<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Mark one
[X] Quarterly Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934 for the Quarterly
period ended June 28, 1998 or
[ ] Transition Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
Commission File Number 1-302
------
ARVIN INDUSTRIES, INC.
----------------------
(Exact name of registrant as specified in its charter)
Indiana 35-0550190
------- ----------
(State or other jurisdiction of (I.R.S. Employer
Identification No.)
incorporation or organization)
One Noblitt Plaza, Box 3000
---------------------------
Columbus, IN 47202-3000
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(Address of principal executive (Zip Code)
offices)
812-379-3000
------------
(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 [ ]
As of June 28, 1998, the Registrant had outstanding
24,529,879 Common Shares (including employee stock benefit
trust shares and excluding treasury shares), $2.50 par
value.
1
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Table of Contents
-----------------
Part I. Financial Information Page
- ------------------------------ No.
Item 1. Financial Statements
Consolidated Statement of Operations for the
Three Months and Six Months Ended June 28, 1998
and June 29, 1997 3
Consolidated Statement of Financial Condition at
June 28, 1998 and December 28, 1997 4
Consolidated Statement of Cash Flows for the Six
Months Ended June 28, 1998 and June 29, 1997 5
Condensed Notes to Consolidated Financial
Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 10
Part II. Other Information
- --------------------------
Item 4. Submission of Matters to a Vote of Security
Holders 16
Item 6. Exhibits and Reports on Form 8K 16
2
<PAGE>
Part I
Part I
Item 1: Financial Statements
<TABLE>
Arvin Industries, Inc.
Consolidated Statement of Operations
(Dollars in millions, except per share amounts)
Unaudited
<CAPTION>
Three Months Ended Six Months Ended
------------------- ------------------
June 28, June 29, June 28, June 29,
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net Sales $ 643.3 $ 632.5 $ 1,236.7 $ 1,196.5
Costs and Expenses:
Cost of goods sold 538.7 539.2 1,051.2 1,030.5
Selling, operating general
and administrative 46.9 43.2 91.2 79.8
Corporate general and administrative 6.2 5.1 10.5 10.9
Interest expense 9.2 9.9 17.9 19.5
Other expense, net 3.4 2.6 6.1 4.3
------- ------- ------- -------
604.4 600.0 1,176.9 1,145.0
------- ------- ------- -------
Earnings Before Income Taxes 38.9 32.5 59.8 51.5
Income taxes (12.2) (11.9) (19.8) (17.6)
Minority share of income (.6) (1.2) (.9) (2.9)
Equity income of affiliates 1.6 1.7 2.1 3.1
------- ------- ------- -------
Net Earnings $ 27.7 $ 21.1 $ 41.2 $ 34.1
======= ======= ======= =======
Earnings Per Common Share
Basic $ 1.16 $ .92 $ 1.74 $ 1.50
Diluted $ 1.14 $ .91 $ 1.71 $ 1.48
Average Common Shares Outstanding (000's)
Basic 23,787 22,821 23,658 22,738
Diluted 24,217 23,133 24,099 22,984
Dividends Declared per Common Share $ .20 $ .19 $ .40 $ .38
<FN>
See notes to consolidated financial statements.
</TABLE>
3
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<TABLE>
Arvin Industries, Inc.
