<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 1998
Commission file number 1-13093
Meritor Automotive, Inc.
(Exact name of registrant as specified in its charter)
Delaware 38-3354643
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
2135 West Maple Road, Troy, Michigan 48084-7186
(Address of principal executive offices) (Zip Code)
(248) 435-1000
(Registrant's telephone number,
including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
69,026,198 shares of registrant's Common Stock, $1.00 par value, were
outstanding on July 31, 1998.
<PAGE> 2
MERITOR AUTOMOTIVE, INC.
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements:
Page
No.
<S> <C> <C>
Consolidated Balance Sheet - -
June 30, 1998 and September 30, 1997................................. 2
Statement of Consolidated Income - - Three Months
and Nine Months Ended June 30, 1998 and 1997......................... 3
Statement of Consolidated Cash Flows - -
Nine Months Ended June 30, 1998 and 1997............................. 4
Notes to Consolidated Financial Statements........................... 5
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations..................... 10
PART II. OTHER INFORMATION:
Item 1. Legal Proceedings.................................................... 16
Item 2. Changes in Securities and Use of Proceeds............................ 16
Item 5. Other Information.................................................... 17
Item 6. Exhibits and Reports on Form 8-K..................................... 17
</TABLE>
<PAGE> 3
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
MERITOR AUTOMOTIVE, INC.
CONSOLIDATED BALANCE SHEET
June 30,
1998 September 30,
(unaudited) 1997
------------------ ------------------
ASSETS (In millions)
Current assets:
<S> <C> <C>
Cash .................................................... $ 68 $ 133
Receivables (less allowance for doubtful accounts:
June 30, 1998, $11; September 30, 1997, $9) .......... 666 563
Inventories ............................................. 360 327
Other current assets .................................... 132 128
------- -------
Total current assets ................................ 1,226 1,151
------- -------
Net property ................................................. 626 635
Other assets ................................................. 222 216
------- -------
TOTAL .................................. $ 2,074 $ 2,002
======= =======
LIABILITIES AND SHAREOWNERS' EQUITY
Current liabilities:
Short-term debt ......................................... $ 51 $ 21
Accounts payable ........................................ 543 501
Accrued compensation and benefits ....................... 140 129
Accrued income taxes .................................... 13 88
Other current liabilities ............................... 201 177
------- -------
Total current liabilities ........................... 948 916
Long-term debt ............................................... 440 465
Accrued retirement benefits .................................. 377 387
Other liabilities ............................................ 45 46
Minority interests ........................................... 39 37
Shareowners' equity:
Common Stock
(shares issued and outstanding: June 30, 1998, 69.0;
September 30, 1997, 68.9) .......................... 69 69
Additional paid-in-capital .............................. 155 154
Retained earnings ....................................... 102 --
Cumulative currency translation adjustments ............. (101) (72)
------- -------
Total shareowners' equity .................. 225 151
------- -------
TOTAL .................................. $ 2,074 $ 2,002
======= =======
See notes to consolidated financial statements.
- -------------------------------------------------------------------------------------------------------------
2
</TABLE>
<PAGE> 4
<TABLE>
<CAPTION>
MERITOR AUTOMOTIVE, INC.
STATEMENT OF CONSOLIDATED INCOME
(Unaudited)
Three Months Ended Nine Months Ended
June 30, June 30,
--------------------------------------------------------------------
1998 1997 1998 1997
(In millions, except (In millions, except
per share amounts) per share amounts)
<S> <C> <C> <C> <C>
Sales ................................. $ 1,003 $ 889 $ 2,882 $ 2,467
Cost of sales ......................... 852 764 2,466 2,135
------- ------- ------- -------
Gross margin .......................... 151 125 416 332
Selling, general and administrative ... 63 58 184 168
------- ------- ------- -------
Operating earnings .................... 88 67 232 164
Other income-net ...................... 3 1 10 10
Interest expense ...................... (11) (2) (32) (6)
------- ------- ------- -------
Income before income taxes ............ 80 66 210 168
Provision for income taxes ............ (33) (28) (86) (68)
------- ------- ------- -------
Net income ............................ $ 47 $ 38 $ 124 $ 100
======= ======= ======= =======
Basic and diluted earnings per share... $ .68 $ 1.79
======= =======
Cash dividends per common share ....... $ .105 $ .315
======= =======
Average common shares outstanding -
basic and diluted ................... 69.0 69.0
======= =======
See notes to consolidated financial statements.
