<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, 2000
----------------------------------------
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
----- -----
62,302,787 shares of registrant's Common Stock, $1.00 par value, were
outstanding on April 28, 2000.
<PAGE> 2
MERITOR AUTOMOTIVE, INC.
INDEX
<TABLE>
<S> <C> <C>
PART I. FINANCIAL INFORMATION:
Page
Item 1. Financial Statements: No.
Statement of Consolidated Income - - Three Months
and Six Months Ended March 31, 2000 and 1999......................... 2
Consolidated Balance Sheet - -
March 31, 2000 and September 30, 1999................................ 3
Statement of Consolidated Cash Flows - -
Six Months Ended March 31, 2000 and 1999............................. 4
Notes to Consolidated Financial Statements........................... 5
Item 2. Management's Discussion and Analysis
of Results of Operations and Financial Condition..................... 12
Item 3. Quantitative and Qualitative Disclosures About
Market Risk.......................................................... 16
PART II. OTHER INFORMATION:
Item 2. Changes in Securities and Use of Proceeds................................. 17
Item 4. Submission of Matters to a Vote of Security Holders....................... 17
Item 5. Other Information......................................................... 18
Item 6. Exhibits and Reports on Form 8-K.......................................... 19
</TABLE>
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
MERITOR AUTOMOTIVE, INC.
STATEMENT OF CONSOLIDATED INCOME
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
March 31, March 31,
--------------------------- --------------------------
2000 1999 2000 1999
---------- --------- --------- ---------
(In millions, except per share amounts)
<S> <C> <C> <C> <C>
Sales.......................................... $ 1,196 $ 1,163 $ 2,332 $ 2,107
Cost of sales.................................. (1,004) (992) (1,974) (1,809)
--------- --------- --------- ---------
Gross margin................................... 192 171 358 298
Selling, general and administrative............ (84) (72) (163) (130)
Gain on sale of business....................... - - 83 -
--------- --------- --------- ---------
Operating earnings............................. 108 99 278 168
Equity in earnings of affiliates............... 8 7 17 14
Other income-net............................... 1 2 1 6
Minority interests............................. (6) (5) (10) (8)
Interest expense............................... (19) (19) (36) (30)
--------- --------- --------- ---------
Income before income taxes..................... 92 84 250 150
Provision for income taxes..................... (35) (34) (96) (60)
--------- --------- --------- ---------
Net income .................................... $ 57 $ 50 $ 154 $ 90
========= ========= ========= =========
Basic and diluted earnings per share........... $ 0.91 $ 0.72 $ 2.39 $ 1.30
========= ========= ========= =========
Cash dividends per common share................ $ 0.105 $ 0.105 $ .21 $ .21
========= ========= ========= =========
Average common shares outstanding:
Basic....................................... 62.4 69.1 64.5 69.1
========= ========= ========= =========
Diluted..................................... 62.5 69.1 64.5 69.1
========= ========= ========= =========
</TABLE>
See notes to consolidated financial statements.
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2
<PAGE> 4
MERITOR AUTOMOTIVE, INC.
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
March 31,
2000 September 30,
(Unaudited) 1999
----------------- -----------------
ASSETS (In millions)
------
<S> <C> <C>
Current assets:
Cash $ 91 $ 68
Receivables (less allowance for doubtful accounts:
March 31, 2000, $9; September 30, 1999, $10).................. 799 742
Inventories.......................................................... 383 392
Other current assets................................................. 129 130
------- -------
Total current assets............................................. 1,402 1,332
Net property.............................................................. 729 766
Net goodwill (less accumulated amortization:
March 31, 2000, $38; September 30, 1999, $35) ....................... 449 454
Other assets.............................................................. 246 244
------- -------
TOTAL............................................... $ 2,826 $ 2,796
======= =======
LIABILITIES AND SHAREOWNERS' EQUITY
-----------------------------------
Current liabilities:
Short-term debt...................................................... $ 72 $ 44
Accounts payable..................................................... 649 712
Accrued compensation and benefits.................................... 139 144
Accrued income taxes................................................. 60 28
Other current liabilities............................................ 193 196
------- -------
Total current liabilities........................................ 1,113 1,124
------- -------
Long-term debt............................................................ 865 802
Accrued retirement benefits............................................... 357 371
Other liabilities......................................................... 97 116
Minority interests........................................................ 48 35
Shareowners' equity:
Common stock (March 31, 2000, 69.1 shares issued and
62.3 outstanding; September 30, 1999, 69.1 shares issued
and 68.8 outstanding).......................................... 69 69
Additional paid-in-capital........................................... 158 158
Retained earnings.................................................... 423 283
Treasury stock (March 31, 2000, 6.8 shares;
September 30, 1999, 0.3 shares) ............................... (125) (6)
Accumulated other comprehensive loss................................. (179) (156)
------- -------
Total shareowners' equity........................................ 346 348
------- -------
TOTAL............................................... $ 2,826 $ 2,796
======= =======
</TABLE>
See notes to consolidated financial statements.