Consolidated Statement of Financial Condition
(Dollars in millions, except per share amounts)
Unaudited
<CAPTION>
<S>
As of As of
Assets 6/28/98 12/28/97
- ------ -------- ---------
<C> <C>
Current Assets:
Cash and cash equivalents $ 137.2 $ 108.9
Receivables, net of allowances of $6.1 as of
June 28, 1998 and $5.6 as of December 28, 1997 446.3 354.6
Inventories 134.5 124.5
Other current assets 85.1 81.4
-------- ---------
Total current assets 803.1 669.4
-------- ---------
Non-Current Assets:
Property, plant and equipment:
Land, buildings, machinery & equipment 1,161.3 1,133.5
Less: Allowance for depreciation 665.5 632.1
-------- ---------
495.8 501.4
Goodwill, net of amortization of $38.9 as of
June 28, 1998 and $36.5 as of December 28, 1997 162.2 165.9
Investment in affiliates 57.0 53.9
Other assets 47.6 56.5
-------- ---------
Total non-current assets 762.6 777.7
-------- ---------
$ 1,565.7 $ 1,447.1
======== =========
Liabilities and Shareholders' Equity
- ------------------------------------
Current Liabilities:
Short-term debt $ 24.0 $ 55.6
Accounts payable 324.9 303.3
Employee related costs 59.5 57.6
Accrued expenses 110.4 104.7
-------- ---------
Total current liabilities 518.8 521.2
-------- ---------
Long-term debt 314.7 222.3
Long-term employee benefits 67.2 66.7
Other long-term liabilities 39.6 40.4
Minority interest 6.4 12.4
Company-obligated mandatorily redeemable preferred
capital securities of subsidiary trust holding solely
subordinated debentures of the Company 98.9 98.9
Shareholders' Equity:
Common shares ($2.50 par value) 65.6 65.6
Capital in excess of par value 249.6 248.8
Retained earnings 307.0 275.1
Cumulative translation adjustment (48.2) (41.8)
Employee stock benefit trust (15.9) (25.6)
Common shares held in treasury (at cost) (38.0) (36.9)
-------- ---------
Total shareholders' equity 520.1 485.2
-------- ---------
$ 1,565.7 $ 1,447.1
======== =========
<FN>
See notes to consolidated financial statements.
</TABLE>
4
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<TABLE>
Arvin Industries, Inc.
Consolidated Statement of Cash Flows
(Dollars in millions)
Unaudited
Six Months Ended
-------------------------
June 28, June 29,
1998 1997 (1)
--------- ---------
<S> <C> <C>
Operating Activities:
Net earnings $ 41.2 $ 34.1
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation 42.3 42.5
Amortization 3.0 3.3
Minority interest .9 2.9
Gain on investment (5.5) --
Other 9.3 (3.8)
Changes in operating assets and liabilities:
Receivables (95.2) (78.6)
Inventories and other current assets (16.2) 5.6
Accounts payable and other accrued expenses 36.4 60.9
Income taxes payable and deferred taxes (2.2) (3.4)
-------- --------
Net Cash Provided by Operating Activities 14.0 63.5
-------- --------
Investing Activities:
Purchase of property, plant and equipment (44.3) (22.3)
Proceeds from sale of property,
plant and equipment 3.2 5.2
Proceeds from sale of investment 9.6 --
Investments in affiliates (3.2) (7.0)
Business acquisitions, net of cash acquired (8.7) (19.5)
Cash proceeds from sale of business, net
of cash balance of business sold -- 3.7
Other .6 (13.5)
-------- --------
Net Cash Used for Investing Activities (42.8) (53.4)
-------- --------
Financing Activities:
Change in short-term debt, net 10.2 (43.2)
Proceeds from long-term borrowings 99.0 99.8
Principal payments on long-term debt (46.2) (4.9)
Dividends paid (9.4) (8.8)
Exercise of stock options 7.6 .5
Other (2.8) (4.9)
-------- --------
Net Cash Provided by Financing Activities 58.4 38.5
-------- --------
Cash and Cash Equivalents:
Effect of exchange rate changes on cash (1.3) .6
-------- --------
Net increase 28.3 49.2
Beginning of the year 108.9 39.4
-------- --------
End of the period $ 137.2 $ 88.6
======== ========
<FN>
(1) Certain amounts have been reclassified to conform
with current year presentation.
<FN>
See notes to consolidated financial statements.
</TABLE>
5
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ARVIN INDUSTRIES, INC.
- ----------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
Note 1. The accompanying unaudited consolidated financial
statements have been prepared in accordance with generally
accepted accounting principles for interim financial information
and with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted
accounting principles for complete financial statements and
should be read in conjunction with the financial statements and
notes thereto appearing in the Company's annual report on Form
10-K for the year ended December 28, 1997.