- -------------------------------------------------------------------------------------------------------------------
3
</TABLE>
<PAGE> 5
<TABLE>
<CAPTION>
MERITOR AUTOMOTIVE, INC.
STATEMENT OF CONSOLIDATED CASH FLOWS
(Unaudited)
Nine Months Ended
June 30,
-------------------------------------
1998 1997
----------------- ----------------
(In millions)
<S> <C> <C>
OPERATING ACTIVITIES
Net income ............................................................... $ 124 $ 100
Adjustments to net income to arrive at cash provided by operating
activities:
Depreciation and amortization ....................................... 77 76
Deferred income taxes ............................................... (4) (4)
Pension expense ..................................................... 15 18
Pension contributions ............................................... (16) --
Changes in assets and liabilities, excluding effects of acquisitions,
divestitures and foreign currency adjustments:
Receivables ....................................................... (129) (98)
Inventories ....................................................... (39) (12)
Accounts payable .................................................. 41 39
Other assets and liabilities ...................................... 19 (20)
----- -----
CASH PROVIDED BY OPERATING ACTIVITIES 88 99
----- -----
INVESTING ACTIVITIES
Capital expenditures ..................................................... (80) (59)
Acquisition of businesses (net of cash acquired) ......................... (8) (16)
Proceeds from disposition of property and businesses ..................... 2 6
----- -----
CASH USED FOR INVESTING ACTIVITIES (86) (69)
----- -----
FINANCING ACTIVITIES
Net increase in short-term borrowings .................................... 34 17
Payments of long-term debt ............................................... (119) (3)
Long-term borrowings ..................................................... 98 --
----- -----
Net increase in debt ............................................... 13 14
Dividends ................................................................ (22) --
Payment of Distribution tax obligation ................................... (72) --
Net transfers from (to) Rockwell ......................................... 14 (50)
----- -----
CASH USED FOR FINANCING ACTIVITIES (67) (36)
----- -----
DECREASE IN CASH ......................................................... (65) (6)
CASH AT BEGINNING OF PERIOD .............................................. 133 74
----- -----
CASH AT END OF PERIOD .................................................... $ 68 $ 68
===== =====
Income tax payments, excluding the payment of the Distribution tax obligation,
were $89 million and $12 million in the nine months ended June 30, 1998 and
1997, respectively.
See notes to consolidated financial statements.
- -----------------------------------------------------------------------------------------------------------------
4
</TABLE>
<PAGE> 6
MERITOR AUTOMOTIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Meritor Automotive, Inc. (the company or Meritor) 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 on the basis of one share of the company's common stock for
every three shares of Rockwell common stock outstanding (the
Distribution). Rockwell and the company entered into a number of
agreements to facilitate the transition of Meritor to an independent
company.
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 all
of the related costs of doing business, including an allocation for
certain general corporate expenses of Rockwell which were not directly
related to the automotive businesses, including costs for corporate
oversight, financial, legal, tax, corporate communications and human
resources. The amounts allocated for the three- and nine-months ended June
30, 1997 were $7 million and $21 million, respectively. These costs were
allocated to the company based on Meritor's sales in proportion to total
Rockwell sales. Management believes those allocations were made 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. The consolidated
financial statements for periods after September 30, 1997 are those of the
company and its subsidiaries.
In the opinion of the company the unaudited financial statements contain
all adjustments, consisting solely of adjustments of a normal recurring
nature, necessary to present fairly the financial position, results of
operations and cash flows for the periods presented. These statements
should be read in conjunction with the company's Annual Report on Form
10-K for the fiscal year ended September 30, 1997, including the financial
statements incorporated by reference in the Form 10-K. The results of
operations for the three- and nine- month periods ended June 30, 1998 are
not necessarily indicative of the results for the full year.
It is the company's practice at the end of each interim reporting period
to make an estimate of the effective tax rate expected to be applicable
for the full fiscal year. The rate so determined is used in providing for
income taxes on a year-to-date basis.
