<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 1999
------------------------------
Commission file number 1-13093
---------------------
Meritor Automotive, Inc.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 38-3354643
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State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
2135 West Maple Road, Troy, Michigan 48084-7186
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(Address of principal executive offices) (Zip Code)
(248) 435-1000
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(Registrant's telephone number,
including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
69,083,505 shares of registrant's Common Stock, $1.00 par value, were
outstanding on April 30, 1999.
<PAGE> 2
MERITOR AUTOMOTIVE, INC.
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION:
Page
Item 1. Financial Statements: No.
<S> <C>
Consolidated Balance Sheet - -
March 31, 1999 and September 30, 1998................................ 2
Statement of Consolidated Income - - Three Months
and Six Months Ended March 31, 1999 and 1998......................... 3
Statement of Consolidated Cash Flows - -
Six Months Ended March 31, 1999 and 1998............................. 4
Notes to Consolidated Financial Statements........................... 5
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations.......................... 12
Item 3. Quantitative and Qualitative Disclosures About
Market Risk............................................................... 19
PART II. OTHER INFORMATION:
Item 1. Legal Proceedings......................................................... 20
Item 2. Changes in Securities and Use of Proceeds................................. 20
Item 4. Submission of Matters to a Vote of Security Holders....................... 21
Item 5. Other Information......................................................... 22
Item 6. Exhibits and Reports on Form 8-K.......................................... 22
</TABLE>
<PAGE> 3
Part I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Meritor Automotive, Inc.
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
March 31,
1999 September 30,
(unaudited) 1998
----------------- -----------------
ASSETS (In millions)
Current assets:
<S> <C> <C>
Cash $ 49 $ 65
Receivables (less allowance for doubtful accounts:
March 31, 1999, $12; September 30, 1998, $11)..................... 766 638
Inventories.......................................................... 392 360
Other current assets................................................. 151 153
------- -------
Total current assets............................................. 1,358 1,216
------- -------
Net property.............................................................. 780 666
Net goodwill.............................................................. 470 39
Other assets.............................................................. 194 165
------- -------
TOTAL............................................... $2,802 $ 2,086
======= =======
LIABILITIES AND SHAREOWNERS' EQUITY
Current liabilities:
Short-term debt...................................................... $ 42 $ 34
Accounts payable..................................................... 653 636
Accrued compensation and benefits.................................... 128 142
Accrued income taxes................................................. 34 13
Other current liabilities............................................ 230 229
------- -------
Total current liabilities........................................ 1,087 1,054
Long-term debt............................................................ 909 313
Accrued retirement benefits............................................... 388 378
Other liabilities......................................................... 106 44
Minority interests........................................................ 38 31
Shareowners' equity:
Common Stock
(shares issued and outstanding: March 31, 1999, 69.1; and
September 30, 1998, 69.0)....................................... 69 69
Additional paid-in-capital........................................... 157 156
Retained earnings.................................................... 194 118
Accumulated other comprehensive loss................................. (146) (77)
------- ------
Total shareowners' equity............................... 274 266
------- -------
TOTAL............................................... $ 2,802 $ 2,086
======= =======
</TABLE>
See notes to consolidated financial statements.
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2
<PAGE> 4
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Meritor Automotive, Inc.
STATEMENT OF CONSOLIDATED INCOME
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
March 31, March 31,
----------------------------------- --------------------------
1999 1998 1999 1998
---- ---- ---- ----
(In millions, except
per share amounts)
<S> <C> <C> <C> <C>
Sales............................................ $ 1,163 $ 968 $ 2,107 $ 1,879
Cost of sales.................................... 992 823 1,809 1,614
--------- ----------- ---------- -----------
Gross margin..................................... 171 145 298 265
Selling, general and administrative.............. 72 64 130 121
--------- ----------- ---------- -----------
Operating earnings............................... 99 81 168 144
Other income-net................................. 4 6 12 7
Interest expense................................. (19) (11) (30) (21)
--------- ---------- ---------- -----------
Income before income taxes....................... 84 76 150 130
Provision for income taxes....................... (34) (31) (60) (53)
--------- ---------- ---------- -----------
Net income....................................... $ 50 $ 45 $ 90 $ 77
========= ========== ========== ===========
Basic and diluted earnings per share............. $ .72 $ .64 $ 1.30 $ 1.11
========= ========== ========== ===========
Cash dividends per common share.................. $ .105 $ .105 $ .21 $ .21
========= ========== ========== ===========
Average common shares outstanding -
basic and diluted........................... 69.1 69.0 69.1 69.0
========= ========== ========== ===========
</TABLE>
See notes to consolidated financial statements.
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3
<PAGE> 5
Meritor Automotive, Inc.
