UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended January 1, 2006
Commission File No. 1-15983
ARVINMERITOR, INC.
(Exact name of registrant as specified in its charter)
Indiana | 38-3354643 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
2135 West Maple Road, Troy, Michigan | 48084-7186 |
(Address of principal executive offices) | (Zip Code) |
(248) 435-1000
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes | X | No |
|
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
Yes | X | No |
|
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes |
| No | X |
70,468,395 shares of Common Stock, $1.00 par value, of ArvinMeritor, Inc. were outstanding on December 31, 2005.
INDEX
PART I. | FINANCIAL INFORMATION: |
| |
|
|
|
|
| Item 1. | Financial Statements: | Page |
|
|
| No. |
|
| Consolidated Statement of Income - - Three Months |
|
|
| Ended December 31, 2005 and 2004 | 2 |
|
|
|
|
|
| Consolidated Balance Sheet - - |
|
|
| December 31, 2005 and September 30, 2005 | 3 |
|
|
|
|
|
| Condensed Consolidated Statement of Cash Flows - - |
|
|
| Three Months Ended December 31, 2005 and 2004 | 4 |
|
|
|
|
|
| Notes to Consolidated Financial Statements | 5 |
|
|
|
|
| Item 2. | Management’s Discussion and Analysis |
|
|
| of Financial Condition and Results of Operations | 31 |
|
|
|
|
| Item 3. | Quantitative and Qualitative Disclosures About |
|
|
| Market Risk | 40 |
|
|
|
|
| Item 4. | Controls and Procedures | 41 |
|
|
|
|
PART II. | OTHER INFORMATION: |
| |
|
|
|
|
| Item 5. | Other Information | 42 |
|
|
|
|
| Item 6. | Exhibits | 42 |
|
|
|
|
|
|
|
|
Signatures |
|
| 43 |
1
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
ARVINMERITOR, INC.
CONSOLIDATED STATEMENT OF INCOME
(in millions, except per share amounts)
|
| Three Months Ended December 31, |
| ||||
|
| 2005 |
| 2004 |
| ||
|
| (Unaudited) |
| ||||
Sales |
| $ | 2,086 |
| $ | 2,067 |
|
Cost of sales |
|
| (1,957 | ) |
| (1,933 | ) |
GROSS MARGIN |
|
| 129 |
|
| 134 |
|
Selling, general and administrative |
|
| (87 | ) |
| (83 | ) |
Restructuring costs |
|
| (1 | ) |
| (10 | ) |
Gain on divestitures |
|
| 23 |
|
| 4 |
|
Customer bankruptcies |
|
| — |
|
| (5 | ) |
OPERATING INCOME |
|
| 64 |
|
| 40 |
|
Equity in earnings of affiliates |
|
| 7 |
|
| 6 |
|
Interest expense, net and other |
|
| (32 | ) |
| (28 | ) |
INCOME BEFORE INCOME TAXES |
|
| 39 |
|
| 18 |
|
Provision for income taxes |
|
| (10 | ) |
| (6 | ) |
Minority interests |
|
| (2 | ) |
| 2 |
|
INCOME FROM CONTINUING OPERATIONS |
|
| 27 |
|
| 14 |
|
INCOME FROM DISCONTINUED OPERATIONS |
|
| 7 |
|
| 4 |
|
NET INCOME |
| $ | 34 |
| $ | 18 |
|
|
|
|
|
|
|
|
|
BASIC EARNINGS PER SHARE |
|
|
|
|
|
|
|
Continuing operations |
| $ | 0.39 |
| $ | 0.21 |
|
Discontinued operations |
|
| 0.10 |
|
| 0.06 |
|
Basic earnings per share |
| $ | 0.49 |
| $ | 0.27 |
|
|
|
|
|
|
|
|
|
DILUTED EARNINGS PER SHARE |
|
|
|
|
|
|
|
Continuing operations |
| $ | 0.39 |
| $ | 0.20 |
|
Discontinued operations |
|
| 0.10 |
|
| 0.06 |
|
Diluted earnings per share |
| $ | 0.49 |
| $ | 0.26 |
|
|
|
|
|
|
|
|
|
Basic average common shares outstanding |
|
| 69.0 |
|
| 67.8 |
|
Diluted average common shares outstanding |
|
| 69.8 |
|
| 69.0 |
|
|
|
|
|
|
|
|
|
Cash dividends per common share |
| $ | 0.10 |
| $ | 0.10 |
|
See notes to consolidated financial statements. Amounts for the three months ended December 31, 2004 have been restated for discontinued operations.
2
ARVINMERITOR, INC.
CONSOLIDATED BALANCE SHEET
(in millions)
|
| December 31, |
| September 30, |
| ||
|
| 2005 |
| 2005 |
| ||
|
| (Unaudited) |
|
| |||
ASSETS |
|
|
|
|
|
|
|
CURRENT ASSETS: |
|
|
|
|
|
|
|
Cash and cash equivalents |
| $ | 302 |
| $ | 187 |
|
Receivables, net |
|
| 1,452 |
|
| 1,655 |
|
Inventories |
|
| 550 |
|
| 541 |
|
Other current assets |
|
| 256 |
|
| 256 |
|
Assets of discontinued operations |
|
| 525 |
|
| 531 |
|
TOTAL CURRENT ASSETS |
|
| 3,085 |
|
| 3,170 |
|
NET PROPERTY |
|
| 982 |
|
| 1,013 |
|
GOODWILL |
|
| 787 |
|
| 801 |
|
OTHER ASSETS |
|
| 875 |
|
| 886 |
|
TOTAL ASSETS |
| $ | 5,729 |
| $ | 5,870 |
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREOWNERS’ EQUITY |
|
|
|
|
|
|
|
CURRENT LIABILITIES: |
|
|
|
|
|
|
|
Short-term debt |
| $ | 99 |
| $ | 131 |
|
Accounts payable |
|
| 1,448 |
|
| 1,483 |
|
Other current liabilities |
|
| 618 |
|
| 667 |
|
Liabilities of discontinued operations |
|
| 221 |
|
| 242 |
|
TOTAL CURRENT LIABILITIES |
|
| 2,386 |
|
| 2,523 |
|
LONG-TERM DEBT |
|
| 1,438 |
|
| 1,451 |
|
RETIREMENT BENEFITS |
|
| 753 |
|
| 754 |
|
OTHER LIABILITIES |
|
| 215 |
|
| 209 |
|
MINORITY INTERESTS |
|
| 60 |
|
| 58 |
|
SHAREOWNERS’ EQUITY: |
|
|
|
|
|
|
|
Common stock (December 31, 2005 and September 30, 2005, |
|
|
|
|
|
|
|
71.0 shares issued and 70.5 and 70.3 outstanding, respectively) |
|
| 71 |
|
| 71 |
|
Additional paid-in capital |
|
| 573 |
|
| 580 |
|
Retained earnings |
|
| 606 |
|
| 579 |
|
Treasury stock (December 31, 2005 and September 30, 2005, |
|
|
|
|
|
|
|
0.5 and 0.7 shares, respectively) |
|
| (12 | ) |
| (10 | ) |
Unearned compensation |
|
| — |
|
| (13 | ) |
Accumulated other comprehensive loss |
|
| (361 | ) |
| (332 | ) |
TOTAL SHAREOWNERS’ EQUITY |
|
| 877 |
|
| 875 |
|
TOTAL LIABILITIES AND SHAREOWNERS’ EQUITY |
| $ | 5,729 |
| $ | 5,870 |
|
See notes to consolidated financial statements.
3
ARVINMERITOR, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(in millions)
|
| Three Months Ended December 31, |
| ||||
|
| 2005 |
| 2004 |
| ||
|
| (Unaudited) |
| ||||
OPERATING ACTIVITIES |
|
|
|
|
|
|
|
Income from continuing operations |
| $ | 27 |
| $ | 14 |
|
Adjustments to income from continuing operations to arrive |
|
|
|
|
|
|
|
at cash provided by (used for) operating activities: |
|
|
|
|
|
|
|
Depreciation and amortization |
|
| 40 |
|
| 45 |
|
Gain on divestitures |
|
| (23 | ) |
| (4 | ) |
Restructuring costs, net of payments |
|
| (7 | ) |
| — |
|
Pension and retiree medical expense |
|
| 33 |
|
| 27 |
|
Other adjustments to income |
|
| 1 |
|
| — |
|
Pension and retiree medical contributions |
|
| (28 | ) |
| (22 | ) |
Changes in receivable securitization and factoring |
|
| 37 |
|
| (41 | ) |
Changes in assets and liabilities, excluding effects of |
|
|
|
|
|
|
|
acquisitions, divestitures and foreign currency adjustments |
|
| 83 |
|
| (144 | ) |
Cash flows provided by (used for) continuing operations |
|
| 163 |
|
| (125 | ) |
Cash flows used for discontinued operations |
|
| (12 | ) |
| (95 | ) |
CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES |
|
| 151 |
|
| (220 | ) |
|
|
|
|
|
|
|
|
INVESTING ACTIVITIES |
|
|
|
|
|
|
|
Capital expenditures |
|
| (37 | ) |
| (27 | ) |
Acquisitions of businesses and investments, net of cash acquired |
|
| (1 | ) |
| (22 | ) |
Proceeds from disposition of property and businesses |
|
| 39 |
|
| 33 |
|
Net investing cash flows provided by discontinued operations |
|
| 7 |
|
| 162 |
|
CASH PROVIDED BY INVESTING ACTIVITIES |
|
| 8 |
|
| 146 |
|
|
|
|
|
|
|
|
|
FINANCING ACTIVITIES |
|
|
|
|
|
|
|
Net change in revolving credit facilities |
|
| — |
|
| 11 |
|
Change in accounts receivable securitization program |
|
| (24 | ) |
| — |
|
Purchase of notes |
|
| (3 | ) |
| — |
|
Borrowings (payments) on lines of credit and other |
|
| (14 | ) |
| 20 |
|
Net change in debt |
|
| (41 | ) |
| 31 |
|
Proceeds from exercise of stock options |
|
| — |
|
| 5 |
|
Cash dividends |
|
| (7 | ) |
| (7 | ) |
Net financing cash flows provided by discontinued operations |
|
| 2 |
|
| — |
|
CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES |
|
| (46 | ) |
| 29 |
|
EFFECT OF CHANGES IN FOREIGN CURRENCY EXCHANGE |
|
|
|
|
|
|
|
RATES ON CASH |
|
| 2 |
|
| 4 |
|
CHANGE IN CASH AND CASH EQUIVALENTS |
|
| 115 |
|
| (41 | ) |
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD |
|
| 187 |
|
| 132 |
|
CASH AND CASH EQUIVALENTS AT END OF PERIOD |
| $ | 302 |
| $ | 91 |
|
See notes to consolidated financial statements.
4
ARVINMERITOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. | Basis of Presentation |
ArvinMeritor, Inc. (the company or ArvinMeritor) is a leading global supplier of a broad range of integrated systems, modules and components serving light vehicle, commercial truck, trailer and specialty original equipment manufacturers and certain aftermarkets. The consolidated financial statements are those of the company and its consolidated subsidiaries.
The company’s Light Vehicle Aftermarket (LVA) and Light Vehicle Systems (LVS) ride control businesses are presented as discontinued operations in the consolidated statement of income and related notes. The company sold its coil coating business during the first quarter of fiscal year 2005 and its results of operations are presented as discontinued operations in the consolidated statement of income for the period through the date of sale. The assets and liabilities of LVA are classified as held for sale and included in assets and liabilities of discontinued operations in the consolidated balance sheet (see Note 4).
In the opinion of the company, the unaudited financial statements contain all adjustments, consisting solely of adjustments of a normal, recurring nature, necessary to present fairly the financial position, results of operations and cash flows for the periods presented. These statements should be read in conjunction with the company’s audited consolidated financial statements and notes thereto included in the Annual Report on Form 10-K for the fiscal year ended September 30, 2005. The results of operations for the three months ended December 31, 2005, are not necessarily indicative of the results for the full year.
The company’s fiscal year ends on the Sunday nearest September 30. The company’s fiscal quarters end on the Sundays nearest December 31, March 31 and June 30. The first quarter of fiscal years 2006 and 2005 ended on January 1, 2006, and January 2, 2005, respectively. All year and quarter references relate to the company’s fiscal year and fiscal quarters, unless otherwise stated. For ease of presentation, September 30 and December 31 are used consistently throughout this report to represent the fiscal year end and first quarter end, respectively.
For each interim reporting period, the company makes an estimate of the effective tax rate expected to be applicable for the full fiscal year. The rate so determined is used in providing for income taxes on a year-to-date basis.
