1
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 December 31, 2000
------------------------
Commission file number 1-15983
----------------------------
ArvinMeritor, Inc.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Indiana 38-3354643
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
2135 West Maple Road, Troy, Michigan 48084-7186
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(Address of principal executive offices) (Zip Code)
(248) 435-1000
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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
-------- --------
65,566,217 shares of Common Stock, $1.00 par value, of ArvinMeritor, Inc. were
outstanding on January 31, 2001.
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ARVINMERITOR, INC.
INDEX
PART I. FINANCIAL INFORMATION:
Page
Item 1. Financial Statements: No.
Statement of Consolidated Income (Loss) - - Three
Months Ended December 31, 2000 and 1999.............................. 2
Consolidated Balance Sheet - -
December 31, 2000 and September 30, 2000............................. 3
Statement of Consolidated Cash Flows - -
Three Months Ended December 31, 2000 and 1999........................ 4
Notes to Consolidated Financial Statements........................... 5
Item 2. Management's Discussion and Analysis
of Results of Operations and Financial Condition.......................... 14
Item 3. Quantitative and Qualitative Disclosures About
Market Risk............................................................... 18
PART II. OTHER INFORMATION:
Item 1. Legal Proceedings......................................................... 19
Item 2. Changes in Securities and Use of Proceeds................................. 19
Item 5. Other Information......................................................... 20
Item 6. Exhibits and Reports on Form 8-K.......................................... 20
3
Part I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
ARVINMERITOR, INC.
STATEMENT OF CONSOLIDATED INCOME (LOSS)
(Unaudited)
Three Months Ended
December 31,
---------------------------
2000 1999
----------- ---------
(In millions, except per share amounts)
Sales....................................................... $ 1,659 $ 1,136
Cost of sales ............................................ (1,487) (966)
--------- ---------
Gross margin................................................ 172 170
Selling, general and administrative......................... (102) (79)
Amortization expense........................................ (6) (4)
Restructuring costs and other charges....................... (46) -
Gain on sale of business.................................... - 83
-------- ---------
Operating income............................................ 18 170
Equity in earnings of affiliates............................ 5 9
Interest expense, net....................................... (35) (17)
-------- ---------
(Loss) income before income taxes........................... (12) 162
Benefit (provision) for income taxes........................ 4 (63)
Minority interests.......................................... (2) (2)
-------- ---------
Net (loss) income........................................... $ (10) $ 97
======== =========
Basic and diluted (loss) earnings per share................. $ (0.15) $ 1.94
======== =========
Cash dividends per common share............................. $ 0.22 $ 0.14
======== =========
Basic and diluted average common
shares outstanding................................. 67.0 50.0
======== =========
See notes to consolidated financial statements.
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ARVINMERITOR, INC.
CONSOLIDATED BALANCE SHEET
December 31,
2000 September 30,
(Unaudited) 2000
----------------- ----------------
ASSETS (In millions)
Current assets:
Cash and cash equivalents............................................ $ 115 $ 116
Receivables (less allowance for doubtful accounts:
December 31, 2000, $24; September 30, 2000, $22).............. 1,186 1,278
Inventories.......................................................... 603 583
Other current assets................................................. 208 212
------- -------
Total current assets............................................. 2,112 2,189
Net property.............................................................. 1,285 1,348
Net goodwill (less accumulated amortization:
December 31, 2000, $55; September 30, 2000, $48) .................... 797 756
Other assets.............................................................. 451 427
------- -------
TOTAL............................................... $ 4,645 $ 4,720
======= =======
LIABILITIES AND SHAREOWNERS' EQUITY
Current liabilities:
Short-term debt...................................................... $ 183 $ 183
Accounts payable..................................................... 1,002 1,058
Accrued compensation and benefits.................................... 183 203
Accrued income taxes................................................. 1 27
Other current liabilities............................................ 311 254
------- -------
Total current liabilities........................................ 1,680 1,725
------- -------
Long-term debt............................................................ 1,578 1,537
Accrued retirement benefits............................................... 381 382
Other liabilities......................................................... 95 113
Minority interests........................................................ 96 96
Company-obligated manditorily redeemable preferred
capital securities................................................... 64 74
Shareowners' equity:
Common stock (December 31, 2000, 71.0 shares issued and 66.2
outstanding; September 30, 2000, 71.0 shares issued
and 67.9 outstanding).......................................... 71 71
Additional paid-in capital........................................... 546 546
Retained earnings.................................................... 441 466
Treasury stock (December 31, 2000, 4.8 shares;
September 30, 2000, 3.1 shares) .................................
