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 July 2, 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 |
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Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
Yes | X | No |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes |
| No | X |
70,572,396 shares of Common Stock, $1.00 par value, of ArvinMeritor, Inc. were outstanding on June 30, 2006.
INDEX
PART I. | FINANCIAL INFORMATION: |
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| Item 1. | Financial Statements: | Page |
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| No. |
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| Consolidated Statement of Income - - Three and Nine Months |
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| Ended June 30, 2006 and 2005 | 2 |
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| Consolidated Balance Sheet - - |
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| June 30, 2006 and September 30, 2005 | 3 |
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| Condensed Consolidated Statement of Cash Flows - - |
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| Nine Months Ended June 30, 2006 and 2005 | 4 |
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| Notes to Consolidated Financial Statements | 5 |
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| Item 2. | Management’s Discussion and Analysis |
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| of Financial Condition and Results of Operations | 36 |
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| Item 3. | Quantitative and Qualitative Disclosures About |
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| Market Risk | 50 |
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| Item 4. | Controls and Procedures | 51 |
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PART II. | OTHER INFORMATION: |
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| Item 5. | Other Information | 51 |
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| Item 6. | Exhibits | 52 |
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Signatures |
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| 53 |
1
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
ARVINMERITOR, INC.
CONSOLIDATED STATEMENT OF INCOME
(in millions, except per share amounts)
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| Three Months Ended |
| Nine Months Ended |
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| June 30, |
| June 30, |
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| 2006 |
| 2005 |
| 2006 |
| 2005 |
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| (Unaudited) |
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Sales |
| $ | 2,477 |
| $ | 2,389 |
| $ | 6,877 |
| $ | 6,713 |
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Cost of sales |
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| (2,327 | ) |
| (2,186 | ) |
| (6,426 | ) |
| (6,222 | ) |
GROSS MARGIN |
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| 150 |
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| 203 |
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| 451 |
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| 491 |
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Selling, general and administrative |
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| (105 | ) |
| (104 | ) |
| (294 | ) |
| (286 | ) |
Restructuring costs |
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| (1 | ) |
| (6 | ) |
| (19 | ) |
| (65 | ) |
Other income (expense) |
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| 3 |
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| — |
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| 23 |
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| (12 | ) |
OPERATING INCOME |
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| 47 |
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| 93 |
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| 161 |
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| 128 |
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Equity in earnings of affiliates |
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| 10 |
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| 7 |
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| 25 |
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| 20 |
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Interest expense, net and other |
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| (28 | ) |
| (31 | ) |
| (104 | ) |
| (89 | ) |
INCOME BEFORE INCOME TAXES |
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| 29 |
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| 69 |
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| 82 |
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| 59 |
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Benefit (provision) for income taxes |
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| — |
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| (15 | ) |
| 11 |
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| (12 | ) |
Minority interests |
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| (4 | ) |
| (4 | ) |
| (10 | ) |
| (4 | ) |
INCOME FROM CONTINUING OPERATIONS |
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| 25 |
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| 50 |
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| 83 |
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| 43 |
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INCOME (LOSS) FROM DISCONTINUED OPERATIONS |
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| (5 | ) |
| (4 | ) |
| 16 |
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| (12 | ) |
NET INCOME |
| $ | 20 |
| $ | 46 |
| $ | 99 |
| $ | 31 |
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BASIC EARNINGS (LOSS) PER SHARE |
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Continuing operations |
| $ | 0.36 |
| $ | 0.73 |
| $ | 1.20 |
| $ | 0.63 |
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Discontinued operations |
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| (0.07 | ) |
| (0.06 | ) |
| 0.23 |
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| (0.18 | ) |
Basic earnings per share |
| $ | 0.29 |
| $ | 0.67 |
| $ | 1.43 |
| $ | 0.45 |
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DILUTED EARNINGS (LOSS) PER SHARE |
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Continuing operations |
| $ | 0.36 |
| $ | 0.72 |
| $ | 1.19 |
| $ | 0.62 |
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Discontinued operations |
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| (0.07 | ) |
| (0.06 | ) |
| 0.23 |
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| (0.17 | ) |
Diluted earnings per share |
| $ | 0.29 |
| $ | 0.66 |
| $ | 1.42 |
| $ | 0.45 |
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Basic average common shares outstanding |
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| 69.3 |
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| 68.8 |
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| 69.2 |
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| 68.4 |
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Diluted average common shares outstanding |
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| 70.1 |
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| 69.2 |
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| 69.9 |
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| 69.3 |
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Cash dividends per common share |
| $ | 0.10 |
| $ | 0.10 |
| $ | 0.30 |
| $ | 0.30 |
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See notes to consolidated financial statements. Amounts for the three and nine months ended June 30, 2005 have been restated for discontinued operations.
2
ARVINMERITOR, INC.
CONSOLIDATED BALANCE SHEET
(in millions)
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| June 30, |
| September 30, |
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| 2006 |
| 2005 |
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| (Unaudited) |
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ASSETS |
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CURRENT ASSETS: |
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Cash and cash equivalents |
| $ | 365 |
| $ | 187 |
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Receivables, net |
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| 1,723 |
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| 1,655 |
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Inventories |
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| 591 |
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| 541 |
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Other current assets |
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| 284 |
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| 256 |
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Assets of discontinued operations |
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| 308 |
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| 531 |
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TOTAL CURRENT ASSETS |
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| 3,271 |
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| 3,170 |
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NET PROPERTY |
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| 971 |
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| 1,013 |
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GOODWILL |
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| 810 |
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| 801 |
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OTHER ASSETS |
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| 835 |
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| 886 |
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TOTAL ASSETS |
| $ | 5,887 |
| $ | 5,870 |
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LIABILITIES AND SHAREOWNERS’ EQUITY |
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CURRENT LIABILITIES: |
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Short-term debt |
| $ | 60 |
| $ | 131 |
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Accounts payable |
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| 1,703 |
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| 1,483 |
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Other current liabilities |
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| 658 |
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| 667 |
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Liabilities of discontinued operations |
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| 150 |
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| 242 |
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TOTAL CURRENT LIABILITIES |
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| 2,571 |
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| 2,523 |
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LONG-TERM DEBT |
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| 1,288 |
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| 1,451 |
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RETIREMENT BENEFITS |
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| 608 |
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| 754 |
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OTHER LIABILITIES |
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| 228 |
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| 209 |
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MINORITY INTERESTS |
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| 60 |
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| 58 |
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SHAREOWNERS’ EQUITY: |
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Common stock (June 30, 2006 and September 30, 2005, 71.0 |
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shares issued and 70.6 and 70.3 outstanding, respectively) |
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| 71 |
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| 71 |
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Additional paid-in capital |
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| 583 |
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| 580 |
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Retained earnings |
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| 657 |
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| 579 |
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Treasury stock (June 30, 2006 and September 30, 2005, |
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0.4 and 0.7 shares, respectively) |
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| (11 | ) |
| (10 | ) |
Unearned compensation |
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| — |
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| (13 | ) |
Accumulated other comprehensive loss |
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| (168 | ) |
| (332 | ) |
TOTAL SHAREOWNERS’ EQUITY |
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| 1,132 |
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| 875 |
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TOTAL LIABILITIES AND SHAREOWNERS’ EQUITY |
| $ | 5,887 |
| $ | 5,870 |
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See notes to consolidated financial statements.
3
ARVINMERITOR, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(in millions)
|
| Nine Months Ended June 30, |
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| 2006 |
| 2005 |
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| (Unaudited) |
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OPERATING ACTIVITIES |
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Income from continuing operations |
| $ | 83 |
| $ | 43 |
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Adjustments to income from continuing operations to arrive |
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at cash provided by (used for) operating activities: |
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Depreciation and amortization |
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| 125 |
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| 135 |
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Gain on divestitures |
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| (28 | ) |
| (4 | ) |
Restructuring costs, net of payments |
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| (9 | ) |
| 39 |
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Loss on debt extinguishment |
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| 9 |
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| — |
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Pension and retiree medical expense |
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| 102 |
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| 82 |
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Pension and retiree medical contributions |
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| (79 | ) |
| (141 | ) |
Proceeds from unwind of swap agreements |
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| — |
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| 22 |
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Changes in sale of receivables |
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| 105 |
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| 137 |
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Changes in assets and liabilities, excluding effects of |
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acquisitions, divestitures and foreign currency adjustments |
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| 42 |
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| (174 | ) |
Cash flows provided by continuing operations
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| 350 |
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| 139 |
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Cash flows used for discontinued operations |
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| (38 | ) |
| (151 | ) |
CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES |
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| 312 |
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| (12 | ) |
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INVESTING ACTIVITIES |
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Capital expenditures |
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| (104 | ) |
| (99 | ) |
Acquisitions of businesses and investments, net of cash acquired |
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| (8 | ) |
| (24 | ) |
Investment in debt defeasance trust |
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| (12 | ) |
| — |
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Proceeds from disposition of property and businesses |
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| 51 |
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| 38 |
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Net investing cash flows provided by discontinued operations |
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| 201 |
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| 154 |
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CASH PROVIDED BY INVESTING ACTIVITIES |
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| 128 |
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| 69 |
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FINANCING ACTIVITIES |
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Payments on accounts receivable securitization program |
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| (66 | ) |
| — |
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Proceeds from issuance of notes and term loan |
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| 470 |
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| — |
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Repayment of notes |
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| (603 | ) |
| (21 | ) |
Borrowings (payments) on lines of credit and other |
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| (17 | ) |
| 23 |
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Net change in debt |
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| (216 | ) |
| 2 |
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Debt issuance and extinguishment costs |
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| (28 | ) |
| — |
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Proceeds from exercise of stock options |
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| 1 |
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| 5 |
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Cash dividends |
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| (21 | ) |
| (21 | ) |
CASH USED FOR FINANCING ACTIVITIES |
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| (264 | ) |
| (14 | ) |
EFFECT OF CHANGES IN FOREIGN CURRENCY EXCHANGE RATES |
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ON CASH |
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| 2 |
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| 5 |
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CHANGE IN CASH AND CASH EQUIVALENTS |
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| 178 |
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| 48 |
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CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD |
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| 187 |
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| 132 |
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CASH AND CASH EQUIVALENTS AT END OF PERIOD |
| $ | 365 |
| $ | 180 |
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See notes to consolidated financial statements. Amounts for the nine months ended June 30, 2005 have been restated for discontinued operations.
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) businesses and Light Vehicle Systems (LVS) ride control business are presented as discontinued operations in the consolidated statement of income and related notes. The company sold its LVA North American filters and exhaust businesses in the second quarter of fiscal year 2006 and its coil coating business during the first quarter of fiscal year 2005. Results of operations related to these businesses 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 and Current Report on Form 8-K dated February 27, 2006 updating the historical financial statements included in the Annual Report on Form 10-K for the presentation of the LVS ride control business as discontinued operations. The results of operations for the three and nine months ended June 30, 2006 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 third quarter of fiscal years 2006 and 2005 ended on July 2, 2006, and July 3, 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 June 30 are used consistently throughout this report to represent the fiscal year end and third 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. In the second quarter of fiscal year 2006, the company recorded a $23 million tax benefit related to the expiration of certain statutes of limitations and the completion of various worldwide tax audits of certain of the company’s income tax returns.
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):
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| Three Months Ended |
| Nine Months Ended |
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| June 30, |
| June 30, |
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| 2006 |
| 2005 |
| 2006 |
| 2005 |
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Basic average common shares outstanding |
| 69.3 |
| 68.8 |
| 69.2 |
| 68.4 |
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Impact of restricted stock |
| 0.6 |
| 0.4 |
| 0.5 |
| 0.8 |
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Impact of stock options |
| 0.2 |
| — |
| 0.2 |
| 0.1 |
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Diluted average common shares outstanding |
| 70.1 |
| 69.2 |
| 69.9 |
| 69.3 |
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5
ARVINMERITOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
At June 30, 2006 and 2005, options to purchase 3.5 million and 3.9 million shares of common stock, respectively, were not included in the computation of diluted earnings per share because their inclusion would be anti-dilutive.
The company issued $300 million of convertible senior unsecured notes in the second quarter of fiscal year 2006 (see Note 14). Since the company’s stock price during the quarter is less than the conversion price, these convertible notes are not included in the computation of diluted earnings per share because their inclusion would be anti-dilutive.
3. | New Accounting Standards |
New accounting standards to be implemented: In March 2005, the Financial Accounting Standards Board (FASB) issued Interpretation No. 47 (FIN 47), “Accounting for Conditional Asset Retirement Obligations,” an interpretation of Statement of Financial Accounting Standards (SFAS) No. 143, “Accounting for Asset Retirement Obligations.” FIN 47 clarifies the term “conditional asset retirement obligation” as used in SFAS No. 143 and provides clarification with respect to the timing of liability recognition for such obligations. Conditional asset retirement obligations represent a legal obligation to perform asset retirement activities in which the timing and/or method of settlement are conditional on a future event. FIN 47 requires an entity to recognize a liability for the fair value of a conditional asset retirement obligation when incurred if the liability’s fair value can be reasonably estimated. FIN 47 is effective no later than the end of fiscal years ending after December 15, 2005. The company is currently evaluating the impact of FIN 47 on its consolidated financial statements.
In July 2006, the FASB issued FASB Interpretation No. 48 (FIN 48), “Accounting for Uncertainty in Income Taxes” which prescribes a recognition threshold and measurement process for recording in the financial statements uncertain tax positions taken or expected to be taken in a tax return. Additionally, FIN 48 provides criteria for subsequently recognizing, derecognizing and measuring changes in uncertain tax positions and requires expanded disclosures with respect to the uncertainty of income taxes. The accounting provisions of FIN 48 will be effective for the company beginning October 1, 2007 with the cumulative effect of the change in accounting principle recorded as an adjustment to opening retained earnings. The company is in the process of determining the effect, if any, the adoption of FIN 48 will have on its financial statements.
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.
New accounting standards implemented: In September 2005, the FASB Emerging Issues Task Force (EITF) issued EITF 04-13, “Accounting for Purchases and Sales of Inventory with the Same Counterparty.” EITF 04-13 addresses the circumstances under which two or more inventory purchase and sales transactions with the same counterparty that are entered into in contemplation of one another should be combined for purposes of applying Opinion 29 “Accounting for Nonmonetary Transactions.” This EITF also addresses whether there are circumstances under which nonmonetary exchanges of inventory within the same line of business should be recognized at fair value if (a) fair value is determinable within reasonable limits and (b) the transaction has commercial substance. EITF 04-13 is effective for new arrangements entered into, or modifications or renegotiations of existing arrangements, beginning in the company’s third fiscal quarter ended June 30, 2006. The adoption of EITF 04-13 did not have any impact on the company’s results of operations or financial position.
In November 2004, the FASB issued 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
6
ARVINMERITOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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.
4. | Discontinued Operations |
In October 2004, the company announced plans to divest its LVA businesses. 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. The company’s previous strategy was to sell the LVA North American businesses as a whole.
The company announced the sale, subject to regulatory approvals, of its Gabriel South Africa LVA ride control business in June 2006. The company expects to complete this transaction in the fourth quarter of fiscal year 2006. The company sold its LVA North American motion control business in July 2006.
In March 2006, the company completed the sale of its LVA North American filters and exhaust businesses. Cash proceeds from these sales were $198 million, resulting in a net pre-tax gain on sale of $34 million ($22 million after-tax, or $0.31 per diluted share), which is recorded in income from discontinued operations. 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.
The company continues to work with potential buyers for the remaining LVA businesses, and accordingly, has evaluated, for accounting purposes, the fair value of these remaining businesses. This resulted in non-cash impairment charges of $22 million ($14 million after-tax, or $0.20 per diluted share) during the nine months ended June 30, 2006. The impairment charges are recorded in income from discontinued operations in the consolidated statement of income. The company expects to substantially complete the divestiture of its remaining LVA businesses in fiscal year 2006.
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 completed 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 nine months ended June 30, 2006 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 Asti, Italy ride control operations, the company reversed, in the first nine months of fiscal year 2006, $11 million of restructuring costs related to employee termination benefits that will no longer be paid by the company.
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.
