Filed Pursuant to Rule 424(b)(2)
Registration No. 333-58760
PROSPECTUS SUPPLEMENT
(To Prospectus dated February 19, 2002)
[ArvinMeritor Logo]
ARVINMERITOR, INC.
$400,000,000
8 3/4% Notes due 2012
Interest payable March 1 and September 1
ISSUE PRICE: 100%
The notes will mature on March 1, 2012. Interest on the notes will accrue from
February 26, 2002, and the first interest payment date will be September 1,
2002. We may redeem the notes, in whole or in part, at any time prior to
maturity at the redemption price described in this prospectus supplement.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of the notes or determined that this
prospectus supplement or the accompanying prospectus is accurate or complete.
Any representation to the contrary is a criminal offense.
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PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS ARVINMERITOR
-------------------------------------------------------------------------------
Per Note 100% 1.375% 98.625%
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Total $400,000,000 $5,500,000 $394,500,000
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The notes will not be listed on any national securities exchange. Currently,
there is no public market for the notes.
We expect to deliver the notes to investors through the book-entry delivery
system of The Depository Trust Company on or about February 26, 2002.
JPMORGAN SALOMON SMITH BARNEY
BANC ONE CAPITAL MARKETS, INC.
ABN AMRO INCORPORATED
UBS WARBURG
COMERICA SECURITIES
SUNTRUST ROBINSON HUMPHREY
BNY CAPITAL MARKETS, INC.
TD SECURITIES
TOKYO-MITSUBISHI INTERNATIONAL PLC
February 21, 2002
In making your investment decision, you should rely only on the information
contained in or incorporated by reference in this prospectus supplement and the
accompanying prospectus. We and the underwriters have not authorized anyone to
provide you with any additional information. If you receive any other
information, you should not rely on it. Any statement contained in this
prospectus supplement will be deemed to modify and supercede any previous
statement contained or incorporated by reference in the accompanying prospectus.
This prospectus supplement and accompanying prospectus do not constitute an
offer to sell, or the solicitation of an offer to buy, the notes offered by this
prospectus supplement and the accompanying prospectus in any jurisdiction where
the offer or sale is not permitted. Neither the delivery of this prospectus
supplement and the accompanying prospectus nor any distribution of notes
pursuant to this prospectus supplement and the accompanying prospectus shall,
under any circumstances, create any implication that there has been no change in
the information set forth in or incorporated by reference into this prospectus
supplement and the accompanying prospectus or in our affairs since the date of
this prospectus supplement.
We began operations as a combined company on July 7, 2000 as a result of the
merger of Meritor Automotive, Inc. and Arvin Industries, Inc. and accordingly,
do not have an operating history as a combined company before that date. Except
where otherwise noted, the historic financial information included in this
prospectus supplement for periods prior to July 7, 2000 reflects only the
results of Meritor and its consolidated subsidiaries. The information for
periods after July 7, 2000 represents the results of ArvinMeritor and our
consolidated subsidiaries. This information may not be indicative of our future
results of operations, financial position or cash flows.
As used in this prospectus supplement, the terms "ArvinMeritor," the "Company,"
"we," "us" and "our" refer to ArvinMeritor, Inc., its subsidiaries and its
predecessors, unless the context indicates otherwise.
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
PAGE
-----
Summary..................................................... S-3
Forward-Looking Information................................. S-8
Use of Proceeds............................................. S-9
Ratio of Earnings to Fixed Charges.......................... S-10
Capitalization.............................................. S-11
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. S-12
Business.................................................... S-23
Description of the Notes.................................... S-37
Underwriting................................................ S-41
Legal Matters............................................... S-42
PROSPECTUS
PAGE
----
About This Prospectus....................................... 2
Where You Can Find More Information......................... 2
ArvinMeritor................................................ 3
Use of Proceeds............................................. 3
Ratio of Earnings to Fixed Charges.......................... 4
Description of the Debt Securities.......................... 4
Global Securities........................................... 12
Plan of Distribution........................................ 13
Experts..................................................... 14
Legal Matters............................................... 14
Cautionary Statement........................................ 14
S-2
SUMMARY
This summary highlights selected information from this prospectus supplement and
may not contain all the information that is important to you. You should read
the following summary together with the more detailed information and financial
statements and notes to the financial statements contained elsewhere or
incorporated by reference in this prospectus supplement or the accompanying
prospectus, as described under the heading "Where You Can Find More Information"
in the accompanying prospectus. To fully understand this offering, you should
read all these documents. As used in this prospectus supplement, references to
fiscal 1999, fiscal 2000 and fiscal 2001 are to our fiscal years ended September
30, 1999, 2000 and 2001, respectively, and references to the first quarter of
fiscal 2001 and 2002 are to our fiscal quarters ended December 31, 2000 and
2001, respectively.
ARVINMERITOR, INC.
GENERAL
We are 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. As of September 30,
2001, we operated 165 manufacturing facilities in 27 countries around the world.
Our sales were $6.8 billion for the fiscal year ended September 30, 2001 and
$1.6 billion for the quarter ended December 31, 2001. For the fiscal year ended
September 30, 2001, 53% of our sales were from our light vehicle systems
segment, 32% were from our commercial vehicle systems segment, 13% were from our
light vehicle aftermarket segment and 2% were from other businesses that do not
focus on automotive products (primarily our coil coating operation).
We serve our customers worldwide through three operating segments:
- Light Vehicle Systems supplies aperture systems (roof, door and access control
systems and motion control products), undercarriage systems (suspension, ride
control and wheel products) and exhaust systems for passenger cars, light
trucks and sport utility vehicles to original equipment manufacturers.
- Commercial Vehicle Systems supplies drivetrain systems and components,
including axles, brakes, drivelines and ride control products, for medium- and
heavy-duty trucks, trailers and off-highway equipment and specialty vehicles.
- Light Vehicle Aftermarket supplies exhaust, ride control and filter products
and accessories to the passenger car, light truck and sport utility vehicle
aftermarket.
BUSINESS STRATEGY
The industry in which we operate is cyclical and has been characterized
historically by periodic fluctuations in demand for vehicles for which we supply
products. Softening demand in several of our principal markets had a negative
effect on our financial results for fiscal year 2001 and continues to have an
effect in 2002.
We have developed leadership market positions as a global supplier of a broad
range of components and systems for use in commercial, specialty and light
vehicles worldwide. In the short term, we seek to maintain these market
positions in the face of the industry downturns described above. In the longer
term, we work to enhance our leadership positions, capitalize on our existing
customer, product and geographic strengths, and increase sales, earnings and
profitability. Our business strategies to achieve these goals include the
following:
- reduce products costs, improve product quality and lower required asset
investment levels by continuously improving core business processes;
S-3
- leverage our geographic strengths to meet the global sourcing needs of
customers, as well as to address new markets;
- provide lower cost and higher quality products, and more systems and modules
to customers that are increasing their outsourcing activities;
- improve our design and engineering capabilities and invest in new technologies
and product development;
- leverage our aftermarket business by using existing distribution channels to
market new products, both those manufactured by us and those manufactured by
others and sold by us under distribution agreements; and
- selectively pursue strategic and business development opportunities, including
licensing agreements, marketing arrangements, joint ventures, acquisitions and
dispositions.
ArvinMeritor was formed as an Indiana corporation in connection with the merger
of Meritor Automotive, Inc. and Arvin Industries, Inc. on July 7, 2000. Meritor
Automotive, Inc. was a Delaware corporation that was spun off by its parent
company, Rockwell International Corporation, on September 30, 1997. Our
principal executive offices are located at 2135 West Maple Road, Troy, Michigan
48084-7186. Our telephone number is 248-435-1000.
S-4
THE OFFERING
SECURITIES OFFERED........................ $400,000,000 initial principal amount of 8 3/4% Notes
due 2012.
MATURITY DATE............................. March 1, 2012.
INTEREST PAYMENT DATES.................... March 1 and September 1 of each year, commencing
September 1, 2002.
REDEMPTION................................ At our option, we may redeem any or all of the notes,
in whole or in part, at any time, at the redemption
prices described under "Description of the
Notes -- Optional Redemption" in this prospectus
supplement.
RANKING................................... The notes:
- are unsecured;
- rank equally with all our existing and future
unsecured and unsubordinated debt;
- are senior to any future subordinated debt; and
- are effectively junior to any secured debt and to all
existing and future debt and other liabilities of our
subsidiaries.
COVENANTS................................. We will issue the notes under an indenture containing
covenants for your benefit. These covenants restrict
our ability, with certain exceptions, to:
- incur debt secured by liens;
- engage in sale/leaseback transactions; or
- merge or consolidate with another entity or sell
substantially all of our assets to another entity.
USE OF PROCEEDS........................... We will receive net proceeds from this offering of
approximately $394.0 million, which we intend to use to
repay outstanding indebtedness incurred under our bank
credit facilities, as further described under "Use of
Proceeds" below.
FURTHER ISSUANCES......................... We may create and issue further notes ranking equally
and ratably with the notes offered hereby in all
respects, so that such further notes will be
consolidated and form a single series with the notes
offered hereby and will have the same terms as to
status, redemption or otherwise as the notes offered
hereby.
S-5
SUMMARY FINANCIAL DATA
The following summary consolidated financial data have been taken or derived
from, and should be read in conjunction with, the financial information
contained in or incorporated by reference in this prospectus supplement and the
accompanying prospectus. The results of operations and financial position data
as of and for the years ended September 30, 2001, 2000 and 1999 have been
derived from our audited financial statements. The information as of December
31, 2001 and 2000, and for the quarters then ended, is unaudited and reflects
all adjustments which are of a normal recurring nature and, in the opinion of
management, necessary to present fairly the financial position, results of
operations and cash flows as of and for the periods presented. The results of
operations for the quarter ended December 31, 2001 are not necessarily
indicative of the results to be expected for the full fiscal year ending
September 30, 2002.
ACTUAL PRO FORMA(1)
-------------------------------------------- ---------------
QUARTER ENDED YEAR ENDED
DECEMBER 31, YEAR ENDED SEPTEMBER 30, SEPTEMBER 30,
---------------- ------------------------ ---------------
2001(2) 2000 2001 2000 1999 2000 1999
------- ------ ------ ------ ------ ------ ------
(IN MILLIONS, EXCEPT PER SHARE DATA)
RESULTS OF OPERATIONS
Sales
Light Vehicle Systems.................. $ 852 $ 870 $3,588 $2,031 $1,575 $3,668 $3,474
Commercial Vehicle Systems............. 483 552 2,199 2,872 2,875 2,926 2,941
Light Vehicle Aftermarket.............. 194 197 859 209 -- 950 906
Other.................................. 37 40 159 41 -- 178 170
------ ------ ------ ------ ------ ------ ------
Total Sales.............................. $1,566 $1,659 $6,805 $5,153 $4,450 $7,722 $7,491
====== ====== ====== ====== ====== ====== ======
Operating Income
Light Vehicle Systems.................. $ 44 $ 52 $ 213 $ 149 $ 130 $ 232 $ 199
Commercial Vehicle Systems............. 11 12 32 221 233 231 245
Light Vehicle Aftermarket.............. 9 3 44 6 -- 43 72
Other.................................. (1) (3) (10) -- -- 9 17
------ ------ ------ ------ ------ ------ ------
Segment Operating Income................. 63 64 279 376 363 515 533
Gain on sale of business and other..... -- -- -- 89 24 89 31
Restructuring costs and other
charges.............................. (15) (46) (84) (26) (28) (30) (35)
Merger expenses........................ -- -- (--) (10) -- -- --
------ ------ ------ ------ ------ ------ ------
Total Operating Income................... 48 18 195 429 359 574 529
Equity in earnings of affiliates......... -- 5 4 29 35 40 45
Non-operating one-time items............. -- -- -- -- -- (3) (1)
Interest expense, net and other.......... (28) (35) (136) (89) (61) (142) (117)
(Provision) benefit for income taxes..... (6) 4 (21) (141) (129) (177) (169)
Minority interests....................... (3) (2) (7) (10) (10) (5) (7)
------ ------ ------ ------ ------ ------ ------
Income (Loss) Before Cumulative Effect of
Accounting Change...................... 11 (10) 35 218 194 287 280
Cumulative Effect of Accounting
Change(2).............................. (42) -- -- -- -- -- --
------ ------ ------ ------ ------ ------ ------
Net Income (Loss)........................ $ (31) $ (10) $ 35 $ 218 $ 194 $ 287 $ 280
====== ====== ====== ====== ====== ====== ======
Basic and Diluted Earnings (Loss) Per
Share:
Earnings (Loss) Per Share Before
Cumulative Effect of Accounting
Change................................. $ 0.17 $(0.15) $ 0.53 $ 4.12 $ 3.75 $ 4.02 $ 3.67
Cumulative Effect of Accounting
Change(2).............................. (0.64) -- -- -- -- -- --
------ ------ ------ ------ ------ ------ ------
Earnings (Loss) Per Share................ $(0.47) $(0.15) $ 0.53 $ 4.12 $ 3.75 $ 4.02 $ 3.67
====== ====== ====== ====== ====== ====== ======
S-6
ACTUAL
------------------------------------------------
QUARTER ENDED AND
AT DECEMBER 31, YEAR ENDED AND
(UNAUDITED) AT SEPTEMBER 30,
------------------ --------------------------
2001 2000 2001 2000 1999
------- ------- ------ ------ ------
(IN MILLIONS, EXCEPT PER SHARE DATA)
FINANCIAL POSITION
Total assets............................................ $4,234 $4,645 $4,362 $4,720 $2,796
Short-term debt......................................... 43 183 94 183 44
Long-term debt.......................................... 1,353 1,578 1,313 1,537 802
Preferred capital securities............................ 39 64 57 74 --
Minority interests...................................... 57 96 69 96 35
Total shareowners' equity............................... 625 751 651 793 348
OTHER DATA
EBITDA(3)............................................... $ 93 $ 70 $ 409 $ 610 $ 515
Depreciation and other amortization..................... 48 43 193 143 120
Goodwill amortization(2)................................ -- 6 24 19 11
Cash provided by operating activities................... 79 69 605 228 262
Cash used for investing activities...................... (42) (64) (210) (200) (692)
Cash provided by (used for) financing activities........ (32) (6) (402) 38 441
Capital expenditures.................................... 34 50 206 225 170
Cash dividends per share................................ 0.10 0.22 0.76 0.64 0.56
---------------
(1) Pro forma financial information gives effect to the July 2000 merger of
Meritor and Arvin as if the merger had occurred at the beginning of each
fiscal year, and reflects (a) the amortization of goodwill from the merger
and the elimination of historical Arvin goodwill amortization expense; (b)
the adjustment to interest expense for borrowings to fund the Arvin cash
consideration and other financing costs; (c) the income tax effects of (a)
and (b) above; and (d) the adjustment of shares outstanding representing the
exchange of one share of Meritor common stock for 0.75 shares of
ArvinMeritor common stock and one share of Arvin common stock for one share
of ArvinMeritor common stock, based on the average shares outstanding for
each year. The pro forma financial information is not necessarily indicative
of what our results of operations or financial position would have been had
the merger been in effect as of and for the periods presented.
