<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 December 31, 1998
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Commission file number 1-13093
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Meritor Automotive, Inc.
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(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
------ ------
69,076,443 shares of registrant's Common Stock, $1.00 par value, were
outstanding on January 31, 1999.
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MERITOR AUTOMOTIVE, INC.
INDEX
PART I. FINANCIAL INFORMATION:
Page
Item 1. Financial Statements: No.
Consolidated Balance Sheet - -
December 31, 1998 and September 30, 1998............... 2
Statement of Consolidated Income - - Three Months
Ended December 31, 1998 and 1997....................... 3
Statement of Consolidated Cash Flows - -
Three Months Ended December 31, 1998 and 1997.......... 4
Notes to Consolidated Financial Statements............. 5
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations.......12
Item 3. Quantitative and Qualitative Disclosures About
Market Risk............................................18
PART II. OTHER INFORMATION:
Item 1. Legal Proceedings......................................19
Item 2. Changes in Securities and Use of Proceeds..............19
Item 5. Other Information......................................20
Item 6. Exhibits and Reports on Form 8-K.......................21
<PAGE> 3
Part I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
MERITOR AUTOMOTIVE, INC.
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
December 31,
1998 September 30,
(unaudited) 1998
-------------- --------------
ASSETS (In millions)
<S> <C> <C>
Current assets:
Cash ........................................................ $ 88 $ 65
Receivables (less allowance for doubtful accounts:
December 31, 1998 and September 30, 1998, $11) ........... 596 638
Inventories ................................................. 401 360
Other current assets ........................................ 156 153
------- -------
Total current assets .................................... 1,241 1,216
------- -------
Net property ..................................................... 726 666
Net goodwill ..................................................... 155 39
Other assets ..................................................... 172 165
------- -------
TOTAL ...................................... $ 2,294 $ 2,086
======= =======
LIABILITIES AND SHAREOWNERS' EQUITY
Current liabilities:
Short-term debt ............................................. $ 44 $ 34
Accounts payable ............................................ 573 636
Accrued compensation and benefits ........................... 116 142
Accrued income taxes ........................................ 31 13
Other current liabilities ................................... 187 229
------- -------
Total current liabilities ............................... 951 1,054
Long-term debt ................................................... 547 313
Accrued retirement benefits ...................................... 393 378
Other liabilities ................................................ 77 44
Minority interests ............................................... 33 31
Shareowners' equity:
Common Stock
(shares issued and outstanding: December 31, 1998, 69.1;
and September 30, 1998, 69.0) ....................... 69 69
Additional paid-in-capital .................................. 157 156
Retained earnings ........................................... 151 118
Accumulated other comprehensive loss ........................ (84) (77)
------- -------
Total shareowners' equity ............................... 293 266
------- -------
TOTAL ...................................... $ 2,294 $ 2,086
======= =======
</TABLE>
See notes to consolidated financial statements.
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2
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MERITOR AUTOMOTIVE, INC.