In order to reduce costs and improve profitability, LVA recorded restructuring costs of $6 million in the first nine months of fiscal year 2006. These costs for employee severance benefits related to the reduction of approximately 75 employees. At June 30, 2006 and September 30, 2005, $4 million and $2 million, respectively, of restructuring reserves primarily related to unpaid employee termination benefits are included in liabilities of discontinued operations.
7
ARVINMERITOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Results of the discontinued operations are summarized as follows (in millions):
|
| Three Months Ended |
| Nine Months Ended |
| ||||||||
|
| June 30, |
| June 30, |
| ||||||||
|
| 2006 |
| 2005 |
| 2006 |
| 2005 |
| ||||
Sales: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Light Vehicle Aftermarket |
| $ | 131 |
| $ | 234 |
| $ | 528 |
| $ | 665 |
|
Ride Control |
|
| 10 |
|
| 22 |
|
| 34 |
|
| 64 |
|
Roll Coater |
|
| — |
|
| — |
|
| — |
|
| 28 |
|
Total Sales |
| $ | 141 |
| $ | 256 |
| $ | 562 |
| $ | 757 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
| $ | (2 | ) | $ | 2 |
| $ | 31 |
| $ | (6 | ) |
Provision for income taxes |
|
| (2 | ) |
| (5 | ) |
| (13 | ) |
| (4 | ) |
Minority interests |
|
| (1 | ) |
| (1 | ) |
| (2 | ) |
| (2 | ) |
Income from discontinued operations |
| $ | (5 | ) | $ | (4 | ) | $ | 16 |
| $ | (12 | ) |
Assets and liabilities of discontinued operations are summarized as follows (in millions):
|
| June 30, |
| September 30, |
| ||
|
| 2006 |
| 2005 |
| ||
|
|
|
|
|
|
|
|
Current assets |
| $ | 239 |
| $ | 367 |
|
Net property |
|
| 65 |
|
| 136 |
|
Other assets |
|
| 4 |
|
| 28 |
|
Assets of discontinued operations |
| $ | 308 |
| $ | 531 |
|
|
|
|
|
|
|
|
|
Current liabilities |
| $ | 129 |
| $ | 201 |
|
Other liabilities |
|
| 14 |
|
| 33 |
|
Minority interests |
|
| 7 |
|
| 8 |
|
Liabilities of discontinued operations |
| $ | 150 |
| $ | 242 |
|
5. | Restructuring Costs |
The company recorded restructuring charges of $19 million and $65 million during the first nine months of fiscal year 2006 and 2005, respectively. At June 30, 2006 and September 30, 2005, $34 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. In the second quarter of fiscal year 2006, the company identified the elimination of approximately 250 additional salaried positions in its LVS business segment. In addition to the elimination of approximately 700 salaried employees across the entire company, the fiscal year 2005 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. These actions are intended to align capacity with industry conditions, utilize assets more efficiently, and improve operations. The total estimated cost of these actions is approximately $135 million, of which approximately $105 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.
8
ARVINMERITOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
In the first nine months of fiscal year 2006, the company recorded $19 million of restructuring costs associated with the fiscal year 2005 actions, primarily in its LVS business segment. These restructuring costs are net of reversals of costs recorded in previous periods of $7 million and include $22 million related to employee severance benefits, $3 million of asset impairment charges and $1 million of other closure costs.
Cumulative restructuring costs recorded for the fiscal year 2005 actions, including amounts recorded in discontinued operations, are $109 million as of June 30, 2006. These costs include $76 million of employee termination benefits, $29 million of asset impairment charges and $4 million of other closure costs. Also included in these costs is an $18 million reversal of restructuring costs in the first nine months of fiscal year 2006, of which $11 million is related to the sale of the company’s ride control business in Asti, Italy. This $11 million reversal is recorded in discontinued operations in the consolidated statement of income (see Note 4). The company expects to complete the majority of the fiscal year 2005 restructuring actions and record the remaining costs by December 2006.
Other restructuring actions: 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 $8 million related to this action in the first nine months of fiscal year 2005. These costs included employee termination and other exit costs of approximately $4 million and asset impairment charges of $4 million. The employee termination benefits related to a reduction of approximately 10 salaried and 125 hourly employees
The LVS business segment also recorded in the nine months ended June 30, 2005, restructuring costs of $5 million for previously approved employee termination and other expenses. These costs related to a reduction in workforce of approximately 10 salaried and 230 hourly employees and the consolidation of two plants in Brazil.
The changes in the restructuring reserves for the nine months ended June 30, 2006 are as follows (in millions):
|
| Employee Termination Benefits |
| Asset Impairment |
| Plant Shutdown & Other |
| Total |
| ||||
Balance at September 30, 2005 |
| $ | 56 |
| $ | — |
| $ | — |
| $ | 56 |
|
Activity during the period: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Charges to expense |
|
| 22 |
|
| 3 |
|
| 1 |
|
| 26 |
|
Ride Control reversal (1) |
|
| (11 | ) |
| — |
|
| — |
|
| (11 | ) |
Other reversals |
|
| (7 | ) |
| — |
|
| — |
|
| (7 | ) |
Asset write-offs |
|
| — |
|
| (3 | ) |
| — |
|
| (3 | ) |
Cash payments and other |
|
| (26 | ) |
| — |
|
| (1 | ) |
| (27 | ) |
Balance at June 30, 2006 |
| $ | 34 |
| $ | — |
| $ | — |
| $ | 34 |
|
(1) Recorded in income from discontinued operations in the consolidated statement of income for the nine months ended June 30, 2006.
6. | Acquisitions and Divestitures |
In the third quarter of fiscal year 2006, the company acquired the remaining 20 percent interest in Zeuna Starker Produzione Italia SpA (ZSPI) from the minority partner for €5 million ($6 million). As a result, ZSPI is a wholly-owned subsidiary of the company at June 30, 2006. This acquisition was accounted for as a business combination and accordingly $1 million of the purchase price was allocated to goodwill in the consolidated balance sheet. Concurrent with this transaction, ZSPI sold its land and building to a related party of the minority partner for €5 million ($6 million). These transactions had no impact on the company’s results of operations for the nine months ended June 30, 2006.
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.
9
ARVINMERITOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
On October 4, 2004, the company formed two joint ventures in France with AB Volvo to manufacture and distribute commercial vehicle 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 and AB Volvo has an option that would require the company 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 ($20 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 is included in Other Liabilities (see Note 13). 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 |
In March 2006, the company entered into a new European arrangement to sell trade receivables through one of its European subsidiaries. Under the new arrangement, the company can sell up to €100 million ($127 million) of eligible trade receivables. The receivables under this program are sold at face value and excluded from the company’s consolidated balance sheet. The company continues to perform collection and administrative functions. Costs associated with this securitization arrangement are included in operating income in the consolidated statement of income and were not significant for the nine months ended June 30, 2006. The gross amount of proceeds received from the sale of receivables under this arrangement was $129 million for the nine months ended June 30, 2006. The company’s retained interest in receivables sold is $5 million at June 30, 2006. The company had utilized €48 million ($60 million) of this accounts receivable securitization facility as of June 30, 2006.
The company also participates in a U.S. accounts receivable securitization program to enhance financial flexibility and lower interest costs. Under this $250 million program, which was established in September 2005, 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 14). As of June 30, 2006 and September 30, 2005, the company had utilized $46 million and $112 million, respectively, of this accounts receivable securitization facility. Borrowings under this arrangement are collateralized by approximately $429 million of receivables held at ARC at June 30, 2006. If certain receivables performance-based covenants are not met, it would constitute a termination event, which, at the option of the banks, could result in termination of the accounts receivable securitization arrangement. At June 30, 2006, the company was in compliance with all covenants.
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 $3 million was recorded for the nine months ended June 30, 2005. The company did not have a retained interest in the receivables sold, but did perform collection and administrative functions.
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 $73 million and $23 million at June 30, 2006 and September 30, 2005, respectively.
10
ARVINMERITOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
8. | Other Income (Expense) |
Other income (expense) is comprised of the following (in millions):
|
| Three Months Ended |
| Nine Months Ended |
| ||||||||
|
| June 30, |
| June 30, |
| ||||||||
|
| 2006 |
| 2005 |
| 2006 |
| 2005 |
| ||||
Gain on divestitures (see Note 6) |
| $ | — |
| $ | — |
| $ | 23 |
| $ | 4 |
|
Gain on liquidation of joint venture |
|
| 5 |
|
| — |
|
| 5 |
|
| — |
|
Environmental remediation costs |
|
| (2 | ) |
| — |
|
| (5 | ) |
| (6 | ) |
Customer bankruptcies |
|
| — |
|
| — |
|
| — |
|
| (10 | ) |
Other income (expense) |
| $ | 3 |
| $ | — |
| $ | 23 |
| $ | (12 | ) |
In fiscal year 2005, the company closed its stabilizer bar facility located in Sheffield, England and sold the land and buildings (see Note 5). This facility was the primary operations of Meritor Suspensions Systems Holdings (UK) Ltd (MSSH). In June 2006 the company substantially completed the liquidation of MSSH and recorded a $5 million gain, primarily related to the extinguishment of debt owed to the minority partner.
9. | 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):
|
| June 30, |
| September 30, |
| ||
|
| 2006 |
| 2005 |
| ||
Finished goods |
| $ | 174 |
| $ | 143 |
|
Work in process |
|
| 160 |
|
| 177 |
|
Raw materials, parts and supplies |
|
| 257 |
|
| 221 |
|
Total |
| $ | 591 |
| $ | 541 |
|
10. | Other Current Assets |
Other current assets are summarized as follows (in millions):
|
| June 30, |
| September 30, |
| ||
|
| 2006 |
| 2005 |
| ||
|
|
|
|
|
|
|
|
Current deferred income tax assets |
| $ | 127 |
| $ | 112 |
|
Customer reimbursable tooling and engineering |
|
| 73 |
|
| 69 |
|
Asbestos-related recoveries (see Note 17) |
|
| 11 |
|
| 13 |
|
Assets held for sale |
|
| 11 |
|
| 11 |
|
Prepaid and other |
|
| 62 |
|
| 51 |
|
Other current assets |
| $ | 284 |
| $ | 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.
11
ARVINMERITOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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.
11. | Other Assets |
Other Assets are summarized as follows (in millions):
|
| June 30, |
| September 30, |
| ||
|
| 2006 |
| 2005 |
| ||
Non-current deferred income tax assets |
| $ | 491 |
| $ | 575 |
|
Investments in affiliates |
|
| 122 | �� |
| 114 |
|
Long-term receivables |
|
| 39 |
|
| 36 |
|
Unamortized debt issuance costs |
|
| 32 |
|
| 16 |
|
Prepaid pension costs |
|
| 26 |
|
| 26 |
|
Asbestos-related recoveries (see Note 17) |
|
| 23 |
|
| 22 |
|
Capitalized software costs, net |
|
| 27 |
|
| 30 |
|
Patents, licenses and other intangible assets (less accumulated |
|
|
|
|
|
|
|
amortization: $6 at June 30, 2006 and $5 at September 30, 2005) |
|
| 20 |
|
| 23 |
|
Investment in debt defeasance trust (see Note 14) |
|
| 11 |
|
| — |
|
Other |
|
| 44 |
|
| 44 |
|
Other assets |
| $ | 835 |
| $ | 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.
12
ARVINMERITOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
12. | Other Current Liabilities |
Other current liabilities are summarized as follows (in millions):
|
| June 30, |
| September 30, |
| ||
|
| 2006 |
| 2005 |
| ||
|
|
|
|
|
|
|
|
Compensation and benefits |
| $ | 238 |
| $ | 224 |
|
Income taxes |
|
| 85 |
|
| 164 |
|
Taxes other than income taxes |
|
| 55 |
|
| 33 |
|
Product warranties |
|
| 49 |
|
| 55 |
|
Reserve for labor disruption (see Note 17) |
|
| 36 |
|
| — |
|
Restructuring (see Note 5) |
|
| 34 |
|
| 56 |
|
Interest |
|
| 27 |
|
| 11 |
|
Current deferred income tax liabilities |
|
| 21 |
|
| 21 |
|
Asbestos- related liabilities (see Note 17) |
|
| 14 |
|
| 16 |
|
Environmental (see Note 17) |
|
| 9 |
|
| 8 |
|
Other |
|
| 90 |
|
| 79 |
|
Other current liabilities |
| $ | 658 |
| $ | 667 |
|
The company’s Commercial Vehicle Systems (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):
|
| Nine Months Ended |
| ||||
|
| June 30, |
| ||||
|
| 2006 |
| 2005 |
| ||
Total product warranties – beginning balance |
| $ | 93 |
| $ | 90 |
|
Accruals for product warranties |
|
| 37 |
|
| 45 |
|
Payments |
|
| (39 | ) |
| (41 | ) |
Total product warranties – ending balance |
|
| 91 |
|
| 94 |
|
Less: Non-current product warranties |
|
| (42 | ) |
| (30 | ) |
Product warranties - current portion |
| $ | 49 |
| $ | 64 |
|
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 had 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
13
ARVINMERITOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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, net of recoveries, related to this matter.
13. | Other Liabilities |
Other Liabilities are summarized as follows (in millions):
|
| June 30, |
| September 30, |
| ||
|
| 2006 |
| 2005 |
| ||
|
|
|
|
|
|
|
|
Asbestos - related liabilities (see Note 17) |
| $ | 40 |
| $ | 38 |
|
Non-current deferred income tax liabilities |
|
| 24 |
|
| 23 |
|
Product warranties (see Note 12) |
|
| 42 |
|
| 38 |
|
Environmental (see Note 17) |
|
| 16 |
|
| 16 |
|
Long-term payable |
|
| 61 |
|
| 57 |
|
Fair value of interest rate swaps, net of collateral |
|
| 9 |
|
| — |
|
Other |
|
| 36 |
|
| 37 |
|
Other liabilities |
| $ | 228 |
| $ | 209 |
|
14. | Long-Term Debt |
Long-Term Debt, net of discount where applicable, is summarized as follows (in millions):
|
| June 30, |
| September 30, |
| ||
|
| 2006 |
| 2005 |
| ||
6 5/8 percent notes due 2007 |
| $ | 5 |
| $ | 200 |
|
6 3/4 percent notes due 2008 |
|
| 5 |
|
| 100 |
|
7 1/8 percent notes due 2009 |
|
| 6 |
|
| 91 |
|
6.8 percent notes due 2009 |
|
| 77 |
|
| 305 |
|
8 3/4 percent notes due 2012 |
|
| 380 |
|
| 380 |
|
Term Loan B due 2012 |
|
| 170 |
|
| — |
|
8 1/8 percent notes due 2015 |
|
| 250 |
|
| 250 |
|
4.625 percent convertible notes due 2026(1) |
|
| 300 |
|
| — |
|
9.5 percent subordinated debentures due 2027 |
|
| 39 |
|
| 39 |
|
Bank revolving credit facilities |
|
| — |
|
| — |
|
Accounts receivable securitization (see Note 7) |
|
| 46 |
|
| 112 |
|
Lines of credit and other |
|
| 67 |
|
| 88 |
|
Fair value adjustment of notes |
|
| 3 |
|
| 17 |
|
Subtotal |
|
| 1,348 |
|
| 1,582 |
|
Less: current maturities |
|
| (60 | ) |
| (131 | ) |
Long-term debt |
| $ | 1,288 |
| $ | 1,451 |
|
(1) These convertible notes contain a put and call feature, which allows for earlier redemption beginning in 2016 (see Convertible Securities below).
Repurchase of Debt Securities
In March 2006, the company completed the repurchase of $600 million aggregate principal amount of its previously outstanding notes in the following amounts: $195 million of its outstanding $200 million 6 5/8 percent notes due in 2007; $95 million of its outstanding $100 million 6 3/4 percent notes due in 2008; $225 million of its outstanding $302 million 6.8 percent notes due in 2009; and $85 million of its outstanding $91 million 7 1/8 percent notes also due in 2009. The repurchase was accounted for as an extinguishment of debt and, accordingly, $9 million was recognized as a loss on debt extinguishment and is included in interest
14
ARVINMERITOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
expense, net and other in the consolidated statement of income. The loss primarily consists of debt reacquisition costs associated with the note repurchase, unamortized debt issuance costs and debt discount, and the premium paid to repurchase the notes.
