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 April 4, 1999 or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission File Number 1-302
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ARVIN INDUSTRIES, INC.
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(Exact name of registrant as specified in its charter)
Indiana 35-0550190
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
One Noblitt Plaza, Box 3000
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Columbus, IN 47202-3000
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(Address of principal executive offices) (Zip Code)
812-379-3000
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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 [ ]
As of May 9, 1999, the Registrant had outstanding 25,829,909 Common Shares
(including employee stock benefit trust shares and excluding treasury shares),
$2.50 par value.
<PAGE>
Table of Contents
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Part I. Financial Information Page No.
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Item 1. Financial Statements
Consolidated Statement of Operations for the Three Months Ended
April 4, 1999 and March 29, 1998 3
Consolidated Statement of Financial Condition at April 4, 1999
and January 3, 1999 4
Consolidated Statement of Cash Flows for the Three Months Ended
April 4, 1999 and March 29, 1998 5
Condensed Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk 15
Part II. Other Information
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Item 6. Exhibits and Reports on Form 8K 16
<PAGE> 2
<TABLE>
Part I
Item 1: Financial Statements
Arvin Industries, Inc.
Consolidated Statement of Operations
(Dollars in millions, except per share amounts)
Unaudited
<CAPTION>
Three Months Ended
------------------
4/4/99 3/29/98
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<S> <C> <C>
Net Sales $ 738.4 $ 593.4
Costs and Expenses:
Cost of goods sold 641.6 512.5
Selling, operating general
and administrative 53.4 44.3
Corporate general and administrative 8.3 4.3
Interest expense 10.5 8.7
Other expense, net 2.7 2.7
--- ---
716.5 572.5
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Earnings Before Income Taxes 21.9 20.9
Income taxes (6.8) (7.6)
Minority share of (income)/loss .4 (.3)
Equity income of affiliates 2.9 .5
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Earnings before Cumulative Effect of
Accounting Change 18.4 13.5
Cumulative effect of accounting change,
net of tax benefit of $.3 (.5) -
--------- ----------
Net Earnings $ 17.9 $ 13.5
========= ==========
Earnings Per Common Share
Basic:
Before cumulative effect of
accounting change $ .76 $ .57
Cumulative effect of accounting change (.02) -
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Total Basic $ .74 $ .57
========= ==========
Diluted:
Before cumulative effect of
accounting change $ .75 $ .56
Cumulative effect of accounting change (.02) -
--------- ----------
Total Diluted $ .73 $ .56
========= ==========
Average Common Shares Outstanding (000's)
Basic 24,151 23,530
Diluted 24,464 24,089
Dividends Declared per Common Share $ .21 $ .20
<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>
<PAGE> 3
<TABLE>
Arvin Industries, Inc.
Consolidated Statement of Financial Condition
(Dollars in millions, except per share amounts)
Unaudited
<CAPTION>
As of As of
Assets 4/4/99 1/3/99
- ------ ------ ------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 28.8 $ 107.0
Receivables, net of allowances
of $14.2 and $8.1, respectively 459.4 319.0
Inventories 200.1 151.3
Other current assets 118.1 103.7
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Total current assets 806.4 681.0
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Non-Current Assets:
Property, plant and equipment:
Land, buildings, machinery & equipment 1,362.4 1,289.8
Less: Allowance for depreciation 699.5 704.0
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662.9 585.8
Goodwill, net of accumulated amortization
of $42.4 and $42.5, respectively 281.3 170.2
Investment in affiliates 160.6 148.2
Other assets 61.8 61.3
---- ----
Total non-current assets 1,166.6 965.5
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$ 1,973.0 $ 1,646.5
========== ===========
Liabilities and Shareholders' Equity
Current Liabilities:
Short-term debt $ 153.3 $ 10.9
Accounts payable 366.1 337.1
Employee-related costs 57.4 63.3
Accrued expenses 109.8 105.6
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Total current liabilities 686.6 516.9
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Long-term debt 453.8 307.7
Long-term employee benefits 80.2 70.4
Other long-term liabilities 62.2 41.6
Minority interest 56.5 57.1
Company-obligated mandatorily redeemable preferred
capital securities of subsidiary trust holding solely
subordinated debentures of the Company 89.1 89.1
Shareholders' Equity:
Common shares ($2.50 par value) 68.8 68.8
Capital in excess of par value 306.3 305.2
Retained earnings 347.1 334.3
Cumulative translation adjustment (76.6) (41.3)
Employee stock benefit trust (62.6) (64.7)
Common shares held in treasury (at cost) (38.4) (38.6)
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Total shareholders' equity 544.6 563.7
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$ 1,973.0 $ 1,646.5
========== ===========
<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>
<PAGE> 4
<TABLE>
Arvin Industries, Inc.