In the opinion of management, all adjustments considered
necessary for a fair presentation of the results of operations
for the periods reported have been included and all such
adjustments are of a normal recurring nature.
The results of operations for the three and six months ended June
28, 1998 are not necessarily indicative of the results to be
expected for the full year ending January 3, 1999.
Note 2. Basic earnings per share are based on the weighted
average number of common shares outstanding during the period.
Diluted earnings per share are based on the weighted average
number of common and common equivalent shares (principally stock
option related) outstanding during the period. Calculation of
the weighted average shares is as follows:
(Shares in 000's)
Second Quarter Six Months
--------------- --------------
1998 1997 1998 1997
------ ------ ------ ------
Denominator for basic
earnings
per share - weighted- 23,787 22,821 23,658 22,738
average shares
Effect of dilutive 430 312 441 246
securities
Denominator for diluted
earnings
per share - adjusted
weighted-average
shares and assumed 24,217 23,133 24,099 22,984
conversions
Arvin has adopted Statement of Financial Accounting Standards No.
128 (SFAS 128), "Earnings per Share" and has restated prior
period earnings per share accordingly.
6
<PAGE>
Note 3. The Company and its consolidated subsidiaries are
defending various environmental claims and legal actions that
arise in the normal course of business or from previously owned
businesses. Where reasonable estimates of environmental
liabilities are possible, Arvin has provided for the undiscounted
costs of study, cleanup, remediation, and certain other costs,
taking into account, as applicable, available information
regarding site conditions, potential cleanup methods and the
extent to which other parties can be expected to bear those
costs. Management regularly reviews pending environmental and
legal proceedings with its legal counsel and adjusts its accruals
to reflect the current best estimate of its exposure. Where no
best estimate is determinable, the Company has accrued for the
minimum amount of the most probable range of its liability.
Given the inherent uncertainties in evaluating legal and
environmental exposures, actual costs to be incurred in future
periods may vary from the currently recorded estimates. Arvin
expects that any sum it may be required to pay in connection with
legal and environmental matters in excess of the amounts recorded
will not have a material adverse effect on its results of
operations, cash flows or financial condition.
Note 4. On March 23, 1998 Arvin issued $100 million of 6.75
percent notes, maturing on March 15, 2008. Proceeds from this
issue were or will be used for the repayment of $45 million of
9.8 to 9.98 percent medium-term notes due in 1998 and for general
corporate purposes, including working capital and capital
expenditures.
Note 5. Other expense, net includes a gain of $5.5 million
relating to the early redemption of the Company's investment in
preferred stock received in conjunction with Arvin's 1995 sale of
its Schrader Automotive unit. The 1995 sale agreement provided
for cash redemption of the outstanding preferred shares in 2003.
The preferred shares and accrued dividends had been recorded on
the books of Arvin, discounted at a risk adjusted rate of return.
No tax expense was recorded on this gain due to the difference
between the book and tax basis of the preferred stock asset and
capital loss utilzation.
Note 6. Other expense, net includes a charge of $6.6 million for
the realignment of the Company's Automotive Original Equipment
exhaust operations. The charge includes a $1.8 million goodwill
write-off, $1.2 million for the write-down of equipment and $3.6
million for severance provisions.
Note 7. Comprehensive income for the three and six months ended
June 28, 1998 of $25.6 and $34.8 million and for the three and
six months ended June 29, 1997 of $23.4 and $20.4 million,
respectively, includes reported net income adjusted by the non-
cash effect of changes in the cumulative translation adjustment.