In June 2006, the company entered into an agreement to purchase, at a discount, $10 million of its $380 million outstanding 8 3/4 percent notes on the open market. This transaction settled on July 6, 2006 and the debt was extinguished. This transaction did not have a significant impact on the company’s results of operations in the quarter ended June 30, 2006. 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 June 30, 2006 the company had $150 million of debt securities available for issuance under this shelf registration.
Investment in Debt Defeasance Trust
In the third quarter of fiscal year 2006, the company purchased $12 million of U.S. government securities and placed those securities into an irrevocable trust, for the sole purpose of funding payments of principal and interest through the stated maturity on the $5 million outstanding 6 3/4 percent notes due 2008 and the $6 million outstanding 7 1/8 percent notes due 2009, in order to defease certain covenants under the associated indenture. As these securities are restricted and can only be withdrawn and used for payments of the principal and interest on the aforementioned notes, the assets of the trust are primarily recorded in Other Assets (see Note 11) in the consolidated balance sheet.
| Convertible Securities |
In March 2006, the company issued $300 million of 4.625 percent convertible senior unsecured notes due 2026 (the “convertible notes”). The convertible notes were sold by the company to qualified institutional buyers in a private placement exempt from the registration requirements of the Securities Act of 1933. These convertible notes were registered with the Securities and Exchange Commission under the Securities Act of 1933 on May 23, 2006. Net proceeds received by the company, after issuance costs, were $289 million. The related debt issuance costs are being amortized over a ten-year term, which represents the earliest date that the company can redeem the convertible notes. The company used the net proceeds from this offering, together with proceeds from the sales of its LVA North American filters and exhaust businesses and other sources to fund the repurchase of $600 million aggregate principal amount of previously outstanding notes (see Repurchase of Debt Securities above).
Cash interest at a rate of 4.625 percent per annum from the date of issuance through March 1, 2016 is payable semi-annually in arrears on March 1 and September 1 of each year. After March 1, 2016, the principal amount of the convertible notes will be subject to accretion at a rate that provides holders with an aggregate annual yield to maturity of 4.625 percent.
The notes are convertible into shares of the company’s common stock at an initial conversion rate, subject to adjustment, equivalent to 47.6667 shares of common stock per $1,000 initial principal amount of notes, which represents an initial conversion price of approximately $20.98 per share. If converted, the accreted principal amount will be settled in cash and the remainder of the company’s conversion obligation, if any, in excess of such accreted principal amount will be settled in cash, shares of common stock, or a combination thereof, at the company’s election.
Holders may convert their notes at any time on or after March 1, 2024. Prior to March 1, 2024, holders may convert their notes only under the following circumstances:
• | during any calendar quarter, after the calendar quarter ending June 30, 2006, if the closing price of the company’s common stock for 20 or more trading days in a period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter exceeds 120 percent of the applicable conversion price; |
• | during the five business day period after any five consecutive trading day period in which the average trading price per $1,000 initial principal amount of notes is equal to or less than 97 percent of the average conversion value of the notes during such five consecutive trading day period; |
• | upon the occurrence of specified corporate transactions; or |
• | if the notes are called by us for redemption. |
On or after March 1, 2016, the company may redeem the convertible notes, in whole or in part, for cash at a redemption price equal to 100 percent of the accreted principal amount plus any accrued and unpaid interest. On each of March 1, 2016, 2018, 2020,
15
ARVINMERITOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
2022, and 2024, or upon certain fundamental changes, holders may require the company to purchase all or a portion of their convertible notes at a purchase price in cash equal to 100 percent of the accreted principal amount plus any accrued and unpaid interest.
The convertible notes are fully and unconditionally guaranteed by certain subsidiaries of the company that currently guarantee the company’s obligations under its senior secured credit facilities and other publicly-held notes (see Bank Revolving Credit Facilities below).
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.
Senior Secured Credit Facilities
In June 2006, the company replaced its $900 million revolving credit facility that was to expire in 2008 with two new senior secured credit facilities totaling $1.15 billion (the new credit facilities). The new credit facilities include a five year $980 million revolving credit facility and a six year $170 million term loan. Debt issuance costs associated with the new credit facilities of $10 million are being amortized over the five year term of the revolving credit facility. Borrowings under the new revolving credit facility are subject to interest based on quoted LIBOR rates plus a margin, and a commitment fee on undrawn amounts, both of which are based upon the company’s current credit rating for the senior secured facilities. At June 30, 2006, the margin over the LIBOR rate was 150 basis points, and the commitment fee was 30 basis points. Similar to the prior revolving credit facility, the new revolving credit facility includes a $150 million limit on the issuance of letters of credit. At June 30, 2006 and September 30, 2005, approximately $27 million and $23 million letters of credit, respectively, were issued.
The term loan is payable in quarterly installments of $0.25 million with the remaining balance due at maturity. Borrowings under the term loan are subject to interest based on quoted LIBOR rates plus a margin. At June 30, 2006, the margin over the LIBOR rate was 175 basis points.
Borrowings under the revolving credit facility and term loan are collateralized by approximately $1.2 billion of the company’s assets, primarily consisting of eligible accounts receivable, inventory, plant, property, and equipment, intellectual property and the company’s investment in certain of its wholly-owned subsidiaries.
The new credit facilities require the company to maintain a total net debt to earnings before interest, taxes, depreciation and amortization (EBITDA) ratio no greater than 4.25x and a minimum fixed charge coverage ratio (EBITDA less capital expenditures to interest expense) no less than 1.50x. At June 30, 2006, the company was in compliance with all covenants.
Certain of the company’s subsidiaries, as defined in the credit agreement, irrevocably and unconditionally guarantee amounts outstanding under the new credit facilities. Similar subsidiary guarantees are provided for the benefit of the holders of the publicly-held notes outstanding under the company’s indentures (see Note 21).
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 4.63 percent. Amounts outstanding under this agreement are reported as short-term debt in the consolidated balance sheet and are collateralized by $429 million of eligible receivables purchased and held by ARC at June 30, 2006. If certain receivables performance-based covenants are not met, it would constitute a termination event, which, at the option of the banks, could result in termination of the accounts receivable securitization arrangement. At June 30, 2006, the company was in compliance with all covenants.
16
ARVINMERITOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 June 30, 2006 and September 30, 2005.
Interest Rate Swap Agreements
In March 2006, concurrent with the repurchase of $225 million of the company’s outstanding $302 million 6.8 percent notes, the company terminated $30 million notional amount of its 6.8 percent interest rate swaps. As of June 30, 2006, the company had interest rate swap agreements that effectively convert $221 million of the company’s 8-3/4 percent notes and $63 million of the 6.8 percent notes to variable interest rates. As of June 30, 2006, the fair value of the 8-3/4 percent swaps was a liability of $12 million and is included in Other Liabilities and the fair value of the 6.8 percent swaps was not significant. The fair value of the swaps was not material as of September 30, 2005. The terms of the interest rate swap agreements, require the company to place cash on deposit as collateral if the fair value of the interest rate swaps declines below a negative $10 million. Accordingly, the company has placed $3 million on deposit with the counterparty as collateral and recorded such deposit as a reduction in the carrying value of the associated interest rate swap. The swaps have been designated as fair value hedges and the impact of the changes in their fair values is offset by an equal and opposite change in the carrying value of the related notes. Under the terms of the swap agreements, the company receives a fixed rate of interest of 8.75 percent and 6.8 percent on notional amounts of $221 million and $63 million, respectively, and pays variable rates based on three-month LIBOR plus a weighted-average spread of 3.44 percent. The payments under the agreements coincide with the interest payment dates on the hedged debt instruments, and the difference between the amounts paid and received is included in interest expense, net and other. Included in the fair value adjustment of notes is $15 million related to previously terminated interest rate swaps, which is being amortized to earnings as a reduction of interest expense over the remaining life of the related debt.
The company classifies the cash flows associated with 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 June 30, 2006 and September 30, 2005. Amounts outstanding under this agreement are collateralized by the $35 million of property and equipment being leased. In July 2006, the company purchased the properties and extinguished its outstanding obligation. The lease was to expire in December 2006.
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.
15. | 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 14.
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.
17
ARVINMERITOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 twelve months. There was no material impact to operating income associated with hedge ineffectiveness in the nine months ended June 30, 2006 and 2005.
At June 30, 2006 there was a $1 million loss recorded in AOCI. The company expects to reclassify this amount from AOCI to operating income during the next three months as the forecasted hedged transactions are recognized in earnings. At September 30, 2005, there was a $2 million gain recorded in AOCI.
The company classifies the cash flows associated with the contracts in cash flows from operating activities in the consolidated statement of cash flows. This is consistent with the classification of the cash flows associated with the underlying hedged item.
Fair Value
Fair values of financial instruments are summarized as follows (in millions):
|
| June 30, 2006 |
| September 30, 2005 |
| ||||||||
|
| Carrying |
| Fair |
| Carrying |
| Fair |
| ||||
|
| Value |
| Value |
| Value |
| Value |
| ||||
Cash and cash equivalents |
| $ | 365 |
| $ | 365 |
| $ | 187 |
| $ | 187 |
|
Foreign exchange contracts - asset |
|
| — |
|
| — |
|
| 4 |
|
| 4 |
|
Investment in debt defeasance trust |
|
| 12 |
|
| 12 |
|
| — |
|
| — |
|
Collateral on interest rate swap liability |
|
| 3 |
|
| 3 |
|
| — |
|
| — |
|
Interest rate swaps - liability |
|
| 12 |
|
| 12 |
|
| — |
|
| — |
|
Foreign exchange contracts - liability |
|
| 1 |
|
| 1 |
|
| 2 |
|
| 2 |
|
Short-term debt |
|
| 60 |
|
| 60 |
|
| 131 |
|
| 131 |
|
Long-term debt |
|
| 1,288 |
|
| 1,288 |
|
| 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. | Retirement Benefit Liabilities |
Retirement Benefit Liabilities consisted of the following (in millions):
|
| June 30, |
| September 30, |
| ||
|
| 2006 |
| 2005 |
| ||
Retiree medical liability |
| $ | 249 |
| $ | 263 |
|
Pension liability |
|
| 355 |
|
| 483 |
|
Other |
|
| 54 |
|
| 58 |
|
Subtotal |
|
| 658 |
|
| 804 |
|
18
ARVINMERITOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Less: current portion (included in other current liabilities) |
|
| (50 | ) |
| (50 | ) |
Retirement benefit liabilities |
| $ | 608 |
| $ | 754 |
|
The components of net periodic pension and retiree medical expense, including discontinued operations, for the three months ended June 30, are as follows:
|
| 2006 |
| 2005 |
| ||||||||
|
| Pension |
| Retiree Medical |
| Pension |
| Retiree Medical |
| ||||
Service cost |
| $ | 11 |
| $ | 1 |
| $ | 10 |
| $ | — |
|
Interest cost |
|
| 24 |
|
| 8 |
|
| 23 |
|
| 7 |
|
Assumed return on plan assets |
|
| (24 | ) |
| — |
|
| (23 | ) |
| — |
|
Amortization of prior service costs |
|
| 2 |
|
| (2 | ) |
| 3 |
|
| (7 | ) |
Recognition of transition asset |
|
| (1 | ) |
| — |
|
| (1 | ) |
| — |
|
Recognized actuarial loss |
|
| 11 |
|
| 6 |
|
| 8 |
|
| 7 |
|
Total expense |
| $ | 23 |
| $ | 13 |
| $ | 20 |
| $ | 7 |
|
The components of net periodic pension and retiree medical expense, including discontinued operations, for the nine months ended June 30, are as follows:
|
| 2006 |
| 2005 |
| ||||||||
|
| Pension |
| Retiree Medical |
| Pension |
| Retiree Medical |
| ||||
Service cost |
| $ | 33 |
| $ | 3 |
| $ | 30 |
| $ | 2 |
|
Interest cost |
|
| 70 |
|
| 19 |
|
| 69 |
|
| 19 |
|
Assumed return on plan assets |
|
| (73 | ) |
| — |
|
| (70 | ) |
| — |
|
Amortization of prior service costs |
|
| 5 |
|
| (14 | ) |
| 7 |
|
| (18 | ) |
Recognition of transition asset |
|
| (1 | ) |
| — |
|
| (2 | ) |
| — |
|
Recognized actuarial loss |
|
| 39 |
|
| 21 |
|
| 24 |
|
| 21 |
|
Total expense |
| $ | 73 |
| $ | 29 |
| $ | 58 |
| $ | 24 |
|
Retirement Pension Plans
The sale of the company’s LVA North American filters and exhaust businesses in the second quarter of fiscal year 2006 (see Note 4) triggered a pension curtailment, which required a new valuation of the U.S. pension plan. The measurement date of this valuation was March 31, 2006 and resulted in an $81 million reduction in the additional minimum pension liability. For accounting purposes, the company recorded the impact of this valuation in June 2006, 90 days from the March 31 measurement date, which is consistent with the 90-day lag between the company’s normal plan measurement date of June 30 and its fiscal year-end. This adjustment, net of a deferred tax asset of $31 million, was charged to accumulated other comprehensive loss in the consolidated balance sheet. The reduction in the additional minimum pension liability was primarily due to an increase in the discount rate to 6.3 percent from 5.8 percent. The pension curtailment did not have a material impact on the company’s results of operations for the quarter ended June 30, 2006.
In the second quarter of fiscal year 2006, the company changed its U.S. pension plan actuary and obtained a new U.S. plan valuation as a result of this change. The measurement date of this valuation was October 1, 2005. Accounting rules require the company to use the June 30 valuation unless a more current valuation is available. Since a more current valuation is available, the company recorded a $91 million reduction in the additional minimum pension liability in the second quarter of fiscal year 2006. This adjustment, net of a deferred tax asset of $35 million, was charged to accumulated other comprehensive loss in the consolidated balance sheet. The reduction in additional minimum pension liability was primarily due to an increase in the discount rate to 5.8 percent from 5.3 percent.
As a result of these plan valuations, the company expects pension expense to be $95 million in fiscal year 2006, a reduction of $3 million from previous estimates included in the company’s Quarterly Report on Form 10-Q for the quarter ended March 31,
19
ARVINMERITOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
2006 and a reduction of $9 million from previous estimates included in the company’s Current Report on Form 8-K dated February 27, 2006. The company has recorded $4 million of this reduction in the nine months ended June 30, 2006. The reduction in pension expense is primarily due to an increase in the discount rate to 6.3 percent from 5.3 percent.
The company expects funding for its retirement pension plans of approximately $55 million in fiscal year 2006, a reduction of $68 million from its previous estimate of $123 million included in the company’s Current Report on Form 8-K dated February 27, 2006.
Retirement Medical Plans
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.
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 began recording the impact of the injunction in March 2006, 90 days from the December 22, 2005 measurement date, which is consistent with the 90-day lag between the company’s normal plan measurement date of June 30 and its fiscal year-end. Compared to previous estimates included in the company’s Current Report on Form 8-K dated February 27, 2006, the company expects its retiree medical expense to increase by approximately $12 million in fiscal year 2006, of which $6 million was recorded in the nine months ended June 30, 2006. Retiree medical benefit payments are expected to increase by approximately $10 million in fiscal year 2006, compared to previous estimates included in the company’s Current Report on Form 8-K dated February 27, 2006.
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.
17. | 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.
20
ARVINMERITOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 to be approximately $24 million, of which $9 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 to be approximately $61 million, of which $16 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 June 30, 2006. The undiscounted estimate of these costs is approximately $11 million.
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 |
|
| (3 | ) |
| (3 | ) |
| (6 | ) |
Change in cost estimates (1) |
|
| 1 |
|
| 6 |
|
| 7 |
|
Balance at June 30, 2006 |
| $ | 9 |
| $ | 16 |
| $ | 25 |
|
(1) Recorded $2 million of environmental remediation costs in income from discontinued operations in the consolidated statement of income for the nine months ended June 30, 2006.
A portion of the environmental reserves is included in Other Current Liabilities (see Note 12), with the majority of the amounts recorded in Other Liabilities (see Note 13).
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 60,500 and 61,700 pending asbestos-related claims at June 30, 2006 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.