- --------------------------------------------------------------------------------
3
<PAGE> 5
MERITOR AUTOMOTIVE, INC.
STATEMENT OF CONSOLIDATED CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
March 31,
---------------------------
2000 1999
-------- -------
(In millions)
<S> <C> <C>
OPERATING ACTIVITIES
Net income...................................................................... $ 154 $ 90
Adjustments to net income to arrive at cash provided by
operating activities:
Depreciation.............................................................. 63 56
Amortization............................................................... 8 2
Gain on sale of business................................................... (83) -
Pension contributions...................................................... (20) (10)
Other, net................................................................. 12 22
Changes in assets and liabilities, excluding effects of
acquisitions, divestitures and foreign currency adjustments.............. (117) (122)
------- ------
CASH PROVIDED BY OPERATING
ACTIVITIES............................................................. 17 38
------- ------
INVESTING ACTIVITIES
Capital expenditures............................................................ (74) (50)
Acquisition of businesses and other............................................. (28) (577)
Proceeds from disposition of property and businesses............................ 140 -
------- ------
CASH PROVIDED BY (USED FOR) INVESTING
ACTIVITIES............................................................. 38 (627)
------- ------
FINANCING ACTIVITIES
Net increase in revolving and other debt........................................ 101 120
Proceeds from issuance of notes................................................. - 498
------- ------
Net increase in debt....................................................... 101 618
Cash dividends.................................................................. (14) (14)
Purchases of treasury stock..................................................... (119) -
Payment of interest rate settlement cost........................................ - (31)
------- ------
CASH (USED FOR) PROVIDED BY FINANCING
ACTIVITIES............................................................. (32) 573
------- ------
CHANGE IN CASH.................................................................. 23 (16)
CASH AT BEGINNING OF PERIOD..................................................... 68 65
------- ------
CASH AT END OF PERIOD........................................................... $ 91 $ 49
======= ======
</TABLE>
See notes to consolidated financial statements.
- --------------------------------------------------------------------------------
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 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, 1999, 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, 2000 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. 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 will
adopt this standard effective October 1, 2000 and is currently analyzing
the impact SFAS 133 will have on its financial statements.
3. On April 6, 2000, the company entered into a definitive agreement to merge
with Arvin Industries, Inc. (Arvin). Under the terms of the merger
agreement, each share of Meritor common stock will be converted into the
right to receive .75 shares of common stock of the combined company, to be
named ArvinMeritor, Inc. Each share of Arvin common stock will be
converted into the right to receive one share of common stock of
ArvinMeritor, Inc., plus $2.00 in cash. After completion of the merger,
the current shareowners of Meritor will own approximately 65.8 percent of
the combined company and the current shareowners of Arvin will own
approximately 34.2 percent of the combined company. The boards of
directors of both companies have approved the proposed merger, which is
subject to shareowner and regulatory approvals. The company expects to
complete the merger during the quarter ending September 30, 2000 and for
the merger to be accounted for utilizing the "purchase method" of
accounting under generally accepted accounting principles.
