<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 2000
----------------------------
Commission file number 1-15983
-------------------------------
ArvinMeritor, Inc. (successor to Meritor Automotive, Inc.)
--------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Indiana 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
-------- --------
70,916,247 shares of Common Stock, $1.00 par value of ArvinMeritor, were
outstanding on July 31, 2000.
<PAGE> 2
MERITOR AUTOMOTIVE, INC.
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION:
Page
Item 1. Financial Statements: No.
<S> <C> <C> <C>
Statement of Consolidated Income - - Three Months
and Nine Months Ended June 30, 2000 and 1999.............................. 2
Consolidated Balance Sheet - -
June 30, 2000 and September 30, 1999...................................... 3
Statement of Consolidated Cash Flows - -
Nine Months Ended June 30, 2000 and 1999.................................. 4
Notes to Consolidated Financial Statements................................ 5
Item 2. Management's Discussion and Analysis
of Results of Operations and Financial Condition.............................. 13
Item 3. Quantitative and Qualitative Disclosures About
Market Risk................................................................... 18
PART II. OTHER INFORMATION:
Item 2. Changes in Securities and Use of Proceeds..................................... 19
Item 4. Submission of Matters to a Vote of Security Holders........................... 19
Item 5. Other Information............................................................. 20
Item 6. Exhibits and Reports on Form 8-K.............................................. 20
</TABLE>
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
MERITOR AUTOMOTIVE, INC.
STATEMENT OF CONSOLIDATED INCOME
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
June 30, June 30,
--------------------------- --------------------------
2000 1999 2000 1999
---------- --------- --------- ---------
(In millions, except per share amounts)
<S> <C> <C> <C> <C>
Sales.......................................... $ 1,141 $ 1,217 $ 3,473 $ 3,324
Cost of sales ............................... (956) (1,033) (2,922) (2,836)
-------- ---------- --------- ---------
Gross margin................................... 185 184 551 488
Selling, general and administrative............ (75) (74) (238) (204)
Amortization expense........................... (5) (3) (13) (7)
Restructuring costs............................ (26) (28) (26) (28)
Merger expenses................................ (2) - (2) -
Gain on sale................................... 6 - 89 -
-------- ---------- --------- ---------
Operating earnings............................. 83 79 361 249
Other income, net.............................. - - - 2
Equity in earnings of affiliates............... 7 8 24 22
Interest expense, net.......................... (19) (17) (54) (45)
-------- ---------- --------- ---------
Income before income taxes..................... 71 70 331 228
Provision for income taxes..................... (27) (28) (127) (91)
Minority interests, net of taxes............... (4) (3) (10) (8)
-------- ---------- --------- ---------
Net income ................................... $ 40 $ 39 $ 194 $ 129
========= ========== ========= =========
Basic and diluted earnings per share........... $ 0.64 $ 0.56 $ 3.04 $ 1.86
========= ========== ========= =========
Cash dividends per common share................ $ 0.105 $ 0.105 $ .315 $ .315
========= ========== ========= =========
Basic and diluted average common
shares outstanding...................... 62.3 69.1 63.8 69.1
========== ========== ========= =========
</TABLE>
See notes to consolidated financial statements.
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2
<PAGE> 4
MERITOR AUTOMOTIVE, INC.
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
June 30, 2000 September 30,
(Unaudited) 1999
----------------- -----------------
ASSETS (In millions)
------
<S> <C> <C>
Current assets:
Cash $ 75 $ 68
Receivables (less allowance for doubtful accounts:
June 30, 2000, $8; September 30, 1999, $10).......................... 767 742
Inventories.............................................................. 369 392
Other current assets..................................................... 124 130
------- -------
Total current assets.................................................. 1,335 1,332
Net property................................................................ 713 766
Net goodwill (less accumulated amortization:
June 30, 2000, $41; September 30, 1999, $35) ............................ 439 454
Other assets................................................................ 253 244
------- -------
TOTAL.................................................... $ 2,740 $ 2,796
======= =======
LIABILITIES AND SHAREOWNERS' EQUITY
-----------------------------------
Current liabilities:
Short-term debt.......................................................... $ 25 $ 44
Accounts payable......................................................... 655 712
Accrued compensation and benefits........................................ 145 144
Accrued income taxes..................................................... 63 28
Other current liabilities................................................ 202 196
------- -------
Total current liabilities............................................. 1,090 1,124
------- -------
Long-term debt.............................................................. 787 802
Accrued retirement benefits................................................. 347 371
Other liabilities........................................................... 96 116
Minority interests.......................................................... 50 35
Shareowners' equity:
Common stock (June 30, 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........................................................ 457 283
Treasury stock (June 30, 2000, 6.8 shares;
September 30, 1999, 0.3 shares) .....................................