21
ARVINMERITOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Maremont’s asbestos-related reserves and corresponding asbestos-related recoveries are summarized as follows (in millions):
|
| June 30, 2006 |
| September 30, 2005 |
|
| ||
Pending and future claims |
| $ | 46 |
| $ | 50 |
| |
Shortfall and other |
|
| 8 |
|
| 4 |
| |
Asbestos-related liabilities |
| $ | 54 |
| $ | 54 |
| |
|
|
|
|
|
|
|
| |
Asbestos-related recoveries |
| $ | 34 |
| $ | 35 |
|
A portion of the asbestos-related recoveries and reserves are included in Other Current Assets and Liabilities, with the majority of the amounts recorded in Other Assets and Liabilities (see Notes 10, 11, 12 and 13).
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 approximately $5 million in the nine months ended June 30, 2006 and $8 million in the nine months ended June 30, 2005.
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 June 30, 2006.
Bates White provided an estimate of the reasonably possible range of Maremont’s obligation for asbestos personal injury claims over the next three to four years of $33 million to $49 million. After consultation with Bates White, Maremont determined that as of June 30, 2006 the most likely and probable liability for pending and future claims over the next four years is $44 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.
22
ARVINMERITOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following assumptions were made by Maremont after consultation with Bates White and are included in their study:
• | Pending and future claims were estimated for a four year period ending in fiscal year 2010. Maremont believes that the litigation environment will change significantly in several years, and that the reliability of estimates of future probable expenditures in connection with asbestos-related personal injury claims declines for each year further in the future. As a result, estimating a probable liability beyond four years is difficult and uncertain; |
• | The ultimate cost of resolving pending and future claims filed in Madison County, Illinois, a jurisdiction where a substantial amount of Maremont’s claims are filed, will decline to reflect average outcomes throughout the United States; |
• | Defense and processing costs for pending and future claims will be at the level consistent with Maremont’s prior experience; and |
• | The ultimate indemnity cost of resolving nonmalignant claims with plaintiffs’ law firms in jurisdictions without an established history with Maremont cannot be reasonably estimated. Recent changes in tort law and insufficient settlement history make estimating a liability for these nonmalignant claims difficult and uncertain. |
Shortfall and other: Several former members of the CCR have filed for bankruptcy protection, and these members have failed, or may fail, to pay certain financial obligations with respect to settlements that were reached while they were CCR members. Maremont is subject to claims for payment of a portion of these defaulted member shares (shortfall). In an effort to resolve the affected settlements, Maremont has entered into negotiations with plaintiffs’ attorneys, and an estimate of Maremont’s obligation for the shortfall is included in the total asbestos-related reserves. In addition, Maremont and its insurers are engaged in legal proceedings to determine whether existing insurance coverage should reimburse any potential liability related to this issue. Payments by the company related to shortfall and other were not significant in the nine months ended June 30, 2006 and 2005.
Recoveries: Maremont has insurance that reimburses a substantial portion of the costs incurred defending against asbestos-related claims. The coverage also reimburses Maremont for any indemnity paid on those claims. The coverage is provided by several insurance carriers based on insurance agreements in place. Incorporating historical information with respect to buy-outs and settlements of coverage, and excluding any policies in dispute, the insurance receivable related to asbestos-related liabilities is $34 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
23
ARVINMERITOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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.
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.
Contingencies related to work stoppage
The company’s collective bargaining agreement with the Canadian Auto Workers (“CAW”) at its CVS brakes facility in Tilbury, Ontario, Canada, expired on June 3, 2006. On June 4, 2006, the company announced that, after lengthy negotiations, a new tentative agreement with the CAW had not yet been reached and, as a result, the company had suspended operations at the facility. On June 12, 2006, the company reached a tentative agreement with the CAW, which was subsequently ratified on June 14, 2006, and resumed operations. As a result of this work stoppage, the company experienced temporary manufacturing inefficiencies and incurred certain costs in order to return to normal production. The company was temporarily unable to completely fulfill certain customer orders, resulting in temporary production interruptions at some customer manufacturing facilities. The impact of this labor disruption on operating income in the third quarter of fiscal year 2006 was $45 million. Included in this amount are premium labor costs, expedited freight and logistical costs and other costs associated with production disruptions at certain customers’ facilities. At June 30, 2006, $36 million is recorded as a contingent liability in the consolidated balance sheet. The ultimate settlement of this liability will be determinable over a period of time and may be negotiated, as a commercial matter, with the affected customers. The amount of this liability may change in future periods depending on our customers’ ability to schedule additional production to compensate for prior disruptions, the results of the negotiations with the affected customers and other factors. The company believes that any future adjustment to this liability will not have a material effect on the company’s results of operations and financial position.
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 is 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.
24
ARVINMERITOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
In connection with the sale of the LVA North American filters business, the company agreed to indemnify the purchaser against liabilities from litigation and commercial losses in connection with specific intellectual property claims, with a maximum indemnity of $4 million for commercial losses, which is included in the consolidated balance sheet at June 30, 2006.
Other
Various other lawsuits, claims and proceedings have been or may be instituted or asserted against the company, relating to the conduct of the company’s business, including those pertaining to product liability, intellectual property, safety and health, and employment matters. Although the outcome of litigation cannot be predicted with certainty, and some lawsuits, claims or proceedings may be disposed of unfavorably to the company, management believes the disposition of matters that are pending will not have a material adverse effect on the company’s business, financial condition or results of operations.
Litigation associated with the company’s retiree medical plans is discussed in Note 16.
18. | Comprehensive Income (Loss) |
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 (loss) is summarized as follows (in millions):
|
| Three Months Ended |
| Nine Months Ended |
| ||||||||
|
| June 30, |
| June 30, |
| ||||||||
|
| 2006 |
| 2005 |
| 2006 |
| 2005 |
| ||||
Net income |
| $ | 20 |
| $ | 46 |
| $ | 99 |
| $ | 31 |
|
Foreign currency translation adjustments |
|
| 43 |
|
| (73 | ) |
| 62 |
|
| 15 |
|
Minimum pension liability adjustment, net of tax |
|
| 50 |
|
| — |
|
| 105 |
|
| — |
|
Unrealized loss on foreign exchange contracts, net of tax |
|
| (2 | ) |
| (3 | ) |
| (3 | ) |
| (1 | ) |
Comprehensive income (loss) |
| $ | 111 |
| $ | (30 | ) | $ | 263 |
| $ | 45 |
|
19. | 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, a component of undercarriage systems, is presented as discontinued operations in the consolidated statement of income for the three and nine months ended June 30, 2006 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.
25
ARVINMERITOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Segment information is summarized as follows (in millions):
|
| Three Months Ended |
| Nine Months Ended |
| ||||||||
|
| June 30, |
| June 30, |
| ||||||||
|
| 2006 |
| 2005 |
| 2006 |
| 2005 |
| ||||
Sales: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Light Vehicle Systems |
| $ | 1,322 |
| $ | 1,271 |
| $ | 3,707 |
| $ | 3,656 |
|
Commercial Vehicle Systems |
|
| 1,155 |
|
| 1,118 |
|
| 3,170 |
|
| 3,057 |
|
Total sales |
| $ | 2,477 |
| $ | 2,389 |
| $ | 6,877 |
| $ | 6,713 |
|
Operating Income (Loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
Light Vehicle Systems |
| $ | 37 |
| $ | 23 |
| $ | 26 |
| $ | (10 | ) |
Commercial Vehicle Systems |
|
| 14 |
|
| 72 |
|
| 143 |
|
| 146 |
|
Segment operating income |
|
| 51 |
|
| 95 |
|
| 169 |
|
| 136 |
|
Other unallocated costs |
|
| (4 | ) |
| (2 | ) |
| (8 | ) |
| (8 | ) |
Operating income |
|
| 47 |
|
| 93 |
|
| 161 |
|
| 128 |
|
Equity in earnings of affiliates |
|
| 10 |
|
| 7 |
|
| 25 |
|
| 20 |
|
Interest expense, net and other |
|
| (28 | ) |
| (31 | ) |
| (104 | ) |
| (89 | ) |
Income before income taxes |
|
| 29 |
|
| 69 |
|
| 82 |
|
| 59 |
|
Benefit (provision) for income taxes |
|
| — |
|
| (15 | ) |
| 11 |
|
| (12 | ) |
Minority interests |
|
| (4 | ) |
| (4 | ) |
| (10 | ) |
| (4 | ) |
Income from continuing operations |
| $ | 25 |
| $ | 50 |
| $ | 83 |
| $ | 43 |
|
A summary of the changes in the carrying value of goodwill for the nine months ended June 30, 2006, is as follows (in millions):
|
| LVS |
| CVS |
| Total |
| |||
Balance at September 30, 2005 |
| $ | 368 |
| $ | 433 |
| $ | 801 |
|
Goodwill written-off due to the sale of off-highway brakes (see Note 6) |
|
| — |
|
| (7 | ) |
| (7 | ) |
Acquisition of the remaining 20 percent interest in ZSPI (see Note 6) |
|
| 1 |
|
| — |
|
| 1 |
|
Foreign currency translation |
|
| 9 |
|
| 6 |
|
| 15 |
|
Balance at June 30, 2006 |
| $ | 378 |
| $ | 432 |
| $ | 810 |
|
20. | Subsequent Event |
In July 2006, the company announced that it had signed a letter of intent to sell its 57 percent shareholdings in MSSC to the joint venture partner Mitsubishi Steel Mfg. Co., Ltd. The sale is subject to final ArvinMeritor board approval and regulatory approval. MSSC produces steel torsion and stabilizer bars and coil springs for the North American light vehicle market.
26
ARVINMERITOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
21. | Supplemental Guarantor Condensed Consolidating Financial Statements |
Certain of the company’s wholly-owned subsidiaries, as defined in the credit agreement (the Guarantors), irrevocably and unconditionally guarantee amounts outstanding under the senior credit facilities. Similar subsidiary guarantees were provided for the benefit of the holders of the publicly-held notes outstanding under the company’s indentures (see Note 14).
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.
27
ARVINMERITOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Condensed Consolidating Statement of Income
(In millions)
|
| Three Months Ended June 30, 2006 |
| |||||||||||||
|
| Parent |
| Guarantors |
| Non- Guarantors |
| Elims |
| Consolidated |
| |||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
External |
| $ | — |
| $ | 914 |
| $ | 1,563 |
| $ | — |
| $ | 2,477 |
|
Subsidiaries |
|
| — |
|
| 61 |
|
| 108 |
|
| (169 | ) |
| — |
|
Total sales |
|
| — |
|
| 975 |
|
| 1,671 |
|
| (169 | ) |
| 2,477 |
|
Cost of sales |
|
| (6 | ) |
| (950 | ) |
| (1,540 | ) |
| 169 |
|
| (2,327 | ) |
GROSS MARGIN |
|
| (6 | ) |
| 25 |
|
| 131 |
|
| — |
|
| 150 |
|
Selling, general and administrative |
|
| (25 | ) |
| (53 | ) |
| (27 | ) |
| — |
|
| (105 | ) |
Restructuring costs |
|
| — |
|
| 28 |
|
| (29 | ) |
| — |
|
| (1 | ) |
Other operating income (expense) |
|
| (2 | ) |
| — |
|
| 5 |
|
| — |
|
| 3 |
|
OPERATING INCOME (LOSS) |
|
| (33 | ) |
| — |
|
| 80 |
|
| — |
|
| 47 |
|
Equity in earnings of affiliates |
|
| 2 |
|
| 6 |
|
| 2 |
|
| — |
|
| 10 |
|
Other income (expense), net |
|
| 16 |
|
| (10 | ) |
| (6 | ) |
| — |
|
| — |
|
Interest expense, net and other |
|
| (27 | ) |
| (3 | ) |
| 2 |
|
| — |
|
| (28 | ) |
INCOME (LOSS) BEFORE INCOME TAXES |
|
| (42 | ) |
| (7 | ) |
| 78 |
|
| — |
|
| 29 |
|
Benefit (provision) for income taxes |
|
| 15 |
|
| 30 |
|
| (45 | ) |
| — |
|
| — |
|
Minority interests |
|
| — |
|
| — |
|
| (4 | ) |
| — |
|
| (4 | ) |
INCOME (LOSS) FROM CONTINUING OPERATIONS |
|
| (27 | ) |
| 23 |
|
| 29 |
|
| — |
|
| 25 |
|
INCOME (LOSS) FROM DISCONTINUED OPERATIONS |
|
| — |
|
| (16 | ) |
| 11 |
|
| — |
|
| (5 | ) |
Equity in net income of subsidiaries |
|
| 47 |
|
| 9 |
|
| — |
|
| (56 | ) |
| — |
|
NET INCOME |
| $ | 20 |
| $ | 16 |
| $ | 40 |
| $ | (56 | ) | $ | 20 |
|
28
ARVINMERITOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Condensed Consolidating Statement of Income
(In millions)
|
| Three Months Ended June 30, 2005 |
| |||||||||||||
|
| Parent |
| Guarantors |
| Non- Guarantors |
| Elims |
| Consolidated |
| |||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
External |
| $ | — |
| $ | 967 |
| $ | 1,422 |
| $ | — |
| $ | 2,389 |
|
Subsidiaries |
|
| — |
|
| 33 |
|
| 98 |
|
| (131 | ) |
| — |
|
Total sales |
|
| — |
|
| 1,000 |
|
| 1,520 |
|
| (131 | ) |
| 2,389 |
|
Cost of sales |
|
| (6 | ) |
| (915 | ) |
| (1,396 | ) |
| 131 |
|
| (2,186 | ) |
GROSS MARGIN |
|
| (6 | ) |
| 85 |
|
| 124 |
|
| — |
|
| 203 |
|
Selling, general and administrative |
|
| (22 | ) |
| (49 | ) |
| (33 | ) |
| — |
|
| (104 | ) |
Restructuring costs |
|
| — |
|
| — |
|
| (6 | ) |
| — |
|
| (6 | ) |
OPERATING INCOME (LOSS) |
|
| (28 | ) |
| 36 |
|
| 85 |
|
| — |
|
| 93 |
|
Equity in earnings of affiliates |
|
| 2 |
|
| 3 |
|
| 2 |
|
| — |
|
| 7 |
|
Other income (expense), net |
|
| 23 |
|
| (13 | ) |
| (10 | ) |
| — |
|
| — |
|
Interest expense, net and other |
|
| (26 | ) |
| (3 | ) |
| (2 | ) |
| — |
|
| (31 | ) |
INCOME (LOSS) BEFORE INCOME TAXES |
|
| (29 | ) |
| 23 |
|
