SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Mark one
[ X ] Quarterly Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934 for the
Quarterly period ended March 30, 1997 or
[ ] Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
Commission File Number 1-302
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ARVIN INDUSTRIES, INC.
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(Exact name of registrant as specified in its charter)
Indiana 35-0550190
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(State or other jurisdiction of (I.R.S. Employer
Identification No.)
incorporation or organization)
One Noblitt Plaza, Box 3000
Columbus, IN 47202-3000
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(Address of principal executive (Zip Code)
offices)
812-379-3000
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(Registrant's telephone number including area code)
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the Registrant was required to file such
reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes [ X ] No [ ]
As of May 4, 1997, the Registrant had outstanding 24,581,677 Common
Shares (including employee stock benefit trust shares and excluding
treasury shares), $2.50 par value.
Table of Contents
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Part I. Financial Information Page
- ------------------------------- No.
Item 1. Financial Statements
Consolidated Statement of Operations for the Three Months
Ended March 30, 1997 and March 31, 1996 3
Consolidated Statement of Financial Condition at March 30, 1997
and December 29, 1996 4
Consolidated Statement of Cash Flows for the Three Months Ended
March 30, 1997 and March 31, 1996 5
Condensed Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
Part II. Other Information
Item 6. Exhibits and Reports on Form 8K 11
Part I
Item 1: Financial Statements
Arvin Industries, Inc.
Consolidated Statement of Operations
(Dollars in millions, except per share amounts)
Unaudited
Three Months Ended
--------------------
March 30, March 31,
1997 1996
-------- --------
Net Sales $ 564.0 $ 511.6
Costs and Expenses:
Cost of goods sold 491.3 450.0
Selling, operating general and administrative 36.6 36.4
Corporate general and administrative 5.8 3.5
Net gain on capital transactions (2.2) .0
Interest expense 9.6 9.9
Interest income (.9) (.4)
Other expense, net 4.8 3.5
-------- --------
545.0 502.9
-------- --------
Earnings Before Income Taxes 19.0 8.7
Income taxes (5.7) (3.2)
Minority share of income (1.7) (.8)
Equity income of affiliates 1.4 1.2
-------- --------
Net Earnings $ 13.0 $ 5.9
======== ========
Primary Earnings Per Common Share $ .57 $ .26
Average Common Shares Outstanding (000's) 22,835 22,333
Dividends per common share $ .19 $ .19
See notes to consolidated financial statements.
3
Arvin Industries, Inc.
Consolidated Statement of Financial Condition
(Dollars in millions, except per share amounts)
Unaudited
As of As of
Assets 3/30/97 12/29/96
- -------- -------- --------
Current Assets:
Cash and cash equivalents $ 71.2 $ 39.4
Receivables, net of allowances of $7.0 as of
March 30, 1997 and $6.7 as of December 29, 1996 354.4 304.7
Inventories 109.8 115.9
Other current assets 81.5 78.9
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Total current assets 616.9 538.9
-------- --------
Non-Current Assets:
Property, plant and equipment 1,014.2 1,011.0
Less accumulated depreciation 554.7 547.1
-------- --------
459.5 463.9
Goodwill, net of amortization of $32.2 as of
March 30, 1997 and $32.3 as of December 29, 1996 149.7 158.0
Investment in affiliates 86.9 85.7
Assets of business transferred under
contractual arrangements 72.4 72.4
Other assets 54.5 61.3
-------- --------
Total non-current assets 823.0 841.3
-------- --------
$ 1,439.9 $ 1,380.2
======== ========
Liabilities and Shareholders' Equity
- -------------------------------------
Current Liabilities:
Short-term debt $ 8.3 $ 52.6
Accounts payable 268.0 257.7
Accrued expenses 128.5 124.8
Income taxes payable 7.5 17.7
-------- --------
Total current liabilities 412.3 452.8
-------- --------
Long-term employee benefits 68.0 67.0
Other long-term liabilities 18.4 22.4
Long-term debt 300.3 294.0
Liabilities and deferred credit of
business transferred 72.4 72.4
Minority interest 34.8 34.2
Company-obligated mandatorily redeemable
capital securities of trust subsidiary 98.9 --
Shareholders' Equity:
Common shares ($2.50 par value) 65.6 65.4
Capital in excess of par value 248.5 247.3
Retained earnings 234.9 226.2
Cumulative translation adjustment (35.9) (19.9)
Employee stock benefit trust (42.2) (42.2)
Common shares held in treasury (at cost) (36.1) (39.4)
-------- --------
Total shareholders' equity 434.8 437.4
-------- --------
$ 1,439.9 $ 1,380.2
======== ========
See notes to consolidated financial statements.