STATEMENT OF CONSOLIDATED CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
March 31,
------------------------------------
1999 1998
---------------- ----------------
(In millions)
OPERATING ACTIVITIES
<S> <C> <C>
Net income ..................................................................... $ 90 $ 77
Adjustments to net income to arrive at cash provided by operating
activities
Depreciation and amortization ............................................ 58 51
Pension contributions .................................................... (10) (10)
Other, net ............................................................... 22 14
Changes in assets and liabilities, excluding effects of
acquisitions ........................................................... (122) (70)
----- -----
CASH PROVIDED BY OPERATING ACTIVITIES ................................ 38 62
----- -----
INVESTING ACTIVITIES
Capital expenditures ........................................................... (50) (49)
Acquisition of businesses and other ............................................ (577) (5)
----- -----
CASH USED FOR INVESTING ACTIVITIES ................................... (627) (54)
----- -----
FINANCING ACTIVITIES
Net increase in short-term borrowings .......................................... 15 36
Net increase (decrease) in revolving debt ...................................... 175 (58)
Proceeds from issuance of notes ................................................ 498 --
Net (decrease) increase in other long-term debt ................................ (70) 21
----- -----
Net increase (decrease) in debt .......................................... 618 (1)
Cash dividends ................................................................. (14) (15)
Payment of interest rate settlement cost ....................................... (31) --
Payment of Distribution tax obligation, net .................................... -- (58)
----- -----
CASH PROVIDED BY (USED FOR) FINANCING
ACTIVITIES ............................................................. 573 (74)
----- -----
DECREASE IN CASH ............................................................... (16) (66)
CASH AT BEGINNING OF PERIOD .................................................... 65 133
----- -----
CASH AT END OF PERIOD .......................................................... $ 49 $ 67
===== =====
</TABLE>
Income tax payments, excluding the payment of the Distribution tax obligation,
were $18 million and $46 million in the six months ended March 31, 1999 and
1998, respectively.
See notes to consolidated financial statements.
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4
<PAGE> 6
MERITOR AUTOMOTIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Meritor Automotive, Inc. (the company or Meritor) is a leading global
supplier of a broad range of components and systems for use in commercial,
specialty and light vehicles. The company became an independent,
publicly-held company on September 30, 1997, when Rockwell International
Corporation (Rockwell) spun off its automotive businesses by distributing
all of the issued and outstanding shares of the company to Rockwell's
shareowners (the Distribution). The consolidated financial statements are
those of the company and its consolidated subsidiaries.
In the opinion of the company the unaudited financial statements contain
all adjustments, consisting solely of adjustments of a normal recurring
nature, necessary to present fairly the financial position, results of
operations and cash flows for the periods presented. These statements
should be read in conjunction with the company's Annual Report on Form
10-K for the fiscal year ended September 30, 1998, including the financial
statements incorporated by reference in the Form 10-K. The results of
operations for the three- and six-month periods ended March 31, 1999 are
not necessarily indicative of the results for the full year.
It is the company's practice for each interim reporting period to make an
estimate of the effective tax rate expected to be applicable for the full
fiscal year. The rate so determined is used in providing for income taxes
on a year-to-date basis.
Certain prior period amounts have been reclassified to conform with
current period presentation.
2. On October 1, 1998, the company adopted the Financial Accounting Standards
Board's Statement of Financial Accounting Standards No. 130 (SFAS 130),
"Reporting Comprehensive Income". SFAS 130 establishes standards for the
reporting and presentation of comprehensive income and its components. The
adoption of SFAS 130 had no impact on the company's net income or
shareowners' equity. Comprehensive income includes net income and
components of other comprehensive income, such as foreign currency
translation adjustments, unrealized investment gains or losses and minimum
pension liability adjustments.
5
<PAGE> 7
MERITOR AUTOMOTIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Comprehensive income (loss), net of the related estimated tax, is summarized as
follows (in millions):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
March 31, March 31,
---------------------------- -----------------------------
1999 1998 1999 1998
------------ ---------- -------------- ------------
<S> <C> <C> <C> <C>
Net income............................... $ 50 $ 45 $ 90 $ 77
Foreign currency translation............. (62) (9) (69) (30)
-------- -------- -------- --------
Comprehensive income (loss).............. $ (12) $ 36 $ 21 $ 47
======== ======== ======== ========
</TABLE>
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131 (SFAS 131), "Disclosures about
Segments of an Enterprise and Related Information," effective for the
company's fiscal year ending September 30, 1999. SFAS 131 requires
disclosure of business and geographic segments in the consolidated
financial statements of the company consistent with the way that
management organizes the segments for making operating decisions and
assessing performance. The company is currently analyzing the impact this
standard will have on the disclosures in its fiscal 1999 year end
financial statements.
In February 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 132 (SFAS 132),
"Employers' Disclosure about Pensions and Other Postretirement Benefits,"
effective for the company's fiscal year ending September 30, 1999. SFAS
132 standardizes the disclosure requirements for pensions and other
postretirement benefits, requires additional information on changes in the
benefit obligations and fair values of plan assets that will facilitate
financial analysis and eliminates certain disclosures.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 (SFAS 133), "Accounting for
Derivative Instruments and Hedging Activities," effective for all fiscal
quarters of fiscal years beginning after June 15, 1999. SFAS 133 requires
that all derivatives be recognized as either assets or liabilities in the
statement of financial position and be measured at fair value. The company
is currently analyzing the impact this standard will have on its financial
statements.
3. On December 31, 1998, the company completed its acquisition of the heavy
truck axle manufacturing operations of Volvo Truck Corporation based in
Lindesberg, Sweden. With this acquisition 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.