(2) Effective October 1, 2001, we adopted Statement of Financial Accounting
Standards No. 142 (SFAS 142), "Goodwill and Other Intangible Assets," which
requires goodwill to be subject to an annual impairment test, or more
frequently if certain indicators arise, and also eliminates goodwill
amortization. As required by this standard, we reviewed the fair values of
each of our reporting units using discounted cash flows and market
multiples. As a result of this review, we recorded an impairment loss on
goodwill as a cumulative effect of accounting change for our Coil Coating
operations (classified as "other" for segment reporting) of $42 million ($42
million after-tax, or $0.64 per diluted share) in the quarter ended December
31, 2001. The adoption of the new accounting standard also eliminated
goodwill amortization expense of $6 million ($5 million after-tax, or $0.08
per diluted share) for the first quarter of fiscal 2002 and will eliminate
$24 million ($20 million after-tax, or $0.30 per diluted share) for the full
year.
(3) The pro forma EBITDA for the year ended September 30, 2000 was $854 million
and for the year ended September 30, 1999 was $805 million. See footnote
(1). EBITDA is defined as income before income taxes, plus interest expense,
depreciation and amortization. EBITDA should not be considered as a
substitute for operating earnings, net income, cash flow or other statement
of consolidated income or cash flow data computed in accordance with
generally accepted accounting principles or as a measure of a company's
results of operations or liquidity. Although EBITDA is not defined in
generally accepted accounting principles, it is widely used as a measure of
a company's operating performance and its ability to service its
indebtedness because it assists in comparing performance on a consistent
basis across companies without regard to depreciation and amortization,
which can vary significantly depending on accounting methods (particularly
where acquisitions are involved) or non-operating factors such as historical
cost bases and capital structure.
S-7
FORWARD-LOOKING INFORMATION
This prospectus supplement and the accompanying prospectus, including the
information we incorporate by reference, contain statements relating to our
future results (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. These forward-looking statements are
based on currently available competitive, financial and economic data and
management's views and assumptions regarding future events. Such forward-looking
statements are inherently uncertain, and 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 we supply
products;
- risks inherent in operating abroad, including foreign currency exchange rates;
- original equipment manufacturers' program delays;
- demand for and market acceptance of new and existing products;
- successful development of new products;
- reliance on major original equipment manufacturer customers;
- labor relations of ArvinMeritor, our customers and suppliers;
- successful integration of acquired or merged businesses;
- the ability to achieve the expected annual savings and synergies from past and
future business combinations;
- competitive product and pricing pressures;
- the amount of our debt;
- our ability to access capital markets;
- the credit ratings of our debt; and
- the outcome of our existing and any future legal proceedings, including any
litigation with respect to environmental or asbestos-related matters;
as well as other risks and uncertainties, such as those detailed herein and from
time to time in our filings with the Securities and Exchange Commission. These
forward-looking statements are made only as of the date of this prospectus
supplement, and we undertake no obligation to update or revise the
forward-looking statements, whether as a result of new information, future
events or otherwise.
S-8
USE OF PROCEEDS
The net proceeds to us from the sale of the notes we are offering will be
approximately $394.0 million after deducting underwriting discounts and
commissions and our estimated offering expenses and will be used to repay
outstanding borrowings under our 364-day, $750-million credit facility, which
matures on June 26, 2002, and our five-year $750-million amended and restated
revolving credit facility, which matures on June 27, 2005. At December 31, 2001,
we had outstanding $250 million and $347 million in borrowings under those two
facilities, respectively. Indebtedness under these credit facilities bears
interest at fluctuating rates based on quoted market rates, plus an applicable
margin based on our credit rating. At December 31, 2001, the weighted average
interest rate was 3.16% under the 364-day credit facility and was 3.15% under
the five-year amended and restated revolving credit facility.
S-9
RATIO OF EARNINGS TO FIXED CHARGES
The ratio of earnings to fixed charges for each of our fiscal years ended
September 30, 1997 through 2001 and for the quarters ended December 31, 2000 and
2001 is set forth below. The ratios for periods ended prior to July 7, 2000, the
date of the merger of Meritor and Arvin, reflect only the results of Meritor and
its consolidated subsidiaries. The ratios for periods ended after July 7, 2000
reflect the results of Meritor and its consolidated subsidiaries prior to the
merger and ArvinMeritor and its consolidated subsidiaries after the merger.
QUARTER
ENDED
FISCAL YEAR ENDED SEPTEMBER 30, DECEMBER 31,
---------------------------------- -------------
1997 1998 1999 2000 2001 2000 2001
------ ---- ---- ---- ---- ----- -----
Ratio of Earnings to Fixed Charges(a)..................... 12.0(b) 6.0 5.4 4.6 1.5 --(c) 1.8
---------------
(a) "Earnings" are defined as pre-tax income from continuing operations,
adjusted for undistributed earnings of less than majority owned subsidiaries
and fixed charges excluding capitalized interest. "Fixed charges" are
defined as interest on borrowings (whether expensed or capitalized), the
portion of rental expense applicable to interest, and amortization of debt
issuance costs.
(b) On September 30, 1997, Rockwell International Corporation transferred its
automotive businesses to Meritor and distributed all of the issued and
outstanding shares of Meritor's common stock to Rockwell shareowners. The
ratio for the fiscal year ended September 30, 1997 has been prepared based
on the combined historical financial position and results of operations of
the ongoing automotive business of Rockwell prior to the distribution, and
is not necessarily indicative of what the financial position and results of
operations would have been had Meritor been an independent company during
that period.
(c) As a result of a loss in the first quarter of fiscal 2001, earnings were not
sufficient to cover fixed charges by an amount of $14 million.
S-10
CAPITALIZATION
The following table sets forth our consolidated capitalization at December 31,
2001 on a historical basis and as adjusted to give effect to the issuance of the
notes in this offering and the application of the net proceeds from the sale of
the notes as described under "Use of Proceeds." This table should be read in
conjunction with "Use of Proceeds," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the consolidated financial
statements and related notes of ArvinMeritor appearing elsewhere or incorporated
by reference in this prospectus supplement.
AS OF
DECEMBER 31, 2001
--------------------
ACTUAL AS ADJUSTED
------ -----------
(UNAUDITED)
(IN MILLIONS)
Cash........................................................ $ 107 $ 107
====== ======
Short-term debt............................................. $ 43 $ 43
Long-term debt:
6 3/4% Notes due 2008..................................... 100 100
7 1/8% Notes due 2009..................................... 150 150
6.8% Notes due 2009....................................... 498 498
8 3/4% Notes due 2012..................................... -- 400
Bank revolving credit facilities.......................... 597 203
Lines of credit and other................................. 8 8
------ ------
Total long-term debt................................... 1,353 1,359
Preferred Capital Securities................................ 39 39
Minority interests.......................................... 57 57
Shareowners' equity:
Common Stock.............................................. 71 71
Additional paid-in-capital................................ 547 547
Retained earnings......................................... 412 412
Treasury stock............................................ (69) (69)
Unearned compensation..................................... (11) (11)
Accumulated other comprehensive loss...................... (325) (325)
------ ------
Total shareowners' equity................................... 625 625
------ ------
Total capitalization................................... $2,117 2,123
====== ======
S-11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Management's Discussion and Analysis of Financial Condition and Results of
Operations should be read in conjunction with the consolidated financial
statements and other information and data contained in the Summary Financial
Data section in this prospectus supplement, and in our Annual Report on Form
10-K for the fiscal year ended September 30, 2001 and our Quarterly Report on
Form 10-Q for the Quarterly Period ended December 30, 2001, which are
incorporated by reference in this prospectus supplement and the accompanying
prospectus.
Our fiscal year ends on the Sunday nearest September 30, and our fiscal quarters
end on the Sundays nearest December 31, March 31 and June 30. All year and
quarter references relate to our fiscal year and fiscal quarters unless
otherwise stated.
OVERVIEW AND OUTLOOK
Our industry is rapidly transforming to keep pace with the globalization and
consolidation of the original equipment manufacturers (OEMs), as well as the
continued trends of outsourcing by the OEMs and systems integration. The
increased competitive pressures and complexity of the industry are presenting
suppliers with many challenges and growth opportunities. We believe that we have
all the ingredients and qualities in place to continue to be a leading Tier One
supplier. We have the advantages of scale, product breadth, geographic scope,
technological leadership and systems integration capability to be one of the
industry's strongest competitors and to take further advantage of industry
trends.
Our long-term goals for financial performance have been established with the
recognition that we operate in a cyclical industry that has been characterized
historically by periodic fluctuations in demand for light, commercial and
specialty vehicles, and related aftermarkets, resulting in corresponding
fluctuations in demand for our products. Accordingly, we will measure our
performance against these long-term financial goals over a multi-year period.
Softening demand in several of our principal markets, including commercial truck
and light vehicle markets in North America and light vehicle replacement
markets, had a negative effect on our financial results for fiscal year 2001. We
expect this environment to continue in fiscal 2002.
Our outlook for our major served markets around the world in fiscal 2002
anticipates declines from fiscal 2001 levels. We expect the North American
commercial truck and trailer markets to continue to soften during our fiscal
year 2002, and we anticipate North American Class 8 production to decline about
7 percent. European heavy and medium trucks are estimated to be down almost 15
percent from fiscal 2001. There is greater uncertainty in the light vehicle
original equipment markets, but our current expectations are for a 3 percent
decline in North American and a 5 percent decline in Western European light
vehicle production during fiscal 2002. We also believe the light vehicle
replacement market will continue to weaken in fiscal 2002 based on higher
quality original equipment products. Additionally, it is difficult to predict
the impact the euro and other currencies will have on sales and operating income
in fiscal year 2002.
We have realized significant cost savings from our fiscal year 2001 synergy
related actions and restructuring programs, and we expect to continue to realize
incremental savings from actions implemented in the latter part of fiscal 2001
and in this fiscal year. We will continue to drive strong financial performance
through aggressive ongoing cost-reduction efforts and restructuring actions.
These cost-reduction initiatives include salaried workforce reductions, delays
in merit increases, further rationalization of our facilities and limitations on
capital spending.
While our restructuring programs and cost reduction actions continue at a
vigorous pace and we are making progress in improving our cost structure, our
top priorities remain keeping service at a high level and exceeding our
customers' expectations. We will continue to focus on providing best-in-class
engineering and technology support. Our ongoing commitment to continuous
improvement and customer satisfaction is further evidenced by the rollout of the
ArvinMeritor Performance System, which is a
S-12
combination of lean manufacturing principles and best practices. This internally
focused system is designed to empower teams to drive out waste, eliminate
non-value added tasks, reduce cycle and lead times, and improve processes.
RESULTS OF OPERATIONS
The merger of Arvin and Meritor 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 periods after July 7, 2000,
represents the results of ArvinMeritor and our consolidated subsidiaries.
Consequently, period to period comparisons are materially affected as a result
of this merger. All share and per share data prior to July 7, 2000 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 earnings per share amounts are on a diluted basis. 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. The pro forma financial information
contained in this section is not necessarily indicative of what our results of
operations or financial position would have been had the merger been in effect
as of and for the periods presented.
2002 First Quarter Compared to 2001 First Quarter
Sales for the first quarter of fiscal 2002 were $1,566 million, a decrease of
$93 million, or 6 percent, as compared to last year's first quarter results. The
sales decline was driven primarily by the Commercial Vehicle Systems (CVS)
business, which has been affected by reduced build rates for North American
Class 8 trucks. The softening in North American and Western European light
vehicle production also contributed to our lower sales.
Effective October 1, 2001, we adopted Statement of Financial Accounting
Standards No. 142 (SFAS 142), "Goodwill and Other Intangible Assets", which
requires goodwill to be subject to an annual impairment test, or more frequently
if certain indicators arise, and also eliminates goodwill amortization. As
required by this standard, we reviewed the fair values of each of our reporting
units using discounted cash flows and market multiples. As a result of this
review, we recorded an impairment loss on goodwill as a cumulative effect of
accounting change for our Coil Coating operations (classified as "other" for
segment reporting) of $42 million ($42 million after-tax, or $0.64 per diluted
share) in the first quarter of fiscal 2002. Recent increases in competition,
consolidation in the coil coating applications industry and the struggling U.S.
steel market caused a decrease in the fair value of this business. The adoption
of the new accounting standard also eliminated goodwill amortization expense of
$6 million ($5 million after-tax, or $0.08 per diluted share) for the first
quarter of fiscal 2002 and will eliminate $24 million ($20 million after-tax, or
$0.30 per diluted share) for the full year.
First quarter fiscal 2002 operating income was $48 million, compared to $18
million in the first quarter of 2001. Included in operating income were
restructuring charges of $15 million ($10 million after-tax, or $0.15 per
diluted share) in the first quarter of fiscal 2002 and $46 million ($30 million
after-tax, or $0.45 per diluted share) in the first quarter of fiscal 2001.
The first quarter fiscal 2002 restructuring charge of $15 million related to
employee severance benefits for approximately 450 salaried employees. We expect
to recover these costs in less than one year and estimate these actions, when
fully implemented, will reduce annual operating costs by approximately $24
million ($16 million after-tax). Our Light Vehicle Systems (LVS) business is
expected to account for approximately 50 percent of the annual savings, CVS
business about 42 percent, and Light Vehicle Aftermarket (LVA) and other about 8
percent.
Excluding restructuring costs described in the prior paragraphs, operating
income was $63 million, compared to $64 million for the same period last year
($70 million after adjusting for goodwill amortization expense of $6 million).
