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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1999
COMMISSION FILE NUMBER 1-13093
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MERITOR AUTOMOTIVE, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 38-3354643
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
2135 WEST MAPLE ROAD 48084-7186
TROY, MICHIGAN (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
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REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (248) 435-1000
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
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TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
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Common Stock, $1 Par Value New York Stock Exchange
(including the associated Preferred
Share Purchase Rights)
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SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [X]
The aggregate market value of the registrant's voting stock held by
non-affiliates of the registrant on November 30, 1999 was approximately $1.12
billion.
65,733,537 shares of the registrant's Common Stock, par value $1 per share,
were outstanding on November 30, 1999.
DOCUMENTS INCORPORATED BY REFERENCE
(1) Certain information contained in the Annual Report to Shareowners of the
registrant for the fiscal year ended September 30, 1999 is incorporated by
reference into Part I, Part II and Part IV.
(2) Certain information contained in the Proxy Statement for the Annual Meeting
of Shareowners of the registrant to be held on February 9, 2000 is
incorporated by reference into Part III.
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PART I
ITEM 1. BUSINESS.
Meritor Automotive, Inc. (the "Company" or "Meritor"), headquartered in
Troy, Michigan, is a leading global supplier of a broad range of components and
systems for use in commercial, specialty and light vehicles. The Company was
incorporated in Delaware in May 1997 in connection with the September 30, 1997
distribution by Rockwell International Corporation, a Delaware corporation and
Meritor's former parent company ("Rockwell"), to Rockwell shareowners on a pro
rata basis of all of the issued and outstanding shares of the Company (the
"Distribution"). In the Distribution, Rockwell shareowners received one share of
Company Common Stock for every three shares of Rockwell Common Stock owned on
September 17, 1997, the record date for the Distribution. Prior to the
Distribution, Rockwell transferred substantially all of its operations, assets
and liabilities related to the automotive businesses then owned and operated by
Rockwell (the "Automotive Business") (including liabilities relating to former
operations) to the Company or to subsidiaries of the Company. As used herein,
the terms "Company" or "Meritor" include subsidiaries and predecessors unless
the context indicates otherwise.
Whenever an item of this Annual Report on Form 10-K refers to information
under specific captions of the 1999 Annual Report to Shareowners of the Company
(the "1999 Annual Report") or to information in the Proxy Statement for the
Annual Meeting of Shareowners of the Company to be held on February 9, 2000 (the
"2000 Proxy Statement"), the information is incorporated in that item by
reference.
References in this Annual Report on Form 10-K to the Company's being a
leading supplier or the world's leading supplier, and other similar statements
as to the Company's relative market position, are based principally on
calculations made by the Company based on information collected by the Company,
including Company and industry sales data obtained from internal and available
external sources, as well as Company estimates. In addition to such quantitative
data, the Company's statements are based on other competitive factors such as
the Company's technological capabilities, its research and development efforts
and innovations and the quality of its products and services, in each case
relative to that of its competitors in its addressed markets.
Meritor serves a broad range of original equipment manufacturer ("OEM")
customers worldwide, including truck OEMs, light vehicle OEMs, semi-trailer
producers and off-highway and specialty vehicle manufacturers, and the
aftermarket. Its ten largest customers accounted for 64% of total fiscal 1999
sales. The Company operated 68 manufacturing facilities around the world in
fiscal 1999. Sales outside the United States accounted for approximately 49% of
total sales in fiscal 1999.
The Company serves its customers worldwide through two operating segments:
Heavy Vehicle Systems ("HVS") and Light Vehicle Systems ("LVS"). In fiscal 1999,
HVS supplied drivetrain systems and components, including axles, brakes,
transmissions, clutches and drivelines, for medium- and heavy-duty trucks,
trailers and off-highway equipment and specialty vehicles, including military,
bus and coach, and fire and rescue. Within HVS, the Company distinguishes
between sales of original equipment systems and components and sales to the
aftermarket. In fiscal 1999, LVS supplied roof, door, access control, suspension
and seat adjusting systems and wheel products for passenger cars, light trucks
and sport utility vehicles. (See "Joint Ventures" and "Strategic Initiatives"
below for information with respect to the transfer of HVS' transmission and
clutch business to a new 50% owned joint venture in August 1999 and the sale of
LVS' seat adjusting systems business in November 1999.)
Note 21 of the Notes to Consolidated Financial Statements in the 1999
Annual Report contains financial information by segment for the three years
ended September 30, 1999, including information on sales and assets by
geographic area for each segment. The heading "Products" below includes
information on HVS and LVS sales by product for each of the three years ended
September 30, 1999.
Meritor began operations separate from Rockwell on September 30, 1997 and,
accordingly, does not have an operating history as an independent company prior
to that date. The financial information included or incorporated by reference in
this Annual Report on Form 10-K for periods prior to September 30, 1997
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reflects the Automotive Business as part of Rockwell and may not necessarily be
indicative of the results of operations, financial position and cash flows of
the Company had it been a separate, independent company during these periods.
The consolidated financial statements for periods as of and after September 30,
1997 are those of the Company and its subsidiaries.
INDUSTRY TRENDS
The automotive industry is experiencing several significant trends that
present opportunities and challenges to industry suppliers. These trends, which
influence the Company's business strategies, include the globalization of OEMs
and their suppliers, increased outsourcing by OEMs, increased demand for modules
and systems by OEMs and the consolidation of suppliers worldwide.
As OEMs expand geographically to access new markets, they are able to
achieve significant cost savings and enhanced product quality and consistency by
sourcing from the most capable full-service global suppliers. OEMs and suppliers
also have the opportunity to take advantage of economies of scale through global
sourcing of components and systems and by designing platforms that can be used
in different geographic markets but still be adapted to local preferences.
OEMs are responding to global competitive pressures to improve quality and
reduce manufacturing costs and related capital investments by outsourcing
products that historically have been engineered and manufactured internally.
Outsourcing enables OEMs to focus on their core design, assembly and marketing
capabilities. In markets addressed by LVS, this increased outsourcing trend has
extended not only to components, but to entire modules and systems, requiring
suppliers to provide a higher level of engineering, design, electromechanical
and systems integration expertise in order to remain competitive. Increased
outsourcing by light vehicle OEMs has produced higher overall per vehicle sales
by independent suppliers. Such increased outsourcing can result in supplier
sales growth independent of the overall automotive industry growth trend.
OEMs also are reducing their total number of suppliers and are more
frequently entering into supply arrangements with the most capable global
suppliers. Increasingly, the criteria for selection include quality, cost and
responsiveness, as well as certain full-service capabilities, including design
and engineering. This trend and the globalization trend described above have
contributed to the consolidation of automotive suppliers into larger, more
efficient and more capable companies.
BUSINESS STRATEGIES
Meritor has developed leadership market positions as it has grown into a
global supplier of a broad range of components and systems for use in
commercial, specialty and light vehicles worldwide. Meritor seeks to enhance its
leadership positions and capitalize on its existing customer, product and
geographic strengths, as well as the industry trends described above, and to
increase its sales, earnings and profitability. To achieve these goals, Meritor
employs the following business strategies:
Continuously Improve Core Business Processes. The Company is continuously
seeking to improve its core business processes, through investment in
information technology and capital equipment, rationalization of production
among facilities, deintegration of non-core processes, establishment of flexible
assembly sites and simplification and increased commonality of products. The
goals of these actions are to reduce product costs, improve product quality and
lower required asset investment levels, which should result in reduced product
development times and more flexibility to meet customer needs.
Capitalize on Customer Outsourcing Activities. A significant growth
strategy of the Company is to provide lower cost and higher quality products to
customers that are increasing their outsourcing activities. Management believes
truck and trailer OEMs in Europe will increasingly outsource in order to achieve
cost and efficiency advantages. The Company works closely with current and
prospective customers worldwide to identify and implement mutually beneficial
outsourcing opportunities. As part of this strategy, in December 1998, the
Company acquired Volvo Truck Corporation's heavy truck axle manufacturing
operations in
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Lindesberg, Sweden, and entered into a related worldwide axle supply agreement
with Volvo. See "Strategic Initiatives" below.
The Company has sought and will continue to seek to utilize its broad
product lines and its design, engineering and manufacturing expertise by
expanding its sales of higher value modules and systems. The Company will seek
to utilize its leadership positions in the supply of electromechanical systems
to light vehicle OEMs and its ability to provide drivetrain systems to truck and
specialty vehicle OEMs to capitalize on this anticipated customer demand.
Leverage Geographic Strengths. Geographic expansion to meet the global
sourcing needs of customers and to address new markets will continue to be an
important element of the Company's growth strategy. Management believes
opportunities exist to increase further the Company's presence in the North
American light vehicle market, where its sales of light vehicle products
increased from approximately $575 million in fiscal 1998 to approximately $702
million in fiscal 1999. The Company also believes there are opportunities to
increase sales to heavy-duty and medium-duty commercial vehicle OEMs in Europe,
building on established customer relationships with their North American
affiliates and the Company's existing manufacturing presence in Europe. Emerging
markets such as the Asia-Pacific region and South America also present growth
opportunities as demand for commercial, specialty and light vehicles increases
in these areas. In evaluating opportunities in these emerging markets, the
Company will continue to assess the economic situation in these regions and its
potential effect on the Company's businesses and served markets.
The Company implemented this strategy during fiscal 1999 with the
acquisition of Volvo Truck Corporation's heavy truck axle manufacturing
operations in Lindesberg, Sweden, and LucasVarity plc's Heavy Vehicle Braking
Systems business (see "Strategic Initiatives" below). These acquisitions
increased HVS' manufacturing capability and presence in Europe.
Introduce New Systems and Technologies. Meritor plans to continue
investing in new technologies and product development. Meritor also plans to
continue working closely with its customers to develop and implement design,
engineering, manufacturing and quality improvements. The Company will draw upon
the engineering resources of its Technical Center in Troy, Michigan and its
engineering centers of expertise in the United States, Brazil, France, Germany
and the United Kingdom. See "Research and Development" below.
Management believes that the strategy of continuing to introduce new and
improved systems and technologies will be an important factor in the Company's
efforts to achieve its growth objectives. LVS is implementing this strategy by
developing and strengthening its market position in two areas: aperture systems,
including door, access control and roof systems, and undercarriage components
and systems, including suspensions, wheels, corner modules and other components.
See "Products -- Light Vehicle Systems" below.
Expand Aftermarket Business. Meritor believes that the aftermarket offers
significant growth opportunities and is pursuing expansion of its Aftermarket
business. In furtherance of this strategy, in December 1998, the Company
acquired Euclid Industries, a North American supplier and manufacturer of
aftermarket replacement parts for a wide range of medium- and heavy-duty
vehicles. See "Strategic Initiatives" below.
The Company's fiscal 1999 Aftermarket sales were $415 million, representing
sales of components and services principally to HVS North American customers.
The Company is expanding its Aftermarket business by utilizing its advanced
distribution centers in Florence, Kentucky and Mayfield Village, Ohio and by
leveraging its existing aftermarket channels with new products, both those
manufactured by the Company and those manufactured by others and sold by the
Company under distribution agreements.
Selectively Pursue Strategic Opportunities. The Company regularly
evaluates various strategic and business development opportunities, including
licensing agreements, marketing arrangements, joint ventures, acquisitions and
dispositions. The Company intends to continue to pursue selectively alliances
and acquisitions that would allow it to gain access to new customers and
technologies, penetrate new geographic markets and enter new product markets.
The Company also intends to continue to review the prospects of its existing
businesses to determine whether any of them should be modified, restructured,
sold or otherwise discontinued.
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Since the beginning of fiscal 1999, the Company has acquired three
businesses (Volvo Truck Corporation's heavy truck axle manufacturing operations,
LucasVarity plc's Heavy Vehicle Braking Systems business and Euclid Industries)
and sold its seat adjusting systems business (see "Strategic Initiatives"
below). The Company also entered into a joint venture in fiscal 1999 with ZF
Friedrichshafen AG ("ZF") to produce transmissions for the North American heavy
vehicle market (see "Joint Ventures" below).
PRODUCTS
Meritor designs, develops, manufactures, markets, distributes, sells,
services and supports a broad range of products for use in commercial, specialty
and light vehicles. In addition to sales of original equipment systems and
components, the Company provides its truck and trailer products and off-highway
and specialty products to OEMs, dealers, distributors, fleets and other
end-users in the aftermarket.
The following chart depicts HVS and LVS sales by product for each of the
three fiscal years ended September 30, 1999. A narrative description of the
principal products of the Company's two operating segments follows the chart.
See "Strategic Initiatives" below for information with respect to businesses
acquired in fiscal 1999 that have enhanced the Company's product lines.
SALES BY PRODUCT
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FISCAL YEAR ENDED
SEPTEMBER 30,
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1999 1998 1997
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HVS:
Original Equipment:
Truck and Trailer Axles and Brakes..................... 39% 34% 32%
Off-Highway, Specialty and Government Products......... 12 14 14
Transmissions, Clutches, Drivelines and Other*......... 5 5 4
Aftermarket............................................... 9 8 9
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Total HVS......................................... 65% 61% 59%
--- --- ---
LVS:
Door Systems.............................................. 13% 13% 12%
Roof Systems.............................................. 7 10 13
Suspension Systems........................................ 5 5 5
Access Control Systems.................................... 4 5 6
Wheel Products............................................ 3 4 4
Seat Adjusting Systems**.................................. 3 2 1
--- --- ---
Total LVS......................................... 35% 39% 41%
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Total............................................. 100% 100% 100%
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* In August 1999 the Company transferred its transmission and clutch businesses
to a new joint venture 50% owned by the Company. See "Joint Ventures" below.
** In November 1999 the Company sold its seat adjusting systems business. See
"Strategic Initiatives" below.
Heavy Vehicle Systems
Truck and Trailer Products
Truck Axles. Meritor is one of the world's leading independent suppliers
of axles for heavy-duty commercial vehicles. The Company's axle manufacturing
facilities located in the United States, Brazil, England, Sweden and Italy
produce axles for medium- and heavy-duty commercial vehicles. The Company's
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extensive truck axle product line includes a wide range of drive and non-drive
front steer axles and single and tandem rear drive axles, which can include
driver-controlled differential lock for extra traction, aluminum carriers to
reduce weight and pressurized filtered lubrication systems for longer life. The
Company's front steer and rear drive axles can be equipped with the Company's
cam, wedge or air disc brakes, automatic slack adjusters and anti-lock braking
systems.
Brakes. The Company is a leading independent supplier of air brakes to
medium- and heavy-duty commercial vehicle manufacturers in North America and
Europe. Through manufacturing facilities located in the United States, Canada,
the United Kingdom and Italy, the Company manufactures a broad range of
foundation air brakes as well as automatic slack adjusters for brake systems.
The Company's foundation air brake products include cam drum brakes, which offer
improved lining life and tractor/trailer interchangeability, air disc brakes,
which provide fade resistant braking for demanding applications, wedge drum
brakes, which are lightweight and provide automatic internal wear adjustment,
hydraulic brakes and wheel end components such as hubs, drums and rotors.
Through its 50%-owned joint venture with WABCO Automotive Products
("WABCO"), a wholly-owned subsidiary of American Standard, Inc., the Company is
the leading supplier of anti-lock braking systems ("ABS") and a supplier of
other electronic and pneumatic control systems for North American heavy-duty
commercial vehicles. Through the joint venture the Company also supplies
hydraulic ABS to the North American medium-duty truck market.
In 1995, federal regulations were adopted requiring that new heavy-duty and
medium-duty vehicles sold in the United States be equipped with ABS. Under these
regulations ABS are now required on all truck-tractors, on all trailers,
single-unit trucks and buses with air brakes manufactured after March 1, 1998,
and on all trucks and buses with hydraulic brakes manufactured after March 1,
1999.
Trailer Products. Meritor believes it is the world's leading manufacturer
of heavy-duty trailer axles, with leadership positions in North America and in
Europe. The Company's trailer axles are available in over forty models in
capacities from 20,000 to 30,000 pounds for virtually all heavy trailer
applications and are available with the Company's broad range of brake products,
including ABS. In addition, the Company supplies trailer air suspension products
for which it has strong market positions in Europe and a market presence in
North America.
Transmissions and Clutches. The Company introduced its transmission
product line in 1989, enabling it to supply a complete drivetrain system to
heavy-duty commercial vehicle manufacturers in North America. The Company's
range of transmission models includes its Engine Synchro Shift(TM) transmission
for heavy-duty trucks that is designed to reduce gear shifting effort for
drivers and reduce wear on clutches and other drivetrain components in a cost
efficient manner by synchronizing engine speed to road speed shifts without use
of the clutch. (See Item 3. Legal Proceedings for information with respect to a
patent infringement lawsuit filed against the Company by Eaton Corporation and
an adverse judgment in the case.) The Company also supplies clutches, including
diaphragm-spring clutches.
In fiscal 1999, the Company transferred its transmission and clutch
businesses to a new 50%-owned joint venture. See "Joint Ventures" below.
Drivelines and Other Products. Meritor also supplies universal joints and
driveline components. The Company believes that its Permalube(TM) universal
joint is currently the only permanently lubricated universal joint used in the
high mileage on-highway market.
Off-Highway, Specialty and Government Products
Off-Highway Vehicle Products. The Company supplies heavy-duty axles,
brakes and drivelines for use in numerous off-highway vehicle applications,
including construction, material handling, agriculture, mining and forestry, in
North America, South America, Europe and the Asia-Pacific region. These products
are designed to tolerate high tonnages and operate under extreme conditions.
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Specialty Vehicle Products. The Company supplies axles, brakes and
transfer cases for use in buses, coaches and recreational, fire and other
specialty vehicles in North America and Europe, and is the leading supplier of
bus and coach axles and brakes in North America.
Government Products. The Company supplies axles, brakes, brake system
components including ABS, trailer products, transfer cases and drivelines for
use in medium- and heavy-duty military tactical wheeled vehicles, principally in
North America.