6
<PAGE> 8
MERITOR AUTOMOTIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The company also acquired the assets of Euclid Industries on December 28,
1998 and assumed substantially all of Euclid's liabilities. Euclid is a
leading North American supplier and manufacturer of aftermarket
replacement parts for a wide range of medium- and heavy-duty vehicles and
has been a premier participant in the North American heavy-duty
aftermarket. For its fiscal year ended August 31, 1998, Euclid generated
sales of more than $100 million.
On January 29, 1999, the company acquired the Heavy Vehicle Braking
Systems (HVBS) business of LucasVarity plc for approximately $390 million
in cash. The LucasVarity HVBS components include air drum and disc brakes,
hydraulic brakes, wheel end components and aftermarket products. For its
fiscal year ended January 1999, the HVBS business of LucasVarity had net
sales of approximately $310 million.
The following unaudited pro forma consolidated results of operations for
the six months ended March 31, 1999 and 1998 assumes that each of the
foregoing acquisitions occurred as of the beginning of each period (in
millions, except per share amounts):
<TABLE>
<CAPTION>
Six Months Ended
March 31,
---------
1999 1998
---- ----
<S> <C> <C>
Net sales............................................ $2,280 $2,170
====== ======
Net income ......................................... $ 90 $ 75
====== ======
Basic and diluted earnings per share................. $ 1.30 $ 1.09
====== ======
</TABLE>
The above acquisitions were accounted for by the purchase method of
accounting. Accordingly, the results of operations of the acquired
businesses are included with those of the company for the periods
subsequent to the date of acquisition. The assets and liabilities have
been recorded based upon preliminary estimates of fair value as of the
dates of the acquisitions. The company does not believe the final
allocation of the purchase prices will be materially different than the
preliminary allocation.
7
<PAGE> 9
MERITOR AUTOMOTIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
4. Inventories are summarized as follows (in millions):
<TABLE>
<CAPTION>
March 31, September 30,
1999 1998
------------ ----------------
<S> <C> <C>
Finished goods.............................................. $ 169 $ 143
Work in process............................................. 129 120
Raw materials, parts and supplies........................... 145 150
--------- ----------
Total.................................................. 443 413
Less allowance to adjust the carrying value of
certain inventories to a last in, first-out
(LIFO) basis........................................... 51 53
--------- ----------
Inventories............................................ $ 392 $ 360
========= ==========
5. Other Current Assets are summarized as follows (in millions):
March 31, September 30,
1999 1998
------------ ----------------
Current deferred income taxes............................... $ 105 $ 112
Customer tooling............................................ 20 20
Prepaid expenses and other.................................. 26 21
--------- ----------
Other Current Assets................................... $ 151 $ 153
========= ==========
6. Other Assets are summarized as follows (in millions):
March 31, September 30,
1999 1998
------------ ---------------
Net deferred income taxes................................... $ 64 $ 53
Investments in affiliates................................... 46 46
Prepaid pension costs....................................... 30 30
Net capitalized computer software costs..................... 23 16
Other....................................................... 31 20
-------- ---------
Other Assets........................................... $ 194 $ 165
======== =========
</TABLE>
8
<PAGE> 10
MERITOR AUTOMOTIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
7. Other Current Liabilities are summarized as follows (in millions):
<TABLE>
<CAPTION>
March 31, September 30,
1999 1998
------------------ -----------------
<S> <C> <C>
Accrued product warranties ..................................................... $ 103 $ 112
Accrued taxes other than income taxes .......................................... 34 36
Accrued restructuring .......................................................... 6 10
Accrued interest rate settlement cost .......................................... -- 31
Other .......................................................................... 87 40
------ --------
Other Current Liabilities ........................................... $ 230 $ 229
======= ========
</TABLE>
8. Long-term Debt is summarized as follows (in millions):
<TABLE>
<CAPTION>
March 31, September 30,
1999 1998
------------------ -----------------
<S> <C> <C>
Bank revolving Credit Facility.............................. $ 388 $ 219
Lines of credit............................................. 8 79
6.8% notes due 2009, net of discount........................ 498 -
Other ................................................... 15 15
------- --------
Long-term Debt......................................... $ 909 $ 313
======= ========
</TABLE>
On April 9, 1998, the company filed a shelf Registration Statement with
the Securities and Exchange Commission covering up to $500 million
aggregate principal amount of debt securities. On February 24, 1999, the
company completed its public offering of debt securities consisting of
$500 million 10-year fixed-rate 6.8% notes due February 15, 2009. The
notes were offered to the public at 99.553% of their principal amount, and
were recorded net of this discount of approximately $2 million. The
proceeds were used to repay existing indebtedness, including the $300
million unsecured term Credit Facility discussed below.
On January 15, 1999 the company entered into a $300 million unsecured term
Credit Facility with six banks. Interest rates under this Credit Facility
were based on LIBOR plus 75 basis points. The company borrowed $300
million under this Credit Facility in January 1999. The facility was paid
with proceeds from issuance of the company's 6.8% notes due February 15,
2009, and the facility was terminated in February 1999.
