In September 2005, the company completed an offer to exchange $194 million of its previously outstanding $499 million 6.8 percent notes, due in 2009, and $59 million of its previously outstanding $150 million 7-1/8 percent notes, also due in 2009 for $253 million of new 8-1/8 percent notes due in 2015. The exchange of the $194 million of 6.8 percent notes was accounted for as an extinguishment of debt and, accordingly, $4 million was recognized in fiscal year 2005 as a loss on debt extinguishment and included in interest expense, net and other in the consolidated statement of operations. The loss on debt extinguishment primarily consisted of the premium paid to note holders to exchange their notes. The exchange of the $59 million of 7-1/8 percent notes was accounted for as a debt exchange, and accordingly, the $3 million premium paid to exchange these notes was recorded as a discount and included as a reduction in the carrying value of the new notes.
The company previously filed a shelf registration statement with the Securities and Exchange Commission registering $750 million aggregate principal amount of debt securities to be offered in one or more series on terms determined at the time of sale. At September 30, 2006 the company had $150 million of debt securities available for issuance under this shelf registration.
During fiscal year 2006, the company purchased $12 million of U.S. government securities and placed those securities into an irrevocable trust, for the sole purpose of funding payments of principal and interest through the stated maturity on the $5 million of outstanding 6-3/4 percent notes due 2008 and the $6 million of outstanding 7-1/8 percent notes due 2009, in order to defease certain covenants under the associated indenture. As these securities are restricted and can only be withdrawn and used for payments of the principal and interest on the aforementioned notes, the assets of the trust are primarily recorded in Other Assets (see Note 12) in the consolidated balance sheet.
Cash interest at a rate of 4.625 percent per annum from the date of issuance through March 1, 2016 is payable semi-annually in arrears on March 1 and September 1 of each year. After March 1, 2016, the principal amount of the convertible notes will be subject to accretion at a rate that provides holders with an aggregate annual yield to maturity of 4.625 percent.
The notes are convertible into shares of the company’s common stock at an initial conversion rate, subject to adjustment, equivalent to 47.6667 shares of common stock per $1,000 initial principal amount of notes, which represents an initial conversion price of approximately $20.98 per share. If converted, the accreted principal amount will be settled in cash and the remainder of the company’s conversion obligation, if any, in excess of such accreted principal amount will be settled in cash, shares of common stock, or a combination thereof, at the company’s election.
Holders may convert their notes at any time on or after March 1, 2024. Prior to March 1, 2024, holders may convert their notes only under the following circumstances:
Exhibit 99
ARVINMERITOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On or after March 1, 2016, the company may redeem the convertible notes, in whole or in part, for cash at a redemption price equal to 100 percent of the accreted principal amount plus any accrued and unpaid interest. On each of March 1, 2016, 2018, 2020, 2022, and 2024, or upon certain fundamental changes, holders may require the company to purchase all or a portion of their convertible notes at a purchase price in cash equal to 100 percent of the accreted principal amount plus any accrued and unpaid interest.
The convertible notes are fully and unconditionally guaranteed by certain subsidiaries of the company that currently guarantee the company’s obligations under its senior secured credit facilities and other publicly-held notes (seeSenior Secured Credit Facilities below).
Subordinated Debentures
The company, through Arvin Capital I (the trust), a wholly-owned finance subsidiary trust, issued $39 million of 9.5 percent Company-Obligated Mandatorily Redeemable Preferred Capital Securities of a Subsidiary Trust (preferred capital securities), due February 1, 2027, and callable in February 2007 at a premium and in February 2017 at par. The proceeds from the capital securities are invested entirely in 9.5 percent junior subordinated debentures of the company, which are the sole assets of the trust. The company fully and unconditionally guarantees the trust’s obligation to the holders of the preferred capital securities.
Under the provisions of FASB Interpretation No. 46, it was determined that the trust is a variable interest entity in which the company does not have a variable interest and therefore is not the primary beneficiary and accordingly has included in long-term debt $39 million of junior subordinated debentures due to the trust.
Senior Secured Credit Facilities
In June 2006, the company replaced its $900 million revolving credit facility that was to expire in 2008 with two new senior secured credit facilities totaling $1.15 billion (the new credit facilities). The new credit facilities include a $980 million revolving credit facility and a $170 million term loan maturing in 2011 and 2012, respectively. Debt issuance costs associated with the new credit facilities of $10 million are being amortized over the five year term of the revolving credit facility. Borrowings under the new revolving credit facility are subject to interest based on quoted LIBOR rates plus a margin, and a commitment fee on undrawn amounts, both of which are based upon the company’s current credit rating for the senior secured facilities. At September 30, 2006, the margin over the LIBOR rate was 150 basis points, and the commitment fee was 30 basis points. Similar to the prior revolving credit facility, the new revolving credit facility includes a $150 million limit on the issuance of letters of credit. At September 30, 2006 and 2005, approximately $25 million and $23 million of letters of credit, respectively, were issued.
The term loan is payable in quarterly installments of $0.25 million with the remaining balance due at maturity. Borrowings under the term loan are subject to interest based on quoted LIBOR rates plus a margin. At September 30, 2006, the margin over the LIBOR rate was 175 basis points.
Borrowings under the revolving credit facility and term loan are collateralized by approximately $1.1 billion of the company’s assets, primarily consisting of eligible domestic U.S. accounts receivable, inventory, plant, property, and equipment, intellectual property and the company’s investment in all or a portion of certain of its wholly-owned subsidiaries.
The new credit facilities require the company to maintain a total net debt to earnings before interest, taxes, depreciation and amortization (EBITDA) ratio no greater than 4.25x and a minimum fixed charge coverage ratio (EBITDA less capital expenditures to interest expense) no less than 1.50x. At September 30, 2006, the company was in compliance with all covenants.
Certain of the company’s subsidiaries, as defined in the credit agreement, irrevocably and unconditionally guarantee amounts outstanding under the new credit facilities. Similar subsidiary guarantees are provided for the benefit of the holders of the publicly-held notes outstanding under the company’s indentures (see Note 27).
Accounts Receivable Securitization
In September 2005, the company entered into a new $250 million accounts receivable securitization arrangement. As discussed in Note 7, the company’s previous accounts receivable securitization facility expired in September 2005. Under the new arrangement, the company sells substantially all of the trade receivables of certain U.S. subsidiaries to ARC. ARC funds these purchases with borrowings under a loan agreement with a bank. The weighted average interest rate on borrowings under this arrangement was approximately 4.80 percent during fiscal 2006. Amounts outstanding under this agreement are reported as short-term debt in the consolidated balance sheet and are collateralized by $384 million of eligible receivables purchased and held by ARC at September 30, 2006. If certain receivables performance-based covenants are not met, it would constitute a termination event, which, at the option of the banks, could result in termination of the accounts receivable securitization arrangement. At September 30, 2006, the company was in compliance with all covenants.
46
Exhibit 99
ARVINMERITOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Related Parties
A 57-percent owned consolidated joint venture of the company has a $6 million, 6.5-percent loan with its minority partner. The maturity date of this loan was extended in November 2005 to fiscal year 2009. This loan is included in long-term debt in the consolidated balance sheet.
The company also has an arrangement with a non-consolidated joint venture that allows the company to borrow funds from time to time, at LIBOR plus 50 basis points. No amounts were outstanding under this arrangement at September 30, 2006 and 2005.
Interest Rate Swap Agreements
In September 2006, the company executed a new swap agreement that effectively converts $25 million notional amount of 8-1/8 percent notes to variable rates. In March 2006, concurrent with the repurchase of $225 million of the company’s outstanding $302 million 6.8 percent notes, the company terminated $30 million notional amount of its 6.8 percent interest rate swaps.
In May 2005, the company terminated $262 million of its $300 million notional amount 8.75 percent interest rate swap and $22 million of its $100 million notional amount 6.8 percent interest rate swap. Proceeds from these terminations, including interest received, were $22 million. The fair value adjustment to the notes associated with these partially terminated swaps was $20 million, and is amortized to earnings as a reduction of interest expense over the remaining life of the debt. The fair value adjustment of the notes is classified in Long-Term Debt in the consolidated balance sheet. Simultaneously, the company executed new swap agreements that effectively convert $183 million notional amount of 8-3/4 percent notes and $15 million notional amount of 6.8 percent notes to variable interest rates. The new swap agreements had the same terms as the original agreements, and the fixed spread is approximately 140 basis points higher than in the original swap agreements.
As of September 30, 2006, the company had interest rate swap agreements that effectively convert $221 million of the company’s 8-3/4 percent notes and $63 million of the 6.8 percent notes to variable interest rates. These are in addition to the $25 million notional amount interest rate swap executed in September 2006, As of September 30, 2006, the fair value of the 8-3/4 percent swaps was a liability of $6 million and is included in Other Liabilities and the fair value of the 6.8 percent swaps was not significant. As of September 30, 2005, the fair value of the swaps was not material. The terms of the interest rate swap agreements require the company to place cash on deposit as collateral if the fair value of the interest rate swaps declines below zero. Accordingly, the company has placed $6 million on deposit with the counterparty as collateral and recorded such deposit as a reduction in the carrying value of the associated interest rate swap. The swaps have been designated as fair value hedges and the impact of the changes in their fair values is offset by an equal and opposite change in the carrying value of the related notes. Under the terms of the swap agreements, the company receives a fixed rate of interest of 8.75 percent, 6.8 percent and 8.125 percent on notional amounts of $221 million, $63 million and $25 million, respectively, and pays variable rates based on three-month LIBOR plus a weighted-average spread of 3.41 percent. The payments under the agreements coincide with the interest payment dates on the hedged debt instruments, and the difference between the amounts paid and received is included in interest expense, net and other. Included in the fair value adjustment of notes is $12 million related to previously terminated interest rate swaps, which is being amortized to earnings as a reduction of interest expense over the remaining life of the related debt.
The company classifies the cash flows associated with its interest rate swaps in cash flows from operating activities in its consolidated statement of cash flows. This is consistent with the classification of the cash flows associated with the underlying hedged item.
Leases
The company had entered into an agreement to lease certain manufacturing and administrative assets. Under the agreement, the assets were held by a variable interest entity in which the company had a variable interest in the form of a $30 million residual value guarantee that obligates the company to absorb a majority of the variable interest entity’s losses. Accordingly the assets and liabilities of this variable interest entity were included in the company’s consolidated balance sheet. In July 2006, the company purchased the assets and extinguished the liability for $35 million.
The company has various other operating leasing arrangements. Future minimum lease payments under these operating leases are $21 million in 2007, $16 million in 2008, $13 million in 2009, $10 million in 2010, $8 million in 2011 and $11 million thereafter.
Covenants
The senior secured revolving credit facility requires the company to maintain a total net debt to earnings before interest, taxes, depreciation and amortization (EBITDA) ratio no greater than 4.25x and a minimum fixed charge coverage ratio (EBITDA less capital expenditures to interest expense) no less than 1.50x. At September 30, 2006, the company was in compliance with all covenants.
47
Exhibit 99
ARVINMERITOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
17. FINANCIAL INSTRUMENTS
The company’s financial instruments include cash and cash equivalents, short-term debt, long-term debt, interest rate swaps, and foreign exchange forward contracts. The company uses derivatives for hedging and non-trading purposes in order to manage its interest rate and foreign exchange rate exposures. The company’s interest rate swap agreements are discussed in Note 16.
Foreign Exchange Contracts
The company’s operations are exposed to global market risks, including the effect of changes in foreign currency exchange rates. The company has a foreign currency cash flow hedging program to reduce the company’s exposure to changes in exchange rates. The company uses foreign currency forward contracts to manage the company’s exposures arising from foreign currency exchange risk. Gains and losses on the underlying foreign currency exposures are partially offset with gains and losses on the foreign currency forward contracts.
Under this program, the company has designated the foreign exchange contracts (the “contracts”) as cash flow hedges of underlying forecasted foreign currency purchases and sales. The effective portion of changes in the fair value of the contracts is recorded in Accumulated Other Comprehensive Income (AOCI) in the consolidated statement of shareowners’ equity and is recognized in operating income when the underlying forecasted transaction impacts earnings. The contracts generally mature within 12 months. The company recognized gains on the contracts of approximately $2 million and $14 million in the fiscal years ended September 30, 2006 and 2005, respectively. The contracts were not significant to results of operations in fiscal year 2004. The impact to operating income associated with hedge ineffectiveness was not significant in fiscal years 2006, 2005 and 2004.
At September 30, 2006, there was a $1 million loss recorded in AOCI. The company expects to reclassify this amount from AOCI to operating income during the next three months as the forecasted hedged transactions are recognized in earnings. At September 30, 2005, there was a $2 million gain recorded in AOCI.
The company classifies the cash flows associated with the contracts in cash flows from operating activities in the consolidated statement of cash flows. This is consistent with the classification of the cash flows associated with the underlying hedged item.
Fair Value
Fair values of financial instruments are summarized as follows (in millions):
| | | | | | | | | | | | | |
| | September 30, | |
| |
| |
| | 2006 | | 2005 | |
| |
| |
| |
| | Carrying
Value | | Fair
Value | | Carrying
Value | | Fair
Value | |
| |
| |
| |
| |
| |
Cash and cash equivalents | | $ | 350 | | $ | 350 | | $ | 187 | | $ | 187 | |
Short-term investments | | | 5 | | | 5 | | | — | | | — | |
Interest rate swaps - asset | | | 1 | | | 1 | | | — | | | — | |
Foreign exchange contracts - asset | | | — | | | — | | | 4 | | | 4 | |
Investment in debt defeasance trust | | | 12 | | | 12 | | | — | | | — | |
Collateral on interest rate swap liability | | | 6 | | | 6 | | | — | | | — | |
Interest rate swaps - liability | | | 6 | | | 6 | | | — | | | — | |
Foreign exchange contracts - liability | | | 1 | | | 1 | | | 2 | | | 2 | |
Short-term debt | | | 56 | | | 56 | | | 136 | | | 136 | |
Long-term debt | | | 1,174 | | | 1,141 | | | 1,436 | | | 1,401 | |
Cash and cash equivalents — All highly liquid investments purchased with an original maturity of three months or less are considered to be cash equivalents. The carrying value approximates fair value because of the short maturity of these instruments.
Interest rate swaps and foreign exchange forward contracts — Fair values are estimated by obtaining quotes from external sources.
Short-term debt — The carrying value of short-term debt approximates fair value because of the short maturity of these borrowings.
Long-term debt — Fair values are based on interest rates that would be currently available to the company for issuance of similar types of debt instruments with similar terms and remaining maturities.
48
Exhibit 99
ARVINMERITOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
18. SHAREOWNERS’ EQUITY
Common Stock
The company is authorized to issue 500 million shares of Common Stock, with a par value of $1 per share, and 30 million shares of Preferred Stock, without par value, of which two million shares are designated as Series A Junior Participating Preferred Stock (Junior Preferred Stock). Under the Company Rights Plan, a Preferred Share Purchase Right (Right) is attached to each share of Common Stock pursuant to which the holder may, in certain takeover-related circumstances, become entitled to purchase from the company 1/100th of a share of Junior Preferred Stock at a price of $100, subject to adjustment. Also, in certain takeover-related circumstances, each Right (other than those held by an acquiring person) will be exercisable for shares of Common Stock or stock of the acquiring person having a market value of twice the exercise price. In certain events, the company may exchange each Right for one share of Common Stock or 1/100th of a share of Junior Preferred Stock. The Rights will expire on July 7, 2010, unless earlier exchanged or redeemed at a redemption price of $0.01 per Right. Until a Right is exercised, the holder, as such, will have no voting, dividend or other rights as a shareowner of the company.
The company has reserved approximately 15.6 million shares of Common Stock in connection with its Long-Term Incentives Plan (LTIP), Directors Stock Plan, Incentive Compensation Plan, 1998 and 1988 Stock Benefit Plans, and Employee Stock Benefit Plan for grants of non-qualified stock options, incentive stock options, stock appreciation rights, restricted stock, performance shares, restricted share units and stock awards to key employees and directors. At September 30, 2006, there were 1.5 million shares available for future grants under these plans.