(125) (6)
Accumulated other comprehensive loss..................................... (189) (156)
------- -------
Total shareowners' equity............................................ 370 348
------- -------
TOTAL.................................................... $ 2,740 $ 2,796
======= =======
</TABLE>
See notes to consolidated financial statements.
--------------------------------------------------------------------------------
3
<PAGE> 5
MERITOR AUTOMOTIVE, INC.
STATEMENT OF CONSOLIDATED CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
June 30,
-----------------------------
2000 1999
------------ ------------
(In millions)
<S> <C> <C>
OPERATING ACTIVITIES
Net income...................................................................... $ 194 $ 129
Adjustments to net income to arrive at cash provided by
operating activities:
Depreciation................................................................ 95 87
Amortization................................................................. 13 7
Gain on sale................................................................. (89) -
Restructuring, net of expenditures........................................... 25 27
Pension contributions........................................................ (33) (21)
Other, net................................................................... 19 30
Changes in assets and liabilities, excluding effects of
acquisitions, divestitures and foreign currency adjustments................. (73) (127)
------- ------
CASH PROVIDED BY OPERATING
ACTIVITIES................................................................ 151 132
------- ------
INVESTING ACTIVITIES
Capital expenditures............................................................ (116) (99)
Acquisition of businesses and other............................................. (28) (570)
Proceeds from disposition of property and businesses............................ 148 -
------- ------
CASH PROVIDED BY (USED FOR) INVESTING
ACTIVITIES................................................................ 4 (669)
------- ------
FINANCING ACTIVITIES
Net (decrease) increase in revolving and other debt............................. (9) 72
Proceeds from issuance of notes................................................. - 498
------- ------
Net (decrease) increase in debt.............................................. (9) 570
Cash dividends.................................................................. (20) (22)
Purchases of treasury stock..................................................... (119) -
Payment of interest rate settlement cost........................................ - (31)
------- ------
CASH (USED FOR) PROVIDED BY FINANCING
ACTIVITIES................................................................ (148) 517
------- ------
CHANGE IN CASH.................................................................. 7 (20)
CASH AT BEGINNING OF PERIOD..................................................... 68 65
------- ------
CASH AT END OF PERIOD........................................................... $ 75 $ 45
======= ======
</TABLE>
See notes to consolidated financial statements.
--------------------------------------------------------------------------------
4
<PAGE> 6
MERITOR AUTOMOTIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. On July 7, 2000, Meritor Automotive, Inc. (the company or Meritor) and
Arvin Industries, Inc. (Arvin) merged into ArvinMeritor, Inc. (the combined
company or ArvinMeritor). Under the terms of the merger agreement, each
share of Meritor common stock was converted into the right to receive .75
shares of common stock of the combined company and each share of Arvin
common stock was converted into the right to receive one share of common
stock of the combined company, plus $2.00 in cash. The previous shareowners
of Meritor now own approximately 65.8 percent of the combined company and
the previous shareowners of Arvin now own approximately 34.2 percent of the
combined company. The merger will be accounted for utilizing the "purchase
method" of accounting.
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 nine-month periods ended June 30, 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 FASB amended SFAS 133 again
by issuing Statement of Financial Accounting Standards No. 138 (SFAS 138),
"Accounting for Certain Derivative Instruments and Certain Hedging
Activities - an amendment of FASB Statement No. 133" in June 2000. The new
standard addresses certain implementation issues and further clarifies SFAS
133. The company will adopt these standards effective October 1, 2000 and
is currently analyzing the impact SFAS 133 and SFAS 138 will have on its
financial statements.