Consolidated Statement of Cash Flows
(Dollars in millions)
Unaudited
<CAPTION>
Three Months Ended
------------------
4/4/99 3/29/98(1)
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<S> <C> <C>
Operating Activities:
Net earnings $ 17.9 $ 13.5
Adjustments to reconcile net earnings to
net cash used for operating activities:
Depreciation 25.8 20.9
Amortization 1.7 1.5
Minority interest (.4) .3
Gain on sale of investment (7.3) -
Change in deferred income tax benefit, net (.6) .6
Other 1.3 5.2
Changes in operating assets and liabilities:
Receivables (89.2) (67.2)
Inventories and other current assets (17.0) (6.3)
Accounts payable and other accrued expenses (14.4) 13.2
Income taxes payable .9 5.6
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Net Cash Used for Operating Activities (81.3) (12.7)
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Investing Activities:
Purchase of property, plant and equipment (24.1) (17.1)
Proceeds from sale of property, plant and equipment .7 1.0
Proceeds from sale of investment 12.4 -
Investments in affiliates (2.1) (.3)
Business acquisitions, net of cash acquired (267.0) (8.7)
Other 4.8 1.3
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Net Cash Used for Investing Activities (275.3) (23.8)
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Financing Activities:
Change in short-term debt, net 134.7 (.9)
Proceeds from long-term financings 152.5 99.9
Principal payments on long-term financings (2.0) (20.4)
Change in discounted receivables (.7) (40.0)
Dividends paid (5.1) (4.7)
Other .1 2.7
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Net Cash Provided by Financing Activities 279.5 36.6
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Cash and Cash Equivalents:
Effect of exchange rate changes on cash (1.1) (.9)
---- ---
Net decrease (78.2) (.8)
Beginning of the year 107.0 108.9
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End of the period $ 28.8 $ 108.1
========= =========
<FN>
(1) Certain amounts have been reclassified to conform with current year presentation.
See notes to consolidated financial statements.
</FN>
</TABLE>
<PAGE> 5
ARVIN INDUSTRIES, INC.
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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 January 3, 1999.
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 months ended April 4, 1999 are not
necessarily indicative of the results to be expected for the full year ending
January 2, 2000.
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.
The following illustrates the reconciliation of the numerators and denominators
of the basic and diluted EPS computations for net earnings:
(Shares in 000's) First Quarter
--------------------------
1999 1998
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Denominator for basic earnings
per share - weighted-average shares 24,151 23,530
Effect of dilutive securities 313 559
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Denominator for diluted earnings
per share - adjusted weighted-average
shares and assumed conversions 24,464 24,089
============ ===========
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.
<PAGE> 6
Note 4. On January 29, 1999 Arvin acquired certain operating assets and
assumed certain liabilities from WorldSource Coil Coating, Inc., a coil coating
facility in Hawesville, Kentucky. Coil coating is the pre-painting of metals to
be fabricated in the construction, home appliance, and automotive industries.
The purchase price, subject to adjustment, was $1.6 million. Additional
consideration, up to $5.0 million over a three-year period, is contingent upon
future sales volume. This acquisition was accounted for under the purchase
method and the results of the acquired operations are included in the
consolidated financial statements as of the date of acquisition.