STATEMENT OF CONSOLIDATED INCOME
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
December 31,
-----------------------------------
1998 1997
---- ----
(In millions, except
per share amounts)
<S> <C> <C>
Sales ............................................. $ 944 $ 911
Cost of sales ..................................... 817 791
----- -----
Gross margin ...................................... 127 120
Selling, general and administrative ............... 58 57
----- -----
Operating earnings ................................ 69 63
Other income-net .................................. 8 1
Interest expense .................................. (11) (10)
----- -----
Income before income taxes ........................ 66 54
Provision for income taxes ........................ (26) (22)
----- -----
Net income ........................................ $ 40 $ 32
===== =====
Basic and diluted earnings per share .............. $ .58 $ .47
===== =====
Cash dividends per common share ................... $.105 $.105
===== =====
Average common shares outstanding-basic and diluted 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>
Three Months Ended
December 31,
---------------------------
1998 1997
---------- -------------
(In millions)
<S> <C> <C>
OPERATING ACTIVITIES
Net income ...................................................... $ 40 $ 32
Adjustments to net income to arrive at cash provided by operating
activities:
Depreciation and amortization .............................. 27 24
Changes in assets and liabilities and other, excluding
acquisitions ............................................. (49) 9
----- -----
CASH PROVIDED BY OPERATING ACTIVITIES .................. 18 65
----- -----
INVESTING ACTIVITIES
Capital expenditures ............................................ (19) (23)
Acquisition of businesses and other ............................. (180) (4)
----- -----
CASH USED FOR INVESTING ACTIVITIES ..................... (199) (27)
----- -----
FINANCING ACTIVITIES
Net increase in short-term borrowings ........................... 8 39
Net increase (decrease) in revolving debt ....................... 268 (28)
Net decrease in other long-term debt ............................ (34) --
----- -----
Net increase in debt ....................................... 242 11
Cash dividends .................................................. (7) (7)
Payment of interest rate settlement cost ........................ (31) --
Payment of Distribution tax obligation .......................... -- (72)
Net transfers from Rockwell ..................................... -- 14
----- -----
CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES........ 204 (54)
----- -----
INCREASE (DECREASE) IN CASH ..................................... 23 (16)
CASH AT BEGINNING OF PERIOD ..................................... 65 133
----- -----
CASH AT END OF PERIOD ........................................... $ 88 $ 117
===== =====
</TABLE>
Income tax payments, excluding the payment of the Distribution tax obligation,
were $7 million and $9 million in the three months ended December 31, 1998 and
1997, respectively.
See notes to consolidated financial statements.
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4
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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-month period ended December 31, 1998 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.
Comprehensive income, net of the related estimated tax, is summarized as
follows (in millions):
<TABLE>
<CAPTION>
Three Months Ended
December 31,
------------
1998 1997
---- ----
<S> <C> <C>
Net income $ 40 $ 32
Foreign currency translation (7) (21)
---- ----
Comprehensive income $ 33 $ 11
==== ====
</TABLE>
5
<PAGE> 7
MERITOR AUTOMOTIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131 (SFAS 131), "Disclosures about
Segments of an Enterprise and Related Information," effective for 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 Financial Accounting Standards Board 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 Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 (SFAS 133), "Accounting for
Derivative Instruments and Hedging Activities," effective for all fiscal
quarters of fiscal years beginning after June 15, 1999. SFAS 133 requires
that all derivatives be recognized as either assets or liabilities in the
statement of financial position and be measured at fair value. The company
is currently analyzing the impact this standard will have on its financial
statements.
3. 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, 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 at the end of
the first quarter of fiscal 1999 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.
6
<PAGE> 8
MERITOR AUTOMOTIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following unaudited pro forma consolidated results of operations for
the quarters ended December 31, 1998 and 1997 assumes the two acquisitions
occurred as of the beginning of each period (in millions, except per share
amounts):
<TABLE>
<CAPTION>
Three Months Ended
December 31,
------------
1998 1997
---- ----
<S> <C> <C>
Net sales $ 1,020 $ 974
========= =========
Net income $ 41 $ 33
========= =========
Basic and diluted earnings $ .59 $ .48
========= =========
</TABLE>
On January 29, 1999, the company acquired the Heavy Vehicle Braking
Systems (HVBS) business of LucasVarity plc for $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 31, 1998, the HVBS business of LucasVarity had net sales of
approximately $290 million.
The above acquisitions are 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 preliminary 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.
