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 September 27, 1998 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.
----------------------
(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
Incorporation or organization) Identification No.)
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 September 27, 1998, the Registrant had outstanding
24,533,051 Common Shares (including employee stock benefit
trust shares and excluding treasury shares), $2.50 par
value.
1
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 and Nine Months Ended September 27,
1998 and September 28, 1997 3
Consolidated Statement of Financial Condition
at September 27, 1998 and December 28, 1997 4
Consolidated Statement of Cash Flows for the
Nine Months Ended September 27, 1998 and
September 28, 1997 5
Condensed Notes to Consolidated Financial
Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
Part II. Other Information
- --------------------------
Item 6. Exhibits and Reports on Form 8K 17
2
Part I
Item 1: Financial Statements
Arvin Industries, Inc.
Consolidated Statement of Operations
(Dollars in millions, except per share amounts)
Unaudited
Three Months Ended Nine Months Ended
------------------- -------------------
9/27/98 9/28/97 9/27/98 9/28/97
------- ------- ------- -------
Net Sales $ 573.8 $ 554.0 $ 1,810.5 $ 1,750.5
Costs and Expenses:
Cost of goods sold 490.2 473.7 1,541.4 1,504.2
Selling, operating general
and Administrative 46.1 42.6 137.3 122.4
Corporate general and administrative 5.5 4.1 16.0 15.0
Interest expense 9.4 10.7 27.3 30.2
Other (income)/expense, net (.6) 3.2 5.5 7.5
-------- -------- -------- --------
550.6 534.3 1,727.5 1,679.3
-------- -------- -------- --------
Earnings Before Income Taxes 23.2 19.7 83.0 71.2
Income taxes (7.8) (7.0) (27.6) (24.6)
Minority share of income .1 - (.8) (2.9)
Equity income of affiliates 1.3 .9 3.4 4.0
-------- -------- -------- --------
Earnings from Continuing Operations 16.8 13.6 58.0 47.7
Income from disposal of discontinued
operations - 1.6 - 1.6
-------- -------- -------- --------
Net Earnings $ 16.8 $ 15.2 $ 58.0 $ 49.3
======== ======== ======== ========
Earnings Per Common Share
Basic:
Continuing Operations $ .70 $ .59 $ 2.44 $ 2.09
Discontinued Operations - .07 - .07
-------- -------- -------- --------
Total Basic $ .70 $ .66 $ 2.44 $ 2.16
======== ======== ======== ========
Diluted:
Continuing Operations $ .69 $ .58 $ 2.40 $ 2.06
Discontinued Operations - .07 - .07
-------- -------- -------- --------
Total Diluted $ .69 $ .65 $ 2.40 $ 2.13
======== ======== ======== ========
Average Common Shares Outstanding (000's)
Basic 23,942 23,017 23,753 22,831
Diluted 24,332 23,600 24,177 23,190
Dividends Declared per Common Share $ .20 $ .19 $ .60 $ .57
<FN>
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
9/27/98 12/28/97
--------- ---------
Assets
- ------
Current Assets:
Cash and cash equivalents $ 73.8 $ 108.9
Receivables, net of allowances of $6.8 as of
September 27, 1998 and $5.6 as of
December 28, 1997 439.8 354.6
Inventories 145.4 124.5
Other current assets 89.7 81.4
--------- ---------
Total current assets 748.7 669.4
--------- ---------
Non-Current Assets:
Property, plant and equipment:
Land, buildings, machinery & equipment 1,197.7 1,133.5
Less: Allowance for depreciation 691.3 632.1
--------- ---------
506.4 501.4
Goodwill, net of amortization of $41.4 as of
September 27, 1998 and $36.5 as of
December 28, 1997 172.1 165.9
Investment in affiliates 74.4 53.9
Other assets 45.8 56.5
Total non-current assets 798.7 777.7
--------- ---------
$ 1,547.4 $ 1,447.1
Liabilities and Shareholders' Equity
Current Liabilities:
Short-term debt $ 3.5 $ 55.6
Accounts payable 300.8 303.3
Employee related costs 62.2 57.6
Accrued expenses 118.9 104.7
--------- ---------
Total current liabilities 485.4 521.2
--------- ---------
Long-term debt 305.9 222.3
Long-term employee benefits 68.7 66.7
Other long-term liabilities 41.3 40.4
Minority interest 6.8 12.4
Company-obligated mandatorily redeemable preferred
capital securities of subsidiary trust holding
solely subordinated debentures of the Company 89.1 98.9
Shareholders' Equity:
Common shares ($2.50 par value) 65.6 65.6
Capital in excess of par value 250.3 248.8
Retained earnings 319.0 275.1
Cumulative translation adjustment (35.1) (41.8)
Employee stock benefit trust (11.3) (25.6)
Common shares held in treasury (at cost) (38.3) (36.9)
--------- ---------
Total shareholders' equity 550.2 485.2
--------- ---------
$ 1,547.4 $ 1,447.1
========= =========
<FN>
See notes to consolidated financial statements.