5
<PAGE> 7
MERITOR AUTOMOTIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
4. Inventories are summarized as follows (in millions):
<TABLE>
<CAPTION>
March 31, September 30,
2000 1999
------------------- --------------------
<S> <C> <C>
Finished goods.............................................. $ 178 $ 181
Work in process............................................. 106 117
Raw materials, parts and supplies........................... 150 145
--------- ----------
Total.................................................. 434 443
Less allowance to adjust the carrying value of
certain inventories to a last in, first-out
(LIFO) basis........................................... 51 51
--------- ----------
Inventories............................................ $ 383 $ 392
========= ==========
</TABLE>
5. Other Current Assets are summarized as follows (in millions):
<TABLE>
<CAPTION>
March 31, September 30,
2000 1999
------------------ --------------------
<S> <C> <C>
Current deferred income taxes............................... $ 80 $ 83
Customer tooling............................................ 25 30
Prepaid expenses and other.................................. 24 17
--------- ----------
Other Current Assets................................... $ 129 $ 130
========= ==========
</TABLE>
6. Other Assets are summarized as follows (in millions):
<TABLE>
<CAPTION>
March 31, September 30,
2000 1999
------------------ --------------------
<S> <C> <C>
Long-term deferred income taxes............................. $ 73 $ 71
Investments in affiliates................................... 51 50
Prepaid pension costs....................................... 64 66
Net capitalized computer software costs..................... 35 34
Other....................................................... 23 23
--------- ----------
Other Assets........................................... $ 246 $ 244
========= ==========
</TABLE>
6
<PAGE> 8
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,
2000 1999
------------------ --------------------
<S> <C> <C>
Accrued product warranties.................................. $ 87 $ 95
Accrued taxes other than income taxes....................... 33 27
Accrued restructuring....................................... 7 11
Environmental reserves...................................... 7 10
Other....................................................... 59 53
--------- ----------
Other Current Liabilities.............................. $ 193 $ 196
========= ==========
</TABLE>
8. Other Liabilities are summarized as follows (in millions):
<TABLE>
<CAPTION>
March 31, September 30,
2000 1999
------------------ --------------------
<S> <C> <C>
Self insurance reserves..................................... $ 17 $ 16
Environmental reserves...................................... 14 14
Deferred payments........................................... 34 44
Other....................................................... 32 42
--------- ----------
Other Liabilities...................................... $ 97 $ 116
========= ==========
</TABLE>
9. Long-term Debt is summarized as follows (in millions):
<TABLE>
<CAPTION>
March 31, September 30,
2000 1999
------------------ --------------------
<S> <C> <C>
6.8% notes due 2009, net of discount........................ $ 498 $ 498
Bank revolving Credit Facility.............................. 324 239
Lines of credit............................................. 26 50
Other ..................................................... 17 15
--------- ----------
Total....................................................... $ 865 $ 802
========= ==========
</TABLE>
7
<PAGE> 9
MERITOR AUTOMOTIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
10. The company's financial instruments include cash, short- and long-term
debt and foreign currency forward exchange contracts. As of March 31,
2000, 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 $130 million at March 31, 2000 and $266 million at September
30, 1999. Meritor does not anticipate any material adverse effect on its
results of operations or financial position relating to these foreign
currency forward exchange contracts.
11. Accrued Retirement Benefits consisted of the following (in millions):
<TABLE>
<CAPTION>
March 31, September 30,
2000 1999
------------------ --------------------
<S> <C> <C>
Accrued retirement medical costs............................ $ 289 $ 295
Accrued pension costs....................................... 96 104
Other....................................................... 12 12
--------- ----------
Total................................................ 397 411
Amount classified as current liability...................... 40 40
--------- ----------
Accrued Retirement Benefits.......................... $ 357 $ 371
========= ==========
</TABLE>
8
<PAGE> 10
MERITOR AUTOMOTIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
12. The company defines 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. The company currently has two
operating segments, Heavy Vehicle Systems (HVS) and Light Vehicle Systems
(LVS). Within HVS, the company distinguishes between Original Equipment
sales and Aftermarket sales. Segment information is summarized as follows
(in millions):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
March 31, March 31,
--------------------------- ---------------------------
2000 1999 2000 1999
---------- --------- --------- ---------
<S> <C> <C> <C> <C>
Sales:
HVS
Original Equipment................. $ 652 $ 637 $ 1,279 $ 1,130
Aftermarket........................ 124 115 227 180
--------- --------- --------- ---------
Total HVS..................... 776 752 1,506 1,310
LVS................................... 420 411 826 797