2. | Earnings per Share |
Basic earnings per share is calculated using the weighted average number of shares outstanding during each period. The diluted earnings per share calculation includes the impact of dilutive common stock options, restricted stock, and performance share awards.
A reconciliation of basic average common shares outstanding to diluted average common shares outstanding is as follows (in millions):
|
| Three Months Ended |
| ||
|
| December 31, |
| ||
|
| 2005 |
| 2004 |
|
|
|
|
|
|
|
Basic average common shares outstanding |
| 69.0 |
| 67.8 |
|
Impact of restricted stock |
| 0.8 |
| 0.9 |
|
Impact of stock options |
| — |
| 0.3 |
|
Diluted average common shares outstanding |
| 69.8 |
| 69.0 |
|
At December 31, 2005 and 2004, options to purchase 4.9 million and 1.3 million shares of common stock, respectively, were not included in the computation of diluted earnings per share because their inclusion would be anti-dilutive.
5
ARVINMERITOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3. | New Accounting Standards |
In November 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 151, “Inventory Costs.” This statement clarifies the accounting for abnormal amounts of idle facility expense, freight, handling costs and wasted material (spoilage), and requires that these items be recognized as current-period charges. In addition, SFAS No. 151 requires that the allocation of fixed production overhead to inventory be based on the normal capacity of the company’s manufacturing facilities. The company adopted SFAS No. 151 in the first quarter of fiscal year 2006. The adoption of SFAS No. 151 did not impact the company’s results of operations or financial position.
In December 2004, the FASB issued SFAS No. 123(R), “Share-Based Payment,” which requires compensation costs related to share-based payment transactions to be recognized in the financial statements. This statement also establishes fair value as the measurement objective for share-based payment transactions with employees. The company began expensing the fair value of stock options in fiscal year 2002. The company adopted the provisions of SFAS No. 123(R) in the first quarter of fiscal year 2006, which resulted primarily in changing the company’s method of accounting for retirement eligible employees and estimating forfeitures for unvested stock based compensation awards. Upon adoption, the company recognizes compensation expense associated with stock grants to retirement eligible employees during the year granted. Prior to adoption, the company expensed stock compensation granted to retirement eligible employees ratably over the respective vesting period. Also upon adoption the company reclassified amounts recorded in unearned compensation (a contra-equity account) to additional paid-in-capital in the consolidated balance sheet. The adoption of SFAS No. 123(R) did not have a material impact on the company’s results of operations or financial position.
In December 2004, the FASB issued Staff Position (FSP) FAS 109-2, “Accounting and Disclosure Guidance for the Foreign Repatriation Provision within the American Jobs Creation Act of 2004.” The American Jobs Creation Act of 2004 (the Act) introduced a special limited-time dividends received deduction on the repatriation of certain foreign earnings to a U.S. taxpayer. The FSP addresses whether a company should be allowed additional time beyond the financial reporting period in which the Act was enacted, to evaluate the effects of the Act on the company’s plan for reinvestment or repatriation of foreign earnings for purposes of applying SFAS No. 109. The company is still evaluating the repatriation provisions of the Act for purposes of applying SFAS No. 109. This evaluation is expected to be completed in fiscal year 2006. The range of income tax effects of such repatriation cannot be reasonably estimated at this time.
4. | Discontinued Operations |
In December 2005, the company sold its light vehicle ride control business located in Asti, Italy and recorded an after-tax loss on the sale of $2 million. This sale, along with the previous divestiture of the company’s 75-percent shareholdings in AP Amortiguadores, S.A. (APA) in the second quarter of fiscal year 2004, substantially completes the company’s plan to exit its LVS ride control business (ride control). Therefore, ride control is presented as discontinued operations in the consolidated statement of income for the three months ended December 31, 2005 and all prior periods have been restated to reflect this presentation. Ride control provides shock absorbers, struts, ministruts, and corner modules to the light vehicle industry. The company previously expected to close the ride control business in Asti, Italy during fiscal year 2006 and recorded approximately $31 million of restructuring costs in fiscal year 2005 related to the expected closure. These costs included $16 million of employee termination benefits and $15 million of asset impairment charges. As a result of the sale of the ride control operations located in Asti, Italy, in the first quarter of fiscal year 2006, the company reversed $12 million of restructuring costs related to employee termination benefits that will no longer be paid by the company.
In October 2004, the company announced plans to divest its LVA business. This plan is part of the company’s long-term strategy to focus on core competencies and support its global light vehicle systems original equipment manufacturing (OEM) customers and its commercial vehicle systems OEM and aftermarket customers. LVA supplies exhaust, ride control, motion control and filter products, as well as other automotive parts to the passenger car, light truck and sport utility vehicle aftermarket. LVA is reported as discontinued operations in the consolidated statement of income. The assets and liabilities of LVA are held for sale and included in assets and liabilities of discontinued operations in the consolidated balance sheet. Accordingly, net property and amortizable intangible assets are no longer being depreciated or amortized. In the fourth quarter of fiscal year 2005, management concluded that it is more likely that LVA’s North American businesses will be sold individually rather than as a whole. Our previous strategy was to sell the LVA North American business as a whole. The company expects to complete the divestiture of LVA in fiscal year 2006.
6
ARVINMERITOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
In November 2005, the company sold its 39-percent equity ownership interest in its light vehicle aftermarket joint venture, Purolator India. Cash proceeds from the sale were $9 million, resulting in a $2 million after-tax gain, which is recorded in income from discontinued operations.
In order to reduce costs and improve profitability, LVA recorded restructuring costs of $2 million in the first quarter of fiscal year 2006. At December 31 and September 30, 2005, $2 million of restructuring reserves primarily related to unpaid employee termination benefits are included in liabilities of discontinued operations.
In November 2004, the company completed the sale of its coil coating business, Roll Coater, Inc., a wholly owned subsidiary which supplied coil coating services and other value-added metal processing services to the transportation, appliance, heating and cooling, construction, doors and other industries. Cash proceeds from the sale were $163 million, resulting in a $2 million after-tax gain, which is recorded in income from discontinued operations.
Results of the discontinued operations are summarized as follows (in millions):
|
| Three Months Ended |
| ||||
|
| December 31, |
| ||||
|
| 2005 |
| 2004 |
| ||
Sales: |
|
|
|
|
|
|
|
Light Vehicle Aftermarket |
| $ | 194 |
| $ | 204 |
|
Ride Control |
|
| 15 |
|
| 23 |
|
Roll Coater |
|
| — |
|
| 28 |
|
Total Sales |
| $ | 209 |
| $ | 255 |
|
Income before income taxes |
| $ | 11 |
| $ | 7 |
| |||
Provision for income taxes |
|
| (4 | ) |
| (3 | ) | |||
Income from discontinued operations |
| $ | 7 |
| $ | 4 |
| |||
|
|
|
|
|
|
|
|
|
|
|
Assets and liabilities of the discontinued operations are summarized as follows (in millions):
|
| December 31, |
| September 30, |
| ||
|
| 2005 |
| 2005 |
| ||
|
|
|
|
|
|
|
|
Current assets |
| $ | 362 |
| $ | 367 |
|
Net property |
|
| 141 |
|
| 136 |
|
Other assets |
|
| 22 |
|
| 28 |
|
Assets of discontinued operations |
| $ | 525 |
| $ | 531 |
|
|
|
|
|
|
|
|
|
Current liabilities |
| $ | 181 |
| $ | 201 |
|
Other liabilities |
|
| 31 |
|
| 33 |
|
Minority interests |
|
| 9 |
|
| 8 |
|
Liabilities of discontinued operations |
| $ | 221 |
| $ | 242 |
|
7
ARVINMERITOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
5. | Restructuring Costs |
The company recorded restructuring charges of $1 million and $10 million during the first three months of fiscal year 2006 and 2005, respectively. At December 31 and September 30, 2005, $37 million and $56 million, respectively, of restructuring reserves primarily related to unpaid employee termination benefits remained in the consolidated balance sheet.
Fiscal year 2005 actions: In the second quarter of fiscal year 2005, the company announced the elimination of approximately 400 to 500 salaried positions and approved plans to consolidate, downsize, close or sell certain underperforming businesses or facilities. These actions are intended to align capacity with industry conditions, utilize assets more efficiently, and improve operations. In addition to the elimination of 400 to 500 salaried employees across the entire company, these actions will result in the reduction of an additional 300 salaried and 1,550 hourly employees at 11 global facilities that have been or will be closed, primarily in the LVS business segment. The total estimated cost of these actions is approximately $135 million, of which approximately $110 million will be cash costs. Estimated costs include employee severance and other exit costs, as well as asset impairments. Asset impairment charges relate to manufacturing facilities that will be closed or sold and machinery and equipment that have become idle and obsolete as a result of the facility closures. Total restructuring costs recorded related to these actions is $90 million as of December 31, 2005, which includes $60 million of employee termination benefits, $26 million of asset impairment charges and $4 million of other closure costs. Also included in these costs is a $12 million reversal of restructuring costs in the first quarter of fiscal year 2006 related to the sale of the company’s ride control business in Asti, Italy. This reversal is recorded in discontinued operations in the consolidated statement of income (see Note 4). The company expects to complete the majority of these restructuring actions and record the remaining costs by December 2006.
During fiscal year 2005, Meritor Suspensions Systems Company (MSSC), a 57-percent owned consolidated joint venture of the company, closed its Sheffield, England, stabilizer bar facility. The LVS business segment recorded restructuring and other exit costs of approximately $9 million related to this action, of which $5 million was recorded in the first quarter of fiscal year 2005. This included employee termination and other exit costs of approximately $2 million and asset impairment charges of $3 million. The employee termination costs related to a reduction of approximately 10 salaried and 125 hourly employees.
LVS also recorded $5 million of restructuring costs for previously approved employee terminations and other expenses during the first quarter of fiscal year 2005. These costs related to a reduction in workforce in the company’s operations in Spain and the consolidation of two facilities in Brazil. These actions resulted in the reduction of 10 salaried and 230 hourly employees.
The changes in the restructuring reserves for the three months ended December 31, 2005 are as follows (in millions):
|
| Employee |
| |
|
| Termination |
| |
|
| Benefits |
| |
Balance at September 30, 2005 |
| $ | 56 |
|
Activity during the period: |
|
|
|
|
Charges to expense |
|
| 1 |
|
Ride control reversal |
|
| (12 | ) |
Cash payments |
|
| (8 | ) |
Balance at December 31, 2005 |
| $ | 37 |
|
8
ARVINMERITOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
6. | Acquisitions and Divestitures |
In October 2005, the company completed the sale of certain assets of its commercial vehicle off-highway brake business for cash proceeds of approximately $39 million and recognized a pre-tax gain on the sale of $23 million. The sale includes equipment and certain assets from manufacturing facilities in York, South Carolina and Cwmbran, U.K. The divestiture of the off-highway brakes operation is aligned with the company's strategy to focus on its core products. These operations had sales of approximately $60 million in fiscal year 2005.
In December 2004, the company completed the divestiture of its LVS Columbus, Indiana automotive stamping and components manufacturing business and recognized a pre-tax gain on the sale of $4 million. This divestiture is part of the company’s plan to rationalize its operations and focus on its core automotive businesses.
On October 4, 2004, the company formed two joint ventures in France with AB Volvo to manufacture and distribute axles. The company acquired its 51-percent interest for a purchase price of €19 million ($25 million). Accordingly, beginning in the first quarter of fiscal year 2005, the results of operations and financial position of these joint ventures are consolidated by the company. The company has an option to purchase the remaining 49-percent interest in one of the joint ventures beginning in the first quarter of fiscal year 2008 for €16 million ($19 million) plus interest at EURIBOR rates, plus a margin. This option to purchase the minority interest is essentially a financing arrangement as the minority shareholder does not participate in any profits or losses of the joint venture. Therefore, this is recorded as a long-term obligation of the company and included in Other Liabilities (see Note 12). Accordingly, no minority interest is recognized for the 49-percent interest in this joint venture. The company recorded $4 million of goodwill associated with the purchase price allocation. In September 2005, as part of the purchase agreement, the company purchased approximately $5 million of additional machinery and equipment from AB Volvo.
7. | Accounts Receivable Securitization and Factoring |
The company participates in a U.S. accounts receivable securitization program to enhance financial flexibility and lower interest costs. In September 2005, the company entered into a new $250 million accounts receivable securitization arrangement. Under the new arrangement, the company sells substantially all of the trade receivables of certain U.S. subsidiaries to ArvinMeritor Receivables Corporation (ARC), a wholly owned, special purpose subsidiary. ARC funds these purchases with borrowings under a loan agreement with a bank. Amounts outstanding under this agreement are collateralized by eligible receivables purchased by ARC and are reported as short-term debt in the consolidated balance sheet (see Note 13). As of December 31, 2005 and September 30, 2005, the company had utilized $88 million and $112 million, respectively, of this accounts receivable securitization facility. Borrowings under this arrangement are collateralized by approximately $306 million of receivables held at ARC at December 31, 2005.