4
Arvin Industries, Inc.
Consolidated Statement of Cash Flows
(Dollars in millions)
Unaudited
Nine Months Ended
--------------------
9/27/98 9/28/97 (1)
-------- --------
Operating Activities:
Net earnings $ 58.0 $ 49.3
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation 63.3 61.4
Amortization 4.5 4.6
Minority interest .8 2.9
Gain on investment (5.5) -
Other 7.6 (2.8)
Changes in operating assets and liabilities:
Receivables (87.9) (60.2)
Inventories and other current assets (25.7) 5.3
Accounts payable and other accrued expenses 2.2 40.7
Income taxes payable and deferred taxes 11.0 (4.3)
-------- --------
Net Cash Provided by Operating Activities 28.3 96.9
-------- --------
Investing Activities:
Purchase of property, plant and equipment (66.2) (65.7)
Proceeds from sale of property, plant and equipment 3.9 .6
Proceeds from redemption of investment 9.6 -
Investments in affiliates (19.0) (7.0)
Business acquisitions, net of cash acquired (25.4) (19.5)
Cash proceeds from sale of business, net
of cash balance of business sold 6.9 6.9
Other 1.2 10.3
-------- --------
Net Cash Used for Investing Activities (89.0) (74.4)
-------- --------
Financing Activities:
Change in short-term debt, net 4.3 (40.8)
Proceeds from long-term financings 99.9 99.8
Principal payments on long-term financings (74.7) (35.8)
Dividends paid (14.2) (12.9)
Exercise of stock options 11.8 9.3
Other .4 (.2)
-------- --------
Net Cash Provided by Financing Activities 27.5 19.4
-------- --------
Cash and Cash Equivalents:
Effect of exchange rate changes on cash (1.9) (1.6)
Net (decrease)/increase (35.1) 40.3
Beginning of the year 108.9 39.4
-------- --------
End of the period $ 73.8 $ 79.7
======== ========
<FN>
(1) Certain amounts have been reclassified to conform with
current year presentation.
<FN>
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 28, 1997.
In the opinion of management, all adjustments considered
necessary for a fair presentation of the results of operations
for the periods reported have been included and all such
adjustments are of a normal recurring nature.
The results of operations for the three and nine months ended
September 27, 1998 are not necessarily indicative of the results
to be expected for the full year ending January 3, 1999.
Note 2. Basic earnings per share are based on the weighted
average number of common shares outstanding during the period.
Diluted earnings per share are based on the weighted average
number of common and common equivalent shares (principally stock
option related) outstanding during the period. Calculation of
the weighted average shares is as follows:
(shares in 000's)
-----------------
Third Quarter Nine Months
--------------- --------------
1998 1997 1998 1997
------ ------ ------ ------
Denominator for basic
earnings per share
- - weighted-average shares 23,942 23,017 23,753 22,831
Effect of dilutive
securities 390 583 424 359
Denominator for diluted
earnings per share
- - adjusted weighted-average
shares and assumed
conversions 24,332 23,600 24,177 23,190
Arvin has adopted Statement of Financial Accounting Standards
No. 128 (SFAS 128), "Earnings per Share" and has restated prior
period earnings per share accordingly.
6
Note 3. The Company and its consolidated subsidiaries are
defending various environmental claims and legal actions that
arise in the normal course of business or from previously owned
businesses. Where reasonable estimates of environmental
liabilities are possible, Arvin has provided for the
undiscounted costs of study, cleanup, remediation, and certain
other costs, taking into account, as applicable, available
information regarding site conditions, potential cleanup methods
and the extent to which other parties can be expected to bear
those costs. Management regularly reviews pending environmental
and legal proceedings with its legal counsel and adjusts its
accruals to reflect the current best estimate of its exposure.