Light Vehicle Systems
Door Systems. The Company is the world's leading supplier of manual and
power window regulators and a leading supplier of integrated door modules and
systems. In fiscal 1999, the Company manufactured window regulators at plants in
North America, South America, Europe and the Asia-Pacific region for light
vehicle and heavy-duty commercial vehicle manufacturers. The Company's wide
range of power and manual door system products utilizes numerous technologies
and offers the Company's own electric motors, which are designed for individual
applications and to maximize operating efficiency and reduce noise levels. In
fiscal 1999, the Company entered into an alliance with Sommer Allibert, a
French-based global producer of complete car interiors, to jointly develop and
produce integrated mechanized components and interior door trim panels.
Roof Systems. Meritor is one of the world's leading independent suppliers
of sunroofs and roof systems products, including its Golde(R) brand sunroofs,
for use in passenger cars, light trucks and sport utility vehicles. During
fiscal 1998 and 1999, the Company introduced one-piece, modular roof systems
that provide OEMs with cost savings by reducing assembly time and parts. One of
these roof modules is supplied to DaimlerChrysler AG for use in its Smart Car.
The Company has roof system manufacturing facilities in North America, Europe
and the Asia-Pacific region.
Meritor's North American sunroof sales increased in fiscal 1997, 1998 and
1999, reflecting increased demand in North America. However, demand for sunroofs
in the European light vehicle market decreased in fiscal 1997, 1998 and 1999 due
to increasing popularity of air conditioning. This trend, which may continue,
had a negative impact on the Company's European sales in those periods. See
"Chief Financial Officer's Review - Management's Discussion and
Analysis -- Results of Operations" in the 1999 Annual Report.
Suspension Products. Through its 57%-owned joint venture with Mitsubishi
Steel Mfg. Co., the Company is one of the leading independent suppliers of
products used in suspension systems for passenger cars, light trucks and sport
utility vehicles in North America. The Company's suspension system products,
which are manufactured at three facilities in the United States and Canada,
include coil springs, stabilizer bars and torsion bars. This business has
experienced significant sales growth over the past five years as light vehicle
OEMs have increased their outsourcing of suspension system products and the
light vehicle market has grown.
Access Control Systems. Meritor supplies manual and power activated latch
systems to light vehicle and heavy-duty commercial vehicle manufacturers, with
leadership market positions in Europe and a market presence in North America and
the Asia-Pacific region. The Company's access control products include modular
and integrated door latches, actuators, trunk and hood latches and fuel flap
locking devices. The Company has access control systems manufacturing facilities
in North America, Europe and the Asia-Pacific region.
Wheel Products. Meritor is a leading supplier of wheel products to the
light vehicle OEM market, principally in North and South America. The Company
has wheel manufacturing facilities in Brazil and Mexico.
Seat Adjusting Systems. In fiscal 1999, the Company supplied manual and
power seat adjusting systems for passenger cars, light trucks and sport utility
vehicles, principally in North America. The Company's seat adjusting system
products featured systems with integrated electronic memory and electric motors
manufactured by the Company. In November 1999, the Company sold its seat
adjusting systems business. See "Strategic Initiatives" below.
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CUSTOMERS; SALES AND MARKETING
The Company's operating segments have numerous customers worldwide and have
developed long-standing business relationships with many of these customers.
Both HVS and LVS market and sell their products principally to OEMs. In North
America, HVS also markets its truck and trailer products directly to dealers,
fleets and other end-users, which may designate the components and systems of a
particular supplier for installation in the vehicles they purchase from OEMs.
HVS also provides its truck and trailer products and off-highway and specialty
products to OEMs, dealers and distributors in the aftermarket.
Consistent with industry practice, HVS and LVS make most of their sales to
OEMs through open purchase orders, which do not require the purchase of a
minimum number of products. These purchase orders typically may be canceled by
the customer on reasonable notice without penalty. HVS and LVS also sell
products to certain customers under long-term arrangements that require the
Company to provide annual cost reductions (through price reductions or other
cost benefits for the OEMs). If the Company were unable to generate sufficient
cost savings in the future to offset such price reductions, the Company's gross
margins could be adversely affected.
Both HVS and LVS are dependent upon large OEM customers with substantial
bargaining power, including with respect to price and other commercial terms.
Although the Company believes that it generally enjoys good relations with its
OEM customers, loss of all or a substantial portion of sales to any of its large
volume customers for whatever reason (including, but not limited to, loss of
contracts, reduced or delayed customer requirements or strikes or other work
stoppages affecting production by such customers) could have a significant
adverse effect on the Company's financial results. During fiscal 1999,
DaimlerChrysler AG (which owns Mercedes-Benz AG and Freightliner Corporation)
accounted for approximately $740 million of sales for HVS and $292 million of
sales for LVS, or 23% of the total sales of the Company.
Except as noted above with respect to the North American market for
heavy-duty trucks and trailers, HVS and LVS generally compete for new business
from OEMs both at the beginning of the development of new vehicle platforms and
upon the redesign of existing platforms. New platform development generally
begins two to four years prior to the start-up of production. Once a supplier
has been designated to supply products to a new platform, an OEM will generally
continue to purchase those products from the supplier for the life of the
platform, which typically lasts from four to six years.
COMPETITION
Both HVS and LVS operate in a highly competitive environment. Principal
competitive factors are price, quality, service, product performance, design and
engineering capabilities, new product innovation and timely delivery. In both
segments, the Company competes worldwide with a number of United States and
international manufacturers that are both larger and smaller than the Company in
terms of resources and market shares. In addition, certain OEMs manufacture for
their own use products of the types supplied by the Company, and any future
increase in this activity could displace sales by the Company. In North America,
the major competitors of HVS are Eaton Corporation and Dana Corporation. LVS has
numerous competitors across its various product lines worldwide.
RAW MATERIALS AND SUPPLIES
The Company believes it has adequate sources for the supply of raw
materials and components for its HVS and LVS manufacturing needs with suppliers
located around the world. The Company does, however, concentrate its purchases
of certain raw materials and parts over a limited number of suppliers, some of
which are located in developing countries, and is dependent upon the ability of
its suppliers to meet performance and quality specifications and delivery
schedules. Although the Company historically has not experienced any significant
difficulties in obtaining an adequate supply of raw materials and components
necessary for its manufacturing operations, the loss of a significant supplier
or the inability of a supplier to meet performance and quality specifications or
delivery schedules could have an adverse effect on the Company. See "Year 2000
Readiness Disclosure -- Contingency Plans" and "-- Risks" below.
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STRATEGIC INITIATIVES
Meritor regularly considers various strategic and business opportunities,
including licensing agreements, marketing arrangements and acquisitions, and
reviews the prospects of its existing businesses to determine whether any of
them should be modified, restructured, sold or otherwise discontinued. No
assurance can be given as to whether or when any strategic initiatives will be
consummated in the future. If an agreement with respect to any additional
acquisitions were to be reached, the Company could finance such acquisitions by
issuance of additional debt or equity securities. The additional debt from any
such acquisitions, if consummated, could increase the Company's debt to
capitalization ratio. In addition, the ultimate benefit of any acquisition would
depend on the ability of the Company to successfully integrate the acquired
entity or assets into its existing business and to achieve any projected
synergies.
The industry in which the Company operates is experiencing significant
consolidation among suppliers. This trend is due in part to globalization and
increased outsourcing of product engineering and manufacturing by OEMs, and in
part to OEMs reducing the total number of their suppliers by more frequently
awarding long-term, sole-source or preferred supplier contracts to the most
capable global suppliers. The Company will continue to consider acquisitions as
a means of further expansion, but cannot predict whether its participation or
lack of participation in industry consolidation will ultimately be beneficial to
the Company.
The Company has acquired three businesses and sold another business since
the beginning of fiscal 1999, as described below:
- On December 28, 1998, the Company acquired the assets of Euclid
Industries and assumed substantially all of Euclid's liabilities. Euclid
is a North American supplier and manufacturer of aftermarket replacement
parts for a wide range of medium- and heavy-duty vehicles.
- On December 31, 1998, Meritor acquired the heavy truck axle manufacturing
operations of Volvo Truck Corporation based in Lindesberg, Sweden. With
this acquisition and its associated worldwide axle supply agreement,
Meritor became the primary supplier of heavy-duty axles for Volvo's heavy
truck operations. Meritor believes that this acquisition has enhanced its
position as a global leader in commercial axle production.
- On January 29, 1999, the Company acquired the Heavy Vehicle Braking
Systems ("HVBS") business of LucasVarity plc. The LucasVarity HVBS
components include air drum and disc brakes, hydraulic brakes, wheel end
components and aftermarket products, which complement the Company's brake
system products. The Company believes that this acquisition enhances its
position as a leading provider of brakes in Europe and enables it to
provide North American OEM and aftermarket customers with a comprehensive
offering of drivetrain products.
- On November 30, 1999, the Company sold its LVS seat adjusting systems
business for $130 million cash. The Company had determined that retention
of this business was not consistent with the LVS strategy of developing
its market position in aperture systems and undercarriage components and
systems.
JOINT VENTURES
As the automotive industry has become more globalized, joint ventures and
other cooperative arrangements have become an important element of the business
strategies of the Company. At September 30, 1999, the Company had interests in
14 joint ventures with operations in the United States, Brazil, Canada, China,
India, Japan, Mexico and Turkey.
In accordance with generally accepted accounting principles, operating
results of the seven joint ventures more than 50% owned in which the Company has
control are consolidated in the financial statements of the Company.
Consolidated joint ventures include the Company's 57%-owned joint venture with
Mitsubishi Steel Mfg. Co. for the manufacture and supply of suspension products
for passenger cars, light trucks and sport utility vehicles. Unconsolidated
joint ventures of the Company include its 50%-owned joint venture with WABCO for
the manufacture and supply of ABS systems for heavy-duty commercial vehicles
(see
8
<PAGE> 10
"Products -- Heavy Vehicle Systems -- Truck and Trailer Products -- Brakes"
above); and its 50%-owned joint venture with ZF, described below.
On August 31, 1999, the Company formed a joint venture with ZF to produce
technologically-advanced medium- and heavy-duty transmission components and
systems for heavy vehicle original equipment manufacturers and the aftermarket
for the United States, Canada and Mexico. The joint venture, ZF Meritor LLC,
combines 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. Meritor also
transferred it 60% interest in Meritor Clutch Co. to the joint venture. ZF and
Meritor each own 50% of the joint venture, which is based at the former Meritor
transmission manufacturing plant in Laurinburg, North Carolina.
RESEARCH AND DEVELOPMENT
The Company has significant research, development, engineering and product
design capabilities. The Company spent approximately $117 million, $111 million
and $103 million in fiscal 1999, 1998 and 1997, respectively, on research,
development and engineering. At September 30, 1999, the Company employed
approximately 800 professional engineers and scientists. Pursuant to a
transitional services agreement entered into with Rockwell in connection with
the Distribution, Rockwell's Science Center will continue to provide assistance
to the Company in the development of various technological and product
advancements through September 30, 2000.
PATENTS AND TRADEMARKS
Numerous United States and foreign patents and patent applications are
owned or licensed by the Company in its manufacturing operations and other
activities. While in the aggregate these patents and licenses are considered
important to the operation of the HVS and LVS businesses, management does not
consider them of such importance that the loss or termination of any one of them
would materially affect HVS, LVS or the Company as a whole. (See Item 3. Legal
Proceedings for information with respect to a patent infringement lawsuit filed
against the Company by Eaton Corporation and an adverse judgment in the case.)
The Company's name, its registered trademark "Meritor" and its symbol are
important to its business. Other significant trademarks owned by the Company
include Golde(R) (sunroofs) and Fumagalli(TM) (wheels) with respect to LVS, and
ROR(TM) (trailer axles) with respect to HVS. Under the terms of the Distribution
Agreement (the "Distribution Agreement") entered into with Rockwell in
connection with the Distribution, the Company may continue to apply the
"Rockwell" brand name to its products until September 30, 2007.
EMPLOYEES
At September 30, 1999, the Company had approximately 19,000 full-time
employees. At that date, approximately 3,300 Company employees in the United
States and Canada were covered by collective bargaining agreements. The Company
believes its relationship with unionized employees is satisfactory. No
significant work stoppages have occurred in the past five years.
ENVIRONMENTAL MATTERS
In connection with the Distribution, the Company assumed all liabilities in
respect of environmental matters related to current and former operations of the
Automotive Business.
Federal, state and local requirements relating to the discharge of
substances into the environment, the disposal of hazardous wastes and other
activities affecting the environment have had and will continue to have an
impact on the manufacturing operations of the Company. Thus far, compliance with
environmental requirements and resolution of environmental claims have been
accomplished without material effect on the Company's liquidity and capital
resources, competitive position or financial statements.
9
<PAGE> 11
Meritor has been designated as a potentially responsible party at three
Superfund sites, excluding sites as to which the Company's records disclose no
involvement or as to which the Company's potential liability has been finally
determined. Management estimates the total reasonably possible costs the Company
could incur for the remediation of Superfund sites at September 30, 1999 to be
approximately $17 million, of which $10 million had been accrued.
Various other lawsuits, claims and proceedings have been asserted against
the Company alleging violations of federal, state and local environmental
protection requirements, or seeking remediation of alleged environmental
impairments, principally at previously disposed of properties. For these
matters, management has estimated the total reasonably possible costs the
Company could incur at September 30, 1999 to be approximately $39 million.
Environmental accruals for these matters of $14 million have been recorded at
September 30, 1999.
At September 30, 1999, there were no receivables recorded from third
parties related to environmental matters.
Based on its assessment and after consulting with Vernon G. Baker, II,
Esq., General Counsel of the Company, management believes that the Company's
expenditures for environmental capital investment and remediation necessary to
comply with present regulations governing environmental protection and other
expenditures for the resolution of environmental claims will not have a material
adverse effect on the Company's liquidity and capital resources, competitive
position or financial statements. Management cannot assess the possible effect
of compliance with future requirements.
INTERNATIONAL OPERATIONS
Approximately 42% of Meritor's total assets as of September 30, 1999, and
36% of fiscal 1999 sales were outside North America, primarily in Brazil,
France, Germany, Italy, Sweden, and the United Kingdom. Note 21 of the Notes to
Consolidated Financial Statements in the 1999 Annual Report includes financial
information by geographic area for the three fiscal years ended September 30,
1999.
The Company believes that international operations have significantly
benefited its financial performance. However, the Company's international
operations are subject to a number of risks inherent in operating abroad,
including, but not limited to, risks with respect to currency exchange rate
fluctuations, local economic and political conditions, disruptions of capital
and trading markets, restrictive governmental actions (such as restrictions on
transfer of funds and trade protection measures, including export duties and
quotas and customs duties and tariffs), changes in legal or regulatory
requirements, import or export licensing requirements, limitations on the
repatriation of funds, difficulty in obtaining distribution and support,
nationalization, the laws and policies of the United States affecting trade,
foreign investment and loans, and tax laws. There can be no assurance that these
risks will not have a material adverse impact on the Company's ability to
increase or maintain its foreign sales or on its financial condition or results
of operations.
The Company's financial condition and results of operations could be
affected (negatively or positively) by fluctuations in foreign currency exchange
rates. The Company enters into foreign currency forward exchange contracts to
manage risks associated with currency fluctuations that could affect foreign
currency commitments entered into in the ordinary course of business. The
Company has not experienced nor does it anticipate any material adverse effect
on its results of operations or financial condition related to these foreign
currency forward exchange contracts. The Company has not entered into foreign
currency forward exchange contracts for other purposes.
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 1999 in these
countries were approximately 18% of the Company's total sales. In
10
<PAGE> 12
addition, the Company enters into foreign currency forward exchange contracts
with respect to several of the existing currencies that have been subsumed into
the Euro and has borrowings in participating currencies primarily under its bank
revolving credit arrangements. The Company has analyzed the potential effects of
the Euro conversion on competitive conditions, information technology and other
systems, currency risks, financial instruments and contracts, and has examined
the tax and accounting consequences of Euro conversion, and believes that the
conversion will not have a material adverse effect on its business, operations
and financial condition.
The Company 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.
SEASONALITY; CYCLICALITY
HVS and LVS may experience seasonal variations in the demand for their
products to the extent automotive vehicle production fluctuates. Historically,
for both segments, such demand has been somewhat lower in the Company's first
and fourth fiscal quarters (the fourth and third calendar quarters,
respectively) when OEM plants may close during model changeovers and vacation
and holiday periods.
In addition, the industry in which HVS and LVS operate has been
characterized historically by periodic fluctuations in overall demand for
trucks, passenger cars and other vehicles for which the Company supplies
products, resulting in corresponding fluctuations in demand for products of the
Company. Cycles in the major automotive industry markets of North America and
Europe are not necessarily concurrent or related. The cyclical nature of the
automotive industry is outside the control of the Company and cannot be
predicted with certainty. The Company has sought and will continue to seek to
expand its operations globally to mitigate the effect of periodic fluctuations
in demand of the automotive industry in one or more particular countries.
The following table sets forth vehicle production in principal markets
served by HVS and LVS for the last five fiscal years:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED SEPTEMBER 30,
------------------------------------
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Heavy Vehicles (in thousands):
North America, Heavy-Duty Trucks........................ 243 203 201 245 292
North America, Medium-Duty Trucks..................... 150 125 138 141 175
North America, Trailers............................... 327 266 252 327 366
Europe, Trailers...................................... 86 91 81 130 118
Light Vehicles (in millions):
North America......................................... 15.0 15.1 15.2 15.4 16.9
South America......................................... 1.7 1.8 2.1 2.0 1.5
Europe................................................ 14.0 14.5 15.2 17.7 18.2
Asia-Pacific (calendar year data)..................... 15.2 16.6 17.1 15.4 15.6
</TABLE>
- ---------------
Source: Automotive industry publications and management estimates.
YEAR 2000 READINESS DISCLOSURE
Background. The Company has substantially completed a Company-wide year
2000 project to ensure the Company's information technology ("IT") and non-IT
systems are year 2000 compliant. None of the Company's other IT projects were
significantly delayed due to the year 2000 project. The year 2000 project
included an assessment of compliance at the supplier and service provider level
to ensure supply disruptions will be minimized. In addition, certain of the
Company's locations implemented Enterprise Resource Planning systems. These
systems were in place at September 30, 1999, and it is anticipated that they
will be year 2000 compliant. Fewer resources of the project have been directed
to the area of customer compliance due to the
11
<PAGE> 13
nature of the Company's customer base. The Company has participated in several
year 2000 audits conducted by its customers which have resulted in no
significant findings of year 2000 non-compliance at the Company.