Prior to September 2005 the company participated in an accounts receivable securitization program wherein ARC entered into an agreement to sell an undivided interest in up to $250 million of eligible receivables to a bank conduit that funded its purchases through the issuance of commercial paper. The receivables under this program were sold at fair market value and excluded from the consolidated balance sheet. A discount on the sale, included in interest expense, net and other, of $1 million was recorded for the three months ended December 31, 2004. The company did not have a retained interest in the receivables sold, but did perform collection and administrative functions. The gross amount of proceeds received from the sale of receivables under these programs was $118 million for the three months ended December 31, 2004.
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 December 31, 2005, the company was in compliance with all covenants.
In addition, several of the company’s European subsidiaries factor eligible accounts receivable with financial institutions. These receivables are factored without recourse to the company and are excluded from accounts receivable. The amount of factored receivables excluded from accounts receivable was $60 million and $23 million at December 31, 2005 and September 30, 2005, respectively.
9
ARVINMERITOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
8. | Inventories |
Inventories are stated at the lower of cost (using first-in, first-out (FIFO) or average cost methods) or market (determined on the basis of estimated realizable values) and are summarized as follows (in millions):
|
| December 31, |
| September 30, |
| ||
|
| 2005 |
| 2005 |
| ||
Finished goods |
| $ | 144 |
| $ | 143 |
|
Work in process |
|
| 165 |
|
| 177 |
|
Raw materials, parts and supplies |
|
| 241 |
|
| 221 |
|
Total |
| $ | 550 |
| $ | 541 |
|
9. | Other Current Assets |
Other current assets are summarized as follows (in millions):
|
| December 31, |
| September 30, |
| ||
|
| 2005 |
| 2005 |
| ||
|
|
|
|
|
|
|
|
Current deferred income tax assets |
| $ | 112 |
| $ | 112 |
|
Customer reimbursable tooling and engineering |
|
| 54 |
|
| 69 |
|
Asbestos-related recoveries (see Note 16) |
|
| 10 |
|
| 13 |
|
Assets held for sale |
|
| 9 |
|
| 11 |
|
Prepaid and other |
|
| 71 |
|
| 51 |
|
Other current assets |
| $ | 256 |
| $ | 256 |
|
Costs incurred for tooling and engineering, principally for light vehicle products, for which customer reimbursement is contractually guaranteed, are classified as customer reimbursable tooling and engineering. These costs are billed to the customer based on the terms of the contract. Provisions for losses are recorded at the time management expects costs to exceed anticipated customer reimbursements.
The company records certain assets as held for sale. These assets primarily relate to land and buildings that have been previously closed through restructuring and other rationalization actions.
10
ARVINMERITOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
10. | Other Assets |
Other Assets are summarized as follows (in millions):
|
| December 31, |
| September 30, |
| ||
|
| 2005 |
| 2005 |
| ||
Non-current deferred income tax assets |
| $ | 565 |
| $ | 575 |
|
Investments in non-consolidated joint ventures |
|
| 118 |
|
| 114 |
|
Long-term receivables |
|
| 36 |
|
| 36 |
|
Prepaid pension costs |
|
| 24 |
|
| 26 |
|
Asbestos-related recoveries (see Note 16) |
|
| 25 |
|
| 22 |
|
Capitalized software costs, net |
|
| 28 |
|
| 30 |
|
Patents, licenses and other intangible assets (less accumulated |
|
|
|
|
|
|
|
amortization: $5 at December 31 and September 30, 2005) |
|
| 22 |
|
| 23 |
|
Other |
|
| 57 |
|
| 60 |
|
Other assets |
| $ | 875 |
| $ | 886 |
|
In accordance with Statement of Position (SOP) 98-1, “Accounting for the Costs of Computer Software Developed or Obtained for Internal Use,” costs relating to internally developed or purchased software in the preliminary project stage and the post-implementation stage are expensed as incurred. Costs in the application development stage that meet the criteria for capitalization are capitalized and amortized using the straight-line basis over the economic useful life of the software.
The company’s trademarks, which were determined to have an indefinite life, are not amortized. Patents, licenses and other intangible assets are amortized over their contractual or estimated useful lives, as appropriate. The company anticipates amortization expense for patents, licenses and other intangible assets of approximately $2 million for fiscal year 2006, $1 million in fiscal year 2007 and $1 million total for fiscal years 2008 through 2010.
11. | Other Current Liabilities |
Other current liabilities are summarized as follows (in millions):
|
| December 31, |
| September 30, |
| ||
|
| 2005 |
| 2005 |
| ||
|
|
|
|
|
|
|
|
Compensation and benefits |
| $ | 187 |
| $ | 224 |
|
Income taxes |
|
| 152 |
|
| 164 |
|
Product warranties |
|
| 50 |
|
| 55 |
|
Taxes other than income taxes |
|
| 35 |
|
| 33 |
|
Current deferred income tax liabilities |
|
| 21 |
|
| 21 |
|
Asbestos-related liabilities (see Note 16) |
|
| 14 |
|
| 16 |
|
Interest |
|
| 31 |
|
| 11 |
|
Restructuring |
|
| 37 |
|
| 56 |
|
Environmental |
|
| 8 |
|
| 8 |
|
Other |
|
| 83 |
|
| 79 |
|
Other current liabilities |
| $ | 618 |
| $ | 667 |
|
11
ARVINMERITOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The company’s CVS segment records product warranty costs at the time of shipment of products to customers. Warranty reserves are primarily based on factors that include past claims experience, sales history, product manufacturing and engineering changes and industry developments. Liabilities for product recall campaigns are recorded at the time the company’s obligation is known and can be reasonably estimated. Product warranties, including recall campaigns, not expected to be paid within one year are recorded as a non-current liability.
The company’s LVS segment records product warranty liabilities based on individual customer or warranty-sharing agreements. Product warranties are recorded for known warranty issues when amounts can be reasonably estimated.
A summary of the changes in product warranties is as follows (in millions):
|
| Three Months Ended |
| ||||||||
|
| December 31, |
| ||||||||
|
| 2005 |
| 2004 |
| ||||||
|
|
|
|
|
| ||||||
Total product warranties -- beginning of period |
| $ | 93 |
| $ | 90 |
| ||||
Accruals for product warranties |
|
| 11 |
|
| 12 |
| ||||
Payments |
|
| (12 | ) |
| (14 | ) | ||||
Change in estimates and other |
|
| (3 | ) |
| (2 | ) | ||||
Total product warranties – end of period |
|
| 89 |
|
| 86 |
| ||||
Less: Non-current product warranties (see Note 12) |
|
| (39 | ) |
| (30 | ) | ||||
Product warranties – current portion |
| $ | 50 |
| $ | 56 |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
In fiscal year 2004, the company, as a result of receiving the wrong grade of steel from one of its steel suppliers, manufactured and shipped certain products that were out of specification with various customers’ orders. The company was notified by a customer in fiscal year 2005 that it was initiating a field service campaign covering approximately 35,000 vehicles that were manufactured by the customer during the relevant time frame, prior to the aforementioned steel issue being identified, and would expect the company to reimburse it for the cost of the campaign. Associated with this matter, in fiscal year 2005, the company recorded a warranty charge of $4 million, net of probable recoveries from the supplier, which are recorded in receivables. In the first quarter of fiscal year 2006, the company reached a settlement with the supplier regarding the field service campaign. This settlement resulted in a $1 million reduction in the company’s recorded liability, net of recoveries, related to this matter. Additionally, in fiscal year 2005 another customer notified the company that it has initiated a field service campaign to replace an affected part in approximately 8,300 vehicles. Although this field service campaign is associated with the same steel issue and the same supplier, it relates to a different part on the vehicle. Based on the currently available facts and circumstances, the company does not believe it has a probable liability related to this matter.
12
ARVINMERITOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
12. | Other Liabilities |
Other Liabilities are summarized as follows (in millions):
|
| December 31, |
| September 30, |
| ||
|
| 2005 |
| 2005 |
| ||
|
|
|
|
|
|
|
|
Asbestos – related liabilities (see Note 16) |
| $ | 41 |
| $ | 38 |
|
Non-current deferred income tax liabilities |
|
| 23 |
|
| 23 |
|
Product warranties |
|
| 39 |
|
| 38 |
|
Environmental |
|
| 15 |
|
| 16 |
|
Long-term payable |
|
| 56 |
|
| 57 |
|
Fair value of interest rate swaps |
|
| 4 |
|
| — |
|
Other |
|
| 37 |
|
| 37 |
|
Other liabilities |
| $ | 215 |
| $ | 209 |
|
13. | Long-Term Debt |
Long-Term Debt, net of discount where applicable, is summarized as follows (in millions):
|
| December 31, |
| September 30, |
| ||
|
| 2005 |
| 2005 |
| ||
6 5/8 percent notes due 2007 |
| $ | 200 |
| $ | 200 |
|
6 3/4 percent notes due 2008 |
|
| 100 |
|
| 100 |
|
7 1/8 percent notes due 2009 |
|
| 91 |
|
| 91 |
|
6.8 percent notes due 2009 |
|
| 302 |
|
| 305 |
|
8 3/4 percent notes due 2012 |
|
| 380 |
|
| 380 |
|
8 1/8 percent notes due 2015 |
|
| 250 |
|
| 250 |
|
9.5 percent subordinated debentures due 2027 |
|
| 39 |
|
| 39 |
|
Bank revolving credit facilities |
|
| — |
|
| — |
|
Accounts receivable securitization |
|
| 88 |
|
| 112 |
|
Lines of credit and other |
|
| 73 |
|
| 88 |
|
Fair value adjustment of notes |
|
| 14 |
|
| 17 |
|
Subtotal |
|
| 1,537 |
|
| 1,582 |
|
Less: current maturities |
|
| (99 | ) |
| (131 | ) |
Long-term debt |
| $ | 1,438 |
| $ | 1,451 |
|
Debt Securities
In the first quarter of fiscal year 2006, the company purchased $3 million of the outstanding 6.8 percent notes on the open market at a discount.
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 December 31, 2005 the company had $150 million of debt securities available for issuance under this shelf registration.
13
ARVINMERITOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Subordinated Debentures
The company, through Arvin Capital I (the trust), a wholly owned finance subsidiary trust, issued 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 FIN 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.
Bank Revolving Credit Facilities
The company has a $900 million revolving credit facility that expires in 2008. Under the facility, borrowings are subject to interest based on quoted LIBOR rates plus a margin, and a facility fee, both of which are based upon the company’s credit rating. At December 31, 2005, the margin over the LIBOR rate was 150 basis points, and the facility fee was 37.5 basis points. Certain of the company’s domestic subsidiaries, as defined in the credit agreement, irrevocably and unconditionally guarantee amounts outstanding under the credit facility. The revolving credit facility includes a $150 million limit on the issuance of letters of credit. At December 31, 2005 and September 30, 2005, approximately $24 million and $23 million letters of credit, respectively, were issued.
The company, under the terms of an existing lease agreement, provided similar subsidiary guarantees for the benefit of the lessor, lenders and agent thereunder and voluntarily agreed to provide similar subsidiary guarantees for the benefit of the holders of the publicly-held notes outstanding under the company’s two indentures (see Note 19).
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 4.89 percent at December 31, 2005. Amounts outstanding under this agreement are reported as short-term debt in the consolidated balance sheet and are collateralized by $306 million of eligible receivables purchased and held by ARC at December 31, 2005.
Related Parties
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 December 31 and September 30, 2005.
14
ARVINMERITOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Interest Rate Swap Agreements
As of December 31, 2005, the company had interest rate swap agreements that effectively convert $221 million of the company’s 8-3/4 percent notes and $93 million of the 6.8 percent notes to variable interest rates. As of December 31, 2005, the fair value of the 8-3/4 percent swaps was a liability of $4 million and is included in Other Liabilities. The fair value of the 6.8 percent swaps was an asset of $1 million and is included in Other Assets. The fair value of the swaps was not material as of September 30, 2005. 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. The fair value adjustment of notes relates to previously terminated interest rate swaps and is amortized to earnings as a reduction of interest expense over the remaining life of the related debt. Under the terms of the swap agreements, the company receives a fixed rate of interest of 8.75 percent and 6.8 percent on notional amounts of $221 million and $93 million, respectively, and pays variable rates based on three-month LIBOR plus a weighted-average spread of 3.30 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.
The company classifies the cash flows associated with the interest rate swaps 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.