Where no best estimate is determinable, the Company has accrued
for the minimum amount of the most probable range of its
liability. Given the inherent uncertainties in evaluating legal
and environmental exposures, actual costs to be incurred in
future periods may vary from the currently recorded estimates.
Arvin expects that any sum it may be required to pay in
connection with legal and environmental matters in excess of the
amounts recorded will not have a material adverse effect on its
results of operations, cash flows or financial condition.
Note 4. On March 23, 1998 Arvin issued $100 million of 6.75
percent notes, maturing on March 15, 2008. Proceeds from this
issue were or will be used for the repayment of $45 million of
9.8 to 9.98 percent medium-term notes due in 1998 and for
general corporate purposes, including working capital and
capital expenditures.
Note 5. Other expense, net for the first nine months of 1998
includes a gain of $5.5 million relating to the early redemption
of the Company's investment in preferred stock received in
conjunction with Arvin's 1995 sale of its Schrader Automotive
unit. The preferred shares and accrued dividends had been
recorded on the books of Arvin, discounted at a risk-adjusted
rate of return. No tax expense was recorded on this gain due to
available capital loss carryforwards.
Note 6. Other expense, net for the first nine months of 1998
includes a charge of $6.6 million for the realignment of the
Company's Automotive Original Equipment exhaust operations. The
charge includes a $1.8 million goodwill write-off, $1.2 million
for the write-down of equipment and $3.6 million for severance
provisions.
Note 7. On July 6, 1998, the Company entered into a stock
purchase agreement to acquire the remaining 60 percent of COFAP-
Arvin for a purchase price of approximately $17 million. COFAP-
Arvin, renamed Arvin Exhaust do Brasil Ltda., is located in
Minas Gerais, Brazil, where it manufactures original equipment
exhaust products. The results of Arvin Exhaust do Brasil
Ltda.'s operations are included in the Company's consolidated
financial results for the third quarter. Goodwill resulting
from this transaction is expected to approximate $8 million.
7
Note 8. On July 6, 1998, the Company sold its shares in
Autocomponents Suspension S.r.l. (Autocomponents), an original
equipment ride control manufacturing facility in Melfi, Italy.
The sales price, subject to adjustment, is approximately $12
million, of which $9.9 million was received in the third
quarter. No gains or losses are expected from this transaction.
Note 9. Comprehensive income for the three and nine months
ended September 27, 1998 of $29.9 and $64.7 million and for the
three and nine months ended September 28, 1997 of $8.2 and $28.6
million, respectively, includes reported net income adjusted by
the non-cash effect of changes in the cumulative translation
adjustment.
Note 10. The Company adopted Statement of Financial Accounting
Standards No. 131 (SFAS 131), "Disclosures about Segments of an
Enterprise and Related Information," at the beginning of fiscal
1998. Following the provisions of SFAS 131, Arvin is reporting
segment sales and operating income in the same format reviewed
by the Company's management (the "management approach"). Arvin
has two reportable segments: Automotive Original Equipment (OE)
and Automotive Replacement (Replacement). The OE segment is
comprised of those business units that deal primarily with
Original Equipment Manufacturers (OEM's). Business units in the
OE segment also provide the OEM's with replacement parts, either
as dealer service parts or as part of manufacturers' recall or
warranty programs, which typically account for a small percent
of OE segment sales. The Replacement segment is comprised of
those business units that deal primarily with Replacement
customers, including wholesale distributors, retailers, and
installers. Sales and operating income from business units
whose primary focus is other than the manufacturing of
automotive products are reported as Other. Operating income,
reported under the management approach, includes the gains and
losses reported by the Company's equity affiliates.