| 75 |
|
| — |
|
| 69 |
|
Benefit (provision) for income taxes |
|
| 10 |
|
| (15 | ) |
| (10 | ) |
| — |
|
| (15 | ) |
Minority interests |
|
| — |
|
| — |
|
| (4 | ) |
| — |
|
| (4 | ) |
INCOME (LOSS) FROM CONTINUING OPERATIONS |
|
| (19 | ) |
| 8 |
|
| 61 |
|
| — |
|
| 50 |
|
INCOME FROM DISCONTINUED OPERATIONS |
|
| — |
|
| 1 |
|
| (5 | ) |
| — |
|
| (4 | ) |
Equity in net income of subsidiaries |
|
| 65 |
|
| 74 |
|
| — |
|
| (139 | ) |
| — |
|
NET INCOME |
| $ | 46 |
| $ | 83 |
| $ | 56 |
| $ | (139 | ) | $ | 46 |
|
29
ARVINMERITOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Condensed Consolidating Statement of Income
(In millions)
|
| Nine Months Ended June 30, 2006 |
| |||||||||||||
|
| Parent |
| Guarantors |
| Non- Guarantors |
| Elims |
| Consolidated |
| |||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
External |
| $ | — |
| $ | 2,754 |
| $ | 4,123 |
| $ | — |
| $ | 6,877 |
|
Subsidiaries |
|
| — |
|
| 178 |
|
| 300 |
|
| (478 | ) |
| — |
|
Total sales |
|
| — |
|
| 2,932 |
|
| 4,423 |
|
| (478 | ) |
| 6,877 |
|
Cost of sales |
|
| (14 | ) |
| (2,773 | ) |
| (4,117 | ) |
| 478 |
|
| (6,426 | ) |
GROSS MARGIN |
|
| (14 | ) |
| 159 |
|
| 306 |
|
| — |
|
| 451 |
|
Selling, general and administrative |
|
| (61 | ) |
| (145 | ) |
| (88 | ) |
| — |
|
| (294 | ) |
Restructuring costs |
|
| — |
|
| 21 |
|
| (40 | ) |
| — |
|
| (19 | ) |
Other operating income (expense) |
|
| (5 | ) |
| 17 |
|
| 11 |
|
| — |
|
| 23 |
|
OPERATING INCOME (LOSS) |
|
| (80 | ) |
| 52 |
|
| 189 |
|
| — |
|
| 161 |
|
Equity in earnings of affiliates |
|
| 4 |
|
| 15 |
|
| 6 |
|
| — |
|
| 25 |
|
Other income (expense), net |
|
| 42 |
|
| (15 | ) |
| (27 | ) |
| — |
|
| — |
|
Interest expense, net and other |
|
| (95 | ) |
| (10 | ) |
| 1 |
|
| — |
|
| (104 | ) |
INCOME (LOSS) BEFORE INCOME TAXES |
|
| (129 | ) |
| 42 |
|
| 169 |
|
| — |
|
| 82 |
|
Benefit (provision) for income taxes |
|
| 46 |
|
| 12 |
|
| (47 | ) |
| — |
|
| 11 |
|
Minority interests |
|
| — |
|
| — |
|
| (10 | ) |
| — |
|
| (10 | ) |
INCOME (LOSS) FROM CONTINUING OPERATIONS |
|
| (83 | ) |
| 54 |
|
| 112 |
|
| — |
|
| 83 |
|
INCOME FROM DISCONTINUED OPERATIONS |
|
| — |
|
| 8 |
|
| 8 |
|
| — |
|
| 16 |
|
Equity in net income of subsidiaries |
|
| 182 |
|
| 106 |
|
| — |
|
| (288 | ) |
| — |
|
NET INCOME |
| $ | 99 |
| $ | 168 |
| $ | 120 |
| $ | (288 | ) | $ | 99 |
|
30
ARVINMERITOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Condensed Consolidating Statement of Income
(In millions)
|
| Nine Months Ended June 30, 2005 |
| |||||||||||||
|
| Parent |
| Guarantors |
| Non- Guarantors |
| Elims |
| Consolidated |
| |||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
External |
| $ | — |
| $ | 2,696 |
| $ | 4,017 |
| $ | — |
| $ | 6,713 |
|
Subsidiaries |
|
| — |
|
| 118 |
|
| 292 |
|
| (410 | ) |
| — |
|
Total sales |
|
| — |
|
| 2,814 |
|
| 4,309 |
|
| (410 | ) |
| 6,713 |
|
Cost of sales |
|
| (22 | ) |
| (2,595 | ) |
| (4,015 | ) |
| 410 |
|
| (6,222 | ) |
GROSS MARGIN |
|
| (22 | ) |
| 219 |
|
| 294 |
|
| — |
|
| 491 |
|
Selling, general and administrative |
|
| (59 | ) |
| (133 | ) |
| (94 | ) |
| — |
|
| (286 | ) |
Restructuring costs |
|
| (1 | ) |
| (13 | ) |
| (51 | ) |
| — |
|
| (65 | ) |
Other operating expense |
|
| — |
|
| (2 | ) |
| (10 | ) |
| — |
|
| (12 | ) |
OPERATING INCOME (LOSS) |
|
| (82 | ) |
| 71 |
|
| 139 |
|
| — |
|
| 128 |
|
Equity in earnings of affiliates |
|
| 3 |
|
| 11 |
|
| 6 |
|
| — |
|
| 20 |
|
Other income (expense), net |
|
| 53 |
|
| (23 | ) |
| (30 | ) |
| — |
|
| — |
|
Interest expense, net and other |
|
| (79 | ) |
| (6 | ) |
| (4 | ) |
| — |
|
| (89 | ) |
INCOME (LOSS) BEFORE INCOME TAXES |
|
| (105 | ) |
| 53 |
|
| 111 |
|
| — |
|
| 59 |
|
Benefit (provision) for income taxes |
|
| 39 |
|
| (22 | ) |
| (29 | ) |
| — |
|
| (12 | ) |
Minority interests |
|
| — |
|
| — |
|
| (4 | ) |
| — |
|
| (4 | ) |
INCOME (LOSS) FROM CONTINUING OPERATIONS |
|
| (66 | ) |
| 31 |
|
| 78 |
|
| — |
|
| 43 |
|
INCOME (LOSS) FROM DISCONTINUED OPERATIONS |
|
| — |
|
| 2 |
|
| (14 | ) |
| — |
|
| (12 | ) |
Equity in net income of subsidiaries |
|
| 97 |
|
| 79 |
|
| — |
|
| (176 | ) |
| — |
|
NET INCOME |
| $ | 31 |
| $ | 112 |
| $ | 64 |
| $ | (176 | ) | $ | 31 |
|
31
ARVINMERITOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Condensed Consolidating Balance Sheet
(In millions)
|
| June 30, 2006 |
| |||||||||||||
|
| Parent |
| Guarantors |
| Non- Guarantors |
| Elims |
| Consolidated |
| |||||
CURRENT ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
| $ | 156 |
| $ | 6 |
| $ | 203 |
| $ | — |
| $ | 365 |
|
Receivables, net |
|
| — |
|
| 171 |
|
| 1,552 |
|
| — |
|
| 1,723 |
|
Inventories |
|
| — |
|
| 253 |
|
| 338 |
|
| — |
|
| 591 |
|
Other current assets |
|
| 33 |
|
| 122 |
|
| 129 |
|
| — |
|
| 284 |
|
Assets of discontinued operations |
|
| — |
|
| — |
|
| 308 |
|
| — |
|
| 308 |
|
TOTAL CURRENT ASSETS |
|
| 189 |
|
| 552 |
|
| 2,530 |
|
| — |
|
| 3,271 |
|
NET PROPERTY |
|
| 35 |
|
| 297 |
|
| 639 |
|
| — |
|
| 971 |
|
GOODWILL |
|
| — |
|
| 430 |
|
| 380 |
|
| — |
|
| 810 |
|
OTHER ASSETS |
|
| 412 |
|
| 26 |
|
| 397 |
|
| — |
|
| 835 |
|
INVESTMENTS IN SUBSIDIARIES |
|
| 3,680 |
|
| 1,463 |
|
| — |
|
| (5,143 | ) |
| — |
|
TOTAL ASSETS |
| $ | 4,316 |
| $ | 2,768 |
| $ | 3,946 |
| $ | (5,143 | ) | $ | 5,887 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT LIABILITIES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term debt |
| $ | 7 |
| $ | — |
| $ | 53 |
| $ | — |
| $ | 60 |
|
Accounts payable |
|
| 24 |
|
| 545 |
|
| 1,134 |
|
| — |
|
| 1,703 |
|
Other current liabilities |
|
| 178 |
|
| 180 |
|
| 300 |
|
| — |
|
| 658 |
|
Liabilities of discontinued operations |
|
| — |
|
| — |
|
| 150 |
|
| — |
|
| 150 |
|
TOTAL CURRENT LIABILITIES |
|
| 209 |
|
| 725 |
|
| 1,637 |
|
| — |
|
| 2,571 |
|
LONG-TERM DEBT |
|
| 1,264 |
|
| — |
|
| 24 |
|
| — |
|
| 1,288 |
|
RETIREMENT BENEFITS |
|
| 375 |
|
| — |
|
| 233 |
|
| — |
|
| 608 |
|
INTERCOMPANY PAYABLE (RECEIVABLE) |
|
| 1,279 |
|
| (1,292 | ) |
| 13 |
|
| — |
|
| — |
|
OTHER LIABILITIES |
|
| 57 |
|
| 103 |
|
| 68 |
|
| — |
|
| 228 |
|
MINORITY INTERESTS |
|
| — |
|
| — |
|
| 60 |
|
| — |
|
| 60 |
|
SHAREOWNERS’ EQUITY |
|
| 1,132 |
|
| 3,232 |
|
| 1,911 |
|
| (5,143 | ) |
| 1,132 |
|
TOTAL LIABILITIES AND SHAREOWNERS’ EQUITY |
| $ | 4,316 |
| $ | 2,768 |
| $ | 3,946 |
| $ | (5,143 | ) | $ | 5,887 |
|
32
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 |
|
33
ARVINMERITOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Condensed Consolidating Statement of Cash Flows
(In millions)
|
| Nine Months Ended June 30, 2006 |
| |||||||||||||
|
| Parent |
| Guarantors |
| Non- Guarantors |
| Elims |
| Consolidated |
| |||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS PROVIDED BY (USED FOR) OPERATING ACTIVITIES |
| $ | 162 |
| $ | (151 | ) | $ | 301 |
| $ | — |
| $ | 312 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INVESTING ACTIVITIES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures |
|
| (1 | ) |
| (24 | ) |
| (79 | ) |
| — |
|
| (104 | ) |
Acquisitions of businesses and investments, net of cash acquired |
|
| — |
|
| — |
|
| (8 | ) |
| — |
|
| (8 | ) |
Investment in debt defeasance trust |
|
| (12 | ) |
| — |
|
| — |
|
| — |
|
| (12 | ) |
Proceeds from disposition of property and businesses |
|
| — |
|
| — |
|
| 51 |
|
| — |
|
| 51 |
|
Net investing cash flows provided by discontinued operations |
|
| — |
|
| 195 |
|
| 6 |
|
| — |
|
| 201 |
|
CASH PROVIDED BY (USED FOR) INVESTING ACTIVITIES |
|
| (13 | ) |
| 171 |
|
| (30 | ) |
| — |
|
| 128 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FINANCING ACTIVITIES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in debt |
|
| (133 | ) |
| (14 | ) |
| (69 | ) |
| — |
|
| (216 | ) |
Debt issuance and extinguishment costs |
|
| (28 | ) |
| — |
|
| — |
|
| — |
|
| (28 | ) |
Proceeds from the issuance of stock options |
|
| 1 |
|
| — |
|
| — |
|
| — |
|
| 1 |
|
Intercompany advances |
|
| 125 |
|
| — |
|
| (125 | ) |
| — |
|
| — |
|
Cash dividends |
|
| (21 | ) |
| — |
|
| — |
|
| — |
|
| (21 | ) |
CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES |
|
| (56 | ) |
| (14 | ) |
| (194 | ) |
| — |
|
| (264 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EFFECT OF FOREIGN CURRENCY ON CASH |
|
| — |
|
| — |
|
| 2 |
|
| — |
|
| 2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CHANGE IN CASH AND CASH EQUIVALENTS |
|
| 93 |
|
| 6 |
|
| 79 |
|
| — |
|
| 178 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD |
|
| 63 |
|
| — |
|
| 124 |
|
| — |
|
| 187 |
|
CASH AND CASH EQUIVALENTS AT END OF PERIOD |
| $ | 156 |
| $ | 6 |
| $ | 203 |
| $ | — |
| $ | 365 |
|
34
ARVINMERITOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Condensed Consolidating Statement of Cash Flows
(In millions)
|
| Nine Months Ended June 30, 2005 |
| |||||||||||||
|
| Parent |
| Guarantors |
| Non- Guarantors |
| Elims |
| Consolidated |
| |||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS PROVIDED BY (USED FOR) OPERATING ACTIVITIES |
| $ | 218 |
| $ | (23 | ) | $ | (207 | ) | $ | — |
| $ | (12 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INVESTING ACTIVITIES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures |
|
| (2 | ) |
| (40 | ) |
| (57 | ) |
| — |
|
| (99 | ) |
Acquisitions of businesses and investments, net of cash acquired |
|
| — |
|
| — |
|
| (24 | ) |
| — |
|
| (24 | ) |
Proceeds from disposition of property and businesses |
|
| — |
|
| 36 |
|
| 2 |
|
| — |
|
| 38 |
|
Net investing cash flows provided by discontinued operations |
|
| — |
|
| — |
|
| 154 |
|
| — |
|
| 154 |
|
CASH PROVIDED BY (USED FOR) INVESTING ACTIVITIES |
|
| (2 | ) |
| (4 | ) |
| 75 |
|
| — |
|
| 69 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FINANCING ACTIVITIES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in debt |
|
| (21 | ) |
| 26 |
|
| (3 | ) |
| — |
|
| 2 |
|
Proceeds from exercise of stock options |
|
| 5 |
|
| — |
|
| — |
|
| — |
|
| 5 |
|
Intercompany advances |
|
| (113 | ) |
| — |
|
| 113 |
|
| — |
|
| — |
|
Cash dividends |
|
| (21 | ) |
| — |
|
| — |
|
| — |
|
| (21 | ) |
CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES |
|
| (150 | ) |
| 26 |
|
| 110 |
|
| — |
|
| (14 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EFFECT OF FOREIGN CURRENCY ON CASH |
|
| — |
|
| — |
|
| 5 |
|
| — |
|
| 5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CHANGE IN CASH AND CASH EQUIVALENTS |
|
| 66 |
|
| (1 | ) |
| (17 | ) |
| — |
|
| 48 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD |
|
| 2 |
|
| 1 |
|
| 129 |
|
| — |
|
| 132 |
|
CASH AND CASH EQUIVALENTS AT END OF PERIOD |
| $ | 68 |
| $ | — |
| $ | 112 |
| $ | — |
| $ | 180 |
|
35
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.
In the third quarter of fiscal year 2006, we replaced our $900 million revolving credit facility that was to expire in 2008 with two new senior secured credit facilities totaling $1.15 billion. The new credit facilities include a five year $980 million revolving credit facility and a six year $170 million term loan (see Liquidity and Contractual Obligations).
Our financial results in the third quarter of fiscal year 2006 were significantly impacted by a labor disruption and work stoppage at our commercial vehicle brakes facility in Tilbury, Ontario, Canada. The collective bargaining agreement with the Canadian Auto Workers (“CAW”) at Tilbury expired on June 3, 2006. On June 4, 2006, we announced that, after lengthy negotiations, a new tentative agreement with the CAW had not yet been reached and, as a result, operations at the facility had been suspended. On June 12, 2006, we reached a tentative agreement with the CAW, which was subsequently ratified on June 14, 2006, and resumed operations. As a result of this work stoppage, we experienced temporary manufacturing inefficiencies and incurred certain costs in order to return to normal production. We were temporarily unable to completely fulfill certain customer orders, resulting in temporary production interruptions at some customer manufacturing facilities. The impact of this labor disruption on operating income in the third quarter of fiscal year 2006 was $45 million. Included in this amount are premium labor costs, expedited freight and logistical costs and other costs associated with production disruptions at certain customers’ facilities. At June 30, 2006, $36 million is recorded as a contingent liability in the consolidated balance sheet. The ultimate settlement of this liability will be determinable over a period of time and may be negotiated, as a commercial matter, with the affected customers. The amount of this liability may change in future periods depending on our customers’ ability to schedule additional production to compensate for prior disruptions, the results of the negotiations with the affected customers and other factors. We believe that any future adjustments to this liability will not have a material effect on the company’s results of operations and financial position.
We continue to execute our restructuring plans announced in early fiscal year 2005 and have recorded $19 million of restructuring costs, primarily in our LVS business segment, in the nine months ended June 30, 2006. To date we have consolidated, closed or sold 9 facilities, primarily in the LVS business segment.
We previously announced our intention to divest our Light Vehicle Aftermarket (LVA) businesses and therefore these businesses are reported as discontinued operations for all periods presented. We announced the sale, subject to regulatory approvals, of our Gabriel South Africa LVA ride control business in June 2006 and our LVA motion control business in July 2006. We expect to complete both of these transactions in the fourth quarter of fiscal year 2006. In March 2006, we completed the sale of our LVA North American filters and exhaust businesses. In November 2005 we sold our 39-percent equity ownership interest in our LVA joint venture, Purolator India. We expect to substantially complete the divestiture of our remaining LVA businesses in fiscal year 2006.
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 completed our plan to exit the LVS ride control business. Therefore, the results of operations of this business are included in discontinued operations at June 30, 2006 and all prior periods’ results of operations have been restated to reflect this presentation.
