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ArvinMeritor 10-Q 2005 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q
QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended July 3, 2005
ARVINMERITOR, INC. (Exact name of registrant as specified in its charter)
(248) 435-1000 (Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
70,226,196 shares of Common Stock, $1.00 par value, of ArvinMeritor, Inc. were outstanding on June 30, 2005.
INDEX
1
PART I. FINANCIAL INFORMATION ITEM 1. Financial Statements ARVINMERITOR, INC. CONSOLIDATED STATEMENT OF INCOME (in millions, except per share amounts)
See notes to consolidated financial statements. Amounts for the three and nine months ended June 30, 2004 have been restated for the change in accounting for certain inventories and for discontinued operations (see Note 1).
2
ARVINMERITOR, INC. CONSOLIDATED BALANCE SHEET (in millions)
See notes to consolidated financial statements.
3
ARVINMERITOR, INC. CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (in millions)
See notes to consolidated financial statements. Amounts for the nine months ended June 30, 2004 have been restated for the change in accounting for certain inventories and for discontinued operations (see Note 1).
4
ARVINMERITOR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
ArvinMeritor, Inc. (the company or ArvinMeritor) is a leading global supplier of a broad range of integrated systems, modules and components serving light vehicle, commercial truck, trailer and specialty original equipment manufacturers and certain aftermarkets. The consolidated financial statements are those of the company and its consolidated subsidiaries. The company’s Light Vehicle Aftermarket (LVA) and coil coating businesses are classified as held for sale and presented as discontinued operations in the consolidated financial statements and related notes. The company sold its coil coating business during the first quarter of fiscal year 2005 (see Note 4). During the fourth quarter of fiscal 2004, the company changed its method of costing certain inventories in the United States of America (U.S.) to the first-in, first-out (FIFO) method from last-in, first-out (LIFO). In accordance with accounting principles generally accepted in the U.S., all prior periods have been restated to give retroactive effect to this change. The effect of this change decreased previously reported net income in the three months and nine months ended June 30, 2004, by $2 million ($0.03 per diluted share). In the opinion of the company, the unaudited financial statements contain all adjustments, consisting solely of adjustments of a normal, recurring nature, necessary to present fairly the financial position, results of operations and cash flows for the periods presented. These statements should be read in conjunction with the company’s audited consolidated financial statements and notes thereto included in the Annual Report on Form 10-K for the fiscal year ended September 30, 2004. The results of operations for the three and nine months ended June 30, 2005, are not necessarily indicative of the results for the full year. The company’s fiscal year ends on the Sunday nearest September 30. The company’s fiscal quarters end on the Sundays nearest December 31, March 31 and June 30. The third quarter of fiscal year 2005 and 2004 ended on July 3, 2005, and June 27, 2004, respectively. All year and quarter references relate to the company’s fiscal year and fiscal quarters, unless otherwise stated. For each interim reporting period, the company makes an estimate of the effective tax rate expected to be applicable for the full fiscal year. The rate so determined is used in providing for income taxes on a year-to-date basis.
Basic earnings per share is calculated using the weighted average number of shares outstanding during each period. The diluted earnings per share calculation includes the impact of dilutive common stock options and restricted stock. A reconciliation of basic average common shares outstanding to diluted average common shares outstanding is as follows (in millions):
At June 30, 2005 and 2004, options to purchase 3.9 million and 1.8 million shares of common stock, respectively, were not included in the computation of diluted earnings per share because their inclusion would be anti-dilutive.