5
<PAGE> 7
MERITOR AUTOMOTIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
2. Inventories are summarized as follows (in millions):
<TABLE>
<CAPTION>
June 30, September 30,
1998 1997
------------------- --------------------
<S> <C> <C>
Finished goods.............................................. $ 135 $ 117
Work in process............................................. 137 146
Raw materials, parts and supplies........................... 140 116
--------- ----------
Total.................................................. 412 379
Less allowance to adjust the carrying value of
certain inventories to a last in, first-out
(LIFO) basis........................................... 52 52
--------- ----------
Inventories............................................ $ 360 $ 327
========= ==========
</TABLE>
3. Other current assets are summarized as follows (in millions):
<TABLE>
<CAPTION>
June 30, September 30,
1998 1997
------------------ --------------------
<S> <C> <C>
Current deferred income taxes............................... $ 94 $ 85
Customer tooling............................................ 21 20
Prepaid expenses............................................ 11 13
Other....................................................... 6 10
--------- ----------
Other current assets................................... $ 132 $ 128
========= ==========
</TABLE>
4. Other assets are summarized as follows (in millions):
<TABLE>
<CAPTION>
June 30, September 30,
1998 1997
------------------ --------------------
<S> <C> <C>
Net deferred income taxes................................... $ 66 $ 71
Goodwill.................................................... 40 42
Investments in affiliates................................... 50 43
Prepaid pension costs....................................... 30 29
Other....................................................... 36 31
--------- ----------
Other assets........................................... $ 222 $ 216
========= ==========
6
</TABLE>
<PAGE> 8
MERITOR AUTOMOTIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
5. Other current liabilities are summarized as follows (in millions):
<TABLE>
<CAPTION>
June 30, September 30,
1998 1997
------------------ --------------------
<S> <C> <C>
Accrued product warranties.................................. $ 104 $ 95
Accrued taxes other than income taxes....................... 36 28
Accrued restructuring....................................... 17 26
Other....................................................... 44 28
--------- ----------
Other current liabilities.............................. $ 201 $ 177
========= =========
</TABLE>
6. Long-term debt consisted of the following (in millions):
<TABLE>
<CAPTION>
June 30, September 30,
1998 1997
------------------ --------------------
<S> <C> <C>
Bank revolving credit facility.............................. $ 394 $ 447
Other obligations........................................... 46 18
--------- ----------
Long-term debt......................................... $ 440 $ 465
========= ==========
</TABLE>
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 sale, 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.
7. The company's financial instruments include cash, short- and long-term
debt and foreign currency forward exchange contracts. At June 30, 1998,
the carrying values of the company's financial instruments approximated
their fair values based on current market prices and rates.
7
<PAGE> 9
MERITOR AUTOMOTIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
It is the policy of the company not to enter into derivative financial
instruments for speculative purposes. The company 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 commitments relate to purchase and
sales transactions and are generally for terms of less than one year. The
gains and losses relating to these foreign currency forward exchange
contracts are deferred and included in the measurement of the foreign
currency transaction subject to the hedge. The amount of any deferred gain
or loss on these contracts is immaterial.
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 $211 million at June 30, 1998 and $194
million at September 30, 1997. The company does not anticipate any
material adverse effect on its results of operations or financial position
relating to these foreign currency forward exchange contracts.
Concurrent with the filing of the registration statement described in Note
6, and in connection with a possible offering of debt securities pursuant
thereto, the company entered into forward treasury lock agreements with
creditworthy financial institutions pursuant to which the company will
make or receive, respectively, payments in respect of an aggregate
notional principal amount of $200 million depending upon whether certain
interest rates fall or rise during the term of the agreements, which
originally expired on June 15, 1998, and were subsequently extended to
expire on August 31, 1998, unless earlier terminated or extended. The
company does not anticipate any material adverse effect on its results of
operations or financial position in respect of these agreements.