A summary of our results for the three months ended June 30, 2006, is as follows:
• | Sales were $2.5 billion, up 4 percent from the same period last year. |
• | Operating margins were 1.9 percent, down from 3.9 percent in the same period a year ago. |
• | Diluted earnings per share from continuing operations were $0.36, compared to $0.72 per diluted share in the third quarter of fiscal year 2005. |
• | Diluted loss per share from discontinued operations was $0.07, compared to a loss of $0.06 per diluted share in the third quarter of fiscal year 2005. |
• | Net income was $20 million or $0.29 per diluted share, compared to $46 million, or $0.66 per diluted share in the same period a year ago. |
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 restructuring actions, more than offset the impact of lower selling prices to our customers.
36
ARVINMERITOR, INC.
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 was being amortized as a reduction of retiree medical expense over the average remaining service period of approximately 12 years. These plan amendments have been challenged in three separate class action lawsuits that have been filed in the United States District Court for the Eastern District of Michigan (District Court). 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. For accounting purposes, we began recording the impact of the injunction in March 2006, on a one-quarter lag from the December 22, 2005 injunction date, which is consistent with the 90-day lag between our plan measurement date and fiscal year-end. As a result of the injunction, we expect retiree medical expense to increase by approximately $12 million of which approximately $6 million was recorded in the third quarter ended June 30, 2006. We also expect retiree medical benefit payments to increase by approximately $10 million in fiscal year 2006 compared to previous estimates included in our Current Report on Form 8-K dated February 27, 2006. 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 for the nine months ended June 30, 2006 was $312 million, compared to $12 million of cash used by operating activities in the same period last year. The increase in cash flow was largely driven by a reduction in working capital and lower pension and retiree medical contributions of $62 million.
MARKET OUTLOOK
Our fiscal year 2006 outlook for light vehicle production is 15.8 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 to 340,000 units in fiscal year 2006, up from 324,000 last year, and European heavy and medium truck production will increase to 439,000 units, up from 421,000 last year.
COMPANY OUTLOOK
Our business continues to address a number of challenging industry-wide issues including:
• | Excess capacity; |
• | High commodity prices, particularly steel and oil prices; |
• | Weakened financial strength of some of the original equipment (OE) manufacturers; |
• | Employee labor relations; |
• | Reduced production volumes and changes in product mix in North America; |
• | Higher energy and transportation costs; |
• | OE pricing pressures; and |
• | Currency exchange rate volatility. |
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.
37
ARVINMERITOR, INC.
Significant factors that could affect our results in the remaining quarter of fiscal year 2006 include:
• | Higher than planned price reductions to our customers; |
• | Additional restructuring actions and the timing and recognition of restructuring charges; |
• | Our ability to recover steel price increases from our customers; |
• | The financial strength of our suppliers and customers, including potential bankruptcies; |
• | Any unplanned extended 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; |
• | The impact of currency fluctuations on sales and operating income; |
• | The emergence from bankruptcy of certain competitors; |
• | Higher than planned warranty expenses; |
• | Any adjustments to the contingent liability associated with the Tilbury labor disruption; |
• | Our ability to continue to access our bank revolving credit facilities and capital markets; and |
• | The impact of any new accounting rules. |
38
ARVINMERITOR, INC.
RESULTS OF OPERATIONS
The following is a summary of the financial results (in millions, except per share amounts):
|
| Three Months Ended |
| Nine Months Ended |
| ||||||||
|
| June 30, |
| June 30, |
| ||||||||
|
|
| 2006 |
|
| 2005 |
|
| 2006 |
|
| 2005 |
|
Sales: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Light Vehicle Systems |
| $ | 1,322 |
| $ | 1,271 |
| $ | 3,707 |
| $ | 3,656 |
|
Commercial Vehicle Systems |
|
| 1,155 |
|
| 1,118 |
|
| 3,170 |
|
| 3,057 |
|
SALES |
| $ | 2,477 |
| $ | 2,389 |
| $ | 6,877 |
| $ | 6,713 |
|
Operating Income (Loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
Light Vehicle Systems |
| $ | 37 |
| $ | 23 |
| $ | 26 |
| $ | (10 | ) |
Commercial Vehicle Systems |
|
| 14 |
|
| 72 |
|
| 143 |
|
| 146 |
|
SEGMENT OPERATING INCOME |
|
| 51 |
|
| 95 |
|
| 169 |
|
| 136 |
|
Unallocated costs |
|
| (4 | ) |
| (2 | ) |
| (8 | ) |
| (8 | ) |
OPERATING INCOME |
|
| 47 |
|
| 93 |
|
| 161 |
|
| 128 |
|
Equity in earnings of affiliates |
|
| 10 |
|
| 7 |
|
| 25 |
|
| 20 |
|
Interest expense, net and other |
|
| (28 | ) |
| (31 | ) |
| (104 | ) |
| (89 | ) |
INCOME BEFORE INCOME TAXES |
|
| 29 |
|
| 69 |
|
| 82 |
|
| 59 |
|
Benefit (provision) for income taxes |
|
| — |
|
| (15 | ) |
| 11 |
|
| (12 | ) |
Minority interests |
|
| (4 | ) |
| (4 | ) |
| (10 | ) |
| (4 | ) |
INCOME FROM CONTINUING OPERATIONS |
|
| 25 |
|
| 50 |
|
| 83 |
|
| 43 |
|
INCOME (LOSS) FROM DISCONTINUED OPERATIONS |
|
| (5 | ) |
| (4 | ) |
| 16 |
|
| (12 | ) |
NET INCOME |
| $ | 20 |
| $ | 46 |
| $ | 99 |
| $ | 31 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DILUTED EARNINGS (LOSS) PER SHARE |
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations |
| $ | 0.36 |
| $ | 0.72 |
| $ | 1.19 |
| $ | 0.62 |
|
Discontinued operations |
|
| (0.07 | ) |
| (0.06 | ) |
| 0.23 |
|
| (0.17 | ) |
Diluted earnings per share |
| $ | 0.29 |
| $ | 0.66 |
| $ | 1.42 |
| $ | 0.45 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DILUTED AVERAGE COMMON SHARES OUTSTANDING |
|
| 70.1 |
|
| 69.2 |
|
| 69.9 |
|
| 69.3 |
|
39
ARVINMERITOR, INC.
Three Months Ended June 30, 2006 Compared to Three Months Ended June 30, 2005
Sales
The following table reflects geographical business segment sales for the three months ended June 30, 2006 and 2005. 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 |
| ||||||||||
|
| June 30, |
| Dollar |
| % |
|
|
| Acquisitions |
| Volume |
| ||||||||
|
| 2006 |
| 2005 |
| Change |
| Change |
| Currency |
| / Divestitures |
| / Other |
| ||||||
LVS: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America |
| $ | 518 |
| $ | 538 |
| $ | (20 | ) | (3.7) | % | $ | 6 |
| $ | — |
| $ | (26 | ) |
Europe |
|
| 644 |
|
| 597 |
|
| 47 |
| 7.9 | % |
| 3 |
|
| (2 | ) |
| 46 |
|
Asia and other |
|
| 160 |
|
| 136 |
|
| 24 |
| 17.6 | % |
| 5 |
|
| — |
|
| 19 |
|
|
|
| 1,322 |
|
| 1,271 |
|
| 51 |
| 4.0 | % |
| 14 |
|
| (2 | ) |
| 39 |
|
CVS: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America |
| $ | 722 |
| $ | 682 |
| $ | 40 |
| 5.9 | % | $ | 2 |
| $ | (10 | ) | $ | 48 |
|
Europe |
|
| 302 |
|
| 304 |
|
| (2 | ) | (0.7) | % |
| — |
|
| (5 | ) |
| 3 |
|
Asia and other |
|
| 131 |
|
| 132 |
|
| (1 | ) | (0.8) | % |
| 5 |
|
| — |
|
| (6 | ) |
|
|
| 1,155 |
|
| 1,118 |
|
| 37 |
| 3.3 | % |
| 7 |
|
| (15 | ) |
| 45 |
|
SALES |
| $ | 2,477 |
| $ | 2,389 |
| $ | 88 |
| 3.7 | % | $ | 21 |
| $ | (17 | ) | $ | 84 |
|
Continuing Operations
Sales for the three months ended June 30, 2006 were $2,477 million, up $88 million, or 4 percent, from the same period last year. The increase in sales was primarily attributable to higher pass-through sales in our LVS business segment and higher specialty product sales in our CVS business segment. Foreign currency translation also increased sales by $21 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 third quarter of fiscal year 2006 by $17 million.
Business Segments
Light Vehicle Systems (LVS) sales were $1,322 million for the three months ended June 30, 2006, up $51 million, or 4 percent, from a year ago. The effect of foreign currency translation increased sales by $14 million. Excluding the impact of foreign currency translation, sales were up $37 million. Pass-through sales were approximately $425 million in the third quarter of fiscal year 2006 compared to approximately $348 million in the third quarter of fiscal year 2005. Pass-through sales are products sold to our customers where we acquire certain components and assemble them 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 value added sales, lower selling prices to our customers and the loss of sales associated with previously announced divestitures.
Commercial Vehicle Systems (CVS) sales were $1,155 million, up $37 million, or 3 percent, from the third quarter of fiscal year 2005. Excluding the impact of foreign currency translation, sales were up $30 million. The increase in sales was primarily attributable to higher axle and specialty product sales, offset partially by lower trailer products sales and the loss of sales associated with the divestiture of certain assets of the off-highway brakes business of approximately $15 million.
40
ARVINMERITOR, INC.
Operating Income (Loss) and Operating Margins
The following table reflects operating income and operating margins for three months ended June 30, 2006 and 2005 (in millions).
|
| Operating Income (Loss) |
| Operating Margin |
| ||||||||||||||||
|
| June 30, |
| Dollar |
| % |
| June 30, |
|
|
|
|
| ||||||||
|
| 2006 |
| 2005 |
| Change |
| Change |
| 2006 |
| 2005 |
| Change |
| ||||||
LVS: |
| $ | 37 |
| $ | 23 |
| $ | 14 |
| 61 | % | 2.8 | % | 1.8 | % | 11.0 |
| pts |
| |
CVS: |
|
| 14 |
|
| 72 |
|
| (58 | ) | (81) | % | 1.2 | % | 6.4 | % | (5.2 | ) | pts |
| |
Total segment |
|
| 51 |
|
| 95 |
|
| (44 | ) | (46) | % | 2.1 | % | 4.0 | % | (1.9 | ) | pts |
| |
Unallocated |
|
| (4 | ) |
| (2 | ) |
| (2 | ) |
|
|
|
|
|
|
|
|
|
| |
TOTAL |
| $ | 47 |
| $ | 93 |
| $ | (46 | ) | (49) | % | 1.9 | % | 3.9 | % | (2.0 | ) | pts |
| |
Operating income for the three months ended June 30, 2006 was $47 million, a decrease of $46 million, compared to the three months ended June 30, 2005. Operating margin was 1.9 percent, down from an operating margin of 3.9 percent in the same period last year. The labor disruption and work stoppage at our commercial vehicle brakes operation in Tilbury unfavorably impacted operating income by $45 million.
We recorded restructuring costs in the third quarter of fiscal years 2006 and 2005 as follows (in millions).
|
| Three Months Ended June 30, |
| ||||||||||||||||
|
| 2006 |
| 2005 |
| 2006 |
| 2005 |
| 2006 |
| 2005 |
| ||||||
|
| LVS |
| CVS |
| Total |
| ||||||||||||
Fiscal year 2005 actions: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Facility rationalization, primarily employee severance benefits |
| $ | 1 |
| $ | 4 |
| $ | 1 |
| $ | — |
| $ | 2 |
| $ | 4 |
|
Asset Impairment |
|
| — |
|
| — |
|
| — |
|
| 1 |
|
| — |
|
| 1 |
|
Reversals |
|
| (1 | ) |
| — |
|
| — |
|
| — |
|
| (1 | ) |
| — |
|
Total fiscal year 2005 actions |
|
| — |
|
| 4 |
|
| 1 |
|
| 1 |
|
| 1 |
|
| 5 |
|
Other actions |
|
| — |
|
| 1 |
|
| — |
|
| — |
|
| — |
|
| 1 |
|
Total restructuring costs |
| $ | — |
| $ | 5 |
| $ | 1 |
| $ | 1 |
| $ | 1 |
| $ | 6 |
|
Selling, general and administrative expenses as a percentage of sales were 4.2 percent, down slightly from the prior year.
Business Segments
LVS operating income was $37 million, compared to $23 million in the same period last year. The primary drivers for the improvement in operating income were the benefits of cost reduction and productivity programs, restructuring savings and lower restructuring costs. Also included in operating income in the third quarter of fiscal year 2006, was a $5 million gain on the liquidation of Meritor Suspensions Systems Holdings (UK) Ltd (MSSH), a 57-percent owned consolidated joint venture. This gain primarily related to the extinguishment of debt with the minority partner. In the prior year, LVS recorded restructuring costs of $5 million primarily associated with employee termination benefits for workforce reductions related to facility closures and consolidations.
CVS operating income was $14 million, down $58 million compared to the same period last year. Operating margin decreased to 1.2 percent from 6.4 percent a year ago. The labor disruption and work stoppage at our commercial vehicle brakes operation in Tilbury unfavorably impacted operating income by $45 million. Other items impacting operating income were higher retiree medical costs of $7 million, higher warranty costs of $8 million and unfavorable product mix. These matters more than offset the benefits of higher sales volumes, cost reduction and productivity programs and restructuring savings. CVS recorded restructuring costs of $1 million in the three months ended June 30, 2006 and 2005.
41
ARVINMERITOR, INC.
Other Income Statement Items
Equity in earnings of affiliates was $10 million in the third quarter of fiscal year 2006, compared to $7 million in the third quarter of fiscal year 2005. The increase was largely driven by higher earnings from our commercial vehicle affiliates.
Income taxes from continuing operations in the quarter ended June 30, 2006 were favorably impacted by a decrease in the expected full year effective tax rate. As a result, we recorded a catch up adjustment in the third quarter of fiscal year 2006 to adjust income taxes for the nine months ended June 30, 2006 to the lower effective tax rate. The decrease in the expected full year effective tax rate was primarily due to lower income before taxes. We recorded income tax expense of $15 million in the prior year.
Interest expense, net and other was $28 million, compared to $31 million in the same period last year. Lower interest expense is primarily due to lower debt levels as a result of the extinguishment of $600 million of notes in the second quarter of fiscal year 2006 offset by the issuance of $300 million of convertible notes, higher levels of short term borrowings and higher interest rates on our variable rate debt compared with the prior year.
Income from continuing operations for the third quarter of fiscal year 2006 was $25 million, or $0.36 per diluted share, compared to $50 million, or $0.72 per diluted share, in the prior year.
Loss from discontinued operations was $5 million for the three months ended June 30, 2006 compared to a loss of $4 million a year ago. In the three months ended June 30, 2006, we recorded an after-tax non-cash impairment charge of $2 million associated with the land and building at our LVA North American motion control business. The land and building are not included in the sale of this business, which was announced in July 2006. Loss from discontinued operations also includes after-tax restructuring costs of $1 million primarily related to our remaining LVA businesses. These costs were offset by a lower effective tax rate for discontinued operations in the third quarter of fiscal year 2006, compared to the prior year.
Net income for the third quarter of fiscal year 2006 was $20 million, or $0.29 per diluted share, compared to $46 million, or $0.66 per diluted share, in the prior year.