5
ARVINMERITOR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
In November 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 151, “Inventory Costs.” This statement clarifies the accounting for abnormal amounts of idle facility expense, freight, handling costs and wasted material (spoilage), and requires that these items be recognized as current-period charges. In addition, SFAS No. 151 requires that the allocation of fixed production overhead to inventory be based on the normal capacity of the company’s manufacturing facilities. SFAS No. 151 is effective for fiscal years beginning after June 15, 2005. The company is evaluating the impact of adopting this standard. In December 2004, the FASB issued SFAS No. 123(R), “Share Based Payment,” which will require compensation costs related to share-based payment transactions to be recognized in the financial statements. This statement also establishes fair value for share based payment transactions with employees. The company began expensing the fair value of stock options in fiscal year 2002. In addition, the company expenses stock compensation granted to retirement eligible employees ratably over the respective vesting period. Upon adoption of FAS 123(R), the company will recognize compensation expense associated with grants to retirement eligible employees in the period granted. This statement is effective as of the beginning of the first annual reporting period that begins after June 15, 2005. In December 2004, the FASB issued Staff Position (FSP) FAS 109-1, “Application of FASB Statement No. 109, Accounting for Income Taxes, to the Tax Deduction on Qualified Production Activities Provided by the American Jobs Creation Act of 2004.” The American Jobs Creation Act of 2004 (the Act) provides tax relief to U.S. domestic manufacturers under certain circumstances. The FSP states that the manufacturers’ deduction under the Act should be accounted for as a special deduction in accordance with SFAS No. 109 and not as a tax rate deduction. The adoption of FSP FAS 109-1 did not have an impact on the company’s results of operations or financial position. In December 2004, the FASB issued FSP FAS 109-2, “Accounting and Disclosure Guidance for the Foreign Repatriation Provision within the American Jobs Creation Act of 2004.” The Act introduced a special limited-time dividends received deduction on the repatriation of certain foreign earnings to a U.S. taxpayer. The FSP addresses whether a company should be allowed additional time beyond the financial reporting period in which the Act was enacted, to evaluate the effects of the Act on the company’s plan for reinvestment or repatriation of foreign earnings for purposes of applying SFAS No. 109. The adoption of FSP FAS 109-2 did not have an impact on the company’s results of operations or financial position.
In the fourth quarter of fiscal year 2004, the company announced plans to divest its Light Vehicle Aftermarket (LVA) business segment and coil coating business, Roll Coater, Inc., a wholly owned subsidiary. These plans are part of the company’s long-term strategy to focus on core competencies and support its global light vehicle systems original equipment manufacturing (OEM) customers and its commercial vehicle systems OEM and aftermarket customers. LVA supplies exhaust, ride control, motion control and filter products, as well as other automotive parts to the passenger car, light truck and sport utility aftermarket. LVA and Roll Coater are reported as discontinued operations. Accordingly, net property and amortizable intangible assets are no longer being depreciated or amortized. Due to new industry dynamics, the company now expects the timeframe to complete the divestiture of LVA to extend into fiscal year 2006. In November 2004, the company completed the sale of Roll Coater, which supplied coil coating services and other value-added metal processing services to the transportation, appliance, heating and cooling, construction, doors and other industries. Cash proceeds from the sale were $163 million, resulting in a $2 million after-tax gain on the sale, which is recorded in discontinued operations for the nine months ended June 30, 2005. In the third quarter of 2005, LVA entered into a five-year exclusive supply agreement with a significant customer to supply certain exhaust and ride control products. As part of the supply agreement, LVA expects to incur certain costs to changeover the customer to LVA products. LVA recognizes these costs as selling expenses in the period the changeover occurs. LVA recognized approximately $6 million of after-tax changeover costs as expense in the third quarter. During the first nine months of fiscal 2004, due to declining markets, LVA recorded restructuring costs of $2 million. These costs included severance and other termination costs related to a reduction of approximately 50 salaried employees.