8. Accrued retirement benefits consisted of the following (in millions):
<TABLE>
<CAPTION>
June 30, September 30,
1998 1997
------------------ --------------------
<S> <C> <C>
Accrued retirement medical costs............................ $ 292 $ 299
Accrued pension costs....................................... 108 110
Other....................................................... 12 13
--------- ----------
Total................................................ 412 422
Amount classified as current liability...................... 35 35
--------- ----------
Accrued retirement benefits.......................... $ 377 $ 387
========= ==========
</TABLE>
8
<PAGE> 10
MERITOR AUTOMOTIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
9. Other income - net consisted of the following (in millions):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
June 30, June 30,
---------------------------- ----------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Equity in earnings of affiliates .. $ 9 $ 5 $ 19 $ 10
Minority interests ................ (4) (3) (11) (9)
(Loss) gain on the sale of property
and businesses ................... (1) -- 1 --
Interest income ................... 1 -- 3 2
Insurance settlement .............. -- -- -- 5
Other ............................. (2) (1) (2) 2
---- ---- ---- ----
Other income - net .......... $ 3 $ 1 $ 10 $ 10
==== ==== ==== ====
</TABLE>
10. Various 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,
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, management believes the disposition of matters which are pending
or asserted will not have a material adverse effect on the company's
financial statements.
9
<PAGE> 11
MERITOR AUTOMOTIVE, INC.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
RESULTS OF OPERATIONS
1998 Third Quarter Compared to 1997 Pro Forma Third Quarter
The following sets forth the sales, operating earnings and net income of the
company for the third quarter of fiscal 1998 and 1997 pro forma (in millions,
except per share amounts):
<TABLE>
<CAPTION>
Three Months Ended
June 30,
-------------------------------------------------------------------------
Historical Pro Forma Pro Forma
1998 1997 Adjustments (1) 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
Sales
Heavy Vehicle Systems ........... $ 610 $ 525 $ -- $ 525
Light Vehicle Systems ........... 393 364 -- 364
------- ------- ------- -------
Total sales .......................... $ 1,003 $ 889 $ -- $ 889
======= ======= ======= =======
Gross margin ......................... $ 151 $ 125 $ -- $ 125
Selling, general and administrative... 63 58 (2) 56
------- ------- ------- -------
Operating earnings ................... $ 88 $ 67 $ 2 $ 69
Other income-net ..................... 3 1 -- 1
Interest expense ..................... (11) (2) (7) (9)
------- ------- ------- -------
Income before income taxes ........... 80 66 (5) 61
Provision for income taxes ........... (33) (28) 2 (26)
------- ------- ------- -------
Net income ........................... $ 47 $ 38 $ (3) $ 35
======= ======= ======= =======
Earnings per share ................... $ .68 $ .51
======= =======
</TABLE>
(1) Pro forma adjustments reflect (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 $2 million lower on a stand-alone basis
for the quarter than those allocated to the automotive businesses by
Rockwell and (c) $7 million of interest expense at an annual rate of 6.0%
for the quarter ended June 30, 1997 related to the debt incurred by the
company in connection with the $445 million pre-Distribution payment to
Rockwell.
10
<PAGE> 12
MERITOR AUTOMOTIVE, INC.
RESULTS OF OPERATIONS (Cont'd)
Sales of $1,003 million for the 1998 third quarter were up $114 million, or 13
percent, from the 1997 third quarter. The sales growth for the quarter was
primarily driven by the continued strength of the company's major markets and
penetration gains across most of the company's products. The company also
continued to increase its penetration rates across most of its Heavy Vehicle
Systems products in North America and Light Vehicle Systems products in both
North America and Europe. Given the diversity of the company's customer base and
its moderate exposure to General Motors in North America, the General Motors
strike had a negligible effect on the company's third quarter results.
Net income for the third quarter of 1998 was $47 million, or 68 cents per share,
compared to $35 million, or 51 cents per share pro forma last year, representing
a 33 percent increase in earnings per share. The increases in net income and
earnings per share were due primarily to the impact of productivity and cost
improvement programs, higher incremental sales and an increase in other income.
Other income for the third quarter was up $2 million over the third quarter last
year, primarily due to higher equity income from joint ventures pertaining to
the heavy truck and trailer markets.
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.
Operating earnings of $88 million increased 28 percent for the 1998 third
quarter as compared to $69 million for the 1997 third quarter pro forma. Third
quarter operating margins improved to 8.8 percent from last year's 7.8 percent
driven by the continued successful implementation of productivity and cost
improvement programs (discussed above) and higher incremental sales. Selling,
general and administrative expenses, as a percentage of sales, held constant,
despite planned increased investments in information technology during fiscal
1998.