4
Arvin Industries, Inc.
Consolidated Statement of Cash Flows
(Dollars in millions)
Unaudited
Three Months Ended
-------------------
March 30, March 31,
1997 1996 (1)
------------------
Operating Activities:
Net earnings $ 13.0 $ 5.9
Adjustments to reconcile net earnings to net cash
provided by/(used for) operating activities:
Depreciation 21.0 18.5
Amortization 1.6 1.4
Long-term employee benefits 2.3 0.3
Deferred income taxes, long-term (3.2) 0.0
Equity earnings of affiliates (1.4) (1.2)
Minority interest 1.7 0.8
Other 2.5 2.9
Changes in operating assets and liabilities,
net of reclassifications:
Receivables (48.9) (28.2)
Inventories and other current assets 1.0 (8.2)
Accounts payable and other accrued expenses 14.7 23.4
Income taxes payable and deferred taxes (9.4) (2.6)
------ ------
Net Cash Provided By/(Used For) Operating Activities (5.1) 13.0
------ ------
Investing Activities:
Purchase of property, plant and equipment (3.8) (19.7)
Proceeds from sale of capital assets 5.5 0.6
Business acquisition, net of cash acquired (1.8) ---
Investment in affiliates (7.0) ---
Other (0.7) 0.1
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Net Cash Used For Investing Activities (7.8) (19.0)
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Financing Activities:
Change in short-term debt, net (42.5) 0.2
Proceeds from issuance of company-obligated mandatorily
redeemable capital securities of trust subsidiary 99.5 ---
Principal payments on long-term debt (2.3) (1.2)
Dividends paid (4.9) (4.2)
Other (4.2) 0.3
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Net Cash Provided By/(Used For) Financing Activities 45.6 (4.9)
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Cash and Cash Equivalents:
Effect of exchange rate changes on cash (0.9) (0.2)
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Net increase/(decrease) 31.8 (11.1)
Beginning of the period 39.4 15.2
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End of the Period $ 71.2 $ 4.1
====== ======
(1) Certain amounts have been reclassified to conform
with current year presentation.
See notes to consolidated financial statements.
5
ARVIN INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. The accompanying unaudited consolidated financial statements
have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the
instructions to Form 10-Q and Rule 10-01 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete
financial statements and should be read in conjunction with the
financial statements and notes thereto appearing in the Company's
annual report on Form 10-K for the year ended December 29, 1996.
In the opinion of management, all adjustments considered necessary
for a fair presentation of the results of operations for the periods
reported have been included and all such adjustments are of a normal
recurring nature.
The results of operations for the three months ended March 30, 1997
are not necessarily indicative of the results to be expected for the
full year ending December 28, 1997.
Note 2. There were options for 2.4 and 2.3 million common shares
outstanding as of March 30, 1997 and March 31, 1996, respectively.
Earnings per share calculations include dilutive options in the
determination of the weighted average common and common equivalent
shares outstanding.
Note 3. The Company uses the method of pooling, by individual
natural inventory components (e.g., steel, substrate, labor and
overhead), in computing an overall weighted average LIFO index. The
index is applied to the total dollar value of the ending inventory.
This method of pooling makes it impractical to classify LIFO
inventories into the finished goods, work in process and raw material
components.