4. Inventories are summarized as follows (in millions):
<TABLE>
<CAPTION>
December 31, September 30,
1998 1998
------------------ -------------------
<S> <C> <C>
Finished goods.............................................. $ 165 $ 143
Work in process............................................. 115 120
Raw materials, parts and supplies........................... 173 150
---------- ----------
Total.................................................. 453 413
Less allowance to adjust the carrying value of
certain inventories to a last-in, first-out
(LIFO) basis 52 53
---------- ----------
Inventories............................................ $ 401 $ 360
========== ==========
</TABLE>
7
<PAGE> 9
MERITOR AUTOMOTIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
5. Other Current Assets are summarized as follows (in millions):
<TABLE>
<CAPTION>
December 31, September 30,
1998 1998
------------------ -------------------
<S> <C> <C>
Current deferred income taxes............................... $ 112 $ 112
Customer tooling............................................ 18 20
Prepaid expenses............................................ 23 20
Other....................................................... 3 1
--------- ----------
Other Current Assets................................... $ 156 $ 153
========= ==========
</TABLE>
6. Other Assets are summarized as follows (in millions):
<TABLE>
<CAPTION>
December 31, September 30,
1998 1998
------------------ -------------------
<S> <C> <C>
Net deferred income taxes................................... $ 53 $ 53
Investments in affiliates................................... 46 46
Prepaid pension costs....................................... 30 30
Net capitalized computer software........................... 19 16
Other....................................................... 24 20
--------- ----------
Other Assets........................................... $ 172 $ 165
========= ==========
</TABLE>
7. Other Current Liabilities are summarized as follows (in millions):
<TABLE>
<CAPTION>
December 31, September 30,
1998 1998
------------------ -------------------
<S> <C> <C>
Accrued product warranties.................................. $ 107 $ 112
Accrued taxes other than income taxes....................... 32 36
Accrued restructuring....................................... 7 10
Accrued interest rate settlement cost (see Note 9).......... - 31
Other....................................................... 41 40
--------- ----------
Other Current Liabilities.............................. $ 187 $ 229
========= =========
</TABLE>
8
<PAGE> 10
MERITOR AUTOMOTIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
8. Long-term Debt is summarized as follows (in millions):
<TABLE>
<CAPTION>
December 31, September 30,
1998 1998
------------------ -------------------
<S> <C> <C>
Bank revolving Credit Facility.............................. $ 486 $ 219
Lines of credit............................................. 44 79
Other ................................................... 17 15
--------- ----------
Long-term Debt......................................... $ 547 $ 313
========= ==========
</TABLE>
On January 15, 1999 the company entered into a $300 million unsecured term
Credit Facility with six banks. Interest rates under this Credit Facility
are based on LIBOR plus 75 basis points. The facility expires in January
2000. The company borrowed $300 million under the Credit Facility during
January 1999.
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. The net proceeds
of any offering would first be utilized to repay amounts outstanding under
the $300 million Credit Facility. Except as may otherwise be determined at
the time of any sales, the remaining net proceeds of any offering would be
added to the company's general funds which would be available for general
corporate purposes, including the repayment of existing indebtedness,
working capital needs, capital expenditures and acquisitions. No debt
securities have been issued under the Registration Statement at December
31, 1998.
9
<PAGE> 11
MERITOR AUTOMOTIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
9. The company's financial instruments include cash, short- and long-term
debt and foreign currency forward exchange contracts. As of December 31,
1998, 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 $178 million at December 31, 1998 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 8, the company entered into interest rate
agreements in April 1998 to secure interest rates. The planned issuance of
the debt securities did not occur, initially due to the consideration of a
major acquisition and, subsequently, the instability in the U.S. corporate
bond market. The company settled the interest rate agreements in October
1998 resulting in a payment of $31 million, which was accrued and included
in Other Current Liabilities at September 30, 1998.
10. Accrued Retirement Benefits consisted of the following (in millions):
<TABLE>
<CAPTION>
December 31, September 30,
1998 1998
------------------ -------------------
<S> <C> <C>
Accrued retirement medical costs............................ $ 306 $ 292
Accrued pension costs....................................... 112 110
Other....................................................... 12 12
--------- ----------
Total.................................................. 430 414
Amount classified as current liability...................... 37 36
--------- ----------
Accrued Retirement Benefits ........................... $ 393 $ 378
========= ==========
</TABLE>
10
<PAGE> 12
MERITOR AUTOMOTIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
11. Other Income - Net is comprised of the following (in millions):
<TABLE>
<CAPTION>
Three Months Ended
December 31,
-------------------------------------------
1998 1997
------------------ --------------------
<S> <C> <C>
Equity in earnings of affiliates............................ $ 7 $ 3
Minority interests.......................................... (3) (4)
Gain on the sale of property and businesses................. 3 2
Interest income............................................. 1 1
Other....................................................... - (1)
-------- ---------
Other Income - Net..................................... $ 8 $ 1
======== =========
</TABLE>
12. 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.