Heavy Vehicle Systems sales were $610 million for the third quarter of fiscal
1998, an increase of $85 million, or 16 percent, compared to the third quarter
of fiscal 1997. The North American heavy truck market was up about 13 percent
compared to last year's third quarter. Sales increased across most of the
company's heavy truck and trailer products, including axles, transmissions,
clutches and brake systems, primarily as a result of the strong North American
heavy truck market, greater market penetration in North America and improved
volumes in the aftermarket. Sales also increased in Heavy Vehicle Systems'
off-highway, specialty and military product lines.
11
<PAGE> 13
MERITOR AUTOMOTIVE, INC.
RESULTS OF OPERATIONS (Cont'd)
Light Vehicle Systems sales improved by 8 percent in the third quarter to $393
million, an increase of $29 million over the third quarter of fiscal 1997. The
sales growth was driven by penetration gains in the door, suspension, access
control and seat adjusting systems and wheel product lines. This growth was
partially offset by the negative impact on European sales of currency
translation and lower European sunroof demand.
Nine Months Ended June 30, 1998 Compared to Pro Forma Nine Months Ended June 30,
1997
The following sets forth the sales, operating earnings and net income of the
company for the first nine months of fiscal 1998 and 1997 pro forma (in
millions, except per share amounts):
<TABLE>
<CAPTION>
Nine Months Ended
June 30,
-------------------------------------------------------------------------
Historical Pro Forma Pro Forma
1998 1997 Adjustments (1) 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
Sales
Heavy Vehicle Systems ........... $ 1,759 $ 1,419 $ -- $ 1,419
Light Vehicle Systems ........... 1,123 1,048 -- 1,048
------- ------- ------- -------
Total sales .......................... $ 2,882 $ 2,467 $ -- $ 2,467
======= ======= ======= =======
Gross margin ......................... $ 416 $ 332 $ -- $ 332
Selling, general and administrative... 184 168 (8) 160
------- ------- ------- -------
Operating earnings ................... $ 232 $ 164 $ 8 $ 172
Other income-net ..................... 10 10 -- 10
Interest expense ..................... (32) (6) (20) (26)
------- ------- ------- -------
Income before income taxes ........... 210 168 (12) 156
Provision for income taxes ........... (86) (68) 5 (63)
------- ------- ------- -------
Net income ........................... $ 124 $ 100 $ (7) $ 93
======= ======= ======= =======
Earnings per share ................... $ 1.79 $ 1.35
======= =======
</TABLE>
(1) Pro forma adjustments reflect (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 $8 million lower on a stand-alone basis
for the nine months than those allocated to the automotive businesses by
Rockwell and (c) $20 million of interest expense at an annual rate of 6.0%
for the nine months ended June 30, 1997 related to the debt incurred by the
company in connection with the $445 million pre-Distribution payment to
Rockwell.
12
<PAGE> 14
MERITOR AUTOMOTIVE, INC.
RESULTS OF OPERATIONS (Cont'd)
For the first nine months of fiscal 1998, sales were $2,882 million, up 17
percent over the same period a year ago. The strong sales growth for the nine
months was driven by a robust North American heavy truck market, which was up
substantially compared to last year, and higher penetration across most product
lines of Heavy Vehicle and Light Vehicle Systems.
Net income for 1998's first nine months was $124 million, or $1.79 per share, up
$31 million above last year's pro forma net income of $93 million, or $1.35 per
share. This was an improvement of 33 percent in earnings per share. The increase
in net income and earnings per share was a result of higher sales and savings
generated from cost and productivity improvement programs (described
previously).
Operating earnings of $232 million increased 35 percent for the first nine
months of 1998, from $172 million in the first nine months of 1997 pro forma.
Operating margins increased to 8.0 percent for the first nine months, from 7.0
percent in last year's period on a pro forma basis, reflecting savings generated
from cost and productivity improvement programs (described previously), and
higher sales.
Heavy Vehicle Systems sales were $1,759 million in the first nine months of
fiscal 1998, an increase of $340 million, or 24 percent, compared to the first
nine months of fiscal 1997. Almost all product lines within Heavy Vehicle
Systems showed an increase in sales, primarily as a result of the strong North
American heavy truck and trailer market and greater market penetration in North
America. If current market conditions continue, the company anticipates a growth
rate of more than 20 percent in the North American heavy truck market for fiscal
1998 over last year. The company estimates that the heavy truck market was up
about 25 percent for the first nine months of fiscal 1998 over last year, but
expects to see a more moderate growth rate - in the 10 percent range - over last
year's fourth quarter.
