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 October 3, 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 November 7, 1999, the Registrant had outstanding 25,828,749 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 and Nine
Months Ended October 3, 1999 and September 27, 1998 3
Consolidated Statement of Financial Condition at October 3, 1999
and January 3, 1999 4
Consolidated Statement of Cash Flows for the Nine Months Ended
October 3, 1999 and September 27, 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 16
Part II. Other Information
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Item 6. Exhibits and Reports on Form 8K 17
<PAGE> 2
Part I
<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 Nine Months Ended
------------------ -----------------
10/3/99 9/27/98 10/3/99 9/27/98
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net Sales $ 744.4 $ 573.8 $ 2,322.1 $ 1,810.5
Costs and Expenses:
Cost of goods sold 642.9 490.2 1,995.7 1,541.4
Selling, operating general
and administrative 54.3 46.1 166.7 137.3
Corporate general and administrative 7.1 5.5 21.4 16.0
Interest expense 13.3 9.4 37.5 27.3
Other expense/(income), net 2.6 (.6) 8.6 5.5
--- --- --- ---
720.2 550.6 2,229.9 1,727.5
----- ----- ------- -------
Earnings Before Income Taxes 24.2 23.2 92.2 83.0
Income taxes (8.4) (7.8) (32.0) (27.6)
Minority share of loss/(income) 2.0 .1 2.9 (.8)
Equity income of affiliates 2.3 1.3 7.8 3.4
--- --- --- ---
Earnings before Cumulative Effect of
Accounting Change 20.1 16.8 70.9 58.0
Cumulative effect of accounting change,
net of tax benefit of $.3 - - (.5) -
--- --- ---- ---
Net Earnings $ 20.1 $ 16.8 $ 70.4 $ 58.0
========= ========== ========= =========
Earnings Per Common Share
Basic:
Before cumulative effect of
accounting change $ .83 $ .70 $ 2.93 $ 2.44
Cumulative effect of
accounting change - - (.02) -
--- --- ---- ---
Total Basic $ .83 $ .70 $ 2.91 $ 2.44
========= ========== ========= =========
Diluted:
Before cumulative effect of
accounting change $ .82 $ .69 $ 2.89 $ 2.40
Cumulative effect of accounting change - - (.02) -
--- --- ---- ---
Total Diluted $ .82 $ .69 $ 2.87 $ 2.40
========= ========== ========= =========
Average Common Shares Outstanding (000's)
Basic 24,322 23,942 24,236 23,753
Diluted 24,570 24,332 24,523 24,177
Dividends Declared per Common Share $ .21 $ .20 $ .63 $ .60
<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
10/3/99 1/3/99
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<S> <C> <C>
Assets
- ------
Current Assets:
Cash and cash equivalents $ 45.6 $ 107.0
Receivables, net of allowances
of $13.8 and $8.1, respectively 474.6 319.0
Inventories 215.2 151.3
Other current assets 123.7 103.7
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Total current assets 859.1 681.0
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Non-Current Assets:
Property, plant and equipment:
Land, buildings, machinery & equipment 1,403.2 1,289.8
Less: Allowance for depreciation 740.8 704.0
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662.4 585.8
Goodwill, net of accumulated amortization
of $48.5 and $42.5, respectively 282.0 170.2
Investment in affiliates 163.0 148.2
Other assets 66.0 61.3
---- ----
Total non-current assets 1,173.4 965.5
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$ 2,032.5 $ 1,646.5
=========== ===========
Liabilities and Shareholders' Equity
- ------------------------------------
Current Liabilities:
Short-term debt $ 174.7 $ 10.1
Accounts payable 379.6 337.9
Employee-related costs 66.6 63.3
Accrued expenses 113.8 105.6
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Total current liabilities 734.7 516.9
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Long-term debt 416.4 307.7
Long-term employee benefits 83.1 70.4
Other long-term liabilities 59.5 41.6
Minority interest 54.0 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 ($2.50 par value) 68.8 68.8
Capital in excess of par value 306.7 305.2
Retained earnings 389.4 334.3
Cumulative translation adjustment (71.6) (41.3)
Employee stock benefit trust (59.1) (64.7)
Common shares held in treasury (at cost) (38.5) (38.6)
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Total shareholders' equity 595.7 563.7