Operating margin was 4.0 percent, compared to last year's 3.9 percent
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(4.2 percent after adjusting for amortization expense). The LVS segment
primarily drove the operating income and margin decline, as described below.
Equity in earnings of affiliates declined $5 million, compared to the same
period last year, primarily due to declining earnings from commercial vehicle
affiliates. Net interest expense decreased $7 million, or 20 percent, compared
to the same period last year, primarily reflecting lower interest rates and debt
levels. Debt levels have been reduced as a result of strong operating cash flow
and the impact of our accounts receivable securitization program.
The first quarter effective tax rate of 32 percent was down from 35.5 percent
for the first quarter of the prior year. We expect the full year effective tax
rate to approximate the first quarter rate of 32 percent.
Income before cumulative effect of accounting change was $11 million, or $0.17
per basic and diluted share for the quarter ended December 31, 2001, as compared
to a net loss of $10 million, or $0.15 per basic and diluted share for the same
period last year. As discussed above, we recorded a cumulative effect of
accounting change, upon the adoption of SFAS 142, of $42 million ($42 million
after-tax, or $0.64 per diluted share) in the first quarter of fiscal 2002. Net
loss in fiscal 2002 first quarter was $31 million.
LVS sales were $852 million, down $18 million, or 2 percent, from the first
quarter of fiscal 2001 and operating income was $44 million, a decrease of $8
million from last year's first quarter. Operating margin fell to 5.2 percent
from 6.0 percent in last year's first quarter (6.2 percent adjusted to exclude
goodwill amortization expense of $2 million). Continued margin pressures from
the vehicle manufacturers and production declines contributed to the operating
margin decline. LVS continues to offset these margin challenges through
restructuring and other programs aimed at lowering fixed costs. In addition,
start-up costs associated with the new Detroit manufacturing facility, as well
as higher engineering and launch costs associated with new product development
negatively impacted the first quarter of fiscal 2002 results by approximately $6
million.
CVS sales were $483 million, down $69 million, or 13 percent, from last year's
first quarter and operating income was $11 million, compared to $12 million in
last year's first quarter. CVS operating margin was 2.3 percent, compared to 2.2
percent in the first quarter of fiscal 2001 (2.7 percent after excluding
goodwill amortization expense of $3 million). The continued decline in Class 8
North American truck volumes was the major factor in the sales decrease. CVS has
been able to offset much of the impact of the sales decline on its margins by
lowering its fixed-cost structure through restructuring programs and other cost-
reduction activities.
LVA sales were $194 million, down slightly from $197 million in last year's
first quarter. Operating income increased to $9 million from $3 million in the
prior year's first quarter. LVA operating margin increased to 4.6 percent, up
from 1.5 percent in the first quarter of fiscal 2001 (2.0 percent after
excluding goodwill amortization expense of $1 million). While the markets
remained weak for aftermarket parts, LVA was able to increase its operating
margin as a result of improved pricing and the impact of ongoing cost
reductions.
2001 Compared to 2000
Sales
Sales for fiscal 2001 were $6,805 million, up $1,652 million, or 32 percent,
over last year's sales of $5,153 million. Included in fiscal 2001 is a full year
of sales attributable to the merger with Arvin, whereas fiscal 2000 includes
Arvin results only for the fourth quarter. The increase in sales is due to
$2,439 million of incremental sales from Arvin in the first three quarters of
fiscal 2001, partially offset by a $787 million decline in sales relating
primarily to the CVS segment, which has been experiencing a steep decline in
Class 8 North American truck volumes. Fiscal 2001 Class 8 North American truck
volumes declined 48 percent from fiscal 2000 levels. Pro forma sales in fiscal
2000, as if Arvin and Meritor had operated as a merged company during the entire
year, were $7,722 million. The $917 million or 12 percent decline in sales from
pro forma 2000 levels is attributable to the decline in heavy truck volumes, as
described above,
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as well as volume declines in the North American light vehicle market and a
softening of demand in the aftermarket.
LVS sales increased to $3,588 million in fiscal 2001 from $2,031 million a year
ago, as a result of the incremental sales of $1,633 million in fiscal 2001
related to the merger with Arvin. This sales increase is slightly offset by $84
million of negative currency exchange. LVS sales were down $80 million, or 2
percent, from fiscal 2000's pro forma sales of $3,668 million. LVS sales in
North America increased 83 percent (down 5 percent on a pro forma basis). Sales
in South America and Europe were up 181 percent and 61 percent, respectively
(both up 1 percent on a pro forma basis). Sales in Asia/Pacific grew 13 percent
(6 percent on a pro forma basis).
CVS reported $2,199 million in sales for components and systems for original
equipment and the aftermarket in fiscal 2001, including $41 million of
incremental sales in fiscal 2001 related to the Arvin merger and $82 million of
negative currency exchange, versus $2,872 million in fiscal 2000. CVS sales in
North America were $1,464 million in fiscal 2001, down $556 million, or 28
percent from fiscal 2000. The 48 percent volume decline in the North American
Class 8 truck market and the 29 percent decline in the North American medium
truck market drove this decline. Western European sales were down $116 million,
or 17 percent in a heavy and medium truck market that was down 4 percent. South
American sales were down 1 percent, while sales in the rest of the world were
flat. Sales of $2,199 million were down $727 million from $2,926 million pro
forma in fiscal 2000.
The LVA business is attributable to Arvin, and accordingly is included in fiscal
2000 for only the fourth quarter. LVA sales were $859 million in fiscal 2001,
versus $209 million in the prior year. The increase is due to the inclusion of
$648 million of sales in the first three quarters of fiscal 2001 due to the
merger. On a pro forma basis, LVA sales declined $91 million, or 10 percent,
from $950 million pro forma fiscal 2000 sales. Softening customer demand
resulted in depressed volumes in this segment.
Operating Income
Fiscal 2001 operating income was $195 million, down $234 million from fiscal
2000. Operating margin was 2.9 percent in fiscal 2001 versus 8.3 percent in
fiscal 2000. In fiscal 2001, we recorded charges totaling $84 million ($56
million after-tax, or $0.85 per share) related to restructuring costs and other
items. The restructuring charge was $67 million, and the other items include a
charge related to additional environmental liability of $5 million and an
employee separation charge of $12 million. In fiscal 2000, we completed the sale
of our LVS seat adjusting systems business for approximately $135 million in
cash, resulting in a one-time gain of $83 million ($51 million after-tax, or
$0.96 per share). Also during fiscal 2000, we recorded a restructuring charge of
$26 million ($16 million after-tax, or $0.30 per share), merger expenses of $10
million ($6 million after-tax, or $0.11 per share), and a gain on sale of land
of $6 million ($3 million after-tax, or $0.05 per share).
Excluding the restructuring costs and other charges, merger expenses and
one-time gains, operating income was $279 million, down $97 million from $376
million in fiscal 2000. This decrease in operating income is primarily
attributable to revenue declines in the CVS business of over 20 percent from
fiscal 2000. Additionally, operating income from Other (business units not
focused on automotive products) decreased $10 million. Partially offsetting
these operating income declines is the favorable impact of including Arvin
results for a full year in fiscal 2001, versus only the fourth quarter of fiscal
2000.
Segment operating income (which is operating income before restructuring costs
and other charges, merger expenses, and gain on sale of business and other) of
$279 million was down $236 million, or 46 percent from fiscal 2000's pro forma
segment operating income of $515 million. The steep decline in CVS markets and
the related decline in CVS revenues, particularly in North America, was the
primary driver of this decline. The remaining decline is attributable to
declines in operating income in the LVS and Other segments of $19 million each.
Segment operating margin was 4.1 percent in fiscal 2001, as compared to 6.7
percent in pro forma fiscal 2000.
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LVS operating income was $213 million in fiscal 2001, up $64 million, or 43
percent, from fiscal 2000. Results from the merger with Arvin contributed an
additional $74 million of operating income in fiscal 2001. LVS operating margin
declined to 5.9 percent, from 7.3 percent in fiscal 2000. LVS operating income
was down $19 million from pro forma 2000 operating income of $232 million and
operating margin was 5.9 percent in fiscal 2001, versus 6.3 percent in pro forma
fiscal 2000. Continued pricing pressures from the vehicle manufacturers, coupled
with North American production declines, contributed to the operating margin
decline. LVS continues to offset these challenges through restructuring and
other programs aimed at lowering fixed costs.
CVS operating income was $32 million, a decrease of $189 million from fiscal
2000. Operating margin declined from 7.7 percent in fiscal 2000 to 1.5 percent
in fiscal 2001. The margin decline was driven by the 48 percent drop in North
American heavy truck volumes and the 29 percent decline in North American medium
truck volumes. These volume reductions outpaced the lowering of our fixed costs.
Compared to pro forma fiscal 2000, operating income was down $199 million, and
operating margin was down from 7.9 percent.
LVA operating income was $44 million in fiscal 2001, with an operating margin of
5.1 percent, compared to operating income of $6 million and a related margin of
2.9 percent in fiscal 2000. The inclusion of a full year of activity in fiscal
2001, due to the merger with Arvin on July 7, 2000, added $28 million to
operating income. Compared to pro forma fiscal 2000, operating income was up
slightly from $43 million and operating margin was up 60 basis points from 4.5
percent. The operating margin increase is the result of improved pricing, the
favorable impact of ongoing cost reductions and lower changeover spending.
Equity in Earnings of Affiliates
Equity in earnings of affiliates declined to $4 million, as compared to $29
million a year ago, primarily due to declining earnings from commercial vehicle
affiliates. Equity in earnings of affiliates was $40 million on a pro forma
basis in fiscal 2000.
Interest Expense, Net and Other
Interest expense, net and other, for fiscal 2001 was $136 million, up $47
million, or 53 percent, from $89 million in fiscal 2000. This increase is
primarily attributable to the July 7, 2000 merger with Arvin, which increased
total debt by over $700 million. The decline in interest expense, net and other,
from $142 million pro forma 2000 to $136 million in 2001 reflects lower debt
levels and interest rates. Included in fiscal 2001 interest expense, net and
other, is a discount of $3 million on the sale of receivables.
Income Taxes
The effective income tax rate in fiscal 2001 was 33.5 percent, compared to 38.2
percent in fiscal 2000. The effective tax rate has been favorably impacted by
ongoing legal entity restructuring, which more closely aligns our organization
structure with the underlying operations of the business.
Net Income and Basic and Diluted Earnings Per Share
Net income for fiscal 2001 was $35 million, or $0.53 per basic and diluted
share, a decrease of 84 percent and 87 percent, respectively, as compared to
fiscal 2000 net income of $218 million, or $4.12 per basic and diluted share. On
a pro forma basis fiscal 2000 basic and diluted earnings per share was $4.02.
2000 Compared to 1999
Sales
Sales for fiscal 2000 were $5,153 million, up $703 million, or 16 percent, over
fiscal 1999 sales of $4,450 million. Included in fiscal 2000 sales are $714
million of sales attributable to the merger with Arvin and a decrease of about
$130 million due to currency exchange. The sale of the seat adjusting systems
business in November 1999 resulted in a decrease of $98 million in sales
year-over-year. Additionally, the
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transmission and clutch business contributed sales of $166 million in fiscal
1999. The results of this business are now reported as affiliate income, due to
the formation of the ZF Meritor joint venture in fiscal 1999. Pro forma sales,
as if Arvin and Meritor had operated as a merged company in all periods, were
$7,722 million in fiscal 2000, an increase of 3 percent over pro forma 1999
sales.
LVS sales increased $456 million, or 29 percent, to $2,031 million from $1,575
million in fiscal 1999. Fiscal 2000 sales include $447 million of sales from
Arvin businesses. The remaining increase in sales is due to penetration gains
and strong industry volumes which were partially offset by the sale of the LVS
seat adjusting systems business in early fiscal 2000 and the $84 million
negative impact of currency. The seat adjusting systems business had fiscal 1999
sales of $129 million and fiscal 2000 sales of $31 million. On a pro forma
basis, LVS sales for fiscal 2000 were $3,668 million, up $194 million or 6
percent from $3,474 million in 1999. Additional market penetration gains in
exhaust systems drove this growth. LVS sales in North America grew 48 percent
(11 percent on a pro forma basis). Sales in South America and Asia/Pacific grew
7 percent and 5 percent, respectively (up 4 percent and 6 percent on a pro forma
basis, respectively). Sales in Europe were up 15 percent (down 2 percent on a
pro forma basis).
CVS reported $2,872 million in sales of components and systems for original
equipment and the aftermarket in fiscal 2000, including $17 million attributable
to the merger with Arvin, which was down slightly from fiscal 1999 sales. CVS
sales in North America were $2,020 million, down $148 million, or 7 percent,
from $2,168 million in fiscal 1999. The decline in North American heavy truck
markets of approximately 8 percent drove this decline. European sales were up
$103 million, or 18 percent, and South American sales were up $18 million, or 27
percent, while sales in the rest of the world were up $24 million. On a pro
forma basis, CVS sales would have been $2,926 million in fiscal 2000, down $15
million, or 1 percent, from pro forma 1999 sales.
LVA sales were $209 million in fiscal 2000 with no sales in fiscal 1999, because
this business is attributable to Arvin and is included in the consolidated
results only from July 7, 2000, and forward. On a pro forma basis, LVA sales in
fiscal 2000 were $950 million, an increase of 5 percent, or $44 million from pro
forma 1999 levels. The increase in pro forma sales is attributable primarily to
the inclusion of a full year of results of the Purolator business, which was
acquired by Arvin in March 1999. Purolator generated $318 million of pro forma
sales in fiscal 2000, as compared to $203 million in pro forma sales in fiscal
1999. These increases were partially offset by price reductions and product mix
issues, the negative impact of currency translation and a softening of markets
in both North America and Europe in the latter part of the fiscal year.
Operating Income
Fiscal 2000 operating income was $429 million, up $70 million from fiscal 1999.
Operating margin was 8.3 percent in fiscal 2000 versus 8.1 percent in fiscal
1999. In fiscal 2000, we completed the sale of our LVS seat adjusting systems
business for approximately $135 million in cash, resulting in a one-time gain of
$83 million ($51 million after-tax, or $0.96 per share). Also during fiscal
2000, we recorded a restructuring charge of $26 million ($16 million after-tax,
or $0.30 per share), merger expenses of $10 million ($6 million after-tax, or
$0.11 per share) and a gain on sale of land of $6 million ($3 million after-tax,
or $0.05 per share). Fiscal 1999 operating income was $359 million, and includes
a restructuring charge of $28 million ($17 million after-tax, or $0.33 per
share) and a one-time gain of $24 million ($18 million after-tax, or $0.34 per
share) in connection with the formation of a transmission and clutch joint
venture with ZF.