5
<PAGE> 7
MERITOR AUTOMOTIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3. 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 June 30, 2000. On January 29, 1999, the company
acquired the Heavy Vehicle Braking Systems (HVBS) business of LucasVarity
plc for approximately $400 million in cash. These acquisitions were
accounted for by the purchase method of accounting, and 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 nine months ended June 30, 2000 and 1999 assume that the ArvinMeritor
merger and each of the foregoing acquisitions occurred as of the beginning
of fiscal 2000 and 1999 (in millions, except per share amounts).
<TABLE>
<CAPTION>
Nine Months Ended Nine Months Ended
June 30, 2000 June 30, 1999
-------------------- --------------------
<S> <C> <C>
Net sales.................................................. $6,042 $ 5,784
====== =======
Net income................................................. $ 205 $ 196
====== =======
Basic earnings per share................................... $ 2.84 $ 2.58
====== =======
Diluted earnings per share................................. $ 2.84 $ 2.57
====== =======
</TABLE>
Pro forma net income and basic and diluted earnings per share amounts for
the nine months ended June 30, 2000 include a non-recurring charge of $62
million ($53 million after-tax or $0.74 per share) for merger related
expenses. The pro forma combined data for ArvinMeritor is based on
historical information and management's current estimates which may differ
from the final allocation due to appraisals of fixed assets, other fair
value adjustments, and the finalization of any potential plans of
restructuring.
6
<PAGE> 8
MERITOR AUTOMOTIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
4. 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. The company purchased 6,827,200 shares at an aggregate cost of
approximately $125 million, or an average of $18.38 per share, under these
programs before they were suspended in February 2000 in anticipation of
entering into a definitive agreement to merge with Arvin. In July 2000, the
board of directors of ArvinMeritor authorized the purchase of up to $100
million of the combined company's common stock. Under the repurchase
program, the combined company will purchase shares periodically in the open
market or through privately negotiated transactions. As of July 31, 2000,
172,400 shares of ArvinMeritor common stock had been purchased under this
repurchase program at an aggregate cost of approximately $3 million.
5. In the third quarter of fiscal 2000 the company recorded a restructuring
charge of $26 million ($16 million after-tax, or $0.26 per basic and
diluted share). The charge included severance and other employee costs of
approximately $19 million related to a net reduction of approximately 500
employees, with the balance primarily associated with facility related
costs from the rationalization of operations. As of June 30, 2000,
approximately $1 million had been paid in termination benefits, with a net
reduction of approximately 50 employees. As of June 30, 2000,
approximately $19 million of the 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 2001.
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 350 employees, with the balance primarily associated with
facility related costs from the rationalization of operations. All
restructuring actions had been completed as of June 30, 2000 and 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 June 30, 2000, approximately $11 million had been paid in
termination benefits for a net reduction of approximately 425 employees,
with approximately $3 million remaining in Other Current Liabilities for
final termination benefits. The net reduction of employees primarily
related to Light Vehicle Systems (LVS) businesses.