The company accounts for treasury stock at cost. There were no purchases of treasury stock in fiscal years 2006, 2005 or 2004. During fiscal years 2006 and 2005, approximately 0.5 million and 0.9 million shares of treasury stock were issued in connection with the exercise of stock options and issuance of restricted stock under the company’s incentive plans.
Accumulated Other Comprehensive Loss
The components of Accumulated Other Comprehensive Loss as reported in the Consolidated Balance Sheet and Statement of Shareowners’ Equity are as follows:
| | | | | | | | | | | | | | | | | | | |
| | Foreign
Currency
Translation | | Minimum
Pension
Liability | | Unrealized
Gains (Losses) | | Total | |
| |
| |
| |
| |
| |
Balance at September 30, 2003 | | | $ | (32 | ) | | | $ | (294 | ) | | | $ | 3 | | | $ | (323 | ) |
2004 adjustment | | | | 112 | | | | | 1 | | | | | — | | | | 113 | |
Reclassification of unrealized gain | | | | — | | | | | — | | | | | (3 | ) | | | (3 | ) |
Deferred gain on cash flow hedges | | | | — | | | | | — | | | | | 3 | | | | 3 | |
| | |
|
| | | |
|
| | | |
|
| | |
|
| |
Balance at September 30, 2004 | | | | 80 | | | | | (293 | ) | | | | 3 | | | | (210 | ) |
2005 adjustment | | | | 22 | | | | | (143 | ) | | | | — | | | | (121 | ) |
Deferred loss on cash flow hedges | | | | — | | | | | — | | | | | (1 | ) | | | (1 | ) |
| | |
|
| | | |
|
| | | |
|
| | |
|
| |
Balance at September 30, 2005 | | | | 102 | | | | | (436 | ) | | | | 2 | | | | (332 | ) |
2006 adjustment | | | | 77 | | | | | 179 | | | | | — | | | | 256 | |
Deferred loss on cash flow hedges | | | | — | | | | | — | | | | | (3 | ) | | | (3 | ) |
| | |
|
| | | |
|
| | | |
|
| | |
|
| |
Balance at September 30, 2006 | | | $ | 179 | | | | $ | (257 | ) | | | $ | (1 | ) | | $ | (79 | ) |
| | |
|
| | | |
|
| | | |
|
| | |
|
| |
| | | | | | | | | |
19. EQUITY BASED COMPENSATION
Stock Options
Under the company’s incentive plans, stock options are granted at prices equal to the fair value on the date of grant and have a maximum term of 10 years. Stock options vest over a three year period from the date of grant. No stock options were granted during fiscal years 2006 and 2005.
49
Exhibit 99
ARVINMERITOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Information related to stock options is as follows (shares in thousands, exercise price and remaining contractual term represent weighted averages, and aggregate intrinsic values in millions):
| | | | | | | | | | | | | |
| | Shares | | Exercise
Price | | Remaining
Contractual
Life | | Aggregate
Intrinsic
Value | |
| |
| |
| |
| |
| |
Outstanding — beginning of year | | | 5,180 | | $ | 20.49 | | | | | | | |
Granted | | | — | | | — | | | | | | | |
Exercised | | | (85 | ) | | 15.20 | | | | | | | |
Cancelled or expired | | | (570 | ) | | 26.79 | | | | | | | |
| |
|
| | | | | | | | | | |
Outstanding — end of year | | | 4,525 | | | 19.81 | | | 5.0 | | | — | |
| |
|
| | | | | | | | | | |
|
Exercisable — end of year | | | 4,198 | | $ | 19.95 | | | 4.8 | | | — | |
| |
|
| | | | | | | | | | |
The following table provides additional information about outstanding stock options at September 30, 2006 (shares in thousands, exercise price represents a weighted average):
| | | | | | | | | | | | | | | | |
| | Outstanding | | Exercisable | |
| |
| |
| |
| | | | Remaining
Contractual | | Exercise | | | | Exercise | |
| |
| |
| |
| |
| |
| |
| | Shares | | Life | | Price | | Shares | | Price | |
| |
| |
| |
| |
| |
| |
$14.00 to $22.00 | | | 3,669 | | | 5.7 | | $ | 17.74 | | | 3,342 | | $ | 17.72 | |
$22.01 to $32.00 | | | 803 | | | 1.8 | | | 28.06 | | | 803 | | | 28.06 | |
$32.01 to $41.00 | | | 53 | | | 2.2 | | | 38.06 | | | 53 | | | 38.06 | |
| |
|
| | | | | | | |
|
| | | | |
| | | 4,525 | | | | | | | | | 4,198 | | | | |
| |
|
| | | | | | | |
|
| | | | |
| | | | | | | | |
Compensation expense is recognized for the non-vested portion of previously issued stock options. The company recorded compensation expense of $3 million, $6 million, and $7 million in fiscal years 2006, 2005, and 2004, respectively, associated with the expensing of stock options. The total intrinsic value of options exercised was less than $1 million in fiscal year 2006 and $2 million and $3 million in fiscal years 2005 and 2004, respectively.
The weighted average grant date fair value of options granted was $5.80 for fiscal 2004. The fair value was estimated on the date of grant using the Black-Scholes pricing model and the following assumptions:
| | | | |
| | 2004 | | |
| |
| | |
Average risk-free interest rate | | | 3.1 | % | |
Expected dividend yield | | | 2.4 | % | |
Expected volatility | | | 41.0 | % | |
Expected life (years) | | | 5 | | |
Restricted Stock, Restricted Units, and Performance Share Units
The company grants shares of restricted stock and restricted and performance share units to certain employees and non-employee members of the Board of Directors in accordance with the LTIP, the 1998 Stock Benefit Plan, the Employee Stock Benefit Plan and the 2004 Directors Stock Plan, respectively. The company measures the grant price fair value of these stock based awards at the market price of the company’s common stock as of the date of the grant. Employee awards typically vest over three years and are subject to continued employment by the employee. Performance share units are also subject to satisfaction of certain conditions related to the company’s financial performance. Compensation cost associated with stock based awards is recognized ratably over the vesting period. Cash dividends on the restricted stock are reinvested in additional shares of common stock during the vesting period.
In fiscal years 2006, 2005, and 2004, the company granted 888,300, 851,975, and 738,100 shares of stock based awards, respectively. The grant date fair value of these shares was $13.69, $20.53, and $22.68 for shares granted in 2006, 2005 and 2004, respectively.
50
Exhibit 99
ARVINMERITOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The company’s nonvested restricted shares and share units as of September 30, 2006, and the activity during fiscal year 2006 is summarized as follows (shares in thousands):
| | | | | | | |
Nonvested Shares | | Number of
Shares | | Weighted-Average Grant-Date
Fair Value | |
| |
| |
| |
Nonvested at September 30, 2005 | | | 979 | | $ | 21.01 | |
Granted | | | 888 | | | 13.69 | |
Vested | | | (862 | ) | | 18.33 | |
Forfeited | | | (83 | ) | | 21.24 | |
| |
|
| | | | |
Nonvested at September 30, 2006 | | | 922 | | | 16.45 | |
| |
|
| | | | |
As of September 30, 2006, there was $15 million of total unrecognized compensation costs related nonvested equity compensation arrangements. These costs are expected to be recognized over a weighted average period of 1.2 years. Total compensation expense recognized for restricted stock, restricted share units, and performance share units was $14 million in fiscal year 2006, $18 million in fiscal year 2005 and $9 million in fiscal year 2004.
Prior to the adoption of SFAS 123(R), total compensation expense related to the grants of restricted stock was recorded as unearned compensation and was shown as a separate reduction of shareowners’ equity. Unearned compensation was expensed over the vesting period. Upon the adoption of SFAS 123(R) in fiscal year 2006, compensation expense is recorded as incurred as a reduction of additional paid in capital in the consolidated statement of shareowners’ equity. In addition, the previously recorded balance in unearned compensation was reclassed to additional paid in capital.
20. RETIREMENT MEDICAL PLANS
The company has retirement medical plans that cover the majority of its U.S. and certain non-U.S. employees, including certain employees of divested businesses, and provide for medical payments to eligible employees and dependents upon retirement. These plans are unfunded.
The company approved amendments to certain retiree medical plans in fiscal years 2002 and 2004. The cumulative effect of these amendments was a reduction in the accumulated postretirement benefit obligation (APBO) of $293 million, which was being amortized as a reduction of retiree medical expense over the average remaining service period of approximately 12 years. These plan amendments have been challenged in three separate class action lawsuits that have been filed in the United States District Court for the Eastern District of Michigan (District Court). The lawsuits allege that the changes breach the terms of various collective bargaining agreements entered into with the United Auto Workers (the UAW lawsuit) and the United Steel Workers (the USW lawsuit) at facilities that have either been closed or sold. The complaints also allege a companion claim under the Employee Retirement Income Security Act of 1974 (ERISA) essentially restating the alleged collective bargaining breach claims and seeking to bring them under ERISA. Plaintiffs sought injunctive relief requiring the company to provide lifetime retiree health care benefits under the applicable collective bargaining agreements.
On December 22, 2005, the District Court issued an order granting a motion by the UAW for a preliminary injunction. The order enjoined the company from implementing the changes to retiree health benefits that had been scheduled to become effective on January 1, 2006, and ordered the company to reinstate and resume paying the full cost of health benefits for the UAW retirees at the levels existing prior to the changes approved in 2002 and 2004. On August 17, 2006, the District Court denied a motion by the company and the other defendants for summary judgment; granted a motion by the UAW for summary judgment; and granted the UAW’s request to make the terms of the preliminary injunction permanent (the injunction). Due to the uncertainty related to the ongoing lawsuits and because the injunction has the impact of at least temporarily changing the benefits provided under the existing postretirement medical plans, the company has accounted for the injunction as a rescission of the 2002 and 2004 plan amendments that modified UAW retiree healthcare benefits. The company recalculated the APBO as of December 22, 2005, which resulted in an increase in the APBO of $168 million. The increase in APBO will offset the remaining unamortized negative prior service cost of the 2002 and 2004 plan amendments and will increase retiree medical expense over the average remaining service period associated with the original plan amendments of approximately 10 years. In addition, the increase in APBO resulted in higher interest cost, a component of retiree medical expense. The company began recording the impact of the injunction in March 2006, 90 days from the December 22, 2005 measurement date, which is consistent with the 90-day lag between the company’s normal plan measurement date of June 30 and its fiscal year-end. In addition, the injunction ordered the defendants to reimburse the plaintiffs for out-of-pocket expenses incurred since the date of the earlier benefit modifications. The company recorded a $5 million reserve at September 30, 2006 as the best estimate of its liability for these retroactive benefits. Including the estimated liability for retroactive benefits, the injunction increased retiree medical expense by approximately $17 million in fiscal year 2006. The company continues to believe it has meritorious defenses to these actions and has appealed the District Court’s order to the U.S. Court of Appeals for the Sixth Circuit. The ultimate outcome of the UAW lawsuit may result in future plan amendments. The impact of any future plan amendments cannot be currently estimated.
51
Exhibit 99
ARVINMERITOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Based on management’s assessment of the USW lawsuit, the 2002 and 2004 plan amendments are still in effect for USW retirees. The ultimate outcome of the USW lawsuit may result in future plan amendments. The impact of any future plan amendments cannot be currently estimated.
The company’s retiree medical obligations are measured as of June 30. The following are the assumptions used in the measurement of the APBO and retiree medical expense:
| | | | | | | | | | |
| | 2006 | | 2005 | | 2004 | |
| |
| |
| |
| |
Assumptions as of June 30 Discount rate | | 6.40 | % | | 5.00 | % | | 6.25 | % | |
Health care cost trend rate (weighted average) | | 8.00 | % | | 9.00 | % | | 9.50 | % | |
Ultimate health care trend rate | | 5.00 | % | | 5.00 | % | | 5.00 | % | |
Year ultimate rate is reached | | 2011 | | | 2011 | | | 2011 | | |
Since the company measures its retiree medical obligations at June 30, the assumptions noted above are used to calculate the APBO as of June 30 of the current fiscal year and retiree medical expense for the subsequent fiscal year.
The discount rate is used to calculate the present value of the APBO. This rate is determined based on high-quality fixed income investments that match the duration of expected retiree medical benefits. The company has typically used the corporate AA/Aa bond rate for this assumption. The health care cost trend rate represents the company’s expected annual rates of change in the cost of health care benefits. The trend rate noted above represents a projection of health care costs as of the measurement date through 2011, at which time the health care trend rate is projected to be 5.0 percent. The company’s projection for fiscal year 2007 is an increase in health care costs of 8.0 percent.
The APBO as of the June 30 measurement date is summarized as follows (in millions):
| | | | | | | |
| | 2006 | | 2005 | |
| |
| |
| |
Retirees | | $ | 551 | | $ | 397 | |
Employees eligible to retire | | | 14 | | | 11 | |
Employees not eligible to retire | | | 35 | | | 47 | |
| |
|
| |
|
| |
Total | | $ | 600 | | $ | 455 | |
| |
|
| |
|
| |
The following reconciles the change in APBO and the amounts included in the consolidated balance sheet (in millions):
| | | | | | | |
| | 2006 | | 2005 | |
| |
| |
| |
APBO — beginning of year | | $ | 455 | | $ | 443 | |
Service cost | | | 4 | | | 3 | |
Interest cost | | | 27 | | | 26 | |
Plan amendments | | | 168 | | | — | |
Actuarial losses | | | 5 | | | 45 | |
Benefit payments | | | (59 | ) | | (62 | ) |
| |
|
| |
|
| |
APBO — end of year(1) | | | 600 | | | 455 | |
| | | | | | | |
Items not yet recognized in the balance sheet: | | | | | | | |
Unrecognized net actuarial loss | | | (413 | ) | | (450 | ) |
Unrecognized prior service benefit | | | 75 | | | 258 | |
Benefit payments made during the fourth quarter | | | (12 | ) | | — | |
Other(2) | | | 5 | | | — | |
| |
|
| |
|
| |
Retiree medical liability | | $ | 255 | | $ | 263 | |
| |
|
| |
|
| |
| |
| (1) The APBO at September 30, 2005 included $15 million of benefit payments made during the fourth quarter of fiscal year 2005. |
| |
| (2) The company recorded a $5 million reserve for retiree medical liabilities at September 30, 2006 as its best estimate for retroactive benefits related to the previously mentioned injunction. |
Actuarial losses relate to changes in the discount rate and earlier than expected retirements due to certain plant closings and restructuring actions. In accordance with SFAS No. 106, “Employers’ Accounting for Postretirement Benefits Other than Pensions”, a portion of the actuarial losses is not subject to amortization. The actuarial losses that are subject to amortization are generally
52
Exhibit 99
ARVINMERITOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
amortized over the average expected remaining service life, which is approximately 12 years. Union plan amendments are generally amortized over the contract period, or 3 years.
The Medicare Prescription Drug Improvement and Modernization Act of 2003 provides for a federal subsidy to sponsors of retiree health care benefit plans that provide a benefit at least actuarially equivalent to the benefit established by the law. The company provides retiree medical benefits for certain plans that exceed the value of the benefits that are provided by the Medicare Part D plan. Therefore, management concluded that these plans are at least actuarially equivalent to the Medicare Part D plan and the company is eligible for the federal subsidy. The impact of the subsidy was reflected as a reduction in the 2006 and 2005 retiree medical expense of $4 million and $2 million, respectively. Additionally, the subsidy reduced the APBO at June 30, 2005 by $25 million.
