UNITED STATES

 

SECURITIES AND EXCHANGE COMMISSION

 

Washington, D.C. 20549

 

FORM 10-K

 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Fiscal Year Ended September 28, 2008

Commission file number 1-15983


ARVINMERITOR, INC.
(Exact name of registrant as specified in its charter) 

 

 

 

 

 

Indiana

 

38-3354643

 

 


 


 

 

(State or other jurisdiction of incorporation or organization)

 

(I.R.S. Employer
Identification No.)

 

 

 

 

 

 

 

 

 

 

 

 

2135 West Maple Road
Troy, Michigan

 

48084-7186

 

 


 


 

 

(Address of principal executive offices)

 

(Zip Code)

 

Registrant’s telephone number, including area code: (248) 435-1000

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

 

 

 

 

 

 

Title of each class

 

Name of each exchange on which registered

 

 


 


 

 

Common Stock, $1 Par Value (including the associated Preferred Share Purchase Rights)

 

New York Stock Exchange

 

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None

          Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
          Yes  x   No o

          Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
          Yes  o   No x

          Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
          Yes  x   No o

          Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x

          Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

 

 

 

 

 

Large accelerated filer

x

 

Accelerated filer

o

 

 

 

 

 

Non-accelerated filer

o

   (Do not check if a smaller reporting company)

Smaller reporting company

o




          Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
          Yes  o   No x 

          The aggregate market value of the registrant’s voting and non-voting common equity held by non-affiliates of the registrant on March 28, 2008 (the last business day of the most recently completed second fiscal quarter) was approximately $894.7 million.

          73,806,881 shares of the registrant’s Common Stock, par value $1 per share, were outstanding on November 2, 2008.

DOCUMENTS INCORPORATED BY REFERENCE

               Certain information contained in the Proxy Statement for the Annual Meeting of Shareowners of the registrant to be held on January 30, 2009 is incorporated by reference into Part III.

2




 

 

 

 

 

 

 

 

 

Page
No.

 PART I.

 

 

 

 

 

 

 

 

 

 

Item 1.

Business Information

 

4

 

 

 

 

 

 

Item 1A.

Risk Factors

 

15

 

 

 

 

 

 

Item 1B.

Unresolved Staff Comments

 

22

 

 

 

 

 

 

Item 2.

Properties

 

22

 

 

 

 

 

 

Item 3.

Legal Proceedings

 

23

 

 

 

 

 

 

Item 4.

Submission of Matter to a Vote of Security Holders

 

23

 

 

 

 

 

 

Item 4A.

Executive Officers of the Registrant

 

23

 

 

 

 

 

PART II.

 

 

 

 

 

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

 

24

 

 

 

 

 

 

Item 6.

Selected Financial Data

 

26

 

 

 

 

 

 

Item 7.

Management’s Discussion and Analysis of Financial Conditions and Results of Operations

 

27

 

 

 

 

 

 

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

 

51

 

 

 

 

 

 

Item 8.

Financial Statements and Supplementary Data

 

52

 

 

 

 

 

 

Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

 

102

 

 

 

 

 

 

Item 9A.

Controls and Procedures

 

102

 

 

 

 

 

 

Item 9B.

Other Information

 

104

 

 

 

 

 

 PART III.

 

 

 

 

 

Item 10.

Directors, Executive Officers and Corporate Governance

 

104

 

 

 

 

 

 

Item 11.

Executive Compensation

 

104

 

 

 

 

 

 

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

 

104

 

 

 

 

 

 

Item 13.

Certain Relationships and Related Transactions, and Director Independence

 

105

 

 

 

 

 

 

Item 14.

Principal Accountant Fees and Services

 

105

 

 

 

 

 

PART IV.

 

 

 

 

 

Item 15.

Exhibits and Financial Statement Schedules

 

106

 

 

 

 

 

 

 

Signatures

 

111

3



PART I

 

 

Item 1.

Business.

          ArvinMeritor, Inc. (the “company” or “ArvinMeritor”), headquartered in Troy, Michigan, is a global supplier of a broad range of integrated systems, modules and components serving commercial truck, light vehicle, trailer and specialty original equipment manufacturers (“OEMs”) and certain aftermarkets.