Note 4. The Company is defending various environmental claims and
legal actions that arise in the normal course of its business,
including matters in which the Company has been designated a
potentially responsible party at certain waste disposal sites or has
been notified that it may be a potentially responsible party at other
sites as to which no proceedings have been initiated. At a majority
of these sites, the information currently available leads the Company
to believe it has very limited or even de minimis responsibility. At
other sites, neither the remediation method, amount of remediation
costs nor the allocation among potentially responsible parties has
been determined. Where reasonable estimates are possible, the
Company has provided for the costs of study, cleanup, remediation,
and certain other costs, taking into account, as applicable,
available information regarding site conditions, potential cleanup
methods and the extent to which other parties can be expected to bear
those costs.
The Company is a participant with the EPA and the current owner of a
site previously owned by the Company's Maremont subsidiary in a
corrective action proceeding under the Resource Conservation and
Recovery Act. The Company has accrued for its share of the
reasonably estimable minimum remediation costs at this site, which
include costs incurred in connection with further studies and design
of a remediation plan, remedial costs, including cleanup activities,
and administrative, legal and consulting fees. Given the inherent
uncertainties in evaluating legal and environmental exposures, actual
costs to be incurred in future periods may vary from the currently
recorded estimates. The Company expects that any sum it may be
required to pay in connection with legal and environmental matters in
excess of the amounts recorded will not have a material adverse
effect on its financial condition.
6
Note 5. In conjunction with the September 29, 1995 sale of Space
Industries International, Inc., the Company guaranteed approximately
$22.9 million of the purchaser's (Calspan SRL Corporation) debt. The
guarantee amount, which was $16.7 million at March 30, 1997, is
scheduled to decline quarterly over a four year period before
expiring on September 30, 1999. It is not practicable to estimate the
fair value of the guarantee; however, the Company does not anticipate
that it will incur losses as a result of this guarantee.
Note 6. On January 28, 1997 Arvin Capital I, a subsidiary of Arvin
Industries, Inc., issued $100 million of its 9.5 percent Company-
obligated mandatorily redeemable capital securities of trust
subsidiary, maturing on February 1, 2027, callable in 10 years. The
sole assets of the Trust are $103.1 million principal amount of 9.5
percent Subordinated Debentures of Arvin. Proceeds from this issue
were used for the acquisition of additional shares in Autocomponents
Suspension S.r.l., the purchase of the remaining shares of Timax
Exhaust Systems Holding B.V. (TESH), general corporate purposes and
the pay down of short-term borrowings incurred in connection with the
December 27, 1996 redemption of convertible subordinated debentures.
Note 7. On January 29, 1997 the Company exercised its option to
purchase an additional 5 percent of Autocomponents Suspension S.r.l.
for a purchase price of $1.8 million. Autocomponents, which is
located in Melfi, Italy, manufactures ride control products primarily
for the original equipment market. The results of Autocomponents'
operations are included in the Company's consolidated financial
results subsequent to the date of acquisition of this controlling
interest.
Additional investments of approximately $7 million were made in
unconsolidated European subsidiaries.
On May 7, 1997 the Company exercised its option to purchase the
remaining 50 percent of the TESH joint venture with Sogefi S.p.A.
The total purchase price of approximately $29 million includes the
value of previous option payments plus interest thereon and a cash
payment of approximately $21 million.
Note 8. Changes in Shareholders' Equity
(Dollars in millions)
For the Three
Months Ended
-----------------
3/30/97 3/31/96
------- -------
Beginning balance $ 437.4 $ 395.1
Exercise of stock options .1 .1
Cash dividends (4.3) (4.2)
Net earnings 13.0 5.9
Translation adjustments during the period (16.0) (4.3)
Shares issued for employee compensation 1.5 --
Shares contributed to employee
benefit plan 3.1 .5
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Total shareholders' equity $ 434.8 $ 393.1
======= =======
Note 9. During the first quarter of 1997, the Company recognized $2.2
million as a non-recurring net gain on the sale of capital assets.
Of this amount $3.3 relates to the sale of capital lease assets and
$.5 million relates to the 1996 sale of an Argentinean affiliate. An
adjustment to reduce the carrying value of a non-controlled venture
in the South American exhaust market partially offset these gains.