9
<PAGE> 11
MERITOR AUTOMOTIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
9. The company's financial instruments include cash, short- and long-term
debt and foreign currency forward exchange contracts. As of March 31,
1999, the carrying values of the company's financial instruments
approximated their fair values based on prevailing market prices and
rates. It is the policy of the company not to enter into derivative
financial instruments for speculative purposes. The company does enter
into foreign currency forward exchange contracts to minimize risk of loss
from currency rate fluctuations on foreign currency commitments entered
into in the ordinary course of business. These foreign currency forward
exchange contracts relate to purchase and sales transactions and are
generally for terms of less than one year. The foreign currency forward
exchange contracts are executed with creditworthy banks and are
denominated in currencies of major industrial countries. The notional
amount of outstanding foreign currency forward exchange contracts
aggregated $191 million at March 31, 1999 and $212 million at September
30, 1998. Meritor does not anticipate any material adverse effect on its
results of operations or financial position relating to these foreign
currency forward exchange contracts.
In anticipation of offering debt securities under the shelf Registration
Statement described in Note 8, the company entered into interest rate
agreements in April 1998 to secure interest rates. The planned issuance of
the debt securities did not occur in fiscal 1998, initially due to the
consideration of a major acquisition and, subsequently, the instability in
the U.S. corporate bond market. The company settled the interest rate
agreements in October 1998 resulting in payment of $31 million, which was
accrued and included in Other Current Liabilities at September 30, 1998.
10. Accrued Retirement Benefits consisted of the following (in millions):
<TABLE>
<CAPTION>
March 31, September 30,
1999 1998
------------------ --------------------
<S> <C> <C>
Accrued retirement medical costs............................ $ 303 $ 292
Accrued pension costs....................................... 111 110
Other....................................................... 10 12
--------- ----------
Total................................................ 424 414
Amount classified as current liability...................... 36 36
--------- ----------
Accrued Retirement Benefits.......................... $ 388 $ 378
========= ==========
</TABLE>
10
<PAGE> 12
MERITOR AUTOMOTIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
11. Other Income - Net consisted of the following (in millions):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
March 31, March 31,
---------------------------- --------------------------------
1999 1998 1999 1998
------------ ---------- -------------- -------------
<S> <C> <C> <C> <C>
Equity in earnings of affiliates......... $ 7 $ 7 $ 14 $ 10
Minority interests....................... (5) (3) (8) (7)
Gain on the sale of property and
businesses............................ - - 3 2
Interest income.......................... 1 1 2 2
Other.................................... 1 1 1 -
--------- --------- -------- --------
Other Income - Net................. $ 4 $ 6 $ 12 $ 7
========= ========= ======== ========
</TABLE>
12. Various lawsuits, claims and proceedings have been or may be instituted
or asserted against the company relating to the conduct of its business,
including those pertaining to product liability, intellectual property,
environmental, safety and health and employment matters. Although the
outcome of litigation cannot be predicted with certainty and some
lawsuits, claims or proceedings may be disposed of unfavorably to the
company, management believes the disposition of matters which are pending
or asserted will not have a material adverse effect on the company's
consolidated financial position, results of operations or cash flows.
11
<PAGE> 13
MERITOR AUTOMOTIVE, INC.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
RESULTS OF OPERATIONS
1999 Second Quarter Compared to 1998 Second Quarter
Sales of $1.2 billion for the 1999 second quarter, which include $122 million
from recent acquisitions, increased by $195 million, or 20 percent, over the
same period last year. Excluding acquisition sales and the related neutral
earnings per share impact, sales increased by $73 million, or 8 percent. Sales
growth for the second quarter includes the results of the three recent
acquisitions, as well as market penetration gains from new Light Vehicle Systems
product introductions and continued strong demand in the primary Heavy Vehicle
Systems markets.
Net income for the 1999 second quarter was $50 million, or 72 cents per share,
compared to $45 million or 64 cents per share last year. This represents an 8
cents or 13 percent increase in earnings per share for the second quarter of
1999 as compared to the same period in 1998. Second quarter operating margins
improved to 8.5 percent, up from 8.4 percent in the same period last year. This
improvement reflects the ongoing impact of the company's process improvement and
cost reduction programs, which more than offset the impact of Meritor's three
recent acquisitions. Excluding the impact of acquisitions, Meritor's second
quarter operating margins improved by 40 basis points to 8.8 percent.
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.
Heavy Vehicle Systems (HVS) sales were $752 million for the second quarter of
fiscal 1999, an increase of $160 million, or 27 percent, as compared to the
second quarter of fiscal 1998. Excluding the impact of acquisitions, base HVS
sales increased by $38 million or 6 percent. This sales growth reflects the
continued strength of the North American heavy truck market, partially offset by
anticipated government program changeovers and weaker sales in Brazil. Base HVS
sales in North America increased by $55 million, or 12 percent, while European
sales were flat and South American sales were down about $10 million. The
company's North American sales increase is net of a $25 million sales decline
related to planned government program changeovers.
12
<PAGE> 14
MERITOR AUTOMOTIVE, INC.