--------- --------- --------- ---------
Total......................... $ 1,196 $ 1,163 $ 2,332 $ 2,107
========= ========= ========= =========
Operating earnings:
HVS................................... $ 68 $ 67 $ 124 $ 112
LVS................................... 40 32 71 56
Gain on sale of business.............. - - 83 -
--------- --------- --------- ---------
Operating earnings............... 108 99 278 168
Equity in earnings of affiliates...... 8 7 17 14
Other income-net...................... 1 2 1 6
Minority interest..................... (6) (5) (10) (8)
Interest expense...................... (19) (19) (36) (30)
--------- --------- --------- ---------
Income before income taxes............ 92 84 250 150
Provision for income taxes............ (35) (34) (96) (60)
--------- --------- --------- ---------
Net income............................ $ 57 $ 50 $ 154 $ 90
========= ========= ========= =========
</TABLE>
13. Comprehensive income (loss) is summarized as follows (in millions):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
March 31, March 31,
--------------------------- --------------------------
2000 1999 2000 1999
---------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net income............................ $ 57 $ 50 $ 154 $ 90
Foreign currency translation.......... (16) (62) (23) (69)
--------- --------- --------- ---------
Comprehensive income (loss)........... $ 41 $ (12) $ 131 $ 21
========= ========= ========= =========
</TABLE>
9
<PAGE> 11
MERITOR AUTOMOTIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
14. In September 1999, the company's board of directors authorized the
purchase of up to $125 million of the company's common stock and in
February 2000, the board of directors authorized an additional $75 million
for such purpose. Under the repurchase program, the company purchases
shares periodically in the open market or through privately negotiated
transactions. The company has suspended such purchases pending completion
of the merger with Arvin referred to in Note 3 above. Through March 31,
2000 the company had acquired 6,827,200 shares at an aggregate cost of
approximately $125 million, or an average of $18.38 per share.
15. During fiscal 1999, the company completed three acquisitions. On December
28, 1998, the company acquired the assets of Euclid Industries and assumed
substantially all of Euclid's liabilities. The company completed its
acquisition of the heavy truck axle manufacturing operations of Volvo
Truck Corporation on December 31, 1998. The purchase price for the Volvo
heavy truck axle business was approximately $135 million in cash, of which
$34 million is deferred at March 31, 2000. On January 29, 1999, the
company acquired the Heavy Vehicle Braking Systems (HVBS) business of
LucasVarity plc for approximately $400 million in cash.
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 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 $424
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 for
the six months ended March 31, 1999 assume that each of the foregoing
acquisitions occurred as of the beginning of fiscal 1999 (in millions,
except per share amounts):
<TABLE>
<CAPTION>
Six Months Ended
March 31, 1999
-----------------------------
<S> <C>
Net sales.......................................... $ 2,280
=========
Net income......................................... $ 90
=========
Basic and diluted earnings per share............... $ 1.30
=========
</TABLE>
16. On November 30, 1999, the company completed the sale of its Light Vehicle
Systems seat adjusting systems business for approximately $135 million
cash, resulting in a one-time gain of $83 million ($51 million after-tax,
or $0.79 per basic and diluted share). The seat adjusting systems business
had fiscal 1999 sales of approximately $130 million.
10
<PAGE> 12
MERITOR AUTOMOTIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
17. In the third quarter of fiscal 1999, the company recorded a restructuring
charge of $28 million ($17 million after-tax, or $0.25 per basic and
diluted share). The original charge included 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.
Restructuring actions completed as of March 31, 2000 have resulted in
lower than expected severance and other employee costs of approximately $2
million and higher facility related costs of approximately $2 million. As
of March 31, 2000, approximately $8 million had been paid in termination
benefits, with a net reduction of approximately 350 employees. The net
reduction of employees primarily related to LVS businesses. As of March
31, 2000, approximately $7 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 third quarter of fiscal 2000.
18. Various lawsuits, claims and proceedings have been or may be instituted or
asserted against the company relating to the conduct of its business,
including those pertaining to product liability, intellectual property,
environmental, safety and health and employment matters. Although the
outcome of litigation cannot be predicted with certainty and some
lawsuits, claims or proceedings may be disposed of unfavorably to the
company, management believes the disposition of matters which are pending
or asserted will not have a material adverse effect on the company's
financial statements.
11
<PAGE> 13
MERITOR AUTOMOTIVE, INC.
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
RESULTS OF OPERATIONS
2000 Second Quarter Compared to 1999 Second Quarter
Sales for the second quarter of fiscal 2000 were $1,196 million, an increase of
$33 million, or 3 percent, over the same period last year. Strong demand in most
of the company's Light and Heavy Vehicle Systems markets and market penetration
gains drove the sales performance.