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$ 2,032.5 $ 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>
Nine Months Ended
-----------------
10/3/99 9/27/98 (1)
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<S> <C> <C>
Operating Activities:
Net earnings $ 70.4 $ 58.0
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation 78.9 63.3
Amortization 6.4 4.5
Minority interest (2.9) .8
Gain on sale of investment (7.3) (5.5)
Change in deferred income tax benefit, net (3.9) (.4)
Other 2.8 7.9
Changes in operating assets and liabilities:
Receivables (103.2) (87.9)
Inventories and other current assets (36.1) (25.5)
Accounts payable and other accrued expenses 10.7 2.2
Income taxes payable 5.1 10.9
--- ----
Net Cash Provided by Operating Activities 20.9 28.3
---- ----
Investing Activities:
Purchase of property, plant and equipment (79.2) (66.2)
Proceeds from sale of property, plant and equipment 3.0 3.9
Proceeds from sale of investment 12.4 9.6
Investments in affiliates (2.1) (19.0)
Business acquisitions, net of cash acquired (272.1) (25.4)
Cash proceeds from sale of business, net
of cash balance of business sold - 6.9
Other 2.5 1.2
--- ---
Net Cash Used for Investing Activities (335.5) (89.0)
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Financing Activities:
Change in short-term debt, net 121.2 4.3
Proceeds from long-term financings 156.7 99.9
Principal payments on long-term financings (10.7) (74.7)
Dividends paid (15.3) (14.2)
Exercise of stock options 3.0 11.8
Other (.6) .4
--- --
Net Cash Provided by Financing Activities 254.3 27.5
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Cash and Cash Equivalents:
Effect of exchange rate changes on cash (1.1) (1.9)
---- ----
Net decrease (61.4) (35.1)
Beginning of the year 107.0 108.9
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End of the period $ 45.6 $ 73.8
========= =========
<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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CONDENSED 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 and nine months ended October 3, 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):
Third Quarter Nine Months
----------------- ---------------
1999 1998 1999 1998
-------- -------- -------- --------
Denominator for basic earnings
per share - weighted-average shares 24,322 23,942 24,236 23,753
Effect of dilutive securities 248 390 287 424
------- ------- ------- -------
Denominator for diluted earnings
per share - adjusted for weighted-average
shares and assumed conversions 24,570 24,332 24,523 24,177
======== ======== ======== ========
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 was approximately $1million. 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 further 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.
On September 7, 1999, Arvin acquired the assets of Camloc Gas Springs of
Leicester, England from Fairchild Corporation for approximately $5million,
subject to further adjustment. This acquisition was accounted for under the
purchase method and the results of operations for Camloc, renamed Arvin Motion
Control, Ltd., are included in the consolidated financial statements as of the
acquisition date.
The following unaudited pro forma information presents a summary of the
Company's consolidated results of operations as if the acquisitions of
Purolator, WorldSource, and Camloc had taken place on December 29, 1997:
(Dollars in millions, except per share amounts) Nine months ended
---------------------
10/3/99 9/27/98
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Net sales $ 2,384.3 $ 2,130.1
Net earnings before cumulative effect of accounting change 72.0 60.2
Net earnings 71.5 60.2
Per share data:
Basic:
Before cumulative effect of accounting change $ 2.97 $ 2.53
Cumulative effect of accounting change (.02) -
------ ------
Total $ 2.95 $ 2.53
==== ====
Diluted:
Before cumulative effect of accounting change $ 2.94 $ 2.49
Cumulative effect of accounting change (.02) -
------ ------
Total $ 2.92 $ 2.49
==== ====
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 minor 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,
which mature on March 15, 2009. Proceeds from this issue were used to repay a
portion of short-term bank debt incurred in connection with Arvin's acquisition
of Purolator.