7
<PAGE> 9
MERITOR AUTOMOTIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
6. Inventories are summarized as follows (in millions):
<TABLE>
<CAPTION>
June 30, September 30,
2000 1999
------------------- --------------------
<S> <C> <C>
Finished goods................................................. $ 164 $ 181
Work in process................................................ 113 117
Raw materials, parts and supplies.............................. 143 145
--------- ----------
Total....................................................... 420 443
Less allowance to adjust the carrying value of
certain inventories to a last in, first-out
(LIFO) basis 51 51
--------- ----------
Inventories................................................. $ 369 $ 392
========= ==========
</TABLE>
7. Other Current Assets are summarized as follows (in millions):
<TABLE>
<CAPTION>
June 30, September 30,
2000 1999
------------------ --------------------
<S> <C> <C>
Current deferred income taxes.................................. $ 79 $ 83
Customer tooling............................................... 25 30
Prepaid expenses and other..................................... 20 17
--------- ----------
Other Current Assets...................................... $ 124 $ 130
========= ==========
</TABLE>
8. Other Assets are summarized as follows (in millions):
<TABLE>
<CAPTION>
June 30, September 30,
2000 1999
------------------ --------------------
<S> <C> <C>
Long-term deferred income taxes................................ $ 74 $ 71
Investments in affiliates...................................... 52 50
Prepaid pension costs.......................................... 62 66
Net capitalized computer software costs........................ 42 34
Other.......................................................... 23 23
--------- ----------
Other Assets................................................ $ 253 $ 244
========= ==========
</TABLE>
8
<PAGE> 10
MERITOR AUTOMOTIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
9. Other Current Liabilities are summarized as follows (in millions):
<TABLE>
<CAPTION>
June 30, September 30,
2000 1999
------------------ --------------------
<S> <C> <C>
Accrued product warranties.................................. $ 83 $ 95
Accrued taxes other than income taxes....................... 33 27
Accrued restructuring....................................... 22 11
Environmental reserves...................................... 5 10
Other....................................................... 59 53
--------- ----------
Other Current Liabilities................................. $ 202 $ 196
========= ==========
</TABLE>
10. Other Liabilities are summarized as follows (in millions):
<TABLE>
<CAPTION>
June 30, September 30,
2000 1999
------------------ --------------------
<S> <C> <C>
Self insurance reserves..................................... $ 17 $ 16
Environmental reserves...................................... 14 14
Deferred payments........................................... 34 44
Other....................................................... 31 42
--------- ----------
Other Liabilities......................................... $ 96 $ 116
========= ==========
</TABLE>
11. Long-term Debt is summarized as follows (in millions):
<TABLE>
<CAPTION>
June 30, September 30,
2000 1999
------------------ --------------------
<S> <C> <C>
6.8% notes due 2009, net of discount........................ $ 498 $ 498
Bank revolving Credit Facility.............................. 255 239
Lines of credit............................................. 17 50
Other ..................................................... 17 15
--------- ----------
Long-term Debt............................................ $ 787 $ 802
========= ==========
</TABLE>
9
<PAGE> 11
MERITOR AUTOMOTIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
In June 2000, the company and certain of its foreign subsidiaries
negotiated on behalf of the combined company to enter into two unsecured
credit facilities with a group of banks: a 364-day $750 million credit
facility (under which borrowings are subject to conversion to a two-year
term loan) and a five-year $750 million revolving credit facility. The new
credit facilities were entered into effective at the date of the merger by
the combined company and will be used for payment of merger expenses,
working capital needs and other general corporate purposes of the combined
company. Borrowings are subject to interest based on quoted market rates
plus a margin based on the combined company's credit rating. In addition, a
facility fee, which also varies based on ArvinMeritor's credit rating, is
required on the amount of the facilities. Up to $500 million of the
five-year credit facility is available for non-U.S. currency loans and up
to $100 million of that facility is available for the issuance of standby
letters of credit. Existing credit agreements of Arvin and Meritor were
terminated at the time of the merger, and the initial borrowing under the
new credit facilities was used to repay amounts outstanding under these
agreements.
12. The company's financial instruments include cash, short- and long-term debt
and foreign currency forward exchange contracts. As of June 30, 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 $164
million at June 30, 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.
