities 229 177
------- -------
Total current liabilities 1,054 916
------- -------
LONG-TERM DEBT 313 465
ACCRUED RETIREMENT BENEFITS 378 387
OTHER LIABILITIES 44 46
MINORITY INTERESTS 31 37
SHAREOWNERS' EQUITY
Common Stock (shares issued and outstanding:
1998, 69.0; 1997, 68.9) 69 69
Additional paid-in capital 156 154
Retained earnings 118 --
Cumulative currency translation adjustments (77) (72)
------- -------
Total shareowners' equity 266 151
------- -------
TOTAL LIABILITIES AND SHAREOWNERS' EQUITY $ 2,086 $ 2,002
======= =======
</TABLE>
See notes to consolidated financial statements.
2
<PAGE> 21
MERITOR AUTOMOTIVE, INC.
STATEMENT OF CONSOLIDATED CASH FLOWS
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-----------------------------
1998 1997 1996
----- ----- -----
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 147 $ 109 $ 114
Adjustments to net income to arrive at cash
provided by operating activities:
Depreciation and amortization 102 100 102
Gain on sale of property and businesses -- (3) (19)
Restructuring, net of expenditures -- 20 26
Deferred income taxes (10) (4) (18)
Pension expense 21 24 25
Pension contributions (28) (5) (2)
Changes in assets and liabilities, excluding effects of
acquisitions, divestitures and foreign currency adjustments:
Receivables (88) (103) (32)
Inventories (34) (40) 19
Accounts payable 129 80 24
Other assets and liabilities 39 30 (42)
----- ----- -----
CASH PROVIDED BY OPERATING ACTIVITIES 278 208 197
----- ----- -----
INVESTING ACTIVITIES
Capital expenditures (139) (126) (144)
Acquisitions of businesses and investments, net of cash acquired (8) (16) (15)
Sale of long-term note receivable 12 -- --
Proceeds from disposition of property and businesses 5 8 58
----- ----- -----
CASH USED FOR INVESTING ACTIVITIES (130) (134) (101)
----- ----- -----
FINANCING ACTIVITIES
Net increase (decrease) in short-term borrowings 17 17 (3)
Net (decrease) increase in revolving debt (222) 445 --
Net increase (decrease) in other long-term debt 76 (6) (7)
----- ----- -----
Net (decrease)increase in debt (129) 456 (10)
Cash dividends (29) -- --
Pre-Distribution Payment to Rockwell -- (445) --
Transfer from Rockwell - Distribution tax obligation -- 58 --
Payment of Distribution tax obligation (72) -- --
Net transfers from (to) Rockwell 14 (84) (74)
----- ----- -----
CASH USED FOR FINANCING ACTIVITIES (216) (15) (84)
----- ----- -----
(DECREASE) INCREASE IN CASH (68) 59 12
CASH AT BEGINNING OF YEAR 133 74 62
----- ----- -----
CASH AT END OF YEAR $ 65 $ 133 $ 74
===== ===== =====
</TABLE>
See notes to consolidated financial statements.
3
<PAGE> 22
MERITOR AUTOMOTIVE, INC.
STATEMENT OF CONSOLIDATED SHAREOWNERS' EQUITY
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-----------------------------
1998 1997 1996
----- ----- -----
<S> <C> <C> <C>
COMMON STOCK
Beginning balance $ 69 $-- $--
Distribution of Meritor shares -- 69 --
----- ----- -----
Ending balance 69 69 --
----- ----- -----
ADDITIONAL PAID-IN CAPITAL
Beginning balance 154 -- --
Distribution of Meritor shares -- 154 --
Other 2 -- --
----- ----- -----
Ending balance 156 154 --
----- ----- -----
RETAINED EARNINGS
Beginning balance -- 643 603
Net income 147 109 114
Cash dividends (per share: 1998, $.42) (29) -- --
Net transfers to Rockwell -- (84) (74)
Pre-Distribution Payment to Rockwell -- (445) --
Distribution of Meritor shares -- (223) --
----- ----- -----
Ending balance 118 -- 643
----- ----- -----
CUMULATIVE CURRENCY TRANSLATION ADJUSTMENTS
Beginning balance (72) (44) (42)
Net translation adjustments (5) (28) (2)
----- ----- -----
Ending balance (77) (72) (44)
----- ----- -----
TOTAL SHAREOWNERS' EQUITY $ 266 $ 151 $ 599
===== ===== =====
</TABLE>
See notes to consolidated financial statements.
4
<PAGE> 23
MERITOR AUTOMOTIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
Meritor Automotive, Inc. (the company or Meritor) is a leading global
supplier of a broad range of components and systems for use in
commercial, specialty and light vehicles. The company became an
independent, publicly-held company on September 30, 1997 (the
Distribution Date), when Rockwell International Corporation (Rockwell)
spun off its automotive businesses as an independent publicly-traded
company by distributing all of the issued and outstanding shares of the
company to Rockwell's shareowners (the Distribution). Prior to the
Distribution Date, the company made a payment of approximately $445
million in cash to Rockwell through a combination of dividends and
other payments, including repayments of intercompany indebtedness
(collectively, the Pre-Distribution Payment). The Pre-Distribution
Payment was funded through borrowings under the revolving Credit
Facility (see Note 8).
The consolidated financial statements as of and for periods after
September 30, 1997 are those of the company and its consolidated
subsidiaries. The financial statements for periods prior to September
30, 1997 present the combined historical financial position, results of
operations and cash flows of the ongoing automotive businesses of
Rockwell that were spun off. The company's financial statements prior
to September 30, 1997 include charges from Rockwell for certain
centralized services and general corporate expenses. Charges from
Rockwell for centralized services, including payroll and employee
benefits administration, data processing and telecommunication services
were billed to the company based on actual usage and aggregated $21
million and $25 million in fiscal years 1997 and 1996, respectively.
Charges from Rockwell for general corporate expenses which were not
directly related to the automotive businesses were allocated to the
company based on Meritor's sales in proportion to total Rockwell sales.
These costs included costs for corporate oversight, financial, legal,
tax, corporate communications and human resources and aggregated $28
million and $27 million in fiscal years 1997 and 1996, respectively.
Management believes these amounts were allocated or billed to the
company on a reasonable basis. The financial information included
herein for periods prior to September 30, 1997 may not necessarily be
indicative of the results of operations or cash flows of the company if
it had been a separate, independent company during such periods.