Excluding the restructuring charges, merger costs and one-time gains from sales
of businesses and assets, operating income was $376 million in fiscal 2000, up
$13 million from $363 million in fiscal 1999. This increase is attributable to
the results of Arvin, included in results after July 7, 2000. Segment operating
margin was 7.3 percent in fiscal 2000, as compared to 8.2 percent in fiscal
1999. On a pro forma basis, segment operating income was $515 million in fiscal
2000, down 3 percent from $533 million in fiscal 1999. Pro forma segment
operating margin declined from 7.1 percent in fiscal 1999 to 6.7 percent in
fiscal 2000.
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LVS operating income was $149 million in fiscal 2000, with operating margin of
7.3 percent. Operating income was up $19 million, or 15 percent, from 1999,
although operating margin decreased from 8.3 percent. Results from the merger
with Arvin contributed $7 million of operating income in fiscal 2000. Operating
income increased due to the volume contribution from higher sales and favorable
product mix. On a pro forma basis, operating income for fiscal 2000 increased
$33 million, or 17 percent, to $232 million. Pro forma operating margin
increased from 5.7 percent in fiscal 1999 to 6.3 percent in fiscal 2000.
CVS operating income was $221 million in fiscal 2000, a decrease of 5 percent
from 1999. Operating margin declined by 40 basis points to 7.7 percent in fiscal
2000. The decline in margin was driven by higher costs due to unfavorable
economics, the negative impact of currency exchange and higher warranty
expenses. On a pro forma basis, operating income for fiscal 2000 was $231
million, also down 6 percent from pro forma fiscal 1999. Pro forma operating
margin of 7.9 percent also declined by 40 basis points.
LVA operating income was $6 million in fiscal 2000, with an operating margin of
2.9 percent. This business was acquired as part of the merger with Arvin and is,
accordingly, included in the consolidated results from July 7, 2000, and
forward. On a pro forma basis, operating income and margin for fiscal 2000 were
$43 million and 4.5 percent, respectively, down from fiscal 1999 pro forma
operating income of $72 million and related margin of 7.9 percent. The decline
in LVA pro forma operating income relates primarily to reduced pricing and
product mix issues, and was partially offset by increased volume. The decline in
operating income also reflects the soft market conditions experienced in late
fiscal 2000 and consolidation of the distribution channel base.
Equity in Earnings of Affiliates
Equity in earnings of affiliates was down $6 million in fiscal 2000, to $29
million, primarily as a result of the lower North American truck volumes.
Interest Expense, Net and Other
Interest expense, net and other, for fiscal 2000 was $89 million, up $28 million
from fiscal 1999 interest expense, net and other, of $61 million. The increase
was primarily attributable to higher debt levels associated with acquisitions
and the share repurchase programs. On a pro forma basis, fiscal 2000 interest
expense, net and other, increased $25 million, to $142 million, primarily as a
result of the share repurchase programs and acquisitions made during fiscal
1999.
Income Taxes
Our effective income tax rate in fiscal 2000 was 38.2 percent, compared to 38.8
percent in fiscal 1999. The tax rate decline was primarily due to our legal
entity restructuring which more closely aligns our organizational structure with
the underlying operations of the business.
Net Income and Basic and Diluted Earnings Per Share
Net income for fiscal 2000 was $218 million, or $4.12 per basic and diluted
share, an increase of 12 percent and 10 percent, respectively, as compared with
fiscal 1999 net income of $194 million, or $3.75 per basic and diluted share. On
a pro forma basis, fiscal 2000 basic and diluted earnings per share was $4.02,
compared to 1999 basic and diluted earnings per share of $3.67.
FINANCIAL CONDITION
Operating Cash Flow
Cash provided by operating activities for the first three months of fiscal 2002
was $79 million, an increase of $10 million compared to the first three months
of fiscal 2001 and reflects our continued focus on working capital management.
Depreciation and other amortization expense was $48 million for the first
quarter of fiscal 2002.
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Our cash provided by operating activities was $605 million in fiscal 2001, and
is primarily the result of significant improvement in working capital levels and
the sale of $211 million of receivables (see below). Working capital
improvements were driven by improved inventory turnover and higher days in
payables. Cash provided by operating activities was $228 million and $262
million in fiscal 2000 and 1999, respectively. The decline in cash provided by
operating activities in fiscal 2000 from fiscal 1999 is primarily the result of
working capital levels not being reduced commensurate with the decline in sales
during the fourth quarter of fiscal 2000. In addition, increased pension funding
and retiree medical payments contributed to the reduction from 1999 levels.
We participate in an asset securitization facility to improve financial
flexibility and lower interest costs. ArvinMeritor Receivables Corporation
(ARC), a wholly owned subsidiary, has entered into an agreement to sell an
undivided interest in up to $250 million of trade receivables to a group of
banks. The accounts receivable sold are reflected as a reduction to accounts
receivable in the consolidated balance sheet. As of December 31, 2001 and
September 30, 2001, we had utilized $198 million and $211 million, respectively,
of the asset securitization facility.
Investing Cash Flow
Cash used for investing activities was $42 million and $64 million for the first
three months of fiscal 2002 and 2001, respectively. Capital expenditures were
$34 million in the first three months of fiscal 2002, compared to $50 million in
the first three months of fiscal 2001. The decrease was driven by our fiscal
2002 cost-reduction initiatives, which include salaried workforce reductions,
delays in merit increases and limitations on capital spending.
Our operating cash flow allowed us to fund capital expenditures of $206 million
in fiscal 2001. In fiscal 2001, cash used for investing activities also included
$34 million used for the acquisition of a business and investments. The cash
used was partially offset by $30 million of proceeds from dispositions of assets
and an investment in an affiliate.
In fiscal 2000, cash used for investing activities included capital expenditures
of $225 million, cash payments of $49 million relating to the merger between
Arvin and Meritor and cash used for acquisitions of businesses and investments
of $74 million. This cash used was partially offset by $148 million of proceeds
from dispositions of assets, property and businesses, primarily relating to the
sale of the seat adjusting systems business. The increase in capital spending
for fiscal 2000 compared to fiscal 1999 was due in part to the inclusion of
Arvin capital expenditures after the merger.
In fiscal 1999, cash used for investing activities included capital expenditures
of $170 million and cash used for three acquisitions totaling $573 million,
offset somewhat by $51 million of proceeds from the formation of the
transmission and clutch joint venture with ZF Friedrichshafen AG (ZF).
Financing Cash Flow
Cash used for financing activities in the fiscal 2002 first quarter includes
payments totaling $25 million to reduce debt and purchase preferred capital
securities. Cash used for financing activities also includes payment of $7
million for cash dividends. Our first quarter dividend of $0.10 cents per share
was paid on December 17, 2001, to shareowners of record on November 26, 2001.
Cash used for financing activities for the first three months of fiscal 2001
included the purchase of preferred capital securities of $10 million, and
payments for purchases of our common stock of $22 million and cash dividends of
$15 million, offset by an increase in revolving debt of $41 million.
Cash used for financing activities was $402 million in fiscal 2001. Cash
provided by operating activities was used to repay $303 million of debt and $17
million of preferred capital securities. Additionally, we made payments of $31
million for the repurchase of our stock and $51 million for cash dividends in
fiscal 2001.
We have two unsecured credit facilities: a 364-day, $750 million credit facility
and a five-year $750 million revolving credit facility. The 364-day facility
matures on June 26, 2002, with the option to convert
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borrowings thereunder to a one-year term loan. The five-year facility matures on
June 27, 2005. In addition, we have $50 million of unsecured lines of credit and
a commercial paper program with authorized borrowings of up to $1 billion.
Interest rates applicable to our commercial paper borrowings are currently
higher than the cost of other available sources of financing, and no commercial
paper borrowings were outstanding as of December 31, 2001 or September 30, 2001.
On April 12, 2001, we filed a shelf registration statement with the Securities
and Exchange Commission registering $750 million aggregate principal amount of
debt securities that may be offered in one or more series on terms to be
determined at the time of sale. The registration statement became effective on
April 18, 2001. The notes offered by this prospectus supplement are part of the
debt securities registered in the shelf registration statement.
Net cash provided by financing activities was $38 million in fiscal 2000. The
net increase in revolving debt in fiscal 2000 was $245 million. We made payments
of $172 million for the repurchase of our common stock and $35 million for cash
dividends.
Net cash provided by financing activities was $441 million in fiscal 1999. This
amount included a $507 million increase in debt, primarily related to the
February 1999 public offering of $500 million of debt securities. The proceeds
were used to repay existing indebtedness, including short-term credit facilities
entered into to facilitate three acquisitions. In addition, we made payments of
$6 million for the repurchase of our stock, $29 million for cash dividends and
$31 million for the settlement of interest rate agreements entered into in
fiscal 1998 to secure interest rates in anticipation of offering debt
securities.
Other Information
We have retirement medical and defined benefit pension plans that cover most of
our U.S. and certain non-U.S. employees. Retirement medical plan benefit
payments aggregated $53 million in fiscal 2001, $49 million in fiscal 2000 and
$41 million in fiscal 1999. We made pension plan contributions of $44 million in
fiscal 2001, $40 million in fiscal 2000 and $30 million in fiscal 1999.
Management expects to fund at least the minimum pension plan contributions
required by government regulations for the various plans and anticipates that
pension plan funding will be between $40 million and $60 million in fiscal 2002.
Our total debt to capitalization ratio was 68 percent at December 31, 2001 and
67 percent at September 30, 2001 and 2000. We regularly consider various
strategic and business opportunities, including acquisitions. Although no
assurance can be given as to whether or when any acquisitions may be
consummated, if an agreement were to be reached, we could finance such
acquisitions by issuance of additional debt or equity securities. The additional
debt from any acquisitions, if consummated, could increase our total debt to
capitalization ratio.
Based upon our projected cash flow from operations, existing bank credit
facilities and the proceeds of this offering, management believes that
sufficient liquidity is available to meet anticipated operating, capital and
dividend requirements for the next 12 months.
AFFILIATES
At September 30, 2001, we had 14 joint ventures which were not majority-owned
and controlled and were accounted for under the equity method of accounting.
These strategic alliances provide for sales, product design, development and
manufacturing in certain product and geographic areas. Aggregate sales of these
affiliates were $1,782 million, $924 million and $488 million in fiscal 2001,
2000 and 1999, respectively. The increase in fiscal 2001 is due to the inclusion
of $1,129 million in sales from Arvin's affiliates in the first three quarters
of fiscal 2001 versus none from Arvin's affiliates in the corresponding period
of the prior year, due to the merger, offset slightly by the decline in sales of
certain CVS affiliates. The increase in fiscal 2000 is due to the inclusion of
approximately $290 million in sales from Arvin's affiliates and $146 million
attributable to sales of the ZF Meritor joint venture created in late fiscal
1999.
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INTERNATIONAL OPERATIONS
Approximately 41 percent of our total assets as of September 30, 2001, and 37
percent of fiscal 2001 sales were outside North America. Management believes
that international operations have significantly benefited our financial
performance. However, international operations are subject to a number of risks
inherent in operating abroad. There can be no assurance that these risks will
not have a material adverse impact on our ability to increase or maintain our
foreign sales or on our financial condition or results of operations. Our sales
in fiscal 2001 and 2000 were negatively impacted by approximately $170 million
and $130 million, respectively, due to exchange rate changes. Operating income
in fiscal 2001 and 2000 was negatively impacted due to foreign exchange by $19
million and $20 million, respectively. The impact the euro and other currencies
will have on our sales and operating income is difficult to predict in fiscal
2002.
On January 1, 2002, the euro became the sole legal tender in eleven countries of
the European Union. We are engaged in business in many of the countries that
participate in the European Monetary Union, and sales for fiscal 2001 in these
countries were approximately 18 percent of our total sales. In addition, we
enter into foreign currency forward exchange contracts denominated in the euro
and have borrowings in participating countries.
We have made the necessary adjustments to accommodate the euro conversion,
including modifications to our information technology systems and programs,
pricing schedules and financial instruments, and believe that the conversion has
not had and will not have a material adverse effect on our business, financial
condition or results of operations.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to foreign currency exchange rate risk related to our
transactions denominated in currencies other than the U.S. dollar and interest
rate risk associated with our debt.
We 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. It is our
policy not to enter into derivative financial instruments for speculative
purposes, and therefore, we hold no derivative instruments for trading purposes.
We have 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, 2001, the
analysis indicated that such market movements would not have a material effect
on our business, financial condition or results of operations. 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 our actual exposures.
NEW ACCOUNTING PRONOUNCEMENTS
Effective October 1, 2001, we adopted Statement of Financial Accounting
Standards No. 142 (SFAS 142), "Goodwill and Other Intangible Assets," which
requires goodwill to be subject to an annual impairment test, or more frequently
if certain indicators arise, and also eliminates goodwill amortization. As
required by this standard, we reviewed the fair values of each of our reporting
units using discounted cash flows and market multiples. As a result of this
review, we recorded an impairment loss on goodwill as a cumulative effect of
accounting change for our Coil Coating operations (classified as "other" for
segment reporting) of $42 million ($42 million after-tax, or $0.64 per diluted
share) in the quarter ended December 31, 2001. The adoption of the new
accounting standard also eliminated goodwill amortization expense of $6 million
($5 million after-tax, or $0.08 per diluted share) for the first quarter of
fiscal 2002 and will eliminate $24 million ($20 million after-tax, or $0.30 per
diluted share) for the full year.
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In August 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 144 (SFAS 144), "Accounting for the
Impairment or Disposal of Long-Lived Assets". The new standard requires one
model of accounting for long-lived assets to be disposed of, and broadens the
definition of discontinued operations to include a component of a segment. SFAS
144 is effective for fiscal years beginning after December 15, 2001, and interim
periods within those fiscal years, with early adoption encouraged. We do not
expect the adoption of this statement to have a significant impact on our
financial position or results of operations.