13. Accrued Retirement Benefits consisted of the following (in millions):
<TABLE>
<CAPTION>
June 30, September 30,
2000 1999
------------------ --------------------
<S> <C> <C>
Accrued retirement medical costs............................ $ 282 $ 295
Accrued pension costs....................................... 93 104
Other....................................................... 12 12
--------- ----------
Total.................................................... 387 411
Amount classified as current liability...................... 40 40
--------- ----------
Accrued Retirement Benefits.............................. $ 347 $ 371
========= ==========
</TABLE>
10
<PAGE> 12
MERITOR AUTOMOTIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
14. 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 Nine Months Ended
June 30, June 30,
--------------------------- --------------------------
2000 1999 2000 1999
---------- --------- --------- ---------
<S> <C> <C> <C> <C>
Sales:
HVS
Original Equipment................... $ 612 $ 691 $ 1,891 $ 1,821
Aftermarket.......................... 123 116 350 296
--------- --------- --------- ---------
Total HVS........................ 735 807 2,241 2,117
LVS................................... 406 410 1,232 1,207
--------- --------- --------- ---------
Total............................ $ 1,141 $ 1,217 $ 3,473 $ 3,324
========= ========= ========= =========
Operating earnings:
HVS................................... $ 67 $ 67 $ 191 $ 180
LVS................................... 38 40 109 97
Restructuring costs................... (26) (28) (26) (28)
Merger expenses....................... (2) - (2) -
Gain on sale.......................... 6 - 89 -
--------- --------- --------- ---------
Operating earnings............... 83 79 361 249
Other income, net..................... - - - 2
Equity in earnings of affiliates...... 7 8 24 22
Interest expense, net................. (19) (17) (54) (45)
--------- --------- --------- ---------
Income before income taxes............ 71 70 331 228
Provision for income taxes............ (27) (28) (127) (91)
Minority interests, net of taxes...... (4) (3) (10) (8)
--------- --------- --------- ---------
Net income............................ $ 40 $ 39 $ 194 $ 129
========= ========= ========= =========
</TABLE>
11
<PAGE> 13
MERITOR AUTOMOTIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
15. Comprehensive income is summarized as follows (in millions):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
June 30, June 30,
--------------------------- --------------------------
2000 1999 2000 1999
---------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net income............................ $ 40 $ 39 $ 194 $ 129
Foreign currency translation.......... (10) (9) (33) (78)
--------- --------- --------- ---------
Comprehensive income.................. $ 30 $ 30 $ 161 $ 51
========= ========= ========= =========
</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 $0.80 per basic and diluted share). The seat adjusting systems business
had fiscal 1999 sales of approximately $130 million.
17. 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.
12
<PAGE> 14
MERITOR AUTOMOTIVE, INC.
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
RESULTS OF OPERATIONS
2000 Third Quarter Compared to 1999 Third Quarter
Sales of $1,141 million in the third quarter of fiscal 2000 decreased six
percent from sales of $1,217 million in the same period last year. Softening in
the North American heavy-truck market and the negative impact of European
currency exchange rates contributed to the sales decrease.
Heavy Vehicle Systems (HVS) sales were $735 million in the third quarter of
fiscal 2000, a decrease of nine percent from the third quarter last year.
Contributing to this sales decline were the negative impact of European currency
exchange rates and the weaker demand in the North American heavy-duty truck
market. Additionally, transmission and clutch sales are now reported on the
equity method for the ZF Meritor joint venture, formed last September. Excluding
$49 million of transmission and clutch sales in last year's third quarter total
HVS sales declined three percent while HVS sales in North America were down
eight percent. Strong truck build volumes drove a 15 percent increase in
European HVS sales, before taking into account the negative impact of currency
exchange of $14 million this year. South American sales were up 44 percent,
while sales in other world regions were up 16 percent.
Light Vehicle Systems (LVS) sales decreased one percent in the third quarter to
$406 million, as compared to the same quarter last year. Strong worldwide
new-vehicle volumes and market penetration gains, principally in door systems,
were offset by the impact of the company's divestiture of its North American
seat adjusting systems business in the first quarter of fiscal 2000, and the
negative impact of currency translation. Ongoing LVS sales in North America
increased 17 percent excluding the $36 million sales decline resulting from the
divestiture of the seat adjusting systems business. Excluding an unfavorable
currency exchange impact of $28 million, LVS sales in Europe rose 18 percent,
reflecting the region's strong vehicle build volumes and higher content per
vehicle. Sales in the rest of the world were up six percent.
Special items in the third quarter of 2000 included a charge of $26 million ($16
million after-tax, or $0.26 per share) for restructuring actions that are
expected to significantly reduce costs and improve operational efficiencies, a
one-time gain of $6 million ($3 million after-tax, or $0.05 per share) from the
sale of land and non-recurring costs of $2 million ($1 million after-tax, or
$0.02 per share) associated with the company's merger with Arvin Industries,
Inc.(Arvin) (discussed below).
Third quarter operating margins including special items were 7.3 percent,
compared with 6.5 percent in the same period last year. Operating margins before
special items improved 40 basis points to 9.2 percent in the third quarter of
fiscal 2000, up from 8.8 percent in the same period last year. The positive
impact of restructuring actions, and the company's continued focus on cost
reduction and process improvement programs, more than offset higher expenditures
for new product development and enterprise resource planning systems.