8
Segment Information
(Dollars in millions)
For the Three For the Nine
Months Ended Months Ended
------------------ ------------------
9/27/98 9/28/97 9/27/98 9/28/97
------- ------- ------- -------
Net Sales: $ $ $ $
Automotive Original
Equipment 370.9 348.3 1,204.1 1,171.5
Automotive Replacement 170.6 175.0 519.4 494.1
Other 32.3 30.7 87.0 84.9
-------- -------- -------- --------
Net sales $ 573.8 $ 554.0 $ 1,810.5 $ 1,750.5
======== ======== ======== ========
Operating Income:
Automotive Original $ $ $ $
Equipment 17.0 13.9 65.2 61.2
Automotive Replacement 19.8 20.5 56.7 51.8
Other 2.6 3.6 2.0 13.2
-------- -------- -------- --------
Operating income 39.4 38.0 123.9 126.2
Less: Equity income of
affiliates (1.3) (0.9) (3.4) (4.0)
Interest expense (9.4) (10.7) (27.3) (30.2)
Corporate general and
administrative (5.5) (4.1) (16.0) (15.0)
Gain on sale of investment - - 5.5 -
Other non-operating
income/(expense) - (2.6) 0.3 (5.8)
-------- -------- -------- --------
Earnings before
income taxes $ 23.2 $ 19.7 $ 83.0 $ 71.2
======== ======== ======== ========
9/27/98 12/28/97
------- --------
$ $
Automotive Original Equipment 865.5 763.3
Automotive Replacement 352.3 307.9
Other 53.9 55.4
------- -------
Total operating assets 1,271.7 1,126.6
Corporate and other 275.7 320.5
------- -------
Total assets $ 1,547.4 $ 1,447.1
======= =======
9
Note 11. In March 1998, the American Institute of Certified
Public Accountants (AICPA) issued Statement of Position (SOP) 98-
1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use," which establishes new accounting and
reporting standards for the costs of computer software developed
or obtained for internal use. This statement will be applied
prospectively and is effective for financial statements for
fiscal years beginning after December 15, 1998. The impact of
this new standard is not expected to have a significant effect
on Arvin's financial position or results of operations.
Note 12. In April 1998, the AICPA issued SOP 98-5, "Reporting
on the Costs of Start-Up Activities," which requires costs of
start-up activities to be expensed as incurred. This statement
is effective for financial statements for fiscal years beginning
after December 15, 1998. The statement requires capitalized
costs related to start-up activities to be expensed as a
cumulative effect of a change in accounting principle when the
statement is adopted. Arvin plans to adopt the provisions of
SOP 98-5 at the beginning of fiscal 1999. Current estimates are
that, at that time, the Company will write off approximately $.8
million of previously capitalized costs related to start-up
activities.
Note 13. In June 1998, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities."
The statement is effective for fiscal years beginning after June
15, 1999. The Company plans to adopt this statement at the
beginning of fiscal 2000. This statement is not expected to
have a material impact on the Company's results of operations.
Item 2. Management's Discussion and Analysis of Financial
-------------------------------------------------
Condition and Results of Operations
- -----------------------------------
Financial Review
(Dollar amounts in tables in millions)
Overview
Arvin reported record sales of $573.8 million and record
earnings from continuing operations of $16.8 million for the
third quarter. Sales for the nine months ended September 27,
1998 of $1,810.5 million improved $60.0 million over a strong
comparable 1997 period despite the negative impact of a strong
United States' (U.S.) dollar on the translation of foreign sales
and the impact of the General Motors (GM) strike. On a constant
dollar basis, sales increased by $85.1 million or five percent.
Year-to-date earnings from continuing operations were up $10.3
million or 22 percent. The GM strike, which was settled at the
end of July, reduced year-to-date sales by approximately $20
million.
10
Results of Operations
Third First
Quarter Nine Months
------- -----------
1998 1997 1998 1997
------ ------ ------ ------
Net Sales:
Automotive original $ $ $ $
equipment 370.9 348.3 1,204.1 1.171.5
Automotive replacement 170.6 175.0 519.4 494.1
Other 32.3 30.7 87.0 84.9
------ ------ ------- -------
Net sales $ 573.8 $ 554.0 $ 1,810.5 $ 1,750.5
====== ====== ======= =======
Operating Income *
Automotive original $ $ $ $
equipment 17.0 13.9 65.2 61.2
Automotive replacement 19.8 20.5 56.7 51.8
Other 2.6 3.6 2.0 13.2
------ ------ ------- -------
Operating income $ 39.4 $ 38.0 $ 123.9 $ 126.2
====== ====== ======= =======
* Operating income reflects: (1)income from consolidated operations
prior to Corporate expenses, interest, other non-operational items,
and (2) Arvin's share of net income from unconsolidated subsidiaries.
