<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, 1999
-------------------------------------------------
Commission file number 1-13093
-------------------------------------------------------
Meritor Automotive, Inc.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 38-3354643
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
2135 West Maple Road, Troy, Michigan 48084-7186
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(Address of principal executive offices) (Zip Code)
(248) 435-1000
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(Registrant's telephone number,
including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
------ ------
69,118,093 shares of registrant's Common Stock, $1.00 par value, were
outstanding on July 31, 1999.
<PAGE> 2
MERITOR AUTOMOTIVE, INC.
INDEX
PART I. FINANCIAL INFORMATION:
<TABLE>
<CAPTION>
Page
No.
<S> <C>
Item 1. Financial Statements:
Consolidated Balance Sheet - -
June 30, 1999 and September 30, 1998................................. 2
Statement of Consolidated Income - - Three Months
and Nine Months Ended June 30, 1999 and 1998......................... 3
Statement of Consolidated Cash Flows - -
Nine Months Ended June 30, 1999 and 1998............................. 4
Notes to Consolidated Financial Statements........................... 5
Item 2. Management's Discussion and Analysis
of Results of Operations and Financial Condition.......................... 12
Item 3. Quantitative and Qualitative Disclosures About
Market Risk............................................................... 19
PART II OTHER INFORMATION:
Item 2. Changes in Securities and Use of Proceeds................................. 20
Item 5. Other Information......................................................... 20
Item 6. Exhibits and Reports on Form 8-K.......................................... 21
</TABLE>
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MERITOR AUTOMOTIVE, INC.
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
June 30,
1999 September 30,
(unaudited) 1998
----------------- -----------------
ASSETS (In millions)
<S> <C> <C>
Current assets:
Cash $ 45 $ 65
Receivables (less allowance for doubtful accounts:
June 30, 1999 and September 30, 1998, $11).................... 796 638
Inventories.......................................................... 402 360
Other current assets................................................. 146 153
------- -------
Total current assets............................................. 1,389 1,216
------- -------
Net property.............................................................. 763 666
Net goodwill.............................................................. 437 39
Other assets.............................................................. 228 165
------- -------
TOTAL............................................... $ 2,817 $ 2,086
======= =======
LIABILITIES AND SHAREOWNERS' EQUITY
Current liabilities:
Short-term debt...................................................... $ 23 $ 34
Accounts payable..................................................... 653 636
Accrued compensation and benefits.................................... 141 142
Accrued income taxes................................................. 41 13
Other current liabilities............................................ 257 229
------- -------
Total current liabilities........................................ 1,115 1,054
Long-term debt............................................................ 878 313
Accrued retirement benefits............................................... 383 378
Other liabilities......................................................... 107 44
Minority interests........................................................ 37 31
Shareowners' equity:
Common stock
(shares issued and outstanding: June 30, 1999, 69.1;
and September 30, 1998, 69.0)................................ 69 69
Additional paid-in-capital........................................... 158 156
Retained earnings.................................................... 225 118
Accumulated other comprehensive loss................................. (155) (77)
-------- -------
Total shareowners' equity........................................ 297 266
-------- -------
TOTAL............................................... $ 2,817 $ 2,086
======= =======
</TABLE>
See notes to consolidated financial statements.
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2
<PAGE> 4
MERITOR AUTOMOTIVE, INC.
STATEMENT OF CONSOLIDATED INCOME
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
June 30, June 30,
------------------ -----------------
1999 1998 1999 1998
---- ---- ---- ----
(In millions, except per share amounts)
<S> <C> <C> <C> <C>
Sales ....................................... $ 1,217 $ 1,003 $ 3,324 $ 2,882
Cost of sales ............................... 1,035 852 2,844 2,466
------- ------- ------- -------
Gross margin ................................ 182 151 480 416
Selling, general and administrative ......... 74 63 204 184
Restructuring costs ......................... 28 -- 28 --
------- ------- ------- -------
Operating earnings .......................... 80 88 248 232
Other income-net ............................ 3 3 15 10
Interest expense ............................ (18) (11) (48) (32)
------- ------- ------- -------
Income before income taxes .................. 65 80 215 210
Provision for income taxes .................. (26) (33) (86) (86)
------- ------- ------- -------
Net income .................................. $ 39 $ 47 $ 129 $ 124
======= ======= ======= =======
Basic and diluted earnings per share ........ $ .56 $ .68 $ 1.86 $ 1.79
======= ======= ======= =======
Cash dividends per common share ............. $ .105 $ .105 $ .315 $ .315
======= ======= ======= =======
Average common shares outstanding - basic and
diluted ................................ 69.1 69.0 69.1 69.0
======= ======= ======= =======
</TABLE>
See notes to consolidated financial statements.