(75) (53)
Accumulated other comprehensive loss................................. (232) (237)
------- -------
Total shareowners' equity........................................ 751 793
------- -------
TOTAL............................................... $ 4,645 $ 4,720
======= =======
See notes to consolidated financial statements.
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ARVINMERITOR, INC.
STATEMENT OF CONSOLIDATED CASH FLOWS
(Unaudited)
Three Months Ended
December 31,
----------------------
2000 1999
-------- --------
(In millions)
OPERATING ACTIVITIES
Net (loss) income............................................................... $ (10) $ 97
Adjustments to net (loss) income to arrive at cash provided by
operating activities:
Depreciation.............................................................. 43 32
Amortization............................................................... 6 4
Gain on sale of business................................................... - (83)
Restructuring, net of expenditures......................................... 45 -
Pension and retiree medical contributions.................................. (20) (17)
Other, net................................................................. 15 6
Changes in assets and liabilities, excluding effects of
acquisitions, divestitures and foreign currency adjustments.............. (10) (37)
------- ------
CASH PROVIDED BY OPERATING ACTIVITIES.................................. 69 2
------- ------
INVESTING ACTIVITIES
Capital expenditures............................................................ (50) (31)
Acquisition of businesses and investments....................................... (14) (10)
Proceeds from disposition of property and businesses............................ - 135
------- ------
CASH (USED FOR) PROVIDED BY INVESTING
ACTIVITIES............................................................. (64) 94
------- ------
FINANCING ACTIVITIES
Net increase in revolving and other debt........................................ 41 7
Purchase of preferred capital securities........................................ (10) _
Cash dividends.................................................................. (15) (7)
Purchases of treasury stock..................................................... (22) (91)
------- ------
CASH USED FOR FINANCING ACTIVITIES..................................... (6) (91)
------- ------
Effect of exchange rate changes on cash......................................... - (4)
------- ------
CHANGE IN CASH.................................................................. (1) 1
CASH AT BEGINNING OF PERIOD..................................................... 116 68
------- ------
CASH AT END OF PERIOD........................................................... $ 115 $ 69
======= ======
See notes to consolidated financial statements.
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ARVINMERITOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. 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 company also
provides coil coating applications to the transportation, appliance,
construction and furniture industries.
On July 7, 2000, Meritor Automotive, Inc. (Meritor) and Arvin Industries,
Inc. (Arvin) merged into ArvinMeritor. The merger was accounted for
utilizing the purchase method of accounting. The financial information for
the periods prior to July 7, 2000, reflect the results of Meritor and its
consolidated subsidiaries prior to the merger. The information for the
period after July 7, 2000, represents the results of ArvinMeritor and its
consolidated subsidiaries.
All prior periods' share and per share data have been restated to conform
with the exchange of Meritor shares to ArvinMeritor shares on a one to
0.75 basis in connection with the merger with Arvin (see Note 3).
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 Annual Report on Form
10-K for the fiscal year ended September 30, 2000, including the financial
statements incorporated by reference in the Form 10-K. The results of
operations for the three-month period ended December 31, 2000 are not
necessarily indicative of the results for the full year.
It is the company's practice for each interim reporting period to make 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.
Effective October 1, 2000, the company changed the date for the end of its
fiscal year to the Sunday nearest September 30. The company's fiscal
quarters end on the Sundays nearest December 31, March 31, and June 30.
All year and quarter references relate to the company's fiscal year and
fiscal quarters unless otherwise stated.
Certain prior period amounts have been reclassified to conform with
current period presentation.
2. In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 133 (SFAS 133), "Accounting
for Derivative Instruments and Hedging Activities." SFAS 133 requires that
all derivatives be recognized as either assets or liabilities in the
consolidated balance sheet and be measured at fair value, and changes in
the fair value be recorded in earnings, unless they are designated as
hedges of an underlying transaction. The company adopted this standard, as
amended, effective October 1, 2000. The adoption of this standard did not
have a material impact on the financial position or results of operations
of the company.
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ARVINMERITOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The company uses forward exchange contracts to offset the effect of
exchange rate fluctuations on foreign currency denominated payables and
receivables. These contracts help minimize the risk of loss from changes
in exchange rates, and are generally of short duration (less than three
months). The foreign currency denominated payables and receivables are
remeasured on a quarterly basis and the forward exchange contracts are
utilized to help offset the earnings impact of the remeasurement. The
company has not elected to designate the forward exchange contracts as
hedges. In addition to forward exchange contracts, the company has a
currency swap embedded in a sales contract between a 49 percent owned
affiliate and a wholly owned subsidiary, that does not qualify as a hedge
per SFAS 133. The impact of fair valuing the foreign exchange contracts
and the foreign currency swap is recognized in operating income. The first
quarter 2000 net income impact of recording these items was immaterial.