7
<PAGE>
Note 8. The Company adopted Statement of Financial Accounting
Standards No. 131 (SFAS 131), "Disclosures about Segments of an
Enterprise and Related Information," at the beginning of fiscal
1998. Following the provisions of SFAS 131, Arvin is reporting
segment sales and operating income in the same format reviewed by
the Company's management (the "management approach"). Arvin has
two reportable segments: Automotive Original Equipment (OE) and
Automotive Replacement (Replacement). The OE segment is
comprised of those business units that deal primarily with
Original Equipment Manufacturers (OEM's). Business units in the
OE segment also provide the OEM's with replacement parts, either
as dealer service parts or as part of manufacturers' recall or
warranty programs, which typically account for a small percent of
OE segment sales. The Replacement segment is comprised of those
business units that deal primarily with Replacement customers,
including wholesale distributors, retailers, and installers.
Sales and operating income from business units whose primary
focus is other than the manufacturing of automotive products are
reported as Other. There was no change in the Company's reported
sales as a result of the restatement of prior results for SFAS
131. Operating income, reported under the management approach,
includes the gains and losses reported by the Company's equity
affiliates.
Segment Information
(Dollars in millions)
For The Three For The Six
Months Ended Months Ended
----------------- ------------------
6/28/98 6/29/97 6/28/98 6/29/97
------- ------- ------- -------
Net Sales:
Automotive original $ 426.2 $ 421.7 $ 833.2 $ 823.2
equipment
Automotive replacement 188.6 181.1 348.8 319.1
Other 28.5 29.7 54.7 54.2
------- ------- ------- -------
Net sales $ 643.3 $ 632.5 $ 1,236.7 $ 1,196.5
======= ======= ======= =======
Operating Income:
Automotive original $ 26.0 $ 26.1 $ 48.2 $ 47.3
equipment
Automotive replacement 23.4 21.4 36.9 31.3
Other 1.7 4.1 (0.6) 9.6
------- ------- ------- -------
Operating income 51.1 51.6 84.5 88.2
Less equity income of (1.6) (1.7) (2.1) (3.1)
affiliates
Interest expense (9.2) (9.9) (17.9) (19.5)
Corporate general and
administrative (6.2) (5.1) (10.5) (10.9)
Gain on sale of 5.5 --- 5.5 ---
investment
Other income (expense), (.7) (2.4) .3 (3.2)
net ------- ------- ------- -------
Earnings before income $ 38.9 $ 32.5 $ 59.8 $ 51.5
taxes ======= ======= ======= =======
8
<PAGE>
6/28/98 12/28/97
------- --------
Assets:
- -------
Original equipment $ 810.4 $ 763.3
Replacement 367.3 307.9
Other 52.0 55.5
------- --------
Total operating assets 1,229.7 1,126.7
Corporate and other 336.0 320.4
------- --------
Total assets $ 1,565.7 $ 1,447.1
======= ========
Note 9. In March 1998, the American Institute of Certified
Public Accountants (AICPA) issued Statement of Position (SOP) 98-
1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use," which establishes new accounting and
reporting standards for the costs of computer software developed
or obtained for internal use. This statement will be applied
prospectively and is effective for financial statements for
fiscal years beginning after December 15, 1998. The impact of
this new standard is not expected to have a significant effect on
Arvin's financial position or results of operations.
Note 10. In April 1998, the AICPA issued SOP 98-5, "Reporting on
the Costs of Start-Up Activities," which requires costs of start-
up activities be expensed as incurred. This statement is
effective for financial statements for fiscal years beginning
after December 15, 1998. The statement requires capitalized
costs related to start-up activities to be expensed as a
cumulative effect of a change in accounting principle when the
statement is adopted. Arvin plans to adopt the provisions of SOP
98-5 at the beginning of fiscal 1999. Current estimates are
that, at that time, the Company will write off approximately $.8
million of previously capitalized costs related to start-up
activities.
Note 11. In June 1998, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities."
The statement is effective for fiscal years beginning after June
15, 1999. The Company plans to adopt this statement at the
beginning of fiscal 2000. This statement is not expected to have
a material impact on the Company's results of operations.