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3
<PAGE> 5
MERITOR AUTOMOTIVE, INC.
STATEMENT OF CONSOLIDATED CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
June 30,
---------------------------
1999 1998
---------- ----------
(In millions)
<S> <C> <C>
OPERATING ACTIVITIES
Net income...................................................................... $ 129 $ 124
Adjustments to net income to arrive at cash provided by operating
activities:
Depreciation and amortization.............................................. 94 77
Restructuring, net of expenditures......................................... 16 -
Pension contributions...................................................... (21) (16)
Other, net................................................................. 30 11
Changes in assets and liabilities, excluding effects of
acquisitions............................................................. (116) (108)
------- ------
CASH PROVIDED BY OPERATING ACTIVITIES.................................. 132 88
------- ------
INVESTING ACTIVITIES
Capital expenditures............................................................ (99) (80)
Acquisition of businesses and other............................................. (570) (6)
------- ------
CASH USED FOR INVESTING ACTIVITIES..................................... (669) (86)
------- ------
FINANCING ACTIVITIES
Net (decrease) increase in short-term borrowings................................ (4) 34
Net increase (decrease) in revolving debt....................................... 132 (48)
Proceeds from issuance of notes................................................. 498 -
Net (decrease) increase in other long-term debt................................. (56) 27
------- ------
Net increase in debt....................................................... 570 13
Cash dividends.................................................................. (22) (22)
Payment of interest rate settlement cost........................................ (31) -
Payment of Distribution tax obligation, net..................................... - (58)
------- ------
CASH PROVIDED BY (USED FOR) FINANCING
ACTIVITIES............................................................. 517 (67)
------- ------
DECREASE IN CASH................................................................ (20) (65)
CASH AT BEGINNING OF PERIOD..................................................... 65 133
------- ------
CASH AT END OF PERIOD........................................................... $ 45 $ 68
======= ======
</TABLE>
See notes to consolidated financial statements.
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4
<PAGE> 6
MERITOR AUTOMOTIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. 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, when Rockwell International
Corporation (Rockwell) spun off its automotive businesses by distributing
all of the issued and outstanding shares of the company to Rockwell's
shareowners (the Distribution). The consolidated financial statements are
those of the company and its consolidated subsidiaries.
In the opinion of the company the unaudited financial statements contain
all adjustments, consisting solely of adjustments of a normal recurring
nature, necessary to present fairly the financial position, results of
operations and cash flows for the periods presented. These statements
should be read in conjunction with the company's Annual Report on Form
10-K for the fiscal year ended September 30, 1998, 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, 1999 are
not necessarily indicative of the results for the full year.
It is the company's practice for each interim reporting period to make an
estimate of the effective tax rate expected to be applicable for the full
fiscal year. The rate so determined is used in providing for income taxes
on a year-to-date basis.
Certain prior period amounts have been reclassified to conform with
current period presentation.
2. On October 1, 1998, the company adopted the Financial Accounting Standards
Board's Statement of Financial Accounting Standards No. 130 (SFAS 130),
"Reporting Comprehensive Income". SFAS 130 establishes standards for the
reporting and presentation of comprehensive income and its components. The
adoption of SFAS 130 had no impact on the company's net income or
shareowners' equity. Comprehensive income includes net income and
components of other comprehensive income, such as foreign currency
translation adjustments, unrealized investment gains or losses and minimum
pension liability adjustments.