Leases
The company has entered into an agreement to lease certain manufacturing and administrative assets. Under the agreement, the assets are held by a variable interest entity. The variable interest entity’s purpose is to hold the manufacturing and administrative assets and lease such assets to the company. The company has determined that it has a variable interest in the variable interest entity, 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. The assets and liabilities of this variable interest entity are included in the company’s consolidated balance sheet at December 31, 2005 and September 30, 2005. Amounts outstanding under this agreement are collateralized by the $35 million of property and equipment being leased. The lease expires in December 2006 at which time the company will either extend the lease at market terms, or purchase the properties and extinguish its outstanding obligation. If the properties are purchased, the company expects to finance the purchase using its existing long-term revolving credit facility. Therefore amounts outstanding are included in long-term debt in the consolidated balance sheet. The company also has various other operating leasing arrangements that are not with variable interest entities.
Future minimum lease payments under this lease and other operating leases are $22 million in 2006, $17 million in 2007, $14 million in 2008, $11 million in 2009, $8 million in 2010 and $5 million thereafter.
Covenants
The bank revolving credit facilities require the company to maintain a total net debt to earnings before interest, taxes, depreciation and amortization (EBITDA) ratio no greater than 3.25x and a minimum fixed charge coverage ratio (EBITDA less capital expenditures to interest expense) no less than 1.50x. In addition, an operating lease requires the company to maintain financial ratios that are similar to those required under the company’s credit facilities. At December 31, 2005, the company was in compliance with all covenants.
15
ARVINMERITOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
14. | 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 13.
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 was no material impact to operating income associated with hedge ineffectiveness in the three months ended December 31, 2005 and 2004.
Amounts recorded in AOCI were not material at December 31, 2005. At September 30, 2005, $2 million of gains were recorded in AOCI. The company expects to reclassify amounts from AOCI to operating income during fiscal year 2006 as the forecasted hedged transactions are recognized in earnings.
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):
|
| December 31, 2005 |
| September 30, 2005 |
| |||||||||||||
|
| Carrying |
| Fair |
| Carrying |
| Fair |
| |||||||||
|
| Value |
| Value |
| Value |
| Value |
| |||||||||
Cash and cash equivalents |
| $ | 302 |
| $ | 302 |
| $ | 187 |
| $ | 187 |
| |||||
Interest rate swaps - asset |
|
| 1 |
|
| 1 |
|
| — |
|
| — |
| |||||
Foreign exchange contracts - asset |
|
| 2 |
|
| 2 |
|
| 4 |
|
| 4 |
| |||||
Interest rate swaps - liability |
|
| 4 |
|
| 4 |
|
| — |
|
| — |
| |||||
Foreign exchange contracts - liability |
|
| 2 |
|
| 2 |
|
| 2 |
|
| 2 |
| |||||
Short-term debt |
|
| 99 |
|
| 99 |
|
| 131 |
|
| 131 |
| |||||
Long-term debt |
|
| 1,438 |
|
| 1,376 |
|
| 1,451 |
|
| 1,416 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents — All highly liquid investments purchased with 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.
16
ARVINMERITOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
15. | Retirement Benefit Liabilities |
Retirement Benefit Liabilities consisted of the following (in millions):
|
| December 31, |
| September 30, |
| ||
|
| 2005 |
| 2005 |
| ||
Retiree medical liability |
| $ | 255 |
| $ | 263 |
|
Pension liability |
|
| 494 |
|
| 483 |
|
Other |
|
| 54 |
|
| 58 |
|
Subtotal |
|
| 803 |
|
| 804 |
|
Less: current portion (included in compensation and benefits) |
|
| (50 | ) |
| (50 | ) |
Retirement benefit liabilities |
| $ | 753 |
| $ | 754 |
|
The components of net periodic pension and retiree medical expense, including discontinued operations, for the three months ended December 31, are as follows:
|
| 2005 |
| 2004 |
| ||||||||||||||
|
| Pension |
| Retiree Medical |
| Pension |
| Retiree Medical |
| ||||||||||
Service cost |
| $ | 12 |
| $ | 1 |
| $ | 10 |
| $ | 1 |
| ||||||
Interest cost |
|
| 23 |
|
| 5 |
|
| 23 |
|
| 6 |
| ||||||
Assumed return on plan assets |
|
| (24 | ) |
| — |
|
| (23 | ) |
| — |
| ||||||
Amortization of prior service costs |
|
| 1 |
|
| (6 | ) |
| 2 |
|
| (6 | ) | ||||||
Recognition of transition asset |
|
| — |
|
| — |
|
| (1 | ) |
| — |
| ||||||
Recognized actuarial loss |
|
| 14 |
|
| 7 |
|
| 8 |
|
| 7 |
| ||||||
Total expense |
| $ | 26 |
| $ | 7 |
| $ | 19 |
| $ | 8 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 is 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 (UAW) and the United Steel Workers 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.
17
ARVINMERITOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
On December 22, 2005, the District Court issued an order granting a motion by the UAW for a preliminary injunction (the injunction). The order enjoins the company from implementing the changes to retiree health benefits that had been scheduled to become effective on January 1, 2006, and orders 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. Due to the uncertainty related to the ongoing lawsuits and since 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 partial rescission of the 2002 and 2004 plan amendments. 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 will result in higher interest cost, a component of retiree medical expense, of approximately $9 million. For accounting purposes, the company will begin recording the impact of the injunction in March 2006, 90 days after the December 22, 2005 measurement date, which is consistent with the 90-day lag between the company's normal plan measurement date of June 30th and its fiscal year-end. The company expects its retiree medical expense to increase by approximately $13 million in fiscal year 2006 and retiree medical benefit payments to increase approximately $10 million in fiscal year 2006 compared to previous estimates.
The company continues to believe it has meritorious defenses to these actions and plans to defend these suits vigorously. The ultimate outcome of these three class action lawsuits may result in future plan amendments. The impact of any future plan amendments cannot be currently estimated.
16. | 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 December 31, 2005 to be approximately $28 million, of which $10 million is recorded as a liability.
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 December 31, 2005 to be approximately $53 million, of which $13 million is recorded as a liability.
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 $6 million at December 31, 2005. The undiscounted estimate of these costs is approximately $11 million.
18
ARVINMERITOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 |
|
| (1 | ) |
| (2 | ) |
| (3 | ) |
Change in cost estimates |
|
| — |
|
| 2 |
|
| 2 |
|
Balance at December 31, 2005 |
| $ | 10 |
|
| 13 |
|
| 23 |
|
A portion of the environmental reserves is included in Other Current Liabilities (see Note 11), with the majority of the amounts recorded in Other Liabilities (see Note 12).
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.
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 61,900 and 61,700 pending asbestos-related claims at December 31, and September 30, 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):
|
| December 31, 2005 |
| September 30, 2005 |
| ||
Pending and future claims |
| $ | 47 |
| $ | 50 |
|
Shortfall and other |
|
| 8 |
|
| 4 |
|
Asbestos-related reserves |
| $ | 55 |
| $ | 54 |
|
|
|
|
|
|
|
|
|
Asbestos-related recoveries |
| $ | 35 |
| $ | 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 9, 10, 11 and 12).
19
ARVINMERITOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Prior to February 2001, Maremont participated in the Center for Claims Resolution (“CCR”) and shared with other CCR members in the payments 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 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. Billings to insurance companies for indemnity and defense costs of resolved cases were $1 million and $3 million in the three months ended December 31, 2005 and 2004, respectively.
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 December 31, 2005.
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 $35 million to $54 million. After consultation with Bates White, Maremont determined that as of December 31, 2005 the most likely and probable liability for pending and future claims over the next four years is $47 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. Additionally, defense and processing costs in Madison County, Illinois will be reduced from current levels; |
• | 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 plaintiff’s 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. |
20
ARVINMERITOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 the three months ended December 31, 2005 and 2004.
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 $35 million. Receivables for policies in dispute are not recorded. Certain insurance policies have been settled in cash prior to the ultimate settlement of related asbestos liabilities. Amounts received from insurance settlements are either recorded in liabilities for shortfall and other or recorded as a reduction to specific insurance receivables. The difference between the estimated liability and the insurance receivable is related to proceeds received from settled insurance policies.
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 automotive 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.
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.
21
ARVINMERITOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
ArvinMeritor has not established reserves for pending or future claims or for corresponding recoveries for Rockwell-legacy asbestos-related claims and defense and indemnity costs related to these claims are expensed as incurred. Reserves have not been established because management cannot reasonably estimate the ultimate liabilities for these costs, primarily because the company does not have a sufficient history of claims settlement and defense costs 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. 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.
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.
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. The estimated fair value of this guarantee is not significant, and therefore, no liability was recorded.
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.
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.
Litigation associated with the company’s retiree medical plans is discussed in Note 15.
22
ARVINMERITOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
17. | Comprehensive Income |
On an annual basis, disclosure of comprehensive income is incorporated into the Consolidated Statement of Shareowners’ Equity. This statement is not presented on a quarterly basis. Comprehensive income includes net income and components of other comprehensive income, such as foreign currency translation adjustments, and unrealized gains and losses on derivatives and equity securities.
Comprehensive income is summarized as follows (in millions):
|
| Three Months Ended |
| ||||
|
| December 31, |
| ||||
|
| 2005 |
| 2004 |
| ||
Net income |
| $ | 34 |
| $ | 18 |
|
Foreign currency translation adjustments |
|
| (27 | ) |
| 151 |
|
Unrealized gain (loss) on foreign exchange contracts, net of tax |
|
| (2 | ) |
| 10 |
|
Comprehensive income |
| $ | 5 |
| $ | 179 |
|
18. | Business Segment Information |
The company has two reportable operating segments: Light Vehicle Systems (LVS) and Commercial Vehicle Systems (CVS). LVS is a major supplier of air and emission systems, aperture systems (roof and door systems), and undercarriage systems (suspension and wheel products) for passenger cars, light trucks and sport utility vehicles to original equipment manufacturers (OEMs). The company’s ride control business is presented as discontinued operations in the consolidated statement of income for the three months ended December 31, 2005 and prior period segment information has been restated to reflect this presentation. CVS supplies drivetrain systems and components, including axles and drivelines, braking and suspension systems, and exhaust 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 and Other are reported in discontinued operations.
The company uses operating income as the primary basis for the Chief Operating Decision Maker (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 accounting principles generally accepted in the United States of America (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.
23
ARVINMERITOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Segment information is summarized as follows (in millions):
|
| Three Months Ended |
| ||||
|
| December 31, |
| ||||
|
| 2005 |
| 2004 |
| ||
Sales: |
|
|
|
|
|
|
|
Light Vehicle Systems |
| $ | 1,150 |
| $ | 1,160 |
|
Commercial Vehicle Systems |
|
| 936 |
|
| 907 |
|
Total sales |
| $ | 2,086 |
| $ | 2,067 |
|
Operating Income (Loss): |
|
|
|
|
|
|
|
Light Vehicle Systems |
| $ | (3 | ) | $ | 3 |
|
Commercial Vehicle Systems |
|
| 67 |
|
| 37 |
|
Operating income |
|
| 64 |
|
| 40 |
|
Equity in earnings of affiliates |
|
| 7 |
|
| 6 |
|
Interest expense, net and other |
|
| (32 | ) |
| (28 | ) |
Income before income taxes |
|
| 39 |
|
| 18 |
|
Provision for income taxes |
|
| (10 | ) |
| (6 | ) |
Minority interests |
|
| (2 | ) |
| 2 |
|
Income from continuing operations |
| $ | 27 |
| $ | 14 |
|
A summary of the changes in the carrying value of goodwill for the three months ended December 31, 2005, is as follows (in millions):
|
| LVS |
| CVS |
| Total |
| |||
Balance at September 30, 2005 |
| $ | 368 |
| $ | 433 |
| $ | 801 |
|
Goodwill allocated to sale of off-highway brakes |
|
| — |
|
| (7 | ) |
| (7 | ) |
Foreign currency translation |
|
| (4 | ) |
| (3 | ) |
| (7 | ) |
Balance at December 31, 2005 |
| $ | 364 |
|
| 423 |
|
| 787 |
|
19. | Supplemental Guarantor Condensed Consolidating Financial Statements |
Under the company’s $900 million revolving credit facility, certain domestic wholly-owned subsidiaries, as defined in the credit agreement, irrevocably and unconditionally guarantee amounts outstanding under the facility. Similar subsidiary guarantees were provided for the benefit of the holders of the publicly-held notes outstanding under the company’s two indentures (see Note 13).
In lieu of providing separate audited financial statements for the Guarantors, 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.