Automotive Original Equipment (OE): Third quarter OE sales
increased by $22.6 million or six percent over strong sales in
the comparable 1997 quarter. The consolidation of Arvin Exhaust
do Brasil added $11.2 million in revenues; however, the sale of
Autocomponents reduced revenues by $5.7 million. Market
influences were mixed. In the U.S. and Canada, car and light
truck production decreased five percent, while new car
registrations in Western Europe improved by almost six percent
as compared to the third quarter of 1997. Price concessions,
which averaged close to one percent of OE sales, were more than
offset by volume gains of $12.8 million during the quarter. A
strong U.S. dollar had a negative effect on the translation of
the quarter's OE sales. On a constant dollar basis, OE sales
grew seven percent. A more favorable product mix contributed
$9.2 million to the current quarter's sales increase.
OE sales for the nine-month period increased three percent over
revenues for the first nine months of 1997. As previously
discussed, sales increased by a net $5.5 million due to the
consolidation of Arvin Exhaust do Brasil, offset by the sale of
Autocomponents. Price concessions averaged one percent of OE
sales. Volume gains and product mix contributed $34.6 and $25.5
million, respectively. On a constant dollar basis, OE sales
grew four percent.
11
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.
Third quarter OE operating profit increased $3.1 million or 22
percent over the comparable quarter for 1997. Volume gains of
$5.4 million were slightly offset by price concessions as
previously described. Negotiated improvements in raw material
prices improved operating profit by $1.1 million and lower
warranty costs contributed an additional $1.1 million.
Operating profit for the first nine months of 1998 includes a
$6.6 million charge for the realignment of OE exhaust
operations. Excluding the impact of the realignment charge,
operating profit increased $10.8 million or 17 percent over the
comparable period of 1997. Productivity improvements and
negotiated raw material price decreases totaling $17.0 million
were offset by the impact of selective price concessions and
labor inflation. Improved volume and product mix added $10.7
million to operating profit. Lower warranty costs contributed
an additional $2.3 million, while higher research and
development costs reduced operating profit by $1.7 million.
Automotive Replacement (Replacement): Sales in the Replacement
segment decreased by $4.4 million or two percent as compared to
the third quarter of 1997. This decrease in sales is reflective
of an overall weakness in the North American and U.K. exhaust
markets, a trend that continues due to improved OE exhaust
systems and the evolution of automobile designs. The impact of
lower volumes reduced sales by $11.8 million; however, this
reduction was slightly offset by a favorable product mix, which
contributed $3.6 million to sales. Volume shortfalls were
further offset by price increases, which averaged nearly three
percent of Replacement sales for the quarter.
For the first nine months of 1998, sales increased by $25.3
million or five percent. The consolidation of a European
exhaust joint venture (TESH) in May of 1997 accounted for most
of the increase. The impact of lower volumes reduced sales by
$10.5 million; however, this reduction was offset by favorable
pricing actions, which contributed $12.2 million to sales.
Operating units in the Replacement segment sell their product
through a variety of different customer "channels" including
merchandisers, installers, and wholesale distributors. As a
result of period to period variations in this "channel mix," in
addition to normal variations in "product mix," the average
price of units sold may not correspond to price changes. There
is also a certain degree of imprecision and subjectivity in
estimating the impact of period to period volume changes,
principally because of questions as to what constitutes a "unit"
12
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.
Operating income for the Replacement segment decreased by $.7
million during the quarter. Volume shortfalls reduced operating
profit by $5.6 million, while favorable pricing actions and
improved product mix added $5.7 million to operating profit.
Operating income for the Replacement segment improved $4.9
million or nine percent during the first nine months of 1998.
Improved pricing increased operating profit by $12.2 million and
reduced costs to obtain new business contributed an additional
$1.2 million. Volume shortfalls and an unfavorable product mix
reduced operating profit by $6.3 million. Productivity
improvements of $2.5 million were offset by higher raw material
costs and labor inflation totaling $4.0 million.
Other: Other sales increased by $1.6 million and $2.1 million
for the quarter and for the first nine months, respectively.
The increase for the quarter was attributable to a strong
product mix. Favorable pricing terms and an improved product
mix contributed $6.7 million to year-to-date sales, while volume
shortfalls reduced year-to-date sales by $4.8 million.