5
<PAGE> 7
MERITOR AUTOMOTIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Comprehensive income, net of the related estimated tax, is summarized as
follows (in millions):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
June 30, June 30,
---------------------------- ------------------------
1999 1998 1999 1998
------------ ---------- ----------- --------
<S> <C> <C> <C> <C>
Net income............................... $ 39 $ 47 $ 129 $ 124
Foreign currency translation............. (9) 1 (78) (29)
-------- -------- ------- --------
Comprehensive income..................... $ 30 $ 48 $ 51 $ 95
======== ======== ======= ========
</TABLE>
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 131 (SFAS 131),
"Disclosures about Segments of an Enterprise and Related Information,"
effective for the company's fiscal year ending September 30, 1999. SFAS
131 requires disclosure of business and geographic segments in the
consolidated financial statements of the company consistent with the way
that management organizes the segments for making operating decisions and
assessing performance. The company is currently analyzing the impact this
standard will have on the disclosures in its fiscal 1999 year end
financial statements.
In February 1998, the FASB issued Statement of Financial Accounting
Standards No. 132 (SFAS 132), "Employers' Disclosure about Pensions and
Other Postretirement Benefits," effective for the company's fiscal year
ending September 30, 1999. 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.
In June 1998, the FASB 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. In June 1999, the FASB amended SFAS 133 by
issuing Statement of Financial Accounting Standards No. 137 (SFAS 137),
"Accounting for Derivative Instruments and Hedging Activities--Deferral of
the Effective Date of FASB Statement No. 133--an amendment of FASB
Statement No. 133". The new standard delays the effective date of SFAS 133
to all fiscal quarters of fiscal years beginning after June 15, 2000. The
company is currently analyzing the impact SFAS 133 will have on its
financial statements.
6
<PAGE> 8
MERITOR AUTOMOTIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3. On December 31, 1998, the company completed its acquisition of the heavy
truck axle manufacturing operations of Volvo Truck Corporation based in
Lindesberg, Sweden. With this acquisition and its associated worldwide
axle supply agreement, the company became the primary supplier of heavy
duty axles for Volvo's heavy truck operations. The purchase price was
approximately $135 million in cash, $44 million of which is deferred.
The company also acquired the assets of Euclid Industries on December 28,
1998 and assumed substantially all of Euclid's liabilities. 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 its fiscal year ended August 31, 1998, Euclid generated
sales of more than $100 million.
On January 29, 1999, the company acquired the Heavy Vehicle Braking
Systems (HVBS) business of LucasVarity plc for approximately $390 million
in cash. The LucasVarity HVBS components include air drum and disc brakes,
hydraulic brakes, wheel end components and aftermarket products. For its
fiscal year ended January 1999, the HVBS business of LucasVarity had net
sales of approximately $310 million.
The following unaudited pro forma consolidated results of operations for
the nine months ended June 30, 1999 and 1998 assume that each of the
foregoing acquisitions occurred as of the beginning of each period (in
millions, except per share amounts):
<TABLE>
<CAPTION>
Nine Months Ended
June 30,
-------- -----------
1999 1998
-------- -----------
<S> <C> <C>
Net sales.......................................... $3,497 $3,342
====== ======
Net income......................................... $ 129 $ 123
====== ======
Basic and diluted earnings per share............... $ 1.86 $ 1.78
====== ======
</TABLE>
The above acquisitions were accounted for by the purchase method of
accounting. Accordingly, the results of operations of the acquired
businesses are included with those of the company for the periods
subsequent to the date of acquisition. The assets and liabilities have
been recorded based upon estimates of fair value as of the dates of the
acquisitions. The company does not believe the final allocation of the
purchase prices will be materially different than the preliminary
allocation.
7
<PAGE> 9
MERITOR AUTOMOTIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
4. In June 1999, the company recorded restructuring charges of $28 million
($17 million after tax) related to workforce reductions and other
manufacturing cost reduction programs. The provision includes severance
and other employee costs of about $16 million related to a net reduction
of approximately 300 employees, with the balance primarily associated with
facility related costs from the rationalization of operations.
Approximately $1 million had been spent by June 30, 1999, with
approximately $17 million remaining in other current liabilities. The
company expects the remaining restructuring actions will be substantially
completed by the end of fiscal year 2000.