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ARVINMERITOR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Results of the discontinued operations are summarized as follows (in millions):
Assets and liabilities of the discontinued operations are summarized as follows (in millions):
On October 4, 2004, the company formed two joint ventures in France with AB Volvo to manufacture and distribute axles. The company acquired its 51-percent interest for a purchase price of $23 million. Accordingly, the results of operations and financial position of these joint ventures were consolidated by the company, beginning in the first quarter of fiscal year 2005. The company has an option to purchase the remaining 49-percent interest in one of the joint ventures beginning in the first quarter of fiscal year 2008 for 15.7 million euro ($19 million) plus interest at EURIBOR rates, plus a margin. This option to purchase the minority interest is essentially a financing arrangement and, therefore, is recorded as a long-term obligation of the company and is included in other liabilities (see Note 13). Accordingly, no minority interest is recognized for the 49-percent interest in this joint venture. In December 2004, the company completed the divestiture of its Columbus, Indiana automotive stamping and components manufacturing business and recognized a pre-tax gain on the sale of $4 million. This divestiture is part of the company’s plan to rationalize its operations and focus on its core automotive businesses. This manufacturing operation had sales of $83 million in fiscal year 2004. As part of the company’s continuing strategy to divest non-core businesses, in the third quarter of fiscal 2004, the company completed the sale of its Commercial Vehicle Systems (CVS) trailer beam fabrication facility in Kenton, OH. The divestiture of this facility is in line with the company’s strategy to be less vertically integrated and more focused on its core processes for the design and assembly of complete systems. This divestiture did not have a material impact on sales or net income.
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ARVINMERITOR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
In the second quarter of fiscal 2004, the company completed the sale of its 75-percent shareholdings in AP Amortiguadores, S.A. (APA), a joint venture that manufactured ride control products. Net proceeds from the sale were $48 million, resulting in a pre-tax gain of $20 million.
The company recorded restructuring charges of $81 million and $11 million during the first nine months of fiscal year 2005 and 2004, respectively. At June 30, 2005, and September 30, 2004, $37 million and $10 million, respectively, of restructuring reserves primarily related to unpaid employee termination benefits remained in the consolidated balance sheet. Fiscal 2005 actions announced in the second quarter: In the second quarter of fiscal year 2005, the company announced the elimination of approximately 400 to 500 salaried positions and approved plans to consolidate, downsize, close or sell certain underperforming businesses or facilities. These actions are intended to align capacity with industry conditions, utilize assets more efficiently, and improve operations. In addition to the elimination of the 400 to 500 salaried employees, these actions will result in the reduction of an additional 300 salaried and 1,550 hourly employees at 11 global facilities, primarily in the Light Vehicle Systems (LVS) business segment. The total estimated cost of these actions is approximately $135 million, of which approximately $110 million will be cash costs. Estimated costs include employee severance and other exit costs, as well as asset impairments. The company recorded restructuring costs of $68 million related to these actions in the first nine months of fiscal 2005. These costs included $44 million of employee termination benefits and $24 million of asset impairment charges. Under accounting principles generally accepted in the United States, the company expects the remainder of the restructuring costs to be recorded in the next 15 months. Other Fiscal 2005 actions: During the first quarter of fiscal year 2005, Meritor Suspensions Systems Company (MSSC), a 57-percent owned consolidated joint venture of the company, announced the decision to close its Sheffield, England, stabilizer bar facility. The LVS business segment has recorded restructuring and other exit costs of approximately $8 million related to this action in the first nine months of fiscal year 2005. This included employee termination and other exit costs of approximately $4 million and asset impairment charges of $4 million. The employee termination costs related to a reduction of approximately 10 salaried and 125 hourly employees. The LVS business segment also recorded in the nine months ended June 30, 2005, restructuring costs for previously approved employee terminations and other expenses of $5 million. These costs related to a reduction in workforce of approximately 10 salaried and 230 hourly employees and the consolidation of two facilities in Brazil. Fiscal 2004 actions: The company recorded restructuring costs of $6 million in the first nine months of fiscal 2004 related to workforce reductions and facility consolidations in its LVS business segment. These costs included severance and other employee termination costs related to a reduction of approximately 200 salaried and 350 hourly employees. These measures follow the management realignment of the company’s LVS business and are also intended to address the competitive challenges in the automotive supplier industry. During the first nine months of fiscal 2004, the company also recorded restructuring charges totaling $5 million associated with certain administrative and managerial employee termination costs. The changes in the restructuring reserves for the nine months ended June 30, 2005, are as follows (in millions):