Forward exchange contracts were also utilized to hedge the purchase of
equipment payable in foreign currency and were designated as fair value
hedges of the firm commitment. The fair value of the firm commitment was
recorded as an asset, the value of the forward contracts were recorded as
a liability, and there was no impact to earnings during the quarter. The
value of both the firm commitment and the forward exchange contracts are
determined using the forward exchange rates, with all other critical terms
of the forward contracts and the hedged transaction being the same.
Therefore, the company has determined the change in fair value
attributable to the risk being hedged is expected to be completely offset
by the change in fair value of the forward contracts. Future assessments
of hedge effectiveness will include verifying and documenting if the
critical terms of the forward contracts and the firm commitment have
changed.
The company's financial instruments include cash, short- and long-term
debt and foreign currency forward exchange contracts. As of December 31,
2000, the carrying values of the company's financial instruments
approximated their fair values based on prevailing market prices and
rates. The notional amount of outstanding foreign currency forward
exchange contracts aggregated $239 million at December 31, 2000 and $222
million at September 30, 2000. It is the policy of the company not to
enter into derivative instruments for speculative purposes.
3. On July 7, 2000, Meritor and Arvin merged to form ArvinMeritor. Under the
terms of the merger agreement, each share of Meritor common stock was
converted into the right to receive 0.75 shares of common stock of
ArvinMeritor, and each share of Arvin common stock was converted into the
right to receive one share of common stock of ArvinMeritor plus $2.00 in
cash. In total, approximately 62.3 million shares of Meritor, 24.3 million
shares of Arvin and $48.5 million in cash were exchanged for approximately
71.0 million shares of ArvinMeritor.
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ARVINMERITOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The merger was accounted for by the purchase method of accounting.
Accordingly, the results of operations of Arvin are included with those of
the company for the period subsequent to the date of the merger. The total
estimated merger consideration of $576 million was allocated first to
assets and liabilities based on their fair values as of the merger date,
with the residual allocated to goodwill, which is being amortized on a
straight-line basis over 40 years. Since the company assumed the stock
options outstanding of Arvin, the fair value of these options was included
in determining the fair value. The purchase price allocation is
preliminary and may be revised up to one year from the date of acquisition
due to appraisals of fixed assets, other fair value adjustments and the
finalization of any potential plans of restructuring.
A summary of the estimated fair market value of assets and liabilities
acquired is as follows:
Fair
Value
--------
Current assets................................................. $ 945
Property plant and equipment................................... 552
Goodwill....................................................... 373
Other assets................................................... 240
--------
Total assets................................................... 2,110
Current liabilities............................................ (993)
Long-term liabilities.......................................... (144)
Long-term debt and capital securities.......................... (397)
--------
Fair market value.............................................. $ 576
=========
The allocation of the purchase price has been revised from previously
reported amounts to reflect appraisals which are substantially complete.
The following unaudited pro forma consolidated results of operations for
the period ended December 31, 1999 assume that the ArvinMeritor merger
occurred as of the beginning of fiscal 2000 (in millions, except per share
amounts):
Three Months Ended
December 31, 1999
--------------------
Net sales............................................................ $ 1,924
=======
Net income........................................................... $ 116
=======
Basic and diluted earnings per share................................ $ 1.56
=======
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ARVINMERITOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The pro forma adjustments are based upon available information and certain
assumptions that management believes are reasonable. The pro forma data is
not necessarily indicative of the results of operations of ArvinMeritor
that would have been achieved if the merger had in fact occurred on such
dates, or the results of operations of ArvinMeritor for any future period.
The pro forma data does not give effect to any potential restructuring
costs or to any potential cost savings or other synergies that could result
from the merger.
4. In the first quarter of fiscal 2001, the company recorded a charge for
restructuring and other costs of $46 million ($30 million after-tax, or
$0.45 per basic and diluted share). The charge included severance and other
employee costs of approximately $38 million related to a net reduction of
approximately 850 employees, with the balance primarily associated with
facility related costs from the rationalization of operations. As of
December 31, 2000, approximately 30 employees had been terminated under
this restructuring action.
In the third quarter of fiscal 2000, the company recorded a restructuring
charge of $26 million ($16 million after-tax, or $0.30 per basic and
diluted share). The charge included severance and other employee costs of
approximately $19 million related to a net reduction of approximately 500
employees, with the balance primarily associated with facility related
costs from the rationalization of operations. As of December 31, 2000,
approximately 210 employees had been terminated under this restructuring
action.