During the first quarter of 1999, Arvin also obtained a $125 million committed
bank facility to provide financing for the Purolator acquisition. As of October
3, 1999, $80 million was outstanding on this facility. 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 nine months 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 Latin American 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 nine months of 1999 also includes a
non-recurring 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 for the three and nine months ended October 3, 1999
of $36.4 and $40.1 million and for the three and nine months ended September 27,
1998 of $29.9 and $64.7 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 For the Nine
(Dollars in millions) Months Ended Months Ended
--------------- --------------
10/3/99 9/27/98 10/3/99 9/27/98
------- ------- ------- -------
Net Sales:
Automotive Original Equipment $ 458.3 $ 370.9 $ 1,469.3 $ 1,204.1
Automotive Replacement 239.9 170.6 715.9 519.4
Other 46.2 32.3 136.9 87.0
------ ------ ------- -------
Net sales $ 744.4 $ 573.8 $ 2,322.1 $ 1,810.5
====== ====== ======= =======
Operating Income:
Automotive Original Equipment $ 20.6 $ 17.0 $ 86.9 $ 65.2
Automotive Replacement 21.9 19.8 64.7 56.7
Other 5.3 2.6 12.8 2.0
------ ------ ------ ------
Operating income 47.8 39.4 164.4 123.9
Less: Equity income of affiliates (2.3) (1.3) (7.8) (3.4)
Interest expense (13.3) (9.4) (37.5) (27.3)
Corporate general and administrative (7.1) (5.5) (21.4) (16.0)
Gain on investment - - - 5.5
Other non-operating income/(expense) (.9) - (5.5) .3
------- ------ ------ ------
Earnings before income taxes $ 24.2 $ 23.2 $ 92.2 $ 83.0
======= ====== ======= ======
Note 10. In June 1999, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 137,"Accounting for Derivatives
Instruments and Hedging Activities--Deferral of the Effective Date of FASB
Statement No. 133--an Amendment of FASB Statement No. 133." Statement No. 137
defers the effective date of Statement No. 133 by one year to fiscal years
beginning after June 15, 2000. Accordingly, the Company plans to adopt
Statement No. 133 at the beginning of fiscal year 2001. Implementation
of this statement is not expected to have a material impact on the Company's
results of operations.
In September 1999, the Emerging Issues Task Force reached a consensus for Issue
99-5, "Accounting for Pre-Production Costs Related to Long-Term Supply
Arrangements." This consensus may be applied on a prospective basis for costs
incurred after December 31, 1999, or as a cumulative effect adjustment as of the
beginning of the current fiscal year. The Company is currently reviewing its
accounting treatment of pre-production costs and has not yet determined the
extent to which results of operations may be affected by the implementation of
this consensus.
<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
Record sales of $744.4 million and record earnings of $20.1 million were
reported for the third quarter of 1999. Sales for the nine months ended October
3, 1999 of $2,322.1 million improved $511.6 million or 28 percent over a strong
comparable 1998 period. Revenue growth was achieved as a result of both recent
acquisitions and strength in the North American original equipment market.
Year-to-date earnings before cumulative effect of accounting change increased by
22 percent to $70.9 million, or $2.89 per diluted share, compared to earnings of
$58.0 million, or $2.40 per diluted share for the first nine months of 1998.
Results of Operations
Third Quarter First Nine Months
------------------- -------------------
1999 1998 1999 1998
------ ------ ------ ------
Net Sales:
Automotive Original Equipment $ 458.3 $ 370.9 $ 1,469.3 $ 1,204.1
Automotive Replacement 239.9 170.6 715.9 519.4
Other 46.2 32.3 136.9 87.0
------ ------ ------- -------
Net sales $ 744.4 $ 573.8 $ 2,322.1 $ 1,810.5
====== ====== ======= =======
Operating Income: *
Automotive Original Equipment $ 20.6 $ 17.0 $ 86.9 $ 65.2
Automotive Replacement 21.9 19.8 64.7 56.7
Other 5.3 2.6 12.8 2.0
------ ------ ------- -------
Operating income $ 47.8 $ 39.4 $ 164.4 $ 123.9
====== ====== ======= =======
* 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): OE sales for the third quarter of 1999
increased by $87.4 million or 24 percent over sales in the third quarter of
1998. Market conditions were favorable in both North America and Western Europe.
Vehicle production in the U.S. and Canada increased by 19 percent, and new car
registrations in Western Europe improved by nearly 3 percent as compared to the
third quarter of 1998. North American sales, which account for 65 percent of
this segment's sales, increased by 41 percent primarily as a result of higher
volumes in the OE exhaust market, including an increase of $28.2 million in
certain products purchased from others and integrated into systems sold by
Arvin. Acquisitions accounted for approximately one-eighth of the increase in
North American sales. European sales increased by six percent due to a $7.9
million increase in system integration sales and also due to higher volumes in
the OE ride control market. Increases in North America and Europe were somewhat
offset by a 28 percent decrease in Latin American sales. The favorable impact of
an acquisition in Latin America was not enough to offset the negative impact of
economic sluggishness in that region. Selling price changes had an insignificant
effect on sales, with selective price concessions averaging one percent of total
OE sales.