8
ARVINMERITOR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
The company participates in a U.S. accounts receivable securitization program to enhance financial flexibility and lower interest costs. Under this program, the company sells substantially all of the trade receivables of certain U.S. subsidiaries to ArvinMeritor Receivables Corporation (ARC), a wholly owned, special purpose subsidiary. ARC has entered into an agreement to sell an undivided interest in up to $250 million of eligible receivables to certain bank conduits. At June 30, 2005, LVA no longer participated in this facility. As a result of this and the recent divestitures of the company’s coil coating business and automotive stamping and components manufacturing business, the amount of receivables available to sell under this facility was reduced to approximately $160 million at June 30, 2005. As of June 30, 2005, and September 30, 2004, the company had utilized $156 million and $24 million, respectively, of this accounts receivable securitization facility. As of June 30, 2005, and September 30, 2004, the banks had a preferential interest in $238 million and $373 million, respectively, of the remainder of the receivables held at ARC to secure the receivables sold under this accounts receivable securitization facility. The company does not have a retained interest in the receivables sold, but does perform collection and administrative functions. The receivables under these programs were sold at fair market value, and a discount on the sale was recorded in interest expense, net and other. A discount of $3 million was recorded for the nine months ended June 30, 2005, and 2004. The accounts receivable securitization program matures in September 2005. If the company’s credit ratings were reduced to certain levels, or if certain receivables performance-based covenants were not met, it would constitute a termination event, which, at the option of the banks, could result in termination of the facilities. At June 30, 2005, the company was in compliance with all covenants. The company previously participated in a European accounts receivable securitization program. The European program expired in March 2005. Several of the company’s European subsidiaries factor eligible accounts receivable with financial institutions. The amounts of factored receivables were $30 million and $10 million at June 30, 2005, and September 30, 2004, respectively. Certain receivables are factored without recourse to the company and are excluded from accounts receivable. Amounts excluded from accounts receivable totaled $23 million and $10 million at June 30, 2005, and September 30, 2004, respectively.
In the first quarter of fiscal year 2004, as a result of the company’s decision to withdraw its all cash tender offer to acquire all of the outstanding shares of Dana Corporation, the company recorded a net charge of $9 million ($6 million after-tax, or $0.09 per diluted share). The pre-tax charge included $16 million in direct incremental acquisition costs, less a gain on the sale of Dana stock of $7 million.
Inventories are summarized as follows (in millions):
9
ARVINMERITOR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Other current assets are summarized as follows (in millions):
Other Assets are summarized as follows (in millions):
The company anticipates amortization expense for patents, licenses and other intangible assets of approximately $2 million in fiscal year 2005, $2 million in fiscal year 2006, and $2 million total for fiscal years 2007 through 2009.
10
ARVINMERITOR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Other current liabilities are summarized as follows (in millions):
A summary of the changes in product warranties is as follows (in millions):
In the first nine months of fiscal 2005, the company increased its accruals for product warranties primarily associated with supplier quality matters. The company intends to pursue vigorously recovery of its direct and indirect costs associated with these matters. Net of probable recoveries, which are recorded in receivables, the company recorded a warranty charge of $4 million associated with these matters.
11
ARVINMERITOR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Other Liabilities are summarized as follows (in millions):
Long-Term Debt, net of discount where applicable, is summarized as follows (in millions):
Bank Revolving Credit Facilities The company has a $900 million revolving credit facility that expires in 2008. Under the facility, borrowings are subject to interest based on quoted LIBOR rates plus a margin, and a facility fee, both of which are based upon the company’s credit rating. At June 30, 2005, the margin over the LIBOR rate was 150 basis points, and the facility fee was 37.5 basis points. Certain of the company’s domestic wholly-owned subsidiaries, as defined in the credit agreement, irrevocably and unconditionally guarantee amounts outstanding under the credit facility. Concurrently, the company was required by the terms of an existing lease agreement to provide similar subsidiary guarantees for the benefit of the lessor, lenders and agent thereunder and voluntarily agreed to provide similar subsidiary guarantees for the benefit of the holders of the publicly-held notes outstanding under the company’s two indentures (see Note 20).