A summary of the restructuring activity as of December 31, 2000 is as
follows:
Employee
Termination Asset
Benefits Impairment Other Total
-------- ---------- ----- -----
Fiscal 2000 charge......................... $ 19 $ 6 $ 1 $ 26
Write-down of assets....................... - (6) - (6)
Cash payments through 12/31/00............. (9) - - (9)
--------- --------- --------- ---------
Subtotal.............................. 10 - 1 11
--------- --------- --------- ---------
First quarter 2001 charge.................. 38 6 2 46
Write-down of assets....................... - (6) - (6)
Cash payments through 12/31/00............. (1) - - (1)
--------- --------- --------- ---------
Subtotal.............................. 37 - 2 39
--------- --------- --------- ---------
Reserve balance at 12/31/00................ $ 47 $ - $ 3 $ 50
========= ========= ========= =========
All restructuring actions related to the fiscal 1999 restructuring charge
were substantially complete as of December 31, 2000.
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ARVINMERITOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
5. In July 2000, the company's board of directors authorized a program to
repurchase up to $100 million of its common stock. Under the program, the
company will purchase shares periodically in the open market or through
privately negotiated transactions as market conditions warrant and in
accordance with Securities and Exchange Commission rules. As of December
31, 2000, 4,812,515 shares of ArvinMeritor common stock had been purchased
under this program at an aggregate cost of approximately $75 million, or an
average of $15.64 per share.
In September 1999, Meritor's board of directors authorized the purchase of
up to $125 million of Meritor's common stock and in February 2000, the
board of directors authorized an additional $75 million for such purpose.
Meritor purchased 5,120,400 shares at an aggregate cost of approximately
$125 million, or an average of $24.51 per share, under these programs
before they were suspended in February 2000 in anticipation of entering
into a definitive agreement to merge with Arvin. The treasury stock was
cancelled in connection with the merger.
6. Inventories are summarized as follows (in millions):
December 31, September 30,
2000 2000
------------------- --------------------
Finished goods.............................................. $ 297 $ 298
Work in process............................................. 143 142
Raw materials, parts and supplies........................... 214 195
--------- ----------
Total.................................................. 654 635
Less allowance to adjust the carrying value of
certain inventories to a last-in, first-out
(LIFO) basis 51 52
--------- ----------
Inventories............................................ $ 603 $ 583
========= ==========
7. Other Current Assets are summarized as follows (in millions):
December 31, September 30,
2000 2000
------------------ --------------------
Current deferred income taxes............................... $ 121 $ 122
Customer tooling............................................ 34 37
Prepaid expenses and other.................................. 53 53
--------- ----------
Other Current Assets................................... $ 208 $ 212
========= ==========
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ARVINMERITOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
8. Other Assets are summarized as follows (in millions):
December 31, September 30,
2000 2000
------------------ --------------------
Long-term deferred income taxes............................. $ 17 $ 9
Investments in affiliates................................... 207 200
Prepaid pension costs....................................... 81 78
Net capitalized computer software costs..................... 42 41
Patents, trademarks and licenses............................ 38 38
Other....................................................... 66 61
--------- ----------
Other Assets........................................... $ 451 $ 427
========= ==========
9. Other Current Liabilities are summarized as follows (in millions):
December 31, September 30,
2000 2000
------------------ --------------------
Accrued product warranties.................................. $ 92 $ 95
Accrued taxes other than income taxes....................... 39 36
Accrued restructuring....................................... 50 16
Environmental reserves...................................... 11 11
Other....................................................... 119 96
--------- ----------
Other Current Liabilities.............................. $ 311 $ 254
========= ==========
10. Other Liabilities are summarized as follows (in millions):
December 31, September 30,
2000 2000
------------------ --------------------
Environmental reserves...................................... $ 27 $ 27
Deferred payments........................................... 24 34
Other....................................................... 44 52
--------- ----------
Other Liabilities...................................... $ 95 $ 113
========= ==========
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ARVINMERITOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
11. Long-term Debt, net of discount where applicable, is summarized as follows
(in millions):
December 31, September 30,
2000 2000
------------------ --------------------
6 7/8 percent notes due 2001................................ $ 75 $ 75
7.94 percent notes due 2005................................. 50 50
6 3/4 percent notes due 2008................................ 100 100
7 1/8 percent notes due 2009................................ 150 150
6.8 percent notes due 2009.................................. 498 498
Commercial paper............................................ 535 560
Bank revolving credit facilities............................ 218 194
Lines of credit and other................................... 135 93
--------- ----------
Subtotal................................................. 1,761 1,720
Less: current maturities................................... (183) (183)
--------- ----------
Long-term Debt.......................................... $ 1,578 $ 1,537
========= =========
12. Accrued Retirement Benefits consisted of the following (in millions):
December 31, September 30,
2000 2000
------------------ --------------------
Accrued retirement medical costs............................ $ 324 $ 325
Accrued pension costs....................................... 77 76
Other....................................................... 25 26
--------- ----------
Total................................................ 426 427
Amount classified as current liability...................... 45 45
--------- ----------
Accrued Retirement Benefits.......................... $ 381 $ 382
========= ==========
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ARVINMERITOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
13. ArvinMeritor currently has three reportable operating segments: Light
Vehicle Systems (LVS), Commercial Vehicle Systems (CVS) and Light Vehicle
Aftermarket (LVA). LVS is a major supplier of exhaust systems, aperture
systems (primarily roof and door systems) and undercarriage systems
(primarily suspension, ride and motion control, and wheel products) for
passenger cars, light trucks and sport utility vehicles to original
equipment manufacturers. CVS is a leading supplier of drivetrain systems
and components, including axles, brakes, and drivelines, for medium- and
heavy-duty trucks, trailers and off-highway equipment and specialty
vehicles. LVA supplies exhaust, ride control, filter products and
accessories to the light vehicle aftermarket. Business units that are not
focused on automotive products are classified as "Other." The company's
Coil Coating division is the primary component of this classification.