5. Inventories are summarized as follows (in millions):
<TABLE>
<CAPTION>
June 30, September 30,
1999 1998
---------------- ------------------
<S> <C> <C>
Finished goods.............................................. $ 181 $ 143
Work in process............................................. 117 120
Raw materials, parts and supplies........................... 156 150
--------- ----------
Total.................................................. 454 413
Less allowance to adjust the carrying value of
certain inventories to a last in, first-out
(LIFO) basis........................................... 52 53
--------- ----------
Inventories............................................ $ 402 $ 360
========= ==========
</TABLE>
6. Other Current Assets are summarized as follows (in millions):
<TABLE>
<CAPTION>
June 30, September 30,
1999 1998
----------------- ------------------
<S> <C> <C>
Current deferred income taxes............................... $ 104 $ 112
Customer tooling............................................ 23 20
Prepaid expenses and other.................................. 19 21
--------- ----------
Other Current Assets................................... $ 146 $ 153
========= ==========
</TABLE>
8
<PAGE> 10
MERITOR AUTOMOTIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
7. Other Assets are summarized as follows (in millions):
<TABLE>
<CAPTION>
June 30, September 30,
1999 1998
------------------ --------------------
<S> <C> <C>
Net deferred income taxes................................... $ 53 $ 53
Investments in affiliates................................... 47 46
Prepaid pension costs....................................... 68 30
Net capitalized computer software costs..................... 29 16
Other....................................................... 31 20
--------- ----------
Other Assets........................................... $ 228 $ 165
========= ==========
</TABLE>
8. Other Current Liabilities are summarized as follows (in millions):
<TABLE>
<CAPTION>
June 30, September 30,
1999 1998
------------------ --------------------
<S> <C> <C>
Accrued product warranties.................................. $ 101 $ 112
Accrued taxes other than income taxes....................... 37 36
Accrued restructuring....................................... 20 10
Accrued interest rate settlement cost....................... - 31
Other....................................................... 99 40
--------- ----------
Other Current Liabilities.............................. $ 257 $ 229
========= ==========
</TABLE>
9. Long-term Debt is summarized as follows (in millions):
<TABLE>
<CAPTION>
June 30, September 30,
1999 1998
------------------ --------------------
<S> <C> <C>
6.8% notes due 2009, net of discount........................ $ 498 $ -
Bank revolving Credit Facility.............................. 342 219
Lines of credit............................................. 23 79
Other ................................................... 15 15
--------- ----------
Long-term Debt......................................... $ 878 $ 313
========= ==========
</TABLE>
9
<PAGE> 11
MERITOR AUTOMOTIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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. On February 24, 1999, the
company completed its public offering of debt securities consisting of
$500 million 10-year fixed-rate 6.8% notes due February 15, 2009. The
notes were offered to the public at 99.553% of their principal amount, and
were recorded net of discount of approximately $2 million. The proceeds
were used to repay existing indebtedness, including the $300 million
unsecured term Credit Facility discussed below.
On January 15, 1999 the company entered into a $300 million unsecured term
Credit Facility with six banks. Interest rates under this Credit Facility
were based on LIBOR plus 75 basis points. The company borrowed $300
million under this Credit Facility in January 1999. The facility was paid
with proceeds from issuance of the company's 6.8% notes due February 15,
2009, and the facility was terminated in February 1999.
10. The company's financial instruments include cash, short- and long-term
debt and foreign currency forward exchange contracts. As of June 30, 1999,
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. 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 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 $240 million at June 30,
1999 and $212 million at September 30, 1998. Meritor does not anticipate
any material adverse effect on its results of operations or financial
position relating to these foreign currency forward exchange contracts.
In anticipation of offering debt securities under the shelf Registration
Statement described in Note 9, the company entered into interest rate
agreements in April 1998 to secure interest rates. The planned issuance of
the debt securities did not occur in fiscal 1998, 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 payment of $31 million, which was
accrued and included in Other Current Liabilities at September 30, 1998.