The retiree medical liability is included in the consolidated balance sheet as follows (in millions):
| | | | | | | |
| | September 30, | |
| |
| |
| | 2006 | | 2005 | |
| |
| |
| |
Current — included in compensation and benefits | | $ | 54 | | $ | 50 | |
Long-term — included in retirement benefits | | | 201 | | | 213 | |
| |
|
| |
|
| |
Retiree medical liability | | $ | 255 | | $ | 263 | |
| |
|
| |
|
| |
The components of retiree medical expense are as follows (in millions):
| | | | | | | | | | |
| | 2006 | | 2005 | | 2004 | |
| |
| |
| |
| |
Service cost | | $ | 4 | | $ | 3 | | $ | 4 | |
Interest cost | | | 27 | | | 26 | | | 39 | |
Curtailment gain(1) | | | — | | | — | | | (5 | ) |
Amortization of — | | | | | | | | | | |
Prior service cost | | | (16 | ) | | (24 | ) | | (4 | ) |
Actuarial gains and losses | | | 27 | | | 27 | | | 23 | |
Other(2) | | | 5 | | | — | | | — | |
| |
|
| |
|
| |
|
| |
Retiree medical expense | | $ | 47 | | $ | 32 | | $ | 57 | |
| |
|
| |
|
| |
|
| |
| |
| (1) The company recognized a curtailment gain in fiscal year 2004 of $5 million related to the previously mentioned amendments to certain retiree medical plans in fiscal year 2004 |
| |
| (2) The company recorded a $5 million charge for retiree medical liabilities at September 30, 2006 as its best estimate for retroactive benefits related to the previously mentioned injunction. |
A one-percentage point change in the assumed health care cost trend rate for all years to, and including, the ultimate rate would have the following effects (in millions):
| | | | | | | |
| | 2006 | | 2005 | |
| |
| |
| |
Effect on total service and interest cost | | | | | | | |
1% Increase | | $ | 4 | | $ | 3 | |
1% Decrease | | | (3 | ) | | (2 | ) |
Effect on APBO | | | | | | | |
1% Increase | | | 55 | | | 38 | |
1% Decrease | | | (47 | ) | | (35 | ) |
The company expects future benefit payments as follows (in millions):
| | | | |
Fiscal 2007 | | $ | 54 | |
Fiscal 2008 | | | 53 | |
Fiscal 2009 | | | 52 | |
Fiscal 2010 | | | 51 | |
Fiscal 2011 | | | 50 | |
Fiscal 2012 – 2016 | | | 223 | |
53
Exhibit 99
ARVINMERITOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
21. RETIREMENT PENSION PLANS
The company sponsors defined benefit pension plans that cover most of its U.S. employees and certain non-U.S. employees. Pension benefits for salaried employees are based on years of credited service and compensation. Pension benefits for hourly employees are based on years of service and specified benefit amounts. The company’s funding policy provides that annual contributions to the pension trusts will be at least equal to the minimum amounts required by ERISA in the U.S. and the actuarial recommendations or statutory requirements in other countries.
Certain of the company’s non-U.S. subsidiaries provide limited non-pension benefits to retirees in addition to government-sponsored programs. The cost of these programs is not significant to the company. Most retirees outside the U.S. are covered by government-sponsored and administered programs.
The company’s pension obligations are measured as of June 30. The U.S. plans include a qualified and non-qualified pension plan. The non-U.S. plans include plans primarily in the United Kingdom, Canada and Germany.
The following are the assumptions used in the measurement of the projected benefit obligation (PBO) and net periodic pension expense:
| | | | | | | | | | |
| | U.S. Plans | |
| |
| |
Assumptions as of June 30 | | 2006 | | 2005 | | 2004 | |
| |
| |
| |
| |
Discount Rate | | 6.60 | % | | 5.30 | % | | 6.25 | % | |
Assumed return on plan assets | | 8.50 | % | | 8.50 | % | | 8.50 | % | |
Rate of compensation increase | | 3.75 | % | | 3.75 | % | | 3.75 | % | |
| | | | | | | | | | | | | | | | | | | |
| | Non-U.S. Plans | |
| |
| |
Assumptions as of June 30 | | 2006 | | 2005 | | 2004 | |
| |
| |
| |
| |
Discount Rate | | | 4.75% | — | | 5.75 | % | | 4.00% | — | | 5.00 | % | | 5.50% | — | | 6.25 | % |
Assumed return on plan assets | | | 8.00% | — | | 8.00 | % | | 7.75% | — | | 8.50 | % | | 8.00% | — | | 8.50 | % |
Rate of compensation increase | | | 2.50% | — | | 3.75 | % | | 3.00% | — | | 3.50 | % | | 3.00% | — | | 3.75 | % |
Since the company measures its pension obligations at June 30, the assumptions noted above are used to calculate the PBO as of June 30 of the current fiscal year and net periodic pension expense for the subsequent fiscal year.
The discount rate is used to calculate the present value of the PBO. The rate used reflects a rate of return on high-quality fixed income investments that match the duration of expected benefit payments. The company uses a portfolio of long-term corporate AA/Aa bonds that match the duration of the expected benefit payments to establish the discount rate for this assumption.
The assumed return on plan assets is used to determine net periodic pension expense. The rate of return assumptions are based on projected long-term market returns for the various asset classes in which the plans are invested, weighted by the target asset allocations. An incremental amount for active plan asset management, where appropriate, is included in the rate of return assumption. The return assumption is reviewed annually.
The rate of compensation increase represents the long-term assumption for expected increases to salaries for pay-related plans.
The accompanying disclosures include pension obligations associated with businesses classified as discontinued operations.
54
Exhibit 99
ARVINMERITOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table reconciles the change in the PBO and the change in plan assets (in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| | 2006 | | 2005 | |
| |
| |
| |
June 30 measurement date | | U.S. | | Non- U.S. | | Total | | U.S. | | Non- U.S. | | Total | |
| |
| |
| |
| |
| |
| |
| |
PBO — beginning of year | | $ | 1,070 | | | $ | 778 | | | $ | 1,848 | | $ | 873 | | | $ | 637 | | | $ | 1,510 | |
Service cost | | | 25 | | | | 19 | | | | 44 | | | 23 | | | | 16 | | | | 39 | |
Interest cost | | | 57 | | | | 38 | | | | 95 | | | 55 | | | | 38 | | | | 93 | |
Participant contributions | | | — | | | | 3 | | | | 3 | | | — | | | | 3 | | | | 3 | |
Plan amendments | | | — | | | | (28 | ) | | | (28 | ) | | — | | | | — | | | | — | |
Actuarial loss (gain) | | | (173 | ) | | | (8 | ) | | | (181 | ) | | 170 | | | | 121 | | | | 291 | |
Divestitures and curtailments | | | (6 | ) | | | (6 | ) | | | (12 | ) | | (5 | ) | | | — | | | | (5 | ) |
Benefit payments | | | (48 | ) | | | (35 | ) | | | (83 | ) | | (46 | ) | | | (28 | ) | | | (74 | ) |
Foreign currency rate changes | | | — | | | | 44 | | | | 44 | | | — | | | | (9 | ) | | | (9 | ) |
| |
|
| | |
|
| | |
|
| |
|
| | |
|
| | |
|
| |
PBO — end of year | | | 925 | | | | 805 | | | | 1,730 | | | 1,070 | | | | 778 | | | | 1,848 | |
| |
|
| | |
|
| | |
|
| |
|
| | |
|
| | |
|
| |
Change in plan assets | | | | | | | | | | | | | | | | | | | | | | | |
Fair value of assets — beginning of year | | | 687 | | | | 502 | | | | 1,189 | | | 604 | | | | 437 | | | | 1,041 | |
Actual return on plan assets | | | 77 | | | | 71 | | | | 148 | | | 52 | | | | 70 | | | | 122 | |
Employer contributions | | | 12 | | | | 22 | | | | 34 | | | 77 | | | | 25 | | | | 102 | |
Participant contributions | | | — | | | | 3 | | | | 3 | | | — | | | | 3 | | | | 3 | |
Benefit payments | | | (48 | ) | | | (35 | ) | | | (83 | ) | | (46 | ) | | | (32 | ) | | | (78 | ) |
Foreign currency rate changes | | | — | | | | 30 | | | | 30 | | | — | | | | (1 | ) | | | (1 | ) |
| |
|
| | |
|
| | |
|
| |
|
| | |
|
| | |
|
| |
Fair value of assets — end of year | | | 728 | | | | 593 | | | | 1,321 | | | 687 | | | | 502 | | | | 1,189 | |
| |
|
| | |
|
| | |
|
| |
|
| | |
|
| | |
|
| |
Funded status | | $ | (197 | ) | | $ | (212 | ) | | $ | (409 | ) | $ | (383 | ) | | $ | (276 | ) | | $ | (659 | ) |
| |
|
| | |
|
| | |
|
| |
|
| | |
|
|
| |
|
| |
In fiscal 2006, the decrease to actuarial losses (see table below) relates primarily to the increase in the discount rate assumptions. In accordance with SFAS No. 87, “Employers’ Accounting for Pensions”, a portion of the actuarial losses is not subject to amortization. The actuarial losses that are subject to amortization are generally amortized over the expected remaining service life, which ranges from 12 to 18 years, depending on the plan. The increase in the discount rate was the primary reason for the decrease in the unfunded status of the U.S. plans at September 30, 2006. In accordance with SFAS No. 87, the company utilizes a market-related value of assets, which recognizes changes in the fair value of assets over a five-year period.
In recognition of the long-term nature of the liabilities of the pension plans, the company has targeted an asset allocation strategy that intends to promote asset growth while maintaining an acceptable level of risk over the long-term. Asset-liability studies are performed periodically to validate the continued appropriateness of these asset allocation targets. The target asset allocation ranges for the U.S. plan are 50–70 percent equity securities, 25–35 percent debt securities, and 5–15 percent alternative investments. The target asset allocation ranges for the non-U.S. plans are 65–75 percent equity securities, 20–35 percent debt securities, and 0–5 percent real estate and alternative investments. The asset class mix and the percentage of securities in any asset class or market may vary as the risk/return characteristics of either individual market or asset classes vary over time.
The investment strategies for the pension plans are designed to achieve an appropriate diversification of investments as well as safety and security of the principal invested. Assets invested are allocated to certain global sub-asset categories within prescribed ranges in order to promote international diversification across security type, issuer type, investment style, industry group, and economic sector. Assets of the plans are both actively and passively managed. Policy limits are placed on the percentage of plan assets that can be invested in a security of any single issuer and minimum credit quality standards are established for debt securities. ArvinMeritor securities comprised less than one half of one percent of the value of our worldwide pension assets during 2006 and 2005.
The weighted average asset allocation for the U.S. and non U.S. pension plans are as follows:
| | | | | | | | | | | | | |
| | 2006 | | 2005 | |
| |
| |
| |
| | U.S. | | Non-U.S. | | U.S. | | Non-U.S. | |
| |
| |
| |
| |
| |
Equity securities | | | 59.7 | % | | 73.7 | % | | 74.2 | % | | 71.6 | % |
Debt securities | | | 28.0 | % | | 20.3 | % | | 24.6 | % | | 24.8 | % |
Alternative investments | | | 9.0 | % | | 0 | % | | 0.0 | % | | 0.0 | % |
Real estate | | | 0.0 | % | | 3.6 | % | | 0.0 | % | | 3.2 | % |
Other | | | 3.3 | % | | 2.4 | % | | 1.2 | % | | 0.4 | % |
| |
|
| |
|
| |
|
| |
|
| |
Total | | | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % |
| |
|
| |
|
| |
|
| |
|
| |
55
Exhibit 99
ARVINMERITOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following reconciles the funded status with the amount included in the consolidated balance sheet (in millions):
| | | | | | | | | | | | | | | | | | | | | |
| | 2006 | | 2005 | |
| |
| |
| |
June 30 measurement date | | U.S. | | Non-U.S. | | Total | | U.S. | | Non-U.S. | | Total | |
| |
| |
| |
| |
| |
| |
| |
Unfunded status | | $ | (197 | ) | | $ | (212 | ) | | $ | (409 | ) | $ | (383 | ) | | $ | (276 | ) | | $ | (659 | ) |
Contributions made in the fourth quarter(1) | | | 13 | | | | 11 | | | | 24 | | | — | | | | — | | | | — | |
Unrecognized amounts: | | | | | | | | | | | | | | | | | | | | | | | |
Actuarial loss | | | 290 | | | | 297 | | | | 587 | | | 518 | | | | 348 | | | | 866 | |
Prior service (benefit) cost | | | 2 | | | | (21 | ) | | | (19 | ) | | 3 | | | | 8 | | | | 11 | |
Initial net transition asset | | | — | | | | — | | | | — | | | — | | | | (2 | ) | | | (2 | ) |
| |
|
| | |
|
| | |
|
| |
|
| | |
|
| | |
|
| |
Net amount recognized | | $ | 108 | | | $ | 75 | | | $ | 183 | | $ | 138 | | | $ | 78 | | | $ | 216 | |
| |
|
| | |
|
| | |
|
| |
|
| | |
|
| | |
|
| |
| |
(1) | Funded status at September 30, 2005 included $6 million of contributions made during the fourth quarter of fiscal year 2005. |
SFAS No. 87 requires a company to record a minimum liability that is at least equal to the unfunded accumulated benefit obligation. The additional minimum pension liability, net of a deferred tax asset, is charged to accumulated other comprehensive loss. At September 30, 2006 and 2005, the company’s additional minimum pension liability reflected in accumulated other comprehensive loss was $257 million and $436 million, respectively.
Amounts included in the consolidated balance sheet at September 30 were comprised of the following (in millions):
| | | | | | | | | | | | | | | | | | | | | |
| | 2006 | | 2005 | |
| |
| |
| |
| | U.S. | | Non-U.S. | | Total | | U.S. | | Non-U.S. | | Total | |
| |
| |
| |
| |
| |
| |
| |
Prepaid pension asset | | $ | — | | | $ | 35 | | | $ | 35 | | $ | — | | | $ | 26 | | | $ | 26 | |
Pension liability | | | (119 | ) | | | (140 | ) | | | (259 | ) | | (290 | ) | | | (193 | ) | | | (483 | ) |
Deferred tax asset on minimum pension liability | | | 87 | | | | 49 | | | | 136 | | | 162 | | | | 58 | | | | 220 | |
Accumulated other comprehensive loss | | | 139 | | | | 118 | | | | 257 | | | 263 | | | | 173 | | | | 436 | |
Intangible asset and other | | | 1 | | | | 8 | | | | 9 | | | 3 | | | | 7 | | | | 10 | |
Minority interest liability | | | — | | | | 5 | | | | 5 | | | — | | | | 7 | | | | 7 | |
| |
|
| | |
|
| | |
|
| |
|
| | |
|
| | |
|
| |
Net amount recognized | | $ | 108 | | | $ | 75 | | | $ | 183 | | $ | 138 | | | $ | 78 | | | $ | 216 | |
| |
|
| | |
|
| | |
|
| |
|
| | |
|
| | |
|
| |
The pension liability is included in Retirement Benefits in the consolidated balance sheet as follows (in millions):
| | | | | | | |
| | September 30, | |
| |
| |
| | 2006 | | 2005 | |
| |
| |
| |
Pension liability | | $ | 243 | | $ | 469 | |
Retiree medical liability — long term (see Note 20) | | | 201 | | | 213 | |
Other | | | 43 | | | 53 | |
| |
|
| |
|
| |
Retirement Benefits – continuing operations | | | 487 | | | 735 | |
Liabilities of discontinued operations | | | 20 | | | 19 | |
| |
|
| |
|
| |
Total retirement benefits | | $ | 507 | | $ | 754 | |
| |
|
| |
|
| |
In accordance with SFAS No. 132(R) “Employers’ Disclosures about Pensions and Other Postretirement Benefits”, the PBO, accumulated benefit obligation (ABO) and fair value of plan assets is required to be disclosed for all plans where the ABO is in excess of plan assets. The difference between the PBO and ABO is that the PBO includes projected compensation increases.