12
ARVINMERITOR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Interest Rate Swap Agreements In May 2005, the company terminated $262 million of its $300 million notional amount 8.75 percent interest rate swap and $22 million of its $100 million notional amount 6.8 percent interest rate swap. Proceeds from these terminations, including interest received, were $22 million. The fair value adjustment to the notes associated with these partially terminated swaps was $20 million, and will be amortized to earnings as a reduction of interest expense over the remaining life of the debt. The fair value adjustment of the notes is classified in Long-Term Debt in the consolidated balance sheet. Simultaneously, the company executed new swap agreements that effectively convert $183 million notional amount of 8 3/4 percent notes and $15 million notional amount of 6.8 percent notes to variable interest rates. The new swap agreements had the same terms as the original agreements, and the fixed spread is approximately 140 basis points higher than in the original swap agreement. As of June 30, 2005, the company has interest rate swap agreements that effectively convert $221 million of the company’s 8 3/4 percent notes and $93 million of the 6.8 percent notes to variable interest rates. The fair value of the swaps was $8 million as of June 30, 2005 and $36 million as of September 30, 2004, and is recorded in Other Assets, with an offsetting amount recorded in Long-Term Debt. The swaps have been designated as fair value hedges and the impact of the changes in their fair values is offset by an equal and opposite change in the carrying value of the related notes. Under the terms of the swap agreements, the company receives a fixed rate of interest of 8.75 percent and 6.8 percent on notional amounts of $221 million and $93 million, respectively, and pays variable rates based on three-month LIBOR plus a weighted-average spread of 3.30 percent. The payments under the agreements coincide with the interest payment dates on the hedged debt instruments, and the difference between the amounts paid and received is included in interest expense, net and other. Concurrent with the partial termination of the interest rate swaps, the company purchased, at a discount, $20 million and $1 million of the 8 3/4 percent notes and 6.8 percent notes, respectively, on the open market. In connection with the purchase of these notes, the company recognized approximately $1 million of the $20 million fair value adjustment of notes as a reduction of interest expense in the third quarter of fiscal year 2005. Leases The company has entered into an agreement to lease certain manufacturing and administrative assets. Under the agreement, the assets are held by a variable interest entity. The company has determined that it has a variable interest in the variable interest entity in the form of a $30 million residual value guarantee that obligates the company to absorb a majority of the variable interest entity’s losses. The assets and liabilities of this variable interest entity are included in the company’s consolidated balance sheet at June 30, 2005, and September 30, 2004. The company has various other operating leasing arrangements that are not with variable interest entities. Covenants The bank revolving credit facility requires the company to maintain a total net debt to earnings before interest, taxes, depreciation and amortization (EBITDA) ratio no greater than 3.25x and a minimum fixed charge coverage ratio (EBITDA less capital expenditures to interest expense) no less than 1.50x. In addition, an operating lease requires the company to maintain financial ratios that are similar to those required under the company’s credit facilities. At June 30, 2005, the company was in compliance with all covenants.
The company’s financial instruments include cash and cash equivalents, short-term and long-term debt, interest rate swaps, and foreign exchange forward contracts. The company uses derivatives for hedging and non-trading purposes in order to manage its interest rate and foreign exchange rate exposures. The company’s interest rate swap agreements are discussed in Note 14. Foreign Exchange Contracts The company’s operations are exposed to global market risks, including the effect of changes in foreign currency exchange rates. In the fourth quarter of fiscal year 2004, the company implemented a foreign currency cash flow hedging program to reduce the company’s exposure to changes in exchange rates. The company uses foreign currency forward contracts to manage the company’s exposures arising from foreign currency exchange risk. Gains and losses on the underlying foreign currency exposures are partially offset with gains and losses on the forward contracts.