Certain prior year amounts have been reclassified to conform with
current year presentation.
2. ACCOUNTING POLICIES
USE OF ESTIMATES
The financial statements of Meritor have been prepared in accordance
with generally accepted accounting principles which require management
to make estimates and assumptions that affect the amounts reported in
the financial statements. Actual results could differ from those
estimates.
5
<PAGE> 24
CONSOLIDATIONS AND JOINT VENTURES
The consolidated financial statements include the accounts of the
company and those majority-owned subsidiaries in which the company has
control. All significant intercompany accounts and transactions are
eliminated in consolidation.
Investments in affiliates which are not majority-owned are reported
using the equity method. The accounts and results of operations of
majority-owned subsidiaries where ownership is greater than 50 percent
but less than 100 percent are included in the consolidated results and
are offset by a related minority interest expense and liability
recorded for the minority interest ownership.
FOREIGN CURRENCY
Local currencies are considered the functional currencies outside the
United States except for subsidiaries located in countries with highly
inflationary economies. For operations reporting in local currencies,
assets and liabilities are translated at year-end exchange rates with
cumulative currency translation adjustments included as a component of
shareowners' equity. Income and expense items are translated at average
rates of exchange during the year. For operations in countries with
highly inflationary economies in which the U.S. dollar is considered
the functional currency, certain financial statement amounts are
translated at historic exchange rates with all other assets and
liabilities translated at year-end exchange rates. These translation
adjustments are reflected in the accompanying Statement of Consolidated
Income.
INVENTORIES
Inventories are stated at the lower of cost (using LIFO, FIFO or
average methods) or market (determined on the basis of estimated
realizable values).
TOOLING
Costs incurred by the company for certain engineering and tooling
projects, principally for light vehicle products, for which customer
reimbursement is anticipated are classified as Other Current Assets in
the accompanying Consolidated Balance Sheet. Provisions for losses are
provided at the time management anticipates costs to exceed anticipated
customer reimbursement. Company-owned tooling is classified as property
and depreciated over its expected life or the life of the related
vehicle platform, whichever is shorter.
PROPERTY
Property is stated at cost. Depreciation of property is based on
estimated useful lives generally using the straight-line method.
Significant renewals and betterments are capitalized and replaced units
are written off. Maintenance and repairs, as well as renewals of minor
amounts, are charged to expense.
INTANGIBLE ASSETS
Goodwill represents the excess of the cost of purchased businesses over
the fair value of their net assets at the date of acquisition and is
amortized using the straight-line method over periods ranging from 5 to
40 years.
CAPITALIZED SOFTWARE
Costs relating to internally developed or purchased software are
capitalized and amortized utilizing the straight-line basis over a
period of generally 5 years. These amounts are included in Other Assets
in the accompanying Consolidated Balance Sheet.
6
<PAGE> 25
IMPAIRMENT OF LONG-LIVED ASSETS
Management periodically reviews the realizability of long-lived assets
based on an evaluation of remaining useful lives, cash flows and
profitability projections and has determined that there is no
impairment at September 30, 1998.
REVENUE RECOGNITION
Revenues are generally recognized upon shipment of products to
customers.
EARNINGS PER SHARE
The company has adopted Statement of Financial Accounting Standards No.
128 (SFAS 128), "Earnings Per Share". Basic earnings per share are
based upon the weighted average number of shares outstanding during
each year. Diluted earnings per share assumes the exercise of common
stock options when dilutive.
ENVIRONMENTAL MATTERS
The company records accruals 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 Meritor is the only responsible party, the company records a
liability for the total estimated costs of remediation before
consideration of recovery from insurers or other third parties. If
recovery from a third party is determined to be probable, the company
records a receivable for the estimated recovery.
STOCK BASED COMPENSATION
The company accounts for its stock based compensation using the
intrinsic value approach under Accounting Principles Board Opinion
(APB) No. 25, "Accounting for Stock Issued to Employees" and adopted
the disclosure-only provisions of Statement of Financial Accounting
Standards No. 123 (SFAS 123), "Accounting for Stock-Based Compensation"
(see Note 11).
NEW ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 130 (SFAS 130), "Reporting
Comprehensive Income," effective for fiscal year 1999. SFAS 130
establishes standards for the reporting and display in the financial
statements of total net income and the components of all other nonowner
changes in equity, referred to as comprehensive income. The adoption of
this standard will not have a material effect on the company's
financial statements.
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 131 (SFAS 131), "Disclosures
about Segments of an Enterprise and Related Information," effective for
fiscal years beginning after December 15, 1997. SFAS 131 requires
disclosure of business and geographic segments in the consolidated
financial statements of the company. The company is currently analyzing
the impact this standard will have on the disclosures in its financial
statements.
7
<PAGE> 26
In February 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 132 (SFAS 132),
"Employers' Disclosure about Pensions and Other Postretirement
Benefits," effective for fiscal years beginning after December 15,
1997. SFAS 132 standardizes the disclosure requirements for pensions
and other postretirement benefits, requires additional information on
changes in the benefit obligations and fair values of plan assets that
will facilitate financial analysis and eliminates certain disclosures.
The company will adopt the disclosure provisions of SFAS 132 in fiscal
year 1999.
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133 (SFAS 133), "Accounting for
Derivative Instruments and Hedging Activities," effective for all
fiscal quarters of fiscal years beginning after June 15, 1999. SFAS 133
requires that all derivatives be recognized as either assets or
liabilities in the statement of financial position and be measured at
fair value. The company is currently analyzing the impact this standard
will have on its financial statements.