56
Exhibit 99
ARVINMERITOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Additional information is as follows (in millions):
| | | | | | | | | | | | | | | | | | | |
| | 2006 | | 2005 | |
| |
| |
| |
| | ABO
Exceeds
Assets | | Assets
Exceeds
ABO | | Total | | ABO
Exceeds
Assets | | Assets
Exceeds
ABO | | Total | |
| |
| |
| |
| |
| |
| |
| |
PBO | | $ | 1,695 | | | $35 | | $ | 1,730 | | $ | 1,830 | | | $18 | | $ | 1,848 | |
ABO | | | 1,555 | | | 32 | | | 1,587 | | | 1,641 | | | 17 | | | 1,658 | |
Plan Assets | | | 1,272 | | | 49 | | | 1,321 | | | 1,158 | | | 31 | | | 1,189 | |
The components of net periodic pension expense are as follows (in millions):
| | | | | | | | | | |
| | 2006 | | 2005 | | 2004 | |
| |
| |
| |
| |
Service cost | | $ | 44 | | $ | 39 | | $ | 41 | |
Interest cost | | | 95 | | | 93 | | | 81 | |
Assumed rate of return on plan assets | | | (99 | ) | | (94 | ) | | (85 | ) |
Amortization of prior service cost | | | 6 | | | 10 | | | 7 | |
Amortization of transition asset | | | (1 | ) | | (2 | ) | | (1 | ) |
Curtailment | | | — | | | — | | | 4 | |
Recognized actuarial loss | | | 50 | | | 32 | | | 26 | |
| |
|
| |
|
| |
|
| |
Net periodic pension expense | | $ | 95 | | $ | 78 | | $ | 73 | |
| |
|
| |
|
| |
|
| |
In connection with the company’s sale of the CVS Kenton, OH facility (see Note 6), the company recognized a curtailment loss of $4 million in fiscal year 2004.
Information about the expected cash flows for the U.S. and non-U.S. pension plans is as follows (in millions):
| | | | | | | | | | |
| | U.S. | | Non U.S. | | Total | |
| |
| |
| |
| |
Employer contributions: | | | | | | | | | | |
Fiscal 2007 (expected) | | $ | 81 | | | $ | 53 | | | $ | 134 | |
Expected benefit payments: | | | | | | | | | | | | |
Fiscal 2007 | | | 51 | | | | 35 | | | | 86 | |
Fiscal 2008 | | | 52 | | | | 36 | | | | 88 | |
Fiscal 2009 | | | 53 | | | | 37 | | | | 90 | |
Fiscal 2010 | | | 54 | | | | 37 | | | | 91 | |
Fiscal 2011 | | | 56 | | | | 38 | | | | 94 | |
Fiscal 2012-2016 | | | 329 | | | | 203 | | | | 532 | |
The company also sponsors certain defined contribution savings plans for eligible employees. Expense related to these plans was $10 million, $12 million and $11 million for fiscal years 2006, 2005 and 2004, respectively.
57
Exhibit 99
ARVINMERITOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
22. INCOME TAXES
The components of the benefit (provision) for Income Taxes are summarized as follows (in millions):
| | | | | | | | | | |
| | 2006 | | 2005 | | 2004 | |
| |
| |
| |
| |
Current tax benefit (expense): | | | | | | | | | | |
U.S. | | $ | 16 | | $ | (21 | ) | $ | (16 | ) |
Foreign | | | (64 | ) | | (96 | ) | | (35 | ) |
State and local | | | (1 | ) | | (2 | ) | | 3 | |
| |
|
| |
|
| |
|
| |
Total current tax benefit (expense) | | | (49 | ) | | (119 | ) | | (48 | ) |
| |
|
| |
|
| |
|
| |
Deferred tax benefit (expense): | | | | | | | | | | |
U.S. | | | 63 | | | 85 | | | 73 | |
Foreign | | | 37 | | | 38 | | | (22 | ) |
State and local | | | 3 | | | 6 | | | (10 | ) |
| |
|
| |
|
| |
|
| |
Total deferred tax benefit (expense) | | | 103 | | | 129 | | | 41 | |
| |
|
| |
|
| |
|
| |
Benefit (provision) for Income Taxes | | $ | 54 | | $ | 10 | | $ | (7 | ) |
| |
|
| |
|
| |
|
| |
The deferred tax expense or benefit represents tax effects of current year deductions or items of income that will be recognized in future periods for tax purposes. The deferred tax benefit primarily represents the tax benefit of current year net operating losses and tax credits carried forward.
Net current and non-current deferred income tax assets included in the consolidated balance sheet consist of the tax effects of temporary differences related to the following (in millions):
| | | | | | | |
| | September 30, | |
| |
| |
| | 2006 | | 2005 | |
| |
| |
| |
Compensation and benefits | | $ | 70 | | $ | 61 | |
Product warranties | | | 3 | | | 6 | |
Inventories | | | 12 | | | 8 | |
Receivables | | | 14 | | | 12 | |
Other, net | | | 44 | | | 34 | |
| |
|
| |
|
| |
Subtotal - net current deferred income taxes — asset | | | 143 | | | 121 | |
| |
|
| |
|
| |
Loss and tax credit carryforwards | | | 512 | | | 479 | |
Retiree medical costs | | | 74 | | | 80 | |
Pensions | | | 51 | | | 97 | |
Taxes on undistributed income | | | (28 | ) | | (57 | ) |
Property | | | 5 | | | (25 | ) |
Intangible assets | | | (21 | ) | | (1 | ) |
Investment basis difference | | | 32 | | | 34 | |
Other | | | 50 | | | 81 | |
| |
|
| |
|
| |
Subtotal - non-current deferred income taxes - asset | | | 675 | | | 688 | |
| |
|
| |
|
| |
Total current and non-current deferred income taxes - asset | | | 818 | | | 809 | |
Less: Valuation allowances | | | (143 | ) | | (146 | ) |
| |
|
| |
|
| |
Net deferred income taxes - asset | | $ | 675 | | $ | 663 | |
| |
|
| |
|
| |
58
Exhibit 99
ARVINMERITOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Net current and non-current deferred income tax assets are included in the consolidated balance sheet as follows (in millions):
| | | | | | | |
| | September 30, | |
| |
| |
| | 2006 | | 2005 | |
| |
| |
| |
Other current asset (see Note 10) | | $ | 137 | | $ | 129 | |
Other current liabilities (see Note 14) | | | (7 | ) | | (20 | ) |
| |
|
| |
|
| |
Net current deferred income taxes — asset | | | 130 | | | 109 | |
| |
|
| |
|
| |
| | | | | | | |
Other assets (see Note 12) | | | 570 | | | 576 | |
Other liabilities (see Note 15) | | | (25 | ) | | (22 | ) |
| |
|
| |
|
| |
Net non-current deferred income taxes — asset | | $ | 545 | | $ | 554 | |
| |
|
| |
|
| |
As of September 30, 2006 the company had approximately $475 million in U.S. net deferred tax assets. These deferred tax assets include net operating loss carryovers that can be used to offset taxable income in future periods and reduce income taxes payable in those future periods. However, many of these deferred taxes will expire if they are not utilized within certain time periods. At this time, the company considers it more likely than not that it will have U.S. taxable income in the future that will allow it to realize these deferred tax assets. Significant factors considered by management in its determination of the probability of the realization of the deferred tax benefits include: (a) historical operating results, (b) expectations of future earnings, and (c) tax planning strategies.
It is possible that some or all of these deferred tax assets could ultimately expire unused. Risk factors include (a) a more severe than expected downturn in the fiscal year 2007 outlook for the company’s CVS segment, which has significant U.S. operations, (b) higher than planned volume or price reductions from the company’s key customers and (c) higher than planned material cost increases.
These risk factors are offset by the following strategic initiatives: (a) the company has undertaken numerous restructuring initiatives in 2006 which are expected to result in significant savings in future periods, (b) the commercial vehicle market in the United States is expected to recover in 2008 and 2009 significantly benefiting the company and (c) the company has announced that it is embarking on a major cost reduction and value creation program that is expected to generate significant improvements in earnings in future periods.
The expiration periods for $512 million of deferred tax assets related to net operating losses and tax credit carryforwards are as follows: $30 million between fiscal years 2007 and 2011; $53 million between fiscal years 2012 and 2021; $243 million between fiscal years 2022 and 2026; and $186 million can be carried foward indefinitely. The company has provided valuation allowances on these deferred tax assets of approximately $22 million, $30 million, $8 million and $82 million, respectively.
The company’s benefit (provision) for income taxes was different from the (benefit) provision for income taxes at the U.S. statutory rate for the reasons set forth below (in millions):
| | | | | | | | | | |
| | 2006 | | 2005 | | 2004 | |
| |
| |
| |
| |
Benefit (provision) for income taxes at statutory tax rate of 35% | | $ | (25 | ) | $ | (5 | ) | $ | (23 | ) |
State and local income taxes | | | 2 | | | 4 | | | 7 | |
Taxes on foreign income | | | 19 | | | 14 | | | 26 | |
Tax audit settlements | | | 21 | | | 8 | | | — | |
Recognition of basis differences | | | 3 | | | 41 | | | 12 | |
Homeland Investment Act | | | 29 | | | — | | | — | |
Tax on undistributed foreign earnings | | | (3 | ) | | (7 | ) | | (4 | ) |
Valuation allowance | | | 3 | | | (54 | ) | | (19 | ) |
Other | | | 5 | | | 9 | | | (6 | ) |
| |
|
| |
|
| |
|
| |
Benefit (provision) for income taxes | | $ | 54 | | $ | 10 | | $ | (7 | ) |
| |
|
| |
|
| |
|
| |
The company provides accruals for tax contingencies in accordance with SFAS No. 5, Accounting for Contingencies. The company believes that positions taken on its returns are supportable; however, it has recorded a liability for its best estimate of a loss on certain of these positions. In fiscal year 2006, the company completed various worldwide tax audits of certain of the company’s income tax returns and certain statutes of limitations expired. As a result of these audit settlements and expiration of statutes of limitations, the company reduced its accrual for tax contingencies by $21 million.
59
Exhibit 99
ARVINMERITOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The company also repatriated approximately $131 million in dividends in the fourth quarter of fiscal year as part of the American Jobs Creation Act of 2004. The dividends are subject to the elective 85 percent dividend received deduction and accordingly the company recorded a corresponding tax benefit of $31 million related to the reversal of previously provided U.S. deferred tax liability on these unremitted foreign subsidiary earnings.
For fiscal year 2006, the significant benefit for U.S. foreign tax credits relates to foreign taxes associated with dividends not covered under the Act. For fiscal year 2005, the significant benefit for recognition of basis differences was related to a deferred tax asset recognized for the excess of the tax basis over the amount for financial reporting of investments in several of the company’s United Kingdom subsidiaries. This asset is expected to reverse in the foreseeable future. For fiscal year 2004, the significant benefit for recognition of basis differences was related to the following items: (a) favorable book and tax basis differences on the sale of APA, (b) favorable impact of recently issued IRS regulations supporting recoverability of previously disallowed capital losses and (c) utilization of previously unrecognized capital losses associated with our Brazilian restructuring.
The income tax provisions were calculated based upon the following components of income (loss) before income taxes (in millions):
| | | | | | | | | | |
| | 2006 | | 2005 | | 2004 | |
| |
| |
| |
| |
U.S. income (loss) | | $ | (75 | ) | $ | (72 | ) | $ | (84 | ) |
Foreign income (loss) | | | 147 | | | 88 | | | 150 | |
| |
|
| |
|
| |
|
| |
Total | | $ | 72 | | $ | 16 | | $ | 66 | |
| |
|
| |
|
| |
|
| |
For fiscal 2006 and 2005, no provision has been made for U.S., state or additional foreign income taxes related to approximately $521 million and $442 million, respectively, of undistributed earnings of foreign subsidiaries that have been or are intended to be permanently reinvested. Quantification of the deferred tax liability, if any, associated with permanently reinvested earnings is not practicable.
23. CONTINGENCIES
Environmental
Federal, state and local requirements relating to the discharge of substances into the environment, the disposal of hazardous wastes and other activities affecting the environment have, and will continue to have, an impact on the manufacturing operations of the company. The process of estimating environmental liabilities is complex and dependent on physical and scientific data at the site, uncertainties as to remedies and technologies to be used and the outcome of discussions with regulatory agencies. The company records liabilities for environmental issues in the accounting period in which its responsibility and remediation plans are established and the cost can be reasonably estimated. At environmental sites in which more than one potentially responsible party has been identified, the company records a liability for its allocable share of costs related to its involvement with the site, as well as an allocable share of costs related to insolvent parties or unidentified shares. At environmental sites in which ArvinMeritor is the only potentially responsible party, the company records a liability for the total estimated costs of remediation before consideration of recovery from insurers or other third parties.
The company has been designated as a potentially responsible party at seven Superfund sites, excluding sites as to which the company’s records disclose no involvement or as to which the company’s potential liability has been finally determined. Management estimates the total reasonably possible costs the company could incur for the remediation of Superfund sites at September 30, 2006 to be approximately $25 million, of which $10 million is recorded as a liability. During fiscal years 2006 and 2005, the company recorded environmental remediation costs of $3 million and $6 million, respectively, resulting from a revised estimate to remediate a former Rockwell facility sold in 1990.
In addition to the Superfund sites, various other lawsuits, claims and proceedings have been asserted against the company, alleging violations of federal, state and local environmental protection requirements, or seeking remediation of alleged environmental impairments, principally at previously disposed-of properties. For these matters, management has estimated the total reasonably possible costs the company could incur at September 30, 2006 to be approximately $65 million, of which $17 million is recorded as a liability. During fiscal year 2006, the company recorded environmental remediation costs of $5 million, resulting from revised estimates to remediate these sites. During fiscal year 2004, the company recorded environmental remediation costs of $11 million resulting from an agreement with the Environmental Protection Agency to remediate a different former Rockwell facility that was sold in 1985.
Included in the company’s environmental liabilities are costs for on-going operating, maintenance and monitoring at environmental sites in which remediation has been put into place. This liability is discounted using a discount rate of 5-percent and is approximately $9 million at September 30, 2006. The undiscounted estimate of these costs is approximately $12 million.
60
Exhibit 99
ARVINMERITOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Following are the components of the Superfund and non-Superfund environmental reserves (in millions):
| | | | | | | | | | | | | | | | |
| | Superfund Sites | | Non-Superfund Sites | | Total | |
| |
| |
| |
| |
Balance at September 30, 2005 | | | $ | 11 | | | | $ | 13 | | | | $ | 24 | | |
Payments | | | | (4 | ) | | | | (4 | ) | | | | (8 | ) | |
Change in cost estimates(1) | | | | 3 | | | | | 8 | | | | | 11 | | |
| | |
|
| | | |
|
| | | |
|
| | |
Balance at September 30, 2006 | | | $ | 10 | | | | $ | 17 | | | | $ | 27 | | |
| | |
|
| | | |
|
| | | |
|
| | |
| |
| (1) Recorded $3 million of environmental remediation costs in income from discontinued operations in the consolidated statement of income for the fiscal year ended September 30, 2006. |
| |
Environmental reserves are included in Other Current Liabilities (see Note 14) and Other Liabilities (see Note 15). |
The actual amount of costs or damages for which the company may be held responsible could materially exceed the foregoing estimates because of uncertainties, including the financial condition of other potentially responsible parties, the success of the remediation and other factors that make it difficult to predict actual costs accurately. However, based on management’s assessment, after consulting with outside advisors that specialize in environmental matters, and subject to the difficulties inherent in estimating these future costs, the company believes that its expenditures for environmental capital investment and remediation necessary to comply with present regulations governing environmental protection and other expenditures for the resolution of environmental claims will not have a material adverse effect on the company’s business, financial condition or results of operations. In addition, in future periods, new laws and regulations, changes in the remediation plan, advances in technology and additional information about the ultimate clean-up remedy could significantly change the company’s estimates. Management cannot assess the possible effect of compliance with future requirements.