13
ARVINMERITOR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Under this program, the company has designated the forward contracts as cash flow hedges of the underlying forecasted purchases and sales. The effective portion of changes in the fair value of the forward contracts is recorded in Accumulated Other Comprehensive Income (OCI) in shareowners’ equity and is recognized in operating income when the underlying forecasted transaction impacts earnings. The forward contracts generally mature within 12 months. There was no material impact to earnings associated with hedge ineffectiveness in the nine months ended June 30, 2005. At June 30, 2005, and September 30, 2004, there was a $2 million and a $3 million after-tax gain, respectively, recorded in OCI. The company expects to reclassify this amount from OCI to operating income during the next three months, as the forecasted hedged transactions are recognized in earnings. Fair Value Fair values of financial instruments are summarized as follows (in millions):
Cash and cash equivalents - All highly liquid investments purchased with a maturity of three months or less are considered to be cash equivalents. The carrying value approximates fair value due to the short maturity of these instruments. Interest rate swaps and foreign exchange contracts - Fair values are estimated by obtaining quotes from external sources. Short-term debt - The carrying value of short-term debt approximates fair value due to the short maturity of these borrowings. Long-term debt - Fair values are based on interest rates that would be currently available to the company for issuance of similar types of debt instruments with similar terms and remaining maturities
Retirement Benefit Liabilities consisted of the following (in millions):
14
ARVINMERITOR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
The components of net periodic pension and retiree medical expense, including discontinued operations, for the three months ended June 30, are as follows:
The components of net periodic pension and retiree medical expense, including discontinued operations, for the nine months ended June 30, are as follows:
In fiscal 2004, the company approved changes to certain retiree medical plans. The plan changes resulted in a reduction in the Accumulated Projected Benefit Obligation of $257 million, which is being amortized as a reduction of retiree medical expense over the average remaining service life of approximately 12 years.
Environmental Federal, state and local requirements relating to the discharge of substances into the environment, the disposal of hazardous wastes and other activities affecting the environment have, and will continue to have, an impact on the manufacturing operations of the company. The process of estimating environmental liabilities is complex and dependent on physical and scientific data at the site, uncertainties as to remedies and technologies to be used, and the outcome of discussions with regulatory agencies. The company records liabilities for environmental issues in the accounting period in which its responsibility and remediation plan are established and the cost can be reasonably estimated. At environmental sites in which more than one potentially responsible party has been identified, the company records a liability for its allocable share of costs related to its involvement with the site, as well as an allocable share of costs related to insolvent parties or unidentified shares. At environmental sites in which ArvinMeritor is the only potentially responsible party, the company records a liability for the total estimated costs of remediation before consideration of recovery from insurers or other third parties. The company has been designated as a potentially responsible party at seven Superfund sites, excluding sites as to which the company’s records disclose no involvement or as to which the company’s potential liability has been finally determined. Management estimates the total reasonably possible costs the company could incur for the remediation of Superfund sites at June 30, 2005, to be approximately $31 million, of which $12 million is recorded as a liability.
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ARVINMERITOR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
In addition to the Superfund sites, various other lawsuits, claims and proceedings have been asserted against the company, alleging violations of federal, state and local environmental protection requirements, or seeking remediation of alleged environmental impairments, principally at previously disposed-of properties. For these matters, management has estimated the total reasonably possible costs the company could incur at June 30, 2005, to be approximately $49 million, of which $17 million is recorded as a liability. During the second quarter of fiscal 2005, the company recorded environmental remediation costs of $6 million, included in the total for Superfund sites, resulting from a revised estimate to remediate a former Rockwell facility sold in 1990. During the second quarter of fiscal 2004, the company recorded environmental remediation costs of $8 million resulting from an agreement with the Environmental Protection Agency to remediate a different former Rockwell facility that was sold in 1985. Following are the components of the Superfund and Non-Superfund Environmental reserves (in millions):
A portion of the environmental reserves is included in Other current liabilities, with the majority of the amount recorded in Other Liabilities (see Notes 12 and 13). The actual amount of costs or damages for which the company may be held responsible could materially exceed the foregoing estimates because of uncertainties, including the financial condition of other potentially responsible parties, the success of the remediation and other factors that make it difficult to predict actual costs accurately. However, based on management’s assessment, after consulting with outside advisors that specialize in environmental matters, and subject to the difficulties inherent in estimating these future costs, the company believes that its expenditures for environmental capital investment and remediation necessary to comply with present regulations governing environmental protection and other expenditures for the resolution of environmental claims will not have a material adverse effect on the company’s business, financial condition or results of operations. In addition, in future periods, new laws and regulations, changes in the remediation plan, advances in technology and additional information about the ultimate clean-up remedy could significantly change the company’s estimates. Management cannot assess the possible effect of compliance with future requirements.