24
ARVINMERITOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Condensed Consolidating Statement of Income
(In millions)
|
| Three Months Ended December 31, 2005 |
| |||||||||||||
|
| Parent |
| Guarantors |
| Non-Guarantors |
| Elims |
| Consolidated |
| |||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
External |
| $ | — |
| $ | 805 |
| $ | 1,281 |
| $ | — |
| $ | 2,086 |
|
Subsidiaries |
|
| — |
|
| 30 |
|
| 89 |
|
| (119 | ) |
| — |
|
Total sales |
|
| — |
|
| 835 |
|
| 1,370 |
|
| (119 | ) |
| 2,086 |
|
Cost of sales |
|
| (5 | ) |
| (787 | ) |
| (1,284 | ) |
| 119 |
|
| (1,957 | ) |
GROSS MARGIN |
|
| (5 | ) |
| 48 |
|
| 86 |
|
| — |
|
| 129 |
|
Selling, general and administrative |
|
| (16 | ) |
| (36 | ) |
| (35 | ) |
| — |
|
| (87 | ) |
Gain on divestitures |
|
| — |
|
| 17 |
|
| 6 |
|
| — |
|
| 23 |
|
Restructuring costs |
|
| — |
|
| (2 | ) |
| 1 |
|
| — |
|
| (1 | ) |
OPERATING INCOME (LOSS) |
|
| (21 | ) |
| 27 |
|
| 58 |
|
| — |
|
| 64 |
|
Equity in earnings of affiliates |
|
| 1 |
|
| 4 |
|
| 2 |
|
| — |
|
| 7 |
|
Other income (expense), net |
|
| 15 |
|
| (159 | ) |
| 144 |
|
| — |
|
| — |
|
Interest expense, net and other |
|
| (29 | ) |
| (4 | ) |
| 1 |
|
| — |
|
| (32 | ) |
INCOME (LOSS) BEFORE INCOME TAXES |
|
| (34 | ) |
| (132 | ) |
| 205 |
|
| — |
|
| 39 |
|
Benefit (provision) for income taxes |
|
| 12 |
|
| 72 |
|
| (94 | ) |
| — |
|
| (10 | ) |
Minority interests |
|
| — |
|
| — |
|
| (2 | ) |
| — |
|
| (2 | ) |
INCOME (LOSS) FROM CONTINUING OPERATIONS |
|
| (22 | ) |
| (60 | ) |
| 109 |
|
| — |
|
| 27 |
|
INCOME FROM DISCONTINUED OPERATIONS |
|
| — |
|
| 1 |
|
| 6 |
|
| — |
|
| 7 |
|
Equity in net income of subsidiaries |
|
| 56 |
|
| 115 |
|
| — |
|
| (171 | ) |
| — |
|
NET INCOME (LOSS) |
| $ | 34 |
| $ | 56 |
| $ | 115 |
| $ | (171 | ) | $ | 34 |
|
25
ARVINMERITOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Condensed Consolidating Statement of Income
(In millions)
|
| Three Months Ended December 31, 2004 |
| |||||||||||||
|
| Parent |
| Guarantors |
| Non-Guarantors |
| Elims |
| Consolidated |
| |||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
External |
| $ | — |
| $ | 750 |
| $ | 1,317 |
| $ | — |
| $ | 2,067 |
|
Subsidiaries |
|
| — |
|
| 45 |
|
| 110 |
|
| (155 | ) |
| — |
|
Total sales |
|
| — |
|
| 795 |
|
| 1,427 |
|
| (155 | ) |
| 2,067 |
|
Cost of sales |
|
| (4 | ) |
| (748 | ) |
| (1,336 | ) |
| 155 |
|
| (1,933 | ) |
GROSS MARGIN |
|
| (4 | ) |
| 47 |
|
| 91 |
|
| — |
|
| 134 |
|
Selling, general and administrative |
|
| (17 | ) |
| (29 | ) |
| (37 | ) |
| — |
|
| (83 | ) |
Customer bankruptcies |
|
| — |
|
| — |
|
| (5 | ) |
| — |
|
| (5 | ) |
Restructuring costs |
|
| — |
|
| — |
|
| (10 | ) |
| — |
|
| (10 | ) |
Gain on divestitures |
|
| — |
|
| 4 |
|
| — |
|
| — |
|
| 4 |
|
OPERATING INCOME (LOSS) |
|
| (21 | ) |
| 22 |
|
| 39 |
|
| — |
|
| 40 |
|
Equity in earnings of affiliates |
|
| — |
|
| 2 |
|
| 4 |
|
| — |
|
| 6 |
|
Other income (expense), net |
|
| 14 |
|
| (4 | ) |
| (10 | ) |
| — |
|
| — |
|
Interest expense, net and other |
|
| (27 | ) |
| (1 | ) |
| — |
|
| — |
|
| (28 | ) |
INCOME (LOSS) BEFORE INCOME TAXES |
|
| (34 | ) |
| 19 |
|
| 33 |
|
| — |
|
| 18 |
|
Benefit (provision) for income taxes |
|
| 13 |
|
| (8 | ) |
| (11 | ) |
| — |
|
| (6 | ) |
Minority interests |
|
| — |
|
| — |
|
| 2 |
|
| — |
|
| 2 |
|
INCOME (LOSS) FROM CONTINUING OPERATIONS |
|
| (21 | ) |
| 11 |
|
| 24 |
|
| — |
|
| 14 |
|
INCOME FROM DISCONTINUED OPERATIONS |
|
| — |
|
| 1 |
|
| 3 |
|
| — |
|
| 4 |
|
Equity in net income of subsidiaries |
|
| 39 |
|
| 28 |
|
| — |
|
| (67 | ) |
| — |
|
NET INCOME (LOSS) |
| $ | 18 |
| $ | 40 |
| $ | 27 |
| $ | (67 | ) | $ | 18 |
|
26
ARVINMERITOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Condensed Consolidating Balance Sheet
(In millions)
|
| December 31, 2005 |
| |||||||||||||
|
| Parent |
| Guarantors |
| Non-Guarantors |
| Elims |
| Consolidated |
| |||||
CURRENT ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
| $ | 45 |
| $ | — |
| $ | 257 |
| $ | — |
| $ | 302 |
|
Receivables, net |
|
| 1 |
|
| 114 |
|
| 1,337 |
|
| — |
|
| 1,452 |
|
Inventories |
|
| — |
|
| 224 |
|
| 326 |
|
| — |
|
| 550 |
|
Other current assets |
|
| 30 |
|
| 81 |
|
| 145 |
|
| — |
|
| 256 |
|
Assets of discontinued operations |
|
| — |
|
| 156 |
|
| 369 |
|
| — |
|
| 525 |
|
TOTAL CURRENT ASSETS |
|
| 76 |
|
| 575 |
|
| 2,434 |
|
| — |
|
| 3,085 |
|
NET PROPERTY |
|
| 36 |
|
| 291 |
|
| 655 |
|
| — |
|
| 982 |
|
GOODWILL |
|
| — |
|
| 311 |
|
| 476 |
|
| — |
|
| 787 |
|
OTHER ASSETS |
|
| 459 |
|
| 70 |
|
| 346 |
|
| — |
|
| 875 |
|
INVESTMENTS IN SUBSIDIARIES |
|
| 3,520 |
|
| 1,176 |
|
| — |
|
| (4,696 | ) |
| — |
|
TOTAL ASSETS |
| $ | 4,091 |
| $ | 2,423 |
| $ | 3,911 |
| $ | (4,696 | ) | $ | 5,729 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT LIABILITIES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term debt |
| $ | — |
| $ | 7 |
| $ | 92 |
| $ | — |
| $ | 99 |
|
Accounts payable |
|
| 14 |
|
| 458 |
|
| 976 |
|
| — |
|
| 1,448 |
|
Other current liabilities |
|
| 232 |
|
| 93 |
|
| 293 |
|
| — |
|
| 618 |
|
Liabilities of discontinued operations |
|
| — |
|
| 124 |
|
| 97 |
|
| — |
|
| 221 |
|
TOTAL CURRENT LIABILITIES |
|
| 246 |
|
| 682 |
|
| 1,458 |
|
| — |
|
| 2,386 |
|
LONG-TERM DEBT |
|
| 1,411 |
|
| — |
|
| 27 |
|
| — |
|
| 1,438 |
|
RETIREMENT BENEFITS |
|
| 533 |
|
| — |
|
| 220 |
|
| — |
|
| 753 |
|
INTERCOMPANY PAYABLE (RECEIVABLE) |
|
| 974 |
|
| (1,746 | ) |
| 772 |
|
| — |
|
| — |
|
OTHER LIABILITIES |
|
| 50 |
|
| 60 |
|
| 105 |
|
| — |
|
| 215 |
|
MINORITY INTERESTS |
|
| — |
|
| — |
|
| 60 |
|
| — |
|
| 60 |
|
SHAREOWNERS’ EQUITY |
|
| 877 |
|
| 3,427 |
|
| 1,269 |
|
| (4,696 | ) |
| 877 |
|
TOTAL LIABILITIES AND SHAREOWNERS’ EQUITY |
| $ | 4,091 |
| $ | 2,423 |
| $ | 3,911 |
| $ | (4,696 | ) | $ | 5,729 |
|
27
ARVINMERITOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 |
|
| 136 |
|
| 1,517 |
|
| — |
|
| 1,655 |
|
Inventories |
|
| — |
|
| 203 |
|
| 338 |
|
| — |
|
| 541 |
|
Other current assets |
|
| 30 |
|
| 81 |
|
| 145 |
|
| — |
|
| 256 |
|
Assets of discontinued operations |
|
| — |
|
| 162 |
|
| 369 |
|
| — |
|
| 531 |
|
TOTAL CURRENT ASSETS |
|
| 95 |
|
| 582 |
|
| 2,493 |
|
| — |
|
| 3,170 |
|
NET PROPERTY |
|
| 37 |
|
| 296 |
|
| 680 |
|
| — |
|
| 1,013 |
|
GOODWILL |
|
| — |
|
| 315 |
|
| 486 |
|
| — |
|
| 801 |
|
OTHER ASSETS |
|
| 461 |
|
| 70 |
|
| 355 |
|
| — |
|
| 886 |
|
INVESTMENTS IN SUBSIDIARIES |
|
| 3,487 |
|
| 1,163 |
|
| — |
|
| (4,650 | ) |
| — |
|
TOTAL ASSETS |
| $ | 4,080 |
| $ | 2,426 |
| $ | 4,014 |
| $ | (4,650 | ) | $ | 5,870 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT LIABILITIES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term debt |
| $ | — |
| $ | 14 |
| $ | 117 |
| $ | — |
| $ | 131 |
|
Accounts payable |
|
| 25 |
|
| 488 |
|
| 970 |
|
| — |
|
| 1,483 |
|
Other current liabilities |
|
| 219 |
|
| 120 |
|
| 328 |
|
| — |
|
| 667 |
|
Liabilities of discontinued operations |
|
| — |
|
| 138 |
|
| 104 |
|
| — |
|
| 242 |
|
TOTAL CURRENT LIABILITIES |
|
| 244 |
|
| 760 |
|
| 1,519 |
|
| — |
|
| 2,523 |
|
LONG-TERM DEBT |
|
| 1,418 |
|
| — |
|
| 33 |
|
| — |
|
| 1,451 |
|
RETIREMENT BENEFITS |
|
| 533 |
|
| — |
|
| 221 |
|
| — |
|
| 754 |
|
INTERCOMPANY PAYABLE (RECEIVABLE) |
|
| 965 |
|
| (1,791 | ) |
| 826 |
|
| — |
|
| — |
|
OTHER LIABILITIES |
|
| 45 |
|
| 61 |
|
| 103 |
|
| — |
|
| 209 |
|
MINORITY INTERESTS |
|
| — |
|
| — |
|
| 58 |
|
| — |
|
| 58 |
|
SHAREOWNERS’ EQUITY |
|
| 875 |
|
| 3,396 |
|
| 1,254 |
|
| (4,650 | ) |
| 875 |
|
TOTAL LIABILITIES AND SHAREOWNERS’ EQUITY |
| $ | 4,080 |
| $ | 2,426 |
| $ | 4,014 |
| $ | (4,650 | ) | $ | 5,870 |
|
28
ARVINMERITOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Condensed Consolidating Statement of Cash Flows
(In millions)
|
| Three Months Ended December 31, 2005 |
| |||||||||||||
|
| Parent |
| Guarantors |
| Non-Guarantors |
| Elims |
| Consolidated |
| |||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES |
| $ | 86 |
| $ | 8 |
| $ | 57 |
| $ | — |
| $ | 151 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INVESTING ACTIVITIES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures |
|
| — |
|
| (7 | ) |
| (30 | ) |
| — |
|
| (37 | ) |
Acquisitions of businesses and investments |
|
| — |
|
| — |
|
| (1 | ) |
| — |
|
| (1 | ) |
Proceeds from disposition of property and businesses |
|
| — |
|
| — |
|
| 39 |
|
| — |
|
| 39 |
|
Net investing cash flows provided by discontinued operations |
|
| — |
|
| 6 |
|
| 1 |
|
| — |
|
| 7 |
|
CASH PROVIDED BY INVESTING ACTIVITIES |
|
| — |
|
| (1 | ) |
| 9 |
|
| — |
|
| 8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FINANCING ACTIVITIES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in debt |
|
| (3 | ) |
| (7 | ) |
| (31 | ) |
| — |
|
| (41 | ) |
Intercompany advances |
|
| (94 | ) |
| — |
|
| 94 |
|
| — |
|
| — |
|
Cash dividends |
|
| (7 | ) |
| — |
|
| — |
|
| — |
|
| (7 | ) |
Net financing cash flows provided by discontinued operations |
|
| — |
|
| — |
|
| 2 |
|
| — |
|
| 2 |
|
CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES |
|
| (104 | ) |
| (7 | ) |
| 65 |
|
| — |
|
| (46 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EFFECT OF FOREIGN CURRENCY ON CASH |
|
| — |
|
| — |
|
| 2 |
|
| — |
|
| 2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CHANGE IN CASH AND CASH EQUIVALENTS |
|
| (18 | ) |
| — |
|
| 133 |
|
| — |
|
| 115 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD |
|
| 63 |
|
| — |
|
| 124 |
|
| — |
|
| 187 |
|
CASH AND CASH EQUIVALENTS AT END OF PERIOD |
| $ | 45 |
| $ | — |
| $ | 257 |
| $ | — |
| $ | 302 |
|
29
ARVINMERITOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Condensed Consolidating Statement of Cash Flows
(In millions)
|
| Three Months Ended December 31, 2004 |
| |||||||||||||
|
| Parent |
| Guarantors |
| Non-Guarantors |
| Elims |
| Consolidated |
| |||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS PROVIDED BY (USED FOR) OPERATING ACTIVITIES |
| $ | 63 |
| $ | (24 | ) | $ | (259 | ) | $ | — |
| $ | (220 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INVESTING ACTIVITIES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures |
|
| — |
|
| (9 | ) |
| (18 | ) |
| — |
|
| (27 | ) |
Acquisitions of businesses and investments |
|
| — |
|
| — |
|
| (22 | ) |
| — |
|
| (22 | ) |
Proceeds from disposition of property and businesses |
|
| — |
|
| 33 |
|
| — |
|
| — |
|
| 33 |
|
Net investing cash flows provided by discontinued operations |
|
| — |
|
| — |
|
| 162 |
|
| — |
|
| 162 |
|
CASH PROVIDED INVESTING ACTIVITIES |
|
| — |
|
| 24 |
|
| 122 |
|
| — |
|
| 146 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FINANCING ACTIVITIES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in debt |
|
| 14 |
|
| — |
|
| 17 |
|
| — |
|
| 31 |
|
Proceeds from exercise of stock options |
|
| 5 |
|
| — |
|
| — |
|
| — |
|
| 5 |
|
Intercompany advances |