RESULTS OF OPERATIONS (Cont'd)
Light Vehicle Systems (LVS) sales improved by 9 percent during the second fiscal
quarter to $411 million, an increase of $35 million over the same period in
1998. Market penetration gains, principally fueled by the company's new door
module and seat adjusting system products, drove the sales growth. LVS sales in
North America increased by about $35 million, or 23 percent, while Asia Pacific
sales were up around $5 million. European LVS sales were generally flat and
South American sales were down roughly $5 million.
Six Months Ended March 31, 1999 Compared to Six Months Ended March 31, 1998
For the first six months of fiscal 1999, the company's sales were $2.1 billion,
up 12 percent over the same period last year, generating operating earnings of
$168 million, an increase of 17 percent over 1998 results. The strong sales
growth for the six months was driven by market penetration gains in the Light
Vehicle Systems segment, continued demand for Heavy Vehicle Systems products and
sales of $122 million from the company's three recent acquisitions.
Net income for the first six months of 1999 was $90 million, or $1.30 per share,
up $13 million over last year's net income of $77 million, or $1.11 per share.
This was an improvement of 17 percent in earnings per share. Operating margins
increased to 8.0 percent for the first six months of 1999, from 7.7 percent for
the same period last year, reflecting higher sales and savings generated from
the company's process improvement and cost reduction programs (described
previously), offset somewhat by the impact of the company's three recent
acquisitions.
Heavy Vehicle Systems sales were $1.3 billion in the first six months of fiscal
1999, an increase of $161 million, or 14 percent, compared to the first six
months of fiscal 1998. Excluding the impact of acquisitions, base HVS sales
increased by $39 million or 3%. Sales increased across the company's core heavy
truck products, including axles, transmissions, clutches, drivelines, and brake
systems, reflecting the continued strength of the North American heavy truck
market. These increases, however, were substantially offset by a decline in
government product sales related to planned government program changeovers and
weaker sales in Brazil due to lower heavy truck volumes.
Light Vehicle Systems sales were $797 million in the first six months of fiscal
1999, an increase of $67 million, or 9 percent, over the first six months of
fiscal 1998. Sales growth for this business was driven by penetration gains,
principally in the door and seat adjusting systems product lines. This growth
was partially offset by decreased sales in roof systems as a result of customer
platform launch delays in Mexico, lower vehicle product sales in Brazil and the
adverse impact of currency translation.
13
<PAGE> 15
MERITOR AUTOMOTIVE, INC.
RESULTS OF OPERATIONS (Cont'd)
The company continues to evaluate the overall global economic environment and
the current outlook for the major served markets remains strong. In North
America, the company expects light vehicle production to be up in fiscal 1999 by
about 6 percent. The company expects the North American heavy- and medium-duty
truck markets, which accounted for 24 percent of the company's 1998 sales, will
achieve all-time record production levels exceeding 280,000 and 165,000 units,
respectively. During fiscal 1999, the company estimates European light vehicle
production to be about even with the prior year, and heavy truck production
levels to be down moderately. As a result of the strength, diversity and balance
of the company's products and served markets, the company expects to perform
well in this environment, with earnings growth in the mid-teens for the second
half of the fiscal year, including the modestly accretive impact of the
company's three recent acquisitions.
FINANCIAL CONDITION
Cash provided by operating activities for the first six months of fiscal 1999
was $38 million, a decrease of $24 million as compared to the first six months
of fiscal 1998. The decrease was due primarily to increases in working capital
requirements, principally in accounts receivable and accounts payable.
Capital expenditures of $50 million in the 1999 six-month period included
equipment for continued new product introductions, capacity expansion and new
production processes. The company anticipates full year fiscal 1999 capital
expenditures of approximately $150 million, excluding the effect of the
acquisitions. Capital expenditures for the acquired businesses are expected to
approximate $30 million during fiscal 1999.
The company's second quarter dividend of 10.5 cents per share was paid on March
15, 1999 to shareowners of record on February 22, 1999. On April 14, 1999, the
board of directors declared a quarterly dividend of 10.5 cents per share on the
company's common stock, payable June 7, 1999, to shareowners of record on May
17, 1999.
Cash provided by financing activities includes $618 million net increase in
debt, of which $570 million was utilized to fund the acquisitions of businesses.
The company has pursued growth initiatives to further strengthen its position in
the global automotive original equipment and aftermarket segments. As is
discussed in Note 3 of the notes to consolidated financial statements, in late
December 1998 and in January 1999 the company completed the acquisitions of
three separate businesses. These transactions are expected to add sales on an
annualized basis of approximately $700 million. The company's long-term debt to
capitalization ratio increased to 74 percent at March 31, 1999 from 51 percent
at September 30, 1998, reflecting the impact of these acquisitions.
14
<PAGE> 16
MERITOR AUTOMOTIVE, INC.
FINANCIAL CONDITION (Cont'd)
After consideration of all three strategic acquisitions, Standard & Poor's and
Moody's have reaffirmed their "BBB" and "Baa2" respective credit ratings for
Meritor's debt.
Meritor regularly considers various strategic and business opportunities,
including acquisitions. Although no assurance can be given as to whether or when
any additional acquisitions will be consummated, if agreement were to be
reached, the company could finance such acquisitions by issuance of additional
debt or equity securities. The additional debt from any acquisitions, if
consummated, would further increase the company's debt to capitalization ratio.