3. INVENTORIES
Inventories are summarized as follows (in millions):
<TABLE>
<CAPTION>
SEPTEMBER 30,
---------------
1998 1997
---- ----
<S> <C> <C>
Finished goods $143 $117
Work in process 120 146
Raw materials, parts and supplies 150 116
---- ----
Total 413 379
Less allowance to adjust the carrying value of certain
inventories (1998, $144; 1997, $150) to a LIFO basis 53 52
---- ----
Inventories $360 $327
==== ====
</TABLE>
4. OTHER CURRENT ASSETS
Other Current Assets are summarized as follows (in millions):
<TABLE>
<CAPTION>
SEPTEMBER 30,
-----------------
1998 1997
---- ----
<S> <C> <C>
Current deferred income taxes (see Note 16) $112 $ 85
Customer tooling 20 20
Prepaid expenses 20 21
Other 1 2
---- ----
Other Current Assets $153 $128
==== ====
</TABLE>
8
<PAGE> 27
5. NET PROPERTY
Net Property is summarized as follows (in millions):
<TABLE>
<CAPTION>
SEPTEMBER 30,
--------------------------
1998 1997
------ ------
<S> <C> <C>
Property at cost:
Land and land improvements $ 32 $ 31
Buildings 293 278
Machinery and equipment 1,037 985
Company-owned tooling 204 195
Construction in progress 95 93
------ ------
Total 1,661 1,582
Less accumulated depreciation 995 947
------ ------
Net Property $ 666 $ 635
====== ======
</TABLE>
6. OTHER ASSETS
Other Assets are summarized as follows (in millions):
<TABLE>
<CAPTION>
SEPTEMBER 30,
--------------------------
1998 1997
------ ------
<S> <C> <C>
Net deferred income taxes (see Note 16) $ 53 $ 71
Goodwill (net of accumulated amortization of:
1998, $25; 1997, $22) 39 42
Investments in affiliates 46 43
Prepaid pension costs (see Note 13) 30 29
Net capitalized computer software 16 7
Other 20 24
---- ----
Other Assets $204 $216
==== ====
</TABLE>
7. OTHER CURRENT LIABILITIES
Other Current Liabilities are summarized as follows (in millions):
<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------------
1998 1997
------ ------
<S> <C> <C>
Accrued product warranties $112 $ 95
Accrued taxes other than income taxes 36 28
Accrued restructuring 10 26
Accrued interest rate settlement cost (see Note 9) 31 --
Other 40 28
---- ----
Other Current Liabilities $229 $177
==== ====
</TABLE>
8. LONG-TERM DEBT
Long-term Debt is summarized as follows (in millions):
<TABLE>
<CAPTION>
SEPTEMBER 30,
--------------------------
1998 1997
------ ------
<S> <C> <C>
Bank revolving Credit Facility $219 $447
Lines of credit 79 --
Other 15 18
---- ----
Long-term Debt $313 $465
==== ====
</TABLE>
9
<PAGE> 28
The company has a $1 billion unsecured revolving Credit Facility with 19
banks which expires in August 2002. Borrowings are subject to interest
based on quoted market rates, principally LIBOR and eurocurrency rates, at
the date of borrowing plus an applicable margin which is based on the
company's credit rating. In addition, a facility fee, which also varies
based upon the company's credit rating, is required on the $1 billion
committed amount. At September 30, 1998, the margin over the LIBOR-based
and eurocurrency rates was 20 basis points, and the facility fee on the
committed amount was 10 basis points. At September 30, 1998, the company
was in compliance with all covenants included in the Credit Facility and
there have been no events of default. Up to $500 million of the Credit
Facility is available for eurocurrency loans and up to $100 million is
available for the issuance of standby letters of credit.
The company has $130 million of unsecured lines of credit. Interest rates
under these lines of credit are determined at the time of borrowing based
on the underlying bank rates and averaged approximately 6.5 percent at
September 30, 1998. Borrowings under the lines generally extend through
September 1999 and are classified as long-term debt as the company has the
ability and intent to refinance these borrowings under its revolving
Credit Facility.
On April 9, 1998, the company filed a shelf Registration Statement with
the Securities and Exchange Commission covering up to $500 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. The
Registration Statement became effective on June 4, 1998. Except as may
otherwise be determined at the time of any sales, the net proceeds of any
offering would be added to the company's general funds which would be
available for general corporate purposes, including the repayment of
existing indebtedness, working capital needs, capital expenditures and
acquisitions. No debt securities have been issued under the shelf
registration at September 30, 1998.
9. FINANCIAL INSTRUMENTS
Meritor's financial instruments include cash, short- and long-term debt
and foreign currency forward exchange contracts. As of September 30, 1998
and 1997, the carrying values of the company's financial instruments
approximated their fair values based on prevailing market prices and
rates. It is the policy of the company not to enter into derivative
financial instruments for speculative purposes. Meritor does enter into
foreign currency forward exchange contracts to minimize risk of loss from
currency rate fluctuations on foreign currency commitments entered into in
the ordinary course of business. These foreign currency forward exchange
contracts relate to purchase and sales transactions and are generally for
terms of less than one year. The foreign currency forward exchange
contracts are executed with creditworthy banks and are denominated in
currencies of major industrial countries. The notional amount of
outstanding foreign currency forward exchange contracts aggregated $212
million and $194 million at September 30, 1998 and 1997, respectively.
Meritor does not anticipate any material adverse effect on its results of
operations or financial position relating to these foreign currency
forward exchange contracts.
10
<PAGE> 29
In anticipation of offering debt securities under the shelf Registration
Statement described in Note 8, the company entered into interest rate
agreements on April 9, 1998 with creditworthy financial institutions.
These agreements effectively fixed the base rate of interest at the rate
prevailing on April 9, 1998 on an aggregate notional principal amount of
$200 million of debt that the company planned to issue. This planned
issuance of these debt securities did not occur, initially due to the
consideration of a major acquisition and, subsequently, the instability in
the U.S. corporate bond market. The company settled the interest rate
agreements in October 1998 resulting in a payment of $31 million, which
was accrued and included in Other Current Liabilities at September 30,
1998. The accounting treatment of the settlement payment is a one-time
charge of $31 million ($19 million after-tax), or $.27 per share, which is
included in the accompanying Statement of Consolidated Income. Had the
debt been issued, the accounting treatment would have been to defer and
amortize the cost of the settlement over the life of the debt securities.
10. CAPITAL STOCK
The company is authorized to issue 350 million shares of Common Stock,
with a par value of $1 per share, and 25 million shares of Preferred
Stock, without par value, of which 1 million shares are designated as
Series A Junior Participating Preferred Stock (Junior Preferred Stock).
Under the Company Rights Plan, a Preferred Share Purchase Right (Right) is
attached to each share of Common Stock pursuant to which the holder may,
in certain takeover-related circumstances, become entitled to purchase
from the company 1/100th of a share of Junior Preferred Stock at a price
of $112.50, subject to adjustment. Also, in certain takeover-related
circumstances, each Right (other than those held by an acquiring
person)will be exercisable for shares of Common Stock or stock of the
acquiring person having a market value of twice the exercise price. In
certain events, each Right may be exchanged by the company for one share
of Common Stock or 1/100th of a share of Junior Preferred Stock. The
Rights will expire on September 30, 2007, unless earlier exchanged or
redeemed at a redemption price of $.01 per Right. Until a Right is
exercised, the holder, as such, will have no voting, dividend or other
rights as a shareowner of the company.