Operating profit decreased $1.0 million for the quarter,
primarily from an increase in current year reserves for a legal
settlement. For the year-to-date period, operating income fell
$11.2 million. Operating profit was lower due to non-recurring
gains of $3.4 million recorded in 1997 related to the sale of
certain capital assets. Operating profit was further reduced by
productivity declines equal to $5.1 million and an increase of
$4.1 million in current year reserves for a legal settlement and
environmental issues related to properties formerly held under
lease. Favorable pricing terms and a strong product mix
contributed $3.4 million to operating profit, which was
partially offset by volume shortfalls of $1.9 million.
Corporate General and Administrative expenses increased by $1.4
million and $1.0 million for the quarter and for the first nine
months, respectively. The increase in both comparison periods
was primarily due to personnel and professional service
expenditures.
Interest Expense decreased 12 percent in the third quarter and
10 percent during the first nine months, when compared to the
same periods in 1997. The decreases were a result of lower
average borrowing rates on slightly higher average interest-
bearing liabilities.
Other expense, net decreased by $3.8 million for the third
quarter comparison period due to a number of small expense
decreases and reclassifications. During the first nine months
of 1998, other expense, net improved over the comparative period
for 1997 by $2.0 million. An increase in interest income, plus
net currency gains contributed $3.9 million to the decrease in
net expense. Net gains/losses on capital transactions increased
other expense by $2.9 million, primarily as a result of a non-
recurring gain of $2.2 million recorded in the first quarter of
1997. An increase in environmental and legal reserves also
increased other expense by $2.3 million. The year-to-date
13
comparison is also affected by the $6.6 million charge for the
realignment expenses noted in the OE segment discussion and a
$5.5 million gain on redemption of an investment, both recorded
in the second quarter of 1998. In addition to these items,
there were a number of small expense decreases and
reclassifications.
Income Taxes: The effective tax rate for the third quarter of
33.6 percent reflects the refinement of the estimates of non-
U.S. net operating loss positions and tax credits. The year-to-
date 1998 rate of 33.2 percent also includes the impact of the
$5.5 million gain on the early redemption of the Company's
investment in preferred stock on which no tax expense was
recorded (see Note 5 to the Consolidated Financial Statements).
The effective tax rates for the third quarter and year-to-date
1997 periods were 35.5 and 34.5 percent, respectively. The year-
to-date 1997 period includes $3.7 million of gain on capital
transactions on which no tax expense was recorded due to
available capital loss carryforwards.
Financial Condition
Liquidity: Working capital increased by $115.1 million during
the first nine months of 1998, which caused the current ratio to
improve from 1.3 at the end of 1997 to 1.5 at September 27,
1998. During the first nine months of 1998, accounts receivable
increased 24 percent. The seasonal increase in September over
December sales accounted for the increase. Short-term debt
decreased by 94 percent due to the repayment of medium-term
notes due in 1998 (see Note 4 to the Consolidated Financial
Statements).
Key elements of the Consolidated Statement of Cash Flows for the
first nine months of 1998 and 1997 were as follows:
1998 1997
---- ----
Net Cash Provided by Operating
Activities 28.3 96.9
Net Cash Used for Investing
Activities (89.0) (74.4)
Net Cash Provided by Financing
Activities 27.5 19.4
Investing cash flows include proceeds of $9.6 million from the
redemption of the Company's investment in preferred stock
received in connection with the 1995 sales of Schrader (see Note
5 to the Consolidated Financial Statements). During the first
nine months of 1998, additional investments totaling $19 million
were made in several joint ventures, including a $15 million
additional investment in the Company's European OE exhaust joint
venture. Investing cash flows also include $16.7 million for
the purchase of the remaining shares of Arvin Exhaust do Brasil,
net of cash acquired, in the third quarter of 1998 (see Note 7
to the Consolidated Financial Statements). In the first quarter
of 1998, the Company purchased the remaining shares of
14
Autocomponents and Arvin Suspension Systems Italia (ASSI,
formerly Way Assauto S.r.l.), resulting in a cash outflow of
$8.7 million. Finally, investing cash flows include cash
proceeds of $9.9 million for the sale of Autocomponents ($6.9
million after netting the cash balance on Autocomponent's books
at the time of the sale).