Note 10. In March 1997, the FASB issued Statement No. 128 (SFAS 128),
"Earnings per Share." The Company will adopt SFAS 128 for 1997 year-
end reporting and restate its reporting for all prior periods
reported as required. The adoption of the new SFAS will not have a
material impact on earnings per share amounts.
7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Financial Review
(Dollar amounts in tables in millions)
Overview
The Company's sales for the quarter ended March 30, 1997 increased 10
percent, despite the effect of a strong U.S. dollar. On a constant
dollar basis, sales increased 13 percent. The Company's market share
increased as the Company's sales volumes increased by more than twice
the estimated volume gains, which resulted from a general
strengthening in the automotive markets in which the Company
operates.
Operating income increased 49 percent for the period. When adjusted
for the positive impact of the non-recurring net gain on capital
transactions and the negative impact of a strong U.S. dollar on the
translation of non-U.S. earnings, operating income increased at a
rate of 45 percent, more than three times the constant dollar rate of
sales growth. The increased operating profit margins are largely a
result of the ongoing implementation of Arvin Total Quality
Production System and other programs designed to reduce costs
throughout the Company's global operations.
Results of Operations
First Quarter First Quarter
Net Sales by Segment 1997 1996
- ---------------------- -------------- -------------
Automotive Original Equipment $406.1 72% $367.4 72%
Automotive Replacement 157.9 28% 144.2 28%
------ ---- ------ ----
Total $564.0 100% $511.6 100%
====== ==== ------ ====
First Quarter First Quarter
Operating Income by Segment (1) 1997 1996
- ------------------------------ -------------- -------------
Automotive Original Equipment $23.1 64% $16.4 67%
Automotive Replacement 13.2 36% 7.9 33%
------ ---- ------ ----
Total $36.3 100% $24.3 100%
====== ==== ====== ====
(1) Reflects income from continuing operations prior to Corporate
allocated expenses.
Automotive Original Equipment ("OE"): Sales in the OE segment of
$406.1 million for the quarter ended March 30, 1997 were 11 percent
higher than OE sales for the same quarter of 1996. Market forces in
the Company's primary markets of Europe and North America were mixed.
In the U.S. and Canada, car and light truck production increased 8
percent over the first quarter of 1996, which was negatively affected
by a work stoppage at General Motors. New car registrations in
Europe fell 2 percent as compared to the first quarter of 1996, as a
result of sales incentives offered in France and Germany in early
1996. Despite these mixed market influences and the effect of a
strong dollar, the Company's OE sales posted an 11 percent increase
(14 percent on a constant dollar basis). Increased volume in ongoing
operations accounted for 83 percent of the overall increase, more
than double the estimated market driven volume changes. The
consolidation of the Company's recent Italian ride control
acquisitions' sales contributed an additional 64 percent of the sales
increase. Offsetting these strong positive trends were selective
price concessions, which averaged 1.2 percent of OE sales, and the
previously mentioned effect of a strong U.S. dollar on the
translation of sales.
8
Comparison of the effect of changes in volume from period to period
is subject to a number of limitations, principally centered around
what constitutes a "unit" for volume measurement. The appropriate
measure of a "unit" varies over time as products develop, varies
among the different countries in which the Company operates, and
varies within each operating unit of the Company. As a result, there
is a certain degree of imprecision and subjectivity in estimating the
impact of volume changes.
OE operating income increased $6.7 million for the quarter, primarily
as a result of increased volume. Sales price concessions were offset
by lower negotiated material pricing. A non-recurring gain on the
sale of capital assets of $3.3 million was included in OE operating
income for the first quarter. Also reflected in operating income was
an estimated $2.4 million in higher labor costs.
Automotive Replacement ("Replacement"): Sales in the replacement
segment of $157.9 million for the quarter March 30, 1997 increased 10
percent. The strong U.S. dollar had little impact on the results of
the Replacement segment. The Company experienced significant volume
increases, accounting for 61 percent of the overall sales increase.