11
<PAGE> 13
MERITOR AUTOMOTIVE, INC.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
RESULTS OF OPERATIONS
1999 First Quarter Compared to 1998 First Quarter
Sales of $944 million for the 1999 first quarter were up $33 million, or 4
percent, from the 1998 first quarter. The sales growth for the quarter was
primarily driven by market penetration gains from new Light Vehicle Systems
product introductions and by continued strong demand in the company's primary
Heavy Vehicle Systems markets. This growth was offset, in part, by a decline in
government products sales driven by government program changeovers and weaker
sales in Brazil.
Net income for the 1999 first quarter was $40 million, or 58 cents per share,
compared to $32 million, or 47 cents per share last year. This represents a 23
percent increase in earnings per share for the first quarter of 1999 as compared
to the same period in 1998. First quarter operating margins improved to 7.3
percent from last year's 6.9 percent, with gross margins improving to 13.5
percent from 13.2 percent in last year's quarter. The improved operating
performance was driven by the ongoing impact of productivity and cost
improvement programs and new business growth initiatives. Selling, general and
administrative expenses, as a percentage of sales, improved from 6.3 percent in
the first quarter of 1998 to 6.1 percent in the first quarter of 1999. Other
income for the first quarter of 1999 was $7 million higher than last year
primarily due to increased equity income from joint ventures pertaining to heavy
truck and trailer markets and a $2.5 million non-recurring asset gain.
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.
Heavy Vehicles Systems sales in the first quarter of fiscal 1999 and 1998 were
$558 million and $557 million, respectively. 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. These increases, however, were substantially offset
by a decline in government product sales related to planned government program
changeovers and weaker sales in Brazil due to lower heavy truck volumes.
Light Vehicle Systems sales improved by 9 percent in the first quarter to $386
million, an increase of $32 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 due to the company's new door module and
seat adjusting system products. This growth was partially offset by lower sales
in roof systems due to customer platform launch delays in Mexico, lower vehicle
product sales in Brazil and the adverse impact of currency translation.
12
<PAGE> 14
MERITOR AUTOMOTIVE, INC.
RESULTS OF OPERATIONS (Cont'd)
The company continues to evaluate the overall global economic outlook,
in particular in the Asian and Brazilian economies. Sales in the Asia/Pacific
region comprised 3 percent and sales in South America comprised 6 percent of
total sales in fiscal 1998.
FINANCIAL CONDITION
Cash provided by operating activities for the fiscal 1999 first quarter was $18
million, a decrease of $47 million compared to the first quarter of fiscal 1998.
The decrease was due primarily to increases in working capital requirements,
principally in accounts payable and accrued compensation and benefits. This
increase was partially offset by a decrease in accounts receivable.
Capital expenditures of $19 million included equipment for continued new product
introductions, capacity expansion and new production processes. The company
anticipates full year fiscal 1999 capital expenditures of approximately $150
million, excluding the effect of the acquisitions.
The company's first quarter dividend of $.105 cents per share was paid on
December 14, 1998 to shareowners of record on November 23, 1998. On February 10,
1999, the board of directors declared a quarterly dividend of $.105 cents per
share on its common stock, payable March 15, 1999, to shareowners of record on
February 22, 1999.
Cash provided by financing activities includes $242 million net increase in
debt, of which $180 million was utilized to fund acquisitions of businesses.
The company has pursued growth initiatives to further strengthen its position in
the global automotive original equipment and aftermarket segments. As is
discussed in Note 3, in late December 1998 the company completed the
acquisitions of the European heavy truck axle manufacturing operations of Volvo
Truck Corporation and Euclid Industries, a leading supplier of aftermarket
replacement parts for medium- and heavy-duty vehicles. The Volvo and Euclid
transactions are expected to add sales on an annualized basis of approximately
$200 million and $125 million, respectively. The company's long-term debt to
capitalization ratio increased to 63 percent at December 31, 1998 from 51
percent at September 30, 1998, reflecting the impact of these acquisitions. The
acquisition of the Heavy Vehicle Braking Systems (HVBS) business of LucasVarity
plc was completed on January 29, 1999. The HVBS acquisition is expected to add
sales on an annualized basis of approximately $400 million.