There were no new accounting pronouncements adopted by us in fiscal 2001 that
had a material impact on our financial condition or results of operations. We
adopted Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities", as amended, on October 1, 2000,
and we adopted Statement of Financial Accounting Standards No. 140 "Accounting
for Transfers and Servicing of Financial Assets and Extinguishment of
Liabilities -- a replacement of FASB Statement No. 125" in the second quarter of
fiscal 2001. The adoption of these statements did not have a material impact on
us.
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BUSINESS
GENERAL
We are 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 (OEMs) and certain aftermarkets. We serve a
broad range of OEM customers worldwide, including truck OEMs, light vehicle
OEMs, semi-trailer producers and off-highway and specialty vehicle
manufacturers, and the related aftermarkets. As of September 30, 2001, we
operated 165 manufacturing facilities in 27 countries around the world. Sales
outside the United States accounted for approximately 49% of total sales in
fiscal 2001.
We serve customers worldwide through three operating segments:
- Light Vehicle Systems (LVS) supplies aperture systems (primarily roof, door
and access control systems and motion control products), undercarriage systems
(primarily suspension, ride control and wheel products) and exhaust systems
for passenger cars, light trucks and sport utility vehicles to OEMs.
- Commercial Vehicle Systems (CVS) supplies drivetrain systems and components,
including axles, brakes, drivelines and ride control products, for medium- and
heavy-duty trucks, trailers and off-highway equipment and specialty vehicles.
- Light Vehicle Aftermarket (LVA) supplies exhaust, ride control and filter
products and accessories to the passenger car, light truck and sport utility
aftermarket.
Business units that do not primarily focus on automotive products are classified
as "Other." Our coil coating operation is the primary component in this
classification.
ArvinMeritor was incorporated in Indiana in March 2000 in connection with the
merger of Meritor Automotive, Inc. and Arvin Industries, Inc., which was
effective on July 7, 2000.
References to our being a leading supplier or the world's leading supplier, and
other similar statements as to our relative market position, are based
principally on calculations we have made. These calculations are based on
information we have collected, including company and industry sales data
obtained from internal and available external sources, as well as our estimates.
In addition to such quantitative data, our statements are based on other
competitive factors such as our technological capabilities, our research and
development efforts and innovations, and the quality of our products and
services, in each case relative to that of our competitors in the markets we
address.
INDUSTRY DEVELOPMENTS AND OUTLOOK
The industry in which we operate is cyclical and has been characterized
historically by periodic fluctuations in demand for vehicles for which we supply
products. Softening demand in several of our principal markets, including
commercial truck and light vehicle markets in North America and light vehicle
replacement markets, had a negative effect on our financial results for fiscal
2001 and continue to have an effect in 2002. Our most recent outlook shows
continued weakness in these markets, as well as a decline in light vehicle
markets in Europe, for fiscal 2002. Currency fluctuations, notably weakness of
the euro relative to the U.S. dollar, also impacted us in 2001 and may continue
to impact us in 2002.
We continue to seek to mitigate the effects of these negative factors by
implementing cost-reduction initiatives, limiting capital spending, reducing
salaried workforce, reducing the number of our facilities and improving
operational efficiencies. In that connection, we have undertaken restructuring
actions and have achieved merger synergies in fiscal year 2001 to improve
efficiency and realize cost reductions.
BUSINESS STRATEGIES AND INDUSTRY TRENDS
We have developed leadership market positions as a global supplier of a broad
range of components and systems for use in commercial, specialty and light
vehicles worldwide. In the short term, we seek to maintain these market
positions in the face of industry downturns described above. In the longer term,
we
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work to enhance our leadership positions and capitalize on our existing
customer, product and geographic strengths, and to increase sales, earnings and
profitability. We employ various business strategies to achieve these goals as
discussed below.
Several significant trends in the automotive industry influence our business
strategies. These trends, which present opportunities and challenges to industry
suppliers, include the globalization of OEMs and their suppliers, increased
outsourcing by OEMs, increased demand for modules and systems by OEMs, with an
increasing emphasis on engineering and technology and the consolidation of
suppliers worldwide.
Our business strategies and the industry trends that affect them include the
following:
Continuously Improve Core Business Processes
As OEMs expand their global presence to reach new markets, they are able to
achieve significant cost savings and enhanced product quality and consistency by
sourcing from the most capable full-service global suppliers. The criteria for
selection of suppliers have increasingly focused on quality, cost and
responsiveness. We have responded to this trend by continuously improving our
core business processes through investment in information technology and capital
equipment; rationalization of production among facilities; deintegration of
non-core processes; establishment of flexible assembly sites; and simplification
and increased commonality of products.
The goals of these actions are to reduce product costs, improve product quality
and lower required asset investment levels, which should result in reduced
product development times or cycles and more flexibility to meet customer needs.
The merger provided an opportunity to advance this continuous improvement
process by combining or selecting between the best practices of both constituent
companies. In fiscal year 2001, we launched the ArvinMeritor Performance System
(AMPS) program, a continuous improvement initiative based on the best principles
of Arvin's Total Quality Production System and Meritor's White Shirt continuous
improvement program.
Leverage Geographic Strengths
As OEMs globalize, they also have the opportunity to take advantage of economies
of scale through global sourcing of components and systems. Geographic expansion
to meet the global sourcing needs of customers and to address new markets will
continue to be an important element of our growth strategy.
Management believes opportunities exist to further increase our presence in the
light vehicle OEM market where, prior to the current downturn in the industry,
our sales of light vehicle products increased each year from 1996 to 2000. The
merger has enhanced our LVS product offerings and improved our ability to take
advantage of these opportunities.
We also believe there are opportunities to increase sales to heavy-duty and
medium-duty commercial vehicle OEMs in Europe, building on established customer
relationships with our North American affiliates and our existing manufacturing
presence in Europe. Emerging markets such as the Asia/Pacific region and South
America also present growth opportunities, as demand for commercial, specialty
and light vehicles increases in these areas. In evaluating opportunities in
these emerging markets, we will continue to assess the economic situation in
these regions and its potential effect on our businesses and served markets.
Capitalize on Customer Outsourcing Activities
OEMs are responding to global competitive pressures to improve quality and
reduce manufacturing costs and related capital investments by outsourcing
products that historically have been engineered and manufactured internally.
Outsourcing enables OEMs to focus on their core design, assembly and marketing
capabilities. One of our significant growth strategies is to provide lower cost
and higher quality products to customers that are increasing their outsourcing
activities.
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Management believes truck and trailer OEMs in Europe will increasingly outsource
in order to achieve cost and efficiency advantages. We work closely with current
and prospective customers worldwide to identify and implement mutually
beneficial outsourcing opportunities.
In markets addressed by LVS, the increased outsourcing trend has extended not
only to components, but to entire modules and systems, requiring suppliers to
provide a higher level of engineering, design, and electromechanical and systems
integration expertise in order to remain competitive. Increased outsourcing by
light vehicle OEMs has resulted in higher overall per vehicle sales by
independent suppliers and presents the opportunity for supplier sales growth
independent of the overall automotive industry growth trend.
We have sought and will continue to seek to capitalize on this trend by using
our broad product lines and design, engineering and manufacturing expertise to
expand sales of higher value modules and systems. For example, Air2Air(TM),
LVS's new integrated airflow system, expands our existing exhaust system
products to incorporate air induction components that are customarily produced
internally by OEMs. In addition, LVS has developed, and is the leading supplier
of, complete roof modules comprised of a roof liner bound to an outer shell
using a patented process. These modules can also incorporate LVS sunroof
technology and such items as sun visors, grab handles and interior lighting, as
well as aerials and loudspeakers. LVS currently has development contracts for
roof modules with several OEMs. While no assurances can be made, these
arrangements have the potential of resulting in increased sales to OEMs in the
future.
Introduce New Systems and Technologies
As OEMs seek the most capable global suppliers, the criteria for selection
include not only quality, cost and responsiveness, but also certain full-service
capabilities, including an increasing emphasis on design and engineering.
We plan to continue investing in new technologies and product development and to
continue working closely with our customers to develop and implement design,
engineering, manufacturing and quality improvements. For example, we are
continuing to develop technical expertise that will permit us to assist
customers in meeting new and more stringent emissions requirements that are
phased in over the next ten years in our primary markets in North America and
Europe. In addition, we are developing braking systems technology that would
assist customers in meeting proposed U.S. regulations to improve braking
performance and reduce stopping distances for commercial motor vehicles.
Management believes that the strategy of continuing to introduce new and
improved systems and technologies will be an important factor in our efforts to
achieve our growth objectives. We will draw upon the engineering resources of
our Technical Centers in Troy, Michigan and Columbus, Indiana, and our
engineering centers of expertise in the United States, Brazil, Canada, France,
Germany and the United Kingdom.
Leverage Aftermarket Business
Longer product lives of automotive parts adversely affect the demand for some
aftermarket products. The average useful life of automotive products has been
increasing steadily in recent years, due to innovations in products and
technologies, resulting in less frequent replacement of parts and a negative
effect on aftermarket sales.
We seek to mitigate the effects of this trend by using our existing distribution
channels to market new products, both those manufactured by us and those
manufactured by others and sold by us under distribution agreements. The merger
furthered this strategy by combining Arvin's strength in the light vehicle
aftermarket with Meritor's strength in the commercial vehicle aftermarket,
thereby providing opportunities for operating synergies and cross-selling of
products.
Selectively Pursue Strategic Opportunities
The globalization of OEMs and the trend toward entering into supply arrangements
with the most capable global suppliers have contributed to the consolidation of
automotive suppliers into larger, more efficient
S-25
and more capable companies. We regularly evaluate various strategic and business
development opportunities, including licensing agreements, marketing
arrangements, joint ventures, acquisitions and dispositions. We intend to
continue to selectively pursue alliances and acquisitions that would allow us to
gain access to new customers and technologies, penetrate new geographic markets
and enter new product markets. We also intend to continue to review the
prospects of our existing businesses to determine whether any of them should be
modified, restructured, sold or otherwise discontinued.
PRODUCTS
We design, develop, manufacture, market, distribute, sell, service and support a
broad range of products for use in commercial, specialty and light vehicles. In
addition to sales of original equipment systems and components, we provide our
products to OEMs, dealers, distributors, fleets and other end-users in the
related aftermarkets. The merger has enhanced our product lines and provided
opportunities for increased sales through cross-marketing products and services
to customers of the two constituent companies.
The following chart sets forth operating segment sales by product for each of
the three fiscal years ended September 30, 2001. Product sales by Arvin and its
subsidiaries are included only for periods after the date of the merger. A
narrative description of the principal products of our three operating segments
and other operations follows the chart.
SALES BY PRODUCT
FISCAL YEAR ENDED
SEPTEMBER 30,
----------------------
2001 2000 1999
---- ---- ----
LVS(1):
Aperture Systems(2)....................................... 17% 23% 27%
Undercarriage Systems..................................... 11 9 8
Exhaust Systems........................................... 25 7 --
--- --- ---
Total LVS.............................................. 53% 39% 35%
--- --- ---
CVS:
Drivetrain Systems........................................ 13% 23% 25%
Stopping Systems.......................................... 8 13 13
Specialty Products........................................ 6 10 12
Suspension Systems and Trailer Products(1)................ 5 9 11
Transmissions and Clutches(3)............................. -- 1 4
--- --- ---
Total CVS.............................................. 32% 56% 65%
--- --- ---
LVA(1):
Exhaust System Products................................... 5% 2% --%
Ride Control Products..................................... 4 1 --
Filtration Products....................................... 4 1 --
--- --- ---
Total LVA.............................................. 13% 4% --%
--- --- ---
Other(1).................................................... 2% 1% --%
--- --- ---
Total....................................................... 100% 100% 100%
=== === ===
---------------
(1) Sales relating to motion control systems (included in aperture systems),
ride control systems (included in undercarriage systems and suspension
systems and trailer products), exhaust systems, LVA products and Other are
included only for periods after the date of the merger, July 7, 2000.
(2) We sold the seat adjusting systems business in November 1999 and sold the
seat motors business in August 2001. Sales from these products are included
in aperture systems prior to these dates.
(3) In August 1999, we transferred the transmission and clutch business to a new
50%-owned joint venture.
S-26
Light Vehicle Systems
A key strategy of LVS is to develop our market position in aperture systems
(including roof, door and access control systems and gas springs), undercarriage
components and systems (including suspension systems, ride control products and
wheel products) and exhaust systems. The merger provided an enhanced platform
for expansion of this business and improved our ability to supply suspension
systems and corner modules to light vehicle OEMs. The following products
comprise our LVS portfolio.
Aperture Systems
Roof Systems. We are one of the world's leading independent suppliers of
sunroofs and roof systems products for use in passenger cars, light trucks and
sport utility vehicles. We make one-piece, modular roof systems, some of which
incorporate sunroofs, that provide OEMs with cost savings by reducing assembly
time and parts. Our roof system manufacturing facilities are located in North
America, Europe and the Asia/Pacific region.
Door Systems. We are a leading supplier of manual and power window regulators
and a leading supplier of integrated door modules and systems. We manufacture
window regulators at plants in North America, Europe and the Asia/Pacific region
for light vehicle and heavy-duty commercial vehicle OEMs. Our wide range of
power and manual door system products utilize numerous technologies and offer
our own electric motors, which are designed for individual applications and to
maximize operating efficiency and reduce noise levels.
Access Control Systems. We supply manual and power activated latch systems to
light vehicle and heavy-duty commercial vehicle manufacturers, with leadership
market positions in Europe and a market presence in North America and the
Asia/Pacific region. Our access control products include modular and integrated
door latches, actuators, trunk and hood latches and fuel flap locking devices.
We have access control systems manufacturing facilities in North America, Europe
and the Asia/Pacific region.
Motion Control Systems. We are a worldwide leader in the manufacture and supply
of motion control and counterbalancing systems for the automotive industry. Our
products include gas lift supports and vacuum actuators. We have motion control
systems manufacturing facilities in the United States and the United Kingdom.
Undercarriage Systems
Suspension Systems. Through our 57%-owned joint venture with Mitsubishi Steel
Manufacturing Co., we are one of the leading independent suppliers of products
used in suspension systems for passenger cars, light trucks and sport utility
vehicles in North America. Our suspension system products, which are
manufactured at facilities in the United States and Canada, include coil
springs, stabilizer bars and torsion bars. In addition, we supply automotive
suspension components for the European light vehicle market from a manufacturing
facility in England. Prior to the current downturn in the industry, this
business experienced significant sales growth over recent years, as light
vehicle OEMs have increased their outsourcing of suspension system products and
the light vehicle market has grown.