13
<PAGE> 15
MERITOR AUTOMOTIVE, INC.
RESULTS OF OPERATIONS (Cont'd)
HVS operating margins for the third quarter were 9.1 percent, up 80 basis points
from last year's third quarter. This margin improvement was due primarily to
cost reduction and other performance improvement programs, and reduced premium
costs resulting from lower North American truck volumes.
LVS operating margins in the third quarter were 9.4 percent this year compared
to 9.8 percent last year. This decrease was the result of higher engineering
expenditures for roof module and other new product development programs.
The company's process improvement and cost reduction programs relate to (i)
purchasing, which includes outsourcing non-core manufacturing and using lower
cost global sourcing of materials and supply base management; and (ii)
manufacturing, which includes shifting production to lower cost facilities,
consolidating common processes, improving material flow and investing in capital
and systems.
Net income for the third quarter of 2000 was $40 million, or $0.64 per share,
compared to $39 million or $0.56 per share last year. Net income before special
items was $54 million, or $0.87 per share, an increase of seven percent over
last year's third quarter earnings per share of $0.81 before special items.
As of June 30, 2000, the company had acquired approximately 6.8 million shares
of its outstanding common stock, at an aggregate cost of $125 million, pursuant
to share repurchase programs (discussed in the notes to the consolidated
financial statements). The $75 million program was suspended in February 2000 in
anticipation of entering into a definitive agreement to merge with Arvin
Industries, Inc. (discussed below). The third quarter impact of these programs
was a reduction of average shares outstanding from 69.1 million last year to
62.3 million this year.
As is discussed in Note 1 of the notes to the consolidated financial statements,
on July 7, 2000, the company and Arvin merged into ArvinMeritor, Inc. (the
combined company). Under the terms of the merger agreement, each share of
Meritor common stock was converted into the right to receive .75 shares of
common stock of the combined company and each share of Arvin common stock was
converted into the right to receive one share of common stock of the combined
company, plus $2.00 in cash. The previous shareowners of Meritor now own
approximately 65.8 percent of the combined company and the previous shareowners
of Arvin now own approximately 34.2 percent of the combined company. The merger
will be accounted for utilizing the purchase method of accounting.
On July 19, 2000, the combined company's board of directors announced a program
to repurchase up to $100 million of its common stock. Under the program, the
combined company will purchase shares periodically in the open market or through
privately negotiated transactions as market conditions warrant and in accordance
with Securities and Exchange Commission rules. As of July 31, 2000, 172,400
shares of ArvinMeritor common stock had been purchased under this program at an
aggregate cost of approximately $3 million.
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MERITOR AUTOMOTIVE, INC.
RESULTS OF OPERATIONS (Cont'd)
Nine Months Ended June 30, 2000 Compared to Nine Months Ended June 30, 1999
For the first nine months of fiscal 2000, the company's sales were $3,473
million, up $149 million or 4 percent over the same period last year. This
increase was principally due to market penetration gains in the LVS business, as
well as strong demand in the company's primary markets.
HVS sales in the first nine months of fiscal 2000 were $2,241 million, up six
percent over the first nine months of fiscal 1999. Strong market demand, except
in the European trailer and North American off-highway and specialty vehicle
sectors, contributed to the sales increase. In addition, the three acquisitions
completed in fiscal 1999 contributed incremental sales of $201 million in the
first nine months of fiscal 2000, which more than offset a $133 million decline
in transmission and clutch sales now reported by the ZF Meritor joint venture
and lower sales of $43 million related to the negative impact of currency
translation.
LVS sales increased 2 percent to $1,232 million in the first nine months of
fiscal 2000 from $1,207 million in the first nine months of fiscal 1999. Market
penetration gains, principally in door and undercarriage systems, and strong
worldwide light vehicle markets were offset by the unfavorable impacts of
currency translation of $61 million and a $65 million sales decline associated
with the sale of the LVS seat adjusting systems business.