As discussed above, the Company completed the acquisition of three
businesses in late December 1998 and in January 1999. The Company has analyzed
the year 2000 compliance of the acquired facilities and these facilities were
substantially compliant as of December 15, 1999.
Company's State of Readiness. The year 2000 project was divided into four
major sections -- business and engineering, factory floor, IT infrastructure
(hardware and software) and supply chain. The business and engineering section
included manufacturing, financial applications and remediation projects,
critical core business system validation testing, aftermarket systems and
supplemental systems. The factory floor section included shop floor controls and
facility systems. The IT infrastructure section included PC/LAN hardware,
software and peripherals; mainframe, midrange and UNIX systems; engineering
workstations; and telecom/global carriers. The supply chain section included
formal communication with the Company's significant customers, suppliers and
critical service providers. Each section involved 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.
A central program management office was established to coordinate the year
2000 project. In addition, the consulting firm of Keane, Inc. and other outside
consultants were engaged 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.
As of September 30, 1999, all four major sections were 100% complete in
phases one and two. The business and engineering, factory floor and IT
infrastructure sections were 99-100% complete and the supply chain section was
94% complete for phase three activities. All phases were substantially completed
as of December 15, 1999.
Contingency Plans. The year 2000 project also included development of
business continuance 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 included 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 had completed its analysis and
developed business continuance plans as of September 30, 1999.
Costs. The Company estimates that the aggregate cost of the year 2000
project will be approximately $21 million. This amount excludes employee expense
and computer equipment and upgrades that would have been purchased regardless of
the year 2000 project, such as the Enterprise Resource Planning systems
implementations. The Company spent $7.7 million, $10.2 million and $0.7 million
during fiscal 1999, 1998 and 1997, respectively, on the project. In fiscal 1999,
approximately $5.5 million of expenditures related to business and engineering
systems and IT infrastructure and approximately $2.2 million related to the
factory floor and supply chain. These costs were expensed as incurred and funded
through operating cash flows. Cost estimates 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.
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 has significantly reduced the Company's level
of uncertainty about year 2000 issues, and the Company believes that completed
modifications and conversions of its internal IT and non-IT systems will allow
it to be year 2000 compliant. The Company believes it is prepared to resolve any
year 2000 problem that might arise in a short time without any material impact
on the Company. 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.
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<PAGE> 14
Forward-looking statements contained in this section should be read in
conjunction with the Company's disclosures in "Cautionary Statement" below.
CAUTIONARY STATEMENT
This Annual Report on Form 10-K contains statements relating to future
results of the Company (including certain projections and business trends) that
are "forward-looking statements" as defined in the Private Securities Litigation
Reform Act of 1995. Actual results may differ materially from those projected as
a result of 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;
successful integration of acquired businesses; competitive product and pricing
pressures; the amount of the Company's debt; as well as other risks and
uncertainties, such as those detailed herein and from time to time in other
filings of the Company with the Securities and Exchange Commission. See also
"Customers; Sales and Marketing," "Competition," "Raw Materials and Supplies,"
"Strategic Initiatives," "International Operations," "Seasonality; Cyclicality"
and "Year 2000 Readiness Disclosure" in this Annual Report on Form 10-K, and
Chief Financial Officer's Review -- Management's Discussion and Analysis in the
1999 Annual Report.
ITEM 2. PROPERTIES.
At September 30, 1999, HVS operated 39 manufacturing facilities and LVS
operated 29 manufacturing facilities in the United States, Europe, Brazil,
Canada, Mexico, Australia and the Far East. HVS also had 38 and LVS had 18
engineering facilities, sales offices, warehouses and service centers. These
facilities had an aggregate floor space of approximately 18.6 million square
feet, substantially all of which is in use. The Company owned approximately 73%
and leased approximately 27% of this floor space. There are no major
encumbrances (other than financing arrangements which in the aggregate are not
material) on any of the Company's plants or equipment. In the opinion of
management, the Company's properties have been well maintained, are in sound
operating condition and contain all equipment and facilities necessary to
operate at present levels. A summary of floor space of these facilities at
September 30, 1999 is as follows:
<TABLE>
<CAPTION>
OWNED LEASED
FACILITIES FACILITIES
--------------- --------------
LOCATION HVS LVS HVS LVS TOTAL
- -------- ------ ----- ----- ----- ------
(IN THOUSANDS OF SQUARE FEET)
<S> <C> <C> <C> <C> <C>
United States............................ 4,678 320 909 262 6,169
Canada................................... 196 563 126 0 885
Europe................................... 2,939 1,601 170 564 5,274
Asia-Pacific............................. 729 151 2,699 144 3,723
Latin America............................ 2,091 267 162 21 2,541
Total.......................... 10,633 2,902 4,066 991 18,592
</TABLE>
Subsequent to September 30, 1999, the Company sold three LVS owned
manufacturing facilities located in the United States (48,000 square feet),
Canada (117,000 square feet) and Europe (327,000 square feet).
ITEM 3. LEGAL PROCEEDINGS.
On July 17, 1997 Eaton Corporation filed suit against Rockwell in the U.S.
District Court in Wilmington, Delaware, asserting infringement of Eaton's U.S.
Patent No. 4850236, which covers certain aspects of heavy-duty truck
transmissions, by the Company's Engine Synchro Shift(TM) transmission for
heavy-duty trucks, and seeking damages and injunctive relief. Meritor was joined
as a defendant on June 11, 1998, and trial in this matter began on June 23,
1998. On July 1, 1998, the jury rendered a verdict in favor of Eaton, finding
that Meritor had infringed Eaton's patent and awarding compensatory damages in
an amount equal to 13% of total product sales (approximately $3.2 million at
September 30, 1999). 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
13
<PAGE> 15
obtaining its patent was held from April 19-21, 1999. The judge is expected to
rule on this phase of the proceedings at the same time as he rules on Eaton's
request for a permanent injunction and the damage issue. Meritor is considering
further actions, including post-trial motions and an appeal to the United States
Court of Appeals for the Federal Circuit. Based on advice of M. Lee Murrah,
Esq., Assistant General Counsel of the Company, management believes the
Company's truck transmissions do not infringe Eaton's patent. The Company
intends to continue to defend this suit vigorously.
Various other lawsuits, claims and proceedings have been or may be
instituted or asserted against Rockwell or the Company or their respective
subsidiaries relating to the conduct of the Company's business, including those
pertaining to product liability, intellectual property, environmental, safety
and health, and employment matters.
Although the outcome of litigation cannot be predicted with certainty and
some lawsuits, claims or proceedings may be disposed of unfavorably to the
Company, based on its evaluation of matters which are pending or asserted and
after consulting with Vernon G. Baker, II, Esq., General Counsel of the Company,
management believes the disposition of such matters will not have a material
adverse effect on the Company's financial statements.
Pursuant to the terms of the Distribution Agreement, the Company assumed
responsibility for all litigation (including environmental proceedings) against
Rockwell or its subsidiaries in respect of the Automotive Business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders during the fourth
quarter of fiscal 1999.
ITEM 4a. EXECUTIVE OFFICERS OF THE COMPANY.
The name, age, positions and offices held with the Company and principal
occupations and employment during the past five years of each of the executive
officers of the Company as of December 15, 1999 are as follows:
LARRY D. YOST, 61 -- Chairman of the Board and Chief Executive Officer of
Meritor since May 1997. Acting President, Light Vehicle Systems from January
1998 to March 1999; Senior Vice President, President, Automotive and Acting
President, Heavy Vehicle Systems of Rockwell (electronic controls and
communications) from March 1997 to September 1997; President, Heavy Vehicle
Systems of Rockwell from November 1994 to March 1997; Senior Vice President,
Operations of Allen-Bradley Company, LLC (automation), a subsidiary of Rockwell,
prior to November 1994.
VERNON G. BAKER, II, 46 -- Senior Vice President, General Counsel and
Secretary of Meritor since August 1999. Vice President and General Counsel,
Corporate Research and Technology of Hoechst Celanese Corporation, a subsidiary
of Hoechst AG (pharmaceuticals and industrial chemicals), from 1989 to July
1999.
GARY L. COLLINS, 53 -- Senior Vice President, Human Resources of Meritor
since August 1997. Vice President -- Human Resources and Government Relations,
Automotive of Rockwell from September 1991 to September 1997.
JUAN L. De La RIVA, 55 -- Senior Vice President, Business Development and
Communications of Meritor since February 1999. Vice President, Business
Development and Communications from September 1998 to February 1999; Managing
Director -- Wheels, Light Vehicle Systems from 1994 to September 1998.
GLENN J. EGGERT, 56 -- Senior Vice President, Operations of Meritor since
September 1998. Senior Vice President -- Operations, Heavy Vehicle Systems of
Meritor from September 1997 to September 1998; Vice President -- Operations,
Heavy Vehicle Systems of Rockwell from May 1996 to September 1997; Vice
President -- Operations, Industrial Control Group of Allen-Bradley Company, LLC
(automation), a subsidiary of Rockwell, from 1990 to April 1996.
14
<PAGE> 16
THOMAS A. GOSNELL, 49 -- Senior Vice President and President, Worldwide
Aftermarket of Meritor since September 1999. Vice President and General Manager,
Aftermarket, from February 1998 to September 1999; General Manager, Worldwide
Aftermarket Services, Heavy Vehicle Systems, from November 1996 to February
1998; General Manager -- North America, Aftermarket Services, Heavy Vehicle
Systems, from June 1991 to November 1996.
THOMAS J. JOYCE, 52 -- Vice President and Treasurer of Meritor since May
1997. Vice President, Investor and Community Relations of Rockwell from May 1989
to September 1997.
SUSAN P. KAMPE, 41 -- Senior Vice President and Chief Information Officer
of Meritor since September 1997. Vice President -- Information Technology, Heavy
Vehicle Systems of Rockwell from August 1996 to September 1997; Director of
Global Information Systems and Services, Safety Restraints Business of
Allied-Signal Automotive (automotive component supplier) from August 1994 to
August 1996.
THOMAS A. MADDEN, 46 -- Senior Vice President and Chief Financial Officer
of Meritor since May 1997. Vice President and Senior Vice President -- Finance,
Automotive of Rockwell from March 1997 to September 1997; Vice President,
Corporate Development of Rockwell from September 1996 to March 1997; Vice
President -- Finance & Administration, Light Vehicle Systems of Rockwell from
May 1996 to September 1996; Vice President -- Finance & Administration,
Automotive of Rockwell from October 1994 to May 1996.
PRAKASH R. MULCHANDANI, 55 -- Senior Vice President and President, Heavy
Vehicle Systems of Meritor since January 1998. Senior Vice President and
President, Worldwide Truck and Trailer Systems of Meritor from September 1997 to
December 1997; President -- Worldwide Truck and Trailer Systems, Heavy Vehicle
Systems of Rockwell from April 1996 to September 1997; President -- North
American Truck Systems, Automotive of Rockwell from June 1994 to April 1996.
TERRENCE E. O'ROURKE, 52 -- Senior Vice President and President, Light
Vehicle Systems of Meritor since March 1999. Group Vice President and
President -- Ford Division of Lear Corporation (automotive component supplier)
from January 1996 to January 1999; President -- Chrysler Division of Lear
Corporation from October 1994 to January 1996.
S. CARL SODERSTROM, 46 -- Senior Vice President, Engineering, Quality and
Procurement of Meritor since February 1998. Vice President, Engineering and
Quality, Heavy Vehicle Systems of Meritor from September 1997 to February 1998;
Vice President, Engineering and Quality, Heavy Vehicle Systems of Rockwell from
October 1996 to September 1997; Director of Development -- Operator Interface
and Logic Division of Allen-Bradley Company, LLC (automation), a subsidiary of
Rockwell, from 1993 to October 1996.
DIANE M. STELFOX, 42 -- Vice President and Controller of Meritor since
September 1998. Assistant Controller of Meritor from January 1998 to September
1998; Controller -- Body Systems N.A. of ITT Automotive, Inc. (automotive
component supplier) from 1995 to 1997; Controller -- Aftermarket N.A. of ITT
Automotive from 1992 to 1995.
There are no family relationships, as defined in Item 401 of Regulation
S-K, between any of the above executive officers. No officer of the Company was
selected pursuant to any arrangement or understanding between him or her and any
person other than the Company. All executive officers are elected annually.
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's Common Stock, par value $1 per share, is listed on the New
York Stock Exchange and trades under the symbol "MRA." On December 13, 1999,
there were 48,293 shareowners of record
15
<PAGE> 17
of the Company's Common Stock. The high and low sale prices for each quarter in
fiscal years 1999 and 1998 were as follows:
<TABLE>
<CAPTION>
1999 1998
------------- -------------
QUARTER ENDED HIGH LOW HIGH LOW
- ------------- ---- --- ---- ---
(IN DOLLARS)
<S> <C> <C> <C> <C>
December 31................................ 22 1/8 14 1/8 25 1/4 20 11/16
March 31................................... 21 11/16 14 3/16 27 3/16 19 1/8
June 30.................................... 26 1/2 15 11/16 28 3/8 21 7/8
September 30............................... 26 19 5/8 24 15
</TABLE>
Four quarterly cash dividends, each in the amount of 10.5 cents per share
of Common Stock, were declared and paid in each of fiscal 1999 and fiscal 1998.
On July 1, 1999, the Company issued 338 shares of Common Stock to each of
Donald R. Beall and James E. Marley, non-employee directors of the Company, in
lieu of cash payment of quarterly retainer fees for board service. In addition,
on July 14, 1999, the Company issued 750 shares of Common Stock to each of
Rhonda L. Brooks and Victoria B. Jackson, newly-elected non-employee directors
of the Company. 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 amended, as a transaction not
involving a public offering under Section 4(2).
In September 1999 the Company's board of directors authorized the purchase
of up to $125 million of the Company's Common Stock. Under the repurchase
program, the Company expects to purchase shares periodically in the open market
or through privately negotiated transactions. Through September 30, 1999, the
Company had acquired 298,000 shares at an aggregate cost of $6 million, or an
average of $21.31 per share.
ITEM 6. SELECTED FINANCIAL DATA.
See the information in the table captioned Selected Financial Data in the
1999 Annual Report.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION.
See the discussion and analysis under the caption Chief Financial Officer's
Review -- Management's Discussion and Analysis in the 1999 Annual Report.
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
See Chief Financial Officer's Review -- Management's Discussion and
Analysis -- Quantitative and Qualitative Disclosures About Market Risk in the
1999 Annual Report.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See Statement of Consolidated Income, Consolidated Balance Sheet, Statement
of Consolidated Cash Flows, Statement of Consolidated Shareowners' Equity, Notes
to Consolidated Financial Statements, and Independent Auditors' Report in the
1999 Annual Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY.
See the information under the captions Election of Directors and
Information as to Nominees for Directors and Continuing Directors in the 2000
Proxy Statement. No nominee for director was selected
16
<PAGE> 18
pursuant to any arrangement or understanding between the nominee and any person
other than the Company pursuant to which such person is or was to be selected as
a director or nominee. See also the information with respect to executive
officers of the Company under Item 4a of Part I.
ITEM 11. EXECUTIVE COMPENSATION.
See the information under the captions Compensation of Directors, Executive
Compensation and Retirement Benefits in the 2000 Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
See the information under the captions Voting Securities and Ownership by
Management of Equity Securities in the 2000 Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
See the information under the caption Certain Transactions and Other
Relationships in the 2000 Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) Financial Statements, Financial Statement Schedules and Exhibits.
(1) Financial Statements (all financial statements listed below are those
of the Company and its consolidated subsidiaries and are incorporated by
reference in Item 8 from the 1999 Annual Report):
Statement of Consolidated Income, years ended September 30, 1999, 1998 and
1997.
Consolidated Balance Sheet, September 30, 1999 and 1998.
Statement of Consolidated Cash Flows, years ended September 30, 1999, 1998
and 1997.
Statement of Consolidated Shareowners' Equity, years ended September 30,
1999, 1998 and 1997.
Notes to Consolidated Financial Statements.
Independent Auditors' Report.
(2) Financial Statement Schedule for the years ended September 30, 1999,
1998 and 1997.
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report................................ S-1
Schedule II -- Valuation and Qualifying Accounts............ S-2
</TABLE>
Schedules not filed with this Annual Report on Form 10-K are omitted
because of the absence of conditions under which they are required or because
the information called for is shown in the financial statements or related
notes.
(3) Exhibits
<TABLE>
<S> <C>
3-a Restated Certificate of Incorporation of the Company, filed
as Exhibit 4.1 to the Company's Registration Statement on
Form S-8 (Registration No. 333-35403), is incorporated by
reference.
3-b By-laws of the Company, filed as Exhibit 4.2 to the
Company's Registration Statement on Form S-8 (Registration
No. 333-35403), is incorporated by reference.
4-a Rights Agreement, dated as of September 8, 1997, by and
between the Company and First Chicago Trust Company of New
York, as Rights Agent, filed as Exhibit 4.3 to the Company's
Registration Statement on Form S-8 (Registration No.
333-35403), is incorporated by reference.
</TABLE>
17
<PAGE> 19
<TABLE>
<S> <C>
4-b-1 Indenture, dated as of April 1, 1998, between the Company
and The Chase Manhattan Bank as trustee, filed as Exhibit 4
to the Company's Registration Statement on Form S-3
(Registration No. 333-49777), is incorporated by reference.
4-b-2 Form of certificate for the Company's 6.80% Notes due
February 15, 2009, filed as Exhibit 4-a to the Company's
Current Report on Form 8-K dated February 25, 1999 (File No.
1-13093), is incorporated by reference.
4-b-3 Copy of resolutions of the Offering Committee of the Board
of Directors of the Company, adopted on February 19, 1999,
with respect to the terms of the Company's 6.80% Notes due
February 15, 2009, filed as Exhibit 4-b to the Company's
Current Report on Form 8-K dated February 25, 1999 (File No.
1-13093), is incorporated by reference.