The Company's recent acquisition of a controlling interest in Way
Assauto S.r.l. accounted for an additional 26 percent of the sales
increase. The remaining increase in sales was primarily a result of
favorable pricing.
Operating income for the replacement market increased $5.3 million
during the quarter to $13.2 million. The increase was primarily the
result of improved pricing. Productivity improvements in excess of
labor inflation also contributed to the current quarter's increase.
Corporate General and Administrative expenses increased $2.3 million
in the first quarter of 1996. The increase was primarily attributable
to expenditures for employee costs.
Net Gain on Capital Transactions includes a $3.7 million gain on the
sale of capital assets and a downward adjustment of $1.5 million in
the carrying value of a non-controlled venture in the South American
exhaust market.
Interest Expense decreased 3 percent in the first quarter of 1997,
when compared to the first quarter of 1996, as a result of a lower
average rate and lower average outstanding interest-bearing
liabilities.
Financial Condition
Liquidity During the first quarter of 1997, accounts receivable
increased by approximately 16 percent and accounts payable increased
by approximately 4 percent, as a result of the consolidation of
Autocomponents Suspension S.r.l. and the seasonal increase in March
over December sales. Days sales outstanding at the end of the first
quarter were 57.3 days compared to 49.8 days at the end of 1996.
Working capital increased $118 million and the current ratio was 1.5
at the end of the first quarter 1997 and 1.2 at the end of 1996.
Short-term debt decreased 84 percent in the first quarter, primarily
as a result of the proceeds from the issuance of the Company-
obligated mandatorily redeemable capital securities of trust
subsidiary. Proceeds from this issue have been used for the
acquisition of additional shares in Autocomponents Suspension S.r.l.,
the purchase of the remaining shares of Timax Exhaust Systems Holding
B.V. (TESH), general corporate purposes and the pay down of short-
term borrowings incurred in connection with the December 27, 1996
redemption of convertible subordinated debentures. (See the
Consolidated Statement of Cash Flows for a detailed analysis of
changes in cash.)
9
Capital Resources Based on the Company's projected cash flow from
operations and existing financing credit facility arrangements,
management believes that sufficient liquidity is available to meet
anticipated capital and dividend requirements over the foreseeable
future.
The Company exercised its option to purchase the remaining 50 percent
of the joint venture with Sogefi S.p.A. on May 7, 1997. The total
purchase price of approximately $29 million includes the value of
previous option payments plus interest thereon and a cash payment of
approximately $21 million. Proceeds from the Company-obligated
mandatorily redeemable capital securities of trust subsidiary were
used to complete this transaction.
Planned capital expenditures for 1997 are adequate for normal growth
and replacement and are consistent with projections for future sales
and earnings. Near-term expenditures are expected to be funded from
internally generated funds.
Hedging The Company uses derivative financial instruments from time-
to-time to hedge certain financial and operating transactions
denominated in currencies other than functional currencies. The
Company believes that adequate controls are in place to monitor these
activities which are not financially material.
Legal/Environmental Matters The Company is defending various
environmental claims and legal actions that arise in the normal
course of its business, including matters in which the Company has
been designated a potentially responsible party at certain waste
disposal sites or has been notified that it may be a potentially
responsible party at other sites as to which no proceedings have been
initiated. At a majority of these sites, the information currently
available leads the Company to believe it has very limited or even de
minimis responsibility. At other sites, neither the remediation
method, amount of remediation costs nor the allocation among
potentially responsible parties has been determined. Where
reasonable estimates are possible, the Company has provided for the
costs of study, cleanup, remediation, and certain other costs, taking
into account, as applicable, available information regarding site
conditions, potential cleanup methods and the extent to which other
parties can be expected to bear those costs.
The Company is a participant with the EPA and the current owner of a
site previously owned by the Company's Maremont subsidiary in a
corrective action proceeding under the Resource Conservation and
Recovery Act. The Company has accrued for its share of the
reasonably estimable minimum remediation costs at this site, which
include costs incurred in connection with further studies and design
of a remediation plan, remedial costs, including cleanup activities,
and administrative, legal and consulting fees. Given the inherent
uncertainties in evaluating legal and environmental exposures, actual
costs to be incurred in future periods may vary from the currently
recorded estimates. The Company expects that any sum it may be
required to pay in connection with legal and environmental matters in
excess of the amounts recorded will not have a material adverse
effect on its financial condition.