The company has reserved 7.7 million shares of Common Stock in connection
with its 1997 Long-Term Incentives Plan (the 1997 LTIP), Directors Stock
Plan and Incentive Compensation Plan for grants of non-qualified stock
options, incentive stock options, stock appreciation rights, restricted
stock and stock awards to key employees and the company's directors. At
September 30, 1998, there were 4.5 million shares available for future
grants under these plans.
11
<PAGE> 30
11. STOCK OPTIONS
Stock options granted under the plans described in Note 10 expire ten
years from the date of grant and generally have a vesting period of three
years. The stock options granted are exercisable at prices equal to the
fair market value of Common Stock on the dates the options are granted;
accordingly, no compensation expense has been recognized for the stock
option plans.
Information relative to stock options is as follows (shares in thousands):
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
EXERCISE
SHARES PRICE
<S> <C> <C>
Conversion of Rockwell options at September 30, 1997 368 $ 23.78
Granted 3,043 22.40
Exercised (1) 23.65
Canceled (292) 22.43
----- ------
Options outstanding at September 30, 1998 3,118 $ 22.56
===== ======
Exercisable at September 30, 1997: - -
Exercisable at September 30, 1998: 114 $ 23.79
</TABLE>
Options outstanding at September 30, 1998 are exercisable at prices
ranging from $22.31 to $26.11 per share and have a weighted average
remaining life of 9 years.
If the company accounted for its stock-based compensation plans using the
fair value method provided by SFAS 123, the company's 1998 net income and
earnings per share would have been reduced to pro forma net income of $142
million and pro forma earnings per share of $2.06. The weighted average
fair value of options granted was $7.01 per share in 1998. The fair value
of each option was estimated on the date of grant using the Black-Scholes
pricing model utilizing expected volatility of 31 percent, risk free
interest of 5.8 percent, expected life of 5 years and an expected dividend
yield of 2 percent. Pro forma net income would have been $1.1 million and
$0.3 million lower in 1997 and 1996, respectively, utilizing the same
assumptions noted, except with an expected volatility of 26 percent.
12. RETIREMENT MEDICAL PLANS
Meritor has retirement medical plans which cover most of its U.S. and
certain non-U.S. employees and provide for medical payments to eligible
employees and dependents upon retirement.
The components of retirement medical expense are as follows (in millions):
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Service cost $ 2 $ 2 $ 2
Interest cost 28 28 27
Amortization of unrecognized amounts (1) (1) (1)
----- ----- -----
Retirement medical expense $ 29 $ 29 $ 28
===== ===== =====
</TABLE>
12
<PAGE> 31
The retirement medical obligation at September 30, 1998 and 1997 is
comprised of the following (in millions):
<TABLE>
<CAPTION>
1998 1997
----- -----
<S> <C> <C>
Accumulated obligation:
Retirees $ 395 $ 346
Employees eligible to retire 22 21
Employees not eligible to retire 37 34
----- -----
Total 454 401
Items not yet recognized in the balance sheet:
Plan amendments 21 27
Actuarial (losses) gains:
Discount rate (84) (54)
Health care cost trend 18 11
Demographic and other (107) (86)
Recorded liability $ 302 $ 299
===== =====
Assumptions used (June 30 measurement date):
Discount rate 6.75% 7.5%
Health care cost trend rates 8.0% 8.0%
Ultimate trend rates 5.0% 5.5%
Year ultimate trend rates achieved 2016 2015
</TABLE>
The actuarial losses relating to demographics are due principally to
earlier than assumed retirements resulting from plant closures and
restructuring actions. The net actuarial losses will be considered in the
determination of retirement medical expense in the future.
Changing the health care cost trend rates by one percentage point would
change the accumulated obligation at September 30, 1998 by approximately
$34 million and would change total expense by approximately $2 million.
Retirement medical payments totaled $36 million, $36 million and $35
million for fiscal 1998, 1997 and 1996, respectively.
13. RETIREMENT PENSION PLANS
Prior to the Distribution, Meritor employees participated in a Rockwell
pension plan which provides monthly pension payments to eligible U.S.
employees upon retirement. At September 30, 1997, the company established
a pension plan with substantially similar benefits which credits
participants for service earned with Rockwell. Pension benefits for
salaried employees are based on years of credited service and
compensation. Pension benefits for certain hourly employees are based on
years of service and specified benefit amounts.
The obligation for vested benefits earned by Meritor participants prior to
the Distribution and all related assets were retained by Rockwell. The
benefits payable under the Meritor plan will be equal to the difference
between the total benefit earned with both companies and the vested
benefit obligation retained by Rockwell.
13
<PAGE> 32
Net pension expense consisted of the following (in millions):
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Service cost $ 15 $ 14 $ 16
Interest cost 18 17 17
Assumed return on plan assets (15) (13) (12)
Amortization of unrecognized amounts 3 6 4
----- ---- ----
Net pension expense $ 21 $ 24 $ 25
===== ==== ====
</TABLE>
The following table reconciles the funded status of the pension assets and
liabilities to amounts included in the balance sheet (in millions):
<TABLE>
<CAPTION>
1998 1997
------------------------------------- --------------------------------------
PLANS WITH PLANS WITH PLANS WITH PLANS WITH
ASSETS ACCUMULATED ASSETS ACCUMULATED
EXCEEDING BENEFITS EXCEEDING BENEFITS
ACCUMULATED EXCEEDING ACCUMULATED EXCEEDING
BENEFITS ASSETS BENEFITS ASSETS
----------------- --------------- ------------------ ----------------
<S> <C> <C> <C> <C>
Accumulated benefit obligation,
principally vested $ 114 $ 135 $ 103 $ 105
Effects of projected compensation
increases 9 60 8 47
----- ----- ----- -----
Projected benefit obligation 123 195 111 152
Fair value of plan assets 183 54 153 31
----- ----- ----- -----
Plan assets in excess of (less than)
projected benefit obligation 60 (141) 42 (121)
Items not yet recognized in the
balance sheet:
Net actuarial (gains) losses (29) 36 (11) 12
Prior service cost 13 3 13 3
Remaining initial net asset (14) (1) (15) (3)
Unfunded pension adjustment - (7) - (1)
----- ----- ----- -----
Prepaid (accrued) pension costs
at September 30 $ 30 $(110) $ 29 $(110)
===== ===== ===== =====
</TABLE>
Assumptions used (June 30 measurement date):
<TABLE>
<CAPTION>
1998 1997
------ ------
<S> <C> <C>
Discount rate 6.0-6.75% 7.0-7.75%
Compensation increase rate 2.5-4.5% 3.5-4.5%
Long-term rate of return on plan assets 9.0% 9.0%
</TABLE>
The company also sponsors certain defined contribution savings plans for
eligible employees. Expense related to these plans was $6 million, $5
million and $6 million for fiscal 1998, 1997 and 1996, respectively.