Heavy Vehicle Systems (HVS) sales were $776 million for the second quarter of
fiscal 2000, an increase of $24 million, or 3 percent, as compared to the second
quarter last year. This sales growth reflects strong demand in the North
American and European heavy-duty truck markets and higher aftermarket sales,
partially offset by declines in the North American off-highway and specialty
vehicle sectors. HVS sales in North America were down $7 million, or 1 percent,
reflecting an increase in ongoing sales of $35 million, or 7 percent, which was
more than offset by a $42 million decline in transmission and clutch sales now
reported by the ZF Meritor joint venture under the equity basis of accounting.
The increase in ongoing North American sales was driven by higher sales of truck
and trailer axles, offset somewhat by lower off-highway and specialty vehicle
sales. European sales were up $18 million, or 11 percent, and reflect an
increase in sales volumes of $33 million, offset by the negative impact of
currency exchange of $15 million. The higher European sales were primarily
acquisition related. Asia-Pacific sales were up $10 million, or 91 percent, and
South American sales were up $3 million, or 20 percent.
Light Vehicle Systems (LVS) sales increased by $9 million, or 2 percent, in the
second quarter to $420 million, as compared to the same quarter last year.
Strong worldwide production volumes and increasing content on cars and light
trucks, principally in door systems and undercarriage products, drove the sales
growth. LVS second quarter sales in North America increased by $3 million, or 2
percent, reflecting an increase of ongoing business sales of $37 million, or 25
percent, offset by the elimination of $34 million of sales resulting from the
November 1999 divestiture of the seat adjusting systems business. LVS sales in
Europe were up $1 million, or 1 percent, reflecting strong volumes and
penetration improvements of $21 million, or 12 percent, offset by the negative
impact of currency exchange of $20 million. Sales in the rest of the world were
up $5 million, or 11 percent.
Operating margins improved to a record 9.0 percent in the second quarter, up
from 8.5 percent for the same period last year. Several initiatives drove this
improvement, including the company's ongoing focus on cost reduction and process
improvement programs and the impact of restructuring actions initiated in late
fiscal 1999, which more than offset higher information technology expenditures
related to enterprise resource planning systems.
HVS operating earnings for the second quarter of fiscal year 2000 were $68
million, compared to $67 million for the same period a year ago. Operating
margins in the second quarter declined slightly to 8.8 percent, from 8.9 percent
in the last year's second quarter, principally due to higher information
technology expenditures for enterprise resource planning systems.
12
<PAGE> 14
MERITOR AUTOMOTIVE, INC.
RESULTS OF OPERATIONS (Cont'd)
LVS operating margins improved in the second quarter of fiscal 2000 to 9.5
percent from 7.8 percent in the same period last year. The improvement stems
from the higher sales, as well as savings from material and cost reduction
programs and restructuring actions initiated in late fiscal 1999, which more
than offset higher expenditures on new product development and information
technology programs.
The company's process improvement and cost reduction programs relate to (i)
purchasing, which includes outsourcing non-core manufacturing and using lower
cost global sourcing of materials and supply base management; and (ii)
manufacturing, which includes shifting production to lower cost facilities,
consolidating common processes, improving material flow and investing in capital
systems.
The company's second quarter effective tax rate improved to 38.5 percent, down
from 40.0 percent for last year's second quarter, primarily as a result of legal
entity re-alignment actions.
Net income for the second quarter was $57 million, an increase of 14 percent
over the same period last year. Basic and diluted earnings per share for the
second quarter of 2000 were $0.91, an increase of $0.19, or 26 percent over the
second quarter of fiscal 1999.
As of March 31, 2000, the company had acquired approximately 6.8 million shares
of its outstanding common stock, at an aggregate cost of approximately $125
million, pursuant to its share repurchase programs (discussed in the notes to
the consolidated financial statements). The programs' second quarter impact was
a reduction of average shares outstanding from 69.1 million last year to 62.5
million (on a diluted basis) this year, thereby benefiting earnings per share by
$0.07.
Six Months Ended March 31, 2000 Compared to Six Months Ended March 31, 1999
For the first six months of fiscal 2000, Meritor's sales were $2,332 million, up
11 percent over the same period last year. This sales improvement was driven by
strong demand in the company's primary markets.