*10-a-1 The Company's 1997 Long-Term Incentives Plan, filed as
Exhibit 10-a-1 to the Company's Annual Report on Form 10-K
for the fiscal year ended September 30, 1997 (File No.
1-13093) ("1997 Form 10-K"), is incorporated by reference.
*10-a-2 Form of Restricted Stock Agreement under the Company's 1997
Long-Term Incentives Plan, filed as Exhibit 10-a-2 to the
1997 Form 10-K, is incorporated by reference.
*10-a-3 Form of Option Agreement under the Company's 1997 Long-Term
Incentives Plan, filed as Exhibit 10(a) to the Company's
Quarterly Report on Form 10-Q for the quarterly period ended
March 31, 1998 (File No. 1-13093), is incorporated by
reference.
*10-b-1 The Company's Directors Stock Plan, filed as Exhibit 10-b-1
to the 1997 Form 10-K, is incorporated by reference.
*10-b-2 Form of Restricted Stock Agreement under the Company's
Directors Stock Plan, filed as Exhibit 10-b-2 to the 1997
Form 10-K, is incorporated by reference.
*10-b-3 Form of Option Agreement under the Company's Directors Stock
Plan, filed as Exhibit 10(b) to the Company's Quarterly
Report on Form 10-Q for the quarterly period ended March 31,
1998 (File No. 1-13093), is incorporated by reference.
*10-c The Company's Incentive Compensation Plan, filed as Exhibit
10-c-1 to the 1997 Form 10-K, is incorporated by reference.
*10-d Copy of resolution of the Board of Directors of the Company,
adopted on September 8, 1997, providing for its Deferred
Compensation Policy for Non-Employee Directors, filed as
Exhibit 10-d-1 to the 1997 Form 10-K, is incorporated by
reference.
*10-e The Company's Deferred Compensation Plan, filed as Exhibit
10-e-1 to the Company's Annual Report on Form 10-K for the
fiscal year ended September 30, 1998 (File No. 1-13093), is
incorporated by reference.
10-f Credit Agreement dated as of August 21, 1997 among the
Company, the lenders from time to time party to the
agreement, Morgan Guaranty Trust Company of New York, as
Administrative Agent and NBD Bank, as Documentation Agent,
filed as Exhibit 10.5 to the Company's Registration
Statement on Form 10 (File No. 1-13093), is incorporated by
reference.
10-g Distribution Agreement dated as of September 30, 1997 by and
between Rockwell and the Company, filed as Exhibit 2.1 to
the Company's Current Report on Form 8-K dated October 10,
1997 (File No. 1-13093), is incorporated by reference.
10-h Employee Matters Agreement dated as of September 30, 1997 by
and between Rockwell and the Company, filed as Exhibit 2.2
to the Company's Current Report on Form 8-K dated October
10, 1997 (File No. 1-13093), is incorporated by reference.
10-i Tax Allocation Agreement dated as of September 30, 1997 by
and between Rockwell and the Company, filed as Exhibit 2.3
to the Company's Current Report on Form 8-K dated October
10, 1997 (File No. 1-13093), is incorporated by reference.
</TABLE>
18
<PAGE> 20
<TABLE>
<S> <C>
10-j 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 (File No.
1-13093), is incorporated by reference.
13 Portions of the 1999 Annual Report to Shareowners.
21 List of Subsidiaries of the Company.
23-a Consent of M. Lee Murrah, Esq., Assistant General Counsel of
the Company.
23-b Consent of Vernon G. Baker, II, Esq., Senior Vice President,
General Counsel and Secretary of the Company.
23-c Independent auditors' consent.
24 Power of Attorney authorizing certain persons to sign this
Annual Report on Form 10-K on behalf of certain directors
and officers of the Company.
27 Financial Data Schedule.
</TABLE>
- ---------------
* Management contract or compensatory plan or arrangement.
(b) Reports on Form 8-K.
There were no reports on Form 8-K filed during the quarter ended September
30, 1999.
19
<PAGE> 21
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
MERITOR AUTOMOTIVE, INC.
By: /s/ VERNON G. BAKER, II
--------------------------------------
Vernon G. Baker, II
Senior Vice President, General Counsel
and Secretary
Date: December 20, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below on the 20th day of December, 1999 by the following
persons on behalf of the registrant and in the capacities indicated.
<TABLE>
<C> <S>
Larry D. Yost* Chairman of the Board and Chief Executive
Officer (principal executive officer) and
Director
Joseph B. Anderson, Jr.* Director
Donald R. Beall* Director
Rhonda L. Brooks* Director
John J. Creedon* Director
Charles H. Harff* Director
Victoria B. Jackson* Director
James E. Marley* Director
Harold A. Poling* Director
Thomas A. Madden* Senior Vice President and Chief Financial
Officer (principal financial officer)
Diane M. Stelfox* Vice President and Controller
(principal accounting officer)
*By: /s/ VERNON G. BAKER, II
------------------------------------------------
Vernon G. Baker, II, Attorney-in-fact **
</TABLE>
**By authority of powers of attorney filed herewith.
20
<PAGE> 22
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareowners
of Meritor Automotive, Inc.
Troy, Michigan
We have audited the consolidated and combined financial statements of
Meritor Automotive, Inc. and subsidiaries (formerly the automotive businesses of
Rockwell International Corporation -- See Note 1) as of September 1999 and 1998,
and for each of the three years in the period ended September 30, 1999, and have
issued our report thereon dated November 9, 1999; such financial statements and
report are included in your 1999 Annual Report to Shareowners and are
incorporated herein by reference. Our audits also included the financial
statement schedule of Meritor Automotive, Inc. and subsidiaries, listed in Item
14(a) (2). This financial statement schedule is the responsibility of the
Company's management. Our responsibility is to express an opinion based on our
audits. In our opinion, such financial statement schedule, when considered in
relation to the basic financial statements taken as a whole, presents fairly in
all material respects the information set forth therein.
DELOITTE & TOUCHE
Detroit, Michigan
November 9, 1999
S-1
<PAGE> 23
SCHEDULE II
MERITOR AUTOMOTIVE, INC.
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEAR ENDED SEPTEMBER 30, 1999, 1998, AND 1997
<TABLE>
<CAPTION>
BALANCE AT
BEGINNING CHARGED TO BALANCE AT
OF COSTS AND OTHER END OF
DESCRIPTION YEAR(A) EXPENSES DEDUCTIONS OTHER YEAR(A)
- ----------- ---------- ---------- ---------- ----- ----------
<S> <C> <C> <C> <C> <C>
Year ended September 30, 1999:
Allowance for doubtful accounts................... $13.8 $ 1.2 $3.9(b) $(0.7)(c) $10.4
Year ended September 30, 1998:
Allowance for doubtful accounts................. 11.6 3.2 1.0(b) -- 13.8
Year ended September 30, 1997:
Allowance for doubtful accounts................. 16.9 2.3 7.6(b) -- 11.6
</TABLE>
- ---------------
(a) Includes allowances for trade and other long-term receivables.
(b) Uncollectible accounts written off.
(c) Includes increase in allowance of $1.8 million due to acquisition of
businesses, less reversal of reserve of $2.5 million due to change in
estimate of collectibility of note receivable.
S-2
<PAGE> 1
Exhibit 13
Independent Auditors' Report
To the Board of Directors and Shareowners of Meritor Automotive, Inc.:
We have audited the accompanying consolidated balance sheets of Meritor
Automotive, Inc. and subsidiaries (formerly the automotive businesses of
Rockwell International Corporation -- see Note 1) as of September 30, 1999 and
1998, and the related consolidated and combined statements of income,
shareowners' equity and cash flows for each of the three years in the period
ended September 30, 1999. These financial statements are the responsibility of
the company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated and combined financial statements present
fairly, in all material respects, the financial position of Meritor Automotive,
Inc. and subsidiaries at September 30, 1999 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
September 30, 1999 in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Detroit, Michigan
November 9, 1999
<PAGE> 2
MERITOR AUTOMOTIVE, INC.
- ------------------------
STATEMENT OF CONSOLIDATED INCOME
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended September 30,
------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Sales $4,450 $3,836 $3,309
Cost of sales 3,804 3,289 2,871
------ ------ ------
GROSS MARGIN 646 547 438
Selling, general and administrative 280 248 228
Restructuring and spin-off costs 28 - 29
------ ------ ------
OPERATING EARNINGS 338 299 181
Equity in earnings of affiliates 35 28 15
Other income-net 1 3 11
Minority interests (16) (11) (11)
Gain on sale of business 24 - -
Interest rate settlement cost - (31) -
Interest expense (65) (43) (10)
------ ------ ------
INCOME BEFORE INCOME TAXES 317 245 186
Provision for income taxes 123 98 77
------ ------ ------
NET INCOME $ 194 $ 147 $ 109
------ ------ ------
Basic and diluted earnings per share $ 2.81 $ 2.13
Average common shares outstanding ====== ======
- basic and diluted 69.1 69.0
====== ======
</TABLE>
See notes to consolidated financial statements.
- --------------------------------------------------------------------------------
2
<PAGE> 3
MERITOR AUTOMOTIVE, INC.
- ------------------------
CONSOLIDATED BALANCE SHEET
(IN MILLIONS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
September 30,
-------------
1999 1998
---- ----
ASSETS
- -------
CURRENT ASSETS
<S> <C> <C>
CASH $ 68 $ 65
Receivables (less allowance for doubtful
accounts: 1999, $10; 1998, $11) 742 638
Inventories 392 360
Other current assets 130 153
------ ------
Total current assets 1,332 1,216
------ ------
NET PROPERTY 766 666
NET GOODWILL (less accumulated amortization:
1999, $35; 1998, $25) 454 39
OTHER ASSETS 244 165
------ ------
TOTAL ASSETS $2,796 $2,086
====== ======
LIABILITIES AND SHAREOWNERS' EQUITY
CURRENT LIABILITIES
Short-term debt $ 44 $ 34
Accounts payable 712 636
Accrued compensation and benefits 144 142
Accrued income taxes 28 13
Other current liabilities 196 229
------ ------
Total current liabilities 1,124 1,054
------ ------
LONG-TERM DEBT 802 313
ACCRUED RETIREMENT BENEFITS 371 378
OTHER LIABILITIES 116 44
MINORITY INTERESTS 35 31
SHAREOWNERS' EQUITY
Common stock (1999, 69.1 shares issued and
68.8 outstanding; 1998, 69.0 shares issued
and outstanding) 69 69
Additional paid-in capital 158 156
Retained earnings 283 118
TREASURY STOCK (1999, 0.3 SHARES) (6) -
Accumulated other comprehensive loss (156) (77)
------ ------
Total shareowners' equity 348 266
------ ------
TOTAL LIABILITIES AND SHAREOWNERS' EQUITY $2,796 $2,086
====== ======
</TABLE>
See notes to consolidated financial statements.
- --------------------------------------------------------------------------------
3
<PAGE> 4
MERITOR AUTOMOTIVE, INC.
STATEMENT OF CONSOLIDATED CASH FLOWS
(IN MILLIONS)
<TABLE>
<CAPTION>
Year Ended September 30,
-------------------------
1999 1998 1997
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 194 $ 147 $ 109
Adjustments to net income to arrive at cash
provided by operating activities:
Depreciation 120 99 97
Amortization 11 3 3
Gain on sale of business (24) - -
Restructuring, net of expenditures 23 - 20
Deferred income taxes 17 (10) (4)
Pension expense 19 21 24
Pension contributions (30) (28) (5)
Changes in assets and liabilities, excluding
effects of acquisitions, divestitures and
foreign currency adjustments:
Receivables (95) (88) (103)
Inventories - (34) (40)
Accounts payable 45 129 80
Other assets and liabilities (26) 39 27
----- ----- -----
CASH PROVIDED BY OPERATING ACTIVITIES 254 278 208
----- ----- -----
INVESTING ACTIVITIES
Capital expenditures (170) (139) (126)
Acquisitions of businesses and investments (573) (8) (16)
Proceeds from disposition of assets, property
and businesses 51 17 8
----- ----- -----
CASH USED FOR INVESTING ACTIVITIES (692) (130) (134)
----- ----- -----
FINANCING ACTIVITIES
Net increase in short-term borrowings 15 17 17
Net increase (decrease) in revolving debt 22 (222) 445
Proceeds from issuance of notes 498 - -
Net (decrease) increase in other long-term debt (28) 76 (6)
----- ----- -----
Net increase (decrease)in debt 507 (129) 456
Cash dividends (29) (29) -
Purchases of treasury stock (6) - -
Payment of interest rate settlement cost (31) - -
Pre-Distribution payment to Rockwell - - (445)
Distribution tax obligation and other transfers
to Rockwell, net - (58) (26)
----- ----- -----
CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES 441 (216) (15)
----- ----- -----
INCREASE (DECREASE) IN CASH 3 (68) 59
CASH AT BEGINNING OF YEAR 65 133 74
----- ----- -----
CASH AT END OF YEAR $ 68 $ 65 $ 133
===== ===== =====
</TABLE>
See notes to consolidated financial statements.
- --------------------------------------------------------------------------------
4
<PAGE> 5
MERITOR AUTOMOTIVE, INC.
- ------------------------
STATEMENT OF CONSOLIDATED SHAREOWNERS' EQUITY
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended September 30,
------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
COMMON STOCK
Beginning Balance $ 69 $ 69 $ --
Distribution of Meritor shares -- -- 69
----- ----- -----
Ending balance 69 69 69
----- ----- -----
ADDITIONAL PAID-IN CAPITAL
Beginning balance 156 154 --
Distribution of Meritor shares -- -- 154
Other 2 2 --
----- ----- -----
Ending balance 158 156 154
----- ----- -----
RETAINED EARNINGS
Beginning balance 118 -- 643
Net income 194 147 109
Cash dividends (per share: 1999 and 1998) (29) (29) --
Net transfers to Rockwell -- -- (84)
Pre-Distribution payment to Rockwell -- -- (445)
Distribution of Meritor shares -- -- (223)
----- ----- -----
Ending balance 283 118 --
----- ----- -----
TREASURY STOCK
Beginning balance -- -- --
Purchases of treasury stock (6) -- --
----- ----- -----
Ending balance (6) -- --
----- ----- -----
ACCUMULATED OTHER COMPREHENSIVE LOSS
Beginning balance (77) (72) (44)
Foreign currency translation adjustments (79) (5) (28)
----- ----- -----
Ending balance (156) (77) (72)
----- ----- -----
TOTAL SHAREOWNERS' EQUITY $ 348 $ 266 $ 151
===== ===== =====
COMPREHENSIVE INCOME
Net income $ 194 $ 147 $ 109
Foreign currency translation adjustments (79) (5) (28)
----- ----- -----
TOTAL COMPREHENSIVE INCOME $ 115 $ 142 $ 81
===== ===== =====
</TABLE>
See notes to consolidated financial statements.
- --------------------------------------------------------------------------------
5
<PAGE> 6
MERITOR AUTOMOTIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. BASIS OF PRESENTATION
Meritor Automotive, Inc. (the company or Meritor) is a leading global
supplier of a broad range of components and systems for use in commercial,
specialty and light vehicles. The company became an independent,
publicly-held company on September 30, 1997 (the Distribution Date), when
Rockwell International Corporation (Rockwell) spun off its automotive
businesses by distributing all of the issued and outstanding shares of the
company to Rockwell's shareowners (the Distribution). Prior to the
Distribution Date, the company made a payment of approximately $445 million
in cash to Rockwell through a combination of dividends and other payments,
including repayments of intercompany indebtedness (collectively, the
Pre-Distribution Payment).
The consolidated financial statements as of and for periods after September
30, 1997 are those of the company and its consolidated subsidiaries. The
financial statements for the period ended September 30, 1997 present the
combined historical financial position, results of operations and cash flows
of the ongoing automotive businesses of Rockwell that were spun off. The
company's financial statements for the period ended September 30, 1997
include charges from Rockwell for certain centralized services and general
corporate expenses. Management believes these amounts were allocated or
billed to the company on a reasonable basis. The financial information
included herein for the period ended September 30, 1997 may not necessarily
be indicative of the results of operations or cash flows of the company if it
had been a separate, independent company during such period.
Certain prior year amounts have been reclassified to conform with current
year presentation.
2. ACCOUNTING POLICIES
Use of Estimates
The financial statements of Meritor have been prepared in accordance with
generally accepted accounting principles which require management to make
estimates and assumptions that affect the amounts reported in the financial
statements. Actual results could differ from those estimates.
Consolidations and Joint Ventures
The consolidated financial statements include the accounts of the company
and those majority-owned subsidiaries in which the company has control. All
significant intercompany accounts and transactions are eliminated in
consolidation. The accounts and results of operations of majority-owned
subsidiaries where ownership is greater than 50 percent but less than 100
percent are included in the consolidated results and are offset by a related
minority interest expense and liability recorded for the minority interest
ownership. Investments in affiliates that are not majority-owned are reported
using the equity method.
6
<PAGE> 7
Foreign Currency
Local currencies are considered the functional currencies outside the
United States, except for subsidiaries located in countries with highly
inflationary economies. For operations reporting in local currencies, assets
and liabilities are translated at year-end exchange rates with cumulative
currency translation adjustments included as a component of accumulated other
comprehensive loss. Income and expense items are translated at average rates
of exchange during the year.
Inventories
Inventories are stated at the lower of cost (using LIFO, FIFO or average
methods) or market (determined on the basis of estimated realizable values).
Tooling
Costs incurred by the company for certain engineering and tooling
projects, principally for light vehicle products, for which customer
reimbursement is anticipated are classified as Other Current Assets in the
accompanying Consolidated Balance Sheet. Provisions for losses are provided
at the time management anticipates costs to exceed anticipated customer
reimbursement. Company-owned tooling is classified as property and
depreciated over its expected life or the life of the related vehicle
platform, whichever is shorter.
Property
Property is stated at cost. Depreciation of property is based on estimated
useful lives generally using the straight-line method. Significant renewals
and betterments are capitalized and replaced units are written off.
Maintenance and repairs, as well as renewals of minor amounts, are charged to
expense.
Intangible Assets
Goodwill represents the excess of the cost of purchased businesses over the
fair value of their net assets at the date of acquisition and is amortized
using the straight-line method, generally over 40 years.