9
<PAGE>
Item 2. Management's Discussion and Analysis of Financial
-------------------------------------------------
Condition and Results of Operations
- -----------------------------------
Financial Review
(Dollar amounts in tables in millions)
Overview
Record sales of $643.3 million, and record earnings of $27.7
million, were reported for the second quarter of 1998. Sales for
the six months ended June 28, 1998 of $1,236.7 million improved
$40.2 million over a strong comparable 1997 period despite the
negative impact of a strong United States' (U.S.) dollar on the
translation of foreign sales and the impact of the General Motors
(GM) strike. On a constant dollar basis, sales increased $62.7
million, or five percent. Year-to-date earnings were up $7.1
million, or 21 percent. The impact of the GM strike, which
reduced both volume and productivity, is estimated to have
reduced sales for the second quarter by approximately $11
million. The strike, which was settled at the end of July,
reduced July sales by an estimated $10 million.
Results of Operations
Second Quarter First Six Months
-------------- -----------------
1998 1997 1998 1997
------ ------ ------- -------
Net Sales:
Automotive original $ 426.2 $ 421.7 $ 833.2 $ 823.2
equipment
Automotive replacement 188.6 181.1 348.8 319.1
Other 28.5 29.7 54.7 54.2
------ ------ ------- -------
Net sales $ 643.3 $ 632.5 $ 1,236.7 $ 1,196.5
====== ====== ======= =======
Operating Income (1):
Automotive original $ 26.0 $ 26.1 $ 48.2 $ 47.3
equipment
Automotive replacement 23.4 21.4 36.9 31.3
Other 1.7 4.1 (0.6) 9.6
------ ------ ------- -------
Operating income $ 51.1 $ 51.6 $ 84.5 $ 88.2
====== ====== ======= =======
(1) Reflects income from consolidated and unconsolidated
operations prior to Corporate expenses, interest, and other
non-operational items.
Automotive Original Equipment (OE): Second quarter OE sales
increased one percent over strong sales in the comparable 1997
quarter. Market influences were mixed. In the U.S. and Canada,
car and light truck production decreased three percent. New car
registrations in Western Europe improved by almost eight percent,
10
<PAGE>
when compared to the second quarter of 1997. Price concessions,
which averaged one percent of OE sales, were offset by volume
gains during the quarter. A strong U.S. dollar had a negative
effect on the translation of the quarter's OE sales. On a
constant dollar basis, OE sales grew three percent. A stronger
product mix contributed $10 million to the current quarter's
sales increase.
OE sales for the six month period increased one percent over
those for the first six months of 1997. Price concessions
averaged one percent of OE sales. Volume gains and product mix
contributed $21 and $16 million, respectively. On a constant
dollar basis, OE sales grew four percent.
Comparison of the effect of changes in volume from period to
period is subject to a number of limitations, principally
centered around what constitutes a "unit" for volume measurement.
The appropriate measure of a "unit" varies over time as products
develop, varies among the different countries in which the
Company operates, and varies within each operating unit of the
Company. As a result, there is a certain degree of imprecision
and subjectivity in estimating the impact of volume changes.
Second quarter 1998 OE operating income includes a $6.6 million
charge for the realignment of OE exhaust operations. Excluding
the impact of the realignment charge, operating profit increased
$6.5 million, or 25 percent, for the quarter. Productivity
improvements outpaced the combined impact of the previously
mentioned selective price concessions and labor inflation by $1.6
million. Negotiated improvements in raw material prices improved
operating profit $2.1 million. Lower warranty costs contributed
an additional $2.4 million.
Excluding the impact of the previously discussed realignment
charge, operating profit for the first six months of 1998
increased $7.5 million over the comparable period in 1997.
Productivity improvements and negotiated raw material price
decreases totaling $13.6 million offset the impact of selective
price concessions and labor inflation. Improved volume and mix
added $6.2 million to operating profit.
Automotive Replacement (Replacement): Sales in the Replacement
segment increased $7.5 million. The consolidation of a European
exhaust joint venture (TESH) in May of 1997 accounted for $7.6
million of the sales increase. Sales price increases offset
market related volume declines during the quarter.