Segment information is summarized as follows (in millions):
Three Months Ended
December 31,
---------------------------
2000 1999
----------- -----------
Sales:
Light Vehicle Systems.......................... $ 870 $ 406
Commercial Vehicle Systems..................... 552 730
Light Vehicle Aftermarket...................... 197 -
Other.......................................... 40 -
--------- -----------
Total.................................. $ 1,659 $ 1,136
========= ===========
Operating income:
Light Vehicle Systems.......................... $ 52 $ 31
Commercial Vehicle Systems..................... 12 56
Light Vehicle Aftermarket...................... 3 -
Other.......................................... (3) -
Restructuring costs and other charges.......... (46) -
Gain on sale of business....................... - 83
--------- -----------
Operating income.......................... 18 170
Equity in earnings of affiliates............... 5 9
Interest expense, net.......................... (35) (17)
--------- -----------
(Loss) income before income taxes.............. (12) 162
Benefit (provision) for income taxes........... 4 (63)
Minority interests............................. (2) (2)
--------- -----------
Net (loss) income.............................. $ (10) $ 97
========= ===========
12
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ARVINMERITOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
14. Comprehensive (loss) income is summarized as follows (in millions):
Three Months Ended
December 31,
---------------------------
2000 1999
---------- ---------
Net (loss) income..................... $ (10) $ 97
Foreign currency translation.......... 5 (7)
--------- ---------
Comprehensive (loss) income........... $ (5) $ 90
========= =========
15. On November 30, 1999, the company completed the sale of its Light Vehicle
Systems seat adjusting systems business for approximately $135 million
cash, resulting in a one-time gain of $83 million ($51 million after-tax,
or $1.02 per basic and diluted share). The seat adjusting systems business
had fiscal 1999 sales of approximately $130 million.
16. Various lawsuits, claims and proceedings have been or may be instituted or
asserted against the company relating to the conduct of its business,
including those pertaining to product liability, intellectual property,
environmental, safety and health and employment matters.
Included in these matters are claims for alleged asbestos-related personal
injuries, which arose from products manufactured prior to 1977 by a
subsidiary acquired by Arvin in 1986. During fiscal years 1995 through
2000, the company and its predecessors paid asbestos-related claims of
approximately $35 million, substantially all of which were reimbursed by
insurance. Management believes that existing insurance coverage will
reimburse substantially all of the potential liabilities and expenses
related to pending cases.
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 which are pending
or asserted will not have a material adverse effect on the company's
financial statements.
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ARVINMERITOR, INC.
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
RESULTS OF OPERATIONS
2001 First Quarter Compared to 2000 First Quarter
As is discussed in Note 1 of the notes to the consolidated financial statements,
on July 7, 2000, Meritor and Arvin merged to form ArvinMeritor. The merger was
accounted for as a purchase with Meritor designated as the acquiror.
Accordingly, the historic financial information for periods prior to July 7,
2000, reflects only the results of Meritor and its consolidated subsidiaries.
The information for the period after July 7, 2000, represents the results of
ArvinMeritor and its consolidated subsidiaries. All prior periods' share and per
share data have been restated to conform with the exchange of Meritor shares to
ArvinMeritor shares on a one Meritor share for 0.75 ArvinMeritor shares basis,
in connection with the merger. All references to pro forma amounts assume that
the merger occurred at the beginning of each period presented, and do not give
pro forma effect to any acquisitions or divestitures made by Arvin or Meritor.