On February 26, 1999 Arvin acquired the Purolator Products automotive
filter business (Purolator) from Mark IV Industries, Inc. for approximately $272
million, subject to adjustment. This transaction included the assumption of $6
million in debt. Included in the Statement of Financial Condition are estimated
purchase liabilities of $9.7 million associated with a plan to exit certain
activities of Purolator including severance and related costs, and costs
associated with the consolidation of certain acquired facilities. The Company
expects to complete its plan by February 2000. The acquisition was accounted for
under the purchase method and, accordingly, results of Purolator's operations
are included in the consolidated financial statements as of the date of
acquisition. The purchase price has been preliminarily allocated based upon
estimated fair values at the date of acquisition, pending final determination by
an independent appraisal. Goodwill resulting from this transaction is being
amortized using the straight-line method over a 40-year period.
The following unaudited pro forma information presents a summary of the
Company's consolidated results of operations as if the acquisitions of
WorldSource and Purolator had taken place on December 29, 1997:
(Dollars in million, except per Three months ended
--------------------------------
share amounts) 4/4/99 3/29/98
------------- ---------------
Net sales $ 796.7 $ 705.5
Net earnings before cumulative
effect of accounting change 19.5 15.5
Net earnings 19.0 15.5
Per share data:
Basic:
Before cumulative effect of accounting change $ .81 $ .65
Cumulative effect of accounting change (.02) -
----------- ----------
Total $ .79 $ .65
=========== ==========
Diluted:
Before cumulative effect of accounting change $ .80 $ .64
Cumulative effect of accounting change (.02) -
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Total $ .78 $ .64
=========== ==========
These unaudited pro forma results have been prepared for comparative purposes
only and include certain adjustments, such as additional amortization expense as
a result of goodwill, increased interest expense on acquisition debt, and
certain other adjustments. They do not purport to be indicative of the results
of operations which would have actually resulted had the acquisitions been in
effect on December 29, 1997, or of future results of operations.
<PAGE> 7
Note 5. On March 12, 1999 Arvin issued $150 million of 7 1/8 percent notes,
maturing on March 15, 2009. Proceeds from this issue were used to repay a
portion of short-term debt incurred in connection with Arvin's acquisition of
Purolator.
During the first quarter of 1999, Arvin also established a $125 million
committed bank facility to provide liquidity needed to finance the Purolator
acquisition. Furthermore, Arvin entered into an interest-rate swap during the
first quarter of 1999 in which Arvin receives a fixed rate of interest and pays
a LIBOR-based floating rate. The swap has a notional value of $50 million and
matures on March 15, 2004.
Note 6. Other expense, net for the first quarter of 1999 includes a pre-tax
gain of $7.3 million relating to the sale of the Company's entire 40 percent
equity investment in a Mexican shock absorber affiliate. The effective tax rate
for the gain was 26.2 percent, which reflects the utilization of an available
capital loss carryforward of $6.8 million.
Other expense, net for the first quarter of 1999 also includes a one-time
charge, before tax benefits, of $7.1 million in connection with a voluntary
early retirement program for certain North American employees. The terms of the
program allowed the employees to elect, prior to March 30, 1999, to retire
during 1999 and to receive medical coverage and pension benefits without the
normal reduction for early retirement. The charge, net of tax benefits, was
equal to $4.3 million.
Note 7. Arvin adopted the provisions of Statement of Position 98-5, "Reporting
on the Costs of Start-Up Activities," as of January 4, 1999. This statement
requires costs of start-up activities to be expensed as incurred. The statement
further requires that capitalized costs related to start-up activities be
expensed as a cumulative effect of a change in accounting principle when the
statement is adopted. Accordingly, the Company wrote off $.5 million, net of
taxes, of previously capitalized costs related to start-up activities and
reported this expense as a cumulative effect of a change in accounting principle
for the first quarter of 1999.
Note 8. Comprehensive income/(loss) for the first quarter in 1999 and 1998 of
$(17.4) and $9.2 million, respectively, includes reported net income adjusted by
the non-cash effect of changes in the cumulative translation adjustment.