          ArvinMeritor was incorporated in Indiana in 2000 in connection with the merger of Meritor Automotive, Inc. (“Meritor”) and Arvin Industries, Inc. (“Arvin”). As used in this Annual Report on Form 10-K, the terms “company,” “ArvinMeritor,” “we,” “us” and “our” include ArvinMeritor, its consolidated subsidiaries and its predecessors unless the context indicates otherwise.

          The company’s fiscal quarters end on the Sundays nearest December 31, March 31 and June 30, and its fiscal year ends on the Sunday nearest September 30. Fiscal year 2008 ended on September 28, 2008 and fiscal year 2007 ended on September 30, 2007. All year and quarter references relate to our fiscal year and fiscal quarters unless otherwise stated. For ease of presentation, September 30 is utilized consistently throughout this report to represent the fiscal year end.

          Whenever an item of this Annual Report on Form 10-K refers to information in the Proxy Statement for the Annual Meeting of Shareowners of ArvinMeritor to be held on January 30, 2009 (the “2009 Proxy Statement”), or under specific captions in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations or Item 8. Financial Statements and Supplementary Data, the information is incorporated in that item by reference.

          ArvinMeritor serves a broad range of OEM customers worldwide, including truck OEMs, light vehicle OEMs, trailer producers and specialty vehicle manufacturers, and certain aftermarkets. Our total sales from continuing operations in fiscal year 2008 were $7.2 billion. Our ten largest customers accounted for approximately 44% of fiscal year 2008 sales from continuing operations. We operated 82 manufacturing facilities in 22 countries around the world as of September 30, 2008, including facilities operated by joint ventures in which we have interests. Sales from operations outside North America accounted for approximately 59% of total sales from continuing operations in fiscal year 2008. Our continuing operations also participated in nine unconsolidated joint ventures accounted for under the equity method of accounting that generated revenues of approximately $1.5 billion in fiscal year 2008.

          In fiscal year 2008, we served customers worldwide through the following businesses within continuing operations:

 

 

 

 

Commercial Vehicle Systems (“CVS”) supplies drivetrain systems and components, including axles and drivelines, braking systems, suspension systems and ride control products for medium- and heavy-duty trucks, trailers and specialty vehicles to OEMs and to the commercial vehicle aftermarket.

 

 

 

 

Light Vehicle Systems (“LVS”) supplies body systems (roof and door systems), chassis systems (suspension systems and modules and ride control products) and wheel products for passenger cars, all-terrain vehicles, light and medium trucks and sport utility vehicles to OEMs.

          In fiscal year 2008, we made a strategic decision to separate our LVS and CVS businesses. Upon completion of the separation, the commercial vehicle business – consisting of truck, trailer, specialty products and the commercial vehicle aftermarket – will remain with ArvinMeritor. We initially determined that the separation would be accomplished through a spin-off of the LVS business to our shareholders. Although the spin-off continues to be an option, the weakened financial market and other factors have prompted us to investigate other alternatives for the separation, including a potential sale of all or portions of the business. On November 18, 2008, we announced that a sale of the LVS business (excluding the Wheels business) is our primary path and that we were engaged in negotiations to sell the business. We believe this separation represents a major step in our corporate transformation by improving corporate clarity and management focus.

          In fiscal year 2007, we sold our Emissions Technologies (“ET”) business, which supplied exhaust systems and exhaust system components to commercial and light vehicle OEMs and to dealers for service parts. In addition, in fiscal years 2007 and 2006, we sold a significant portion of our Light Vehicle Aftermarket (“LVA”) business. These businesses are reflected in discontinued operations for 2007 and 2006.

          See Notes 1 and 3 of the Notes to Consolidated Financial Statements under Item 8. Financial Statements and Supplementary Data below for information with respect to changes in continuing and discontinued operations.

4



          See Item 1A. Risk Factors below for information on certain risks that could have an impact on our business, financial condition or results of operations in the future.