Ride Control Systems. We provide ride control products, including shock
absorbers, struts, ministruts and corner modules. Through our joint ventures
with Kayaba Industries, Inc., we manufactured ride control products and were a
leading supplier in the European OEM market in fiscal 2001.
Wheel Products. We are a leading supplier of steel wheel products to the light
vehicle OEM market, principally in North and South America. We have wheel
manufacturing facilities in Brazil and Mexico.
Exhaust Systems
We are a leading global supplier of a complete line of exhaust system
components, including mufflers, exhaust pipes, catalytic converters and exhaust
manifolds. We sell these products to OEMs primarily as original equipment, while
also supporting the replacement needs for manufacturers and the service parts
needs for dealers. In August 2001, we signed our first letter of intent with
respect to our Air2Air(TM)
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system. An Air2Air(TM) system combines air induction and exhaust systems
development into an integrated airflow system for OEM customers and provides an
overall improved airflow system for better system performance with less
development time.
We participate in this business both directly and through joint ventures and
affiliates. These alliances include our 50% interest in Arvin Sango Inc., an
exhaust joint venture based in North America, and our 49% interest in Zeuna
Starker GmbH & Co., an exhaust systems supplier headquartered in Germany.
Commercial Vehicle Systems
Drivetrain Systems
Truck Axles. We are one of the world's leading independent suppliers of axles
for medium- and heavy-duty commercial vehicles. Our axle manufacturing
facilities located in the United States, South America and Europe produce axles
for medium- and heavy-duty commercial vehicles. Our truck axle product line
includes a wide range of drive and non-drive front steer axles and single and
tandem rear drive axles, which can include driver-controlled differential lock
for extra traction, aluminum carriers to reduce weight and pressurized filtered
lubrication systems for longer life. Our front steer and rear drive axles can be
equipped with our cam, wedge or air disc brakes, automatic slack adjusters and
anti-lock braking systems.
Drivelines and Other Products. We also supply universal joints and driveline
components, including our Permalube(TM) universal joint, a permanently
lubricated universal joint used in the high mileage on-highway market.
Stopping Systems
We are a leading independent supplier of air brakes to medium- and heavy-duty
commercial vehicle manufacturers in North America and Europe. In addition, in
Brazil, which is the third largest truck and trailer market in the world, we are
a leading supplier of brakes and brake-related products through our 49%-owned
joint venture with Randon S. A. Veiculos e Implementos.
Through manufacturing facilities located in North America and Europe, we
manufacture a broad range of foundation air brakes, as well as automatic slack
adjusters for brake systems. Our foundation air brake products include cam drum
brakes, which offer improved lining life and tractor/trailer interchangeability;
air disc brakes, which provide fade resistant braking for demanding
applications; wedge drum brakes, which are lightweight and provide automatic
internal wear adjustment; hydraulic brakes; and wheel end components such as
hubs, drums and rotors.
Federal regulations require that new heavy-duty and medium-duty vehicles sold in
the United States be equipped with anti-lock braking systems (ABS). Through our
50%-owned joint venture with WABCO Automotive Products, a wholly-owned
subsidiary of American Standard, Inc., we are the leading supplier of ABS and a
supplier of other electronic and pneumatic control systems for North American
heavy-duty commercial vehicles. The joint venture also supplies hydraulic ABS to
the North American medium-duty truck market.
Specialty Products
Off-Highway Vehicle Products. We supply heavy-duty axles, brakes and drivelines
for use in numerous off-highway vehicle applications, including construction,
material handling, agriculture, mining and forestry, in North America, South
America, Europe and the Asia/Pacific region. These products are designed to
tolerate high tonnages and operate under extreme conditions.
Government Products. We supply axles, brakes and brake system components
including ABS, trailer products, transfer cases and drivelines for use in
medium-duty and heavy-duty military tactical wheeled vehicles, principally in
North America.
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Specialty Vehicle Products. We supply axles, brakes and transfer cases for use
in buses, coaches and recreational, fire and other specialty vehicles in North
America and Europe, and we are the leading supplier of bus and coach axles and
brakes in North America.
Suspension Systems and Trailer Products
We believe we are the world's leading manufacturer of heavy-duty trailer axles,
with leadership positions in North America and in Europe. Our trailer axles are
available in over 40 models in capacities from 20,000 to 30,000 pounds for
virtually all heavy trailer applications and are available with our broad range
of brake products, including ABS. In addition, we supply trailer air suspension
products for which we have strong market positions in Europe and an increasing
market presence in North America.
Transmissions and Clutches
Through our 50%-owned joint venture with ZF Friedrichshafen AG, we produce
technologically advanced medium- and heavy-duty transmission components and
systems for heavy vehicle original equipment manufacturers and the aftermarket
for the United States, Canada and Mexico. This transmission product line enables
us to supply a complete drivetrain system to heavy-duty commercial vehicle
manufacturers in North America. The most recent additions to the joint venture's
range of transmission models include FreedomLine(TM), a fully automated
mechanical truck transmission without a clutch pedal, and SureShift(TM), a
shift-by-wire system that provides the operating ease of an automatic
transmission with full manual control by the driver. The joint venture also
supplies clutches, including diaphragm-spring clutches.
Light Vehicle Aftermarket
The principal LVA products include mufflers; exhaust and tail pipes; catalytic
converters; shock absorbers; struts; clamps; hangers; automotive oil, air, and
fuel filters; and accessories. These products are sold under the brand names
TIMAX(R), ANSA(R) and ROSI(R) (mufflers); Gabriel(R) (shock absorbers); and
Purolator(R) (filters). LVA also markets products under private label to
customers such as Pep Boys and CarQuest (ride control) and Quaker State
(filters).
Other
"Other" includes business units that are not focused predominantly on automotive
products and consists primarily of our coil coating operation. Coil coated steel
and aluminum substrates are used in a variety of applications, which include
consumer appliances; roofing and siding; garage and entry doors; heating,
ventilation and air conditioning (HVAC); and transportation.
CUSTOMERS; SALES AND MARKETING
Our operating segments have numerous customers worldwide and have developed
long-standing business relationships with many of these customers. Our ten
largest customers accounted for 60% of our total sales in fiscal 2001.
Original Equipment
Both LVS and CVS market and sell products principally to OEMs. In North America,
CVS also markets truck and trailer products directly to dealers, fleets and
other end-users, which may designate the components and systems of a particular
supplier for installation in the vehicles they purchase from OEMs.
Consistent with industry practice, LVS and CVS make most of their sales to OEMs
through open purchase orders, which do not require the purchase of a minimum
number of products. The customer typically may cancel these purchase orders on
reasonable notice without penalty. LVS and CVS also sell products to certain
customers under long-term arrangements that require us to provide annual cost
reductions (through price reductions or other cost benefits for the OEMs). If we
were unable to generate
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sufficient cost savings in the future to offset such price reductions, our gross
margins would be adversely affected.
Both LVS and CVS are dependent upon large OEM customers with substantial
bargaining power, including with respect to price and other commercial terms.
Although we believe that our businesses generally enjoy good relations with our
OEM customers, loss of all or a substantial portion of sales to any of our large
volume customers for whatever reason (including, but not limited to, loss of
contracts, reduced or delayed customer requirements, plant shutdowns, strikes or
other work stoppages affecting production by such customers) could have a
significant adverse effect on our financial results. During fiscal year 2001,
DaimlerChrysler AG (which owns Chrysler, Mercedes-Benz AG and Freightliner
Corporation) accounted for approximately $360 million of sales for CVS, $606
million of sales for LVS and $23 million of sales for LVA, or 15% of our total
sales. In addition, General Motors Corporation accounted for approximately $41
million of sales for CVS, $752 million of sales for LVS and $15 million of sales
for LVA, or 12% of our total sales.
Except as noted above with respect to the North American market for heavy-duty
trucks and trailers, LVS and CVS generally compete for new business from OEMs,
both at the beginning of the development of new vehicle platforms and upon the
redesign of existing platforms. New platform development generally begins two to
four years prior to start-up of production. Once a supplier has been designated
to supply products to a new platform, an OEM will generally continue to purchase
those products from the supplier for the life of the platform, which typically
lasts three to six years.
Aftermarkets
CVS also provides truck and trailer products and off-highway and specialty
products to OEMs, dealers and distributors in the aftermarket. LVA sells
products primarily to wholesale distributors, retailers and installers. The
light vehicle aftermarket includes fewer and larger customers, as the market
consolidates and as OEMs increase their presence in the market.
Coil Coating
Our coil coating customers include steel companies, service centers and end
manufacturers engaged in the transportation, appliance, construction and
furniture industries.
COMPETITION
Each of our businesses operates in a highly competitive environment. LVS and CVS
compete worldwide with a number of North American and international providers of
components and systems, some of which belong to, or are associated with, some of
our customers. Some of these competitors are larger and some are smaller than us
in terms of resources and market shares. The principal competitive factors are
price, quality, service, product performance, design and engineering
capabilities, new product innovation and timely delivery. LVS has numerous
competitors across its various product lines worldwide, including Brose (door
systems); Webasto and Inalfa (roof systems); Kiekert (access control systems);
Stabilus (motion control systems); Krupp-Hoesch (suspension systems);
Hayes-Lemmerz (wheel products); and Tenneco (ride control systems and exhaust
systems). The major competitors of CVS are Eaton Corporation (transmissions);
Dana Corporation (truck axles and drivelines); Knorr (stopping systems); and
Hendrickson (suspension systems and trailer products). In addition, certain OEMs
manufacture for their own use products of the types we supply, and any future
increase in this activity could displace our sales.
LVA competes with both OEMs and independent suppliers in North America and
Europe and serves the market through our own sales force, as well as through a
network of manufacturers' representatives. Major competitors include Tenneco,
Goerlicks, Bosal and Catco (exhaust system products); Tenneco, Kayaba, Sachs,
Tokico and Cofap (ride control products); and Champ Labs, Honeywell, Dana,
Mann-Filter and Filtrauto (filtration products). Competitive factors include
customer loyalty, competitive pricing, customized service, quality, timely
delivery, product development and manufacturing process efficiency.
Our coil coating operation competes with other coil coaters and with customers'
internal painting systems.
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RAW MATERIALS AND SUPPLIES
We believe we have adequate sources for the supply of raw materials and
components for our business segments' manufacturing needs with suppliers located
around the world. We do, however, concentrate our purchases of certain raw
materials and parts over a limited number of suppliers, some of which are
located in developing countries, and we are dependent upon the ability of our
suppliers to meet performance and quality specifications and delivery schedules.
Although we historically have not experienced any significant difficulties in
obtaining an adequate supply of raw materials and components necessary for our
manufacturing operations, the loss of a significant supplier or the inability of
a supplier to meet performance and quality specifications or delivery schedules
could have an adverse effect on us.
STRATEGIC INITIATIVES
We regularly consider various strategic and business opportunities, including
licensing agreements, marketing arrangements and acquisitions, and review the
prospects of our existing businesses to determine whether any of them should be
modified, restructured, sold or otherwise discontinued.
The industry in which we operate continues to experience significant
consolidation among suppliers. This trend is due in part to globalization and
increased outsourcing of product engineering and manufacturing by OEMs, and in
part to OEMs reducing the total number of their suppliers by more frequently
awarding long-term, sole-source or preferred supplier contracts to the most
capable global suppliers. Scale is an important competitive factor, with the
largest industry participants able to maximize key resources and contain costs.
Consistent with this trend, we completed the merger of Arvin and Meritor in
fiscal 2000 in order to enhance the financial strength, diversity of operations
and product lines of both companies and to better position ourselves to take
advantage of global opportunities. In addition, we believe that efficiencies and
cost savings resulting from the merger should enable us to improve upon and
increase our strategic options and lower our average cost of capital. Annual
pre-tax synergies are estimated to have been approximately $40 million in fiscal
2001.
In August 2001, we sold the manufacturing equipment related to our LVS seat
motor business for approximately $11.7 million in cash. We had sold our seat
adjusting systems business in November 1999, after determining that retention of
this business was not consistent with the LVS strategy of developing market
position in aperture systems and undercarriage components and systems.
In fiscal 2001, we announced restructuring actions to realign operations at
selected facilities throughout the world to reflect the decline in our major
markets, with a cost of approximately $105 million. In addition, in the first
quarter of fiscal 2002, we recorded an additional restructuring charge of $15
million relating to employee severance benefits for approximately 450 salaried
employees.
No assurance can be given as to whether or when any additional strategic
initiatives will be consummated in the future. We will continue to consider
acquisitions as a means of further expansion, but cannot predict whether our
participation or lack of participation in industry consolidation will ultimately
be beneficial to us. If an agreement with respect to any additional acquisitions
were to be reached, we could finance such acquisitions by issuance of additional
debt or equity securities. The additional debt from any such acquisitions, if
consummated, could increase our debt to capitalization ratio. In addition, the
ultimate benefit of any acquisition would depend on our ability to successfully
integrate the acquired entity or assets into our existing business and to
achieve any projected synergies.
JOINT VENTURES
As the automotive industry has become more globalized, joint ventures and other
cooperative arrangements have become an important element of our business
strategies. At September 30, 2001, we participated in joint ventures with
interests in the United States, Argentina, Brazil, Canada, China, Colombia, the
Czech Republic, Germany, Hungary, India, Italy, Japan, Mexico, South Africa,
Spain, Turkey, Venezuela and the United Kingdom.
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In accordance with accounting principles generally accepted in the United
States, our consolidated financial statements include the operating results of
those majority-owned joint ventures in which we have control. Consolidated joint
ventures include our 57%-owned joint venture with Mitsubishi Steel Manufacturing
Co. (suspension products for passenger cars, light trucks and sport utility
vehicles); and our 75% interest in a joint venture with Kayaba (ride control
products). Unconsolidated joint ventures include our 50%-owned joint venture
with WABCO Automotive Products (ABS systems for heavy-duty commercial vehicles);
our 50%-owned joint venture with ZF Friedrichshafen AG (transmissions and
clutches); our 50% interest in Arvin Sango Inc. and our 49% interest in Zeuna
Starker GmbH & Co. (exhaust systems); our 49% interest in a joint venture with
Randon S.A. Veiculos e Implementos (brakes and brake-related products); and our
40% interest in a second joint venture with Kayaba (steering pumps).