Asset Retirement Obligations
The company has identified conditional asset retirement obligations for which a reasonable estimate of fair value could not be made since the potential settlement dates cannot be determined at this time. Due to the long term, productive nature of the company’s manufacturing operations, absent plans or expectation of plans to initiate asset retirement activities, the company was not able to reasonably estimate the settlement date for the related obligation. Therefore, the company has not recognized conditional asset retirement obligations when there are no plans or expectations of plans to retire the asset.
Asbestos
Maremont Corporation (“Maremont”), a subsidiary of ArvinMeritor, manufactured friction products containing asbestos from 1953 through 1977, when it sold its friction product business. Arvin acquired Maremont in 1986. Maremont and many other companies are defendants in suits brought by individuals claiming personal injuries as a result of exposure to asbestos-containing products. Maremont had approximately 51,895 and 61,700 pending asbestos-related claims at September 30, 2006 and 2005, respectively. Although Maremont has been named in these cases, in the cases where actual injury has been alleged very few claimants have established that a Maremont product caused their injuries. Plaintiffs’ lawyers often sue dozens or even hundreds of defendants in individual lawsuits on behalf of hundreds or thousands of claimants, seeking damages against all named defendants irrespective of the disease or injury and irrespective of any causal connection with a particular product. For these reasons, Maremont does not consider the number of claims filed or the damages alleged to be a meaningful factor in determining its asbestos-related liability.
Maremont’s asbestos-related reserves and corresponding asbestos-related recoveries are summarized as follows (in millions):
| | | | | | | | | | | |
| | September 30, | |
| |
| |
| | 2006 | | 2005 | |
| |
| |
| |
Pending claims | | | $ | 41 | | | | $ | 50 | | |
Shortfall and other | | | | 9 | | | | | 4 | | |
| | |
|
| | | |
|
| | |
Total asbestos-related reserves | | | $ | 50 | | | | $ | 54 | | |
| | |
|
| | | |
|
| | |
| | | | | | | | | | | |
Asbestos-related insurance recoveries | | | $ | 31 | | | | $ | 35 | | |
| | |
|
| | | |
|
| | |
A portion of the asbestos-related recoveries and reserves are included in Other Current Assets and Liabilities, with the majority of the amounts recorded in Other Assets and Liabilities (see Notes 10, 12, 14 and 15).
Prior to February 2001, Maremont participated in the Center for Claims Resolution (“CCR”) and shared with other CCR members in the payment of defense and indemnity costs for asbestos-related claims. The CCR handled the resolution and processing of asbestos claims on behalf of its members until February 2001, when it was reorganized and discontinued negotiating shared
61
Exhibit 99
ARVINMERITOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
settlements. Upon dissolution of the CCR in February 2001, Maremont began handling asbestos-related claims through its own defense counsel and has taken a more aggressive defensive approach that involves examining the merits of each asbestos-related claim. Although the company expects legal defense costs to continue at higher levels than when it participated in the CCR, the company believes its litigation strategy has reduced the average indemnity cost per claim.
Pending and Future Claims: At the end of fiscal year 2004 and through the third quarter of fiscal year 2005, Maremont established reserves for pending asbestos-related claims that reflected internal estimates of its defense and indemnity costs. These estimates were based on the history and nature of filed claims to date and Maremont’s experience. Maremont developed experience factors for estimating indemnity and litigation costs using data on actual experience in resolving claims since dissolution of the CCR and its assessment of the nature of the claims. Maremont did not accrue reserves for its potential liability for asbestos-related claims that may be asserted against it in the future, because it did not have sufficient information to make a reasonable estimate of these unknown claims.
In the fourth quarter of fiscal year 2005, Maremont engaged Bates White LLC (Bates White), a consulting firm with extensive experience estimating costs associated with asbestos litigation, to assist with determining whether it would be possible to estimate the cost of resolving pending and future asbestos-related claims that have been, and could reasonably be expected to be, filed against Maremont, as well as the cost of Maremont’s share of committed but unpaid settlements entered into by the CCR. Although it is not possible to estimate the full range of costs because of various uncertainties, Bates White advised Maremont that it would be able to determine an estimate of probable costs to resolve pending and future asbestos-related claims, based on historical data and certain assumptions with respect to events that occur in the future. The company engaged Bates White to update the study as of September 30, 2006.
Bates White provided an estimate of the reasonably possible range of Maremont’s obligation for asbestos personal injury claims over the next three to four years of $31 million to $44 million. After consultation with Bates White, Maremont determined that as of September 30, 2006 the most likely and probable liability for pending and future claims over the next four years is $41 million. The ultimate cost of resolving pending and future claims is estimated based on the history of claims and expenses for plaintiffs represented by law firms in jurisdictions with an established history with Maremont.
The following assumptions were made by Maremont after consultation with Bates White and are included in their study:
| | |
| • | Pending and future claims were estimated for a four year period ending in fiscal year 2010. Maremont believes that the litigation environment will change significantly in several years, and that the reliability of estimates of future probable expenditures in connection with asbestos-related personal injury claims declines for each year further in the future. As a result, estimating a probable liability beyond four years is difficult and uncertain; |
| | |
| • | The ultimate cost of resolving pending and future claims filed in Madison County, Illinois, a jurisdiction where a substantial amount of Maremont’s claims are filed, will decline to reflect average outcomes throughout the United States; |
| | |
| • | Defense and processing costs for pending and future claims filed outside of Madison County, Illinois will be at the level consistent with Maremont’s prior experience; and |
| | |
| • | The ultimate cost of resolving nonmalignant claims with plaintiffs’ law firms in jurisdictions without an established history with Maremont cannot be reasonably estimated. Recent changes in tort law and insufficient settlement history make estimating a liability for these nonmalignant claims difficult and uncertain. |
Shortfall and other: Several former members of the CCR have filed for bankruptcy protection, and these members have failed, or may fail, to pay certain financial obligations with respect to settlements that were reached while they were CCR members. Maremont is subject to claims for payment of a portion of these defaulted member shares (shortfall). In an effort to resolve the affected settlements, Maremont has entered into negotiations with plaintiffs’ attorneys, and an estimate of Maremont’s obligation for the shortfall is included in the total asbestos-related reserves. In addition, Maremont and its insurers are engaged in legal proceedings to determine whether existing insurance coverage should reimburse any potential liability related to this issue. Payments by the company related to shortfall and other were not significant in fiscal years 2006 or 2005.
Recoveries: Maremont has insurance that reimburses a substantial portion of the costs incurred defending against asbestos-related claims. The coverage also reimburses Maremont for any indemnity paid on those claims. The coverage is provided by several insurance carriers based on insurance agreements in place. Incorporating historical information with respect to buy-outs and settlements of coverage, and excluding any policies in dispute, the insurance receivable related to asbestos-related liabilities is $31 million. The difference between the estimated liability and insurance receivable is related to proceeds received from settled insurance policies and liabilities for shortfall and other. Certain insurance policies have been settled in cash prior to the ultimate settlement of related asbestos liabilities. Amounts received from insurance settlements generally reduce recorded insurance receivables. Receivables for policies in dispute are not recorded. In fiscal year 2005, the company received $12 million associated with the settlement of certain
62
Exhibit 99
ARVINMERITOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
insurance policies. Billings to insurance companies for indemnity and defense costs of resolved cases were $6 million and $12 million in fiscal years 2006 and 2005, respectively.
The amounts recorded for the asbestos-related reserves and recoveries from insurance companies are based upon assumptions and estimates derived from currently known facts. All such estimates of liabilities and recoveries for asbestos-related claims are subject to considerable uncertainty because such liabilities and recoveries are influenced by variables that are difficult to predict. The future litigation environment for Maremont could change significantly from its past experience, due, for example, to changes in the mix of claims filed against Maremont in terms of plaintiffs’ law firm, jurisdiction and disease; legislative or regulatory developments; Maremont’s approach to defending claims; or payments to plaintiffs from other defendants. Estimated recoveries are influenced by coverage issues among insurers, and the continuing solvency of various insurance companies. If the assumptions with respect to the nature of pending claims, the cost to resolve claims and the amount of available insurance prove to be incorrect, the actual amount of liability for Maremont’s asbestos-related claims, and the effect on the company, could differ materially from current estimates and, therefore, could have a material impact on the company’s financial position and results of operations.
Rockwell — ArvinMeritor, along with many other companies, has also been named as a defendant in lawsuits alleging personal injury as a result of exposure to asbestos used in certain components of Rockwell products many years ago. Liability for these claims was transferred to the company at the time of the spin-off of the automotive business to Meritor from Rockwell in 1997. Currently there are thousands of claimants in lawsuits that name the company, together with many other companies, as defendants. However, the company does not consider the number of claims filed or the damages alleged to be a meaningful factor in determining asbestos-related liabilities. A significant portion of the claims do not identify any of Rockwell’s products or specify which of the claimants, if any, were exposed to asbestos attributable to Rockwell’s products, and past experience has shown that the vast majority of the claimants will never identify any of Rockwell’s products. For those claimants who do show that they worked with Rockwell’s products, management nevertheless believes it has meritorious defenses, in substantial part due to the integrity of the products involved, the encapsulated nature of any asbestos-containing components, and the lack of any impairing medical condition on the part of many claimants. The company defends these cases vigorously. Historically, ArvinMeritor has been dismissed from the vast majority of these claims with no payment to claimants.
In the fourth quarter of fiscal year 2006, the company engaged Bates White to assist with determining whether it would be possible to estimate the cost of resolving pending and future Rockwell legacy asbestos-related claims that have been, and could reasonably be expected to be, filed against the company. Although it is not possible to estimate the full range of costs because of various uncertainties, Bates White advised the company that it would be able to determine an estimate of probable defense costs which could be incurred to resolve pending and future Rockwell legacy asbestos-related claims. Accordingly, the company recorded a $7 million liability for defense costs associated with these claims. This estimate was based on historical data and certain assumptions with respect to events that occur in the future. Bates White was unable to determine an estimate of indemnity costs for pending or future Rockwell legacy asbestos-related claims. Bates White and management cannot reasonably estimate the ultimate liabilities for these costs, primarily because the company does not have a sufficient history of claims settlement from which to develop reliable assumptions. The uncertainties of asbestos claim litigation and resolution of the litigation with the insurance companies make it difficult to predict accurately the ultimate resolution of asbestos claims. That uncertainty is increased by the possibility of adverse rulings or new legislation affecting asbestos claim litigation or the settlement process. Subject to these uncertainties and based on the company’s experience defending these asbestos claims, the company does not believe these lawsuits will have a material adverse effect on its financial condition or results of operations. Rockwell was not a member of the CCR and handled its asbestos-related claims using its own litigation counsel. As a result, the company does not have any additional potential liabilities for committed CCR settlements or shortfall (as described above) in connection with the Rockwell-legacy cases.
Rockwell maintained insurance coverage that management believes covers indemnity and defense costs, over and above self-insurance retentions, for most of these claims. The company has initiated claims against these carriers to enforce the insurance policies. Although the status of one carrier as a financially viable entity is in question, the company expects to recover the majority of defense and indemnity costs it has incurred to date, over and above self-insured retentions, and a substantial portion of the costs for defending asbestos claims going forward. Accordingly, the company has recorded an insurance receivable related to Rockwell legacy asbestos-related liabilities of $7 million at September 30, 2006.
Contingencies Related to Work Stoppage
The company’s collective bargaining agreement with the Canadian Auto Workers (“CAW”) at its CVS brakes facility in Tilbury, Ontario, Canada, expired on June 3, 2006. On June 4, 2006, the company announced that, after lengthy negotiations, a new tentative agreement with the CAW had not yet been reached and, as a result, the company had suspended operations at the facility. On June 12, 2006, the company reached a tentative agreement with the CAW, which was subsequently ratified on June 14, 2006, and resumed operations. As a result of this work stoppage, the company experienced temporary manufacturing inefficiencies and incurred certain costs in order to return to normal production. The company was temporarily unable to completely fulfill certain customer orders, resulting in temporary production interruptions at some customer manufacturing facilities. The impact of this labor disruption on operating income in fiscal year 2006 was $45 million. Included in this amount are premium labor costs, expedited freight and logistical costs and other costs associated with production disruptions at certain customers’ facilities. At September 30, 2006, $29
63
Exhibit 99
ARVINMERITOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
million is recorded as a contingent liability in the consolidated balance sheet. The ultimate settlement of this liability will be determinable over a period of time and may be negotiated, as a commercial matter, with the affected customers. The amount of this liability may change in future periods depending on our customers’ ability to schedule additional production to compensate for prior disruptions, the results of the negotiations with the affected customers and other factors. The company believes that any future adjustment to this liability will not have a material effect on the company’s results of operations and financial position.
Product Recall Campaign
Beginning in fiscal year 2002, the company recalled certain of its commercial vehicle axles equipped with TRW model 20-EDL tie rod ends because of potential safety-related defects in those ends. TRW, Inc. (TRW) manufactured the affected tie rod ends from June 1999 through June 2000 and supplied them to the company for incorporation into its axle products. The company estimated the cost of its recall of TRW model 20-EDL tie rod ends to be approximately $17 million and recorded a liability and offsetting receivable for the estimated cost. In the fourth quarter of fiscal 2004, in anticipation of a settlement of this matter with TRW, the company recorded a charge of $4 million as a reduction of the receivable due from TRW at September 30, 2004. In December 2004, the company reached an agreement with TRW settling this matter, resulting in no additional charges to the Company. See Note 14 for additional information related to the company’s product warranties.
Guarantees
In December 2005, the company guaranteed a third party’s obligation to reimburse another party (the other party) for payment of health and prescription drug benefits to a group of retired employees. The retirees were former employees of a wholly-owned subsidiary of the company prior to it being acquired by the company. To date, the third party has met its obligations to reimburse the other party. The APBO associated with these retiree medical benefits is considered the maximum potential exposure under this guarantee, and is estimated to be approximately $25 million. No amount has been recorded for this guarantee based on the probability of the company having to perform under the guarantee. Due to the nature of this guarantee it is difficult to estimate its approximate term.
The company has guaranteed certain trade payable balances of one of its non-consolidated joint ventures. In the event of a default by the joint venture, the company would be required to pay the guaranteed party. The maximum exposure under the guarantee is $4 million and can be terminated by the company at any time on thirty days written notice. The estimated fair value of this guarantee is not significant, and therefore, no liability is recorded. The investment in the joint venture is recorded in assets of discontinued operations in the consolidated balance sheet.
Indemnifications
The company has provided indemnifications in conjunction with certain transactions, primarily divestitures. These indemnities address a variety of matters, which may include environmental, tax, asbestos, and employment-related matters, and the periods of indemnification vary in duration. The company’s maximum obligations under such indemnifications cannot be reasonably estimated. The company is not aware of any claims or other information that would give rise to material payments under such indemnifications.
In connection with the sale of the LVA North American filters business, the company agreed to indemnify the purchaser against liabilities from litigation and commercial losses in connection with specific intellectual property claims, with a maximum indemnity of $4 million for commercial losses, which is included in the consolidated balance sheet at September 30, 2006.
Other
Various other lawsuits, claims and proceedings have been or may be instituted or asserted against the company, relating to the conduct of the company’s business, including those pertaining to product liability, intellectual property, safety and health, and employment matters. Although the outcome of litigation cannot be predicted with certainty, and some lawsuits, claims or proceedings may be disposed of unfavorably to the company, management believes the disposition of matters that are pending will not have a material adverse effect on the company’s business, financial condition or results of operations.
24. BUSINESS SEGMENT INFORMATION
The company defines its operating segments as components of its business where separate financial information is available and is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. The company’s chief operating decision maker (CODM) is the Chief Executive Officer.