HVS sales for the first six months of fiscal 2000 were $1,506 million, up $196
million, or 15 percent, over the same period last year. Strong market demand,
except in the European trailer and North American off-highway and specialty
vehicle sectors, was a significant contributor to the sales increase. In
addition, the three acquisitions completed in fiscal 1999 contributed
incremental sales of $185 million in the first six months of fiscal 2000, which
more than offset an $84 million decline in transmission and clutch sales now
reported by the ZF Meritor joint venture and lower sales of $29 million related
to the negative impact of currency translation.
For the first six months of fiscal 2000, LVS sales were $826 million, an
increase of $29 million, or 4 percent, over the same period last year. Market
penetration gains, principally in door and undercarriage systems, and strong
worldwide light vehicle markets drove the sales growth for this business. LVS
sales in North and South America increased by $43 million, or 11 percent,
reflecting strong vehicle production volumes and penetration gains in all
product lines other than access control systems. European sales were down $14
million, or 4 percent, principally due to the negative impact of currency
translation of $36 million.
13
<PAGE> 15
MERITOR AUTOMOTIVE, INC.
RESULTS OF OPERATIONS (Cont'd)
For the first six months of fiscal 2000, operating earnings were $278 million.
Excluding the one-time gain on the sale of the seat adjusting systems business
(as discussed in the notes to the consolidated financial statements), operating
earnings were $195 million, an increase of 16 percent over 1999's first six
months' results. Operating margins before the one-time gain increased to 8.4
percent for the first six months of 2000, from 8.0 percent for the same period
last year, reflecting savings generated from restructuring actions and cost and
productivity improvement programs.
HVS operating margins were 8.2 percent in the first six months of fiscal 2000,
down from 8.5 percent last year. Higher premium and other volume-related
expenses incurred in connection with the strong heavy truck demand in North
America and higher information technology expenditures all adversely impacted
operating margins.
LVS operating margins improved to 8.6 percent from 7.0 percent for the first
half of fiscal 1999. This operating margin improvement reflects savings from
material and other cost reduction programs, as well as the restructuring actions
initiated in late fiscal 1999. The operating margin improvement also reflects
the contribution from the higher sales.
On November 30, 1999, the company completed the sale of its LVS seat adjusting
systems business for approximately $135 million cash. The seat adjusting systems
business had fiscal 1999 sales of approximately $135 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.
The company's effective tax rate for the six months ended March 31, 2000
improved to 38.5 percent, down from 40.0 percent for the six months ended March
31, 1999. The improvement was primarily a result of legal entity realignment
actions.
Net income for fiscal 2000's first six months was $154 million. Net income was
$103 million, or $1.60 per basic and diluted share, before the one-time gain of
$51 million, or $0.79 per share, recorded in the first quarter on the sale of
the company's seat adjusting systems business. This represents an increase of 23
percent from last year's net income for the first six months of $1.30 per share.
FINANCIAL CONDITION
Cash provided by operating activities for the first six months of fiscal 2000
was $17 million, a decrease of $21 million compared to the first six months of
fiscal 1999. The decrease was due primarily to higher pension contributions.
Capital expenditures were $74 million in the first six months of fiscal 2000, an
increase of $24 million from the first six months of fiscal 1999. The increase
is primarily related to the three acquisitions in fiscal 1999 (discussed in the
notes to the consolidated financial statements). The company anticipates full
year fiscal 2000 capital expenditures of approximately $205 million. Cash
provided by investing activities in fiscal 2000 included $140 million in
proceeds from the sale of businesses, including the sale of the LVS seat
adjusting systems business (discussed above).
14
<PAGE> 16
MERITOR AUTOMOTIVE, INC.
FINANCIAL CONDITION (Cont'd)
Cash used for financing activities in the fiscal 2000 six-month period includes
payments of $119 million for repurchases of the company's common stock and $14
million for cash dividends. The company's second quarter dividend of $0.105 per
share was paid on March 13, 2000, to shareowners of record on February 22, 2000.
On April 12, 2000, the board of directors declared a quarterly dividend of
$0.105 per share on its common stock, payable June 5, 2000, to shareowners of
record on May 15, 2000.