<PAGE> 10
OE sales for the nine-month period increased by $265.2 million or 22 percent
over sales for the first nine months of 1998. Sales increased by $29.4 million
due to the net effect of acquisition/divestiture activities. Market conditions
were favorable in both North America and Western Europe. Vehicle production in
the U.S. and Canada increased by 15 percent, and new car registrations in
Western Europe improved by 6 percent as compared to the first nine months of
1998. Total North American sales increased by 37 percent, which was primarily
due to the continued strength of the OE exhaust market. An increase in OE system
integration sales and the effect of an acquisition contributed $105.1 and $31.7
million to North American sales, respectively. Latin American operations
reported a 24 percent increase in OE sales. The effect of economic difficulties
in that region was more than offset by the favorable impact of acquisitions.
Sales in Europe were essentially flat. Increased system integration sales of
$21.1 million in Europe were offset by the effect of a disposition. Selling
price changes had an insignificant effect on sales, with selective price
concessions averaging just under one percent of total OE sales.
OE operating profit for the third quarter of 1999 increased by $3.6 million or
21 percent as compared to the third quarter of 1998. Excluding the impact of
acquisitions, the increase would have been $5.6 million or 33 percent. The
increase was primarily attributable to exhaust volume gains in North America.
Negotiated raw material price decreases also contributed $5.3 million. These
benefits were partially offset by increased labor costs of $7.9 million.
OE operating income for the first nine months of 1999 included two significant
non-recurring items: 1) a $7.3 million gain on the sale of the Company's equity
investment in a Latin American shock absorber affiliate, and 2) a $3.2 million
charge for a voluntary early retirement program for certain North American
employees. OE operating income for the first nine months of 1998 included a $6.6
million charge for the realignment of OE exhaust operations. Excluding the
effect of these non-recurring items and the net impact of acquisitions and
divestitures, operating profit increased by $19.8 million or 30 percent over the
comparable period in 1998. The increase was primarily attributable to exhaust
volume gains in North America. Negotiated raw material price decreases also
contributed $12.2 million. These benefits exceeded increased labor costs of
$23.0 million from labor inflation as well as productivity declines that
resulted primarily from the delayed launch of a key customer platform in Europe
and a softness in European volume due to reduced demand for certain other
customer models.
OE operating margins, adjusted for previously discussed non-recurring items,
were 4.5 and 5.6 percent for the third quarter and first nine months of 1999,
respectively, and were 4.6 and 6.0 percent for the third quarter and first nine
months of 1998, respectively. These operating margins were adversely affected by
the increase of OE system integration sales, which typically have very low
margins. Excluding non-recurring items and the negative impact of increased
system integration sales, OE operating margins for the third quarter and first
nine months of 1999 were 5.2 and 6.5 percent, respectively, and were 5.0 and 6.5
percent for the third quarter and the first nine months of 1998, respectively.
Automotive Replacement (Replacement): Replacement sales increased $69.3 million
for the quarter, or 41 percent. Excluding the acquisition of Purolator, sales
decreased by $6.1 million or 4 percent. The Company's Replacement volume was
essentially flat, despite an overall market decline estimated at three percent,
reflecting the Company's growing market share in this segment. Replacement sales
were reduced by the negative impact of a strong U.S. dollar on the translation
of foreign currency sales, an unfavorable product mix, and selective price
concessions averaging less than one percent of Replacement sales.
<PAGE> 11
Replacement sales for the first nine months of 1999 increased by $196.5 million,
or 38 percent over sales for the first nine months of 1998. Excluding the
increase of sales resulting from Arvin's acquisition of Purolator, Replacement
sales were essentially flat. A favorable product mix increased Replacement sales
by three percent and price increases averaged close to one percent of
Replacement sales. These benefits were mainly offset by volume reductions in
North America. Despite softness in both the North American and European
replacement markets, Arvin believes that it continues to gain market share.
Excluding the impact of the Purolator acquisition, Replacement operating income
for the third quarter of 1999 decreased by $2.0 million or 10 percent compared
to the third quarter of 1998. Negotiated decreases in raw material pricing
increased operating profit by 24 percent. This increase was more than offset by
increased labor costs, volume reductions, the cost to obtain new business, and
to a lesser extent, selective price concessions.
Replacement operating income for the first nine months of 1999 included a $3.2
million non-recurring charge for a voluntary early retirement program for
certain North American employees. Excluding the effect of this program and the
effect of the Purolator acquisition, operating income for the Replacement
segment decreased by $1.1 million or 2 percent. Negotiated decreases in raw
material pricing and a favorable product mix increased operating profit by 15
and 8 percent, respectively. These benefits combined with the aforementioned
price increases were offset by volume declines of $11.3 million and the
increased cost to obtain new business of $8.0 million. Labor inflation, which
reduced operating profit by six percent, was offset by productivity
improvements.