|
| (72 | ) |
| — |
|
| 72 |
|
| — |
|
| — |
|
Cash dividends |
|
| (7 | ) |
| — |
|
| — |
|
| — |
|
| (7 | ) |
CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES |
|
| (60 | ) |
| — |
|
| 89 |
|
| — |
|
| 29 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EFFECT OF FOREIGN CURRENCY ON CASH |
|
| — |
|
| — |
|
| 4 |
|
| — |
|
| 4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CHANGE IN CASH AND CASH EQUIVALENTS |
|
| 3 |
|
| — |
|
| (44 | ) |
| — |
|
| (41 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD |
|
| 2 |
|
| 1 |
|
| 129 |
|
| — |
|
| 132 |
|
CASH AND CASH EQUIVALENTS AT END OF PERIOD |
| $ | 5 |
| $ | 1 |
| $ | 85 |
| $ | — |
| $ | 91 |
|
30
ARVINMERITOR, INC.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
OVERVIEW
ArvinMeritor, Inc. is a global supplier of a broad range of integrated systems, modules and components to the motor vehicle industry. The company serves light vehicle, commercial truck, trailer and specialty original equipment manufacturers and certain aftermarkets. Headquartered in Troy, Michigan, the company employs approximately 29,000 people at more than 120 manufacturing facilities in 25 countries. ArvinMeritor common stock is traded on the New York Stock Exchange under the ticker symbol ARM.
The company’s first fiscal quarter ended December 31, 2005 had mixed financial results. Our Commercial Vehicle Systems (CVS) business reported a substantial increase in operating profit, primarily driven by a gain on the sale of certain assets of its off-highway brakes business, and the higher production volumes at many of its customers, but our Light Vehicle Systems (LVS) business incurred an operating loss. The markets CVS participates in were mixed. When compared to the prior year, the North American heavy-duty (commonly referred to as Class 8) truck markets increased approximately 6 percent, while the North American medium-duty and trailer markets each declined by approximately 15 percent. Western European heavy and medium duty truck production volumes increased approximately 15 percent. Our LVS business incurred an operating loss of $3 million for the first quarter of fiscal 2006. We continue to execute our restructuring plans announced in early fiscal year 2005. To date we have consolidated, closed or sold 7 facilities, primarily in the LVS business segment.
In December 2005, we sold our light vehicle ride control business located in Asti, Italy. This sale, along with the previous divestiture of our 75-percent shareholdings in AP Amortiguadores, S.A. (APA) in the second quarter of fiscal year 2004, substantially completes our plan to exit the LVS ride control business. Therefore, the results of operations of this business are included in discontinued operations at December 31, 2005 and all prior periods’ results of operations have been restated to reflect this presentation.
We previously announced our intention to divest our Light Vehicle Aftermarket (LVA) business segment. For financial accounting and reporting purposes, LVA is also reported as discontinued operations for all periods presented. In the fourth quarter of fiscal year 2005, management concluded that it is more likely that LVA’s North American businesses will be sold individually rather than as a whole. Our previous strategy was to sell the LVA North American business as a whole. We expect to complete the divestiture of LVA in fiscal year 2006
A summary of our results for the three months ended December 31, 2005, is as follows:
• | Sales were $2.1 billion, up one percent from the same period last year. |
• | Operating margins were 3.1 percent, up from 1.9 percent a year ago. |
• | Diluted earnings per share from continuing operations were $0.39, compared to $0.20 per share in the first quarter of fiscal year 2005. |
• | Diluted earnings per share from discontinued operations were $0.10, compared to $0.06 in the first quarter of fiscal year 2005. |
• | Net income was $34 million or $0.49 per diluted share, compared to net income of $18 million, or $0.26 per diluted share last year. |
• | Results for the first quarter of fiscal year 2006 include a pre-tax $23 million gain on the sale of certain assets of CVS’ off-highway brakes business. |
Our business continues to address a number of challenging industry-wide issues including:
• | Excess capacity; |
• | High commodity prices, particularly steel; |
• | Weakened financial strength of some of the original equipment (OE) manufacturers; |
• | Reduced production volumes and changes in product mix in North America; |
• | Higher energy and transportation costs; |
• | OE pricing pressures; and |
• | Currency exchange rate volatility. |
31
ARVINMERITOR, INC.
Higher raw material costs and intense competition, coupled with global excess capacity most notably in the light vehicle industry, have created pressure from customers to reduce our prices. We continuously work to address these competitive challenges and offset price decreases by reducing costs, improving productivity and restructuring operations. The company’s cost reduction and productivity programs, including savings from our fiscal year 2005 restructuring actions, offset the impact of lower selling prices to our customers.
Also impacting our industry is the rising cost of pension and other post-retirement benefits. To partially address this issue we 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 is 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 (UAW) and the United Steel Workers 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 injunction). The order enjoins the company from implementing the changes to retiree health benefits that had been scheduled to become effective on January 1, 2006, and orders 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. Due to the uncertainty related to the ongoing lawsuits and since the injunction has the impact of at least temporarily changing the benefits provided under the existing postretirement medical plans, we have accounted for the injunction as a partial rescission of the 2002 and 2004 plan amendments. We 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 will result in higher interest cost, a component of retiree medical expense, of approximately $9 million. For accounting purposes, we will begin recording the impact of the injunction in March 2006, on a one-quarter lag consistent with the 90-day lag between our plan measurement date and fiscal year-end. As a result, we expect retiree medical expense to increase by approximately $13 million in fiscal year 2006. The company also expects retiree medical benefit payments to increase approximately $10 million in fiscal year 2006 compared to previous estimates as a result of the injunction. We continue to believe we have meritorious defenses to these actions and plan to defend these suits vigorously. The ultimate outcome of these three class action lawsuits may result in future plan amendments. The impact of any future plan amendments cannot be currently estimated.
Cash provided by operating activities before the impact of accounts receivable factoring programs for the three months ended December 31, 2005, was $114 million, compared to $179 million of cash used by operating activities before the impact of the accounts receivable securitization and factoring programs in the same period last year. The increase in cash flow was largely driven by a reduction in working capital.
MARKET OUTLOOK
Our fiscal year 2006 outlook for light vehicle production is 15.6 million vehicles in North America and 16.4 million vehicles in Western Europe. We expect that North American heavy-duty (also referred to as Class 8) truck production will increase slightly in fiscal year 2006 to 325,000 units, up from 324,000 last year, and European heavy and medium truck production will remain flat at 429,000 units.
32
ARVINMERITOR, INC.
COMPANY OUTLOOK
Although we believe the price of steel will continue to challenge our industry during fiscal year 2006, we do not expect this issue to significantly impact our results of operations when compared to the prior year. We have taken actions to help mitigate this issue, including finding new global steel sources, identifying alternative materials, finding ways to re-engineer our products to be less dependent on steel, working with our suppliers to reduce material costs, consolidating and selling scrap from many of our facilities and negotiating with our customers to recover some of the higher steel costs. We continue to further consolidate our LVS business to address competitive challenges in the automotive supplier industry. Anticipated restructuring actions include those actions previously discussed.
Significant factors that could affect the company’s results in fiscal year 2006 include:
• | Our ability to recover steel price increases from our customers; |
• | Additional restructuring actions and the timing and recognition of restructuring charges; |
• | Higher than planned price reductions to our customers; |
• | The financial strength of our suppliers and customers, including potential bankruptcies; |
• | Any unplanned extended customer shutdowns or production interruptions; |
• | Our ability to implement planned productivity and cost reduction initiatives; |
• | The impact of any acquisitions or divestitures; |
• | Significant gains or losses of existing business; |
• | The ultimate outcome of the three class action lawsuits concerning our retiree medical plans; and |
• | The impact of currency fluctuations on sales and operating income. |
NON-GAAP MEASURES
In addition to the results reported in accordance with accounting principles generally accepted in the United States (GAAP), we have provided information regarding “cash flow from operations before accounts receivable securitization and factoring programs”, a non-GAAP financial measure. This non-GAAP measure is defined as net cash provided by operating activities before the net change in accounts receivable securitized and factored. The company believes it is appropriate to exclude the net change in securitized and factored accounts receivable since the sale of receivables may be viewed as a substitute for borrowing activity.
We believe that this non-GAAP financial measure is useful to both management and investors in the analysis of our financial position. This non-GAAP measure should not be considered a substitute for cash provided by operating activities or other cash flow statement data prepared in accordance with GAAP or as a measure of liquidity. In addition, cash provided by operations before receivable securitization and factoring programs does not reflect funds available for investment or other discretionary uses. See “Cash Flows” below for a reconciliation of cash flows from operating activities to cash flow from operations before accounts receivable securitization and factoring programs.
33
ARVINMERITOR, INC.