The company has two reportable operating segments: Light Vehicle Systems (LVS) and Commercial Vehicle Systems (CVS). LVS is a major supplier of aperture systems (roof and door systems), chassis systems (suspension systems and modules) and wheel products for passenger cars, motorcycles and all-terrain vehicles, light trucks and sport utility vehicles to original equipment manufacturers (OEMs). CVS supplies drivetrain systems and components, including axles and drivelines, braking systems, suspension
64
Exhibit 99
ARVINMERITOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
systems and ride control products, for medium- and heavy-duty trucks, trailers and specialty vehicles to OEMs and the commercial vehicle aftermarket. The company’s previously reported LVA segment is reported in discontinued operations (see Note 3).
The company uses operating income as the primary basis for the CODM to evaluate the performance of each of the company’s reportable segments. The accounting policies of the segments are the same as those applied in the Consolidated Financial Statements. The company may allocate certain common costs, primarily corporate functions, between the segments differently than the company would for stand alone financial information prepared in accordance with GAAP. These allocated costs include expenses for shared services such as information technology, finance, communications, legal and human resources. The company does not allocate interest expense, equity in earnings of affiliates and certain legacy and other corporate costs not directly associated with the segments’ operating income.
Beginning in fiscal year 2007, the company will measure segment operating performance based on earnings before interest, taxes, depreciation and amortization (EBITDA).
Segment information is summarized as follows (in millions):
Sales:
| | | | | | | | | | |
| | 2006 | | 2005 | | 2004 | |
| |
| |
| |
| |
Light Vehicle Systems | | $ | 2,236 | | $ | 2,399 | | $ | 2,243 | |
Commercial Vehicle Systems | | | 4,179 | | | 3,972 | | | 3,132 | |
| |
|
| |
|
| |
|
| |
Total | | $ | 6,415 | | $ | 6,371 | | $ | 5,375 | |
| |
|
| |
|
| |
|
| |
Earnings:
| | | | | | | | | | |
| | 2006 | | 2005 | | 2004 | |
| |
| |
| |
| |
Operating Income (Loss) | | | | | | | | | | |
Light Vehicle Systems | | $ | 16 | | $ | (46 | ) | $ | 38 | |
Commercial Vehicle Systems | | | 198 | | | 203 | | | 173 | |
| |
|
| |
|
| |
|
| |
Segment operating income | | | 214 | | | 157 | | | 211 | |
Unallocated corporate costs | | | (12 | ) | | (10 | ) | | (27 | ) |
ET corporate allocations(1) | | | (31 | ) | | (33 | ) | | (38 | ) |
| |
|
| |
|
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|
| |
Operating income | | | 171 | | | 114 | | | 146 | |
Equity in earnings of affiliates | | | 32 | | | 26 | | | 17 | |
Gain on sale of marketable securities | | | — | | | — | | | 7 | |
Interest expense, net and other | | | (131 | ) | | (124 | ) | | (104 | ) |
| |
|
| |
|
| |
|
| |
Income (loss) before income taxes | | | 72 | | | 16 | | | 66 | |
Benefit (provision) for income taxes | | | 54 | | | 10 | | | (7 | ) |
Minority interests | | | (14 | ) | | (6 | ) | | (10 | ) |
| |
|
| |
|
| |
|
| |
Income from continuing operations | | $ | 112 | | $ | 20 | | $ | 49 | |
| |
|
| |
|
| |
|
| |
| (1) | As a result of the sale of ET, certain corporate costs previously allocated to ET’s segment results continue to be reported separately in continuing operations. These costs have not been allocated to the company’s LVS and CVS business segments and are included in “ET Corporate Allocations” in the above segment information. |
Depreciation and Amortization:
| | | | | | | | | | |
| | 2006 | | 2005 | | 2004 | |
| |
| |
| |
| |
Light Vehicle Systems | | $ | 54 | | $ | 60 | | $ | 60 | |
Commercial Vehicle Systems | | | 70 | | | 74 | | | 69 | |
| |
|
| |
|
| |
|
| |
Total depreciation and amortization | | $ | 124 | | $ | 134 | | $ | 129 | |
| |
|
| |
|
| |
|
| |
Capital Expenditures:
| | | | | | | | | | |
| | 2006 | | 2005 | | 2004 | |
| |
| |
| |
| |
Light Vehicle Systems | | $ | 39 | | $ | 50 | | $ | 55 | |
Commercial Vehicle Systems | | | 61 | | | 54 | | | 48 | |
| |
|
| |
|
| |
|
| |
Total capital expenditures | | $ | 100 | | $ | 104 | | $ | 103 | |
| |
|
| |
|
| |
|
| |
65
Exhibit 99
ARVINMERITOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Segment Assets:
| | | | | | | | | | |
| | 2006 | | 2005 | | 2004 | |
| |
| |
| |
| |
Light Vehicle Systems | | $ | 1,020 | | $ | 1,122 | | $ | 1,167 | |
Commercial Vehicle Systems | | | 2,227 | | | 2,054 | | | 1,876 | |
| |
|
| |
|
| |
|
| |
Segment total assets | | | 3,247 | | | 3,176 | | | 3,043 | |
Corporate(1) | | | 1,055 | | | 1,001 | | | 882 | |
Discontinued operations | | | 1,206 | | | 1,695 | | | 1,717 | |
| |
|
| |
|
| |
|
| |
| | | | | | | | | | |
Total assets | | $ | 5,508 | | $ | 5,872 | | $ | 5,642 | |
| |
|
| |
|
| |
|
| |
(1) Corporate assets consist primarily of cash, taxes and prepaid pension costs. For fiscal years 2006 and 2005, segment assets include $319 million and $307 million, respectively, of receivables sold to ARC under the accounts receivable securitization and factoring agreements (see Note 7).
Sales by geographic area are based on the location of the selling unit. Information on the company’s geographic areas is summarized as follows (in millions):
Sales by Geographic Area:
| | | | | | | | | | |
| | 2006 | | 2005 | | 2004 | |
| |
| |
| |
| |
U.S. | | $ | 2,889 | | $ | 2,687 | | $ | 2,101 | |
Canada | | | 384 | | | 490 | | | 418 | |
Mexico | | | 360 | | | 328 | | | 327 | |
| |
|
| |
|
| |
|
| |
Total North America | | | 3,633 | | | 3,505 | | | 2,846 | |
| |
|
| |
|
| |
|
| |
Germany | | | 169 | | | 171 | | | 180 | |
U.K. | | | 110 | | | 263 | | | 321 | |
France | | | 719 | | | 666 | | | 454 | |
Other Europe | | | 975 | | | 1,002 | | | 919 | |
| |
|
| |
|
| |
|
| |
Total Europe | | | 1,973 | | | 2,102 | | | 1,874 | |
| |
|
| |
|
| |
|
| |
Asia/Pacific | | | 391 | | | 353 | | | 365 | |
Other | | | 418 | | | 411 | | | 290 | |
| |
|
| |
|
| |
|
| |
Total sales | | $ | 6,415 | | $ | 6,371 | | $ | 5,375 | |
| |
|
| |
|
| |
|
| |
Assets by Geographic Area (excludes assets of discontinued operations):
| | | | | | | |
| | 2006 | | 2005 | |
| |
| |
| |
U.S. | | $ | 2,041 | | $ | 1,904 | |
Canada | | | 268 | | | 271 | |
Mexico | | | 138 | | | 129 | |
| |
|
| |
|
| |
Total North America | | | 2,447 | | | 2,304 | |
U.K. | | | 322 | | | 341 | |
Germany | | | 125 | | | 115 | |
France | | | 344 | | | 343 | |
Other Europe | | | 474 | | | 538 | |
| |
|
| |
|
| |
Total Europe | | | 1,265 | | | 1,337 | |
Asia/Pacific | | | 227 | | | 212 | |
Other | | | 363 | | | 324 | |
| |
|
| |
|
| |
Total | | $ | 4,302 | | $ | 4,177 | |
| |
|
| |
|
| |
Sales to DaimlerChrysler AG (which owns Chrysler, Mercedes-Benz AG and Freightliner Corporation) represented 19 percent, 21 percent and 18 percent of the company’s sales in fiscal years 2006, 2005 and 2004, respectively. Sales to Volvo comprised 13 percent, 12 percent and 12 percent of the company’s sales in fiscal years 2006, 2005 and 2004, respectively.
66
Exhibit 99
ARVINMERITOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The significant financial deterioration, including bankruptcy, of any one of these customers could have a material adverse effect on the company’s financial position and results of operation. No other customer comprised 10 percent or more of the company’s sales in any of the three fiscal years ended September 30, 2006.
25. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following is a condensed summary of the company’s unaudited quarterly results of continuing operations for fiscal 2006 and 2005. Amounts related to prior quarters have been restated to reflect the company’s consolidated Gabriel de Venezuela joint venture and Gabriel Ride Control Aftermarket business in continuing operations and the company’s ET business in discontinued operations (see Note 3). Per share amounts are based on the weighted average shares outstanding for that quarter. Earnings per share for the year may not equal the sum of the four fiscal quarters’ earnings per share due to changes in basic and diluted shares outstanding.
| | | | | | | | | | | | | | | | |
| | 2006 Fiscal Quarters (Unaudited) | |
| |
| |
| | First | | Second | | Third | | Fourth | | 2006 | |
| |
| |
| |
| |
| |
| |
| | (In millions, except share- related data) | |
Sales | | $ | 1,464 | | $ | 1,629 | | $ | 1,735 | | $ | 1,587 | | $ | 6,415 | |
Cost of sales | | | (1,347 | ) | | (1,477 | ) | | (1,618 | ) | | (1,468 | ) | | (5,910 | ) |
Benefit (provision) for income taxes | | | (6 | ) | | 20 | | | 2 | | | 38 | | | 54 | |
Income from continuing operations | | | 26 | | | 32 | | | 4 | | | 50 | | | 112 | |
Net income (loss) | | | 34 | | | 45 | | | 20 | | | (274 | ) | | (175 | ) |
Basic earnings (loss) per share from continuing operations | | | 0.38 | | | 0.46 | | | 0.06 | | | 0.72 | | | 1.62 | |
Diluted earnings (loss) per share from continuing operations | | | 0.37 | | | 0.46 | | | 0.06 | | | 0.71 | | | 1.60 | |
Fourth quarter income from continuing operations included a pre-tax restructuring costs of $7 million. Fourth quarter net loss included an after-tax loss of $6 million on the sale of certain LVA businesses. The work stoppage at the company’s brake facility in Tilbury, Ontario, Canada unfavorably impacted third quarter income from continuing operations by $45 million pre-tax. Second quarter income from continuing operations included pre-tax restructuring costs of $7 million. Second quarter net income includes a net after-tax gain of $22 million on the sale of certain LVA businesses and an after-tax non-cash impairment charge of $12 million related to certain LVA businesses. First quarter income from continuing operations included a $23 million pre-tax gain on the sale of certain assets of CVS’ off-highway brake business.
| | | | | | | | | | | | | | | | |
| | 2005 Fiscal Quarters (Unaudited) | |
| |
| |
| | First | | Second | | Third | | Fourth | | 2005 | |
| |
| |
| |
| |
| |
| |
| | (In millions, except share-related data) | |
Sales | | $ | 1,470 | | $ | 1,639 | | $ | 1,742 | | $ | 1,520 | | $ | 6,371 | |
Cost of sales | | | (1,361 | ) | | (1,499 | ) | | (1,569 | ) | | (1,390 | ) | | (5,819 | ) |
Benefit (provision) for income taxes | | | (1 | ) | | 2 | | | (6 | ) | | 15 | | | 10 | |
Income (loss) from continuing operations | | | 3 | | | (8 | ) | | 40 | | | (15 | ) | | 20 | |
Net income (loss) | | | 18 | | | (33 | ) | | 46 | | | (19 | ) | | 12 | |
Basic earnings (loss) per share from continuing operations | | | 0.04 | | | (0.12 | ) | | 0.58 | | | (0.22 | ) | | 0.29 | |
Diluted earnings (loss) per share from continuing operations | | | 0.04 | | | (0.12 | ) | | 0.58 | | | (0.22 | ) | | 0.29 | |
Fourth quarter loss from continuing operations included pre-tax restructuring costs of $12 million, and a pre-tax loss from debt extinguishment of $4 million. Fourth quarter net loss included an impairment charge of $28 million after-tax in LVA and LVS. Third quarter income from continuing operations included a pre-tax reversal of restructuring costs of $7 million. Second quarter loss from continuing operations included pre-tax restructuring costs of $43 million; a pre-tax charge of $3 million resulting from a customer bankruptcy, and pre-tax environmental remediation costs of $6 million associated with a former Rockwell facility. First quarter income from continuing operations included pre-tax restructuring costs of $8 million and a $5 million pre-tax charge associated with the bankruptcy of certain customers.
67
Exhibit 99
ARVINMERITOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
26. SUPPLEMENTAL FINANCIAL INFORMATION
| | | | | | | | | | |
| | 2006 | | 2005 | | 2004 | |
| |
| |
| |
| |
| | (In millions) | |
Balance sheet data: | | | | | | | | | | |
Allowance for doubtful accounts | | $ | 17 | | $ | 30 | | $ | 26 | |
Statement of operations data: | | | | | | | | | | |
Maintenance and repairs expense | | | 83 | | | 72 | | $ | 63 | |
Research, development and engineering expense | | | 114 | | | 114 | | | 114 | |
Depreciation expense | | | 118 | | | 127 | | | 120 | |
Provision for doubtful accounts | | | 6 | | | 15 | | | 17 | |
Rental expense | | | 32 | | | 27 | | | 26 | |
Statement of cash flows data: | | | | | | | | | | |
Interest payments | | | 133 | | | 116 | | | 102 | |
Income tax payments | | | 50 | | | 66 | | | 64 | |
Non-cash investing activities - capital expenditures | | | 16 | | | 22 | | | 13 | |
| |
27. | SUPPLEMENTAL GUARANTOR CONDENSED CONSOLIDATING FINANCIAL STATEMENTS |
Certain of the company’s wholly-owned subsidiaries, as defined in the credit agreement (the Guarantors) irrevocably and unconditionally guarantee amounts outstanding under the senior credit facilities. Similar subsidiary guarantees were provided for the benefit of the holders of the publicly-held notes outstanding under the company’s indentures (see Note 16).
In lieu of providing separate audited financial statements for the Guarantor subsidiaries, the company has included the accompanying condensed consolidating financial statements. These condensed consolidating financial statements are presented on the equity method. Under this method, the investments in subsidiaries are recorded at cost and adjusted for the parent’s share of the subsidiary’s cumulative results of operations, capital contributions and distributions and other equity changes. The Guarantor subsidiaries are combined in the condensed consolidating financial statements.