<PAGE> 8
Note 9. The reconciliation of segment profit to the Company's consolidated
earnings before income taxes is as follows:
Segment Information For the Three
(Dollars in millions) Months Ended
------------------------------
4/4/99 3/29/98
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Net Sales:
Automotive Original Equipment $ 495.7 $ 407.0
Automotive Replacement 202.8 160.2
Other 39.9 26.2
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Net sales $ 738.4 $ 593.4
============= =============
Operating Income:
Automotive Original Equipment $ 30.0 $ 22.2
Automotive Replacement 14.0 13.5
Other 1.9 (2.3)
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Operating income 45.9 33.4
Less: Equity income of affiliates (2.9) (0.5)
Interest expense (10.5) (8.7)
Corporate general and administrative (8.3) (4.3)
Other non-operating income/(expense) (2.3) 1.0
------------- -------------
Earnings before income taxes $ 21.9 $ 20.9
============= =============
<PAGE> 9
Item 2. Management's Discussion and Analysis of Financial Condition and Results
- -------------------------------------------------------------------------------
of Operations
- -------------
Financial Review
(Dollars in millions, except per share amounts)
Overview
Net sales for the first quarter of 1999 increased by 24 percent to a record
$738.4 million compared to sales of $593.4 million for the first quarter of
1998. Top line growth was achieved as a result of both recent acquisitions and
strength in the original equipment market. Earnings before cumulative effect of
accounting change increased by 36 percent to $18.4 million, or $.76 per diluted
share, compared to earnings of $13.5 million, or $.56 per diluted share for the
first quarter of 1998.
Two significant non-recurring items were recorded in the first quarter. First,
an after-tax gain of $5.4 million on the sale of an investment in a Mexican
shock absorber affiliate increased diluted earnings per share by $.22. An
after-tax charge of $4.3 million for a voluntary early retirement program for
certain North American employees reduced diluted earnings per share by $.18.
Excluding the impact of these non-recurring items, earnings before cumulative
effect of accounting change increased by 28 percent to $17.3 million, or $.71
per diluted common share.
Results of Operations
First Quarter
----------------------------
1999 1998
------------ ------------
Net Sales:
Automotive original equipment $ 495.7 $ 407.0
Automotive replacement 202.8 160.2
Other 39.9 26.2
------------ ------------
Net sales $ 738.4 $ 593.4
============ ============
Operating Income *
Automotive original equipment $ 30.0 $ 22.2
Automotive replacement 14.0 13.5
Other 1.9 (2.3)
------------ ------------
Operating income $ 45.9 $ 33.4
============ ============
* Operating income reflects: (1) income from consolidated operations prior to
Corporate expenses, interest, and other non-operational items, and (2) Arvin's
share of net income from unconsolidated subsidiaries.
Automotive Original Equipment (OE): Net sales in the OE segment of $495.7
million for the first quarter of 1999 increased by $88.7 million or 22 percent
over strong sales in the first quarter of 1998. The consolidation of Arvin
Exhaust do Brasil Ltda., Arvin-Kayaba, LLC, and Arvin Exhaust Thailand added
$15.2 million in revenues. Conversely, the sale of Autocomponents Suspension
S.r.l. (Autocomponents) reduced revenues by $8.8 million. Net sales were boosted
by favorable market conditions worldwide. Vehicle production in the U.S. and
Canada increased by 14 percent, and new car registrations in Western Europe
improved by 6 percent as compared to the first quarter of 1998. Volume gains and
a favorable product mix contributed $63.4 and $18.1 million, respectively.
<PAGE> 10
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 degree of imprecision and subjectivity in estimating the impact of
volume changes.
First quarter OE operating profit of $30.0 million increased by $7.8 million or
35 percent as compared to the first quarter of 1998. Excluding the effect of
non-recurring items (a $7.3 million gain on the sale of the Company's equity
investment in a Mexican shock absorber affiliate and a $3.2 million charge for a
voluntary early retirement program for certain North American employees), OE
operating income increased $3.7 million or 16 percent. Volume gains and a
favorable product mix exceeded the impact of selective price concessions by $5.9
million. Productivity improvements, negotiated raw material price decreases, and
reduced warranty costs contributed $2.4, $2.1, and $1.4 million, respectively,
to operating profit. The net effect of acquisitions and dispositions reduced
operating profit by $4.4 million, while equity in unconsolidated subsidiary
income increased operating profit by $1.9 million. OE operating income was
adversely affected by labor inflation of $4.0 million and higher research and
development costs of $.9 million.