After consideration of all three strategic acquisitions, Standard & Poor's and
Moody's have reaffirmed their "BBB/Baa2" respective credit ratings for Meritor's
debt.
13
<PAGE> 15
MERITOR AUTOMOTIVE, INC.
FINANCIAL CONDITION (Cont'd)
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, would further increase the company's debt to capitalization ratio.
On January 15, 1999 the company entered into a $300 million unsecured term
Credit Facility with six banks. Interest rates under this Credit Facility are
based on LIBOR plus 75 basis points. The facility expires in January 2000. The
company borrowed $300 million under the Credit Facility during January 1999.
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. The net proceeds of any offering would first be
utilized to repay amounts outstanding under the $300 million Credit Facility.
Except as may otherwise be determined at the time of any sales, the remaining
net proceeds of any offering would be added to the company's general funds which
would be available for general corporate purposes, including the repayment of
existing indebtedness, working capital needs, capital expenditures and
acquisitions. No debt securities have been issued under the Registration
Statement at December 31, 1998.
In anticipation of offering debt securities under the shelf Registration, the
company entered into interest rate agreements in April 1998 to secure interest
rates. The planned issuance of the debt securities did not occur, initially due
to the consideration of a major acquisition and, subsequently, the instability
in the U.S. corporate bond market. The company settled the interest rate
agreements in October 1998 resulting in a payment of $31 million, which was
accrued and included in Other Current Liabilities at September 30, 1998.
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 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 December 31, 1998 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.
14
<PAGE> 16
MERITOR AUTOMOTIVE, INC.
INTERNATIONAL OPERATIONS (Cont'd)
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 within budget and in a timely manner, and
that the costs associated with the conversion to the Euro will not be material.
YEAR 2000 READINESS DISCLOSURE
Background
The company initiated a company-wide year 2000 project to determine whether the
company's Information Technology ("IT") and non-IT systems are year 2000
compliant and to identify and implement the remedial actions necessary to effect
compliance. None of the company's other IT projects have been significantly
delayed due to the year 2000 project. The year 2000 project also includes an
assessment of compliance at the supplier and service provider level in order to
minimize supply disruptions. In addition, certain of the company's locations are
implementing Enterprise Resource Planning systems. It is anticipated that these
systems will be in place in 1999 and will be year 2000 compliant. Because the
company's customer base is diverse, fewer resources of the project have been
directed to the area of customer compliance.
Company's State of Readiness
The project is divided into four major sections - business and engineering,
factory floor, IT infrastructure (hardware and software) and supply chain. Each
section involves three phases: phase one - identification of risks; phase two -
defining the scope of necessary corrections, preparation of related plans and
cost estimates and development of contingency plans; and phase three -
implementation of decisions to repair, replace or retire the systems in
question.
The consulting firm of Keane, Inc. was engaged to coordinate the year 2000
project for all four major sections and to provide more direct assistance with
respect to the business and engineering section and the IT infrastructure
section. In addition, the company engaged outside consultants to assist in risk
identification, analysis and remediation planning for factory floor operations
and to assist in implementing repair and remediation projects at local sites.
15
<PAGE> 17
MERITOR AUTOMOTIVE, INC.
YEAR 2000 READINESS DISCLOSURE (Cont'd)
Company's State of Readiness (Cont'd)
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. The company estimates that all four
areas will be year 2000 compliant by June 30, 1999, with follow-up reviews
scheduled through the remainder of 1999.
The following chart summarizes the status of completion by section for each
phase of the project at December 31, 1998:
<TABLE>
<CAPTION>
Approximate Percentage Completed
--------------------------------
Phase 1 Phase 2 Phase 3
------- ------- -------
<S> <C> <C> <C>
Business and Engineering 100 75-100* 35-100*
Factory floor 100 95-100* 15
IT Infrastructure 100 100 30-85*
Supply Chain 100 65 10-15*
</TABLE>
* Percentage of completion varies by location and by separate project
within each section
Contingency Plans
The company is in the initial stage of developing contingency plans designed to
minimize any adverse effects that would result if timely compliance were not
achieved, either internally or at the third party level. The planning process
will include identification of the areas of the company's business and suppliers
with the greatest potential of non-compliance and arrangements for alternate
suppliers, backup systems or stockpiling of components in the affected areas.