Financing cash flows include $98.9 million proceeds from 6.75
percent Notes due in 2008 (see Note 4 to the Consolidated
Financial Statements). During the first nine months of 1998,
the Company paid $69 million to retire current maturities of
long-term debt and to repurchase high coupon debt. Financing
cash flows also include Arvin's quarterly dividend to
shareholders, which was increased five percent during 1997 from
19 cents to 20 cents. The Company announced in October 1998
that the quarterly dividend to shareholders would be increased
by an additional five percent from 20 cents to 21 cents to
shareholders of record as of the close of business on December
4, 1998.
Capital Resources: Based on the Company's projected cash flow
from operations and existing investments and financing credit
facility arrangements, management believes that sufficient
liquidity is available to meet anticipated capital and dividend
requirements over the foreseeable future.
The Company expects increased levels of capital expenditures in
1998 to support new business requirements and process
improvements. Investing cash flows include $66.2 and $65.7
million for the purchase of property, plant and equipment for
the first nine months of 1998 and 1997, respectively. Planned
capital expenditures for 1998 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 cash on hand and 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. In June 1998, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards No.
133, "Accounting for Derivative Instruments and Hedging
Activities." The statement is effective for fiscal years
beginning after June 15, 1999. The Company plans to adopt this
statement at the beginning of fiscal 2000. This statement is
not expected to have a material impact on the Company's results
of operations.
Year 2000: During 1997, Arvin named a task force and began
actively working with customers, suppliers, and employees on
Arvin's plan to address both information technology (IT) and non-
IT related Year 2000 issues. The Company plans to complete the
remediation, testing and implementation phase of the Year 2000
project prior to the end of 1998. These phases represent 90
15
percent of Arvin's Year 2000 project. The final 10 percent of
the Year 2000 project, auditing, is scheduled for completion
during 1999. At the end of September 1998, the Company was on
its established schedule. Given the progress on this project,
the Company has no current plans to create a formal contingency
plan and has not analyzed what the worst case scenario would be
if the Company's Year 2000 project were not completed as
scheduled. Expenses of the Year 2000 project are expensed as
incurred. Capital expenditures are generally replacing fully
depreciated assets. To date, approximately one million dollars
has been expensed for this project. The Company expects that an
additional one to two million dollars will be expensed during
the next 12 months to complete this project.
Legal/Environmental Matters: The Company and its consolidated
subsidiaries are defending various environmental claims and
legal actions that arise in the normal course of business or
from previously owned businesses. Where reasonable estimates of
environmental liabilities are possible, Arvin has provided for
the undiscounted costs of study, cleanup, remediation, and
certain other costs, taking into account, as applicable,
available information regarding site conditions, potential
cleanup methods and the extent to which other parties can be
expected to bear those costs. Management regularly reviews
pending environmental and legal proceedings with its legal
counsel and adjusts its accruals to reflect the current best
estimate of its exposure. Where no best estimate is
determinable, the Company has accrued for the minimum amount of
the most probable range of its liability. Given the inherent
uncertainties in evaluating legal and environmental exposures,
actual costs to be incurred in future periods may vary from the
currently recorded estimates. Arvin expects that any sum it may
be required to pay in connection with legal and environmental
matters in excess of the amounts recorded will not have a
material adverse effect on its results of operations, cash flows
or financial condition.
Certain information and statements included or implied are
forward looking and involve certain risks and uncertainties that
could cause actual results to differ materially from those
expressed or implied by these statements. These forward-looking
statements are identified by their use of terms and phrases such
as "expected," "expect," "should," "plans," "estimated
earnings," "anticipate," and "believe." Information about
potential factors identified by the Company, which would affect
the actual financial results, are included in the Company's Form
8-K, filed January 3, 1997 with the SEC.
16
Part II
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
a. Exhibits
- -------------
27 Financial Data Schedule filed herewith as Exhibit 27
b. Reports Filed on Form 8-K
- ------------------------------
none
17
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly
caused the report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Arvin Industries, Inc.
____________________________________________
Richard A. Smith
Vice President-Finance & Chief
Financial Officer
____________________________________________
William M. Lowe, Jr.
Vice President - Financial Operations
(Chief Accounting Officer)
Date: October 30, 1998
18