          Note 24 of the Notes to Consolidated Financial Statements under Item 8. Financial Statements and Supplementary Data contains financial information by segment for continuing operations for each of the three years ended September 30, 2008, including information on sales and assets by geographic area. The heading “Products” below includes information on CVS and LVS sales by product for each of the three fiscal years ended September 30, 2008.

          References in this Annual Report on Form 10-K to our belief that we are 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.

Business Strategies

          We are currently a global supplier of a broad range of integrated systems, modules and components for use in commercial, specialty and light vehicles worldwide, and we believe we have developed market positions as a leader in most of our served markets. As discussed above, we have decided to separate our LVS business from the company. On November 18, 2008, we announced that a sale of the LVS business (excluding the Wheels business) is our primary path. Upon completion of the separation, the company will substantively exit from the light vehicles market with the commercial vehicles business becoming the primary business of the company. We are working to enhance our leadership positions in the commercial vehicles business and capitalize on our existing customer, product and geographic strengths, and to increase sales, earnings and shareowner returns. To achieve these goals, we are working to refocus our business by evaluating our product portfolio to focus on our core competencies, and regenerate and grow the businesses that offer attractive returns. As part of these strategies, in fiscal year 2007 we implemented a new operational improvement initiative, Performance Plus, designed to improve cash flow, earnings and shareowner value.

          Several significant factors and trends in the commercial vehicle and automotive industries present opportunities and challenges to industry suppliers and influence our business strategies. These factors and trends include severely weakened financial strength of OEMs and suppliers and sharply reduced volumes; the cyclicality of the industry, including the effects of new emissions regulations for commercial vehicles on vehicle sales and production; consolidation and globalization of OEMs and their suppliers; revised outsourcing patterns by OEMs; increased demand for modules and systems by OEMs; pricing pressures from OEMs that could negatively impact suppliers’ earnings even when sales volumes are increasing; fluctuations in the cost of raw materials, primarily steel and oil; rapid market growth in developing countries; and an increasing emphasis on engineering and technology. Our specific business strategies, described below, are influenced by these industry factors and trends and are focused on leveraging our resources to create competitive product offerings.

          Sharply Reduce Costs to Help Counteract Steep Drop in Volume. We are responding aggressively to the current weakness in global business conditions by executing comprehensive restructuring and cost-reduction initiatives. We have:

 

 

 

 

accelerated restructuring actions, including workforce and discretionary cost reductions;

 

 

 

 

implemented prudent steps in an effort to maintain profitability and positive annual cash flow;

 

 

 

 

remained focused on our strategy to separate the LVS and CVS businesses and are pursuing strategic alternatives to ensure the completion of the separation;

 

 

 

 

retained a strong liquidity position through recent renewals of significant factoring and securitization lines with key partner banks;

 

 

 

 

continued to focus on executing growth strategies and investing in critical product offerings and technologies; and

 

 

 

 

repatriated cash to the United States for maximum flexibility, which resulted in a non-cash income tax charge in fiscal year 2008.

          Minimize the Risks of Cyclicality Through Business Diversity. The commercial and light vehicle industries are cyclical in nature and subject to periodic fluctuations in demand for vehicles, accentuated for commercial vehicles in North America by patterns of “pre-buy” before the effective date of new emissions regulations. This in turn results in fluctuations in demand for our products. We seek to diversify our business in order to mitigate the effects of market downturns and better accommodate the changing needs of OEMs. We strive to maintain diversity in three areas:

5



 

 

Products. We manufacture and sell a wide range of products in various segments of the commercial vehicle and automotive market. For fiscal year 2008, our annual sales from continuing operations include $4.8 billion for CVS and $2.3 billion for LVS.

 

 

Customers. A diverse customer base helps to mitigate market fluctuations. We have a large customer base comprised of most major vehicle producers. Our largest customer AB Volvo represented 14% of our total sales in fiscal year 2008. No other customer comprised 10% or more of the company’s sales in fiscal year 2008.

 

 

Global Presence. Cycles in the major geographic markets of the automotive industry are not necessarily concurrent or related. We seek to maintain a strong global presence and balance our global demand to mitigate the effect of periodic fluctuations in demand in one or more geographic areas. A strong global presence also helps to meet the global sourcing needs of our customers.