68
Exhibit 99
ARVINMERITOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATING STATEMENT OF OPERATIONS
(In millions)
| | | | | | | | | | | | | | | | | | | | | | |
| | Fiscal Year Ended September 30, 2006 | |
| |
| |
| | Parent | | Guarantors | | Non-
Guarantors | | Elims | | Consolidated | |
| |
| |
| |
| |
| |
| |
Sales | | | | | | | | | | | | | | | | |
External | | $ | — | | | $ | 2,925 | | | | $ | 3,490 | | | $ | — | | | $ | 6,415 | | |
Subsidiaries | | | — | | | | 205 | | | | | 449 | | | | (654 | ) | | | — | | |
| |
|
| | |
|
| | | |
|
| | |
|
| | |
|
| | |
Total sales | | | — | | | | 3,130 | | | | | 3,939 | | | | (654 | ) | | | 6,415 | | |
Cost of sales | | | (17 | ) | | | (2,953 | ) | | | | (3,594 | ) | | | 654 | | | | (5,910 | ) | |
| |
|
| | |
|
| | | |
|
| | |
|
| | |
|
| | |
GROSS MARGIN | | | (17 | ) | | | 177 | | | | | 345 | | | | — | | | | 505 | | |
Selling, general and administrative | | | (77 | ) | | | (144 | ) | | | | (115 | ) | | | — | | | | (336 | ) | |
Restructuring costs | | | — | | | | (9 | ) | | | | (9 | ) | | | — | | | | (18 | ) | |
Other income (expense) | | | (8 | ) | | | 17 | | | | | 11 | | | | — | | | | 20 | | |
| |
|
| | |
|
| | | |
|
| | |
|
| | |
|
| | |
OPERATING INCOME (LOSS) | | | (102 | ) | | | 41 | | | | | 232 | | | | — | | | | 171 | | |
Equity in earnings of affiliates | | | — | | | | 22 | | | | | 10 | | | | — | | | | 32 | | |
Other income (expense), net | | | 36 | | | | (20 | ) | | | | (16 | ) | | | — | | | | — | | |
Interest expense, net and other | | | (117 | ) | | | 25 | | | | | (39 | ) | | | — | | | | (131 | ) | |
| |
|
| | |
|
| | | |
|
| | |
|
| | |
|
| | |
INCOME (LOSS) BEFORE INCOME TAXES | | | (183 | ) | | | 68 | | | | | 187 | | | | — | | | | 72 | | |
Benefit (provision) for income taxes | | | 65 | | | | 23 | | | | | (34 | ) | | | — | | | | 54 | | |
Minority interests | | | — | | | | — | | | | | (14 | ) | | | — | | | | (14 | ) | |
| |
|
| | |
|
| | | |
|
| | |
|
| | |
|
| | |
INCOME (LOSS) FROM CONTINUING OPERATIONS | | | (118 | ) | | | 91 | | | | | 139 | | | | — | | | | 112 | | |
INCOME (LOSS) FROM DISCONTINUED OPERATIONS | | | (9 | ) | | | (45 | ) | | | | (233 | ) | | | — | | | | (287 | ) | |
Equity in net income of subsidiaries | | | (48 | ) | | | (131 | ) | | | | — | | | | 179 | | | | — | | |
| |
|
| | |
|
| | | |
|
| | |
|
| | |
|
| | |
NET INCOME (LOSS) | | $ | (175 | ) | | $ | (85 | ) | | | $ | (94 | ) | | $ | 179 | | | $ | (175 | ) | |
| |
|
| | |
|
| | | |
|
| | |
|
| | |
|
| | |
69
Exhibit 99
ARVINMERITOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
(In millions)
| | | | | | | | | | | | | | | | | | | | | | |
| | Fiscal Year Ended September 30, 2005 | |
| |
| |
| | Parent | | Guarantors | | Non-Guarantors | | Elims | | Consolidated | |
| |
| |
| |
| |
| |
| |
Sales | | | | | | | | | | | | | | | | |
External | | $ | — | | | $ | 2,786 | | | | $ | 3,585 | | | $ | — | | | $ | 6,371 | | |
Subsidiaries | | | — | | | | 100 | | | | | 361 | | | | (461 | ) | | | — | | |
| |
|
| | |
|
| | | |
|
| | |
|
| | |
|
| | |
Total sales | | | — | | | | 2,886 | | | | | 3,946 | | | | (461 | ) | | | 6,371 | | |
Cost of sales | | | (28 | ) | | | (2,660 | ) | | | | (3,592 | ) | | | 461 | | | | (5,819 | ) | |
| |
|
| | |
|
| | | |
|
| | |
|
| | |
|
| | |
GROSS MARGIN | | | (28 | ) | | | 226 | | | | | 354 | | | | — | | | | 552 | | |
Selling, general and administrative | | | (75 | ) | | | (148 | ) | | | | (113 | ) | | | — | | | | (336 | ) | |
Restructuring costs | | | (1 | ) | | | (10 | ) | | | | (45 | ) | | | — | | | | (56 | ) | |
Other income (expense) | | | — | | | | (7 | ) | | | | (39 | ) | | | — | | | | (46 | ) | |
| |
|
| | |
|
| | | |
|
| | |
|
| | |
|
| | |
OPERATING INCOME (LOSS) | | | (104 | ) | | | 61 | | | | | 157 | | | | — | | | | 114 | | |
Equity in earnings of affiliates | | | — | | | | 19 | | | | | 7 | | | | — | | | | 26 | | |
Other income (expense), net | | | 3 | | | | 505 | | | | | (508 | ) | | | — | | | | — | | |
Interest expense, net and other | | | (110 | ) | | | 32 | | | | | (46 | ) | | | — | | | | (124 | ) | |
| |
|
| | |
|
| | | |
|
| | |
|
| | |
|
| | |
INCOME (LOSS) BEFORE INCOME TAXES | | | (211 | ) | | | 617 | | | | | (390 | ) | | | — | | | | 16 | | |
Benefit (provision) for income taxes | | | 82 | | | | (25 | ) | | | | (47 | ) | | | — | | | | 10 | | |
Minority interests | | | — | | | | — | | | | | (6 | ) | | | — | | | | (6 | ) | |
| |
|
| | |
|
| | | |
|
| | |
|
| | |
|
| | |
INCOME (LOSS) FROM CONTINUING OPERATIONS | | | (129 | ) | | | 592 | | | | | (443 | ) | | | — | | | | 20 | | |
INCOME (LOSS) FROM DISCONTINUED OPERATIONS | | | 3 | | | | 49 | | | | | (60 | ) | | | — | | | | (8 | ) | |
Equity in net income of subsidiaries | | | 138 | | | | (469 | ) | | | | — | | | | 331 | | | | — | | |
| |
|
| | |
|
| | | |
|
| | |
|
| | |
|
| | |
NET INCOME (LOSS) | | $ | 12 | | | $ | 172 | | | | $ | (503 | ) | | $ | 331 | | | $ | 12 | | |
| |
|
| | |
|
| | | |
|
| | |
|
| | |
|
| | |
70
Exhibit 99
ARVINMERITOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
(In millions)
| | | | | | | | | | | | | | | | | | | | | | |
| | Fiscal Year Ended September 30, 2004 | |
| | Parent | | Guarantors | | Non-
Guarantors | | Elims | | Consolidated | |
| |
| |
| |
| |
| |
| |
Sales | | | | | | | | | | | | | | | | | | | | | | |
External | | $ | — | | | $ | 2,019 | | | | $ | 3,356 | | | $ | — | | | $ | 5,375 | | |
Subsidiaries | | | — | | | | 107 | | | | | 402 | | | | (509 | ) | | | — | | |
| |
|
| | |
|
| | | |
|
| | |
|
| | |
|
| | |
Total sales | | | — | | | | 2,126 | | | | | 3,758 | | | | (509 | ) | | | 5,375 | | |
Cost of sales | | | (37 | ) | | | (1,928 | ) | | | | (3,404 | ) | | | 509 | | | | (4,860 | ) | |
| |
|
| | |
|
| | | |
|
| | |
|
| | |
|
| | |
GROSS MARGIN | | | (37 | ) | | | 198 | | | | | 354 | | | | — | | | | 515 | | |
Selling, general and administrative | | | (75 | ) | | | (158 | ) | | | | (104 | ) | | | — | | | | (337 | ) | |
Restructuring costs | | | (5 | ) | | | — | | | | | — | | | | — | | | | (5 | ) | |
Gain on divestitures, net | | | — | | | | — | | | | | — | | | | — | | | | — | | |
Other income (expense) | | | (16 | ) | | | (11 | ) | | | | — | | | | — | | | | (27 | ) | |
| |
|
| | |
|
| | | |
|
| | |
|
| | |
|
| | |
OPERATING INCOME (LOSS) | | | (133 | ) | | | 29 | | | | | 250 | | | | — | | | | 146 | | |
Equity in earnings of affiliates | | | — | | | | 4 | | | | | 13 | | | | — | | | | 17 | | |
Gain on sale of marketable securities | | | 7 | | | | — | | | | | — | | | | — | | | | 7 | | |
Other income (expense), net | | | 13 | | | | (17 | ) | | | | 4 | | | | — | | | | — | | |
Interest expense, net and other | | | (92 | ) | | | — | | | | | (12 | ) | | | — | | | | (104 | ) | |
| |
|
| | |
|
| | | |
|
| | |
|
| | |
|
| | |
INCOME (LOSS) BEFORE INCOME TAXES | | | (205 | ) | | | 16 | | | | | 255 | | | | — | | | | 66 | | |
Benefit (provision) for income taxes | | | 72 | | | | (2 | ) | | | | (77 | ) | | | — | | | | (7 | ) | |
Minority interests | | | — | | | | — | | | | | (10 | ) | | | — | | | | (10 | ) | |
| |
|
| | |
|
| | | |
|
| | |
|
| | |
|
| | |
INCOME (LOSS) FROM CONTINUING OPERATIONS | | | (133 | ) | | | 14 | | | | | 168 | | | | — | | | | 49 | | |
INCOME (LOSS) FROM DISCONTINUED OPERATIONS | | | 11 | | | | (69 | ) | | | | (33 | ) | | | — | | | | (91 | ) | |
Equity in net income of subsidiaries | | | 80 | | | | 131 | | | | | — | | | | (211 | ) | | | — | | |
| |
|
| | |
|
| | | |
|
| | |
|
| | |
|
| | |
NET INCOME (LOSS) | | $ | (42 | ) | | $ | 76 | | | | $ | 135 | | | $ | (211 | ) | | $ | (42 | ) | |
| |
|
| | |
|
| | | |
|
| | |
|
| | |
|
| | |
71
Exhibit 99
ARVINMERITOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONDENSED CONSOLIDATING BALANCE SHEET
(In millions)
| | | | | | | | | | | | | | | | | | | | | | |
| | September 30, 2006 | |
| |
| |
| | Parent | | Guarantors | | Non-
Guarantors | | Elims | | Consolidated | |
| |
| |
| |
| |
| |
| |
CURRENT ASSETS | | | | | | | | | | | | | | | | |
Cash and cash equivalents | | $ | 97 | | | $ | 3 | | | | $ | 250 | | | $ | — | | | $ | 350 | | |
Receivables, net | | | 14 | | | | 97 | | | | | 987 | | | | — | | | | 1,098 | | |
Inventories | | | — | | | | 250 | | | | | 238 | | | | — | | | | 488 | | |
Other current assets | | | 49 | | | | 99 | | | | | 100 | | | | — | | | | 248 | | |
Assets of discontinued operations | | | 37 | | | | 215 | | | | | 954 | | | | — | | | | 1,206 | | |
| |
|
| | |
|
| | | |
|
| | |
|
| | |
|
| | |
TOTAL CURRENT ASSETS | | | 197 | | | | 664 | | | | | 2,529 | | | | — | | | | 3,390 | | |
| |
|
| | |
|
| | | |
|
| | |
|
| | |
|
| | |
NET PROPERTY | | | 34 | | | | 246 | | | | | 439 | | | | — | | | | 719 | | |
GOODWILL | | | — | | | | 341 | | | | | 162 | | | | — | | | | 503 | | |
OTHER ASSETS | | | 381 | | | | 142 | | | | | 373 | | | | — | | | | 896 | | |
INVESTMENTS IN SUBSIDIARIES | | | 3,435 | | | | 1,047 | | | | | — | | | | (4,482 | ) | | | — | | |
| |
|
| | |
|
| | | |
|
| | |
|
| | |
|
| | |
TOTAL ASSETS | | $ | 4,047 | | | $ | 2,440 | | | | $ | 3,503 | | | $ | (4,482 | ) | | $ | 5,508 | | |
| |
|
| | |
|
| | | |
|
| | |
|
| | |
|
| | |
| | | | | | | | | | | | | | | | | | | | | | |
CURRENT LIABILITIES | | | | | | | | | | | | | | | | | | | | | | |
Short-term debt | | $ | 7 | | | $ | — | | | | $ | 49 | | | $ | — | | | $ | 56 | | |
Accounts payable | | | 27 | | | | 371 | | | | | 708 | | | | — | | | | 1,106 | | |
Other current liabilities | | | 207 | | | | 190 | | | | | 309 | | | | — | | | | 706 | | |
Liabilities of discontinued operations | | | — | | | | 204 | | | | | 508 | | | | — | | | | 712 | | |
| |
|
| | |
|
| | | |
|
| | |
|
| | |
|
| | |
TOTAL CURRENT LIABILITIES | | | 241 | | | | 765 | | | | | 1,574 | | | | — | | | | 2,580 | | |
| |
|
| | |
|
| | | |
|
| | |
|
| | |
|
| | |
LONG-TERM DEBT | | | 1,165 | | | | — | | | | | 9 | | | | — | | | | 1,174 | | |
RETIREMENT BENEFITS | | | 337 | | | | — | | | | | 150 | | | | — | | | | 487 | | |
INTERCOMPANY PAYABLE (RECEIVABLE) | | | 1,311 | | | | (1,535 | ) | | | | 224 | | | | — | | | | — | | |
OTHER LIABILITIES | | | 49 | | | | 137 | | | | | 73 | | | | — | | | | 259 | | |
MINORITY INTERESTS | | | — | | | | — | | | | | 64 | | | | — | | | | 64 | | |
SHAREOWNERS’ EQUITY | | | 944 | | | | 3,073 | | | | | 1,409 | | | | (4,482 | ) | | | 944 | | |
| |
|
| | |
|
| | | |
|
| | |
|
| | |
|
| | |
TOTAL LIABILITIES AND SHAREOWNERS’ EQUITY | | $ | 4,047 | | | $ | 2,440 | | | | $ | 3,503 | | | $ | (4,482 | ) | | $ | 5,508 | | |
| |
|
| | |
|
| | | |
|
| | |
|
| | |
|
| | |
72
Exhibit 99
ARVINMERITOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONDENSED CONSOLIDATING BALANCE SHEET
(In millions)
| | | | | | | | | | | | | | | | | | | | | | |
| | September 30, 2005 | |
| |
| |
| | Parent | | Guarantors | | Non-
Guarantors | | Elims | | Consolidated | |
| |
| |
| |
| |
| |
| |
CURRENT ASSETS | | | | | | | | | | | | | | | | |
Cash and cash equivalents | | $ | 63 | | | $ | — | | | | $ | 124 | | | $ | — | | | $ | 187 | | |
Receivables, net | | | 2 | | | | 103 | | | | | 1,103 | | | | — | | | | 1,208 | | |
Inventories | | | — | | | | 182 | | | | | 293 | | | | — | | | | 475 | | |
Other current assets | | | 30 | | | | 71 | | | | | 109 | | | | — | | | | 210 | | |
Assets of discontinued operations | | | 31 | | | | 292 | | | | | 1,372 | | | | — | | | | 1,695 | | |
| |
|
| | |
|
| | | |
|
| | |
|
| | |
|
| | |
TOTAL CURRENT ASSETS | | | 126 | | | | 648 | | | | | 3,001 | | | | — | | | | 3,775 | | |
| |
|
| | |
|
| | | |
|
| | |
|
| | |
|
| | |
NET PROPERTY | | | 37 | | | | 232 | | | | | 474 | | | | — | | | | 743 | | |
GOODWILL | | | — | | | | 315 | | | | | 188 | | | | — | | | | 503 | | |
OTHER ASSETS | | | 430 | | | | 68 | | | | | 353 | | | | — | | | | 851 | | |
INVESTMENTS IN SUBSIDIARIES | | | 3,487 | | | | 1,163 | | | | | — | | | | (4,650 | ) | | | — | | |
| |
|
| | |
|
| | | |
|
| | |
|
| | |
|
| | |
TOTAL ASSETS | | $ | 4,080 | | | $ | 2,426 | | | | $ | 4,016 | | | $ | (4,650 | ) | | $ | 5,872 | | |
| |
|
| | |
|
| | | |
|
| | |
|
| | |
|
| | |
| | | | | | | | | | | | | | | | | | | | | | |
CURRENT LIABILITIES | | | | | | | | | | | | | | | | | | | | | | |
Short-term debt | | $ | — | | | $ | 14 | | | | $ | 122 | | | $ | — | | | $ | 136 | | |
Accounts payable | | | 25 | | | | 364 | | | | | 678 | | | | — | | | | 1,067 | | |
Other current liabilities | | | 219 | | | | 113 | | | | | 303 | | | | — | | | | 635 | | |