Sales for the first quarter of 2001 were $1,659 million, an increase of $523
million over the same period last year. Included in the first quarter of fiscal
2001 are $759 million of sales attributable to the merger with Arvin. Excluding
the impact of the merger, sales decreased $236 million, due to weak demand in
the North American Commercial Vehicle Systems (CVS) markets, in addition to a
negative impact of $54 million due to currency exchange and $31 million due to
the sale of the Light Vehicle Systems (LVS) seat adjusting systems business in
fiscal 2000. Pro forma sales, as if Arvin and Meritor had operated as a merged
company in all periods, declined $265 million, or 14 percent compared to $1,924
million in the first quarter of fiscal 2000. Weak demand in the Light Vehicle
Aftermarket (LVA) market, in addition to the CVS market, contributed to the pro
forma sales decline. Reductions in North American light vehicle production also
have contributed to the company's weaker sales.
First quarter 2001 operating income was $18 million, compared to $170 million in
first quarter 2000. Before special items, operating income decreased $23
million, or 26 percent, to $64 million. Included in the first quarter of fiscal
2001 operating income is $27 million attributed to the merger with Arvin. The
operating income decline was driven by a decrease in sales, primarily in CVS, as
discussed above. Special items in the first quarter of fiscal year 2001 included
charges of $46 million ($30 million after-tax, or $0.45 per share), related to
the company's restructuring actions announced in November 2000 (see below).
Special items in the prior year's first quarter included a net gain of $83
million ($51 million after-tax or $1.02 cents per share), principally due to the
sale of the Light Vehicle Systems seat adjusting systems business. Pro forma
operating income for the quarter, before special items, was down 49 percent from
$125 million in last year's first quarter, resulting in a decrease in operating
margins from 6.5 percent to 3.9 percent. The sales decline in the CVS and LVA
segments drove the decrease in pro forma operating income and margins.
14
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ARVINMERITOR, INC.
Net (loss) was $(10) million, or ($0.15) per basic and diluted shares for the
quarter ended December 31, 2000, compared to $97 million for the same period
last year. Before special items, net income was $20 million, or $0.30 per basic
and diluted shares, a decrease of $26 million, or $0.62 per basic and diluted
shares, from the first quarter 2000. On a pro forma basis, before special items,
net income and earnings per share decreased $45 million and $0.57 per basic and
diluted shares from first quarter 2000 net income of $65 million and $0.87
earnings per share.
Affiliate income for the quarter, weakened primarily by CVS North American
affiliates, declined to $5 million, versus $9 million for the prior year's
comparable period. Interest expense was up $18 million to $35 million, primarily
due to higher debt levels of the combined company, and additional borrowings
used to fund the share repurchase program. First quarter 2000 affiliate income
and interest expense on a pro forma basis were $12 million and $34 million,
respectively.
First quarter 2001 earnings were impacted by net lower depreciation and
amortization expense associated with appraisal of the Arvin fixed assets
recorded at their fair market value under purchase accounting which increased
earnings by $0.05 per share. In addition, earnings per share declined $0.03 per
share due to the bankruptcy filing of a major steel customer in the coil coating
business, and $0.04 per share due to foreign currency exchange.
The first-quarter effective tax rate of 35.5 percent, was down from last year's
39.0 percent, and 37.5 percent on a pro forma basis, as expected, and is a
direct result of the company's ongoing commitment to identifying and
implementing strategic tax-planning initiatives. The company expects the full
year's effective tax rate to approximate the first-quarter rate.
LVS sales were $870 million, up from $406 million as compared to last year's
first quarter, of which $507 million is attributed to the merger with Arvin.
Excluding the sales attributable to Arvin, LVS sales decreased $43 million. The
sale of the LVS seat adjusting systems business negatively impacted LVS sales in
the first quarter 2001 by $31 million. Operating margin was 6.0 percent, down
from last year's first quarter margin of 7.6 percent. The lower depreciation
expense (described above) increased operating margin by 0.8 percent in the
first quarter. On a pro forma basis, sales were down slightly from $905 million
in first quarter 2000, and operating margin was up from 5.5 percent for last
year's pro forma first quarter. Continuing margin pressures and expected volume
declines by the original equipment manufacturers could affect LVS operating
margins throughout the full fiscal year.
CVS sales were $552 million, down from $730 million, or 24 percent lower,
compared to last year's first quarter. Operating income was $12 million in the
first quarter of 2001, reflecting operating margin of 2.2 percent, down from $56
million and 7.7 percent in first quarter 2000. The steep decline experienced in
the last two fiscal quarters in the Class 8 North American truck volumes has
resulted in a higher fixed-cost ratio, which negatively affects operating
margins. CVS operating margins are expected to benefit in the second fiscal
quarter, as a result of restructuring and other cost-reduction activities. Sales
and operating income were $747 million and $59 million on a pro forma basis for
first quarter 2000.