Light Vehicle Systems sales were reported at $1,123 million, an increase of $75
million, or 7 percent, over the first nine months of fiscal 1997. The sales
growth was driven by penetration gains in the door, suspension, access control
and seat adjusting systems and wheel product lines. This growth was partially
offset by the negative impact on European sales of currency translation and
lower European sunroof demand.
Performance for the company's first nine months of fiscal 1998 provides strong
momentum for the achievement of the company's stated long-term financial goals
to grow, on an average annual basis, sales by 8 percent and earnings per share
by 15 percent. At the same time, the company continues to assess the economic
situation in the Asia/Pacific region and its potential effect on the company's
businesses and served markets, although the company's sales in the Asia/Pacific
region represent only 3 percent of the company's total annual sales volume.
The company's fourth quarter is also typically seasonably lower due to annual
OEM model changeovers and plant shutdowns.
13
<PAGE> 15
MERITOR AUTOMOTIVE, INC.
FINANCIAL CONDITION
Cash provided by operating activities for the first nine months of fiscal 1998
was $88 million, a decrease of $11 million as compared to the first nine months
of fiscal 1997. The decrease was due primarily to higher working capital
requirements in receivables and inventories to support the higher sales levels
experienced during the first nine months of the year and anticipated for the
remainder of fiscal 1998. The decrease was partially offset by increased net
income and by a decrease in working capital requirements for other assets and
liabilities. Pension contributions of $16 million were made in the first nine
months of 1998. Management expects that pension plan funding during fiscal 1998
will approximate $25 million.
Capital expenditures of $80 million in the first nine months of fiscal 1998
included equipment for continued new product introductions, capacity expansion
and new production processes. The company anticipates full year fiscal 1998
capital expenditures of approximately $140 million.
The company's third quarterly dividend of 10.5 cents per share was paid on June
1, 1998 to shareowners of record on May 11, 1998. On July 8, 1998, the board of
directors declared a quarterly dividend of 10.5 cents per share on the company's
common stock, payable September 8, 1998, to shareowners of record on August 17,
1998.
Cash used for financing activities includes a $72 million payment of a Rockwell
Distribution tax obligation related to Canadian taxes incurred in connection
with the transfer of assets prior to the Distribution. Rockwell agreed to
indemnify the company for such Canadian income taxes and provided $58 million at
September 30, 1997, as well as an additional $14 million during the quarter
ended December 31, 1997 to pay for such taxes.
The cumulative currency translation adjustments increased $29 million, primarily
due to the strength of the U.S. dollar, principally in relation to the Canadian,
French, Mexican and Australian currencies.
The company's long-term debt to capitalization ratio improved to 63 percent at
June 30, 1998 from 71 percent at September 30, 1997. Although the company
currently expects this trend of improvement to continue and is consistent with
the company's long-term financial goal for its long-term debt to capitalization
ratio of 45 percent, the ratio may vary depending on several factors, including
the company's results of operations and any acquisitions, dispositions or
financings by the company. Based on the closing price of the company's common
stock of $24 at June 30, 1998, the long-term debt to capitalization ratio on a
market value basis was 21 percent at that date. The company's pre-tax interest
coverage increased to 7.9x for the first nine months of 1998, as compared to
7.3x for the first nine months of 1997 pro forma.
14
<PAGE> 16
MERITOR AUTOMOTIVE, INC.
FINANCIAL CONDITION (Cont'd)
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
sale, 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. Concurrent with the filing of the registration statement, and
in connection with a possible offering of debt securities pursuant thereto, the
company entered into forward treasury lock agreements with creditworthy
financial institutions pursuant to which the company will make or receive,
respectively, payments in respect of an aggregate notional principal amount of
$200 million depending upon whether certain interest rates fall or rise during
the term of the agreements, which originally expired on June 15, 1998, and were
subsequently extended to expire on August 31, 1998, unless earlier terminated or
extended. The company does not anticipate any material adverse effect on its
results of operations or financial position in respect of these agreements.
Meritor 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 and such acquisitions and
related financing might, at least in the near term, have a dilutive effect on
earnings per share.