On April 9, 1998, the company filed a shelf Registration Statement with the
Securities and Exchange Commission covering up to $500 million aggregate
principal amount of debt securities. On February 24, 1999, the company completed
its public offering of debt securities consisting of $500 million 10-year
fixed-rate 6.8% notes due February 15, 2009. The notes were offered to the
public at 99.553% of their principal amount, and were recorded net of this
discount of approximately $2 million. The proceeds were used to repay existing
indebtedness, including the $300 million unsecured term Credit Facility
discussed below.
On January 15, 1999 the company entered into a $300 million unsecured term
Credit Facility with six banks. Interest rates under this Credit Facility were
based on LIBOR plus 75 basis points. The company borrowed $300 million under
this Credit Facility in January 1999. The facility was paid with proceeds from
issuance of the company's 6.8% notes due February 15, 2009, and the facility was
terminated in February 1999.
In anticipation of offering debt securities under the shelf Registration
Statement described in Note 8 of the notes to consolidated financial statements,
the company entered into interest rate agreements in April 1998 to secure
interest rates. The planned issuance of the debt securities did not occur in
fiscal 1998, initially due to the consideration of a major acquisition and,
subsequently, the instability in the U.S. corporate bond market. The company
settled the interest rate agreements in October 1998 resulting in payment of $31
million, which was accrued and included in Other Current Liabilities at
September 30, 1998.
Information with respect to the effect on the company and its manufacturing
operations of compliance with environmental protection requirements and
resolution of environmental claims is contained under the caption "Environmental
Matters" in Chief Financial Officer's Review, Management's Discussion and
Analysis in the company's 1998 Annual Report to Shareowners, incorporated by
reference into the company's Annual Report on Form 10-K for the fiscal year
ended September 30, 1998. Management believes that at March 31, 1999 there has
been no material change to this information.
15
<PAGE> 17
MERITOR AUTOMOTIVE, INC.
INTERNATIONAL OPERATIONS
On January 1, 1999, the Euro became the common currency of eleven countries of
the European Union. During a three-year transition period, the present national
currencies of these eleven countries will become sub-units of the Euro at fixed
exchange rates. The European Union's current plans call for the transition
period to be completed by July 1, 2002, at which time the Euro will become the
sole legal tender in those participating countries.
The company is engaged in business in some of the countries that participate in
the European Monetary Union, and sales for fiscal 1998 in these countries were
approximately 21 percent of the company's total sales. In addition, the company
enters into foreign currency forward exchange contracts with respect to several
of the existing currencies that will be subsumed into the Euro and has
borrowings in participating currencies primarily under its revolving Credit
Facility. The company has analyzed the potential effects of the Euro conversion
on competitive conditions, information technology and other systems, currency
risks, financial instruments and contracts, and has examined the tax and
accounting consequences of Euro conversion, and believes that the conversion has
not had and will not have a material adverse effect on its business, operations
and financial condition.
The company is making the necessary adjustments to accommodate the conversion,
including modifications to its information technology systems and programs,
pricing schedules and financial instruments. The company expects that all
necessary actions will be completed within budget and in a timely manner, and
that the costs associated with the conversion to the Euro will not be material.
YEAR 2000 READINESS DISCLOSURE
Background
The company initiated a company-wide year 2000 project to determine whether the
company's Information Technology ("IT") and non-IT systems are year 2000
compliant and to identify and implement the remedial actions necessary to effect
compliance. None of the company's other IT projects have been significantly
delayed due to the year 2000 project. The year 2000 project also includes an
assessment of compliance at the supplier and service provider level in order to
minimize supply disruptions. In addition, certain of the company's locations are
implementing Enterprise Resource Planning systems. It is anticipated that these
systems will be in place in 1999 and will be year 2000 compliant. Because the
company's customer base is diverse, fewer resources of the project have been
directed to the area of customer compliance.
16
<PAGE> 18
MERITOR AUTOMOTIVE, INC.
Company's State of Readiness
The project is divided into four major sections - business and engineering,
factory floor, IT infrastructure (hardware and software) and supply chain. Each
section involves three phases: phase one - identification of risks; phase two -
defining the scope of necessary corrections and preparation of related plans and
cost estimates; and phase three-implementation of decisions to repair, replace
or retire the systems in question.
The consulting firm of Keane, Inc. was engaged to coordinate the year 2000
project for all four major sections and to provide more direct assistance with
respect to the business and engineering section and the IT infrastructure
section. In addition, the company engaged outside consultants to assist in risk
identification, analysis and remediation planning for factory floor operations
and to assist in implementing repair and remediation projects at local sites.
The business and engineering section includes manufacturing, financial
applications and remediation projects, critical core business system validation
testing, aftermarket systems and supplemental systems. The factory floor section
includes shop floor controls and facility systems. The IT infrastructure section
includes PC/LAN hardware, software and peripherals; mainframe, midrange and UNIX
systems; engineering workstations; and telecom/global carriers. The supply chain
section includes formal communication with the company's significant customers,
suppliers and critical service providers. The company estimates that all four
areas will be substantially year 2000 compliant by June 30, 1999, with minor
project completion and follow-up reviews scheduled through the remainder of
1999.