Automotive Replacement (Replacement): Replacement sales in the first quarter of
1999 of $202.8 million increased by $42.6 million or 27 percent compared to net
sales in the first quarter of 1998. The acquisition of Purolator Products
accounted for 79 percent of this increase, and a favorable product mix
contributed $9.7 million. Price increases, averaging one percent of sales, were
offset by volume reductions in the North American exhaust market. The trend of
lower volumes continues for the Replacement segment due to improved original
equipment exhaust systems and the evolution of light vehicle designs.
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. As in the OE segment, there
is also a 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.
Operating income in the first quarter of 1999 for the Replacement segment
increased by $.5 million or four percent compared to the first quarter of 1998.
Excluding the effect of a $3.2 million non-recurring charge for a voluntary
early retirement program for certain North American employees, operating income
increased by $3.7 million or 27 percent. The acquisition of Purolator at the end
of February 1999 added $2.7 million to operating profit. Price increases and a
favorable product mix exceeded volume reductions by $1.3 million. Productivity
gains and negotiated raw material price decreases contributed a total of $3.5
million, but were offset by labor inflation and costs of obtaining new business
totaling $3.7 million.
Other: Other sales in the first quarter of 1999 of $39.9 million increased by
$13.7 million or 52 percent compared to the first quarter of 1998. The
acquisition of WorldSource accounted for 59 percent of the increase, and a
favorable product mix contributed $6.6 million.
<PAGE> 11
Other operating profit in the first quarter of 1999 increased by $4.2 million
compared to the first quarter of 1998. Excluding non-recurring items recorded in
the first quarter of 1999 (a $.4 million charge for a voluntary early retirement
program for certain North American employees) and in the first quarter of 1998
(a $3.5 million increase in reserves for legal and environmental issues),
operating income increased by $1.1 million. Total volume gains, including the
acquisition of WorldSource, contributed $2.7 million, which was partially offset
by minor variances for price decreases, productivity declines, and labor
inflation totaling $1.4 million.
Corporate General and Administrative expenses in the first quarter of 1999
increased by $4.0 million compared to the first quarter of 1998. Higher
compensation and professional service expenditures accounted for 56 and 14
percent of the increase, respectively. A number of smaller increases in general
expenses made up the remainder of the variance.
Interest Expense increased 21 percent in the first quarter of 1999 when compared
to the same period in 1998. The increase was a result of additional
interest-bearing liabilities issued during the first quarter of 1999 (see Note 5
to the Consolidated Financial Statements).
Equity income of affiliates in the first quarter of 1999 increased by $2.4
million as compared to the first quarter of 1998. The increase is primarily
attributable to gains from closing adjustments to account for the liquidation of
the Company's investment in a Mexican shock absorber affiliate, higher earnings
reported for a European ride control affiliate, and equity income for two new
affiliates acquired through the purchase of Purolator.
Other expense, net was essentially flat for the first quarter of 1999 versus the
first quarter of 1998. Two offsetting non-recurring items were reported within
the first quarter of 1999 as follows: 1) a pre-tax gain of $7.3 million for the
sale of an investment in a Mexican shock absorber affiliate, and 2) a pre-tax
charge of $7.1 million for a voluntary early retirement program for certain
North American employees.
Income Taxes: The effective tax rates for the first quarter of 1999 and 1998
were 30.8 and 36.4 percent, respectively. The lower rate for 1999 reflects the
utilization of an available capital loss carryforward.
Financial Condition
Liquidity: Working capital decreased by $44.3 million during the first three
months of 1999, which caused the current ratio to drop from 1.3 at the end of
fiscal year 1998 to 1.2 as of April 4, 1999. Current liabilities increased at a
higher rate than current assets due to the issuance of short-term debt to
acquire Purolator (see Notes 4 and 5 to the Consolidated Financial Statements).