For the first six months of 1998, sales increased $29.7 million.
The consolidation of the TESH joint venture accounted for 85
percent of the increase. Price increases contributed an
additional $6.6 million of the increase. Volume, excluding the
impact of consolidating TESH, was steady during the period,
despite reduced market demand in the Company's primary markets.
11
<PAGE>
Operating income for the Replacement segment increased $2.0
million during the quarter. Improved pricing contributed $4.8
million. Volume shortfall reduced operating profit by $2.1
million. Productivity improvements, in excess of wage increases,
contributed $.7 million. Increased bad debt expense reduced
operating profit by $1.6 million.
Operating income for the Replacement segment improved $5.6
million or 18 percent during the first six months of 1998.
Improved pricing contributed $6.6 million. Productivity
improvements offset wage increases. Increased bad debt expense
reduced operating profit by $1.6 million. Reduced costs to
obtain new business also contributed to the increase.
Operating units in the Replacement segment sell their product
through a variety of different customer "channels" including
merchandisers, installers, and wholesale distributors. As a
result of period to period variations in this "channel mix," in
addition to normal variations in "product mix," the average price
of units sold may not correspond to price changes. There is also
a certain degree of imprecision and subjectivity in estimating
the impact of period to period volume changes, principally
because of questions as to what constitutes a "unit" for volume
measurement. The appropriate measure of a "unit" varies over
time as products develop, varies among the different countries in
which the Company operates, and varies within each operating unit
of the Company.
Other: Other sales were relatively flat for both the quarter and
year-to-date periods as a stronger product mix offset reduced
volumes. Operating profit declined $2.4 million for the quarter,
primarily as a result of productivity declines. For the year to
date period, operating profit fell $10.2 million. The decrease
was primarily related to non-recurring gains recorded in 1997
related to the sale of certain capital assets and an increase in
current year reserves for environmental issues related to
properties formerly held under lease. Productivity also declined
for the year-to-date period.
Corporate General and Administrative expenses were essentially
flat during the first six months. For the second quarter,
corporate general and administrative increased $1.1 million,
primarily due to personnel and professional service expenditures.
Interest Expense decreased seven percent in the second quarter
and eight percent during the first six months, when compared to
the same periods in 1997. The decreases were a result of lower
average borrowing rates on slightly higher average interest-
bearing liabilities.
Other Expense increased $.8 million for the second quarter and
$1.8 million during the first six months, when compared to the
same periods in 1997. For both the second quarter and first six
months of 1998, other expense includes the $6.6 million charge
for the realignment expenses discussed above as a part of OE
operating profit and a gain of $5.5 million relating to the early
redemption of preferred stock received in conjunction with the
12
<PAGE>
Company's 1995 sale of its Schrader Automotive unit. Costs
associated with the early retirement of debt were $1.3 million.
The year-to-date comparison is also affected by a $2.8 million
increase in environmental and legal reserves during the first
quarter of 1998 and a first quarter 1997 net gain on capital
transactions of $2.2 million.
Income Taxes: The low effective tax rates for the second quarter
and year-to-date 1998 periods of 31.3 and 33.1 percent,
respectively, reflect the impact of the $5.5 million gain on the
early redemption of the Company's investment in preferred stock
on which no tax expense was recorded. See Note 5 to the
Consolidated Financial Statements. The effective tax rates for
the second quarter and year-to-date 1997 periods were 37.0 and
34.3 percent, respectively. The year-to-date 1997 period
includes $3.7 million of gain on capital transactions on which no
tax expense was recorded due to available capital loss
carryforwards.
Financial Condition
Liquidity: During the six months of 1998, accounts receivable
increased 26 percent and accounts payable increased seven
percent. The seasonal increase in June over December sales,
coupled with the timing of several large customers' trade
receivable payments accounted for the increases.