Other Matters: In March 1997, the FASB issued Statement No. 128
(SFAS 128), "Earnings per Share." The Company will adopt SFAS 128 for
1997 year-end reporting and restate its reporting for all prior
periods reported as required. The adoption of the new SFAS will not
have a material impact on earnings per share amounts.
10
Part II
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
a. Exhibits
- ------------
04 (F) Amended and Restated Form 8-K dated February 10,
Declaration of Trust dated as of 1997 as Exhibit 4.3
January 28, 1997 relating to 9.5
percent Capital Securities of
Arvin Capital I, guaranteed by
Arvin Industries, Inc.
04 (G) Indenture dated as of Incorporated herein by
January 28, 1997 relating to 9.5 reference as filed on
percent Junior Subordinated Registration Statement No. 333-
Deferrable Interest Debentures 18521 as Exhibit 4.4
due 2027, held by Arvin Capital I
04 (H) First Supplemental Form 8-K dated February 10,
Indenture dated as of January 28, 1997 as Exhibit 4.5
1997 relating to 9.5 percent
Junior Subordinated Deferrable
Interest Debentures due 2027,
held by Arvin Capital I
04 (I) Capital Securities Incorporated herein by
Guarantee Agreement dated as of reference as filed on
January 28, 1997 relating to the Registration Statement No. 333-
9.5 percent Capital Securities of 18521 as Exhibit 4.7
Arvin Capital I, guaranteed by
Arvin Industries, Inc.
11 Computation of Earnings Per filed herewith as Exhibit 11
Share
27 Financial Data Schedule filed herewith as Exhibit 27
b. Reports Filed on Form 8-K
Current report on Form 8-K dated January 3, 1997
- --------------------------------------------------
Items 5 and 7 reported
The Company may issue forward looking statements from time-to-time
and in doing so notes that a variety of factors could cause the
actual results and experience to differ materially from the expressed
forward looking statements. The exhibit describes some factors and
circumstances that may effect the financial performance of the
Company.
Current report on Form 8-K dated January 21, 1997
- --------------------------------------------------
Items 5 and 7 reported
On December 20, 1996, the Registrant created a grantor trust and
entered into a stock ownership trust agreement dated December 20,
1996 with the Northern Trust Company to provide a means to meet
currently the Registrant's anticipated future obligations to
employees under Registrant's employee benefit plans, including its
stock option plans and savings plan.
The Registrant sold one million eight hundred thousand newly issued
shares of Common Stock, $2.50 par value, to the aforementioned stock
ownership trust for $42,187,500. The Trustee delivered to the
Registrant a promissory note in such amount for such shares. Shares
of Common Stock held in the stock ownership trust will be released by
the Trustee as the note is paid down.
11
Current report on Form 8-K dated February 10, 1997
- --------------------------------------------------
Items 5 and 7 reported
On January 28, 1997, Arvin Capital I, a Delaware business trust (the
"Trust"), issued 100,000 of its 9.50 percent Capital Securities (the
"Capital Securities"), which represent beneficial interests in the
Trust, in a public offering registered under the Securities Act of
1933, as amended (Registration Statement Nos. 333-18521 and 333-18521-
01). The sole asset of the Trust is $103,100,000 in aggregate
principal amount of the Registrant's 9.50 percent Junior Subordinated
Deferrable Interest Debentures due 2027 (the "Subordinated
Debentures").
12
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused the report to be
signed on its behalf by the undersigned, thereunto duly authorized.
Arvin Industries, Inc.
by: /s/ Richard A. Smith
__________________________________
Richard A. Smith
Vice President-Finance & Chief
Financial Officer
by: /s/ William M. Lowe, Jr.
__________________________________
William M. Lowe, Jr.
Controller & Chief Accounting Officer
Date: May 9, 1997
13