Key elements of the Consolidated Statement of Cash Flows for the first three
months of 1999 and 1998 were as follows:
1999 1998
---- ----
Net Cash Used for Operating Activities (81.3) (12.7)
Net Cash Used for Investing Activities (275.3) (23.8)
Net Cash Provided by Financing Activities 279.5 36.6
<PAGE> 12
Investing cash flows include $24.1 and $17.1 million for the purchase of
property, plant and equipment for the first quarters of 1999 and 1998,
respectively. The Company expects increased levels of capital expenditures in
1999 to support new business requirements and process improvements. Investing
cash flows for the first quarter of 1999 include proceeds of $12.4 million from
the sale of the Company's investment in a Mexican shock absorber affiliate (see
Note 6 to the Consolidated Financial Statements). Investing cash flows also
include $267.0 million paid for the purchase of Purolator, net of cash acquired
(see Note 4 to the Consolidated Financial Statements). In the first quarter of
1998, the Company purchased the remaining shares of Autocomponents and Arvin
Suspension Systems, resulting in a cash outflow of $8.7 million.
Financing cash flows in the first quarter of 1999 include changes in the
Company's debt structure, which are more fully described in Note 5 to the
Consolidated Financial Statements. The proceeds from long-term financings
reflect the issuance of $150.0 million 7 1/8 percent notes due in 2009, which
were used to pay a portion of short-term debt incurred with the acquisition of
Purolator. Furthermore, the change in short-term debt includes borrowing on a
bank facility arrangement in the amount of $125.0 million, which is also related
to the acquisition of Purolator. Financing cash flows in the first quarter of
1998 include $99.0 million proceeds from 6.75 percent notes due in 2008, $20.0
of which was used for debt retirement. Finally, financing cash flows include
Arvin's quarterly dividend to shareholders, which was increased five percent
during 1998 from 20 cents to 21 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 operating,
capital, and dividend requirements over the next 12 months.
Interest Rate Risk Management: Arvin relies significantly on long-term
fixed-rate debt in its capital structure. An increase in short-term bank
borrowings and the addition of $50 million of interest rate swaps during the
first quarter of 1999, however, have lessened that reliance somewhat (see Note 5
to the Consolidated Financial Statements for further details on the increase in
debt). Under Arvin's current capital structure, if interest rates rise
immediately by a 10 percent increment across the entire yield curve, Arvin's
interest expense will increase, and thus pre-tax earnings will decrease, by
approximately $1.1 million over a one-year period.
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.
<PAGE> 13
Year 2000: During 1997, Arvin named a task force and began actively working with
customers, suppliers, and employees on Arvin's plan to address both information
technology (IT) and non-IT related Year 2000 issues. Non-IT systems include, but
are not limited to, those systems that are not commonly thought of as IT
systems, such as manufacturing equipment, building access, telephone systems and
other miscellaneous systems. Except for one location where new systems are being
implemented, the Company had essentially completed the remediation, testing and
implementation phase of the Year 2000 project at the end of 1998 for both IT and
non-IT systems. These phases represent 90 percent of Arvin's Year 2000 project
and involved taking an inventory of all potentially affected systems,
identifying potential Year 2000 issues, fixing or replacing such problems, and
testing the changes made. The final 10 percent of the Year 2000 project,
auditing, is scheduled for completion during 1999. This phase will consist of
Arvin conducting self-assessment reviews, performing comprehensive tests of the
IT systems in a Year 2000 simulated environment, reviewing the results of such
testing, and putting in place any necessary contingency plans. Given the
progress on this project, the Company plans to assess the need for a formal
contingency plan in June 1999 and will analyze what the worst case scenario
would be if the Company's Year 2000 project were not completed as scheduled at
that time.
The Company has developed a Year 2000 process for dealing with its key
suppliers. The process generally involves the following steps: (1) an initial
supplier survey, (2) risk assessment, and (3) auditing critical suppliers. The
first two steps are essentially complete and the audits are expected to be
completed during the third quarter of 1999. Contingency plans for non-compliant
suppliers will be developed as the audits are completed. These activities
provide a means of managing risk, but cannot eliminate the potential for
disruption due to third party failure. The Company continues to work with major
customers on ensuring that its electronic exchanges of data will continue to
work.