Information with respect to the effect on the company and its manufacturing
operations of compliance with environmental protection requirements and
resolution of environmental claims is contained under the caption Environmental
Matters in Chief Financial Officer's Review, Management's Discussion and
Analysis in the company's 1997 Annual Report to Shareowners, incorporated by
reference into the company's Annual Report on Form 10-K for the fiscal year
ended September 30, 1997. Management believes that at June 30, 1998 there has
been no material change to such information on environmental matters.
15
<PAGE> 17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
As previously reported under the heading "Item 1. Legal Proceedings"
of Part II of the company's Quarterly Report on Form 10-Q for the
quarterly period ended December 31, 1997, 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. The company 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 awarded 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. The company
is evaluating the jury's verdict and the judgment and is pursuing
further actions, including post-trial motions and an appeal to the
United States Court of Appeals for the Federal Circuit. Based on the
advice of M. Lee Murrah, Esq., Assistant General Counsel of the
company, management believes that its truck transmissions do not
infringe Eaton's patent. The company intends to continue to
defend this suit vigorously.
Item 2. Changes in Securities and Use of Proceeds
On April 1, 1998 the company issued 331 and 165 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.
16
<PAGE> 18
Item 5. Other Information
(a) Cautionary Statement
This Quarterly Report on Form 10-Q contains statements relating
to future results of the company (including certain projections
and business trends) that are "forward-looking statements" as
defined in the Private Securities Litigation Reform Act of 1995.
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 customers; labor relations of the company,
its customers and suppliers; and competitive product and pricing
pressures, as well as other risks and uncertainties, including
but not limited to those detailed from time to time in the
filings of the company with the Securities and Exchange
Commission.
(b) Memorandum of Understanding with Volvo Truck Corporation
On June 11, 1998, Meritor and Volvo Truck Corporation signed a
memorandum of understanding that could allow Meritor to acquire
Volvo's heavy truck axle manufacturing operations based in
Lindesberg, Sweden. Under the terms of the proposed agreement,
Meritor would become the primary supplier of heavy duty axles
for Volvo's global heavy truck operations. Completion of the
transaction is subject to due diligence reviews (which are
underway), execution of a definitive agreement, corporate and
regulatory approvals and other customary closing conditions.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
12 Computation of Ratio of Earnings to Fixed Charges for
the Nine Months Ended June 30, 1998.
23 Consent of M. Lee Murrah, Esq., Assistant General
Counsel of the company.
27 Financial Data Schedule.
(b) Reports on Form 8-K.
There were no reports on Form 8-K filed during the quarter ended
June 30, 1998.
17
<PAGE> 19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
<TABLE>
<S> <C>
MERITOR AUTOMOTIVE, INC.
(Registrant)
Date August 5, 1998 By L. J. Lockwood
-------------------------------------------- --------------
L. J. Lockwood
Vice President and Controller
(Principal Accounting Officer)
Date August 5, 1998 By D. W. Greenfield
-------------------------------------------- ----------------
D. W. Greenfield
Senior Vice President,
General Counsel and Secretary
18
</TABLE>
<PAGE> 20
EXHIBIT INDEX
--------------
12 Computation of Ratio of Earnings to Fixed Charges for
the Nine Months Ended June 30, 1998.
23 Consent of M. Lee Murrah, Esq., Assistant General
Counsel of the company.
27 Financial Data Schedule.
<PAGE> 1
Exhibit 12
MERITOR AUTOMOTIVE, INC.
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
NINE MONTHS ENDED JUNE 30, 1998
(In millions, except ratio)
<TABLE>
<S> <C>
Earnings available for fixed charges:
Pre-tax income from continuing operations ..... $ 210
Adjustments:
Undistributed income of affiliates ......... (19)
Minority interest in loss of subsidiaries... 11
-----
202
Add fixed charges included in earnings:
Interest expense ............................ 32
Interest element of rentals ................. 6
-----
Total .................................... 38
-----
Total earnings available for fixed charges $ 240
-----
Fixed charges:
Fixed charges included in earnings ......... $ 38
Capitalized interest ....................... --
-----
Total fixed charges ........................ $ 38
-----
Ratio of Earnings to Fixed Charges(1) ...... 6.3
=====
</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 23
CONSENT OF COUNSEL
I consent to the reference to me under the heading "Item 1. Legal
Proceedings" in Part II of the Quarterly Report on Form 10-Q of Meritor
Automotive, Inc. ("Meritor") for the quarterly period ended June 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: August 5, 1998
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