Other: Other sales increased by $13.9 and $49.9 million for the quarter and for
the first nine months, respectively. The acquisition of WorldSource accounted
for approximately 60 percent of the increase in both periods. Other incremental
volume was primarily responsible for the remainder of the change. Operating
profit increased $2.7 million for the quarter, primarily due to increased
volume, including the impact of WorldSource. For the year-to-date period,
operating profit increased by $10.8 million. Reduced legal and environmental
expenses, relative to unusually high costs in the prior year, contributed 50
percent of the increase. The remainder of the fluctuation was primarily
attributable to volume increases, including the impact of WorldSource.
Corporate General and Administrative expenses increased by $1.6 million for the
quarter and by $5.4 million for the first nine months of 1999, but were
relatively flat as a percent of sales for both comparison periods. For the nine
months, nearly half of the increase was due to compensation expense. The rest of
the increase resulted from small increases in a number of other general
expenses, such as professional services, travel, depreciation, rent, and
communications.
Interest Expense increased by 41 and 37 percent in the third quarter and first
nine months of 1999, respectively, when compared to the same periods in 1998.
The increases were a result of additional interest-bearing obligations issued
during 1999 in connection with the acquisition of Purolator (see Note 5 to the
Consolidated Financial Statements).
Equity income of affiliates increased by $1.0 and $4.4 million in the third
quarter and during the first nine months of 1999, respectively. For the quarter,
the increase was primarily due to newly acquired joint venture companies
(Purodenso and Zeuna Starker). For the nine months, 40 percent of the increase
resulted from newly acquired joint ventures, 25 percent resulted from the growth
in a European OE ride control venture, and the remainder primarily resulted from
the net effect of ventures sold or consolidated in 1999 and 1998.
<PAGE> 12
Other expense, net increased by $3.2 and $3.1 million for the quarter-to-quarter
and year-to-date comparisons, respectively. Other expense for the first nine
months of 1999 includes two offsetting non-recurring items as follows: 1) a
pre-tax gain of $7.3 million for the sale of an investment in a Latin American
shock absorber affiliate, and 2) a pre-tax charge of $7.1 million for a
voluntary early retirement program for certain North American employees. For the
first nine months of 1998, other expense includes a $6.6 million charge for
realignment expenses and a gain of $5.5 million relating to the early redemption
of preferred stock received in conjunction with the Company's 1995 sale of
Schrader Automotive. After adjustment for these non-recurring items, Other
expense, net increased by $4.4 million for the comparable year-to-date periods.
The overall increase in both the quarter and year-to-date periods was
attributable to a number of unfavorable variances in other income/expense items
(each less than $3.0 million), including interest income, fees on discounted
receivables, goodwill amortization expense, and losses from foreign currency
transactions. These items were partially offset by favorable variances in other
expense items, the largest of which was a decline in legal and environmental
costs of $1.1 million for the quarter and $5.0 million for the year-to-date
period. Furthermore, other expense for 1998 included costs of $1.4 and $2.6
million to repurchase high-coupon debt during the third quarter and nine-month
period, respectively.
Income Taxes: The effective tax rate for both the third quarter and year-to-date
1999 periods was 34.7 percent. The effective tax rates for the third quarter and
year-to-date 1998 periods were 33.6 and 33.2 percent, respectively. The lower
rate for the third quarter of 1998 reflects the refinement of estimates of
non-U.S. net operating loss positions and tax credits. The lower rate for the
first nine months of 1998 also reflects 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. The year-to-date 1999 rate reflects the utilization of
an available capital loss carryforward.