Effective September 30, 2001, ArvinMeritor and Kayaba terminated a North
American joint venture that manufactured ride control products, and each company
reacquired the properties it had contributed at formation in 1998. We had a
50.1% interest in this joint venture. We will continue to participate in two
other joint ventures with Kayaba in Europe, in which we own 75% and 40%
interests. Effective October 1, 2001, we acquired our joint venturer's interest
in Arvin Exhaust Finnentrop GmbH, an exhaust joint venture in which we
previously had a 50% interest.
RESEARCH AND DEVELOPMENT
We have significant research, development, engineering and product design
capabilities. We spent approximately $136 million in fiscal 2001, $115 million
in fiscal 2000 and $117 million in fiscal 1999 on research, development and
engineering. At September 30, 2001, we employed approximately 1,700 professional
engineers and scientists.
PATENTS AND TRADEMARKS
We own or license numerous United States and foreign patents and patent
applications in our manufacturing operations and other activities. While in the
aggregate these patents and licenses are considered important to the operation
of our businesses, management does not consider them of such importance that the
loss or termination of any one of them would materially affect a business
segment or ArvinMeritor as a whole. See "Legal Proceedings" below for
information with respect to a patent infringement lawsuit filed against us by
Eaton Corporation and adverse judgments in the case.
Our registered trademarks ArvinMeritor(R), Arvin(R) and Meritor(R) are important
to our business. Other significant trademarks owned by us include Gabriel(R)
(shock absorbers and struts) and Purolator(R) (filters) with respect to LVA, and
ROR(TM) (trailer axles) with respect to CVS. Under the terms of an agreement
entered into by Meritor and Rockwell in 1997 in connection with the spin-off of
Rockwell's automotive businesses, we may continue to apply the "Rockwell" brand
name to our products until September 30, 2007.
EMPLOYEES
At September 30, 2001, we had approximately 33,000 full-time employees. At that
date, approximately 5,200 employees in the United States and Canada were covered
by collective bargaining agreements. We believe our relationship with unionized
employees is satisfactory. No significant work stoppages have occurred in the
past five years.
ENVIRONMENTAL MATTERS
Federal, state and local requirements relating to the discharge of substances
into the environment, the disposal of hazardous wastes and other activities
affecting the environment have had, and will continue to have, an impact on our
manufacturing operations. To date, compliance with environmental requirements
and resolution of environmental claims have been accomplished without material
effect on our business, financial condition or results of operations.
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We have been designated as a potentially responsible party at 8 Superfund sites,
excluding sites as to which our records disclose no involvement or as to which
our potential liability has been finally determined. Management estimates the
total reasonably possible costs we could incur for the remediation of Superfund
sites at December 31, 2001, to be approximately $33 million, of which $15
million had been accrued.
Various other lawsuits, claims and proceedings have been asserted against us
alleging violations of federal, state and local environmental protection
requirements, or seeking remediation of alleged environmental impairments,
principally at previously disposed-of properties. For these matters, management
has estimated the total, reasonably possible costs we could incur at December
31, 2001, to be approximately $52 million, of which $24 million had been
recorded.
The actual amount of costs or damages for which we may be held responsible could
materially exceed the foregoing estimates because of uncertainties, including
the financial condition of other potentially responsible parties, the success of
the remediation and other factors that make it difficult to accurately predict
actual costs. However, based on management's assessment, and subject to the
difficulties inherent in estimating these future costs, we believe that our
expenditures for environmental capital investment and remediation necessary to
comply with present regulations governing environmental protection and other
expenditures for the resolution of environmental claims will not have a material
adverse effect on our business, financial condition or results of operations.
Management cannot assess the possible effect of compliance with future
requirements.
INTERNATIONAL OPERATIONS
Approximately 41% of our total assets as of September 30, 2001 and 37% of fiscal
2001 sales were outside North America. Management believes that international
operations have significantly benefited our financial performance. However, our
international operations are subject to a number of risks inherent in operating
abroad, including, but not limited to:
- risks with respect to currency exchange rate fluctuations;
- local economic and political conditions;
- disruptions of capital and trading markets;
- restrictive governmental actions (such as restrictions on transfer of funds
and trade protection measures, including export duties and quotas and customs
duties and tariffs);
- changes in legal or regulatory requirements;
- import or export licensing requirements;
- limitations on the repatriation of funds;
- difficulty in obtaining distribution and support;
- nationalization;
- the laws and policies of the United States affecting trade, foreign investment
and loans; and
- tax laws.
There can be no assurance that these risks will not have a material adverse
impact on our ability to increase or maintain our foreign sales or on our
financial condition or results of operations. Exchange rate fluctuations reduced
our sales and operating income by approximately $170 million and $19 million,
respectively, in fiscal 2001. The impact that the euro and other currencies will
have on our sales and operating income is difficult to predict in fiscal 2002.
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We 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. It is our
policy not to enter into derivative financial instruments for speculative
purposes and, therefore, we hold no derivative instruments for trading purposes.
We have not experienced any material adverse effect on our business, financial
condition or results of operations related to these foreign currency forward
exchange contracts. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Quantitative and Qualitative Disclosures
about Market Risk" above.
On January 1, 2002, the euro became the sole legal tender in eleven countries of
the European Union. We are engaged in business in many of the countries that
participate in the European Monetary Union, and sales for fiscal 2001 in these
countries were approximately 18% of our total sales. In addition, we enter into
foreign currency forward exchange contracts denominated in the euro and have
borrowings in participating countries.
We have made the necessary adjustments to accommodate the euro conversion,
including modifications to our information technology systems and programs,
pricing schedules and financial instruments, and believe that the conversion has
not had and will not have a material adverse effect on our business, financial
condition or results of operations.
SEASONALITY; CYCLICALITY
LVS and CVS may experience seasonal variations in the demand for products to the
extent automotive vehicle production fluctuates. Historically, for both
segments, such demand has been somewhat lower in the quarters ended September 30
and December 31, when OEM plants may close during model changeovers and vacation
and holiday periods.
In addition, the industry in which LVS and CVS operate has been characterized
historically by periodic fluctuations in overall demand for trucks, passenger
cars and other vehicles for which we supply products, resulting in corresponding
fluctuations in demand for our products. Cycles in the major automotive industry
markets of North America and Europe are not necessarily concurrent or related.
The cyclical nature of the automotive industry is outside our control and cannot
be predicted with certainty. We have sought and will continue to seek to expand
our operations globally to mitigate the effect of periodic fluctuations in
demand of the automotive industry in one or more particular countries.
The following table sets forth vehicle production in principal markets served by
LVS and CVS for the last five fiscal years:
FISCAL YEAR ENDED SEPTEMBER 30,
--------------------------------
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
Light Vehicles (in millions):
North America............................................. 15.6 17.5 16.9 15.4 15.2
South America............................................. 2.2 2.0 1.5 2.0 2.1
Europe.................................................... 19.1 18.9 18.2 17.7 15.2
Asia/Pacific.............................................. 16.0 17.5 15.6 15.4 17.1
Commercial Vehicles (in thousands):
North America, Heavy-Duty Trucks.......................... 140 269 292 245 201
North America, Medium-Duty Trucks......................... 117 165 175 141 138
North America, Trailers................................... 208 367 366 327 252
Europe, Trailers.......................................... 110 119 124 130 81
Source: Automotive industry publications and management estimates.
Our most recent outlook for fiscal 2002 shows continued softening in North
American production in the heavy-duty commercial truck and trailer markets, and
we anticipate North American heavy-duty truck production to decline
approximately 7%. European heavy and medium trucks are estimated to be down
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approximately 15% from fiscal 2001. There is greater uncertainty in light
vehicle production, but we currently expect a 3% decline in North America and a
5% decline in Europe during fiscal 2002. See "-- Industry Developments and
Outlook" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Overview and Outlook" and "-- Results of Operations"
above for information on downturns in certain markets and their effects on our
sales and earnings.
PROPERTIES
At September 30, 2001, our operating segments had the following facilities in
the United States, Europe, South America, Canada, Mexico, Australia, South
Africa and the Asia/Pacific region:
MANUFACTURING ENGINEERING FACILITIES, SALES OFFICES,
FACILITIES WAREHOUSES AND SERVICE CENTERS
------------- --------------------------------------
LVS................................................ 95 62
CVS................................................ 42 59
LVA................................................ 24 29
Other.............................................. 4 3
These facilities had an aggregate floor space of approximately 35 million square
feet, substantially all of which is in use. We owned approximately 74% and
leased approximately 26% of this floor space. There are no major encumbrances
(other than financing arrangements that in the aggregate are not material) on
any of our plants or equipment. In the opinion of management, our properties
have been well maintained, are in sound operating condition and contain all
equipment and facilities necessary to operate at present levels. A summary of
floor space of these facilities at September 30, 2001, is as follows:
OWNED FACILITIES LEASED FACILITIES
------------------------------- -----------------------------
LOCATION LVS CVS LVA OTHER LVS CVS LVA OTHER TOTAL
-------- ------ ------ ----- ----- ----- ----- ----- ----- ------
(IN THOUSANDS OF SQUARE FEET)
United States..................... 4,032 4,856 2,144 642 687 1,106 798 507 14,772
Canada............................ 566 413 -- -- 103 160 107 -- 1,349
Europe............................ 3,903 2,934 1,076 -- 2,747 150 867 -- 11,677
Asia/Pacific...................... 493 1,047 -- -- 147 658 597 -- 2,942
Latin America..................... 1,225 2,120 157 -- 89 163 186 -- 3,940
Africa............................ 304 -- -- -- -- 11 2 -- 317
------ ------ ----- --- ----- ----- ----- --- ------
Total........................... 10,523 11,370 3,377 642 3,773 2,248 2,557 507 34,997
====== ====== ===== === ===== ===== ===== === ======
LEGAL PROCEEDINGS
On July 17, 1997, Eaton Corporation filed suit against Rockwell in the U.S.
District Court in Wilmington, Delaware, asserting infringement of Eaton's U.S.
Patent No. 4850236, which covers certain aspects of heavy-duty truck
transmissions, by our Engine SynchroShift(TM) transmission for heavy-duty
trucks, and seeking damages and injunctive relief. Meritor was joined as a
defendant on June 11, 1998. The following judgments and orders have been issued
in this case:
- After trial, on July 1, 1998, a jury rendered a verdict 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. On October 11, 2001,
the judge entered an order granting damages to Eaton in the amount of $2.9
million, plus post-judgment interest.
- 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 us on the second phase of the
proceedings, finding that we had not provided clear and convincing evidence of
inequitable conduct by Eaton in obtaining its patent.
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- On September 19, 2001, the judge granted Eaton's request for a permanent
injunction against our manufacturing or selling the Engine SynchroShift(TM)
transmission and any "colorable variations."
- On October 11, 2001, the judge denied our motions for a new trial and for
judgment as a matter of law.
We have appealed these judgments and orders to the United States Court of
Appeals for the Federal Circuit. Management believes our truck transmissions do
not infringe Eaton's patent. We intend to continue to defend this suit
vigorously.
Various other lawsuits, claims and proceedings have been or may be instituted or
asserted against us or our subsidiaries relating to the conduct of our 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 1996 through 2001, we and our
predecessors paid asbestos-related claims of approximately $40 million,
substantially all of which were reimbursed by insurance. As of December 31,
2001, we had accrued $71 million for contingent asbestos-related liabilities,
and recorded assets of $60 million for probable recoveries from insurance. Based
on our assessment of the history and nature of filed claims to date, management
believes that existing insurance coverage will reimburse substantially all of
the potential liabilities and expenses related to pending and future claims.
Prior to February 1, 2001, the Center for Claims Resolution (CCR) handled the
processing and settlement of asbestos claims on our behalf, and we shared in the
payment of defense costs and settlements of the asbestos claims with other CCR
members. Several members of the CCR have filed for bankruptcy protection, and
these members have failed, or may fail, to pay certain financial obligations
with respect to settlements that were reached while they were CCR members. We
expect to be subject to claims for payment of a portion of the defaulted shares.
In an effort to resolve the affected settlements, we have entered into
negotiations with plaintiffs' attorneys, and an estimate of our obligation has
been included in the recorded reserves. We and our insurers are engaged in
proceedings to determine whether existing insurance coverage should reimburse
any potential liability related to this issue.
The outcome of litigation cannot be predicted with certainty and some lawsuits,
claims or proceedings may be disposed of unfavorably to us and for amounts in
excess of the foregoing estimates. However, based on management's evaluation of
matters which are pending or asserted, we believe the disposition of such
matters will not have a material adverse effect on our business, financial
condition or results of operations.
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DESCRIPTION OF THE NOTES
The following is a description of the specific terms of the 8 3/4% Notes due
2012 (the "notes"). This description supplements, and should be read together
with, the description of the general terms and provisions of the debt securities
in the accompanying prospectus under the heading "Description of the Debt
Securities." The following description is subject, and qualified by reference,
to the Indenture, dated as of April 1, 1998, as supplemented, between
ArvinMeritor (as successor to Meritor) and BNY Midwest Trust Company (as
successor to The Chase Manhattan Bank), as trustee, under which the notes will
be issued.
GENERAL
The notes will be a single series of the debt securities described in the
accompanying prospectus. The notes will be issued in an initial aggregate
principal amount of $400,000,000. The notes and any future debt securities
issued under the indenture will be direct, unsecured and unsubordinated
obligations of ArvinMeritor and will rank equally with all our existing and
future unsecured and unsubordinated indebtedness. The notes are effectively
junior to any secured debt and to all existing and future debt and other
liabilities of our subsidiaries.
The notes will mature, and become due and payable, together with accrued and
unpaid interest, on March 1, 2012.
The notes are not subject to any sinking fund provision. The notes will be
issued only in fully registered form in denominations of $1,000 and any multiple
of $1,000. The notes will be denominated and payable in U.S. dollars.
INTEREST
The notes will bear interest from February 26, 2002 at a rate of 8 3/4% per
annum. Interest will be payable in arrears on March 1 and September 1 of each
year, beginning September 1, 2002. Interest will be payable to the persons in
whose names the notes are registered at the close of business on the record date
for that payment. The record dates for interest payments on the notes will be
the February 15 or August 15, as the case may be, immediately preceding the
relevant interest payment date. The amount of interest payable will be computed
on the basis of a 360-day year of twelve 30-day months. In the event that any
interest payment date is not a business day, the payment will be made on the
next succeeding day that is a business day.