Liabilities of discontinued operations | | | — | | | | 269 | | | | | 450 | | | | — | | | | 719 | | |
| |
|
| | |
|
| | | |
|
| | |
|
| | |
|
| | |
TOTAL CURRENT LIABILITIES | | | 244 | | | | 760 | | | | | 1,553 | | | | — | | | | 2,557 | | |
| |
|
| | |
|
| | | |
|
| | |
|
| | |
|
| | |
LONG-TERM DEBT | | | 1,418 | | | | — | | | | | 18 | | | | — | | | | 1,436 | | |
RETIREMENT BENEFITS | | | 533 | | | | — | | | | | 202 | | | | — | | | | 735 | | |
INTERCOMPANY PAYABLE (RECEIVABLE) | | | 965 | | | | (1,791 | ) | | | | 826 | | | | — | | | | — | | |
OTHER LIABILITIES | | | 45 | | | | 61 | | | | | 101 | | | | — | | | | 207 | | |
MINORITY INTERESTS | | | — | | | | — | | | | | 62 | | | | — | | | | 62 | | |
SHAREOWNERS’ EQUITY | | | 875 | | | | 3,396 | | | | | 1,254 | | | | (4,650 | ) | | | 875 | | |
| |
|
| | |
|
| | | |
|
| | |
|
| | |
|
| | |
TOTAL LIABILITIES AND SHAREOWNERS’ EQUITY | | $ | 4,080 | | | $ | 2,426 | | | | $ | 4,016 | | | $ | (4,650 | ) | | $ | 5,872 | | |
| |
|
| | |
|
| | | |
|
| | |
|
| | |
|
| | |
73
Exhibit 99
ARVINMERITOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
(In millions)
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Fiscal Year Ended September 30, 2006 | |
| |
| |
| | Parent | | Guarantors | | Non-
Guarantors | | Elims | | Consolidated | |
| |
| |
| |
| |
| |
| |
CASH FLOWS PROVIDED BY (USED FOR) OPERATING ACTIVITIES | | $ | 370 | | | $ | (148 | ) | | | $ | 218 | | | | $ | — | | | | $ | 440 | | |
| |
|
| | |
|
| | | |
|
| | | |
|
| | | |
|
| | |
| | | | | | | | | | | | | | | | | | | | | | | | |
INVESTING ACTIVITIES | | | | | | | | | | | | | | | | | | | | | | | | |
Capital expenditures | | | (1 | ) | | | (28 | ) | | | | (78 | ) | | | | — | | | | | (107 | ) | |
Acquisitions of businesses and investments | | | — | | | | — | | | | | 1 | | | | | — | | | | | 1 | | |
Investment in debt defeasance trust and marketable securities | | | (12 | ) | | | — | | | | | (5 | ) | | | | — | | | | | (17 | ) | |
Proceeds from disposition of property and businesses | | | 2 | | | | — | | | | | 52 | | | | | — | | | | | 54 | | |
Net cash provided (used) by discontinued operations | | | — | | | | 193 | | | | | (14 | ) | | | | — | | | | | 179 | | |
| |
|
| | |
|
| | | |
|
| | | |
|
| | | |
|
| | |
CASH PROVIDED BY (USED FOR) INVESTING ACTIVITIES | | | (11 | ) | | | 165 | | | | | (44 | ) | | | | — | | | | | 110 | | |
| |
|
| | |
|
| | | |
|
| | | |
|
| | | |
|
| | |
| | | | | | | | | | | | | | | | | | | | | | | | |
FINANCING ACTIVITIES | | | | | | | | | | | | | | | | | | | | | | | | |
Change in account receivable securitization | | | — | | | | — | | | | | (72 | ) | | | | — | | | | | (72 | ) | |
Proceeds from issuance of notes and term loan | | | 470 | | | | — | | | | | — | | | | | — | | | | | 470 | | |
Repayment of notes | | | (672 | ) | | | — | | | | | — | | | | | — | | | | | (672 | ) | |
Payments on lines of credit and other | | | (33 | ) | | | (10 | ) | | | | (14 | ) | | | | — | | | | | (57 | ) | |
Debt issuance and extinguishment costs | | | (28 | ) | | | — | | | | | — | | | | | — | | | | | (28 | ) | |
Proceeds from exercise of stock options | | | 1 | | | | — | | | | | — | | | | | — | | | | | 1 | | |
Intercompany advances | | | (35 | ) | | | — | | | | | 35 | | | | | — | | | | | — | | |
Cash dividends | | | (28 | ) | | | — | | | | | — | | | | | — | | | | | (28 | ) | |
Net financing cash flows used by discontinued operations | | | | | | | (4 | ) | | | | (1 | ) | | | | | | | | | (5 | ) | |
| |
|
| | |
|
| | | |
|
| | | |
|
| | | |
|
| | |
CASH USED FOR FINANCING ACTIVITIES | | | (325 | ) | | | (14 | ) | | | | (52 | ) | | | | — | | | | | (391 | ) | |
| |
|
| | |
|
| | | |
|
| | | |
|
| | | |
|
| | |
| | | | | | | | | | | | | | | | | | | | | | | | |
EFFECT OF FOREIGN CURRENCY ON CASH | | | — | | | | — | | | | | 4 | | | | | — | | | | | 4 | | |
| |
|
| | |
|
| | | |
|
| | | |
|
| | | |
|
| | |
| | | | | | | | | | | | | | | | | | | | | | | | |
CHANGE IN CASH AND CASH EQUIVALENTS | | | 34 | | | | 3 | | | | | 126 | | | | | — | | | | | 163 | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD | | | 63 | | | | — | | | | | 124 | | | | | — | | | | | 187 | | |
| |
|
| | |
|
| | | |
|
| | | |
|
| | | |
|
| | |
CASH AND CASH EQUIVALENTS AT END OF PERIOD | | $ | 97 | | | $ | 3 | | | | $ | 250 | | | | $ | — | | | | $ | 350 | | |
| |
|
| | |
|
| | | |
|
| | | |
|
| | | |
|
| | |
| | | | | | | | | | | | | | | | | | | | | | | | |
74
Exhibit 99
ARVINMERITOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
(In millions)
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Fiscal Year Ended September 30, 2005 | |
| |
| |
| | Parent | | Guarantors | | Non-
Guarantors | | Elims | | Consolidated | |
| |
| |
| |
| |
| |
| |
| | | | | | | | | | | | | | | | |
CASH FLOWS PROVIDED BY (USED FOR) OPERATING ACTIVITIES | | $ | 171 | | | $ | 34 | | | | $ | (237 | ) | | | $ | — | | | | $ | (32 | ) | |
| |
|
| | |
|
| | | |
|
| | | |
|
| | | |
|
| | |
| | | | | | | | | | | | | | | | | | | | | | | | |
INVESTING ACTIVITIES | | | | | | | | | | | | | | | | | | | | | | | | |
Capital expenditures | | | (5 | ) | | | (34 | ) | | | | (56 | ) | | | | — | | | | | (95 | ) | |
Acquisitions of businesses and investments | | | — | | | | (5 | ) | | | | (23 | ) | | | | — | | | | | (28 | ) | |
Proceeds from disposition of property and businesses | | | — | | | | 1 | | | | | 11 | | | | | — | | | | | 12 | | |
Net cash provided by discontinued operations | | | — | | | | 16 | | | | | 120 | | | | | — | | | | | 136 | | |
| |
|
| | |
|
| | | |
|
| | | |
|
| | | |
|
| | |
CASH PROVIDED BY (USED FOR) INVESTING ACTIVITIES | | | (5 | ) | | | (22 | ) | | | | 52 | | | | | — | | | | | 25 | | |
| |
|
| | |
|
| | | |
|
| | | |
|
| | | |
|
| | |
| | | | | | | | | | | | | | | | | | | | | | | | |
FINANCING ACTIVITIES | | | | | | | | | | | | | | | | | | | | | | | | |
Change in account receivable securitization | | | — | | | | — | | | | | 112 | | | | | — | | | | | 112 | | |
Repayment of notes | | | (21 | ) | | | — | | | | | — | | | | | — | | | | | (21 | ) | |
Borrowings (payments) on lines of credit and other | | | — | | | | (12 | ) | | | | 10 | | | | | — | | | | | (2 | ) | |
Debt issuance and extinguishment costs | | | (10 | ) | | | — | | | | | — | | | | | — | | | | | (10 | ) | |
Proceeds from exercise of stock options | | | 6 | | | | — | | | | | — | | | | | — | | | | | 6 | | |
Intercompany advances | | | (53 | ) | | | — | | | | | 53 | | | | | — | | | | | — | | |
Cash dividends | | | (28 | ) | | | — | | | | | — | | | | | — | | | | | (28 | ) | |
Net financing cash flows used by discontinued operations | | | | | | | | | | | | (3 | ) | | | | | | | | | (3 | ) | |
| |
|
| | |
|
| | | |
|
| | | |
|
| | | |
|
| | |
CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES | | | (106 | ) | | | (12 | ) | | | | 172 | | | | | — | | | | | 54 | | |
| |
|
| | |
|
| | | |
|
| | | |
|
| | | |
|
| | |
| | | | | | | | | | | | | | | | | | | | | | | | |
EFFECT OF FOREIGN CURRENCY ON CASH | | | — | | | | — | | | | | 8 | | | | | — | | | | | 8 | | |
| |
|
| | |
|
| | | |
|
| | | |
|
| | | |
|
| | |
| | | | | | | | | | | | | | | | | | | | | | | | |
CHANGE IN CASH AND CASH EQUIVALENTS | | | 60 | | | | — | | | | | (5 | ) | | | | — | | | | | 55 | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD | | | 3 | | | | — | | | | | 129 | | | | | — | | | | | 132 | | |
| |
|
| | |
|
| | | |
|
| | | |
|
| | | |
|
| | |
CASH AND CASH EQUIVALENTS AT END OF PERIOD | | $ | 63 | | | $ | — | | | | $ | 124 | | | | $ | — | | | | $ | 187 | | |
| |
|
| | |
|
| | | |
|
| | | |
|
| | | |
|
| | |
75
Exhibit 99
ARVINMERITOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
(In millions)
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Fiscal Year Ended September 30, 2004 | |
| |
| |
| | Parent | | Guarantors | | Non-
Guarantors | | Elims | | Consolidated | |
| |
| |
| |
| |
| |
| |
| | | | | | | | | | | | | | | | |
CASH FLOWS PROVIDED BY (USED FOR) OPERATING ACTIVITIES | | $ | (131 | ) | | $ | 37 | | | | $ | 313 | | | | $ | — | | | | $ | 219 | | |
| |
|
| | |
|
| | | |
|
| | | |
|
| | | |
|
| | |
| | | | | | | | | | | | | | | | | | | | | | | | |
INVESTING ACTIVITIES | | | | | | | | | | | | | | | | | | | | | | | | |
Capital expenditures | | | (6 | ) | | | (47 | ) | | | | (49 | ) | | | | — | | | | | (102 | ) | |
Acquisitions of businesses and investments, net of cash | | | — | | | | — | | | | | (1 | ) | | | | — | | | | | (1 | ) | |
Proceeds from disposition of property, businesses, and marketable securities | | | 18 | | | | 15 | | | | | 19 | | | | | — | | | | | 52 | | |
Cash used by discontinued operations | | | — | | | | (16 | ) | | | | (53 | ) | | | | — | | | | | (69 | ) | |
| |
|
| | |
|
| | | |
|
| | | |
|
| | | |
|
| | |
CASH PROVIDED BY (USED FOR) INVESTING ACTIVITIES | | | 12 | | | | (48 | ) | | | | (84 | ) | | | | — | | | | | (120 | ) | |
| |
|
| | |
|
| | | |
|
| | | |
|
| | | |
|
| | |
| | | | | | | | | | | | | | | | | | | | | | | | |
FINANCING ACTIVITIES | | | | | | | | | | | | | | | | | | | | | | | | |
Net change in debt | | | (53 | ) | | | — | | | | | (1 | ) | | | | — | | | | | (54 | ) | |
Proceeds from exercise of stock options | | | 6 | | | | — | | | | | — | | | | | — | | | | | 6 | | |
Intercompany advances | | | 195 | | | | — | | | | | (195 | ) | | | | — | | | | | — | | |
Cash dividends | | | (28 | ) | | | — | | | | | — | | | | | — | | | | | (28 | ) | |
Net financing cash flows used by discontinued operations | | | | | | | | | | | | (1 | ) | | | | | | | | | (1 | ) | |
| |
|
| | |
|
| | | |
|
| | | |
|
| | | |
|
| | |
CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES | | | 120 | | | | — | | | | | (197 | ) | | | | — | | | | | (77 | ) | |
| |
|
| | |
|
| | | |
|
| | | |
|
| | | |
|
| | |
| | | | | | | | | | | | | | | | | | | | | | | | |
EFFECT OF FOREIGN CURRENCY ON CASH | | | — | | | | — | | | | | 7 | | | | | — | | | | | 7 | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
CHANGE IN CASH AND CASH EQUIVALENTS | | | 1 | | | | (11 | ) | | | | 39 | | | | | — | | | | | 29 | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD | | | 2 | | | | 11 | | | | | 90 | | | | | — | | | | | 103 | | |
| |
|
| | |
|
| | | |
|
| | | |
|
| | | |
|
| | |
CASH AND CASH EQUIVALENTS AT END OF PERIOD | | $ | 3 | | | $ | — | | | | $ | 129 | | | | $ | — | | | | $ | 132 | | |
| |
|
| | |
|
| | | |
|
| | | |
|
| | | |
|
| | |
76
Exhibit 99
ARVINMERITOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
28. SUBSEQUENT EVENT
In October 2006, the company implemented a new enterprise resource planning system at one of its European plants. This system change is part of the company’s plan to integrate, consolidate, and standardize its information systems. During the implementation, the location experienced significant issues, causing temporary manufacturing inefficiencies impacting the company’s ability to completely fulfill certain customer orders. This resulted in production interruptions at some customer manufacturing facilities. As a result, the company began incurring costs to return to normal production as well as costs associated with production disruptions at certain customer facilities. The company does not believe this event will have a material impact on its fiscal year 2007 operating results.
77
SCHEDULE II
ARVINMERITOR, INC.
VALUATION AND QUALIFYING ACCOUNTS
For the Year Ended September 30, 2006, 2005, 2004
| | | | | | | | | | | | | | | | | |
Description (In millions) | | Balance at
Beginning
of Year | | Charged
to costs
and expenses | | Other
Deductions | | Balance at End
of year | |
| |
| |
| |
| |
| |
Year ended September 30, 2006: | | | | | | | | | | | | | | | | | |
Allowance for doubtful accounts | | $ | 30 | | | $ | 6 | | | $ | 19 | (a) | | $ | 17 | | |
Deferred tax asset valuation allowance | | | 146 | | | | (3 | ) | | | — | | | | 143 | | |
| | | | | | | | | | | | | | | | | |
Year ended September 30, 2005: | | | | | | | | | | | | | | | | | |
Allowance for doubtful accounts | | $ | 26 | | | $ | 15 | | | $ | 11 | (a) | | $ | 30 | | |
Deferred tax asset valuation allowance | | | 93 | | | | 54 | | | | 1 | | | | 146 | | |
| | | | | | | | | | | | | | | | | |
Year ended September 30, 2004: | | | | | | | | | | | | | | | | | |
Allowance for doubtful accounts | | $ | 16 | | | $ | 17 | | | $ | 7 | (a) | | $ | 26 | | |
Deferred tax asset valuation allowance | | | 62 | | | | 30 | | | | (1 | ) | | | 93 | | |
| |
|
(a) | Uncollectible accounts written off |
78