Expenses of the Year 2000 project are expensed as incurred. To date,
approximately three million dollars has been expensed for this project. The
Company expects that an additional one million dollars will be expensed during
the remainder of 1999 to complete this project. Capital expenditures are
generally replacing fully depreciated assets and have not had a material effect
on the Company's results of operations, cash flows, or financial condition and
are not expected to in the future.
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.
<PAGE> 14
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," "plans," "estimated earnings," "anticipate,"
"believe," and "intend." Information about potential factors identified by the
Company, which would affect the actual financial results, are included in the
Company's Form 10-K for the year ended January 3, 1999.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
----------------------------------------------------------
See "Interest Rate Risk Management" under the Financial Condition section of
Item 2.
<PAGE> 15
Part II
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
- -----------------------------
Current report on Form 8-K dated March 4, 1999
- ----------------------------------------------
Items 5 & 7 reported
- --------------------
On February 26, 1999 the Registrant acquired the Purolator Products automotive
filter business from Mark IV Industries, Inc. The purchase agreement between the
Registrant and Mark IV Industries, Inc.
was attached to the above-mentioned Form
8-K as Exhibit 99.
Current report on Form 8-K dated March 12, 1999
- -----------------------------------------------
Items 2 & 7 reported
- --------------------
On February 26, 1999 the Registrant acquired the Purolator Products automotive
filter business from Mark IV Industries, Inc.
The Registrant noted that it was impractical at the date of the above-mentioned
Form 8-K filing to file the financial statements and pro forma financial
information required by Item 7 with respect to the acquisition. The Registrant
further noted that such financial statements and pro forma statements would be
filed by amendment to the above-mentioned Form 8-K on or prior to May 12, 1999.
The purchase agreement between the Registrant and Mark IV Industries, Inc. was
incorporated by reference to Exhibit 99 to the Registrant's Current Report on
Form 8-K filed March 4, 1999.
Amendment to Form 8-K dated May 12, 1999
- ----------------------------------------
Item 7 reported
- ---------------
On February 26, 1999 the Registrant acquired the Purolator Products automotive
filter business from Mark IV Industries, Inc.
In connection with the Registrant's acquisition of Purolator, the Registrant
filed financial statements and pro forma financial information as an amendment
to Form 8-K Current Report dated March 12, 1999.
<PAGE> 16
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.
--------------------------------------------
Richard A. Smith
Vice President-Finance & Chief
Financial Officer
--------------------------------------------
William M. Lowe, Jr.
Vice President - Financial Operations
(Chief Accounting Officer)
Date: May 14, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
The schedule contains summary financial information extracted from Form 10-Q for
the period ended April 4, 1999 and is qualified in its entirety by reference to
such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-Mos
<FISCAL-YEAR-END> Jan-02-2000
<PERIOD-START> Jan-04-1999
<PERIOD-END> Apr-04-1999
<CASH> 28,800
<SECURITIES> 0
<RECEIVABLES> 473,600
<ALLOWANCES> 14,200
<INVENTORY> 200,100
<CURRENT-ASSETS> 806,400
<PP&E> 1,362,400
<DEPRECIATION> 699,500
<TOTAL-ASSETS> 1,973,000
<CURRENT-LIABILITIES> 686,600
<BONDS> 453,800
89,100
0
<COMMON> 68,800
<OTHER-SE> 475,800
<TOTAL-LIABILITY-AND-EQUITY> 1,973,000
<SALES> 738,400
<TOTAL-REVENUES> 738,400
<CGS> 641,600
<TOTAL-COSTS> 703,300
<OTHER-EXPENSES> 2,700
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 10,500
<INCOME-PRETAX> 21,900
<INCOME-TAX> 6,800
<INCOME-CONTINUING> 18,400
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> (500)
<NET-INCOME> 17,900
<EPS-PRIMARY> .74
<EPS-DILUTED> .73
</TABLE>