14
<PAGE> 33
14. RESTRUCTURING AND SPIN-OFF COSTS
The company recorded restructuring charges of $21 million ($16 million
after-tax) and $36 million ($24 million after-tax) in fiscal 1997 and
1996, respectively, for manufacturing cost reduction programs mostly
outside of the United States. The 1997 charge was comprised of severance
and other employee costs of $16 million related to 640 employees and other
facility related costs of $5 million. The 1996 charge was comprised of
employee costs of $22 million related to 1,400 employees, asset impairment
of $8 million and other costs of $6 million. At September 30, 1998,
approximately $10 million of the reserve remains in Other Current
Liabilities in the accompanying Consolidated Balance Sheet. The company
anticipates the majority of the remaining expenditures will occur in
fiscal 1999. In 1997, the company also recorded spin-off costs of $8
million ($5 million after-tax) associated with start-up activities of the
new company.
15. OTHER INCOME-NET
Other Income-Net is comprised of the following (in millions):
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Equity in earnings of affiliates $ 28 $ 15 $ 11
Minority interests (11) (11) (11)
Gain on the sale of property
and businesses - 3 19
Interest income 4 2 4
Insurance settlement - 5 15
Other (1) 1 8
----- ---- ---
Other Income-Net $ 20 $ 15 $ 46
===== ==== ====
</TABLE>
16. INCOME TAXES
The components of the Provision for Income Taxes are summarized as follows
(in millions):
<TABLE>
<CAPTION>
1998 1997 1996
----- ----- -----
<S> <C> <C> <C>
Current tax expense:
United States $ 37 $ 23 $ 30
Foreign 62 53 48
State and local 9 5 8
----- ----- -----
Total current tax expense 108 81 86
----- ----- -----
Deferred tax benefit:
United States (4) (3) (13)
Foreign (3) -- (2)
State and local (3) (1) (3)
----- ----- -----
Total deferred tax benefit (10) (4) (18)
----- ----- -----
Provision for Income Taxes $ 98 $ 77 $ 68
===== ===== =====
</TABLE>
The deferred tax benefit represents the tax impact related to certain
accrued expenses that have been recorded for financial statement purposes
but are not deductible for income tax purposes until paid.
15
<PAGE> 34
Net deferred income tax benefits included in Other Current Assets in the
accompanying Consolidated Balance Sheet consist of the tax effects of
temporary differences related to the following (in millions):
<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------
1998 1997
---- ----
<S> <C> <C>
Accrued product warranties $ 40 $ 35
Accrued compensation and benefits 31 25
Accrued restructuring 3 7
Accrued interest rate settlement cost 12 --
Other-net 26 18
---- ----
Current deferred income taxes $112 $ 85
==== ====
</TABLE>
Net deferred income tax benefits included in Other Assets in the
accompanying Consolidated Balance Sheet consist of the tax effects of
temporary differences related to the following (in millions):
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------------
1998 1997
----- -----
<S> <C> <C>
Accrued retirement medical costs $ 99 $ 103
Property (64) (61)
Pensions 12 18
Loss and credit carryforwards 23 21
Other-net (8) 5
----- -----
Subtotal 62 86
Valuation allowance (9) (15)
----- -----
Long-term deferred income taxes $ 53 $ 71
===== =====
</TABLE>
Management believes it is more likely than not that current and long-term
deferred tax benefits will reduce future current income tax expense and
payments. Significant factors considered by management in its determination
of the probability of the realization of the deferred tax benefits
included: (a) historical operating results, (b) expectations of future
earnings and (c) the extended period of time over which the retirement
medical liability will be paid. The valuation allowance represents the
amount of tax benefits related to net operating loss and tax credit
carryforwards which management believes is not likely to be realized. The
carryforward periods for $9 million of net operating losses and tax credit
carryforwards expire between 1999 and 2003. The carryforward period for the
remaining net operating losses and tax credits is indefinite.
A substantial portion of Meritor's results of operations for 1997 and prior
years is included in the consolidated U.S. and combined non-U.S. income tax
returns of Rockwell. The remaining results of operations for Meritor are
included in separate Meritor income tax returns. Rockwell has agreed to
indemnify Meritor for income tax liabilities and retained the rights to tax
refunds relating to any operations included in such consolidated or
combined tax returns. The income tax provisions included in the Statement
of Consolidated Income for fiscal 1997 and 1996 have been determined as if
the company were a separate taxpayer.
At September 30, 1997, Accrued Income Taxes were primarily comprised of
Canadian income taxes incurred in connection with the transfer of assets
prior to the Distribution. The $72 million payment, during the quarter
ended December 31, 1997, of the Rockwell Distribution tax obligation was
indemnified by Rockwell.
16
<PAGE> 35
Prior to the Distribution, Rockwell received a ruling from the United
States Internal Revenue Service that the spin-off of the automotive
businesses would be tax-free to Rockwell shareowners. The company is
responsible for any taxes imposed on Rockwell, the company or Rockwell
shareowners if certain actions by or in respect of the company or its
shareowners result in the disqualification of the Distribution as a
tax-free transaction.