Cash used for financing activities in the first six months of fiscal 1999
includes $14 million of cash dividends and $31 million for the settlement of
interest rate agreements. In anticipation of offering debt securities in fiscal
1998, the company entered into interest rate agreements in April 1998 to secure
interest rates. The planned issuance 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 of $31 million in the fiscal
1999 first quarter. On February 24, 1999, the company completed its public
offering of debt securities consisting of $500 million 10-year fixed-rate 6.8%
notes.
Cash provided by financing activities for the first six months of fiscal 1999
included a net increase in debt of $618 million, of which $570 million was
utilized to fund acquisitions of businesses.
The company's long-term debt to capitalization ratio increased to 69 percent at
March 31, 2000, from 68 percent at September 30, 1999.
Meritor regularly considers various strategic and business opportunities,
including acquisitions. Although no assurance can be given as to whether or when
any additional acquisitions will be consummated, if agreement were to be
reached, the company could finance such acquisitions by issuance of additional
debt or equity securities. The additional debt from any acquisitions, if
consummated, could further increase the company's debt to capitalization ratio.
Information with respect to the effect on the company and its manufacturing
operations of compliance with environmental protection requirements and
resolution of environmental claims is contained under the caption "Environmental
Matters" in the Chief Financial Officer's Review, Management's Discussion and
Analysis in the company's 1999 Annual Report to Shareowners, incorporated by
reference into the company's Annual Report on Form 10-K for the fiscal year
ended September 30, 1999. Management believes that at March 31, 2000 there has
been no material change to this information.
INTERNATIONAL OPERATIONS
On January 1, 1999, the Euro became the common currency of eleven countries of
the European Union. During a three-year transition period, the present national
currencies of these eleven countries will become sub-units of the Euro at fixed
exchange rates. The European Union's current plans call for the transition
period to be completed by July 1, 2002, at which time the Euro will become the
sole legal tender in those participating countries.
15
<PAGE> 17
MERITOR AUTOMOTIVE, INC
INTERNATIONAL OPERATIONS (Cont'd)
The company is engaged in business in some of the countries that participate in
the European Monetary Union, and sales for fiscal 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 will be subsumed into the Euro and has
borrowings in participating currencies primarily under its revolving Credit
Facility. The company has analyzed the potential effects of the Euro conversion
on competitive conditions, information technology and other systems, currency
risks, financial instruments and contracts, and has examined the tax and
accounting consequences of Euro conversion, and believes that the conversion has
not had and will not have a material adverse effect on its business, operations
and financial condition.
The company is making the necessary adjustments to accommodate the conversion,
including modifications to its information technology systems and programs,
pricing schedules and financial instruments. The company expects that all
necessary actions will be completed in a timely manner, and that the costs
associated with the conversion to the Euro will not be material.
YEAR 2000 ISSUES
Meritor successfully completed a company-wide year 2000 project, resulting in no
significant disruptions during the year 2000 event, or to-date. The company does
not anticipate any future issues or expenditures associated with the year 2000.
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 the risk
of unanticipated gains and losses from currency rate fluctuations on 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, 2000, 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.
16
<PAGE> 18
MERITOR AUTOMOTIVE, INC.
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
On January 3, 2000, the company issued 468 shares of common stock to
each of Donald R. Beall and James E. Marley, non-employee directors
of the company, pursuant to the terms of the company's Directors
Stock Plan, in lieu of cash payment of the quarterly retainer fees
for board service. In addition, on February 9, 2000, the company
issued 1,000 shares of common stock to each of the eight 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 amended, as a
transaction not involving a public offering under Section 4(2).
Item 4. Submission of Matters to a Vote of Security Holders
The annual meeting of shareowners of the company was held on February
9, 2000. 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: The following four individuals were
elected to the Board of Directors, with terms expiring at the
annual meeting of shareowners in the years noted. The number of
shares noted below voted in favor of their election or were
withheld. Abstentions and broker non-votes were not applicable.
<TABLE>
<CAPTION>
Name of Nominee Votes in Favor Votes Withheld Term Ending
<S> <C> <C> <C>
Joseph B. Anderson, Jr. 57,052,458 533,570 2003
Donald R. Beall 56,991,416 594,612 2003
Rhonda L. Brooks 57,029,951 556,077 2003
John J. Creedon 56,927,151 658,877 2001
</TABLE>
(ii) Appointment of auditors: The shareowners approved the selection
of Deloitte & Touche LLP as the company's auditors. A total of
57,138,759 votes were cast in favor, 211,397 votes were cast
against, and 235,872 abstained from voting. Broker non-votes
were not applicable.