Capitalized Software
Costs relating to internally developed or purchased software are capitalized
and amortized utilizing the straight-line basis over a period of generally 5
years. These amounts are included in Other Assets in the accompanying
Consolidated Balance Sheet.
Impairment of Long-Lived Assets
Management periodically reviews the realizability of long-lived assets based
on an evaluation of remaining useful lives, cash flows and profitability
projections.
Revenue Recognition
Revenues are generally recognized upon shipment of products to customers.
Earnings per Share
Basic earnings per share are based upon the weighted average number of shares
outstanding during each year. Diluted earnings per share assumes the exercise
of common stock options when dilutive.
7
<PAGE> 8
Environmental Matters
The company records accruals for environmental issues in the accounting
period in which its responsibility is established and the cost can be
reasonably estimated. At environmental sites in which more than one
potentially responsible party has been identified, the company records a
liability for its allocable share of costs related to its involvement with
the site as well as an allocable share of costs related to insolvent parties
or unidentified shares. At environmental sites in which Meritor is the only
responsible party, the company records a liability for the total estimated
costs of remediation before consideration of recovery from insurers or other
third parties. If recovery from a third party is determined to be probable,
the company records a receivable for the estimated recovery.
Stock Based Compensation
The company accounts for its stock-based compensation using the intrinsic
value approach under Accounting Principles Board Opinion (APB) No. 25,
"Accounting for Stock Issued to Employees," and has adopted the
disclosure-only provisions of Statement of Financial Accounting Standards No.
123 (SFAS 123), "Accounting for Stock-Based Compensation" (see Note 15).
New Accounting Standards
The company has adopted 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. The company's comprehensive income includes
net income and foreign currency translation adjustments. Prior year financial
statements have been restated to conform to the requirements of SFAS 130.
The company has adopted Statement of Financial Accounting Standards No. 132
(SFAS 132), "Employers' Disclosure about Pensions and Other Postretirement
Benefits." SFAS 132 standardizes the disclosure requirements for pensions and
other postretirement benefits, requires additional information on changes in
the benefit obligations and fair values of plan assets that will facilitate
financial analysis and eliminates certain disclosures. The adoption of SFAS
132 did not affect the results of operations or financial position of the
company but did affect disclosure of pension and other postretirement
benefits (see Notes 16 and 17).
In June 1998, the Financial Accounting Standards Board (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 delayed 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.
3. ACQUISITION OF BUSINESSES
On December 28, 1998, the company acquired the assets of Euclid Industries
and assumed substantially all of Euclid's liabilities. Euclid is a North
American supplier and manufacturer of aftermarket replacement parts for a
wide range of medium- and heavy-duty vehicles.
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 over a four year period.
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.
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
8
<PAGE> 9
periods subsequent to the dates of acquisition. The assets and liabilities
have been recorded at fair value as of the acquisition dates. The excess of
the purchase price over the fair market value of assets acquired of $421
million is included in Net Goodwill in the accompanying Consolidated Balance
Sheet and is being amortized on a straight-line basis over 40 years.
The following unaudited pro forma consolidated results of operations assume
that each of the foregoing acquisitions occurred as of the beginning of each
period (in millions, except per share amounts):
<TABLE>
<CAPTION>
1999 1998
--------- ---------
<S> <C> <C>
Net sales $4,623 $4,440
====== ======
Net income $ 194 $ 145
====== ======
Basic and diluted earnings per share $ 2.81 $ 2.10
====== ======
</TABLE>
4. SALE OF BUSINESS
In the fourth quarter of 1999 a one-time gain of $24 million ($18 million
after-tax, or $0.27 per share) was recorded to reflect the formation of a
transmission and clutch joint venture with ZF Friedrichshafen AG (ZF). Under
the terms of the joint venture agreement, Meritor transferred the assets of
its transmission and clutch businesses into the joint venture, while ZF
contributed technology and made a $51 million cash payment to Meritor.
Meritor and ZF each own 50 percent of the joint venture.
9
<PAGE> 10
5. RESTRUCTURING AND SPIN-OFF COSTS
The company recorded a restructuring charge of $28 million ($17 million
after-tax, or $0.25 per share) in fiscal 1999. This charge includes severance
and other employee costs of approximately $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. The employees terminated were from various lines of businesses
and functions. As of September 30, 1999, approximately 250 employees had been
terminated and approximately $5 million had been paid in termination
benefits. As of September 30, 1999, approximately $11 million of the 1999
reserve remains in Other Current Liabilities in the accompanying Consolidated
Balance Sheet. The company expects the remaining restructuring actions will
be substantially completed by the end of fiscal 2000.
The company recorded a restructuring charge of $21 million ($16 million
after-tax) in fiscal 1997. This charge was comprised of severance and other
employee costs of $16 million related to 640 employees and other facility
related costs of $5 million. All actions associated with the restructuring
were completed as of September 30, 1999. In 1997, the company also recorded
spin-off costs of $8 million ($5 million after-tax) associated with start-up
activities of the new company.
These charges are included in the caption Restructuring and Spin-off Costs in
the accompanying Statement of Consolidated Income.
6. INVENTORIES
Inventories are summarized as follows (in millions):
<TABLE>
<CAPTION>
September 30,
-------------
1999 1998
---- ----
<S> <C> <C>
Finished Goods $ 181 $ 143
Work in process 117 120
Raw materials, parts and supplies 145 150
----- -----
Total 443 413
Less allowance to adjust the carrying
value of certain inventories (1999, $135;
1998 $144) to a LIFO basis 51 53
----- -----
Inventories $ 392 $ 360
===== =====
</TABLE>
7. OTHER CURRENT ASSETS
Other Current Assets are summarized as
follows (in millions):
<TABLE>
<CAPTION>
September 30,
--------------
1999 1998
---- ----
<S> <C> <C>
Current deferred income taxes (see Note 18) $ 83 $ 112
Customer tooling 30 20
Prepaid expenses and other 17 21
----- -----
Other Current Assets $ 130 $ 153
===== =====
</TABLE>
10
<PAGE> 11
8. NET PROPERTY
Net Property is summarized as follows (in millions):
<TABLE>
<CAPTION>
September 30,
---------------
1999 1998
---- ----
<S> <C> <C>
Property at cost:
Land and land improvements $ 33 $ 32
Buildings 308 293
Machinery and equipment 1,217 1,037
Company-owned tooling 194 204
Construction in progress 113 95
------ ------
Total 1,865 1,661
Less accumulated depreciation 1,099 995
------ ------
Net Property $ 766 $ 666
====== ======
</TABLE>
9. OTHER ASSETS
Other Assets are summarized as follows (in millions):
<TABLE>
<CAPTION>
September 30,
--------------
1999 1998
---- ----
<S> <C> <C>
Long-term deferred income taxes (see Note 18) $ 71 $ 53
Investments in affiliates 50 46
Prepaid pension costs (see Note 17) 66 30
Net capitalized computer software costs 34 16
Other 23 20
------ ------
Other Assets $ 244 $ 165
====== ======
</TABLE>
10. OTHER CURRENT LIABILITIES
Other Current Liabilities are summarized as
follows (in millions):
<TABLE>
<CAPTION>
September 30,
--------------
1999 1998
---- ----
<S> <C> <C>
Accrued product warranties $ 95 $ 112
Accrued taxes other than income taxes 27 36
Accrued restructuring 11 10
Accrued interest rate settlement cost (see note 13) - 31
Environmental reserves 10 10
Other 53 30
------ ------
Other Current Liabilities $ 196 $ 229
====== ======
</TABLE>
11. OTHER LIABILITIES
Other Liabilities are summarized as follows
(in millions):
<TABLE>
<CAPTION>
September 30,
-------------
1999 1998
---- ----
<S> <C> <C>
Self-insurance reserves $ 16 $ 20
Environmental reserves 14 14
Deferred payments 44 -
Other 42 10
------ ----
</TABLE>
11
<PAGE> 12
<TABLE>
<CAPTION>
September 30,
-------------
1999 1998
---- ----
<S> <C> <C>
Other Liabilities $ 116 $ 44
====== ====
</TABLE>
12. LONG-TERM DEBT
Long-term Debt is summarized as follows
(in millions):
<TABLE>
<CAPTION>
September 30,
-------------
1999 1998
------ ------
<S> <C> <C>
6.8% notes due 2009, net of discount $ 498 $ -
Bank revolving Credit Facility 239 219
Lines of credit 50 79
Other 15 15
------ ------
Long-term Debt $ 802 $ 313
====== ======
</TABLE>
The company has a $1 billion unsecured revolving Credit Facility with 20
banks, which expires in August 2002. Borrowings are subject to interest based
on quoted market rates, principally LIBOR and Eurocurrency rates, at the date
of borrowing plus an applicable margin which is based on the company's credit
rating. In addition, a facility fee, which also varies based upon the
company's credit rating, is required on the $1 billion committed amount. At
September 30, 1999, the margin over the LIBOR-based and Eurocurrency rates
was 20 basis points, and the facility fee on the committed amount was 10
basis points. At September 30, 1999, the company was in compliance with all
covenants included in the Credit Facility and there have been no events of
default. Up to $500 million of the Credit Facility is available for non-U.S.
currency loans and up to $100 million is available for the issuance of
standby letters of credit.
The company has $135 million of unsecured lines of credit. Interest rates
under these lines of credit are determined at the time of borrowing based on
the underlying bank rates and averaged approximately 6.09 percent at
September 30, 1999. Borrowings under the lines generally extend through
September 2000 and are classified as long-term debt as the company has the
ability and intent to refinance these borrowings under its revolving Credit
Facility.
On April 9, 1998, the company filed a shelf Registration Statement with the
Securities and Exchange Commission covering up to $500 million aggregate
principal amount of debt securities. On February 24, 1999, the company
completed a public offering of debt securities under the shelf registration
consisting of $500 million 10-year fixed-rate 6.8 percent notes due February
15, 2009. The notes were offered to the public at 99.553 percent of their
principal amount, and were recorded net of discount of approximately $2
million. The proceeds were used to repay existing indebtedness, including an
interim $300 million short-term unsecured credit facility entered into to
facilitate three acquisitions (see Note 3).
12
<PAGE> 13
13. FINANCIAL INSTRUMENTS
Meritor's financial instruments include cash, short- and long-term debt and
foreign currency forward exchange contracts. As of September 30, 1999 and
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 the risk of unanticipated
gains and losses 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
$266 million and $212 million at September 30, 1999 and 1998, respectively.
Meritor does not anticipate any material adverse effect on its results of
operations or financial position relating to these foreign currency forward
exchange contracts.
In anticipation of offering debt securities under the shelf Registration
Statement described in Note 12, 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 a payment in the first quarter of
fiscal 1999 of $31 million, which was accrued and included in Other Current
Liabilities at September 30, 1998. The accounting treatment of the
settlement payment is a one-time charge of $31 million ($19 million
after-tax, or $0.27 per share) which is included in the accompanying
Statement of Consolidated Income. Had the debt been issued, the accounting
treatment would have been to defer and amortize the cost of the settlement
over the life of the debt securities.
14. CAPITAL STOCK
The company is authorized to issue 350 million shares of Common Stock, with
a par value of $1 per share, and 25 million shares of Preferred Stock,
without par value, of which 1 million shares are designated as Series A
Junior Participating Preferred Stock (Junior Preferred Stock). Under the
Company Rights Plan, a Preferred Share Purchase Right (Right) is attached to
each share of Common Stock pursuant to which the holder may, in certain
takeover-related circumstances, become entitled to purchase from the company
1/100th of a share of Junior Preferred Stock at a price of $112.50, subject
to adjustment. Also, in certain takeover-related circumstances, each Right
(other than those held by an acquiring person) will be exercisable for
shares of Common Stock or stock of the acquiring person having a market
value of twice the exercise price. In certain events, each Right may be
exchanged by the company for one share of Common Stock or 1/100th of a share
of Junior Preferred Stock. The Rights will expire on September 30, 2007,
unless earlier exchanged or redeemed at a redemption price of $0.01 per
Right. Until a Right is exercised, the holder, as such, will have no voting,
dividend or other rights as a shareowner of the company.
13
<PAGE> 14
The company has reserved 7.7 million shares of Common Stock in connection
with its 1997 Long-Term Incentives Plan (the 1997 LTIP), Directors Stock
Plan and Incentive Compensation Plan for grants of non-qualified stock
options, incentive stock options, stock appreciation rights, restricted
stock and stock awards to key employees and the company's directors. At
September 30, 1999, there were 3.8 million shares available for future
grants under these plans.
In September 1999, the company's board of directors authorized the purchase
of up to $125 million of the company's common stock. Under the repurchase
program, the company expects to purchase shares periodically in the open
market or through privately negotiated transactions. Through September 30,
1999 the company had acquired 298,000 shares at an aggregate cost of $6
million, or an average of $21.31 per share.
15. STOCK OPTIONS
Stock options granted under the plans described in Note 14 expire ten years
from the date of grant and generally have a vesting period of three years.
The stock options granted are exercisable at prices equal to the fair market
value of Common Stock on the dates the options are granted; accordingly, no
compensation expense has been recognized for the stock option plans.
Information relative to stock options is as follows (shares in thousands):
<TABLE>
<CAPTION>
Weighted
Average
Exercise
Shares Price
---------- ------------
<S> <C> <C>
Conversion of Rockwell options at
September 30, 1997 368 $ 23.78
Granted 3,043 22.40
Exercised (1) --
Canceled (292) --
----- --
Options outstanding at September 30, 1998 3,118 22.56
Granted 839 20.53
Exercised (30) --
Canceled (290) --
----
Options outstanding at September 30, 1999 3,637 22.12
=====
Exercisable at September 30, 1998: 114 23.79
Exercisable at September 30, 1999: 829 22.81
</TABLE>
Options outstanding at September 30, 1999 are summarized as follows (shares
in thousands):
<TABLE>
<CAPTION>
Price range
--------------------------
$14.63-20.75 $22.31-26.11
--------------------------
<S> <C> <C>
Options outstanding 787 2,850
Weighted average remaining life (years) 9.4 8.1
Weighted average exercise price $20.41 $22.59
Options exercisable - 829
</TABLE>
14
<PAGE> 15
If the company accounted for its stock-based compensation plans using the
fair value method provided by SFAS 123, the company's 1999 and 1998 net
income and earnings per share would have been reduced to pro forma net
income of $188 and $142 million, respectively, and pro forma earnings per
share of $2.72 and $2.06, respectively. The weighted average fair value of
options granted was $5.84 and $7.01 per share in 1999 and 1998,
respectively. The fair value of each option was estimated on the date of
grant using the Black-Scholes pricing model utilizing expected volatility of
31 percent, expected life of 5 years and an expected dividend yield of 2
percent in both fiscal 1999 and 1998 and a risk free interest rate of 4.8
percent in fiscal 1999 and 5.8 percent in fiscal 1998. Pro forma net income
would have been $1.1 million lower in 1997, utilizing the same assumptions
noted for fiscal 1998, except with an expected volatility of 26 percent.
16. RETIREMENT MEDICAL PLANS
Meritor has retirement medical plans that cover most of its U.S. and certain
non-U.S. employees and provide for medical payments to eligible employees
and dependents upon retirement.
The components of retirement medical expense are as follows (in millions):
1999 1998 1997
---- ---- ----
Service cost $ 3 $ 2 $ 2
Interest cost 29 28 28
Amortization of unrecognized amounts 1 (1) (1)
---- ---- ---
Retirement medical expense $ 33 $ 29 $ 29
==== ==== ====
The following reconciles the change in retiree medical accumulated benefit
obligation and the amounts included in the balance sheet (in millions):
Accumulated benefit obligation: 1999 1998
------ ------
Retirees $384 $395
Employees eligible to retire 19 22
Employees not eligible to retire 34 37
---- ----
Total accumulated benefit obligation $437 $454
==== ====
Change in accumulated benefit obligation:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Accumulated benefit obligation at beginning of year $454 $401
Service cost 3 2
Interest cost 29 29
Plan amendments - 17
Acquisitions 2 -
Actuarial (gains) and losses (10) 41
Benefits paid ($36 million in fiscal 1997) (41) (36)
---- -----
Accumulated benefit obligation at end of year 437 454
Items not recognized in the balance sheet:
Plan amendments 15 21
Actuarial losses (157) (173)
----- ------
Recorded liability at September 30 $295 $302
==== ====
</TABLE>
Weighted average assumptions used (June 30 measurement date):
1999 1998
---- ----
Discount rate 7.5% 6.75%
Health care cost trend rates 7.0% 8.0%
Ultimate trend rates 5.0% 5.0%
Year ultimate trend rates achieved 2016 2016
15
<PAGE> 16
Increasing the health care cost trend rates by one percentage point would
increase the accumulated obligation at September 30, 1999 by approximately
$34 million and would increase total expense by approximately $3 million.
Decreasing the health care cost trend rates by one percentage point would
decrease the accumulated obligation at September 30, 1999 by approximately
$29 million and would decrease total expense by approximately $2 million.
17. RETIREMENT PENSION PLANS
Prior to the Distribution, Meritor employees participated in a Rockwell
pension plan that provides monthly pension payments to eligible U.S.
employees upon retirement. At September 30, 1997, the company established a
pension plan with substantially similar benefits that credits participants
for service earned with Rockwell. Pension benefits for salaried employees
are based on years of credited service and compensation. Pension benefits
for certain hourly employees are based on years of service and specified
benefit amounts.
The obligation for vested benefits earned by Meritor participants prior to
the Distribution and all related assets were retained by Rockwell. The
benefits payable under the Meritor plan will be equal to the difference
between the total benefit earned with both companies and the vested benefit
obligation retained by Rockwell.