10
<PAGE> 12
MERITOR AUTOMOTIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
11. Accrued Retirement Benefits consisted of the following (in millions):
<TABLE>
<CAPTION>
June 30, September 30,
1999 1998
------------------ --------------------
<S> <C> <C>
Accrued retirement medical costs............................ $ 302 $ 292
Accrued pension costs....................................... 105 110
Other....................................................... 12 12
--------- ----------
Total................................................ 419 414
Amount classified as current liability...................... 36 36
--------- ----------
Accrued Retirement Benefits $ 383 $ 378
========= ==========
</TABLE>
12. Other Income - Net consisted of the following (in millions):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
June 30, June 30,
---------------------------- ----------------------------
1999 1998 1999 1998
------------ ----------- ----------- -------------
<S> <C> <C> <C> <C>
Equity in earnings of affiliates......... $ 8 $ 9 $ 22 $ 19
Minority interests...................... (5) (4) (13) (11)
(Loss) gain on the sale of property
and businesses...................... (2) (1) 1 1
Interest income......................... 1 1 3 3
Other..................................... 1 (2) 2 (2)
-------- -------- -------- --------
Other Income - Net................ $ 3 $ 3 $ 15 $ 10
======== ======== ======== ========
</TABLE>
13. 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
consolidated financial position, results of operations or cash flows.
11
<PAGE> 13
MERITOR AUTOMOTIVE, INC.
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
RESULTS OF OPERATIONS
1999 Third Quarter Compared to 1998 Third Quarter
Sales for the third quarter 1999 of $1,217 million increased by $214 million, or
21 percent, over the same period last year. Record demand in the primary North
American Heavy Vehicle Systems markets, market penetration gains from Light
Vehicle Systems new product introductions and the three recent acquisitions
drove the sales performance. Sales increased by $70 million, or 7 percent,
excluding sales from the three recent acquisitions of $144 million.
Net income was $39 million, or 56 cents per share, for the third quarter of
1999. Excluding the impact of restructuring charges recorded in the third
quarter of 1999 (described below), net income was $56 million, or 81 cents per
share, compared to $47 million, or 68 cents per share last year, representing a
19 percent increase in earnings per share. Earnings per share (EPS) increased by
12 cents, or 18 percent excluding the contribution of 1 cent from the recent
acquisitions and the impact of the restructuring. Third quarter operating
margins, including the restructuring, were 6.6 percent. Third quarter operating
margins, before restructuring, improved to 8.9 percent, up from 8.8 percent for
the same period last year. Excluding the acquisitions and their associated
goodwill amortization, the company's third quarter operating margins improved by
30 basis points to 9.1 percent. This improvement reflects the company's
continued focus on process improvement and cost reduction programs.
The company's process improvement and cost reduction 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.
Meritor recorded a third quarter 1999 charge of $28 million ($17 million after
tax, or 25 cents per share) for restructuring actions that it expects will
significantly improve operational efficiencies, reduce costs and expand
operating margins. The company estimates that the restructuring actions will
reduce operating costs by approximately $12 million ($7 million after tax, or 10
cents per share) in fiscal year 2000 and by approximately $15 million ($9
million after tax, or 13 cents per share) annually, beginning the following
fiscal year.
12
<PAGE> 14
MERITOR AUTOMOTIVE, INC.
RESULTS OF OPERATIONS (Cont'd)
Heavy Vehicle Systems (HVS) sales were $807 million for the third quarter of
fiscal 1999, an increase of $197 million, or 32 percent, as compared to the
third quarter last year. Excluding acquisitions, HVS sales increased $53
million, or 9 percent. The sales growth reflects the continuing strength of the
North American heavy truck market, partially offset by a decline related to
planned government program changeovers and weaker sales in Europe and Brazil.
Excluding acquisitions, HVS sales in North America increased $77 million, or 17
percent, while European sales were down about $13 million, or 13 percent, and
South American sales were down $15 million, or 48 percent. HVS sales in the
Asia/Pacific region were up about $4 million.