Nine Months Ended June 30, 2006 Compared to Nine Months Ended June 30, 2005
Sales
The following table reflects geographical business segment sales for the nine months ended June 30, 2006 and 2005. 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 |
| ||||||||||
|
| June 30, |
| Dollar |
| % |
|
|
| Acquisitions |
| Volume |
| ||||||||
|
| 2006 |
| 2005 |
| Change |
| Change |
| Currency |
| / Divestitures |
| / Other |
| ||||||
LVS: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America |
| $ | 1,492 |
| $ | 1,576 |
| $ | (84 | ) | (5.3) | % | $ | 12 |
| $ | (14 | ) | $ | (82 | ) |
Europe |
|
| 1,775 |
|
| 1,701 |
|
| 74 |
| 4.4 | % |
| (94 | ) |
| (9 | ) |
| 177 |
|
Asia and other |
|
| 440 |
|
| 379 |
|
| 61 |
| 16.1 | % |
| 15 |
|
| — |
|
| 46 |
|
|
|
| 3,707 |
|
| 3,656 |
|
| 51 |
| 1.4 | % |
| (67 | ) |
| (23 | ) |
| 141 |
|
CVS: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America |
| $ | 1,968 |
| $ | 1,830 |
| $ | 138 |
| 7.5 | % | $ | 4 |
| $ | (30 | ) | $ | 164 |
|
Europe |
|
| 844 |
|
| 880 |
|
| (36 | ) | (4.1) | % |
| (66 | ) |
| (12 | ) |
| 42 |
|
Asia and other |
|
| 358 |
|
| 347 |
|
| 11 |
| 3.2 | % |
| 16 |
|
| — |
|
| (5 | ) |
|
|
| 3,170 |
|
| 3,057 |
|
| 113 |
| 3.7 | % |
| (46 | ) |
| (42 | ) |
| 201 |
|
SALES |
| $ | 6,877 |
| $ | 6,713 |
| $ | 164 |
| 2.4 | % | $ | (113 | ) | $ | (65 | ) | $ | 342 |
|
Continuing Operations
Sales for the nine months ended June 30, 2006 were $6,877 million, up $164 million, or 2 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 decreased sales by $113 million, primarily due to the weaker U.S. dollar compared to other currencies in which we
ARVINMERITOR, INC.
42
operate, and lower selling prices to certain customers. Divestitures of various LVS businesses in previous periods and the sale of certain assets of CVS’ off-highway brake business reduced sales in the first nine months of fiscal year 2006 by $65 million.
Business Segments
Light Vehicle Systems (LVS) sales were $3,707 million for the nine months ended June 30, 2006, up $51 million compared to a year ago. The effect of foreign currency translation decreased sales by $67 million. Excluding the impact of foreign currency translation, sales were up $118 million. Pass-through sales were approximately $1,170 million in the first nine months of fiscal year 2006 compared to approximately $991 million in the first nine months of fiscal year 2005. The higher pass-through sales were partially offset by lower OE demand, lower pricing 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 $3,170 million for the nine months ended June 30, 2006, up $113 million, or 4 percent, from a year ago. Excluding the impact of foreign currency translation, sales were up $159 million. The increase in sales was primarily attributable to stronger North American and European commercial vehicle truck volumes. Compared to the same period last year, production volumes in North America for Class 8 trucks and Western European heavy and medium-duty truck volumes increased 6 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 $42 million.
Operating Income (Loss) and Operating Margins
The following table reflects operating income and operating margins for the nine months ended June 30, 2006 and 2005 (in millions).
|
| Operating Income (Loss) |
| Operating Margin |
| |||||||||||||||
|
| June 30, |
| Dollar |
| % |
| June 30, |
|
|
|
|
| |||||||
|
| 2006 |
| 2005 |
| Change |
| Change |
| 2006 |
| 2005 |
| Change |
| |||||
LVS: |
| $ | 26 |
| $ | (10 | ) | $ | 36 |
| 360 | % | 0.7 | % | -0.3 | % | 1.0 |
| pts |
|
CVS: |
|
| 143 |
|
| 146 |
|
| (3 | ) | (2) | % | 4.5 | % | 4.8 | % | (0.3) |
| pts |
|
Total segment |
|
| 169 |
|
| 136 |
|
| 33 |
| 24 | % | 2.5 | % | 2.0 | % | 0.5 |
| pts |
|
Unallocated |
|
| (8 | ) |
| (8 | ) |
| — |
| — |
| — |
| — |
| — |
|
|
|
TOTAL |
| $ | 161 |
| $ | 128 |
| $ | 33 |
| 26 | % | 2.3 | % | 1.9 | % | 0.4 |
| pts |
|
Operating income for the nine months ended June 30, 2006 was $161 million, an increase of $33 million, compared to the nine months ended June 30, 2005. Operating margin was 2.3 percent, up from 1.9 percent a year ago.
We recorded restructuring costs in the nine months ended June 30, 2006 and 2005 as follows (in millions).
|
| Nine Months Ended June 30, |
| ||||||||||||||||
|
| 2006 |
| 2005 |
| 2006 |
| 2005 |
| 2006 |
| 2005 |
| ||||||
|
| LVS |
| CVS |
| Total |
| ||||||||||||
Fiscal year 2005 actions: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaried reduction in force |
| $ | 13 |
| $ | 10 |
| $ | — |
| $ | 13 |
| $ | 13 |
| $ | 23 |
|
Facility rationalization, primarily employee severance benefits |
|
| 7 |
|
| 20 |
|
| 3 |
|
| — |
|
| 10 |
|
| 20 |
|
Asset Impairment |
|
| 3 |
|
| 8 |
|
| — |
|
| 1 |
|
| 3 |
|
| 9 |
|
Reversals |
|
| (7 | ) |
| — |
|
| — |
|
| — |
|
| (7 | ) |
| — |
|
Total fiscal year 2005 actions |
|
| 16 |
|
| 38 |
|
| 3 |
|
| 14 |
|
| 19 |
|
| 52 |
|
Other actions |
|
| — |
|
| 13 |
|
| — |
|
| — |
|
| — |
|
| 13 |
|
Total restructuring costs |
| $ | 16 |
| $ | 51 |
| $ | 3 |
| $ | 14 |
| $ | 19 |
| $ | 65 |
|
The labor disruption and work stoppage at our commercial vehicle brakes operation in Tilbury unfavorably impacted operating income by $45 million. Operating income for the nine months ended June 30, 2006, also includes a $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 $19 million were largely offset by the loss of income associated with certain of our previous
43
ARVINMERITOR, INC.
divestitures of $13 million and higher pension costs of $20 million when compared to the same period last year. Included in operating income in the first nine months of fiscal year 2005 were $14 million in charges associated with customer bankruptcies, $6 million of environmental remediation costs associated with a former Rockwell facility and a $4 million gain on the sale of the Columbus, Indiana stamping and manufacturing components business in the first quarter of fiscal 2005.
Selling, general and administrative expenses as a percentage of sales were 4.3 percent in the first nine months of fiscal year 2006, unchanged from the prior year.
Business Segments
LVS operating income was $26 million, compared to an operating loss of $10 million in the same period last year. The primary driver for the improvement in operating income in the nine months ended June 30, 2006 was a reduction of $35 million in restructuring costs. LVS recorded restructuring costs of $16 million in the nine months ended June 30, 2006. These restructuring costs are net of reversals of costs recorded in previous periods of $7 million and include $19 million of employee termination benefits, $3 million of asset impairment charges and $1 million of other costs associated with the closure of certain facilities. LVS also recorded a $5 million gain on the liquidation of MSSH in the nine months ended June 30, 2006. This gain primarily related to the extinguishment of debt owed to the minority partner. In the prior year, LVS recorded restructuring costs of $51 million. These charges included $38 million of costs associated with the actions announced in the second quarter of fiscal year 2005 and $13 million associated with other facility closures and consolidations and workforce reductions. The $13 million included $8 million of costs associated with closure of the Sheffield, England stabilizer bar plant and $5 million of severance and other employee termination benefits related to a reduction in force at certain facilities and the consolidation of two plants in Brazil in the prior year.
Through the nine months ended June 30, 2006, LVS was able to more than offset lower customer pricing with productivity and cost reduction actions and restructuring savings. Also impacting operating income in the first nine months of fiscal year 2006 were $8 million of higher pension and retiree medical costs. Operating income in the first nine months of fiscal year 2005 included $11 million in charges associated with customer bankruptcies, a $4 million net charge associated with a product warranty matter and a $4 million gain on the sale of its Columbus, Indiana stamping and manufacturing components business in the first quarter of fiscal year 2005.
CVS operating income was $143 million, down $3 million compared to the same period last year. Operating margin decreased to 4.5 percent from 4.8 percent a year ago. The labor disruption and work stoppage at our brakes facility in Tilbury unfavorably impacted operating income by $45 million. Favorably impacting operating income was a $23 million gain on the sale of certain assets of the off-highway brake business, the benefits of the higher sales volumes and productivity and cost reduction actions and restructuring savings. Higher pension and retiree medical costs lowered operating income in the first nine months of fiscal year 2006 by $12 million when compared to the same period last year. CVS recorded restructuring costs of $3 million, primarily related to employee severance benefits, in the first nine months of fiscal year 2006. Operating income for nine months ended June 30, 2006 included $14 million of restructuring costs and a $3 million charge associated with the bankruptcy of a European trailer customer.
Other Income Statement Items
Income tax benefit from continuing operations for the nine months ended June 30, 2006, was $11 million compared to income tax expense of $12 million in the prior year. In the nine months ended June 30, 2006, the company recorded a $23 million tax benefit related to the expiration of certain statutes of limitations and the completion of various worldwide tax audits of certain of the company’s income tax returns.
Interest expense, net and other was $104 million, compared to $89 million in the same period last year. Included in interest expense, net and other for the nine months ended June 30, 2006 were $9 million of costs associated with the extinguishment of $600 million of notes we repurchased in the second quarter of fiscal year 2006. These costs include transaction expenses, including legal and other professional fees, unamortized debt issuance costs, and premiums paid to repurchase the notes. Higher levels of short term borrowings and higher interest rates on our variable rate debt compared with the prior year also increased interest expense.
Income from continuing operations for the first nine months of fiscal year 2006 was $83 million, or $1.19 per diluted share, compared to $43 million, or $0.62 per diluted share, in the prior year.
Income from discontinued operations was $16 million for the nine months ended June 30, 2006 compared to a loss of $12 million a year ago. In the second quarter of fiscal year 2006, we completed the sale of our LVA North American filters and exhaust businesses. Cash proceeds from these divestitures were $198 million, resulting in a net after-tax gain of $22 million, or $0.31 per diluted share. We also evaluated for accounting purposes the fair value of the remaining LVA businesses. This resulted in after-tax non-cash impairment charges of $14 million, or $0.20 per diluted share in the nine months ended June 30, 2006. Also included in income from discontinued operations in the first nine months of fiscal year 2006 was an after-tax gain of $2 million on the sale of our
44
ARVINMERITOR, INC.
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 nine months of fiscal year 2005.
Included in income from discontinued operations in the first nine months of fiscal year 2006 is an after-tax loss of $2 million on the sale of our LVS ride control business located in Asti, Italy and a reversal of approximately $7 million of after-tax employee severance benefits 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. We previously expected to incur these costs as part of the closure of the ride control business in Asti, Italy. Income from discontinued operations in the prior year includes approximately $10 million of after-tax restructuring costs related to the closure of our light vehicle ride control operations.
Income from discontinued operations in the nine months ended June 30, 2006 also includes after-tax restructuring costs of $4 million related to our LVA businesses.
Net income for the first nine months of fiscal year 2006 was $99 million, or $1.42 per diluted share, compared to $31 million, or $0.45 per diluted share, in the prior year.
FINANCIAL CONDITION
Capitalization
|
| June 30, 2006 |
| September 30, 2005 |
| ||
Short-term debt |
| $ | 60 |
| $ | 131 |
|
Long-term debt |
|
| 1,288 |
|
| 1,451 |
|
Total debt |
|
| 1,348 |
|
| 1,582 |
|
Minority interests |
|
| 60 |
|
| 58 |
|
Shareowners’ equity |
|
| 1,132 |
|
| 875 |
|
Total capitalization |
| $ | 2,540 |
| $ | 2,515 |
|
|
|
|
|
|
|
|
|
Ratio of debt to capitalization |
|
| 53 | % |
| 63 | % |
We remain committed to strong cash flow generation, the reduction of debt and regaining an investment grade credit rating. In March 2006, we issued $300 million of 4.625 percent convertible senior unsecured notes due 2026. Net proceeds from the offering, along with proceeds from the sale of our LVA North American filters and exhaust businesses and borrowings under our accounts receivable securitization programs were used to purchase and extinguish $600 million of notes with maturities between 2007 through 2009. Our total debt to capitalization ratio was 53 percent at June 30, 2006, compared to 63 percent at September 30, 2005.
For the first nine 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.
45
ARVINMERITOR, INC.
Cash Flows
|
| Nine Months Ended |
| ||||
|
| June 30, |
| ||||
|
| 2006 |
| 2005 |
| ||
OPERATING CASH FLOWS |
|
|
|
|
|
|
|
Income from continuing operations |
| $ | 83 |
| $ | 43 |
|
Depreciation and amortization |
|
| 125 |
|
| 135 |
|
Gains on divestitures |
|
| (28 | ) |
| (4 | ) |
Loss on debt extinguishment |
|
| 9 |
|
| — |
|
Restructuring costs, net of payments |
|
| (9 | ) |
| 39 |
|
Pension and retiree medical expense |
|
| 102 |
|
| 82 |
|
Pension and retiree medical contributions |
|
| (79 | ) |
| (141 | ) |
Proceeds from termination of interest rate swaps |
|
| — |
|
| 22 |
|
Change in working capital |
|
| 16 |
|
| (146 | ) |
Changes in sale of receivables |
|
| 105 |
|
| 137 |
|
Other |
|
| 26 |
|
| (28 | ) |
Net operating cash provided by continuing operations |
|
| 350 |
|
| 139 |
|
Net operating cash used for discontinued operations |
|
| (38 | ) |
| (151 | ) |
CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES |
| $ | 312 |
| $ | (12 | ) |
Cash provided by operating activities was $312 million in the first nine months of fiscal year 2006, compared to $12 million of cash used by operating activities for the same period in the prior year. The increase in cash flow is primarily attributable to lower usage of cash for working capital for both continuing operations and discontinued operations and lower pension and retiree medical contributions of $62 million. Cash used by discontinued operations was $38 million compared to cash used by discontinued operations of $151 million a year ago.
|
| Nine Months Ended |
| ||||
|
| June 30, |
| ||||
|
| 2006 |
| 2005 |
| ||
INVESTING CASH FLOWS |
|
|
|
|
|
|
|
Capital expenditures |
| $ | (104 | ) | $ | (99 | ) |
Acquisitions of businesses and investments, net of cash acquired |
|
| (8 | ) |
| (24 | ) |
Investment in debt defeasance trust |
|
| (12 | ) |
| — |
|
Proceeds from disposition of property and businesses |
|
| 51 |
|
| 38 |
|
Net investing cash flows provided by discontinued operations |
|
| 201 |
|
| 154 |
|
CASH PROVIDED BY INVESTING ACTIVITIES |
| $ | 128 |
| $ | 69 |
|
Cash provided by investing activities was $128 million in the first nine months of fiscal year 2006, compared to $69 million in the first nine months of fiscal year 2005. Capital expenditures increased to $104 million compared to $99 million in the same period last year. As a percentage of sales, capital expenditures remained unchanged from the prior period at 1.5 percent. During the nine months ended June 30, 2006, we received proceeds of $39 million from the disposition of certain assets of our off-highway brakes business. In the third quarter of fiscal year 2006, we purchased $12 million of U.S. government securities and placed those securities into an irrevocable trust, for the sole purpose of funding payments of principal and interest through the stated maturity on the $5 million outstanding 6 3/4 percent notes due 2008 and the $6 million outstanding 7 1/8 percent notes due 2009, in order to defease certain covenants under the associated indenture. During the nine months ended June 30, 2005, we used $24 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.
Discontinued operations provided cash flows from investing activities of $201 million in the first nine months of fiscal year 2006, primarily related to the cash received from the sales of our LVA North American filters and exhaust businesses and our 39-percent equity ownership interest in Purolator India, a light vehicle aftermarket joint venture. Discontinued operations provided investing cash flows, primarily related to the proceeds from the sale of our coil coating business, of $154 million in the first nine months of fiscal 2005. Discontinued operations used cash of $6 million for capital expenditures in the first nine months of fiscal year 2006 compared to $9 million in fiscal year 2005.