OPTIONAL REDEMPTION
The notes will be redeemable, in whole or in part, at the option of ArvinMeritor
at any time prior to maturity at a redemption price equal to the greater of (i)
100 percent of the principal amount of the notes, and (ii) as determined by the
Quotation Agent (as defined below), the sum of the present values of the
remaining scheduled payments of principal and interest (not including any
portion of those payments of interest accrued as of the date of redemption)
discounted to the date of redemption on a semi-annual basis (assuming a 360-day
year consisting of twelve 30-day months) at the Adjusted Treasury Rate (as
defined below) plus 50 basis points plus, in each case, accrued interest to the
date of redemption.
"Adjusted Treasury Rate" means, with respect to any date of redemption, the rate
per annum equal to the semi-annual equivalent yield to maturity of the
Comparable Treasury Issue, assuming a price for the Comparable Treasury issue
(expressed as a percentage of its principal amount) equal to the Comparable
Treasury Price for the date of redemption.
"Comparable Treasury Issue" means the United States Treasury security selected
by the Quotation Agent as having a maturity comparable to the remaining term of
the notes to be redeemed that would be utilized, at the time of selection and in
accordance with customary financial practice, in pricing new issues of corporate
debt securities of comparable maturity to the remaining term of those notes.
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"Comparable Treasury Price" means, with respect to any date of redemption, (i)
the average of the Reference Treasury Dealer Quotations for the date of
redemption, after excluding the highest and lowest Reference Treasury Dealer
Quotations, or (ii) if the trustee obtains fewer than three Reference Treasury
Dealer Quotations, the average of all such Reference Treasury Dealer Quotations.
"Quotation Agent" means J.P. Morgan Securities Inc. or Salomon Smith Barney Inc.
or another Reference Treasury Dealer appointed by ArvinMeritor.
"Reference Treasury Dealer" means (i) each of J.P. Morgan Securities Inc. and
Salomon Smith Barney Inc. and their respective successors; provided, however,
that if any of the foregoing shall cease to be a primary U.S. Government
securities dealer in New York City (a "Primary Treasury Dealer"), ArvinMeritor
shall substitute another Primary Treasury Dealer; and (ii) any other Primary
Treasury Dealer selected by ArvinMeritor.
"Reference Treasury Dealer Quotations" means, with respect to each Reference
Treasury Dealer and any date of redemption, the average, as determined by the
trustee, of the bid and asked prices for the Comparable Treasury Issue
(expressed in each case as a percentage of its principal amount) quoted in
writing to the trustee by that Reference Treasury Dealer at 5:00 p.m., New York
City time, on the third business day preceding that date of redemption.
Notice of any redemption will be mailed at least 30 days but not more than 60
days before the date of redemption to each holder of the notes to be redeemed.
Unless ArvinMeritor defaults in payment of the redemption price, on and after
the date of redemption, interest will cease to accrue on the notes or portions
thereof called for redemption.
On or before a redemption date, we will deposit with a paying agent (or with the
trustee) sufficient money to pay the redemption price and accrued interest on
the notes to be redeemed. If only a portion of the notes are to be redeemed, the
trustee will select the notes to be redeemed by any method it deems appropriate.
FURTHER ISSUANCES
We may from time to time, without notice to or the consent of the registered
holders of the notes, create and issue further notes ranking equally and ratably
with the notes in all respects (or in all respects except for the payment of
interest accruing prior to the issue date of such further notes or except for
the first payment of interest following the issue date of such further notes),
so that such further notes shall be consolidated and form a single series with
the notes and shall have the same terms as to status, redemption or otherwise as
the notes.
DEFEASANCE
The provisions of the indenture relating to defeasance, described in the
accompanying prospectus under the heading "Description of the Debt
Securities -- Defeasance and Covenant Defeasance," will apply to the notes.
BOOK-ENTRY ONLY ISSUANCE -- THE DEPOSITORY TRUST COMPANY
The Depository Trust Company (DTC) will act as the initial securities depositary
for the notes. The notes will be issued only as fully registered securities
registered in the name of Cede & Co., DTC's nominee. One or more fully
registered global notes certificates will be issued, representing in the
aggregate the total principal amount of notes, and will be deposited with DTC.
DTC is a limited-purpose trust company organized under the New York Banking Law,
a "banking organization" within the meaning of the New York Banking Law, a
member of the Federal Reserve System, a "clearing corporation" within the
meaning of the New York Uniform Commercial Code, and a "clearing agency"
registered pursuant to the provisions of Section 17A of the Securities Exchange
Act of 1934, as amended. DTC holds securities that its participants deposit with
DTC. DTC also facilitates the
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settlement among participants of securities transactions, such as transfers and
pledges, in deposited securities through electronic computerized book-entry
changes in participants' accounts, thereby eliminating the need for physical
movement of securities certificates. Direct participants include securities
brokers and dealers, banks, trust companies, clearing corporations and certain
other organizations. DTC is owned by a number of its direct participants and by
the New York Stock Exchange, Inc., the American Stock Exchange, Inc. and the
National Association of Securities Dealers, Inc. Access to the DTC system is
also available to indirect participants such as securities brokers and dealers,
banks and trust companies that clear through or maintain a custodial
relationship with a direct participant, either directly or indirectly. The rules
applicable to DTC and its participants are on file with the Securities and
Exchange Commission.
Purchases of notes within the DTC system must be made by or through direct
participants, which will receive a credit for the notes on DTC's records. The
ownership interest of the actual purchasers of notes, who are the beneficial
owners of the notes, is in turn to be recorded on the direct and indirect
participants' records. Beneficial owners will not receive written confirmation
from DTC of their purchases, but beneficial owners are expected to receive
written confirmations providing details of the transactions, as well as periodic
statements of their holdings, from the direct or indirect participants through
which the beneficial owners purchased notes. Transfers of ownership interests in
the notes are to be accomplished by entries made on the books of participants
acting on behalf of beneficial owners. Beneficial owners will not receive
certificates representing their ownership interests in notes, except in the
event that use of the book-entry system for the notes is discontinued.
DTC has no knowledge of the actual beneficial owners of the notes. DTC's records
reflect only the identity of the direct participants to whose accounts such
notes are credited, which may or may not be the beneficial owners. The
participants will remain responsible for keeping account of their holdings on
behalf of their customers.
Conveyance of notices and other communications by DTC to direct participants, by
direct participants to indirect participants, and by direct participants and
indirect participants to beneficial owners will be governed by arrangements
among them, subject to any statutory or regulatory requirements as may be in
effect from time to time.
Although voting with respect to the notes is limited, in those cases where a
vote is required, neither DTC nor Cede & Co. will itself consent or vote with
respect to notes. Under its usual procedures, DTC would mail an Omnibus Proxy to
ArvinMeritor as soon as possible after the record date. The Omnibus Proxy
assigns Cede & Co.'s consenting or voting rights to those direct participants to
whose accounts the notes are credited on the record date (identified in a
listing attached to the Omnibus Proxy).
DTC's practice is to credit direct participants' accounts on the relevant
payment date in accordance with their respective holdings shown on DTC's records
unless DTC has reason to believe that it will not receive payments on such
payment date. Payments by participants to beneficial owners will be governed by
standing instructions and customary practices, as is the case with securities
held for the account of customers registered in "street name," and will be the
responsibility of such Participant and not of DTC or ArvinMeritor, subject to
any statutory or regulatory requirements as may be in effect from time to time.
Payment to DTC is the responsibility of ArvinMeritor, disbursement of such
payments to direct participants is the responsibility of DTC, and disbursement
of such payments to the beneficial owners is the responsibility of direct and
indirect participants.
Except as provided herein, a beneficial owner of a global note will not be
entitled to receive physical delivery of notes. Accordingly, each beneficial
owner must rely on the procedures of DTC to exercise any rights under the notes.
The laws of some jurisdictions require that certain purchasers of securities
take physical delivery of securities in definitive form. Such laws may impair
the ability to transfer beneficial interests in a global note.
DTC may notify the Company that it is unwilling or unable to continue as
depositary for the notes and, consequently, discontinue providing its services
as securities depositary with respect to the notes at any time as a result.
Also, DTC will cease being the depositary for the securities if it is no longer
qualified as a
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clearing agency under applicable laws. Under such circumstances, in the event
that a successor securities depositary is not obtained, certificates for the
notes will be printed and delivered to the holders of record. Additionally,
ArvinMeritor may decide to discontinue use of the system of book-entry transfers
through DTC (or a successor depositary) with respect to the notes. In that
event, certificates for the notes will be printed and delivered to the holders
of record.
The information in this section concerning DTC and DTC's book-entry system has
been obtained from sources that ArvinMeritor believes to be reliable, but we
take no responsibility for the accuracy thereof. ArvinMeritor has no
responsibility for the performance by DTC or its participants of their
respective obligations as described herein or under the rules and procedures
governing their respective operations.
CONCERNING THE TRUSTEE
BNY Midwest Trust Company, successor trustee under the indenture, will also act
as authenticating agent, security registrar and paying agent with respect to the
notes. An affiliate of the trustee will act as an underwriter in this offering.
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UNDERWRITING
Subject to the terms and conditions in the underwriting agreement dated the date
hereof between us and the underwriters, we have agreed to sell to each
underwriter, and each underwriter has severally agreed to purchase from us, the
principal amount of notes that appears opposite its name in the table below:
PRINCIPAL AMOUNT
UNDERWRITER OF NOTES
----------- ----------------
J.P. Morgan Securities Inc.................................. $146,000,000
Salomon Smith Barney Inc.................................... 146,000,000
Banc One Capital Markets, Inc. ............................. 40,000,000
ABN AMRO Incorporated....................................... 16,000,000
UBS Warburg LLC............................................. 16,000,000
Comerica Securities, Inc.................................... 8,000,000
SunTrust Capital Markets, Inc. ............................. 8,000,000
BNY Capital Markets, Inc. .................................. 6,667,000
TD Securities (USA) Inc. ................................... 6,667,000
Tokyo-Mitsubishi International plc.......................... 6,666,000
------------
Total............................................. $$400,000,000
============
The underwriting agreement provides that the underwriters will purchase all of
the notes if any of them are purchased.
The underwriters initially propose to offer the notes to the public at the
public offering price that appears on the cover page of this prospectus
supplement. The underwriters may offer the notes to selected dealers at the
public offering price minus a concession of up to 0.50% of the principal amount.
In addition, the underwriters may allow, and those selected dealers may reallow,
a concession of up to 0.25% of the principal amount to certain other dealers.
After the initial offering, the underwriters may change the public offering
price and any other selling terms. The underwriters may offer and sell notes
through certain of their affiliates.
In the underwriting agreement, we have agreed that:
- We will pay our expenses related to the offering, which we estimate will be
$500,000.
- We will indemnify the underwriters against certain liabilities, including
liabilities under the Securities Act of 1933, or contribute to payments that
the underwriters may be required to make in respect of those liabilities.
The notes are a new issue of securities, and there is currently no established
trading market for the notes. We do not intend to apply for the notes to be
listed on any securities exchange or to arrange for the notes to be quoted on
any quotation system. The underwriters have advised us that they intend to make
a market in the notes, but they are not obligated to do so. The underwriters may
discontinue any market making in the notes at any time in their sole discretion.
Accordingly, we cannot assure you that a liquid trading market will develop for
the notes.
In connection with the offering of the notes, the underwriters may engage in
overallotment, stabilizing transactions and syndicate covering transactions.
Overallotment involves sales in excess of the offering size, which creates a
short position for the underwriters. Stabilizing transactions involve bids to
purchase the notes in the open market for the purpose of pegging, fixing or
maintaining the price of the notes. Syndicate covering transactions involve
purchases of the notes in the open market after the distribution has been
completed in order to cover short positions. Stabilizing transactions and
syndicate covering transactions may cause the price of the notes to be higher
than it would otherwise be in the absence of those transactions. If the
underwriters engage in stabilizing or syndicate covering transactions, they may
discontinue them at any time.
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J.P. Morgan Securities Inc. ("JPMorgan") will make the notes available for
distribution on the Internet through a proprietary web site and/or a third-party
system operated by Market Axess Inc., an Internet-based communications
technology provider. Market Axess Inc. is providing the system as a conduit for
communications between JPMorgan and its customers and is not a party to any
transactions. Market Axess Inc., a registered broker-dealer, will receive
compensation from JPMorgan based on transactions JPMorgan conducts through the
system. JPMorgan will make the notes available to its customers through the
Internet distributions, whether made through a proprietary or third-party
system, on the same terms as distributions made through other channels.
Tokyo-Mitsubishi International plc is not a U.S. registered broker-dealer and,
therefore, to the extent that it intends to effect any sales of notes in the
United States, it may do so only through one or more U.S. registered
broker-dealers as permitted by the regulations of the National Association of
Securities Dealers, Inc. (the "NASD").
In the ordinary course of their respective businesses, the underwriters or their
affiliates have engaged, or may in the future engage, in commercial banking or
investment banking transactions with ArvinMeritor and its affiliates. In
particular, under our credit facilities, an affiliate of JPMorgan acts as the
syndication agent, an affiliate of Salomon Smith Barney Inc. acts as one of the
documentation agents and JPMorgan is joint lead arranger and joint book-runner.
In addition, all of the underwriters, or their respective affiliates, are
lenders under our credit facilities and will receive greater than 10% of the
proceeds of this offering. Accordingly, this offering is being conducted in
accordance with Rule 2710(c)(8) and Rule 2720 of the NASD.
LEGAL MATTERS
The validity of the notes offered and sold in this offering will be passed upon
for us by Dewey Ballantine LLP, New York, New York, and Baker & Daniels,
Indianapolis, Indiana. Certain legal matters will be passed upon for the
underwriters by Sidley Austin Brown & Wood LLP, New York, New York. Baker &
Daniels may rely as to matters of New York law upon the opinion of Dewey
Ballantine LLP, and Dewey Ballantine LLP may rely as to matters of Indiana law
upon the opinion of Baker & Daniels. Dewey Ballantine LLP represented one or
more of the underwriters of this offering in one of our prior debt offerings.
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