Key elements of the Consolidated Statement of Cash Flows for
the first six months of 1998 and 1997 were as follows:
1998 1997
----- -----
Net Cash Provided by Operating 14.0 63.5
Activities
Net Cash Used for Investing (42.8) (53.4)
Activities
Net Cash Provided by Financing 58.4 38.5
Activities
Investing cash flows include proceeds of $9.6 million for the
redemption of the Company's investment in preferred stock
received in connection with the 1995 sale of Schrader. Investing
cash flows also include $8.7 million for the purchase of the
remaining shares of Autocomponents Suspension S.r.l.
(Autocomponents) and Arvin Suspension Systems Italia (ASSI,
formerly Way Assauto S.r.l.) in the first quarter of 1998. Early
in the third quarter of 1998, Arvin entered into a series of
agreements with Magneti Marelli S.p.A. to streamline their auto
component manufacturing and distribution activities. As a part
of these agreements, Arvin invested approximately $17 million to
acquire from Magneti Marelli's Brazilian affiliate the remaining
shares of COFAP-Arvin, a formerly unconsolidated affiliate of
Arvin's serving the OE Exhaust markets of South America. Arvin
13
<PAGE>
also sold to Magnetti Marelli its shares in Autocomponents for
approximately $10 million. Arvin retained its ownership of ASSI,
which produces both OE and replacement parts. Arvin expects to
increase its investment in its German OE affiliate during 1998.
Such investment is expected to be funded from internally
generated funds.
Financing cash flows include $99 million proceeds from 6.75
percent Notes due in 2008, $46 million of which was used for debt
retirement as more fully described in Note 4 to the Consolidated
Financial Statements. Financing cash flows also include Arvin's
quarterly dividend to shareholders, which was increased five
percent during 1997 from 19 cents to 20 cents.
Capital Resources: Based on the Company's projected cash flow
from operations and existing investments and financing credit
facility arrangements, management believes that sufficient
liquidity is available to meet anticipated capital and dividend
requirements over the foreseeable future.
The Company expects increased levels of capital expenditures in
1998 to support new business requirements and process
improvements. Investing cash flows include $44.3 and $22.3
million for the purchase of property, plant and equipment for the
first six months of 1998 and 1997, respectively. Planned capital
expenditures for 1998 are adequate for normal growth and
replacement and are consistent with projections for future sales
and earnings. Near-term expenditures are expected to be funded
from cash on hand and internally generated funds.
Hedging: The Company uses derivative financial instruments from
time-to-time to hedge certain financial and operating
transactions denominated in currencies other than functional
currencies. The Company believes that adequate controls are in
place to monitor these activities which are not financially
material. In June 1998, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities."
The statement is effective for fiscal years beginning after June
15, 1999. The Company plans to adopt this statement at the
beginning of fiscal 2000. This statement is not expected to have
a material impact on the Company's results of operations.
Year 2000: During 1997, Arvin named a task force and began
actively working with customers, suppliers, and employees on
Arvin's plan to address Year 2000 issues. The Company plans to
complete the remediation, testing and implementation phase of the
Year 2000 project prior to the end of 1998. These phases
represent 90 percent of Arvin's Year 2000 project. The final ten
percent of the Year 2000 project, auditing, is scheduled for
completion during 1999. At the end of June 1998, the Company was
ahead of its established schedule. Expenses of the Year 2000
project are expensed as incurred. Capital expenditures are
generally replacing fully depreciated assets. To date,
14
<PAGE>
approximately one million dollars have been expensed for this
project. The Company expects that an additional one to two
million dollars will be expensed during the next 12 months to
complete this project.