Financial Condition
Liquidity: Working capital decreased by $39.7 million during the first nine
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 October 3, 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 nine
months of 1999 and 1998 were as follows:
1999 1998
---- ----
Net Cash Provided by Operating Activities 20.9 28.3
Net Cash Used for Investing Activities (335.5) (89.0)
Net Cash Provided by Financing Activities 254.3 27.5
<PAGE> 13
Investing cash flows include $76.2 and $62.3 million for the purchase of
property, plant and equipment for the first nine months of 1999 and 1998,
respectively. The increased levels of capital expenditures support the Company's
new business requirements and process improvements. Investing cash flows for the
first nine months of 1999 include proceeds of $12.4 million from the sale of the
Company's investment in a Latin American 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, and $5.1
million paid for the purchase of Arvin Motion Control, Ltd. (see Note 4 to the
Consolidated Financial Statements). During the first nine months of 1998,
additional investments totaling $19.0 million were made in several joint
ventures, including a $15.0 million additional investment in the Company's
European OE exhaust joint venture. Year-to-date 1998 investing cash flows also
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. The
Company also purchased the remaining shares of Arvin do Brasil, Autocomponents,
and Arvin Suspension Systems Italia during the first nine months of 1998 for a
total cash outflow of $25.4 million, net of cash acquired. Finally, year-to-date
1998 investing cash flows include cash proceeds of $6.9 million for the sale of
Autocomponents, net of the cash balance on Autocomponent's books at the time of
the sale.
Financing cash flows for the first nine months 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 of 7 1/8 percent notes due in 2009, which
were used to repay a portion of the short-term debt incurred with the
acquisition of Purolator. Furthermore, the change in short-term bank debt
includes borrowings under a bank facility established in February 1999 related
to the acquisition of Purolator. As of October 3, 1999, $80.0 million was
outstanding under this facility and $25.0 million was outstanding under another
bank facility that was established in 1997. Financing cash flows for the first
nine months of 1998 include $99.0 million proceeds from 6.75 percent notes due
in 2008, $69.0 million of which was used to retire current maturities of
long-term debt and to repurchase high coupon debt. Finally, financing cash flows
include Arvin's quarterly dividend to shareholders, which was increased five
percent during 1998 from 20 cents to 21 cents. The Company announced in October
1999 that the quarterly dividend to shareholders would be increased by an
additional five percent from 21 cents to 22 cents to shareholders of record as
of the close of business on December 3, 1999.
Capital Resources: Based on the Company's projected cash flow from operations
and existing bank credit facilities, 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 nine months 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 $1.3 million over a one-year period.
<PAGE> 14
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 (FASB) issued Statement of
Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities" and then in June 1999, the FASB issued SFAS
No. 137, "Accounting for Derivatives Instruments and Hedging
Activities--Deferral of the Effective Date of FASB Statement No. 133--an
Amendment of FASB Statement No. 133." SFAS No. 137 defers the effective date of
SFAS No. 133 by one year to fiscal years beginning after June 15, 2000.
Accordingly, the Company plans to adopt SFAS No. 133 at the beginning of fiscal
year 2001. 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 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 phases of the Year 2000 project at the end of 1998 for both IT
and non-IT systems. (The implementation of the new systems noted above is
expected to be completed by the end of 1999.) These phases represented 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 and implementing the changes made. The
final 10 percent of the Year 2000 project, auditing, has essentially been
completed as well. This phase consisted of Arvin conducting internal audit
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.
The Company also developed a Year 2000 process for dealing with its key
suppliers. This process generally involved the following steps: (1) an initial
supplier survey, (2) risk assessment, and (3) auditing critical suppliers. All
three steps of this process have essentially been completed. Contingency plans
for non-compliant suppliers were developed as the audits were 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
key suppliers and major customers on ensuring that its electronic exchanges of
data will continue to work.
The Company believes it has an effective program in place to address possible
Year 2000 problems in a timely manner. At this time, the Company believes its
"reasonably likely worst case scenario" would be the failure of its third party
business partners to address Year 2000 issues. Current contingency plan focus is
on thorough testing, alternate supplier sources, manual backup for critical
processes, and build-up of safety stock in limited cases.
Expenses of the Year 2000 project have been expensed as incurred. Approximately
$3.5 million has been expensed for this project to-date. The Company expects
remaining expenses to be less than $.3 million. Capital expenditures have
generally replaced 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.
<PAGE> 15
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," "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> 16
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
- -----------------------------
None
<PAGE> 17
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: November 5, 1999
<PAGE> 18
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
The schedule contains summary financial information extracted from Form 10-Q for
the period ended October 3, 1999 and is qualified in its entirety y reference to
such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> Jan-02-2000
<PERIOD-START> Jul-05-1999
<PERIOD-END> Oct-03-1999
<CASH> 45,600
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<PP&E> 1,403,200
<DEPRECIATION> 740,800
<TOTAL-ASSETS> 2,032,500
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89,100
0
<COMMON> 68,800
<OTHER-SE> 526,900
<TOTAL-LIABILITY-AND-EQUITY> 2,032,500
<SALES> 744,400
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