The company expects to complete its analysis and have contingency arrangements
in place by September 30, 1999.
16
<PAGE> 18
MERITOR AUTOMOTIVE, INC.
YEAR 2000 READINESS DISCLOSURE (Cont'd)
Costs
The company currently estimates that the aggregate cost of the year 2000 project
will be approximately $26 million. These amounts exclude employee expense and
computer equipment and upgrades that would have been purchased regardless of the
year 2000 project. The company spent $1.0, $10.2 million and $0.7 million during
the first quarter of 1999 and fiscal 1998 and 1997, respectively, on the
project. In the first quarter of 1999, approximately $0.7 million of
expenditures related to IT infrastructure and approximately $0.3 million related
to the factory floor. 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.
The company currently estimates that the costs incurred in connection with the
Enterprise Resource Planning systems will be approximately $35 million,
including costs of internal employees dedicated to the project. The company
anticipates that approximately $30 million of the total costs will be
capitalized and amortized over 5 years.
Risks
Incomplete or untimely resolution of the year 2000 issue by the company, key
suppliers, customers and other parties could have a material adverse effect on
the company's results of operations, financial condition and cash flows. The
year 2000 project is expected to reduce significantly the company's level of
uncertainty about year 2000 issues. The company believes that completed and
planned modifications and conversions of its internal IT and non-IT systems will
allow it to be year 2000 compliant in a timely manner. However, due to the
general uncertainty inherent with year 2000 compliance, the company is unable to
determine at this time whether the consequences of year 2000 failures by third
parties will have a material impact on the company.
As discussed in Note 3 to the consolidated financial statements, the company
completed the acquisition of three separate businesses in late December 1998 and
January 1999. The company is currently assessing the year 2000 compliance of the
IT and non-IT systems of the acquired businesses and of their supply chains.
Information on these businesses will be incorporated into the company's year
2000 readiness disclosure for the quarter ended March 31, 1999.
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.
17
<PAGE> 19
MERITOR AUTOMOTIVE, INC.
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 December 31, 1998,
the analysis indicated that such market movements would not have a material
effect on the company's consolidated financial position, results of operations
or cash flows. Actual gains or losses in the future may differ significantly
from that analysis, however, based on changes in the timing and amount of
interest rate and foreign currency exchange rate movements and the company's
actual exposures.
18
<PAGE> 20
MERITOR AUTOMOTIVE, INC.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
As previously reported under the heading "Item 3. Legal Proceedings"
in the company's Annual Report on Form 10-K for the fiscal year ended
September 30, 1998, on July 17, 1997 Eaton Corporation filed suit
against Rockwell in the U.S. District Court in Wilmington, Delaware,
asserting infringement of Eaton's U.S. Patent No. 4850236, which
covers certain aspects of heavy-duty truck transmissions, by the
company's Engine Synchro Shift(TM) transmission for heavy-duty
trucks, and seeking damages and injunctive relief. Meritor was joined
as a defendant on June 11, 1998, and trial in this matter began on
June 23, 1998. On July 1, 1998, the jury rendered a verdict in favor
of Eaton, finding that Meritor had infringed Eaton's patent and
awarding compensatory damages in the amount of $1.25 million, and a
judgment was entered on July 17, 1998. Because the jury found the
infringement to be willful, the judge in the case has discretion to
increase the damages to an amount up to three times the amount of the
award. Eaton's request for a permanent injunction is pending. A
separate trial with respect to the company's allegations of
inequitable conduct by Eaton in obtaining its patent had been
scheduled for February 8-10, 1999, but has been postponed to
mid-April 1999. The judge is not expected to take action with respect
to Eaton's request for a permanent injunction or the damage issue
until after this trial is completed. Meritor is evaluating the jury's
verdict and the judgment and is considering further actions,
including post-trial motions and an appeal to the United States Court
of Appeals for the Federal Circuit. Based on advice of M. Lee Murrah,
Esq., Assistant General Counsel of the Company, management believes
the Company's truck transmissions do not infringe Eaton's patent. The
Company intends to continue to defend this suit vigorously.