Net pension expense consisted of the following (in millions):
<TABLE>
<CAPTION>
1999 1998 1997
------ ----- ------
<S> <C> <C> <C>
Service cost $ 21 $ 15 $ 14
Interest cost 22 18 17
Assumed return on plan assets (25) (15) (13)
Amortization of unrecognized amounts 1 3 6
----- ----- -----
Net pension expense $ 19 $ 21 $ 24
===== ===== =====
</TABLE>
16
<PAGE> 17
The following reconciles the change in pension projected benefit obligation,
the change in plan assets and the amounts included in the balance sheet (in
millions):
Change in projected benefit obligation:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Projected benefit obligation at beginning of year $ 318 $ 263
Service cost 21 15
Interest cost 22 18
Participant contributions 2 1
Plan amendments 3 2
Acquisitions 81 -
Actuarial losses 19 32
Special termination benefits 1 -
Benefits paid (19) (13)
Foreign exchange rate changes (3) -
----- -----
Projected benefit obligation at end of year 445 318
----- -----
Change in plan assets:
Fair value of plan assets at beginning of year 237 184
Actual return on plan assets 10 38
Employer contributions 30 28
Plan participants' contributions 2 1
Acquisitions 109 -
Benefits paid (19) (13)
Foreign exchange rate changes (1) (1)
----- ----
Fair value of plan assets at end of year 368 237
----- ----
Funded status (77) (81)
Items not recognized in the balance sheet:
Actuarial gains 41 7
Prior service cost 15 16
Net initial obligation (12) (15)
----- -----
Net accrued pension costs $ (33) $ (73)
===== =====
</TABLE>
Amounts recognized in the balance sheet at September 30 consisted of:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Prepaid pension asset $ 66 $ 30
Accrued pension liability (104) (110)
Intangible asset 5 7
----- -----
Net amount recognized $(33) $ (73)
===== =====
</TABLE>
The projected benefit obligation, accumulated benefit obligation, and fair
value of plan assets for the pension plans with accumulated benefit
obligations in excess of plan assets were $235 million, $177 million and $80
million, respectively, as of September 30, 1999 and $195 million, $135
million and $54 million, respectively, as of September 30, 1998.
17
<PAGE> 18
Assumptions used (June 30 measurement date):
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Discount rate 6.0-7.5% 6.0 -6.75%
Compensation increase rate 2.5-4.5% 2.5- 4.5%
Long-term rate of return on plan assets 9.0% 9.0%
</TABLE>
The company also sponsors certain defined contribution savings plans for
eligible employees. Expense related to these plans was $6 million, $6
million and $5 million for fiscal 1999, 1998 and 1997, respectively.
18. INCOME TAXES
The components of the Provision for Income Taxes are summarized as follows
(in millions):
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
Current tax expense:
<S> <C> <C> <C>
United States $ 37 $ 37 $ 23
Foreign 59 62 53
State and local 10 9 5
------ ------ ------
Total current tax expense 106 108 81
------- ------ ------
Deferred tax expense (benefit):
United States 13 (4) (3)
Foreign 3 (3) -
State and local 1 (3) (1)
------ ------ ------
Total deferred tax expense (benefit) 17 (10) (4)
------ ------ ------
Provision for Income Taxes $ 123 $ 98 $ 77
====== ====== ======
</TABLE>
The deferred tax expense represents tax deductions related to previously
accrued expenses. The deferred tax benefit represents the tax impact related
to certain accrued expenses that have been recorded for financial statement
purposes but are not deductible for income tax purposes until paid.
Net deferred income tax benefits included in Other Current Assets in the
accompanying Consolidated Balance Sheet consist of the tax effects of
temporary differences related to the following (in millions):
<TABLE>
<CAPTION>
September 30,
-------------
1999 1998
---- ----
<S> <C> <C>
Accrued product warranties $ 31 $ 40
Accrued compensation and benefits 26 31
Accrued restructuring 3 3
Accrued interest rate settlement cost - 12
Other-net 23 26
------ ------
Current deferred income taxes $ 83 $ 112
====== ======
</TABLE>
18
<PAGE> 19
Net deferred income tax benefits included in Other Assets in the accompanying
Consolidated Balance Sheet consist of the tax effects of temporary
differences related to the following (in millions):
<TABLE>
<CAPTION>
September 30,
-------------
1999 1998
---- ----
<S> <C> <C>
Accrued retirement medical costs $ 100 $ 99
Property (54) (64)
Pensions 8 12
Loss and credit carryforwards 30 23
Other-net 4 (8)
------ ------
Subtotal 88 62
Valuation allowance (17) (9)
------ ------
Long-term deferred income taxes $ 71 $ 53
====== ======
</TABLE>
Management believes it is more likely than not that current and long-term
deferred tax benefits will reduce future current income tax expense and
payments. Significant factors considered by management in its determination
of the probability of the realization of the deferred tax benefits included:
(a) historical operating results, (b) expectations of future earnings and
(c) the extended period of time over which the retirement medical liability
will be paid. The valuation allowance represents the amount of tax benefits
related to net operating loss and tax credit carryforwards which management
believes are not likely to be realized. The carryforward periods for $21
million of net operating losses and tax credit carryforwards expire between
2000 and 2009. The carryforward period for the remaining net operating
losses and tax credits is indefinite.
A substantial portion of Meritor's results of operations for 1997 and prior
years is included in the consolidated U.S. and combined non-U.S. income tax
returns of Rockwell. The remaining results of operations for Meritor are
included in separate Meritor income tax returns. Rockwell has agreed to
indemnify Meritor for income tax liabilities and retained the rights to tax
refunds relating to any operations included in such consolidated or combined
tax returns. The income tax provisions included in the Statement of
Consolidated Income for fiscal 1997 have been determined as if the company
were a separate taxpayer.
Prior to the Distribution, Rockwell received a ruling from the United States
Internal Revenue Service that the spin-off of the automotive businesses
would be tax-free to Rockwell shareowners. The company is responsible for
any taxes imposed on Rockwell, the company or Rockwell shareowners if
certain actions by or in respect of the company or its shareowners result in
the disqualification of the Distribution as a tax-free transaction.
The company's effective tax rate was different from the U.S. statutory rate
for the reasons set forth below:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Statutory tax rate 35.0% 35.0% 35.0%
State and local income taxes 2.3 1.6 1.2
Foreign income taxes 1.1 2.7 3.7
Recognition of tax loss carryforwards - (2.0) (1.9)
Sale of business - basis difference (1.2) - -
Tax on undistributed foreign earnings 1.2 1.6 2.0
Other 0.4 1.1 1.3
------ ------ ------
Effective tax rate 38.8% 40.0% 41.3%
====== ====== ======
</TABLE>
19
<PAGE> 20
The income tax provisions were calculated based upon the following
components of income before income taxes (in millions):
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
United States income $ 157 $ 86 $ 53
Foreign income 160 159 133
------ ------ ------
Total $ 317 $ 245 $ 186
====== ====== ======
</TABLE>
No provision has been made for U.S., state or additional foreign income
taxes related to approximately $199 million of undistributed earnings of
foreign subsidiaries that have been or are intended to be permanently
reinvested.
19. SUPPLEMENTAL FINANCIAL INFORMATION
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
(In millions)
Statement of income data:
Maintenance and repairs expense $ 74 $ 72 $ 70
Research, development and engineering expense 117 111 103
Rental expense 23 18 18
Statement of cash flows data:
Interest payments $ 61 $ 43 $ 10
Income tax payments 95 116 16
Distribution tax payment - 72 -
</TABLE>
20. CONTINGENT LIABILITIES
Federal, state and local requirements relating to the discharge of
substances into the environment, the disposal of hazardous wastes and other
activities affecting the environment have had and will continue to have an
impact on the manufacturing operations of the company. Thus far, compliance
with environmental requirements and resolution of environmental claims have
been accomplished without material effect on the company's liquidity and
capital resources, competitive position or financial statements.
The company has been designated as a potentially responsible party at three
Superfund sites, excluding sites as to which the company's records disclose
no involvement or as to which the company's potential liability has been
finally determined. Management estimates the total reasonably possible costs
the company could incur for the remediation of Superfund sites at September
30, 1999 to be approximately $17 million, of which $10 million has been
accrued.
Various other lawsuits, claims and proceedings have been asserted against
Meritor alleging violations of federal, state and local environmental
protection requirements, or seeking remediation of alleged environmental
impairments, principally at previously disposed of properties. For these
matters, management has estimated the total reasonably possible costs the
company could incur at September 30, 1999 to be approximately $39 million.
Environmental accruals for these matters of $14 million have been recorded.
At September 30, 1999, there were no receivables recorded from third parties
related to environmental matters.
20
<PAGE> 21
Based on its assessment, management believes that the company's expenditures
for environmental capital investment and remediation necessary to comply
with present regulations governing environmental protection and other
expenditures for the resolution of environmental claims will not have a
material adverse effect on the company's liquidity and capital resources,
competitive position or financial statements. Management cannot assess the
possible effect of compliance with future requirements.
Various other lawsuits, claims and proceedings have been or may be
instituted or asserted against the company relating to the conduct of its
business, including those pertaining to product liability, intellectual
property, safety and health and employment matters. Although the outcome of
litigation cannot be predicted with certainty and some lawsuits, claims or
proceedings may be disposed of unfavorably to the company, management
believes the disposition of matters that are pending or asserted will not
have a material adverse effect on the company's financial statements.
In connection with the Distribution, the company assumed all contingent
liabilities (including those in respect of environmental matters) related to
current and former operations of Rockwell's automotive businesses.
21. BUSINESS SEGMENT INFORMATION
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131 (SFAS 131), "Disclosures about Segments of an Enterprise and Related
Information," effective for fiscal years beginning after December 15, 1997.
The company adopted SFAS 131 at the beginning of fiscal 1999. The adoption
of SFAS 131 did not affect the results of operations or financial position
of the company, but did affect the disclosure of segment information. The
company has defined a segment as a component of the company with business
activity resulting in revenue and expense, whose operating results are
evaluated regularly by the company's chief operating decision maker in
determining resource allocation and assessing performance and for which
discrete financial information is available. Following the provisions of
SFAS 131, the company is reporting segment sales and operating income in the
same format reviewed by the company's management. All prior year data have
been restated and are on a comparative basis for fiscal years 1999 and 1998.
The financial data for fiscal 1997 are that of the ongoing automotive
businesses of Rockwell and may not necessarily be comparative to fiscal
years 1999 and 1998 (see Note 1).
The company currently has two operating segments, Heavy Vehicle Systems
(HVS) and Light Vehicle Systems (LVS). Heavy Vehicle Systems is a leading
supplier of drivetrain systems and components, including axles, brakes,
transmissions, clutches and drivelines, for medium- and heavy-duty trucks,
trailers and off-highway equipment and specialty vehicles, including
military, bus and coach, and fire and rescue. Within HVS, the company
distinguishes between Original Equipment sales and Aftermarket sales. Light
Vehicle Systems is a major supplier of roof, door, access control, and
suspension systems, and wheel products for passenger cars, light trucks and
sport utility vehicles. Revenues are attributed to geographic areas based on
the location of the assets producing the revenues.
21
<PAGE> 22
Segment information is summarized as follows:
Sales (in millions):
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
HVS
Original Equipment $2,460 $2,048 $1,667
Aftermarket 415 313 290
------ ------ ------
2,875 2,361 1,957
LVS 1,575 1,475 1,352
------ ------ ------
Total $4,450 $3,836 $3,309
====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
Earnings (in millions):
1999 1998 1997
---- ----- ----
<S> <C> <C> <C>
Operating earnings:
HVS $ 233 $ 211 $ 142
LVS 133 88 68
Restructuring and spin-off costs (28) - (29)
------ ------ ------
Operating Earnings 338 299 181
Equity in earnings of affiliates 35 28 15
Other income - net 1 3 11
Minority interests (16) (11) (11)
Gain on sale of business 24 - -
Interest rate settlement cost - (31) -
Interest expense (65) (43) (10)
------- ------ ------
Income before income taxes 317 245 186
Provision for income taxes 123 98 77
------- ------ ------
Net income $ 194 $ 147 $ 109
======= ====== ======
</TABLE>
<TABLE>
<CAPTION>
Depreciation and Amortization (in millions):
1999 1998 1997
---- ----- ----
<S> <C> <C> <C>
HVS $ 86 $ 58 $ 58
LVS 45 44 42
------ ------ -----
Total depreciation and amortization $ 131 $ 102 $ 100
====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
Capital Expenditures (in millions):
1999 1998 1997
---- ----- ----
<S> <C> <C> <C>
HVS $ 115 $ 81 $ 61
LVS 55 58 65
------ ------ ------
Total capital expenditures $ 170 $ 139 $ 126
====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
Segment Assets (in millions):
1999 1998 1997
---- ----- ----
<S> <C> <C> <C>
HVS $1,814 $1,049 $ 941
LVS 701 741 677
------ ------ -----
Segment total assets 2,515 1,790 1,618
Corporate (1) 281 296 384
------ ------ ------
Total assets $2,796 $2,086 $2,002
====== ====== ======
</TABLE>
(1) Consists primarily of cash, taxes and prepaid pension costs.
22
<PAGE> 23
Information on the company's geographic areas is summarized as follows:
<TABLE>
<CAPTION>
Sales by Geographic Area (in millions):
1999 1998 1997
---- ----- ----
<S> <C> <C> <C>
United States $2,249 $1,848 $1,522
Canada 476 414 352
Mexico 145 124 74
------ ------ ------
Total North America 2,870 2,386 1,948
France 398 411 337
United Kingdom 271 251 265
Other Europe 584 431 420
------ ------- ------
Total Europe 1,253 1,093 1,022
Other 327 357 339
------ ------ ------
Total sales $4,450 $3,836 $ 3,309
====== ====== =======
</TABLE>
<TABLE>
<CAPTION>
Assets by Geographic Area (in millions):
1999 1998 1997
---- ----- ----
<S> <C> <C> <C>
United States $1,375 $ 937 $ 830
Canada 150 146 226
Mexico 83 82 75
------ ------ ------
Total North America 1,608 1,165 1,131
United Kingdom 346 128 121
France 191 202 177
Other Europe 402 309 268
------ ------ ------
Total Europe 939 639 566
Other 249 282 305
------ ------ ------
Total assets $2,796 $2,086 $2,002
====== ====== ======
</TABLE>
Sales to one original equipment manufacturer represented 23 percent of the
company's sales in fiscal 1999, 1998 and 1997. These sales include other
customers acquired or merged with this customer. No other customer comprised
10 percent or more of the company's sales in the three years ended September
30, 1999.
22. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following is a condensed summary of the company's unaudited quarterly
results of operations for fiscal 1999 and 1998 and stock price data for
fiscal 1999.
<TABLE>
<CAPTION>
1999 Fiscal Quarters
--------------------
First Second Third Fourth 1999
----- ------ ----- ------ ----
<S> <C> <C> <C> <C> <C>
(In millions, except
share-related data)
Sales $ 944 $ 1,163 $ 1,217 $1,126 $ 4,450
Cost of sales 817 992 1,035 960 3,804
Net income 40 50 39 65 194
Net income per share
(basic and diluted) $0.58 $0.72 $0.56 $0.95 $ 2.81
===== ===== ===== ===== ======
Stock Prices
High $22 1/8 $21 11/16 $26 1/2 $26 $26 1/2
Low $14 1/8 $14 3/16 $15 11/16 $19 5/8 $14 1/8
</TABLE>
Third quarter 1999 net income included a restructuring charge of $28 million
($17 million after-tax, or $0.25 per share) (See Note 5) and fourth quarter
1999 net income included a gain on sale of business of $24 million ($18
million after-tax, or $.27 per share) (See Note 4).
23
<PAGE> 24
<TABLE>
<CAPTION>
1998 Fiscal Quarters
--------------------
First Second Third Fourth 1998
----- ------ ----- ------ ------
(In millions, except share-related data)
<S> <C> <C> <C> <C> <C>
Sales $ 911 $ 968 $1,003 $ 954 $ 3,836
Cost of sales 791 823 852 823 3,289
Net income 32 45 47 23 147
Net income per share
(basic and diluted) $0.47 $0.64 $0.68 $0.34 $2.13
===== ===== ====== ===== =====
</TABLE>
Fourth quarter 1998 net income was reduced by a one-time charge of $31
million ($19 million after-tax, or $0.27 per share) related to the settlement
of the interest rate agreements (See Note 13).
23. Subsequent Event (Unaudited)
On November 30, 1999, the company completed the sale of its LVS seat
adjusting systems business for $130 million cash. The seat adjusting systems
business had fiscal 1999 sales of approximately $130 million.
24
<PAGE> 25
CHIEF FINANCIAL OFFICER'S REVIEW
--------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS (1)
------------------------------------
OVERVIEW AND OUTLOOK
Since becoming a public company on September 30, 1997, Meritor has
delivered strong sales and earnings growth and improved operating margins.
During this period, Meritor's sales have grown at a 16 percent compounded annual
growth rate (CAGR) and earnings per share have grown at a 27 percent CAGR,
excluding special items, comparing favorably with our long-term financial goals.
Sales for fiscal 1999 were $4.5 billion, a 16 percent increase over last
year's sales of $3.8 billion. Net income for the year was $194 million, or $2.81
per share, an increase of 32 percent as compared with 1998 net income of $147
million, or $2.13 per share. Acquisitions contributed sales of $395 million and
earnings per share of $0.03 in fiscal 1999. Operating earnings for fiscal 1999
were $338 million, including a restructuring charge of $28 million, an increase
of $39 million or 13 percent over fiscal 1998. Operating margins of 8.2 percent,
before restructuring costs, increased 40 basis points from fiscal 1998 operating
margins of 7.8 percent. Our cash flow from operations was $254 million and was
used primarily to fund capital expenditures in our core businesses and to pay
dividends. Proceeds from the issuance of notes were used to finance three
acquisitions and resulted in an increase in our long-term debt to capitalization
ratio to 68 percent at September 30, 1999 from 51 percent at September 30, 1998.
The automotive supplier industry is rapidly transforming to keep pace with
the globalization and consolidation of the automotive OEM's. The increased
competitive pressures and complexity of the automotive industry have presented
suppliers with many challenges and opportunities. To meet the global sourcing
demands of OEM's and achieve the necessary economies of scale, the supplier base
is undergoing consolidation through mergers, acquisitions, joint ventures and
other alliances activities. Future growth opportunities are expected to come
from demand for complete systems and modules, outsourcing trends and emerging
markets. Meritor is well positioned to take full
- --------
(1) See Note 1 of Notes to Consolidated Financial Statements for the definition
of capitalized terms used and not otherwise defined in this section.