The company's effective tax rate was different from the U.S. statutory
rate for the reasons set forth below:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Statutory tax rate 35.0% 35.0% 35.0%
State and local income taxes 1.6 1.2 2.0
Foreign income taxes 2.7 3.7 2.3
Recognition of foreign loss carryforwards (2.0) (1.9) (2.1)
Tax on undistributed foreign earnings 1.6 2.0 1.0
Other 1.1 1.3 (0.6)
---- ---- ----
Effective tax rate 40.0% 41.3% 37.6%
==== ==== ====
</TABLE>
The income tax provisions were calculated based upon the following
components of income before income taxes (in millions):
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
United States income $ 86 $ 53 $ 43
Foreign income 159 133 139
---- ---- ----
Total $245 $186 $182
==== ==== ====
</TABLE>
No provision has been made for U.S., state or additional foreign income
taxes related to approximately $192 million of undistributed earnings of
foreign subsidiaries which have been or are intended to be permanently
reinvested.
17. SUPPLEMENTAL FINANCIAL INFORMATION
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
(IN MILLIONS)
Statement of income data:
Maintenance and repairs $ 72 $ 70 $ 64
Research and development 54 54 51
Rental expense 18 18 17
Statement of cash flows data:
Interest payments $ 43 $ 10 $ 10
Income tax payments 116 16 7
Distribution tax payment 72 -- --
</TABLE>
18. CONTINGENT LIABILITIES
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 had 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 have been accomplished without material effect on the company's
liquidity and capital resources, competitive position or financial
statements.
17
<PAGE> 36
The company has been designated as a potentially responsible party at three
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
September 30, 1998 to be approximately $16 million, of which $10 million
has been accrued.
Various other lawsuits, claims, and proceedings have been asserted against
Meritor 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 September 30, 1998 to be approximately $39 million.
Environmental accruals for these matters of $14 million have been recorded.
At September 30, 1998, there were no receivables recorded from third
parties related to environmental matters.
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 liquidity and capital resources,
competitive position or financial statements. Management cannot assess the
possible effect of compliance with future requirements.
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 which are pending or asserted will not
have a material adverse effect on the company's financial statements.
In connection with the Distribution, the company assumed all contingent
liabilities (including those in respect of environmental matters) related
to current and former operations of Rockwell's automotive businesses.
19. BUSINESS SEGMENT INFORMATION
The company operates in one industry segment, the supply of automotive
components and systems for use in commercial, specialty and light vehicles,
including:
HEAVY VEHICLE SYSTEMS--Drivetrain systems and components, including axles,
brakes, transmissions, clutches and drivelines, for heavy-duty and
medium-duty trucks, trailers, off-highway equipment, buses and coaches, as
well as specialty and military vehicles.
LIGHT VEHICLE SYSTEMS--Electromechanical and other components and systems,
including roof, door, access control, suspension and seat adjusting
systems, as well as wheel products for passenger cars, light trucks
and sport utility vehicles.
18
<PAGE> 37
<TABLE>
<CAPTION>
SALES BY GEOGRAPHIC AREA 1998 1997 1996
(IN MILLIONS) ---- ---- ----
<S> <C> <C> <C>
United States $ 1,848 $ 1,522 $ 1,367
Canada and Mexico 538 426 391
------- ------ -------
Total North America 2,386 1,948 1,758
Europe 1,093 1,022 1,094
South America 244 236 206
Asia-Pacific 113 103 86
------- ------- -------
Total sales $ 3,836 $ 3,309 $ 3,144
======= ======= =======
</TABLE>
Sales to one original equipment manufacturer represented 23 percent of the
company's sales in fiscal 1998, 1997 and 1996. These sales include other
customers acquired or merged with this customer. No other customer
comprised 10 percent or more of the company's sales in the three years
ended September 30, 1998.
<TABLE>
<CAPTION>
EARNINGS BY GEOGRAPHIC AREA 1998 1997 1996
(IN MILLIONS) ----- ----- -----
<S> <C> <C> <C>
United States $ 122 $ 93 $ 64
Canada and Mexico 87 48 38
----- ----- -----
Total North America 209 141 102
Europe 66 56 73
South America 17 7 1
Asia-Pacific 7 6 6
Restructuring and spin-off costs -- (29) (36)
----- ----- -----
Operating earnings 299 181 146
Other income-net 20 15 46
Interest rate settlement cost (31) -- --
Interest expense (43) (10) (10)
Provision for income taxes (98) (77) (68)
----- ----- -----
Net income $ 147 $ 109 $ 114
===== ===== =====
</TABLE>
<TABLE>
<CAPTION>
IDENTIFIABLE ASSETS BY GEOGRAPHIC AREA 1998 1997 1996
(IN MILLIONS) ------ ------ ------
<S> <C> <C> <C>
United States $ 937 $ 830 $ 764
Canada and Mexico 228 301 198
------ ------ ------
Total North America 1,165 1,131 962
Europe 639 566 590
South America 163 192 188
Asia-Pacific 119 113 90
------ ------ ------
Total $2,086 $2,002 $1,830
====== ====== ======
</TABLE>
20. QUARTERLY AND PRO FORMA FINANCIAL INFORMATION (UNAUDITED)
The following is a condensed summary of the company's unaudited quarterly
results of operations for fiscal 1998 and 1997, stock price data for fiscal
1998 and unaudited pro forma quarterly results of operations for fiscal
1997.
19
<PAGE> 38
<TABLE>
<CAPTION>
1998 FISCAL QUARTERS
FIRST SECOND THIRD FOURTH 1998
------ ------ ------- ------ ------
(IN MILLIONS, EXCEPT SHARE-RELATED DATA)
<S> <C> <C> <C> <C> <C>
Sales $ 911 $ 968 $ 1,003 $ 954 $3,836
Cost of sales 791 823 852 823 3,289
Net income 32 45 47 23 147
Net income per share
(basic and diluted) $ .47 $ .64 $ .68 $ .34 $ 2.13
====== ====== ======= ====== ======
Stock Prices
High 25 1/4 27 3/16 28 3/8 24 28 3/8
Low 20 11/16 19 1/8 21 7/8 15 15
</TABLE>
Fourth quarter 1998 net income was reduced by a one-time charge of $31
million ($19 million after-tax) or $.27 per share, related to the
settlement of the interest rate agreements (See Note 9).
<TABLE>
<CAPTION>
1997 FISCAL QUARTERS
--------------------------------------------------------------
FIRST SECOND THIRD FOURTH 1997
------ ------ ------ ------ ------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Sales $ 756 $ 822 $ 889 $ 842 $3,309
Cost of sales 663 708 764 736 2,871
Net income 28 34 38 9 109
</TABLE>
Fourth quarter 1997 net income was reduced by a $29 million ($21 million
after-tax) charge related to restructuring and spin-off costs.