The following chart summarizes the status of completion by section for each
phase of the project at March 31, 1999, excluding the recently acquired
businesses, which are discussed below:
Approximate Percentage Completed
--------------------------------
Phase 1 Phase 2 Phase 3
------- ------- -------
Business and Engineering 100 100 90-100*
Factory floor 100 100 45
IT Infrastructure 100 100 80-100*
Supply Chain 100 100 25-75*
*Percentage of completion varies by location and by
separate project within each section
Contingency Plans
The company is in the process of developing contingency plans designed to
minimize any adverse effects that would result if timely compliance were not
achieved, either internally or at the third party level. The planning process
includes identification of the areas of the company's business and suppliers
with the greatest potential of non-compliance and arrangements for alternate
suppliers, backup systems or stockpiling of components in the affected areas.
The company expects to complete its analysis and have contingency arrangements
in place by September 30, 1999.
17
<PAGE> 19
MERITOR AUTOMOTIVE, INC.
YEAR 2000 READINESS DISCLOSURE (Cont'd)
Costs
The company currently estimates that the aggregate cost of the year 2000 project
will be approximately $26 million. These amounts exclude employee expense and
computer equipment and upgrades that would have been purchased regardless of the
year 2000 project. The company spent $2.9 million, $10.2 million and $0.7
million during the first six months of 1999 and fiscal 1998 and 1997,
respectively, on the project. In the first six months of 1999, approximately
$2.4 million of expenditures related to business and engineering systems and IT
infrastructure and approximately $0.5 million related to the factory floor. In
fiscal 1998, approximately $6.6 million of expenditures related to business and
engineering systems and IT infrastructure and approximately $3.6 million related
to the factory floor. These costs are being expensed as incurred and are being
funded through operating cash flows and do not include costs that may be
incurred as a result of the failure of third parties, including suppliers, to
become year 2000 compliant or costs to implement contingency plans.
The company currently estimates that the costs incurred in connection with the
Enterprise Resource Planning systems will be approximately $35 million,
including costs of internal employees dedicated to the project. The company
anticipates that approximately $30 million of the total costs will be
capitalized and amortized over 5 years.
Company State of Readiness - Recent Acquisitions
As discussed in Note 3 of the notes to consolidated financial statements, the
company completed the acquisition of three separate businesses in late December
1998 and in January 1999. The company has been in the process of analyzing the
year 2000 compliance of the acquired facilities and has integrated each acquired
business into the company's year 2000 compliance program. This process has
included revalidation of the year 2000 compliance of the acquired facilities
reported to the company at acquisition. Based on this analysis, the company
expects that the additional costs to be incurred at the acquired facilities will
not be material to the company, and that the acquired facilities should be
substantially year 2000 compliant by June 30, 1999.
Risks
Incomplete or untimely resolution of the year 2000 issue by the company, key
suppliers, customers and other parties could have a material adverse effect on
the company's results of operations, financial condition and cash flows. The
year 2000 project is expected to reduce significantly the company's level of
uncertainty about year 2000 issues. The company believes that completed and
planned modifications and conversions of its internal IT and non-IT systems will
allow it to be year 2000 compliant in a timely manner. However, due to the
general uncertainty inherent with year 2000 compliance, the company is unable to
determine at this time whether the consequences of year 2000 failures by third
parties will have a material impact on the company.
18
<PAGE> 20
MERITOR AUTOMOTIVE, INC.
YEAR 2000 READINESS DISCLOSURE (Cont'd)
Forward-looking statements contained in this section should be read in
conjunction with the company's disclosures in Item 5 under the heading:
Cautionary Statement.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The company is exposed to foreign currency exchange rate risk inherent in its
sales and assets and liabilities denominated in currencies other than the U.S.
dollar and interest rate risk associated with the company's debt. The company
does enter into foreign currency forward exchange contracts to minimize risk of
loss from currency rate fluctuations on firm and identifiable foreign currency
commitments entered into in the ordinary course of business. Also, the company
may, from time to time, use interest rate agreements in the management of
interest rate exposure on selected debt issuances. It is the policy of the
company not to enter into derivative financial instruments for speculative
purposes.
The company has performed a sensitivity analysis assuming a hypothetical 10
percent adverse movement in foreign currency exchange rates and interest rates
applied to the underlying exposures described above. As of March 31, 1999, the
analysis indicated that such market movements would not have a material effect
on the company's consolidated financial position, results of operations or cash
flows. Actual gains or losses in the future may differ significantly from that
analysis, however, based on changes in the timing and amount of interest rate
and foreign currency exchange rate movements and the company's actual exposures.