RESULTS OF OPERATIONS
The following is a summary of the financial results (in millions, except per share amounts):
|
| Three Months Ended |
| ||||
|
| December 31, |
| ||||
|
| 2005 |
| 2004 |
| ||
Sales: |
|
|
|
|
|
|
|
Light Vehicle Systems |
| $ | 1,150 |
| $ | 1,160 |
|
Commercial Vehicle Systems |
|
| 936 |
|
| 907 |
|
SALES |
| $ | 2,086 |
| $ | 2,067 |
|
Operating Income (Loss): |
|
|
|
|
|
|
|
Light Vehicle Systems |
| $ | (3 | ) | $ | 3 |
|
Commercial Vehicle Systems |
|
| 67 |
|
| 37 |
|
OPERATING INCOME |
|
| 64 |
|
| 40 |
|
Equity in earnings of affiliates |
|
| 7 |
|
| 6 |
|
Interest expense, net and other |
|
| (32 | ) |
| (28 | ) |
INCOME BEFORE INCOME TAXES |
|
| 39 |
|
| 18 |
|
Provision for income taxes |
|
| (10 | ) |
| (6 | ) |
Minority interests |
|
| (2 | ) |
| 2 |
|
INCOME FROM CONTINUING OPERATIONS |
|
| 27 |
|
| 14 |
|
INCOME FROM DISCONTINUED OPERATIONS |
|
| 7 |
|
| 4 |
|
NET INCOME |
| $ | 34 |
| $ | 18 |
|
|
|
|
|
|
|
|
|
DILUTED EARNINGS PER SHARE |
|
|
|
|
|
|
|
Continuing operations |
| $ | 0.39 |
| $ | 0.20 |
|
Discontinued operations |
|
| 0.10 |
|
| 0.06 |
|
Diluted earnings per share |
| $ | 0.49 |
| $ | 0.26 |
|
|
|
|
|
|
|
|
|
DILUTED AVERAGE COMMON SHARES OUTSTANDING |
|
| 69.8 |
|
| 69.0 |
|
34
ARVINMERITOR, INC.
Three Months Ended December 31, 2005 Compared to Three Months Ended December 31, 2004
Sales
The following table reflects geographical business segment sales for the three months ended December 31, 2005 and 2004. The reconciliation is intended to reflect the trend in business segment sales and to illustrate the impact that changes in foreign currency exchange rates and acquisitions and divestitures had on sales (in millions).
|
|
|
|
|
|
|
|
|
| Dollar Change Due To |
| ||||||||||
|
| December 31, |
| Dollar |
| % |
|
|
| Acquisitions |
| Volume |
| ||||||||
|
| 2005 |
| 2004 |
| Change |
| Change |
| Currency |
| / Divestitures |
| / Other |
| ||||||
LVS: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America |
| $ | 472 |
| $ | 507 |
| $ | (35 | ) | (7 | )% |
| 2 |
|
| (14 | ) |
| (23 | ) |
Europe |
|
| 545 |
|
| 541 |
|
| 4 |
| 1 | % |
| (45 | ) |
| (4 | ) |
| 53 |
|
Asia and other |
|
| 133 |
|
| 112 |
|
| 21 |
| 19 | % |
| 4 |
|
| — |
|
| 17 |
|
|
|
| 1,150 |
|
| 1,160 |
|
| (10 | ) | (1 | )% |
| (39 | ) |
| (18 | ) |
| 47 |
|
CVS: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America |
| $ | 566 |
| $ | 530 |
| $ | 36 |
| 7 | % |
| 1 |
|
| (10 | ) |
| 45 |
|
Europe |
|
| 259 |
|
| 278 |
|
| (19 | ) | (7 | )% |
| (34 | ) |
| (4 | ) |
| 19 |
|
Asia and other |
|
| 111 |
|
| 99 |
|
| 12 |
| 12 | % |
| 7 |
|
| — |
|
| 5 |
|
|
|
| 936 |
|
| 907 |
|
| 29 |
| 3 | % |
| (26 | ) |
| (14 | ) |
| 69 |
|
SALES |
| $ | 2,086 |
| $ | 2,067 |
| $ | 19 |
| 1 | % |
| (65 | ) |
| (32 | ) |
| 116 |
|
Continuing Operations
Sales for the three months ended December 31, 2005 were $2,086 million, up $19 million, or one percent, from the same period last year. The increase in sales was attributable to stronger North American and European commercial vehicle truck volumes in our CVS business segment; and higher pass-through sales in our LVS business. These increases were partially offset by foreign currency translation, which reduced sales by $65 million, primarily due to the stronger U.S. dollar compared to other currencies in which we operate. Divestitures of certain LVS businesses in previous periods and the sale of certain assets of CVS’ off-highway brake business reduced sales in the first quarter of fiscal year 2006 by $32 million.
Business Segments
Light Vehicle Systems (LVS) sales were $1,150 million for the three months ended December 31, 2005, down $10 million, or one percent, from a year ago. The effect of foreign currency translation decreased sales by $39 million. Excluding the impact of foreign currency translation, sales were up $29 million. Pass-through sales were approximately $360 million in the first quarter of fiscal year 2006 compared to approximately $310 million in the first quarter of fiscal year 2005. Pass-through sales are products sold to our customers where we acquire the material and assemble it into the final product. These pass-through sales carry minimal margins, as we have little engineering or manufacturing responsibility. The higher pass-through sales were partially offset by lower OE demand and the loss of sales associated with previously announced divestitures, primarily the sale of an automotive stamping and components manufacturing operation in the first quarter of fiscal year 2005.
Commercial Vehicle Systems (CVS) sales were $936 million, up $29 million, or three percent, from the first quarter of fiscal year 2005. Excluding the impact of foreign currency translation, sales were up $55 million. The increase in sales was primarily attributable to stronger North American and European commercial vehicle truck volumes. Compared to the first quarter of fiscal year 2005, production volumes in North America for Class 8 trucks increased approximately 6 percent, and Western European heavy and medium-duty truck volumes increased 15 percent. These increases were partially offset by the loss of sales associated with the divestiture of certain assets of the off-highway brakes business of approximately $14 million.
35
ARVINMERITOR, INC.
Operating Income (Loss) and Operating Margins
The following table reflects operating income and operating margins for three months ended December 30, 2005 and 2004 (in millions).
|
| Operating Income (Loss) |
| Operating Margin |
| |||||||||||||||
|
| December 31, |
| Dollar |
| % |
| December 31, |
|
|
|
|
| |||||||
|
| 2005 |
| 2004 |
| Change |
| Change |
| 2005 |
| 2004 |
| Change |
| |||||
LVS: |
| $ | (3 | ) | $ | 3 |
| $ | (6 | ) | (200 | )% | (0.3 | )% | 0.3 | % | (0.6 | ) | pts |
|
CVS: |
|
| 67 |
|
| 37 |
|
| 30 |
| 81 | % | 7.2 | % | 4.1 | % | 3.1 |
| pts |
|
TOTAL |
| $ | 64 |
| $ | 40 |
| $ | 24 |
| 60 | % | 3.1 | % | 1.9 | % | 1.2 |
| pts |
|
Operating income for the three months ended December 31, 2005 was $64 million, an increase of $24 million, compared to the three months ended December 31, 2004. Operating margin was 3.1 percent, up from 1.9 percent. Included in operating income was the $23 million gain on the sale of certain assets of CVS’ off-highway brakes business. The benefit of higher sales levels in our CVS business and cost savings from our restructuring actions of $8 million were largely offset by the loss of income associated with certain of our previous divestitures of $5 million and higher energy and pension costs of $4 million and $6 million, respectively, when compared to the same period last year. Included in operating income in the first quarter of fiscal year 2005 were $10 million of restructuring costs and a gain on the sale of an automotive stamping business of $4 million.
Selling, general and administrative expenses as a percentage of sales increased slightly to 4.2 percent in the first quarter of fiscal year 2006 from 4.0 percent a year ago.
Business Segments
LVS operating loss was $3 million, compared to operating income of $3 million in the same period last year. Impacting the operating loss were higher energy and transportation costs of $2 million, higher pension and retiree medical costs of $3 million and higher investments in engineering. These items partially offset cost savings resulting from restructuring actions. LVS was able to offset customer pricing pressures with productivity and cost reduction actions. LVS recorded restructuring costs of $10 million in the first quarter of fiscal year 2005 related to the closure of our Sheffield, England stabilizer bar facility, the consolidation of two facilities in Brazil and a reduction in workforce in our operations in Spain. Also impacting operating income in the prior year was a $4 million gain on the sale of an automotive stamping and components manufacturing operation.
CVS operating income was $67 million, up $30 million compared to the same period last year. Operating margin increased to 7.2 percent from 4.1 percent a year ago. Included in operating income for the three months ended December 31, 2005 was a $23 million gain on the sale of certain assets of the off-highway brake business. Also favorably impacting operating income were the benefits of the higher sales volumes.
Other Income Statement Items
The effective income tax rate from continuing operations for the three months ended December 31, 2005, of approximately 24 percent is lower than the U.S. statutory tax rate due primarily to tax planning and lower foreign statutory tax rates. We expect our effective tax rate for continuing operations to be approximately 24 percent in fiscal year 2006.
Interest expense, net and other was $32 million, compared to $28 million in the same period last year. The increase in interest expense is primarily due to higher interest rates on our variable rate debt compared with the prior year.
Income from continuing operations for the first quarter of fiscal year 2006 was $27 million, or $0.39 per diluted share, compared to $14 million, or $0.20 per diluted share, in the prior year.
36
ARVINMERITOR, INC.
Income from discontinued operations was $7 million for the three months ended December 31, 2005 compared to $4 million a year ago. Included in income from discontinued operations in the first quarter of fiscal year 2006 is an after-tax loss of $2 million on the sale of the LVS ride control business located in Asti, Italy. Income from discontinued operations also includes a reversal of approximately $8 million of after-tax employee severance costs that were recorded in the prior year as part of our fiscal year 2005 restructuring actions. As a result of the sale of the ride control operations in Asti, Italy these employee termination benefits will no longer be paid by the company. The company previously expected to incur these costs as part of the closure of the ride control business in Asti, Italy. Also included in income from discontinued operations in the first quarter of fiscal year 2006 was an after-tax gain of approximately $2 million on the sale of our 39-percent equity ownership interest in our light vehicle aftermarket joint venture, Purolator India. A $2 million after-tax gain on the sale of our coil coating business is included in income from discontinued operations in the first quarter of fiscal year 2005.
Net income for the first quarter of fiscal year 2006 was $34 million, or $0.49 per diluted share, compared to net income of $18 million, or $0.26 per diluted share, in the prior year.
FINANCIAL CONDITION
Capitalization
|
| December 31, 2005 |
| September 30, 2005 |
| ||
Short-term debt |
| $ | 99 |
| $ | 131 |
|
Long-term debt |
|
| 1,438 |
|
| 1,451 |
|
Total debt |
|
| 1,537 |
|
| 1,582 |
|
Minority interests |
|
| 60 |
|
| 58 |
|
Shareowners’ equity |
|
| 877 |
|
| 875 |
|
Total capitalization |
| $ | 2,474 |
| $ | 2,515 |
|
|
|
|
|
|
|
|
|
Ratio of debt to capitalization |
|
| 62 | % |
| 63 | % |
We remain committed to strong cash flow generation, the reduction of debt and regaining an investment grade credit rating. For the first three months of fiscal 2006, our primary source of liquidity was cash from operating activities and proceeds from the divestitures of certain businesses, supplemented by our accounts receivables securitization and factoring programs and, as required, borrowings on our revolving credit facility. Our total debt to capitalization ratio was 62 percent at December 31, 2005, compared to 63 percent at September 30, 2005.
37
ARVINMERITOR, INC.
Cash Flows
|
| Three Months Ended |
| ||||
|
| December 30, |
| ||||
|
| 2005 |
| 2004 |
| ||
OPERATING CASH FLOWS |
|
|
|
|
|
|
|
Income from continuing operations |
| $ | 27 |
| $ | 14 |
|
Depreciation and amortization |
|
| 40 |
|
| 45 |
|
Gain on divestitures |
|
| (23 | ) |
| (4 | ) |
Restructuring costs, net of payments |
|
| (7 | ) |
| — |
|
Pension and retiree medical expense |
|
| 33 |
|
| 27 |
|
Pension and retiree medical contributions |
|
| (28 | ) |
| (22 | ) |
Change in working capital |
|
| 71 |
|
| (157 | ) |
Other |
|
| 13 |
|
| 13 |
|
Net operating cash provided by (used for) continuing operations before |
|
|
|
|
|
|
|
changes in receivable securitization and factoring |
|
| 126 |
|
| (84 | ) |
Net operating cash used by discontinued operations |
|
| (12 | ) |
| (95 | ) |
Operating cash flow before receivable securitization and factoring |
|
| 114 |
|
| (179 | ) |
Receivable securitization and factoring |
|
| 37 |
|
| (41 | ) |
CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES |
| $ | 151 |
| $ | (220 | ) |
Operating cash flows provided by continuing operations before the impact of our receivable factoring programs was $126 million in the first three months of fiscal year 2006, compared to $84 million of cash used by continuing operations before the impact of our receivable securitization and factoring programs in the prior year. The increase in cash flow is primarily attributable to lower working capital levels. Cash used by discontinued operations was $12 million compared to cash used by discontinued operations of $95 million a year ago. In addition, LVA did not participate in our accounts receivable securitization program in the first quarter of fiscal year 2005. As a result, LVA’s outstanding receivables increased by approximately $50 million in the first quarter of fiscal year 2005.
|
| Three Months Ended |
| ||||
|
| December 31, |
| ||||
|
| 2005 |
| 2004 |
| ||
INVESTING CASH FLOWS |
|
|
|
|
|
|
|
Capital expenditures |
| $ | (37 | ) | $ | (27 | ) |
Acquisitions of businesses and investments, net of cash acquired |
|
| (1 | ) |
| (22 | ) |
Proceeds from disposition of property and businesses |
|
| 39 |
|
| 33 |
|
Net investing cash flows provided by discontinued operations |
|
| 7 |
|
| 162 |
|
CASH PROVIDED BY INVESTING ACTIVITIES |
| $ | 8 |
| $ | 146 |
|
Cash provided by investing activities was $8 million in the first three months of fiscal year 2006, compared to cash provided by investing activities of $146 million in the first three months of fiscal year 2005. Capital expenditures increased to $37 million compared to $27 million in the same period last year. As a percentage of sales, capital expenditures increased to 1.8 percent, from 1.3 percent in the prior period. During the three months ended December 31, 2005, we received proceeds of $39 million from the disposition of certain assets of our off-highway brakes business. During the three months ended December 31, 2004, we used $22 million of cash for the acquisition of businesses, primarily the formation of two joint ventures with AB Volvo, and we received proceeds of $33 million from the disposition of our automotive stampings business.