17
<PAGE> 19
MERITOR AUTOMOTIVE, INC.
Item 5. Other Information
Cautionary Statement
This Quarterly Report on Form 10-Q contains statements
relating to future results of the company (including
certain projections and business trends) that are
"forward-looking statements" as defined in the Private
Securities Litigation Reform Act of 1995. Actual results
may differ materially from those projected as a result of
certain risks and uncertainties, including but not limited
to global economic and market conditions; the demand for
commercial, specialty and light vehicles for which the
company supplies products; risks inherent in operating
abroad; OEM program delays; demand for and market
acceptance of new and existing products; successful
development of new products; reliance on major OEM
customers; labor relations of the company, its customers
and suppliers; successful integration of acquired
businesses; competitive product and pricing pressures; the
amount of the company's debt; uncertainties related to the
proposed merger of the company with Arvin Industries, Inc.;
as well as other risks and uncertainties, including but not
limited to those detailed from time to time in the filings
of the company with the Securities and Exchange Commission.
See also "Management's Discussion and Analysis of Results
of Operations and Financial Condition" and "Quantitative
and Qualitative Disclosures about Market Risk" herein.
These forward-looking statements are made only as of the
date hereof, and the company undertakes no obligation to
update or revise the forward-looking statements, whether as
a result of new information, future events or otherwise.
18
<PAGE> 20
MERITOR AUTOMOTIVE, INC.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
2(a) Agreement and Plan of Reorganization, dated as of
April 6, 2000, between Meritor Automotive, Inc., Mu
Sub, Inc. and Arvin Industries, Inc. (filed as
Exhibit 2.1 to the company's Current Report on Form
8-K dated April 14, 2000 (File No. 1-13093), and
incorporated herein by reference).
2(b) Arvin Industries, Inc. Stock Option Agreement, dated
as of April 6, 2000, between Arvin Industries, Inc.
and Meritor Automotive, Inc. (filed as Exhibit 2.2 to
the company's Current Report on Form 8-K dated April
14, 2000 (File No. 1-13093), and incorporated herein
by reference).
2(c) Meritor Automotive, Inc. Stock Option Agreement,
dated as of April 6, 2000, between Meritor
Automotive, Inc. and Arvin Industries, Inc. (filed as
Exhibit 2.3 to the company's Current Report on Form
8-K dated April 14, 2000 (File No. 1-13093), and
incorporated herein by reference).
27 - Financial Data Schedule.
(b) Reports on Form 8-K.
There were no reports on Form 8-K during the quarter ended
March 31, 2000.
The company filed a Current Report on Form 8-K, dated April
14, 2000, (a) reporting the execution of an agreement and
plan of reorganization with Arvin Industries, Inc. on April
6, 2000, under Item 5, "Other Events" and (b) filing as
exhibits the agreement and plan of reorganization and
related agreements and a joint press release under Item 7,
"Financial Statements, Pro Forma Financial Information and
Exhibits".
19
<PAGE> 21
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 4, 2000 By V.G. Baker, II
---------------------------- ---------------------------------
V.G. Baker, II
Senior Vice President,
General Counsel and Secretary
(For the Registrant)
Date May 4, 2000 By D.M. Stelfox
---------------------------- ---------------------------------
D.M. Stelfox
Vice President and Controller
(Principal Accounting Officer)
20
<PAGE> 22
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
EX-27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 91
<SECURITIES> 0
<RECEIVABLES> 799
<ALLOWANCES> 9
<INVENTORY> 383
<CURRENT-ASSETS> 1,402
<PP&E> 1,822
<DEPRECIATION> 1,093
<TOTAL-ASSETS> 2,826
<CURRENT-LIABILITIES> 1,113
<BONDS> 865
0
0
<COMMON> 69
<OTHER-SE> 277
<TOTAL-LIABILITY-AND-EQUITY> 2,826
<SALES> 1,196
<TOTAL-REVENUES> 1,205
<CGS> 1,004
<TOTAL-COSTS> 1,088
<OTHER-EXPENSES> 6
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 19
<INCOME-PRETAX> 92
<INCOME-TAX> 35
<INCOME-CONTINUING> 57
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 57
<EPS-BASIC> .91
<EPS-DILUTED> .91
</TABLE>