Asbestos Maremont Corporation (“Maremont”, a subsidiary of the company) and many other companies are defendants in suits brought by individuals claiming personal injuries as a result of exposure to asbestos-containing products. Maremont manufactured friction products containing asbestos from 1953 through 1977, when it sold its friction product business. Arvin Industries, Inc., (“Arvin”) acquired Maremont in 1986. Maremont’s asbestos-related liabilities and corresponding asbestos-related recoveries are summarized as follows (in millions):
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ARVINMERITOR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
A portion of the asbestos-related recoveries and reserves are included in Other current assets and liabilities, with the majority of the amounts recorded in Other Assets and Liabilities (see Notes 10 through 13). Unbilled Committed Settlements: The liability for unbilled committed settlements relates to committed settlements that Maremont agreed to pay when Maremont participated in the Center for Claims Resolution (CCR). Maremont shared in the payments of defense and indemnity costs of asbestos-related claims with other CCR members. The CCR handled the resolution and processing of asbestos claims on behalf of its members until February 1, 2001, when it was reorganized and discontinued negotiating shared settlements. There were no significant billings to insurance companies related to committed settlements in the nine months ended June 30, 2005. There were $1 million in billings to insurance companies related to committed settlements in the nine months ended June 30, 2004. Pending Claims: Upon dissolution of the CCR in February 2001, Maremont began handling asbestos-related claims through its own defense counsel and is committed to examining the merits of each asbestos-related claim. For purposes of establishing liabilities for pending asbestos-related claims, Maremont estimates its defense and indemnity costs based on the history and nature of filed claims to date and Maremont’s experience. Maremont developed experience factors for indemnity and litigation costs, using data on actual experience in resolving claims since the dissolution of the CCR in February 2001 and its assessment of the nature of the claims. Maremont had approximately 69,600 and 74,000 pending asbestos-related claims at June 30, 2005 and September 30, 2004, respectively. Although Maremont has been named in these cases, in the cases where actual injury has been alleged, very few claimants have established that a Maremont product caused their injuries. Although the company expects legal defense costs to continue at higher levels than when it participated in the CCR, the company believes its litigation strategy has reduced the average indemnity cost per claim. The decline in pending claims and related liability since September 30, 2004 reflects the settlement of 8,500 claims in one jurisdiction and lower defense costs. Billings to insurance companies for indemnity and defense costs of resolved cases were $8 million and $9 million in the nine months ended June 30, 2005, and 2004, respectively. Shortfall: Several former members of the CCR have filed for bankruptcy protection, and these members have failed, or may fail, to pay certain financial obligations with respect to settlements that were reached while they were CCR members. Maremont is subject to claims for payment of a portion of these defaulted member shares (shortfall). In an effort to resolve the affected settlements, Maremont has entered into negotiations with plaintiffs’ attorneys, and an estimate of Maremont’s obligation for the shortfall is included in the total asbestos-related reserves. In addition, Maremont and its insurers are engaged in legal proceedings to determine whether existing insurance coverage should reimburse any potential liability related to this issue. There were no payments by the company related to shortfall and other in the nine months ended June 30, 2005. Payments related to the shortfall and other were $2 million in the nine months ended June 30, 2004. Recoveries: Maremont has insurance that reimburses a substantial portion of the costs incurred defending against asbestos-related claims. The coverage also reimburses Maremont for any indemnity paid on those claims. The coverage is provided by several insurance carriers based on the insurance agreements in place. Based on its assessment of the history and nature of filed claims to date, and of Maremont’s insurance carriers, management believes that existing insurance coverage is adequate to cover substantially all costs relating to pending asbestos-related claims. The amounts recorded for the asbestos-related reserves and recoveries from insurance companies are based upon assumptions and estimates derived from currently known facts. All such estimates of liabilities for asbestos-related claims are subject to considerable uncertainty because such liabilities are influenced by variables that are difficult to predict. If the assumptions with respect