Light Vehicle Systems (LVS) sales grew $17 million, or 4 percent, in the third
fiscal quarter to $410 million, as compared to the same quarter last year. Sales
growth for this business was driven by strong North American vehicle volumes and
market penetration gains, principally in the seat adjusting, door, North
American roof and suspension systems product lines. This growth was partially
offset by lower roof systems sales in Europe and the negative impact of currency
translation on European sales. LVS sales in North America increased about $41
million, or 27 percent, while sales in Europe were down $25 million, or 13
percent. Sales in the rest of the world were up slightly.
Nine Months Ended June 30, 1999 Compared to Nine Months Ended June 30, 1998
For the nine months ended June 30, 1999, sales were $3,324 million, up 15
percent over the same period last year. Operating earnings were $248 million for
the first nine months of 1999. Operating earnings, before restructuring, were
$276 million, up 19 percent, while operating margins increased 30 basis points
to 8.3 percent. The operating margin improvement reflects higher sales and
savings generated from the company's cost reduction and productivity improvement
programs, somewhat offset by the impact of acquisitions and their related
goodwill amortization.
Net income was $129 million, or $1.86 per share, for the first nine months of
fiscal 1999. Excluding the restructuring charge, net income for fiscal 1999's
first nine months was $146 million, or $2.11 per share. This was 18 percent
higher than last year's net income of $124 million, or $1.79 per share.
Heavy Vehicle Systems sales in the first nine months of 1999 and 1998 were
$2,117 million and $1,759 million, respectively. Excluding the impact of
acquisitions, base HVS sales increased by $92 million or 5 percent. Sales
increased across all of the company's core heavy truck products, including
axles, transmissions, clutches, drivelines, and brake systems, reflecting the
continued strength of the North American heavy truck market. A decline in
government product sales relating to planned government program changeovers, and
weaker sales in Brazil and Europe due to lower heavy truck volumes, offset some
of these gains.
13
<PAGE> 15
MERITOR AUTOMOTIVE, INC.
RESULTS OF OPERATIONS (Cont'd)
Light Vehicle Systems sales improved by 7 percent in the first nine months of
fiscal 1999 to $1,207 million, an increase of $84 million over the same period
in 1998. Sales growth for this business was driven by penetration gains,
principally in the door and seat adjusting systems product lines. This growth
was partially offset by decreased sales in roof systems as a result of customer
platform launch delays in Mexico, lower vehicle product sales in Brazil and the
adverse impact of currency translation.
The company continues to evaluate the overall global economic environment and
the current outlook for the major served markets remains strong. The company
expects record production levels approaching 300,000 and 180,000 units,
respectively, for North American heavy- and medium-duty trucks in this fiscal
year. In addition, the company forecasts North American light vehicle production
to be up about 9 percent in fiscal 1999, while European production is estimated
to be flat for light vehicles and down moderately for heavy trucks. The company
believes that the strength, balance and diversity of its products and served
markets provide a solid base to meet global customer demands and to achieve the
company's long-term financial goals to grow internally, on an average annual
basis, sales by 8 percent and earnings per share by 15 percent.
The above mentioned restructuring actions and the planned joint venture with ZF
Friedrichshafen AG to manufacture and market in North America medium- and
heavy-duty truck transmissions (discussed below) are examples of the strategies
the company is pursuing to further enhance long-term shareowner value.
FINANCIAL CONDITION
Cash provided by operating activities for the first nine months of fiscal 1999
was $132 million, an increase of $44 million as compared to the first nine
months of fiscal 1998. The increase was driven by an increase in net income of
$5 million, after the impact of the 1999 restructuring charge of $17
million (after tax), and an increase in non-cash depreciation and amortization
charges, primarily attributed to the recent acquisitions
Capital expenditures of $99 million in the 1999 nine-month period included
equipment for continued new product introductions, capacity expansion and new
production processes and costs incurred in connection with the implementation of
the Enterprise Resource Planning system. The company anticipates full year
fiscal 1999 capital expenditures of approximately $180 million, including
approximately $30 million by the acquired businesses.
The company's third quarter dividend of 10.5 cents per share was paid on June 7,
1999 to shareowners of record on May 17, 1999. On July 14, 1999, the board of
directors declared a quarterly dividend of 10.5 cents per share on the company's
common stock, payable September 7, 1999, to shareowners of record on August 16,
1999.