Operating earnings for the first nine months of fiscal 2000 were $361 million,
compared to $249 million for the first nine months of fiscal 1999. Excluding
special items, operating earnings were up eight percent from the first nine
months of fiscal 1999 to $300 million. Operating margins before special items
increased to 8.6 percent, up from 8.3 percent in fiscal 1999.
HVS operating margins were 8.5 percent in the first nine months of both fiscal
2000 and 1999. Higher premium and other volume-related expenses incurred in
connection with the strong heavy truck demand in North America in the first half
of fiscal 2000 and higher information technology expenditures adversely
impacted operating margins.
LVS operating margins improved to 8.8 percent for the first nine months of
fiscal 2000 from 8.0 percent in the prior year. 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 in cash resulting in a one-time
gain of $83 million ($51 million after-tax, or $0.80 per basic and diluted
share). The seat adjusting systems business had fiscal 1999 sales of
approximately $130 million. This divestiture reflects the company's continuous
review and assessment of existing businesses, placing emphasis on the core
businesses that support the company's long-term strategic direction.
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<PAGE> 17
MERITOR AUTOMOTIVE, INC.
RESULTS OF OPERATIONS (Cont'd)
The company's effective tax rate for the nine months ended June 30, 2000 was
38.5 percent, down from 40.0 percent for the nine months ended June 30, 1999.
The improvement was primarily a result of legal entity realignment actions.
Net income was $194 million, or $3.04 per share for the first nine months of
fiscal 2000, compared to $129 million or $1.86 per share for the comparable
period in 1999. Excluding special items, net income was $157 million, an
increase of 8 percent over the first nine months of fiscal 1999 net income of
$146 million. Earnings per share excluding special items increased 17 percent,
up from $2.11 in the first nine months of fiscal 1999 to $2.46 in the first nine
months of fiscal 2000.
FINANCIAL CONDITION
Cash provided by operating activities for the first nine months of fiscal 2000
was $151 million, an increase of $19 million compared to the first nine months
of fiscal 1999. This increase was due mainly to working capital improvements
which were partially offset by changes in other assets and liabilities and
greater pension contributions.
Capital expenditures were $116 million in the first nine months of fiscal 2000,
an increase of $17 million from the first nine months of fiscal 1999. Cash
provided by investing activities in the first nine months of fiscal 2000
included $148 million in proceeds from the sale of property and businesses,
including the sale of the LVS seat adjusting systems business (discussed above).
Cash used for financing activities in the fiscal 2000 nine month period includes
payments of $119 million for repurchases of the company's common stock and $20
million for cash dividends. The company's third quarter dividend of 10.5 cents
per share was paid on June 5, 2000, to shareowners of record on May 15, 2000.
On July 19, 2000, the board of directors of ArvinMeritor declared a dividend of
$0.22 per share on its common stock payable September 5, 2000 to shareowners of
record on August 14, 2000.
Cash provided by financing activities for the first nine months of fiscal 1999
included a net increase in debt of $570 million which was utilized to fund
acquisitions of businesses.
The company's long term debt to capitalization ratio decreased to 65 percent at
June 30, 2000, from 68 percent at September 30, 1999.
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<PAGE> 18
MERITOR AUTOMOTIVE, INC.
FINANCIAL CONDITION (Cont'd)
In June 2000, the company and certain of its foreign subsidiaries negotiated on
behalf of the combined company to enter into two unsecured credit facilities
with a group of banks: a 364-day $750 million credit facility (under which
borrowings are subject to conversion to a two-year term loan) and a five-year
$750 million revolving credit facility. The new credit facilities were entered
into effective at the date of the merger by the combined company and will be
used for payment of merger expenses, working capital needs and other general
corporate purposes of the combined company. Borrowings are subject to interest
based on quoted market rates plus a margin based on the combined company's
credit rating. In addition, a facility fee, which also varies based on
ArvinMeritor's credit rating, is required on the amount of the facilities. Up to
$500 million of the five-year credit facility is available for non-U.S. currency
loans and up to $100 million of that facility is available for the issuance of
standby letters of credit. Existing credit agreements of Arvin and Meritor were
terminated at the time of the merger, and the initial borrowing under the new
credit facilities was used to repay amounts outstanding under these agreements.
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 June 30, 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.
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.