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ARVINMERITOR, INC.
RESULTS OF OPERATIONS (Cont'd)
Light Vehicle Aftermarket sales were $197 million, with no sales in the first
quarter of fiscal 2000 as this business is attributable to Arvin, and is
accordingly included in the consolidated results for periods subsequent to the
merger. Sales on a pro forma basis were down from $229 million, or 14 percent,
as compared to last year's first quarter. LVA operating margin was 1.5 percent,
down from 5.2 percent on a pro forma basis as of December 31, 1999. A continued
downward trend in the North American market, and softer European volumes during
the first quarter were major contributors to the decline in the pro forma
year-over-year comparison of both sales and operating margin.
The company continued its share repurchase program, pursuant to which it is
authorized to repurchase up to $100 million in company stock. As of December 31,
2000, the company had acquired 4,812,515 shares of its outstanding common stock,
at an aggregate cost of $75 million.
In November 2000, the company announced a $90-million restructuring plan to
realign operations to reflect the decline in the company's major markets. To
comply with existing accounting rules, these charges are expected to be recorded
throughout the fiscal year. Special charges related to restructuring actions
were $46 million for the first quarter ($30 million after-tax or $0.45 per
share). Approximately $11 million in charges related to restructuring actions
are expected in the second fiscal quarter ending April 1, 2001. Anticipated
restructuring-related charges of approximately $10 million and $8 million in the
third and fourth fiscal quarters, respectively, will bring the total to $75
million. A further $15 million in costs related to the former Arvin businesses
will be recorded in accordance with purchase accounting rules and will be
charged against the balance sheet. That amount will be incremental to the
goodwill resulting from the combination of Arvin and Meritor.
FINANCIAL CONDITION
Cash provided by operating activities for the first three months of fiscal 2001
was $69 million, an increase of $67 million compared to the first three months
of fiscal 2000. Receivables drove this improvement, which was partially offset
by declines in other working capital. Depreciation and amortization expense was
$49 million for the first quarter of fiscal 2001. The company anticipates
depreciation and amortization expense to be approximately $225 million for the
entire fiscal year.
Capital expenditures were $50 million in the first three months of fiscal 2001,
an increase of $19 million from the first three months of fiscal 2000 due to the
merger with Arvin. The company anticipates full year fiscal 2001 capital
expenditures of approximately $220 to $240 million. Cash provided by investing
activities in the first three months of fiscal 2000 included $135 million in
proceeds from the sale of the LVS seat adjusting systems business.
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ARVINMERITOR, INC.
FINANCIAL CONDITION (cont'd)
Cash used for financing activities in the fiscal 2001 first quarter includes
payments of $22 million for purchases of the company's common stock and $15
million for cash dividends. The company's first quarter dividend of 0.22 cents
per share was paid on December 11, 2000, to shareowners of record on November
20, 2000. Cash provided by financing activities for the first three months of
fiscal 2001 included a net increase in debt of $41 million, offset by purchases
of the company's preferred capital securities of $10 million.
The company's long-term debt to capitalization ratio increased to 66 percent at
December 31, 2000, from 64 percent at September 30, 2000.
Information with respect to the effect on the company and its manufacturing
operations of compliance with environmental protection requirements and
resolution of environmental claims is contained under the caption "Environmental
Matters" in the Chief Financial Officer's Review, Management's Discussion and
Analysis in the company's 2000 Annual Report to Shareowners, incorporated by
reference into the company's Annual Report on Form 10-K for the fiscal year
ended September 30, 2000. Management believes that at December 31, 2000 there
has been no material change to this information.
INTERNATIONAL OPERATIONS
On January 1, 1999, the Euro became the common currency of eleven countries of
the European Union. During a three-year transition period, the present national
currencies of these eleven countries will become sub-units of the Euro at fixed
exchange rates. The European Union's current plans call for the transition
period to be completed by July 1, 2002, at which time the Euro will become the
sole legal tender in those participating countries.
The company is engaged in business in some of the countries that participate in
the European Monetary Union, and sales for fiscal 2000 in these countries were
approximately 17 percent of the company's total sales. In addition, the company
enters into foreign currency forward exchange contracts with respect to several
of the existing currencies that will be subsumed into the Euro and has
borrowings in participating currencies primarily under its revolving Credit
Facility. The company has analyzed the potential effects of the Euro conversion
on competitive conditions, information technology and other systems, currency
risks, financial instruments and contracts, and has examined the tax and
accounting consequences of Euro conversion, and believes that the conversion has
not had and will not have a material adverse effect on its business, operations
and financial condition.