to the nature of pending claims, the cost to resolve claims and the amount of available insurance prove to be incorrect, the actual amount of Maremont’s liability for asbestos-related claims, and the effect on the company’s financial position, could differ materially from current estimates. Maremont has not recorded liabilities for unknown claims that may be asserted against it in the future. Maremont does not have sufficient information to make a reasonable estimate of its potential liability for asbestos-related claims that may be asserted against it in the future. Indemnifications The company has provided indemnifications in conjunction with certain transactions, primarily divestitures. These indemnities address a variety of matters, which may include environmental, tax, asbestos and employment-related matters. In addition, the periods of indemnification vary in duration. The company’s maximum obligations under such indemnifications cannot be reasonably estimated. The company is not aware of claims or other information that would give rise to material payments under such indemnifications.
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ARVINMERITOR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Other Various other lawsuits, claims and proceedings have been or may be instituted or asserted against the company, relating to the conduct of the company’s business, including those pertaining to product liability, intellectual property, safety and health, and employment matters. Although the outcome of litigation cannot be predicted with certainty, and some lawsuits, claims or proceedings may be disposed of unfavorably to the company, management believes the disposition of matters that are pending will not have a material adverse effect on the company’s business, financial condition or results of operations.
On an annual basis, disclosure of comprehensive income is incorporated into the Consolidated Statement of Shareowners’ Equity. This statement is not presented on a quarterly basis. Comprehensive income includes net income and components of other comprehensive income, such as foreign currency translation adjustments, and unrealized gains and losses on derivatives and equity securities. Comprehensive income is summarized as follows (in millions):
The company has two reportable operating segments: Light Vehicle Systems (LVS) and Commercial Vehicle Systems (CVS). LVS is a major supplier of air and emission systems, aperture systems (roof and door systems), and undercarriage systems (suspension and ride control systems and wheel products) for passenger cars, light trucks and sport utility vehicles to original equipment manufacturers (OEMs). CVS supplies drivetrain systems and components, including axles and drivelines, braking and suspension systems, and exhaust and ride control products, for medium- and heavy-duty trucks, trailers and specialty vehicles to OEMs and the commercial vehicle aftermarket. The company’s previously reported LVA segment and Other are reported in discontinued operations. The company no longer allocates certain legacy and other corporate costs to its reportable segments, as management measures the performance of these segments exclusive of these costs. As a result, the company reclassified $8 million of legacy environmental remediation costs for the nine months ended June 30, 2004, from LVS’ previously reported operating income to environmental remediation costs.
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ARVINMERITOR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Segment information is summarized as follows (in millions):
A summary of the changes in the carrying value of goodwill for the nine months ended June 30, 2005, is as follows (in millions):
Under the company’s $900 million revolving credit facility, certain domestic wholly-owned subsidiaries, as defined in the credit agreement, irrevocably and unconditionally guarantee amounts outstanding under the facility. Similar subsidiary guarantees were provided for the benefit of the holders of the publicly-held notes outstanding under the company’s two indentures (see Note 14). In lieu of providing separate audited financial statements for the Guarantors, the company has included the accompanying condensed consolidating financial statements. These condensed consolidating financial statements are presented on the equity method. Under this method, the investments in subsidiaries are recorded at cost and adjusted for the parent’s share of the subsidiary’s cumulative results of operations, capital contributions and distributions and other equity changes. The Guarantor subsidiaries are combined in the condensed consolidating financial statements.
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ARVINMERITOR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Condensed Consolidating Statement of Operations (In millions)
20
ARVINMERITOR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Condensed Consolidating Statement of Operations (In millions)
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