19
<PAGE> 21
MERITOR AUTOMOTIVE, INC.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
As previously reported under the headings "Item 3. Legal Proceedings"
in the company's Annual Report on Form 10-K for the fiscal year ended
September 30, 1998, and "Item 1. Legal Proceedings" in the company's
Quarterly Report on Form 10-Q for the quarterly period ended December
31, 1998, on July 17, 1997 Eaton Corporation filed suit against
Rockwell in the U.S. District Court in Wilmington, Delaware, asserting
infringement of Eaton's U.S. Patent No. 4850236, which covers certain
aspects of heavy-duty truck transmissions, by the company's Engine
Synchro Shift(TM) transmission for heavy-duty trucks, and seeking
damages and injunctive relief. Meritor was joined as a defendant on
June 11, 1998, and trial in this matter began on June 23, 1998. On July
1, 1998, the jury rendered a verdict in favor of Eaton, finding that
Meritor had infringed Eaton's patent and awarding compensatory damages
in the amount of $1.25 million, and a judgment was entered on July 17,
1998. Because the jury found the infringement to be willful, the judge
in the case has discretion to increase the damages to an amount up to
three times the amount of the award. Eaton's request for a permanent
injunction is pending. A separate trial with respect to the company's
allegations of inequitable conduct by Eaton in obtaining its patent 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.
Item 2. Changes in Securities and Use of Proceeds
On January 4, 1999, the company issued 415 shares of Common Stock to
Donald R. Beall, a non-employee director of the company, pursuant to
the terms of the company's Directors Stock Plan, in lieu of cash
payment of quarterly retainer fees for board service. In addition, on
February 10, 1999, the company issued 1,000 shares of Common Stock to
each of the five non-employee directors of the company pursuant to the
terms of the Directors Stock Plan. In each case, the issuance of these
securities was exempt from registration under the Securities Act of
1933, as a transaction not involving a public offering under Section
4(2).
20
<PAGE> 22
MERITOR AUTOMOTIVE, INC.
Item 4. Submission of Matters to a Vote of Security Holders
The annual meeting of shareowners of the company was held February
10, 1999. The following matters were voted on and received the
specified number of votes in favor, votes withheld or against,
abstentions and broker non-votes:
(i) Election of directors: Harold A. Poling was elected to the Board
of Directors, with a term expiring at the annual meeting of
shareowners in 2002. A total of 60,799,260 shares were cast in
favor and 675,796 votes were withheld. Abstentions and broker
non-votes were not applicable. The other members of the Board of
Directors, whose terms continued after the annual meeting, were
Joseph B. Anderson, Jr., Donald R. Beall, John J. Creedon, Larry
D. Yost and Charles H. Harff. One of the directors whose term
expired at the 1999 Annual Meeting, Martin D. Walker, did not
stand for re-election.
(ii) Appointment of auditors: The shareowners approved the selection
of Deloitte & Touche LLP as the company's auditors. A total of
60,957,134 votes were cast in favor, 267,487 votes were cast
against and 250,435 abstained from voting. Broker non-votes were
not applicable.
21
<PAGE> 23
MERITOR AUTOMOTIVE, INC.
Item 5. Other Information
(a) Cautionary Statement
This Quarterly Report on Form 10-Q contains statements
relating to future results of the company (including certain
projections and business trends) that are "forward-looking
statements" as defined in the Private Securities Litigation
Reform Act of 1995. Actual results may differ materially from
those projected as a result of certain risks and
uncertainties, including but not limited to global economic
and market conditions; the demand for commercial, specialty
and light vehicles for which the company supplies products;
risks inherent in operating abroad; OEM program delays; demand
for and market acceptance of new and existing products;
successful development of new products; reliance on major OEM
customers; labor relations of the company, its customers and
suppliers; and competitive product and pricing pressures, as
well as other risks and uncertainties, including but not
limited to those detailed from time to time in the filings of
the company with the Securities and Exchange Commission. See
also "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Quantitative and
Qualitative Disclosures about Market Risk" herein. These
forward-looking statements are made only as of the date
hereof, and the company undertakes no obligation to update or
revise the forward-looking statements, whether as a result of
new information, future events or otherwise.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
23 - Consent of M. Lee Murrah, Esq., Assistant General Counsel
of the company
27 - Financial Data Schedule
(b) Reports on Form 8-K
The company filed a Current Report on Form 8-K, dated
February 25, 1999, reporting under Item 5, "Other Events,"
the issuance by the company on February 24, 1999, of $500
million of 6.8% notes due 2009, and filing under Item 7,
"Financial Statements, Pro Forma Financial Information and
Exhibits," certain exhibits related to the issuance of the
notes.
The company filed a Current Report on Form 8-K, dated
February 16, 1999, filing under Item 7, "Financial
Statements, Pro Forma Financial Information and Exhibits",
an exhibit relating to the issuance by the company of its
6.8% Notes due 2009.
22
<PAGE> 24
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MERITOR AUTOMOTIVE, INC.
-----------------------------
(Registrant)
Date May 14, 1999 By D.M. Stelfox
----------------------------- -------------------------------
D.M. Stelfox
Vice President and Controller
(For the Registrant and as
Principal Accounting Officer)
23
<PAGE> 25
EXHIBIT INDEX
-------------
23 - Consent of M. Lee Murrah, Esq., Assistant General Counsel of the company
27 - Financial Data Schedule
<PAGE> 1
Exhibit 23
CONSENT OF COUNSEL
I consent to the reference to me under the heading "Item 1. Legal
Proceedings" in Part II of the Quarterly Report on Form 10-Q of Meritor
Automotive, Inc. ("Meritor") for the quarterly period ended March 31, 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: May 14, 1999
24
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