38
ARVINMERITOR, INC.
Discontinued operations provided cash flows from investing activities of $7 million in the first quarter of fiscal year 2006, primarily related to the cash received from the sale of our 39-percent equity ownership interest in Purolator India, a light vehicle aftermarket joint venture. Discontinued operations provided investing cash flows of $162 million primarily related to the proceeds from the sale of our coil coating business in the first three months of fiscal 2005. Discontinued operations used cash of $2 million for capital expenditures in the first three months of fiscal year 2006 compared to $1 million fiscal year 2005.
|
| Three Months Ended |
| ||||
|
| December 31, |
| ||||
|
| 2005 |
| 2004 |
| ||
FINANCING CASH FLOWS |
|
|
|
|
|
|
|
Net increase in revolving credit facilities |
| $ | — |
| $ | 11 |
|
Change in accounts receivable securitization program |
|
| (24 | ) |
| — |
|
Payment of notes |
|
| (3 | ) |
| — |
|
Change in lines of credit and other |
|
| (14 | ) |
| 20 |
|
Net change in debt |
|
| (41 | ) |
| 31 |
|
Cash dividends |
|
| (7 | ) |
| (7 | ) |
Proceeds from exercise of stock options |
|
| — |
|
| 5 |
|
Net financing cash flows provided by discontinued operations |
|
| 2 |
|
| — |
|
CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES |
| $ | (46 | ) | $ | 29 |
|
Cash used for financing activities was $46 million in the first three months of fiscal year 2006, compared to cash provided by financing activities of $29 million in the first three months of fiscal year 2005. In September 2005, we entered into a new accounts receivable securitization arrangement. Amounts outstanding under this new arrangement are reported as short-term debt in the consolidated balance sheet and related borrowings are reported as cash flows from financing activities in the consolidated statement of cash flows. As a result of the strong cash flow generated by operating activities and the proceeds we received from the disposition of certain businesses we were able to reduce amounts outstanding under the accounts receivable securitization program and lines of credit and other by $24 million and $14 million, respectively, in the first quarter of fiscal year 2006. Additionally, in the first three months of fiscal year 2006, we purchased, at a discount, $3 million of our 6.8 percent notes on the open market. We paid dividends of $7 million in the first three months of fiscal years 2006 and 2005. We received proceeds of $5 million from the exercise of stock options in the first three months of fiscal year 2005.
LIQUIDITY
Revolving and Other Debt – We have a $900 million revolving credit facility that expires in 2008. Under the facility, borrowings are subject to interest based on quoted LIBOR rates plus a margin, and a facility fee, both of which are based upon the company’s credit rating. At December 31, 2005, the margin over the LIBOR rate was 150 basis points, and the facility fee was 37.5 basis points. Certain of our domestic subsidiaries, as defined in the credit agreement, irrevocably and unconditionally guarantee amounts outstanding under the credit facility.
The credit facility requires us to maintain a total net debt to earnings before interest, taxes, depreciation and amortization (“EBITDA”) ratio no greater than 3.25x and a minimum fixed charge coverage ratio (EBITDA less capital expenditures to interest expense) no less than 1.50x. At December 31, 2005, we were in compliance with all covenants.
We also have 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 December 31, 2005 and September 30, 2005.
We have $150 million of debt securities remaining unissued under the shelf registration filed with the SEC in April 2001 (see Note 13 of the Notes to Consolidated Financial Statements).
Leases - One of our operating leases requires us to maintain financial ratios that are similar to those required by our revolving credit agreement. At December 31, 2005, we were in compliance with all covenants. We have a residual value guarantee of $30 million related to one of our leases.
39
ARVINMERITOR, INC.
Accounts Receivable Securitization and Factoring – In September 2005, the company entered into a new $250 million accounts receivable securitization arrangement to improve financial flexibility and lower interest costs. Under the new arrangement, the company sells substantially all of the trade receivables of certain U.S. subsidiaries to ArvinMeritor Receivables Corporation (ARC), a wholly owned, consolidated special purpose subsidiary, which funds these purchases with borrowings under a loan agreement with a bank. Amounts outstanding under this agreement are collateralized by eligible receivables of ARC and are reported as short-term debt in the consolidated balance sheet. As of December 31, 2005, we had utilized $88 million of this accounts receivable securitization facility. As of September 30, 2005, we utilized $112 million.If certain receivables performance-based covenants were 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 December 31, 2005, we were in compliance with all covenants.
In addition, several of our European subsidiaries factor eligible accounts receivable with financial institutions. The amounts of factored receivables were $60 million and $23 million at December 31 and September 30, 2005, respectively. There can be no assurance that these factoring arrangements will be used or available to us in the future.
Critical Accounting Policies
Information concerning the company’s critical accounting policies is included under Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies in the company’s Annual Report on Form 10-K for the fiscal year ended October 2, 2005, which is incorporated in this Form 10-Q by reference.
New Accounting Pronouncements
New accounting pronouncements are discussed in Note 3 of the Notes to Consolidated Financial Statements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to global market risks including foreign currency exchange rate risk related to our transactions denominated in currencies other than the U.S. dollar and interest rate risk associated with our debt.
We use foreign currency forward contracts to manage the 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, we have designated the foreign currency contracts (the “contracts”) as cash flow hedges of underlying foreign currency forecasted 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 statement of shareowners’ equity and is recognized in operating income when the underlying forecasted transaction impacts earnings. The contracts generally mature within 12 months. Prior to this program, we used foreign exchange contracts to offset the effect of exchange rate fluctuations on foreign currency denominated payables and receivables but did not designate these contracts as hedges for accounting purposes. These contracts were generally of short duration (less than three months). It is difficult to predict the impact the euro and other currencies will have on our sales and operating income in the upcoming year.
We also use interest rate swaps to manage the proportion of variable rate debt to fixed rate debt. It is our policy not to enter into derivative instruments for speculative purposes, and therefore, we hold no derivative instruments for trading purposes.
Sensitivity Analysis: We use sensitivity models to calculate the fair value and cash flow impact that a hypothetical change in market currency rates and interest rates would have on derivative and debt instruments. Actual gains or losses in the future may differ significantly from that analysis, however, based on changes in the timing and amount of interest rate and foreign currency exchange rate movements and the company’s actual exposures.
40
ARVINMERITOR, INC.
The results of the sensitivity analysis are as follows (in millions):
|
| Assuming a 10% Increase in Rates |
| Assuming a 10% Decrease in Rates |
| Increase / (Decrease) on |
| ||
Market Risk |
|
|
|
|
|
|
|
|
|
Foreign Currency Sensitivity: |
|
|
|
|
|
|
|
|
|
Forward contracts(1) |
| $ | 4.9 |
| $ | (4.9 | ) | Fair Value |
|
Foreign currency denominated debt |
| $ | (2.0 | ) | $ | 2.0 |
| Fair Value |
|
|
|
|
|
|
|
|
|
|
|
Interest Rate Sensitivity: |
|
|
|
|
|
|
|
|
|
Debt - fixed rate |
| $ | (34.5 | ) | $ | 36.8 |
| Fair Value |
|
Debt - variable rate |
| $ | (3.4 | ) | $ | 3.4 |
| Cash Flow |
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps (pay variable, receive fixed) |
| $ | (6.3 | ) | $ | 6.3 |
| Fair Value |
|
(1) Includes only the risk related to the derivative instruments that serve as hedges and does not include the risk related to the underlying hedged item or on other operating transactions. The analyses assume overall derivative instruments and debt levels remain unchanged for each hypothetical scenario.
Item 4. Controls and Procedures
As required by Rule 13a-15 under the Securities Exchange Act of 1934, management, with the participation of Charles G. McClure, Jr., Chairman of the Board, Chief Executive Officer and President; and James D. Donlon, III, Senior Vice President and Chief Financial Officer, evaluated the effectiveness of the design and operation of the company’s disclosure controls and procedures as of December 31, 2005. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that, as of December 31, 2005, the company’s disclosure controls and procedures are effective to ensure that information required to be disclosed in the reports the company files or submits under the Securities Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms.
In December 2005, the company implemented a new enterprise resource planning system in a large North American plant. This change is part of the company’s plan to integrate, consolidate, and standardize its information systems. Except for the described system implementation, there have been no changes in the company’s internal control over financial reporting that occurred during the fiscal quarter ended December 31, 2005 that has materially affected, or is reasonably likely to materially affect, the company’s internal control over financial reporting.
In connection with the rule, the company continues to review and document its disclosure controls and procedures, including the company’s internal control over financial reporting, and may from time to time make changes aimed at enhancing their effectiveness and ensuring that the company’s systems evolve with the business.
41
ARVINMERITOR, INC.
PART II. OTHER INFORMATION
Item 5. Other Information
Cautionary Statement
This Quarterly Report on Form 10-Q contains statements relating to future results of the company (including certain projections and business trends) that are “forward-looking statements” as defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements are typically identified by words or phrases such as “believe,” “expect,” “anticipate,” “estimate,” “should,” “are likely to be,” “will” and similar expressions. Actual results may differ materially from those projected as a result of certain risks and uncertainties, including but not limited to global economic and market conditions; the demand for commercial, specialty and light vehicles for which the company supplies products; risks inherent in operating abroad (including foreign currency exchange rates and potential disruption of production and supply due to terrorist attacks or acts of aggression); availability and cost of raw materials, including steel; OEM program delays; demand for and market acceptance of new and existing products; successful development of new products; reliance on major OEM customers; labor relations of the company, its suppliers and customers, including potential disruptions in supply of parts to our facilities or demand for our products due to work stoppages; the financial condition of the company’s suppliers and customers, including potential bankruptcies; successful integration of acquired or merged businesses; the ability to achieve the expected annual savings and synergies from past and future business combinations; success and timing of potential divestitures; potential impairment of long-lived assets, including goodwill; competitive product and pricing pressures; the amount of the company’s debt; the ability of the company to access capital markets; credit ratings of the company’s debt; the outcome of existing and any future legal proceedings, including any litigation with respect to environmental or asbestos-related matters; as well as other risks and uncertainties, including but not limited to those detailed herein and from time to time in other filings of the company with the SEC. See also “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Quantitative and Qualitative Disclosures about Market Risk” herein. These forward-looking statements are made only as of the date hereof, and the company undertakes no obligation to update or revise the forward-looking statements, whether as a result of new information, future events or otherwise, except as otherwise required by law.
Item 6. Exhibits.
12 | Computation of ratio of earnings to fixed charges |
31-a | Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended (Exchange Act) |
31-b | Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) under the Exchange Act |
32-a | Certification of the Chief Executive Officer pursuant to Rule 13a-14(b) under the Exchange Act and 18 U.S.C. Section 1350 |
32-b | Certification of the Chief Financial Officer pursuant to Rule 13a-14(b) under the Exchange Act and 18 U.S.C. Section 1350 |
42
ARVINMERITOR, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
| ARVINMERITOR, INC. | ||
|
|
|
|
|
Date: January 26, 2006 |
| By: | /s/ | V. G. Baker, II |
|
|
|
| V. G. Baker, II |
|
|
|
| Senior Vice President and General Counsel |
|
|
|
| (For the registrant) |
|
|
|
|
|
|
|
|
|
|
Date: January 26, 2006 |
| By: | /s/ | J.D. Donlon, III |
|
|
|
| J.D. Donlon, III |
|
|
|
| Senior Vice President and Chief Financial Officer |
|
|
|
| (Principal Financial and Accounting Officer) |
43