The company is making the necessary adjustments to accommodate the conversion,
including modifications to its information technology systems and programs,
pricing schedules and financial instruments. The company expects that all
necessary actions will be completed in a timely manner, and that the costs
associated with the conversion to the Euro will not be material.
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ARVINMERITOR, INC.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The company is exposed to foreign currency exchange rate risk inherent in its
sales, purchases, assets and liabilities denominated in currencies other than
the U.S. dollar and interest rate risk associated with the company's debt. The
company does enter into foreign currency forward exchange contracts to minimize
the risk of unanticipated gains and losses from currency rate fluctuations on
foreign currency commitments entered into in the ordinary course of business
(See Note 2 to the financial statements for information on accounting for these
contracts). It is the policy of the company not to enter into derivative
financial instruments for speculative purposes, and therefore, the company holds
no derivative instruments for trading purposes.
The company has performed a sensitivity analysis assuming a hypothetical 10
percent adverse movement in foreign currency exchange rates and interest rates
applied to the underlying exposures described above. As of December 31, 2000,
the analysis indicated that such market movements would not have a material
effect on the company's consolidated financial position, results of operations
or cash flows. 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.
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ARVINMERITOR, INC.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
As previously discussed under the heading "Item 3. Legal Proceedings" in
the company's Annual Report on Form 10-K for the fiscal year ended
September 30, 2000 (File No. 1-15983), Eaton Corporation filed suit on July
17, 1997 against Rockwell International Corporation in the U.S. District
Court in Wilmington, Delaware. In the suit, Eaton asserted infringement of
an Eaton patent, which covers certain aspects of heavy-duty truck
transmissions, by the company's Engine Synchro Shift(TM) transmission for
heavy-duty trucks, and sought damages and injunctive relief. Meritor was
joined as defendant on June 11, 1998. After trial, a jury rendered a
verdict on July 1, 1998 in favor of Eaton, finding that Meritor had
infringed Eaton's patent and awarding compensatory damages in an amount
equal to 13% of total product sales. Because the jury found the
infringement to be willful, the judge in the case has discretion to
increase the damages to an amount up to three times the amount of the
award. The judge has not yet ruled on the damage issue or on Eaton's
request for an injunction.
A separate phase of the trial was held in April 1999, without a jury, with
respect to Meritor's allegations that Eaton had engaged in inequitable
conduct in obtaining its patent, and that the patent was therefore
unenforceable. On February 9, 2001, the judge ruled against the company
on the second phase of the proceedings, finding that the company had not
provided clear and convincing evidence of inequitable conduct by Eaton in
obtaining its patent. The company intends to appeal the 1998 jury verdict
and the 2001 order to the U.S. Court of Appeals for the Federal Circuit and
is considering other further actions, including post-trial motions. Based
on advice of M. Lee Murrah, Esq., Assistant General Counsel for the
company, management believes the company's truck transmissions to not
infringe Eaton's patent. The company intends to continue to defend this
suit vigorously, however, the company has accrued for compensatory damages
pursuant to generally accepted accounting principles.
Item 2. Changes in Securities and Use of Proceeds
The company issued 569 shares of Common Stock on October 2, 2000, to each
of Donald R. Beall and James E. Marley, non-employee directors of the
company, pursuant to the terms of the company's Directors Stock Plan, in
lieu of cash payment of the quarterly retainer fees for board service. The
issuance of these securities was exempt from registration under the
Securities Act of 1933, as a transaction not involving a public offering
under Section 4(2).
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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" and similar expressions. Actual
results may differ materially from those projected as a result of certain
risks and uncertainties, including but not limited to global economic and
market conditions; the demand for commercial, specialty and light vehicles
for which the company supplies products; risks inherent in operating
abroad; 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 customers and
suppliers; successful integration of acquired or merged businesses;
achievement of the expected annual savings and synergies from past and
future business combinations; competitive product and pricing pressures;
the amount of the company's debt; 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 Securities and Exchange Commission.
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.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10 - Agreement between the company and Prakash R. Mulchandani
23 - Consent of M. Lee Murrah, Esq., Assistant General Counsel of the
company
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during the quarter ended
December 31, 2000.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ARVINMERITOR, INC.
-------------------
(Registrant)
Date February 14, 2001 By V.G. Baker, II
--------------------------- ------------------------------------
V.G. Baker, II
Senior Vice President,
General Counsel and Secretary
(For the Registrant)
Date February 14, 2001 By W. M. Lowe
--------------------------- ------------------------------------
W. M. Lowe
Vice President and Controller
(Principal Accounting Officer)
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INDEX TO EXHIBITS
EXHIBIT 10 Agreement between the company and Prakash R. Mulchandani
23 Consent of M. Lee Murrah, Esq., Assistant General Counsel of
the company