Legal/Environmental Matters: The Company and its consolidated
subsidiaries are defending various environmental claims and legal
actions that arise in the normal course of business or from
previously owned businesses. Where reasonable estimates of
environmental liabilities are possible, Arvin has provided for
the undiscounted costs of study, cleanup, remediation, and
certain other costs, taking into account, as applicable,
available information regarding site conditions, potential
cleanup methods and the extent to which other parties can be
expected to bear those costs. Management regularly reviews
pending environmental and legal proceedings with its legal
counsel and adjusts its accruals to reflect the current best
estimate of its exposure. Where no best estimate is
determinable, the Company has accrued for the minimum amount of
the most probable range of its liability. Given the inherent
uncertainties in evaluating legal and environmental exposures,
actual costs to be incurred in future periods may vary from the
currently recorded estimates. Arvin expects that any sum it may
be required to pay in connection with legal and environmental
matters in excess of the amounts recorded will not have a
material adverse effect on its results of operations, cash flows
or financial condition.
Certain information and statements included or implied are
forward looking and involve certain risks and uncertainties that
could cause actual results to differ materially from those
expressed or implied by these statements. These forward-looking
statements are identified by their use of terms and phrases such
as "expected," "expect," "should," "estimated earnings,"
"anticipate," and "believe." Information about potential factors
identified by the Company which would affect the actual financial
results are included in the Company's Form 8-K, filed January 3,
1997 with the SEC.
15
<PAGE>
Part II
Item 4. Submission of Matters to a Vote of Security Holders
Arvin held its Annual Meeting of Shareholders on April 16, 1998
at which security holders elected four directors nominated for
three-year terms expiring in 2001, adopted the 1998 Stock Benefit
Plan, and ratified the Board of Directors' appointment of Price
Waterhouse LLP as Arvin's independent certified public
accountants for the current year.
The results of the voting in connection with the above items were
as follows:
Voting on Directors For Withheld
- ------------------- --- --------
Joseph P. Allen 21,833,402 264,558
Steven C. Beering 21,838,260 259,700
Joseph P. Flannery 21,839,325 258,635
V. William Hunt 21,845,325 252,636
Broker
------
For Against Abstain Non-Vote
--- ------- ------- --------
Adopt the 1998
Stock Benefit Plan 15,474,081 6,308,653 315,224 2
Ratify appointment of
Price Waterhouse LLP 21,989,774 59,846 48,340 1
as auditors
Item 6. Exhibits and Reports on Form 8-K
---------------------------------
a. Exhibits
- -------------
27 Financial Data Schedule filed herewith as Exhibit 27
b. Reports Filed on Form 8-K
none
16
<PAGE>
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly
caused the report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Arvin Industries, Inc.
by: /s/ Richard A. Smith
____________________________________________
Richard A. Smith
Vice President-Finance & Chief
Financial Officer
by: /s/ William M. Lowe, Jr.
____________________________________________
William M. Lowe, Jr.
Vice President - Financial Operations
(Chief Accounting Officer)
Date: July 31, 1998
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
Exhibit 27
The schedule contains summary
financial information extracted from
Form 10-Q for the period ended June
28, 1998 and is qualified in its
entirety by reference to such
financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<FISCAL-YEAR-END> Jan-03-1999
<PERIOD-START> Dec-29-1997
<PERIOD-END> Jun-28-1998
<PERIOD-TYPE> 6-MOS
<CASH> 137,200
<SECURITIES> 0
<RECEIVABLES> 452,400
<ALLOWANCES> 6,100
<INVENTORY> 134,500
<CURRENT-ASSETS> 803,100
<PP&E> 1,161,300
<DEPRECIATION> 665,500
<TOTAL-ASSETS> 1,565,700
<CURRENT-LIABILITIES> 518,800
<BONDS> 314,700
98,900
0
<COMMON> 65,600
<OTHER-SE> 454,500
<TOTAL-LIABILITY-AND-EQUITY> 1,565,700
<SALES> 1,236,700
<TOTAL-REVENUES> 1,236,700
<CGS> 1,051,200
<TOTAL-COSTS> 1,152,900
<OTHER-EXPENSES> 6,100
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 17,900
<INCOME-PRETAX> 59,800
<INCOME-TAX> 19,800
<INCOME-CONTINUING> 41,200
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 41,200
<EPS-PRIMARY> 1.74
<EPS-DILUTED> 1.71
</TABLE>