46
ARVINMERITOR, INC.
|
| Nine Months Ended |
| ||||
|
| June 30, |
| ||||
|
| 2006 |
| 2005 |
| ||
FINANCING CASH FLOWS |
|
|
|
|
|
|
|
Net increase (decrease) in revolving credit facilities |
| $ | — |
| $ | — |
|
Payments on U.S. accounts receivable securitization program |
|
| (66 | ) |
| — |
|
Proceeds from issuance of convertible notes and term loan |
|
| 470 |
|
| — |
|
Repayment of notes |
|
| (603 | ) |
| (21 | ) |
Change in lines of credit and other |
|
| (17 | ) |
| 23 |
|
Net change in debt |
|
| (216 | ) |
| 2 |
|
Debt issuance and extinguishment costs |
|
| (28 | ) |
| — |
|
Cash dividends |
|
| (21 | ) |
| (21 | ) |
Proceeds from exercise of stock options |
|
| 1 |
|
| 5 |
|
CASH USED FOR FINANCING ACTIVITIES |
|
| (264 | ) | $ | (14 | ) |
Cash used for financing activities was $264 million in the first nine months of fiscal year 2006, compared to $14 million in the first nine months of fiscal year 2005. In the third quarter of fiscal year 2006, we replaced our $900 million revolving credit facility that was to expire in 2008 with two new senior secured credit facilities totaling $1.15 billion. The new credit facilities include a six year $170 million term loan. In March 2006, we issued $300 million of 4.625 percent convertible senior unsecured notes due in 2026. Net proceeds from the offering, along with proceeds from the sales of our LVA North American filters and exhaust businesses and borrowings under our accounts receivable securitization programs were used to purchase and extinguish $600 million of certain outstanding near-term debt maturities. We incurred $28 million of costs related to these transactions. Additionally, in the first quarter of fiscal year 2006, we purchased, at a discount, $3 million of our 6.8 percent notes on the open market.
In September 2005, we entered into a new U.S. accounts receivable securitization arrangement. Amounts outstanding under this 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. We reduced amounts outstanding under lines of credit and other by $17 million in the first nine months of fiscal year 2006.
We paid dividends of $21 million in the first nine months of fiscal years 2006 and 2005. We received proceeds of $1 million and $5 million from the exercise of stock options in the first nine months of fiscal year 2006 and 2005, respectively.
LIQUIDITY AND CONTRACTUAL OBLIGATIONS
We are contractually obligated to make payments as follows (in millions):
|
| Payments Due by Fiscal Period |
| |||||||||||||
|
| Total |
| 2006 |
| 2007-2008 |
| 2009-2010 |
| Thereafter |
| |||||
Total debt (1) |
| $ | 1,347 |
| $ | 54 |
| $ | 71 |
| $ | 85 |
| $ | 1,137 |
|
Operating leases (4) |
|
| 77 |
|
| 22 |
|
| 31 |
|
| 19 |
|
| 5 |
|
Interest payments on long-term debt (2) (4) |
|
| 739 |
|
| 96 |
|
| 181 |
|
| 171 |
|
| 291 |
|
Purchase option for joint venture |
|
| 22 |
|
| — |
|
| 22 |
|
| — |
|
| — |
|
Residual value guarantees under certain leases (3) |
|
| 30 |
|
| — |
|
| 30 |
|
| — |
|
| — |
|
Total |
| $ | 2,215 |
| $ | 172 |
| $ | 335 |
| $ | 275 |
| $ | 1,433 |
|
(1) Amounts due in fiscal 2006, primarily relate to borrowings on the U.S. accounts receivable securitization at June 30, 2006. Total debt excludes the fair value adjustment of notes of $3 million, unamortized debt discount and $5 million debt of discontinued operations.
(2) Includes the estimated impact of our interest rate swaps.
(3) In July 2006, we purchased the leased properties and extinguished our obligation.
(4) Payments due in fiscal period 2006 represent amounts for the full fiscal year.
47
ARVINMERITOR, INC.
In addition to the obligations above, in connection with the sale of our LVA North American filters business in the second quarter of fiscal year 2006, we agreed to indemnify the purchaser against liabilities from litigation and commercial losses in connection with specific intellectual property claims, with the maximum potential indemnity capped at $4 million for commercial losses.
We also sponsor defined benefit pension plans that cover most of our U.S. employees and certain non-U.S. employees. Our funding practice provides that the annual contribution to the pension trusts will be at least equal to the minimum amounts required by ERISA in the U.S. and the actuarial recommendations or statutory requirements in other countries. We expect funding for our retirement pension plans of approximately $55 million in fiscal year 2006, a reduction of $68 million from its previous estimate of $123 million included in our Current Report on Form 8-K dated February 27, 2006.
Revolving and Other Debt – In June 2006, we replaced our $900 million revolving credit facility that was to expire in 2008 with two new senior secured credit facilities totaling $1.15 billion (the new credit facilities). The new credit facilities include a five year $980 million revolving credit facility and a six year $170 million term loan. Borrowings under the new revolving credit facility are subject to interest based on quoted LIBOR rates plus a margin, and a commitment fee on undrawn amounts, both of which are based upon the company’s current credit rating for the senior secured facilities. At June 30, 2006, the margin over the LIBOR rate was 150 basis points, and the commitment fee was 30 basis points. Similar to the prior revolving credit facility, the new revolving credit facility includes a $150 million limit on the issuance of letters of credit. At June 30, 2006 and September 30, 2005, approximately $27 million and $23 million letters of credit, respectively, were issued.
The term loan is payable in quarterly installments of $0.25 million with the remaining balance due at maturity. Borrowings under the term loan are subject to interest based on quoted LIBOR rates plus a margin. At June 30, 2006, the margin over the LIBOR rate was 175 basis points.
Borrowings under the revolving credit facility and term loan are collateralized by approximately $1.2 billion of the company’s assets, primarily consisting of eligible accounts receivable, inventory, plant, property, and equipment, intellectual property and the company’s investment in certain of its wholly-owned subsidiaries.
Certain of the company’s subsidiaries, as defined in the credit agreement, irrevocably and unconditionally guarantee amounts outstanding under the new credit facilities. The new credit facility requires us to maintain a total net debt to earnings before interest, taxes, depreciation and amortization (“EBITDA”) ratio no greater than 4.25x and a minimum fixed charge coverage ratio (EBITDA less capital expenditures to interest expense) no less than 1.50x. At June 30, 2006, we were in compliance with all covenants.
We also have an arrangement with a non-consolidated joint venture that allows us to borrow funds from time to time, at LIBOR plus 50 basis points. No amounts were outstanding under this arrangement at June 30, 2006 and September 30, 2005.
Debt Securities - In June 2006, the company entered into an agreement to purchase, at a discount, $10 million of its $380 million outstanding 8 3/4 percent notes on the open market. This transaction settled on July 6, 2006 and the debt was extinguished. This transaction did not have a significant impact on the company’s results of operations in the third quarter ended June 30, 2006. 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.
In March 2006, we completed an offer to repurchase $600 million aggregate principal amount of its previously outstanding notes in the following amounts: $195 million of its outstanding $200 million 6.625 percent notes due in 2007; $95 million of its outstanding $100 million 6.75 percent notes due in 2008; $225 million of its outstanding $302 million 6.8 percent notes due in 2009; and $85 million of its outstanding $91 million 7.125 percent notes also due in 2009.
In the third quarter of fiscal year 2006, the company purchased $12 million of U.S. government securities and placed those securities into an irrevocable trust, for the sole purpose of funding payments of principal and interest through the stated maturity on the $5 million outstanding 6-3/4% notes due 2008 and the $6 million outstanding 7.125% notes due 2009, in order to defease certain covenants under the associated indenture.
We have $150 million of debt securities remaining unissued under the shelf registration filed with the SEC in April 2001 (see Note 14 of the Notes to Consolidated Financial Statements).
Convertible Notes – In March 2006, the company issued $300 million of 4.625 percent convertible senior unsecured notes due 2026 (the “convertible notes”). The convertible notes were sold by the company to qualified institutional buyers in a private placement exempt from the registration requirements of the Securities Act of 1933. These convertible notes were registered with the Securities and Exhange Commission under the Securities Act of 1993 on May 23, 2006. Net proceeds received by the company, after issuance costs, were $289 million. Cash interest at a rate of 4.625 percent per annum from the date of issuance through March 1, 2016 is payable semi-annually in arrears on March 1 and September 1 of each year. After March 1, 2016, the principal amount of
48
ARVINMERITOR, INC.
the convertible notes will be subject to accretion at a rate that provides holders with an aggregate annual yield to maturity of 4.625 percent.
The notes are convertible into shares of the company’s common stock at an initial conversion rate, subject to adjustment, equivalent to 47.6667 shares of common stock per $1,000 initial principal amount of notes, which represents an initial conversion price of approximately $20.98 per share. If converted, the accreted principal amount will be settled in cash and the remainder of the company’s conversion obligation, if any, in excess of such accreted principal amount will be settled in cash, shares of common stock, or a combination thereof, at the company’s election.
Holders may convert their notes at any time on or after March 1, 2024. Prior to March 1, 2024, holders may convert their notes only under the following circumstances:
• | during any calendar quarter, after the calendar quarter ending June 30, 2006, if the closing price of our common stock for 20 or more trading days in a period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter exceeds 120 percent of the applicable conversion price; |
• | during the five business day period after any five consecutive trading day period in which the average trading price per $1,000 initial principal amount of notes is equal to or less than 97 percent of the average conversion value of the notes during such five consecutive trading day period; |
• | upon the occurrence of specified corporate transactions; or |
• | if the notes are called by us for redemption. |
On or after March 1, 2016, we may redeem the convertible notes, in whole or in part, for cash at a redemption price equal to 100 percent of the accreted principal amount plus any accrued and unpaid interest. On each of March 1, 2016, 2018, 2020, 2022, and 2024, or upon certain fundamental changes, holders may require the company to purchase all or a portion of their convertible notes at a purchase price in cash equal to 100 percent of the accreted principal amount plus any accrued and unpaid interest.
Accounts Receivable Securitization and Factoring – In March 2006, we entered into a new European arrangement to sell trade receivables through one of our European subsidiaries. Under the new arrangement, we can sell up to €100 million ($127 million) of eligible trade receivables. The receivables under this program are sold at face value and excluded from the consolidated balance sheet. We had utilized €48 million ($60 million) of this accounts receivable securitization facility as of June 30, 2006.
In September 2005, we entered into a new $250 million U.S. 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 June 30, 2006 and September 30, 2005, we had utilized $46 million and $112 million of this accounts receivable securitization facility, respectively. 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 June 30, 2006, we were in compliance with all covenants.
In addition, several of our European subsidiaries factor eligible accounts receivable with financial institutions. The amount of factored receivables was $73 million and $23 million at June 30, 2006 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.
49
ARVINMERITOR, INC.
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.
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.
The results of the sensitivity analysis are as follows (in millions):
|
| Assuming a 10% Increase in Rates |
| Assuming a 10% Decrease in Rates |
| Favorable / (Unfavorable) Impact on |
|
Market Risk |
|
|
|
|
|
|
|
Foreign Currency Sensitivity: |
|
|
|
|
|
|
|
Forward Contracts |
| 1.7 |
| (1.7 | ) | Fair Value |
|
Foreign Currency Denominated Debt |
| 1.9 |
| (1.9 | ) | Fair Value |
|
|
|
|
|
|
|
|
|
Interest Rate Sensitivity: |
|
|
|
|
|
|
|
Debt - Fixed Rate |
| (45.2 | ) | (242.8 | ) | Fair Value |
|
Debt - Variable Rate |
| (3.9 | ) | 3.9 |
| Cash Flow |
|
|
|
|
|
|
|
|
|
Interest Rate Swaps (Pay Variable, Receive Fixed) |
| (2.1 | ) | 2.1 |
| 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.
50
ARVINMERITOR, INC.
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 June 30, 2006. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that, as of June 30, 2006, 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.
There have been no changes in the company’s internal control over financial reporting that occurred during the quarter ended June 30, 2006 that have materially affected, or are 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.
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 cycles and 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; possible adverse effects of any future suspension of normal trade credit terms by our suppliers; potential difficulties competing with companies that have avoided their existing contracts in bankruptcy and reorganization proceedings; successful integration of acquired or merged businesses; the ability to achieve the expected annual savings and synergies from past and future business combinations and the ability to achieve the expected benefits of restructuring actions; 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 continue to comply with covenants in its financing agreements; 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; rising costs of pension and other post-retirement benefits and possible changes in pension and other accounting rules; 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 Results of Operations and Financial Condition” 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.
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Item 6. Exhibits.
4.1 | First Supplemental Indenture, dated as of June 23, 2006, to the Indenture, dated as of March 7, 2006, between ArvinMeritor, Inc. and BNY Midwest Trust Company, as Trustee (including Subsidiary Guaranty dated as of June 23, 2006), filed as Exhibit 4.1 to the Form 8-K dated June 23, 2006 (filed on June 27, 2006), is incorporated herein by reference. |
4.2 | Third Supplemental Indenture, dated as of June 23, 2006, to the Indenture, dated as of April 1, 1998, between ArvinMeritor, Inc. (successor to Meritor Automotive, Inc.) and BNY Midwest Trust Company (successor to Chase Manhattan Bank), as Trustee (including Subsidiary Guaranty dated as of June 23, 2006) , filed as Exhibit 4.2 to the Form 8-K dated June 23, 2006 (filed on June 27, 2006), is incorporated herein by reference. |
4.3 | Fourth Supplemental Indenture, dated as of June 23, 2006, to the Indenture, dated as of July 3, 1990, between ArvinMeritor, Inc. (successor to Arvin Industries, Inc.) and BNY Midwest Trust Company (successor to Harris Trust and Savings Bank), as Trustee (including Subsidiary Guaranty dated as of June 23, 2006), filed as Exhibit 4.3 to the Form 8-K dated June 23, 2006 (filed on June 27, 2006), is incorporated herein by reference. |
10.1 | Credit Agreement, dated as of June 23, 2006, by and among ArvinMeritor, Inc., ArvinMeritor Finance Ireland, the institutions from time to time parties thereto as lenders, JPMorgan Chase Bank, National Association, as Administrative Agent, Citicorp North America, Inc. and UBS Securities LLC, as Syndication Agents, ABN AMRO Bank N.V., BNP Paribas and Lehman Commercial Paper Inc. as Documentation Agents and J.P. Morgan Securities Inc. and Citigroup Global Markets Inc. as Joint Lead Arrangers and Joint Book Runners, filed as Exhibit 10.1 to the Form 8-K dated June 23, 2006 (filed on June 27, 2006), is incorporated herein by reference. |
10.2 | Subsidiary Guaranty, dated as of June 23, 2006, by and among the subsidiary guarantors and JPMorgan Chase Bank, National Association, as Administrative Agent, for the benefit of itself, the lenders and other holders of guaranteed obligations, filed as Exhibit 10.2 to the Form 8-K dated June 23, 2006 (filed on June 27, 2006), is incorporated herein by reference. |
10.3 | Pledge and Security Agreement, dated as of June 23, 2006, by and among ArvinMeritor, Inc., the subsidiaries named therein and JPMorgan Chase Bank, National Association, as Administrative Agent, filed as Exhibit 10.3 to the Form 8-K dated June 23, 2006 (filed on June 27, 2006), is incorporated herein by reference. |
10.4 | Amendment No.1, dated as of May 8, 2006, to Loan Agreement, dated as of September 19, 2005, among ArvinMeritor, ArvinMeritor Receivables Corporation, lenders from time to time party thereto and SunTrust Capital Markets, Inc., filed as Exhibit 10a to the Form 8-K dated May 8, 2006 (filed on May 10, 2006) is incorporated herein by reference. |
10.5 | First Amendment, dated as of May 8, 2006, to Second Amended and Restated Purchase and Sale Agreement, dated as of September 19, 2005, among ArvinMeritor Receivables Corporation and the Originators named therein, filed as Exhibit 10b to the Form 8-K dated Ma8, 2006 (filed on May 10, 2006) is incorporated herein by reference. |
12 | Computation of ratio of earnings to fixed charges |
23 | Consent of Bates White LLC |
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 |
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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 |
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.
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Date: July 31, 2006 |
| By: | /s/ | V. G. Baker, II |
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| V. G. Baker, II |
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| Senior Vice President and General Counsel |
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| (For the registrant) |
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Date: July 31, 2006 |
| By: | /s/ | J.D. Donlon, III |
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| J.D. Donlon, III |
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| Senior Vice President and Chief Financial Officer |
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| (Principal Financial Officer) |
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