The unaudited pro forma financial data for 1997 is presented as though the
Distribution occurred as of October 1, 1996. Pro forma information reflects
(a) the 68.9 million shares of common stock issued at the date of the
spin-off,(b) management's estimate that corporate costs would have been $11
million lower on a stand-alone basis than those allocated to the automotive
businesses by Rockwell and (c) $28 million of interest expense at 6.0
percent for the year ended September 30, 1997 related to the debt incurred
by the company in connection with the Pre-Distribution Payment to Rockwell.
The unaudited pro forma financial data is not necessarily indicative of the
financial results of the company had the Distribution occurred on October
1, 1996.
20
<PAGE> 39
<TABLE>
<CAPTION>
1997 FISCAL QUARTERS
--------------------------------------------------------------
FIRST SECOND THIRD FOURTH 1997
------ ------ ------ ------ ------
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Sales $ 756 $ 822 $ 889 $ 842 $3,309
Pro Forma Operating Earnings 42 61 69 20(1) 192(1)
Pro Forma Net Income 25 33 35 6 99
Pro Forma Earnings Per Share $ .36 $ .48 $ .51 $ .09 $ 1.44
(basic and diluted) ====== ====== ====== ====== ======
Pro Forma Earnings Per Share
Before Restructuring
and Spin-Off Costs $ .36 $ .48 $ .51 $ .39 $ 1.74
(basic and diluted) ====== ====== ====== ====== ======
</TABLE>
(1) Includes restructuring and spin-off costs of $29 million ($21
million after-tax).
21.SUBSEQUENT EVENTS (UNAUDITED)
The company signed a definitive agreement to acquire the Heavy Vehicle
Braking Systems (HVBS) business of LucasVarity plc for $390 million in cash
on November 22, 1998. The LucasVarity HVBS components include air drum and
disc brakes, hydraulic brakes, wheel end components and aftermarket
products which complement the company's brake systems products. For the
fiscal year ended January 31, 1998, the HVBS business of LucasVarity had
net sales of approximately $290 million. The HVBS acquisition is expected
to add annual sales of approximately $400 million. The transaction is
subject to regulatory approvals in the U.S. and Europe and is expected to
close in January 1999.
On December 4, 1998, the company signed a definitive agreement with Volvo
Truck Corporation to acquire Volvo's heavy axle manufacturing operations
based in Lindesberg, Sweden. Under the terms of the agreement, the company
will become the primary supplier of heavy duty axles for Volvo's heavy
truck operations. The transaction is expected to add annual sales of
approximately $200 million with a purchase price of approximately $135
million in cash, $44 million of which is deferred. The transaction is
expected to close in December 1998.
The company also signed a definitive agreement to acquire Euclid Industries
on December 7, 1998. Euclid is a leading North American supplier and
manufacturer of aftermarket replacement parts for a wide range of medium-
and heavy-duty vehicles, and has been a premier participant in the North
American heavy-duty aftermarket. For the fiscal year ended August 31, 1998,
Euclid generated sales of more than $100 million. The transaction is
subject to regulatory approvals and is expected to close in December 1998.
All of the above acquisitions will be accounted for by the purchase method
of accounting. Accordingly, the results of operations of the acquired
companies will be included with those of the company for periods subsequent
to the date of acquisition.
21
<PAGE> 40
MERITOR AUTOMOTIVE, INC.
SELECTED FINANCIAL DATA
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Fiscal Year Ended September 30,
-------------------------------------------------------------
1998 1997 1996 1995 1994
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS
Sales
Heavy Vehicle Systems $ 2,361 $ 1,957 $ 1,827 $ 1,937 $ 1,753
Light Vehicle Systems 1,475 1,352 1,317 1,188 900
------- ------- ------- ------- -------
Total $ 3,836 $ 3,309 $ 3,144 $ 3,125 $ 2,653
======= ======= ======= ======= =======
Operating earnings 299 181(1) 146(1) 178 91
Operating earnings as a percent of sales 7.8% 5.5% 4.6% 5.7% 3.4%
Interest expense 43 10 10 11 12
Income before income taxes 245(2) 186 182 185 88
Net income 147(2) 109 114 123 51
Basic and Diluted earnings per share(3) $ 2.13(2) N/A N/A N/A N/A
Cash dividends per share(3) $ 0.42 N/A N/A N/A N/A
------- ------- ------- ------- -------
FINANCIAL POSITION AT SEPTEMBER 30
Working capital(4) $ 162 $ 235 $ 240 $ 216 $ 204
Property-net 666 635 643 647 617
Total assets 2,086 2,002 1,830 1,766 1,638
Short-term debt 34 21 8 14 17
Long-term debt 313 465 24 31 35
Equity and Minority interests(5) 297 188 628 585 530
------- ------- ------- ------- -------
OTHER DATA
Depreciation and amortization $ 102 $ 100 $ 102 $ 97 $ 93
Cash provided by operating activities 278 208 197 203 156
Capital expenditures 139 126 144 119 102
Employees at year end 16,900 16,900 15,300 16,700 17,200
Annual sales per employee (in thousands)(6) $ 228 $ 203 $ 198 $ 182 $ 159
------- ------- ------- ------- -------
</TABLE>
(1) Operating earnings for fiscal year 1997 and fiscal year 1996 include
restructuring and spin-off costs of $29 million and $36 million,
respectively.
(2) Income before income taxes, net income and basic and diluted earnings
per share for fiscal year 1998 includes a one-time charge of $31
million ($19 million after-tax), or $.27 per share relating to the
settlement of interest rate agreements.
(3) As the company began operations as a stand-alone entity on September
30, 1997, per share data for years ending prior to September 30, 1998
is not applicable.
(4) Working capital consists of all current assets and liabilities,
including cash and short-term debt.
(5) Equity amounts for fiscal years ending September 30, 1996, 1995 and
1994 represent the net investment of Rockwell prior to the spin-off of
Meritor on September 30, 1997.
(6) Annual sales per employee is based on the average of the monthly ending
number of employees during the year.
<PAGE> 1
EXHIBIT 21
MERITOR AUTOMOTIVE, INC.