Item 2. Changes in Securities and Use of Proceeds
On October 1, 1998 the company issued 614 and 307 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 a transaction not involving a public
offering under Section 4(2).
19
<PAGE> 21
MERITOR AUTOMOTIVE, INC.
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. See also "Management's Discussion and Analysis of
Financial Condition and Results of Operations" 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 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.
10 - (a) Credit Agreement, dated as of January 15, 1999, among the
company, the lenders party thereto, UBS AG, Stamford
Branch, as Administrative Agent, Warburg Dillon Read LLC,
as Arranger, and NBD Bank, as Documentation Agent (filed
as Exhibit 99.1 to the company's Current Report on Form
8-K, dated February 5, 1999 in File No. 1-13093, and
incorporated herein by reference).
(b) Umbrella Agreement, dated as of November 22, 1998, among
Lucas Industries plc and others, Meritor Heavy Vehicle
Braking Systems (UK) Limited and others, the company and
LucasVarity plc (filed as Exhibit 2.1 to the company's
Current Report on Form 8-K dated February 5, 1999 in File
No. 1-13093, and incorporated herein by reference).
12 - Computation of Ratio of Earnings to Fixed Charges for the
Three Months Ended December 31, 1998.
23 - Consent of M. Lee Murrah, Esq., Assistant General Counsel of
the Company.
27 - Financial Data Schedule
(b) Reports on Form 8-K.
The company filed a Current Report on Form 8-K, dated October 6,
1998, reporting under Item 5, "Other Events," the settlement on
October 5, 1998, of two forward treasury interest rate agreements
with financial institutions and the accounting treatment of the
settlement.
The company filed a Current Report on Form 8-K, dated February 5,
1999, (a) reporting the acquisition by the company of the Heavy
Vehicle Braking Systems business of LucasVarity plc on January 29,
1999, under Item 2, "Acquisition or Disposition of Assets" and (b)
filing exhibits related to the acquisition under Item 7, "Financial
Statements, Pro Forma Financial Information and Exhibits".
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 February 12, 1999 By 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>
12 - Computation of Ratio of Earnings to Fixed Charges for the
Three Months Ended December 31, 1998.
23 - Consent of M. Lee Murrah, Esq., Assistant General Counsel of
the Company.
27 - Financial Data Schedule
</TABLE>
<PAGE> 1
EXHIBIT 12
MERITOR AUTOMOTIVE, INC.
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
THREE MONTHS ENDED DECEMBER 31, 1998
(In millions, except ratio)
<TABLE>
<S> <C>
Earnings available for fixed charges:
Pre-tax income from continuing operations $66
Adjustments:
Undistributed income of affiliates (7)
Minority interest in loss of subsidiaries 3
-----
62
-----
Add fixed changes included in earnings:
Interest expense 11
Interest element of rentals 4
-----
Total 15
-----
Total earnings available for fixed charges: $77
-----
Fixed charges:
Fixed charges included in earnings $15
Capitalized interest 0
-----
Total fixed charges $15
Ratio of earnings to fixed charges (1) 5.1
</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 December 31, 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.
/s/ M. Lee Murrah
-----------------
M. Lee Murrah
Assistant General Counsel of
Meritor Automotive, Inc.
Date: February 12, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 88
<SECURITIES> 0
<RECEIVABLES> 596
<ALLOWANCES> 11
<INVENTORY> 401
<CURRENT-ASSETS> 1,241
<PP&E> 726
<DEPRECIATION> 0
<TOTAL-ASSETS> 2,294
<CURRENT-LIABILITIES> 951
<BONDS> 547
0
0
<COMMON> 69
<OTHER-SE> 224
<TOTAL-LIABILITY-AND-EQUITY> 2,294
<SALES> 944
<TOTAL-REVENUES> 952
<CGS> 817
<TOTAL-COSTS> 886
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 11
<INCOME-PRETAX> 66
<INCOME-TAX> 26
<INCOME-CONTINUING> 40
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 40
<EPS-PRIMARY> .58
<EPS-DILUTED> .58
</TABLE>