1
<PAGE> 26
advantage of these opportunities. As a global manufacturer with increasingly
diverse products, customers and geographic base, as well as technical leadership
in core products and financial strength, Meritor is equipped to be the partner
of choice for those customers who value exceptional service, outstanding quality
and technology solutions worldwide.
Meritor completed several strategic acquisitions and alliances in fiscal
year 1999, which enhanced the company's position as an increasingly broad-based
supplier in the global automotive components and systems industry. 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, $44 million of
which is deferred over a four year period. On December 28, 1998, the company
acquired the assets of Euclid Industries and assumed substantially all of
Euclid's liabilities. Euclid is a North American supplier and manufacturer of
aftermarket replacement parts for a wide range of medium- and heavy-duty
vehicles. Euclid added improved access to distribution channels and a strong
customer service reputation to our growing business in the HVS aftermarket parts
and services. On January 29, 1999, the company acquired the Heavy Vehicle
Braking Systems (HVBS) business of LucasVarity plc for approximately $390
million cash. The LucasVarity HVBS components include air drum and disc brakes,
hydraulic brakes, wheel end components and aftermarket products which complement
the company's brake systems products. This acquisition is a significant step in
our global growth strategy and reflects our efforts to expand our presence in
Europe and to provide our HVS OEM and Aftermarket customers with a comprehensive
offering of drivetrain systems and components.
{Charts}
The company formed a transmission and clutch joint venture with ZF
Friedrichshafen AG (ZF) on August 31, 1999. Under the terms of the joint venture
agreement, Meritor transferred the assets of its transmission and clutch
businesses into the joint venture, while ZF contributed technology and made a
$51 million cash payment to Meritor. The joint venture will provide customers
with a broader range of state-of-the-
2
<PAGE> 27
art products. Meritor and ZF each own 50 percent of the joint venture.
On November 30, 1999, the company completed the sale of its LVS seat
adjusting systems business for $130 million cash. The seat adjusting business
had fiscal 1999 sales of approximately $130 million. This divestiture reflects
the company's continuous review and assessment of existing businesses, placing
emphasis on the core businesses that support the company's long-term strategic
direction.
In September 1999, the company announced a program to repurchase up to
$125 million of its common stock. Under the program, the company is purchasing
shares periodically in the open market or through privately negotiated
transactions as market conditions warrant and in accordance with Securities and
Exchange Commission rules. As of September 30, 1999, the company had purchased
298,000 shares at an aggregate cost of $6 million, or an average of $21.31 per
share.
With strong market share positions in our major markets, a diversified
revenue base and geographic balance (see charts on page 3), we are confident in
our ability to meet our long-term financial goals to grow internally, on an
average annual basis, sales by 8 percent and earnings per share by 15 percent.
We are also committed to managing Meritor with a strong emphasis on cash and
improving our long-term debt to capitalization ratio to 45 percent, excluding
acquisition activities.
Our long-term goals have been established with the recognition that the
industry in which the company operates has been characterized historically by
periodic fluctuations in overall demand for commercial, specialty and light
vehicles for which the company supplies products, resulting in corresponding
fluctuations in demand for products of the company. Accordingly, the company
will measure its performance against these long-term financial goals over a
multi-year period. The outlook for fiscal 2000 is for strength in our core
markets, although we believe volumes in the North American heavy truck and light
vehicle markets and the European car market will likely be lower than the fiscal
1999 levels. We also anticipate stronger overall results in fiscal 2000, as we
continue to leverage the acquisitions and restructuring actions initiated this
past year and benefit from our ongoing process improvement and cost reduction
programs.
Meritor began operations separate from Rockwell on September 30, 1997. The
financial information included in this annual report for periods prior to
September 30,
3
<PAGE> 28
1997 may not necessarily be indicative of the results of operations, financial
position and cash flows of the company had it been a separate, independent
company during such periods.
FINANCIAL CONDITION
Cash flow from operations was $254 million, $278 million and $208 million
in fiscal 1999, 1998 and 1997, respectively. Increased working capital
requirements in 1999 resulted in a reduction in the amount of cash provided by
operating activities as compared to 1998.
The strong cash flows have allowed the company to fund capital
expenditures of $170 million in fiscal 1999, $139 million in fiscal 1998 and
$126 million in fiscal 1997, as the company continues to invest in the property,
plant and equipment needed for future business requirements. Capital
expenditures in fiscal 1999 included equipment to support new product
introductions, capacity expansion and new production processes and costs to
implement Enterprise Resource Planning systems. The company expects to spend
approximately $205 million for capital expenditures in fiscal 2000. The capital
spending increase in 1999, and the anticipated increase for 2000, are primarily
related to our three acquisitions.
In fiscal 1999, cash was used for investing activities primarily related
to the acquisition of the three businesses and capital expenditures described
above, partially offset by $51 million of proceeds from the formation of the
transmission and clutch joint venture with ZF. In fiscal 1998, net cash used for
investing activities included capital expenditures of $139 million and $8
million used to acquire sunroof patents and technologies and to further invest
in the company's Chinese heavy axle joint venture. These cash outflows were
partially offset by $17 million of proceeds received from the sale of a
long-term note receivable and other property. In fiscal 1997, the $16 million in
acquisition of businesses and investments consisted primarily of investments in
the company's Chinese heavy axle joint venture.
Net cash provided by financing activities was $441 million for fiscal
1999. On February 24, 1999, the company completed a public offering of debt
securities consisting of $500 million 10-year fixed-rate 6.8 percent notes due
February 15, 2009. The notes were offered to the public at 99.553 percent of
their principal amount and were recorded
4
<PAGE> 29
net of discount of approximately $2 million. The proceeds were used to repay
existing indebtedness, including an interim $300 million short-term unsecured
credit facility entered into to facilitate the three acquisitions discussed
above. In addition, the company made payments of $6 million for the repurchase
of its stock, $29 million for cash dividends, or $0.42 per share, and $31
million for the settlement of interest rate agreements entered into in 1998 (see
Note 13 of Notes to Consolidated Financial Statements). In November 1999, the
Board of Directors declared a $0.105 per share quarterly dividend payable in
December 1999.
Net cash used for financing activities was $216 million in 1998. This
amount reflects payments of $222 million to reduce debt under the company's
revolving Credit Facility, partially offset by a $93 million increase in other
borrowings. In addition, the company made net payments of $58 million related to
certain Canadian tax obligations incurred in connection with the transfer of
assets prior to the Distribution and payments of $29 million in cash dividends,
or $0.42 per share.
Net cash used for financing activities for fiscal 1997 was comprised
primarily of $445 million of proceeds from borrowings under the Credit Facility
used to fund the Pre-Distribution Payment to Rockwell. In addition, $58 million
in cash was provided by Rockwell to fund the Canadian tax obligations described
above and the company paid $84 million in cash distributions to Rockwell.
The company's long-term debt to capitalization ratio was reduced to 68
percent at September 30, 1999, from a high of 74 percent at March 31, 1999 after
completing the three acquisitions. Pre-tax interest coverage was 5.9x for the
year ended September 30, 1999.
The company has retirement medical and pension plans that cover most of
its United States and certain non-United States employees (see Notes 16 and 17
of Notes to Consolidated Financial Statements). Retirement medical plan payments
aggregated $41 million in fiscal 1999 and $36 million in each of fiscal 1998 and
1997 and are expected to approximate $40 million in fiscal 2000. The company
made pension plan contributions of $30 million in fiscal 1999, $28 million in
fiscal 1998 and $5 million in fiscal 1997. Management anticipates that pension
plan funding will be approximately $30 million in fiscal 2000.
5
<PAGE> 30
The company regularly considers various strategic and business
opportunities, including acquisitions. Although no assurance can be given as to
whether or when any acquisitions will be consummated, if agreement were to be
reached, the company could finance such acquisitions by issuance of additional
debt or equity securities. The additional debt from any acquisitions, if
consummated, could increase the company's debt to capitalization ratio.
6
<PAGE> 31
RESULTS OF OPERATIONS
The following sets forth the sales, operating earnings and net income of
the company for the years ended September 30, 1999, 1998 and 1997, as well as
pro forma amounts for the year ended September 30, 1997 (in millions, except per
share amounts):
7
<PAGE> 32
<TABLE>
<CAPTION>
Pro Forma (1)
Year Ended September 30, 1999 1998 1997 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Sales:
Heavy Vehicle Systems:
Original Equipment $2,460 $2,048 $1,667 $1,667
Aftermarket 415 313 290 290
--- --- --- ---
2,875 2,361 1,957 1,957
Light Vehicle Systems 1,575 1,475 1,352 1,352
----- ----- ----- -----
TOTAL SALES $4,450 $3,836 $3,309 $ 3,309
====== ====== ====== =======
Operating Earnings:
Heavy Vehicle Systems $ 233 $211 $149 $ 142
Light Vehicle Systems 133 88 72 68
Restructuring and spin-off costs (28) - (29) (29)
----- ----- ----- -----
TOTAL OPERATING EARNINGS 338 299 192 181
Equity in earnings of affiliates 35 28 15 15
Other income-net 1 3 11 11
Minority interests (16) (11) (11) (11)
Gain on sale of business 24 - - -
Interest rate settlement cost - (31) - -
Interest expense (65) (43) (38) (10)
Provision for income taxes (123) (98) (70) (77)
----- ----- ----- -----
NET INCOME $194 $147 $ 99 $ 109
====== ====== ====== =====
Basic and Diluted Earnings Per Share $ 2.81 $ 2.13 $ 1.44
====== ====== ======
Basic and Diluted Earnings Per Share
Before Special Items (2) $ 2.79 $ 2.40 $ 1.74
====== ====== ======
Average Common Shares Outstanding 69.1 69.0 68.9
====== ====== ======
</TABLE>
(1) Pro forma information reflects (a) the 68.9 million shares of common stock
issued at the date of the spin-off from Rockwell, (b) management's estimate
that corporate costs would have been $11 million lower on a stand-alone
basis for the year ended September 30, 1997 than those allocated by Rockwell
to its automotive businesses, and (c) $28 million of interest expense at 6
percent for the year ended September 30, 1997 related to the debt incurred
by the company in connection with the $445
8
<PAGE> 33
million Pre-Distribution Payment to Rockwell.
(1) Special items in fiscal 1999 include restructuring costs of $28 million ($17
million after-tax, or $0.25 per share) and a one-time gain of $24 million
($18 million after-tax, or $0.27 per share). Special items include the
interest rate settlement cost of $31 million ($19 million after-tax, or
$0.27 per share) in fiscal 1998 and restructuring and spin-off costs of $29
million ($21 million after-tax, or $0.30 per share on a pro forma basis) in
fiscal 1997.
The charts on page 3 demonstrate the strength, balance and diversity of
our product mix, geographic presence and served markets for the fiscal year
ended September 30, 1999.
1999 COMPARED TO 1998
Sales for fiscal 1999 were $4.5 billion, up $614 million, or 16 percent,
over last year's sales of $3.8 billion.
Heavy Vehicle Systems (HVS) reported a record $2.9 billion in sales of
components and systems for original equipment and the aftermarket in fiscal
1999, an increase of $514 million, or 22 percent, over 1998. Excluding
acquisitions, HVS sales increased $119 million, or 5 percent. The record
production volumes in the North American heavy truck market drove North American
sales of truck axles, brakes and transmissions to $1.3 billion, an increase of
$245 million, or 22 percent. North American sales of other HVS products were
$657 million, down $65 million from last year, primarily as a result of lower
government program sales. European sales, excluding acquisitions, were down $21
million, or 6 percent, and South American sales fell $47 million, or 41 percent,
while HVS sales in the rest of the world were up $7 million.
Light Vehicle Systems (LVS) sales grew $100 million, or 7 percent, to a
record $1.6 billion for fiscal year 1999. Market penetration gains, principally
in the door, suspension and seat adjusting systems product lines, combined with
strong North American vehicle volumes drove the higher sales. This growth was
partially offset by weakness in European roof systems sales and the negative
impact of currency and lower vehicle volumes in South America. LVS sales in
North America increased $127 million, or 22 percent, and sales in Asia/Pacific
were up $21 million, or 38 percent. Sales in Europe and South America were down
$37 million and $11 million, respectively.
Fiscal 1999 operating earnings were up $39 million over fiscal 1998. The
company recorded a restructuring charge of $28 million ($17 million after-tax,
or $0.25
9
<PAGE> 34
per share) during fiscal 1999 related to workforce reductions and other facility
related costs for the rationalization of operations. Fiscal 1999 operating
earnings of $366 million, before restructuring costs, were up 22 percent over
the prior year's operating earnings of $299 million. Operating margins, before
the restructuring charge, improved to 8.2 percent in fiscal 1999 from last
year's 7.8 percent. Excluding the acquisitions and their associated goodwill
amortization, the company's fiscal year operating margins improved by 50 basis
points, to 8.3 percent. This improvement reflects the company's continued focus
on process improvement and cost reductions, offset somewhat by premium costs
associated with meeting the record levels of demand in the North American truck
markets.
HVS operating earnings for fiscal 1999 were $233 million, an increase of
10 percent over last year. Operating margins declined to 8.1 percent in fiscal
1999 from 8.9 percent in 1998. Excluding the acquisitions and their associated
goodwill amortization, fiscal 1999 operating margins were 8.3 percent. This
margin decline was driven primarily by an increase in premium freight costs and
the use of higher-cost alternate component suppliers to meet the record demand
in the North American heavy truck market. Fiscal 1999 operating margins were
also adversely impacted by the decline of higher-margin government program
sales.
LVS operating margins improved dramatically in fiscal 1999 to 8.4 percent
from 6.0 percent in 1998. Substantial savings were realized in fiscal 1999 from
material and other cost reduction programs. The operating margin improvement
also reflects the volume contribution from the higher sales.
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.
Affiliate income increased $7 million in fiscal 1999, to $35 million,
primarily as a result of higher sales of anti-lock brakes and related systems by
the company's WABCO affiliate.
In fiscal 1999, the company recorded a one-time gain of $24 million ($18
million
10
<PAGE> 35
after-tax, or $0.27 per share) in connection with the formation of a
transmission and clutch joint venture with ZF. Income taxes related to this gain
were recorded at an effective tax rate of 25 percent, due to a book-tax basis
difference on assets transferred into the joint venture. This reduced the
company's overall effective tax rate for fiscal 1999 by 1.2 percentage points to
38.8 percent.
Net income for the year was $194 million, or $2.81 per share, an increase
of 32 percent as compared with 1998 net income of $147 million, or $2.13 per
share. Net income before special items was $193 million in fiscal 1999, or $2.79
per share, compared with 1998 net income before special items of $166 million,
or $2.40 per share, an improvement of 16 percent. Special items include the
one-time gain related to the formation of the ZF Meritor joint venture and a
restructuring charge recorded in fiscal 1999 and the one-time charge in fiscal
1998 for the settlement of interest rate agreements.
1998 COMPARED TO 1997
Sales for fiscal 1998 were $3.8 billion, up $527 million, or 16 percent,
above fiscal 1997.
Heavy Vehicle Systems sales were $2.4 billion in fiscal 1998, an increase
of $404 million, or 21 percent over 1997. Sales increased across all of the
company's heavy truck and trailer products, including axles, transmissions,
clutches, drivelines and brake systems, primarily as a result of the strong
North American heavy truck market, greater market penetration and improved
volumes in the aftermarket. Sales also increased in HVS off-highway, government
and specialty product lines.
Light Vehicle Systems sales for fiscal 1998 of $1.5 billion, increased
$123 million, or 9 percent over 1997. The sales growth was driven by penetration
gains in the door, suspension, access control and seat adjusting systems and
wheel product lines and somewhat by higher industry volumes in Europe. This
growth was negatively affected by lower European sunroof demand and the adverse
impact of currency translation on European sales.
Fiscal 1998 operating earnings of $299 million were up 56 percent over pro
forma fiscal 1997. Excluding the restructuring and spin-off costs of $29 million
recorded in 1997, operating earnings were up 35 percent over the prior year's
pro forma operating earnings of $221 million. Operating margins for fiscal 1998
improved to 7.8 percent
11
<PAGE> 36
from 1997's pro forma 6.7 percent excluding restructuring and spin-off costs
(5.8 percent in fiscal 1997 including restructuring and spin-off costs). This
growth in operating margins reflected the positive results of the company's
productivity and cost improvement programs (described above), the strength of
the company's global markets and the penetration gains across nearly all of the
company's product range.
HVS operating earnings for fiscal 1998 were $211 million, an increase of
42 percent over pro forma fiscal 1997. Operating margins improved to 8.9 percent
from 1997's pro forma 7.6 percent. The margin increase was driven by higher
sales volumes, the impact of material and other cost reduction programs and
prior year restructuring programs.
LVS operating earnings were $88 million in fiscal 1998, an increase of $16
million, or 22 percent over pro forma fiscal 1997. Operating margins improved to
6.0 percent in fiscal 1998, up from 1997's pro forma 5.3 percent. The increase
in operating earnings is due to material and other cost reduction programs, as
well as increased volumes from penetration gains and somewhat higher industry
volumes in Europe.
Affiliate income increased $13 million in fiscal 1998, primarily as a
result of higher sales of anti-lock brakes and related systems by the company's
WABCO affiliate. Other income for 1998 was down $8 million from fiscal 1997
primarily due to a $5 million one-time gain in fiscal 1997 related to an
environmental insurance settlement.
In the fourth quarter of fiscal 1998, the company recorded a one-time
charge of $31 million ($19 million after-tax, or $0.27 per share) in connection
with the settlement of interest rate agreements. These agreements were entered
into in April 1998 to secure interest rates in anticipation of offering debt
securities. The planned issuance of 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. These
agreements were settled and paid in October 1998 resulting in the charge
discussed above.
Net income for fiscal 1998 was $147 million, or $2.13 per share,
increasing 48 percent compared with 1997 pro forma net income of $99 million, or
$1.44 per share. Net income before special items was $166 million in fiscal
1998, or $2.40 per share, compared with 1997 pro forma net income before special
items of $120 million, or $1.74
12
<PAGE> 37
per share, an improvement of 38 percent. Special items include the interest rate
settlement in fiscal 1998 and restructuring and spin-off costs in fiscal 1997.