LIST OF SUBSIDIARIES OF THE COMPANY
AS OF DECEMBER 15, 1998
<TABLE>
<CAPTION>
PERCENTAGE OF VOTING
SECURITIES OWNED BY
-----------------------
NAME AND JURISDICTION REGISTRANT SUBSIDIARY
--------------------- ---------- ----------
<S> <C> <C>
Meritor Heavy Vehicle Systems, LLC (Delaware)................ 100%
Meritor Light Vehicle Systems, Inc. (Delaware)............... 100%
Meritor Automotive Canada Inc. (Canada)...................... 100%
Meritor Automotive Limited (England)......................... 100%
Meritor France (France)............................. 100%
Meritor Automotive GmbH (Germany)............................ 99% 1%*
Meritor do Brasil Ltda. (Brazil)............................. 100%**
</TABLE>
- ----------
* 1% of the voting securities of Meritor Automotive GmbH is owned by Meritor
Heavy Vehicle Systems Limited.
** 100% of the voting securities of Meritor do Brasil Ltda. is owned by
Meritor Participacoes Ltda., a holding company all of the voting securities
of which is owned by Meritor Automotive, Inc.
Listed above are certain consolidated subsidiaries included in the
financial statements of the Company. Unlisted subsidiaries, considered in the
aggregate, do not constitute a significant subsidiary.
<PAGE> 1
EXHIBIT 23-a
CONSENT OF EXPERT
I consent to the reference to me under the heading "Item 3. Legal
Proceedings" in the Annual Report on Form 10-K of Meritor Automotive, Inc.
("Meritor") for the year ended September 30, 1998, and to the incorporation by
reference of such reference into Meritor's Registration Statement on Form S-8
(Registration No. 333-35403) pertaining to the Meritor Savings Plan; Meritor's
Registration Statement on Form S-8 (Registration No. 333-35407) pertaining to
the Meritor 1997 Long-Term Incentives Plan; and Meritor's Registration Statement
on Form S-3 (Registration No. 333-49777) pertaining to debt securities.
----------------------------
M. Lee Murrah
Assistant General Counsel of
Meritor Automotive, Inc.
Date: December 18, 1998
<PAGE> 1
EXHIBIT 23-b
CONSENT OF EXPERT
I consent to the references to me under the headings "Item 1. Business
- - Environmental Matters" and "Item 3. Legal Proceedings" in the Annual Report on
Form 10-K of Meritor Automotive, Inc. ("Meritor") for the year ended September
30, 1998, and under the heading "Chief Financial Officer's Review - Management's
Discussion and Analysis - Environmental Matters" in Meritor's Annual Report to
Shareowners, incorporated by reference in the Form 10-K. I also consent to the
incorporation by reference of such references into Meritor's Registration
Statement on Form S-8 (Registration No. 333-35403) pertaining to the Meritor
Savings Plan; Meritor's Registration Statement on Form S-8 (Registration No.
333-35407) pertaining to the Meritor 1997 Long-Term Incentives Plan; and
Meritor's Registration Statement on Form S-3 (Registration No. 333-49777)
pertaining to debt securities.
--------------------------------
David W. Greenfield
Senior Vice President,
General Counsel and Secretary of
Meritor Automotive, Inc.
Date: December 18, 1998
<PAGE> 1
EXHIBIT 23-c
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference of our reports dated November
11, 1998, appearing in and incorporated by reference in the Annual Report on
Form 10-K of Meritor Automotive, Inc. for the year ended September 30, 1998 in
the following Registration Statements of Meritor Automotive, Inc.:
<TABLE>
<CAPTION>
<S> <C> <C>
Form Registration No. Purpose
---- ---------------- --------
S-8 333-35403 Meritor
Automotive, Inc.
Savings Plan
S-8 333-35407 Meritor Automotive Inc.
Long-Term
Incentives Plan
S-3 333-49777 Debt Securities
</TABLE>
DELOITTE & TOUCHE LLP
Detroit, Michigan
December 18, 1998
<PAGE> 1
EXHIBIT 24
POWER OF ATTORNEY
I, the undersigned Director and/or Officer of Meritor Automotive, Inc.,
a Delaware corporation (the "Company"), hereby constitute DAVID W. GREENFIELD,
BONNIE WILKINSON AND PETER R. KOLYER, and each of them singly, my true and
lawful attorneys with full power to them and each of them to sign for me, and in
my name and in the capacity or capacities indicated below, the Annual Report on
Form 10-K for the fiscal year ended September 30, 1998, and any amendments and
supplements thereto, to be filed by the Company with the Securities and Exchange
Commission pursuant to the Securities Exchange Act of 1934.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Larry D. Yost Chairman of the Board and November 11, 1998
- --------------------------- Chief Executive Officer
Larry D. Yost (principal executive officer)
and Director
/s/ Joseph B. Anderson, Jr. Director November 11, 1998
- ---------------------------
Joseph B. Anderson, Jr.
/s/ Donald R. Beall Director November 11, 1998
- ---------------------------
Donald R. Beall
/s/ John J. Creedon Director November 11, 1998
- ---------------------------
John J. Creedon
/s/ Charles H. Harff Director November 11, 1998
- ---------------------------
Charles H. Harff
/s/ Harold A. Poling Director November 11, 1998
- ---------------------------
Harold A. Poling
/s/ Martin D. Walker Director November 11, 1998
- ---------------------------
Martin D. Walker
/s/ Thomas A. Madden Senior Vice President, Finance, November 11, 1998
- --------------------------- and Chief Financial Officer
Thomas A. Madden (principal financial officer)
/s/ Diane M. Stelfox Vice President and Controller November 11, 1998
- --------------------------- (principal accounting officer)
Diane M. Stelfox
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> SEP-30-1998
<CASH> 65
<SECURITIES> 0
<RECEIVABLES> 638
<ALLOWANCES> 11
<INVENTORY> 360
<CURRENT-ASSETS> 1,216
<PP&E> 666
<DEPRECIATION> 0
<TOTAL-ASSETS> 2,086
<CURRENT-LIABILITIES> 1,054
<BONDS> 313
0
0
<COMMON> 69
<OTHER-SE> 197
<TOTAL-LIABILITY-AND-EQUITY> 2,086
<SALES> 3,836
<TOTAL-REVENUES> 3,856
<CGS> 3,289
<TOTAL-COSTS> 3,611
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 43
<INCOME-PRETAX> 245
<INCOME-TAX> 98
<INCOME-CONTINUING> 147
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 147
<EPS-PRIMARY> 2.13
<EPS-DILUTED> 2.13
</TABLE>