14
<PAGE> 16
MERITOR AUTOMOTIVE, INC.
FINANCIAL CONDITION (Cont'd)
Cash provided by financing activities includes a $570 million net increase in
debt, mainly utilized to fund the acquisitions of businesses.
The company has pursued growth initiatives to further strengthen its position in
the global aftermarket and automotive original equipment markets. As is
discussed in Note 3 of the notes to consolidated financial statements, in late
December 1998 and in January 1999 the company completed the acquisitions of
three separate businesses. These transactions are expected to add sales on an
annualized basis of approximately $700 million. The company's long-term debt to
capitalization ratio decreased to 72 percent at June 30, 1999, from 74 percent
at March 31, 1999. The increase from 51 percent at September 30, 1998 reflects
the three acquisitions.
In June 1999, the company announced its intention to form a joint venture with
ZF Friedrichshafen AG to produce technologically-advanced medium- and heavy-duty
transmissions for heavy vehicle original equipment manufacturers and the
aftermarket, for the United States, Canada and Mexico. The joint venture will
combine the strengths of Meritor's marketing and distribution capabilities and
existing line of transmission products with ZF's technological expertise to
engineer advanced truck transmission components and systems. ZF and Meritor will
each own 50 percent of the new venture, which will be based at the Meritor
Transmission manufacturing plant in Laurinburg, North Carolina. The transaction
is expected to close in August 1999.
Meritor regularly considers various strategic and business opportunities,
including acquisitions. Although no assurance can be given as to whether or when
any additional 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, could further increase the company's debt to capitalization ratio.
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. On February 24, 1999, the company completed
its public offering of debt securities consisting of $500 million 10-year
fixed-rate 6.8% notes due February 15, 2009. The notes were offered to the
public at 99.553% of their principal amount, and were recorded net of discount
of approximately $2 million. The proceeds were used to repay existing
indebtedness, including the $300 million unsecured term Credit Facility
discussed below.
On January 15, 1999 the company entered into a $300 million unsecured term
Credit Facility with six banks. Interest rates under this Credit Facility were
based on LIBOR plus 75 basis points. The company borrowed $300 million under
this Credit Facility in January 1999. The facility was paid with proceeds from
issuance of the company's 6.8% notes due February 15, 2009, and the facility was
terminated in February 1999.
15
<PAGE> 17
MERITOR AUTOMOTIVE, INC.
FINANCIAL CONDITION (Cont'd)
In anticipation of offering debt securities under the shelf Registration
Statement described in Note 9 of the notes to consolidated financial statements,
the company entered into interest rate agreements in April 1998 to secure
interest rates. The planned issuance of the debt securities did not occur in
fiscal 1998, 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 payment of $31
million, which was accrued and included in Other Current Liabilities at
September 30, 1998.
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 the Chief Financial Officer's Review, Management's Discussion and
Analysis in the company's 1998 Annual Report to Shareowners, incorporated by
reference into the company's Annual Report on Form 10-K for the fiscal year
ended September 30, 1998. Management believes that at June 30, 1999 there has
been no material change to this information.
INTERNATIONAL OPERATIONS
On January 1, 1999, the Euro became 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 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 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 has
not had and will not have a material adverse effect on its business, operations
and financial condition.
The company is 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 in a timely manner, and that the costs
associated with the conversion to the Euro will not be material.
16
<PAGE> 18
MERITOR AUTOMOTIVE, INC.
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 to minimize
supply and service 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 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.
As discussed in Note 3 of the notes to consolidated financial statements, the
company completed the acquisition of three separate businesses in late December
1998 and in January 1999. The company has analyzed the year 2000 compliance of
the acquired facilities and has integrated each acquired business into the
company's year 2000 compliance program.
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 and preparation of related plans and
cost estimates; 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; engineering workstations; and telecom/global carriers. The supply chain
section includes formal communication with the company's significant customers,
suppliers and critical service providers. All four areas were substantially year
2000 compliant by June 30, 1999, with minor project completion and follow-up
reviews scheduled through the remainder of 1999.