AFFILIATES
{Chart}
Meritor has seven joint ventures, all related to its HVS business, in
which the company has 50 percent or less ownership, and accordingly are
accounted for under the equity method of accounting. These strategic alliances
provide for sales, product design, development and manufacture in certain
product and geographic areas. Aggregate sales of these affiliates were $488
million, $443 million and $273 million in fiscal 1999, 1998 and 1997,
respectively.
The company's equity in earnings of affiliates was $35 million in fiscal
1999 compared to $28 million in fiscal 1998 and $15 million in fiscal 1997. Cash
dividends to Meritor from these joint ventures were $28 million, $27 million and
$5 million in fiscal 1999, 1998 and 1997, respectively. The increase in equity
income relates primarily to the company's 50 percent-owned joint venture with
WABCO, a leading supplier of anti-lock braking systems for North American
heavy-duty commercial vehicles. This growth is attributed to the growing use of
anti-lock braking systems across North America.
INCOME TAXES
The company's effective income tax rate in fiscal 1999 was 38.8 percent
compared to 40.0 percent in fiscal 1998 and 41.3 percent in fiscal 1997. Income
taxes on the one-time gain related to the formation of the ZF Meritor joint
venture in fiscal 1999 were recorded at an effective tax rate of 25 percent.
This lower tax rate was due to a book-tax basis difference on assets transferred
into the joint venture and reduced Meritor's overall effective tax rate for
fiscal 1999 by 1.2 percentage points. The tax rate decline in fiscal 1998 from
the 1997 level was primarily due to changes in the mix of foreign income.
ENVIRONMENTAL MATTERS
Federal, state and local requirements relating to the discharge of
substances into the environment, the disposal of hazardous wastes and other
activities affecting the environment have had and will continue to have an
impact on the manufacturing operations of the company. Thus far, compliance with
environmental requirements and
13
<PAGE> 38
resolution of environmental claims have been accomplished without material
effect on the company's liquidity and capital resources, competitive position,
or financial statements.
The company has been designated as a potentially responsible party at
three Superfund sites, excluding sites as to which the company's records
disclose no involvement or as to which the company's potential liability has
been finally determined. Management estimates the total reasonably possible
costs the company could incur for the remediation of Superfund sites at
September 30, 1999 to be approximately $17 million, of which $10 million has
been accrued.
Various other lawsuits, claims and proceedings have been asserted against
Meritor alleging violations of federal, state and local environmental protection
requirements, or seeking remediation of alleged environmental impairments,
principally at previously disposed of properties. For these matters, management
has estimated the total reasonably possible costs the company could incur at
September 30, 1999 to be approximately $39 million. Environmental accruals for
these matters of $14 million have been recorded.
At September 30, 1999, there were no receivables recorded from third
parties related to environmental matters.
Based on its assessment, management believes that the company's
expenditures for environmental capital investment and remediation necessary to
comply with present regulations governing environmental protection and other
expenditures for the resolution of environmental claims will not have a material
adverse effect on the company's liquidity and capital resources, competitive
position or financial statements. Management cannot assess the possible effect
of compliance with future requirements.
INTERNATIONAL OPERATIONS
Approximately 42 percent of the company's total assets as of September 30,
1999 and 36 percent of fiscal 1999 sales were outside North America, primarily
in France, the United Kingdom, Germany, Brazil, Italy and Sweden. Borrowings
under the company's revolving Credit Facility have been principally in the
United States, Canada, Italy and the United Kingdom. Management believes that
international operations have significantly benefited the financial performance
of the company. However, the company's international operations are subject to a
number of risks inherent in operating abroad.
14
<PAGE> 39
There can be no assurance that these risks will not have a material adverse
impact on the company's ability to increase or maintain its foreign sales or on
its financial condition or results of operations.
On January 1, 1999, the Euro 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 1999 in these
countries were approximately 18 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 have been subsumed into
the Euro and has borrowings in participating currencies primarily under its
revolving Credit Facility. The company has analyzed the potential effects of the
Euro conversion on competitive conditions, information technology and other
systems, currency risks, financial instruments and contracts, and has examined
the tax and accounting consequences of Euro conversion, and believes that the
conversion will not have a material adverse effect on its business, operations
and financial condition.
The company 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 and in a timely manner, and that the
costs associated with the conversion to the Euro will not be material.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The company is exposed to foreign currency exchange rate risk inherent in
its sales and assets and liabilities denominated in currencies other than the
U.S. dollar and interest rate risk associated with the company's debt.
The company does enter into foreign currency forward exchange contracts
to minimize the risk of unanticipated gains and losses from currency rate
fluctuations on
15
<PAGE> 40
foreign currency commitments entered into in the ordinary course of business.
Also, the company may, from time to time, use interest rate agreements in the
management of interest rate exposure on selected debt issuances. It is the
policy of the company not to enter into derivative financial instruments for
speculative purposes.
The company has performed a sensitivity analysis assuming a hypothetical
10 percent adverse movement in foreign currency exchange rates and interest
rates applied to the underlying exposures described above. As of September 30,
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.
YEAR 2000 READINESS DISCLOSURE
BACKGROUND
The company has substantially completed a company-wide year 2000 project
to ensure the company's Information Technology (IT) and non-IT systems are year
2000 compliant. None of the company's other IT projects were significantly
delayed due to the year 2000 project. The year 2000 project included an
assessment of compliance at the supplier and service provider level to ensure
supply disruptions will be minimized. In addition, certain of the company's
locations implemented Enterprise Resource Planning systems. These systems were
in place at September 30, 1999, and it is anticipated that they will be year
2000 compliant. Fewer resources of the project have been directed to the area of
customer compliance due to the nature of the company's customer base. The
company has participated in several year 2000 audits conducted by its customers
which have resulted in no significant findings of year 2000 non-compliance at
Meritor.
As discussed above, the company completed the acquisition of three
businesses in late December 1998 and in January 1999. The company has analyzed
the year 2000 compliance of the acquired facilities and expects that they will
be compliant by the end of calendar 1999.
COMPANY'S STATE OF READINESS
The year 2000 project was divided into four major sections - business and
16
<PAGE> 41
engineering, factory floor, IT infrastructure (hardware and software) and supply
chain. The business and engineering section included manufacturing, financial
applications and remediation projects, critical core business system validation
testing, aftermarket systems and supplemental systems. The factory floor section
included shop floor controls and facility systems. The IT infrastructure section
included PC/LAN hardware, software and peripherals; mainframe, midrange and UNIX
systems; engineering workstations; and telecom/global carriers. The supply chain
section included formal communication with the company's significant customers,
suppliers and critical service providers. Each section involved 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.
A central program management office was established to coordinate the year
2000 project. In addition, the consulting firm of Keane, Inc. and other outside
consultants were engaged 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.
As of September 30, 1999, all four major sections were 100 percent
complete in phases one and two. The business and engineering, factory floor and
IT infrastructure sections were 99-100 percent complete and the supply chain
section was 94 percent complete for phase three activities. All phases are
expected to be complete by the end of calendar year 1999.
CONTINGENCY PLANS
The year 2000 project also included development of business continuance
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 included 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 had completed its analysis and developed business continuance
plans as of September 30, 1999.
COSTS
The company estimates that the aggregate cost of the year 2000 project
will be
17
<PAGE> 42
approximately $21 million. This amount excludes employee expense and computer
equipment and upgrades that would have been purchased regardless of the year
2000 project, such as the Enterprise Resource Planning systems implementations.
The company spent $7.7 million, $10.2 million and $0.7 million during fiscal
1999, 1998 and 1997, respectively, on the project. In fiscal 1999, approximately
$5.5 million of expenditures related to business and engineering systems and IT
infrastructure and approximately $2.2 million related to the factory floor and
supply chain. These costs were expensed as incurred and funded through operating
cash flows. Cost estimates 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.
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 has significantly reduced the company's level of uncertainty
about year 2000 issues, and the company believes that completed modifications
and conversions of its internal IT and non-IT systems will allow it to be year
2000 compliant. The company believes it is prepared to resolve any year 2000
problem that might arise in a short time without any material impact on the
company. However, due to the general uncertainty inherent with year 2000
compliance, the company is unable to determine at this time whether the
consequences of year 2000 failures by third parties will have a material impact
on the company.
Forward-looking statements contained in this section should be read in
conjunction with the company's disclosures under the heading: Cautionary
Statement following this disclosure.
CAUTIONARY STATEMENT
This Management's Discussion and Analysis as well as other sections of
this Annual Report contain statements relating to future results of the company
(including certain projections and business trends) that are "forward-looking
statements" as defined in the Private Securities Litigation Reform Act of 1995.
Actual results may differ materially from those projected as a result of certain
risks and uncertainties, including but
18
<PAGE> 43
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; successful integration of acquired businesses; competitive
product and pricing pressures; the amount of the company's debt, as well as
other risks and uncertainties, such as those described under Overview and
Outlook, Environmental Matters, International Operations, Quantitative and
Qualitative Disclosures About Market Risk and Year 2000 Readiness Disclosure and
those detailed herein and from time to time in the filings of the company with
the Securities and Exchange Commission.
19
<PAGE> 44
MERITOR AUTOMOTIVE, INC.
SELECTED FINANCIAL DATA
(DOLLARS IN MILLIONS,
EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Year Ended September 30, 1999 1998 1997 1996 1995
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS
Sales
Heavy Vehicle Systems $2,875 $2,361 $1,957 $1,827 $1,937
Light Vehicle Systems 1,575 1,475 1,352 1,317 1,188
----- ----- ----- ----- -----
Total $4,450 $3,836 $3,309 $3,144 $3,125
====== ====== ====== ====== ======
Operating earnings $338 (1) $299 $181 (1) $146 (1) $178
Operating earnings as a
percent of sales 7.6% 7.8% 5.5% 4.6% 5.7%
Interest expense 65 43 10 10 11
Income before income taxes 317 (2) 245 (2) 186 182 185
Net income 194 (2) 147 (2) 109 114 123
Basic and diluted
earnings per share (3) $2.81 (2) $2.13 (2) N/A N/A N/A
Cash dividends per share (3) $0.42 $0.42 N/A N/A N/A
- ---------------------------------------------------------------------------------------------
FINANCIAL POSITION AT
SEPTEMBER 30
Working capital (4) $208 $162 $235 $240 $216
Property-net 766 666 635 643 647
Total assets 2,796 2,086 2,002 1,830 1,766
Short-term debt 44 34 21 8 14
Long-term debt 802 313 465 24 31
Equity and Minority
interests (5) 383 297 188 628 585
- ---------------------------------------------------------------------------------------------
OTHER DATA
Depreciation and
amortization $131 $102 $100 $102 $97
Cash provided by
operating activities 254 278 208 197 203
Capital expenditures 170 139 126 144 119
Employees at year end 19,000 16,900 16,900 15,300 16,700
Annual sales per employee
(in thousands) (6) $242 $228 $203 $198 $182
</TABLE>
- -------------------------------------------------------------------------------
(1) Operating earnings includes restructuring costs of $28 million, $21 million
and $36 million in fiscal 1999, 1997 and 1996, respectively and
<PAGE> 45
spin-off costs of $8 million in fiscal 1997.
(2) Income before income taxes, net income and basic and diluted earnings per
share for fiscal year 1999 includes restructuring costs of $28 million ($17
million after-tax, or $0.25 per share) and a one-time gain of $24 million ($18
million after-tax, or $0.27 per share) recorded to reflect the formation of a
transmission and clutch joint venture with ZF Friedrichshafen AG. Income before
income taxes, net income and basic and diluted earnings per share for fiscal
year 1998 includes a one-time charge of $31 million ($19 million after-tax, or
$0.27 per share) relating to the settlement of interest rate agreements.
(3) As the company began operations as a stand-alone entity on September 30,
1997, per share data for years ending prior to September 30, 1998 are not
applicable.
(4) Working capital consists of all current assets and liabilities, including
cash and short-term debt.
(5) Equity amounts for fiscal years ending September 30, 1996 and 1995 represent
the net investment of Rockwell prior to the spin-off of Meritor on September 30,
1997.
(6) Annual sales per employee is based on the average of the monthly ending
number of employees during the year.
<PAGE> 1
EXHIBIT 21
MERITOR AUTOMOTIVE, INC.
LIST OF SUBSIDIARIES OF THE COMPANY
AS OF SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
PERCENTAGE OF VOTING
SECURITIES OWNED BY
-------------------
NAME AND JURISDICTION REGISTRANT SUBSIDIARY
--------------------- ---------- ----------
<S> <C> <C>
Meritor Heavy Vehicle Systems, LLC (Delaware).............. 100%
Meritor Light Vehicle Systems, Inc. (Delaware)............. 100%
Meritor Automotive Canada Inc. (Canada).................... 100%
Meritor Automotive Limited (England)....................... 100%
Meritor France (France)............................ 100%
Meritor Automotive GmbH (Germany).......................... 99% 1%*
Meritor do Brasil Ltda. (Brazil)........................... 100%**
</TABLE>
- --------------
* 1% of the voting securities of Meritor Automotive GmbH is owned by Meritor
Heavy Vehicle Systems Limited.
** 100% of the voting securities of Meritor do Brasil Ltda. is owned by
Meritor Participacoes Ltda., a holding company all of the voting
securities of which is owned by Meritor Automotive, Inc.
Listed above are certain consolidated subsidiaries included in the
financial statements of the Company at September 30, 1999.
<PAGE> 1
EXHIBIT 23-A
CONSENT OF EXPERT
I consent to the reference to me under the heading "Item 3. Legal
Proceedings" in the Annual Report on Form 10-K of Meritor Automotive, Inc.
("Meritor") for the year ended September 30, 1999, 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; and
Meritor's Registration Statement on Form S-8 (Registration No. 333-35407)
pertaining to the Meritor 1997 Long-Term Incentives Plan.
/s/ M. Lee Murrah
-----------------
M. Lee Murrah
Assistant General Counsel of
Meritor Automotive, Inc.
Date: December 20, 1999
<PAGE> 1
Exhibit 23-b
CONSENT OF EXPERT
I consent to the references to me under the headings "Item 1. Business -
Environmental Matters" and "Item 3. Legal Proceedings" in the Annual Report on
Form 10-K of Meritor Automotive, Inc. ("Meritor") for the year ended September
30, 1999. I also consent to the incorporation by reference of such references
into Meritor's Registration Statement on Form S-8 (Registration No. 333-35403)
pertaining to the Meritor Savings Plan; and Meritor's Registration Statement on
Form S-8 (Registration No. 333-35407) pertaining to the Meritor 1997 Long-Term
Incentives Plan.
/s/ Vernon G. Baker, II
------------------------
Vernon G. Baker, II
Senior Vice President,
General Counsel and Secretary of
Meritor Automotive, Inc.
Date: December 20, 1999
<PAGE> 1
Exhibit 23-c
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference of our reports dated November 9,
1999, appearing in and incorporated by reference in this Annual Report on Form
10-K of Meritor Automotive, Inc. for the year ended September 30, 1999 in the
following Registration Statements of Meritor Automotive, Inc.:
Form Registration No Purpose
S-8 333-35403 Meritor Automotive, Inc. Savings Plan
S-8 333-35407 Meritor Automotive, Inc. Long Term
Incentives Plan
DELOITTE & TOUCHE LLP
Detroit, Michigan
December 17, 1999
<PAGE> 1
Exhibit 24
POWER OF ATTORNEY
I, the undersigned Director and/or Officer of Meritor Automotive,
Inc., a Delaware corporation (the "Company"), hereby constitute VERNON G. BAKER,
II, MARK R. SCHAITKIN and BONNIE WILKINSON, and each of them singly, my true and
lawful attorneys with full power to them and each of them to sign for me, and in
my name and in the capacity or capacities indicated below, the Annual Report on
Form 10-K for the fiscal year ended September 30, 1999, and any amendments and
supplements thereto, to be filed by the Company with the Securities and Exchange
Commission pursuant to the Securities Exchange Act of 1934.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Larry D. Yost Chairman of the Board and November 10, 1999
- ------------------- Chief Executive Officer
Larry D. Yost (principal executive officer)
and Director
/s/ Joseph B. Anderson, Jr. Director November 10, 1999
- ---------------------------
Joseph B. Anderson, Jr.
/s/ Rhonda L. Brooks Director November 10, 1999
- ---------------------------
Rhonda L. Brooks
/s/ Donald R. Beall Director November 10, 1999
- ---------------------------
Donald R. Beall
/s/ John J. Creedon Director November 10, 1999
- ---------------------------
John J. Creedon
/s/ Charles H. Harff Director November 10, 1999
- ---------------------------
Charles H. Harff
/s/ Victoria B. Jackson Director November 10, 1999
- ---------------------------
Victoria B. Jackson
/s/ James E. Marley Director November 10, 1999
- ---------------------------
James E. Marley
/s/ Harold A. Poling Director November 10, 1999
- ---------------------------
Harold A. Poling
/s/ Thomas A. Madden Senior Vice President, Finance, November 10, 1999
- --------------------------- and Chief Financial Officer
Thomas A. Madden (principal financial officer)
/s/ Diane M. Stelfox Vice President and Controller November 10, 1999
- --------------------------- (principal accounting officer)
Diane M. Stelfox
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> SEP-30-1999
<CASH> 68
<SECURITIES> 0
<RECEIVABLES> 742
<ALLOWANCES> 10
<INVENTORY> 392
<CURRENT-ASSETS> 1,332
<PP&E> 1,865
<DEPRECIATION> 1,099
<TOTAL-ASSETS> 2,796
<CURRENT-LIABILITIES> 1,124
<BONDS> 802
0
0
<COMMON> 69
<OTHER-SE> 279
<TOTAL-LIABILITY-AND-EQUITY> 2,796
<SALES> 4,450
<TOTAL-REVENUES> 4,510
<CGS> 3,804
<TOTAL-COSTS> 4,128
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 65
<INCOME-PRETAX> 317
<INCOME-TAX> 123
<INCOME-CONTINUING> 194
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 194
<EPS-BASIC> 2.81
<EPS-DILUTED> 2.81
</TABLE>