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MERITOR AUTOMOTIVE, INC.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The company is exposed to foreign currency exchange rate risk inherent in its
sales and assets and liabilities denominated in currencies other than the U.S.
dollar and interest rate risk associated with the company's debt. The company
does enter into foreign currency forward exchange contracts to minimize 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 June 30, 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.
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MERITOR AUTOMOTIVE, INC.
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
The company issued 557 shares of Common Stock on April 3, 2000, and 696
shares of Common Stock on July 3, 2000, 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 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).
Item 4. Submission of Matters to a Vote of Security Holders
A special meeting of shareowners of the company was held July 6, 2000.
The following matters were voted on and received the specified number of
votes in favor, votes withheld or against, and abstentions. Broker
non-votes were not applicable.
(i) Approval of merger. The shareowners approved the Agreement and
Plan of Reorganization among the company, ArvinMeritor and Arvin,
providing for the merger of the company and Arvin into
ArvinMeritor. A total of 44,132,067 votes were cast in favor,
837,638 votes were cast against, and there were 311,257
abstentions.
(ii) Approval of amendment of long-term incentives plan: The
shareowners approved an amendment of the company's 1997 Long-Term
Incentives Plan to increase the number of shares of common stock
issuable under the Plan and to increase the number of shares that
may be subject to grants under the Plan in any fiscal year. A
total of 28,675,947 votes were cast in favor, 16,000,765 votes
were cast against, and there were 604,250 abstentions.
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MERITOR AUTOMOTIVE, INC.
Item 5. Other Information
Cautionary Statement
This Quarterly Report on Form 10-Q contains statements relating to
future results (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 ArvinMeritor
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
ArvinMeritor, its customers and suppliers; successful
integration of acquired or merged businesses; competitive
product and pricing pressures; the amount of ArvinMeritor's
debt; as well as other risks and uncertainties, including but
not limited to those detailed from time to time in the filings of
the company and ArvinMeritor 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 ArvinMeritor 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.
10-a - Five-Year Revolving Credit Agreement, dated as of June
28, 2000, among the company, the foreign subsidiary borrowers
and lenders from time to time parties thereto, Bank One, NA as
Administrative Agent, the Chase Manhattan Bank as Syndication
Agent, and Citicorp USA, Inc. and Bank of America, NA as
Documentation Agents.
10-b-364-Day Credit Agreement, dated as of June 28, 2000,
among the company, the lenders from time to time parties
thereto, Bank One, NA as Administrative Agent, The Chase
Manhattan Bank as Syndication Agent, and Citicorp USA, Inc. and
Bank of America, NA as Documentation Agents.
27 - Financial Data Schedule.
(b) Reports on Form 8-K.
The company filed a Current Report on Form 8-K, dated June 15,
2000, filing as an exhibit under Item 7, "Financial Statements,
Pro Forma Financial Information and Exhibits," a press release
issued on June 15, 2000 that describes certain restructuring
actions taken by the company.
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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.
ARVINMERITOR, INC. - (successor to
------------------------------------
MERITOR AUTOMOTIVE, INC.)
-------------------------
(Registrant)
Date August 14, 2000 By /s/ V.G. Baker, II
--------------------------- --------------------------------
V.G. Baker, II
Senior Vice President,
General Counsel and Secretary
(For the Registrant)
Date August 14, 2000 By /s/ W. M. Lowe
--------------------------- --------------------------------
W. M. Lowe
Vice President and Controller
(Principal Accounting Officer)
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Exhibit Index
Exhibit No. Description
----------- -----------
10.a Five-Year Revolving Credit Agreement, dated as of June
28, 2000, among the company, the foreign subsidiary
borrowers and lenders from time to time parties
thereto, Bank One, NA as Administrative Agent, the
Chase Manhattan Bank as Syndication Agent, and Citicorp
USA, Inc. and Bank of America, NA as Documentation
Agents.
10.b 364-Day Credit Agreement, dated as of June 28, 2000,
among the company, the lenders from time to time
parties thereto, Bank One, NA as Administrative Agent,
The Chase Manhattan Bank as Syndication Agent, and
Citicorp USA, Inc. and Bank of America, NA as
Documentation Agents.
27 Financial Data Schedule.