17
<PAGE> 19
MERITOR AUTOMOTIVE, INC.
YEAR 2000 READINESS DISCLOSURE (Cont'd)
The following chart summarizes the status of completion by section for each
phase of the project at June 30, 1999, including the recently acquired
businesses:
<TABLE>
<CAPTION>
Approximate Percentage Completed
Phase 1 Phase 2 Phase 3
------- ------- ----------
<S> <C> <C> <C>
Business and engineering 100 100 95 - 100*
Factory floor 100 100 98
IT infrastructure 100 100 95 - 100*
Supply chain 100 100 80
</TABLE>
*Percentage of completion varies by location and by separate project within
each section
Contingency Plans
The company is in the process 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
includes 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 $25 million. These amounts exclude employee expense and
computer equipment and upgrades that would have been purchased regardless of the
year 2000 project. The company spent $4.7 million, $10.2 million and $.7 million
during the first nine months of fiscal 1999 and fiscal 1998 and 1997,
respectively, on the project. In the first nine months of fiscal 1999,
approximately $3.9 million of expenditures related to business and engineering
systems and IT infrastructure and approximately $.8 million related to the
factory floor and supply chain. 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 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.
18
<PAGE> 20
MERITOR AUTOMOTIVE, INC.
YEAR 2000 READINESS DISCLOSURE (Cont'd)
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 significantly reduce 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 in Item 5 under the heading:
Cautionary Statement.
Item 3. 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 June 30, 1999, 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.
19
<PAGE> 21
MERITOR AUTOMOTIVE, INC.
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
On April 1, 1999, the company issued to Donald R. Beall, a
non-employee director of the company, 546 shares of Common Stock in
lieu of cash payment of quarterly retainer fees for board service. In
addition, on April 14, 1999, the company issued to James E. Marley, a
newly-elected non-employee director of the company, 516 shares of
Common Stock in lieu of cash payment of quarterly retainer fees for
board service, and an additional 1,000 shares of Common Stock. All of
these shares were issued pursuant to the terms of the company's
Directors Stock Plan and, in each case, the issuance was exempt from
registration under the Securities Act of 1933, as a transaction not
involving a public offering under Section 4(2).
Item 5. Other Information
Cautionary Statement
This Quarterly Report on Form 10-Q contains statements
relating to future results of the company (including
certain projections and business trends) that are
"forward-looking statements" as defined in the Private
Securities Litigation Reform Act of 1995. 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. See also "Management's Discussion and
Analysis of Results of Operations and Financial Condition"
and "Quantitative and Qualitative Disclosures about Market
Risk" herein. These forward-looking statements are made
only as of the date hereof, and the company undertakes no
obligation to update or revise the forward-looking
statements, whether as a result of new information, future
events or otherwise.
20
<PAGE> 22
MERITOR AUTOMOTIVE, INC.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
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, 1999.
21
<PAGE> 23
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.
MERITOR AUTOMOTIVE, INC.
-------------------------------------
(Registrant)
Date August 16, 1999 By /s/ D.M. Stelfox
-------------------------- -------------------------------
D.M. Stelfox
Vice President and Controller
(For the Registrant and as
Principal Accounting Officer)
22
<PAGE> 24
Exhibit Index
-------------
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> APR-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 45
<SECURITIES> 0
<RECEIVABLES> 796
<ALLOWANCES> 11
<INVENTORY> 402
<CURRENT-ASSETS> 146
<PP&E> 763
<DEPRECIATION> 0
<TOTAL-ASSETS> 2,817
<CURRENT-LIABILITIES> 1,115
<BONDS> 878
0
0
<COMMON> 69
<OTHER-SE> 228
<TOTAL-LIABILITY-AND-EQUITY> 2,817
<SALES> 1,217
<TOTAL-REVENUES> 0
<CGS> 1,035
<TOTAL-COSTS> 1,109
<OTHER-EXPENSES> 28
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 18
<INCOME-PRETAX> 65
<INCOME-TAX> 26
<INCOME-CONTINUING> 39
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 39
<EPS-BASIC> .56
<EPS-DILUTED> .56
</TABLE>