          Focus on Organic Growth While Reviewing Strategic Opportunities. Our goal is to grow businesses that offer attractive returns and are core to our operations. We have identified the areas of our core business that we believe have the most potential for leveraging into other products and markets, and we are focusing our resources on these areas. We also consider strategic opportunities that could enhance the company’s growth. Automotive and commercial suppliers continue to consolidate into larger, more efficient and more capable companies and collaborate with each other in an effort to better serve the global needs of their OEM customers. We regularly evaluate various strategic and business development opportunities, including licensing agreements, marketing arrangements, joint ventures, acquisitions and dispositions. We remain committed to selectively pursuing alliances and acquisitions that would allow us to leverage our capabilities, gain access to new customers and technologies, enter complimentary product markets and implement our business strategies. In fiscal year 2008, our CVS business acquired Mascot Truck Parts Ltd (Mascot) and Trucktechnic SA (Trucktechnic). Mascot remanufactures transmissions, drive axles, steering gears and drivelines in North America. Trucktechnic is a supplier of remanufactured brakes, components and testing equipment primarily to European markets. We also continue to review the prospects of our existing businesses to determine whether any of them should be modified, restructured, sold or otherwise discontinued. See “Strategic Initiatives” and “Joint Ventures” below for information on recent activities in these areas.

          Grow Content Per Vehicle Through Technologically Advanced Systems and Modules. Increased outsourcing by OEMs has resulted in higher overall per vehicle sales by independent suppliers. This presents an opportunity for supplier sales growth at a faster rate than the overall automotive industry growth trend. OEMs are also demanding modules and integrated systems that require little assembly by the OEM customer.

          One of our significant growth strategies is to provide engineering and design expertise, develop new products and improve existing products that meet these customer needs. We will continue to invest in new technologies and product development and work closely with our customers to develop and implement design, engineering, manufacturing and quality improvements. We will also continue to integrate our existing product lines by using our design, engineering and manufacturing expertise and teaming with technology partners to expand sales of higher-value modules and systems.

          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 and engineering centers of expertise in the United States, Brazil, China, France, Germany, India and the United Kingdom. See “Research and Development” below.

          Enhance Core Products to Address Safety and Environmental Issues. Another industry trend is the increasing amount of equipment required for changes in environmental and safety-related regulatory provisions. OEMs select suppliers based not only on the cost and quality of products, but also on their ability to meet these demands. We use our technological expertise to anticipate trends and to develop products that address safety and environmental concerns.

          To address safety, we have implemented a strategy of focusing on products and technologies that enhance overall vehicle stability. As part of this strategy, our CVS group is focusing on the integration of braking and stability products and suspension products, as well as the development of electronic control capabilities. CVS, through its joint venture with WABCO Holdings, Inc. (“WABCO”), has developed electronic braking systems that integrate anti-lock braking systems technology, automatic traction control and other key vehicle control system components to improve braking performance and reduce stopping distances for commercial motor vehicles. In addition, we are developing a hybrid diesel-electric drivetrain for Class 8 trucks. This project has potential for environmental and economic benefits in the future, including significant improvements in fuel efficiency. We are also working on a

6



commercial pick-up and delivery program using alternative drivetrain that has the potential to offer reduced emissions and fossil fuel consumption.

          Strengthen our Presence in Emerging Global Markets. Geographic expansion to meet the global sourcing needs of customers and to address new markets is an important element of our growth strategy. ArvinMeritor currently has wholly-owned operations and regional joint ventures in South America, a market that has experienced significant growth. We also have joint ventures and wholly-owned subsidiaries in China, India and Turkey and participate in programs to support customers as they establish and expand operations in those markets. 

          Drive a Continuous Improvement Culture. In fiscal year 2007, we implemented the ArvinMeritor Production System (APS), a lean manufacturing initiative that guides our pursuit of operational excellence. APS integrates several of our previous initiatives into a set of actions that focus on improving systems, processes, behaviors and capabilities. Throughout the company, continuous improvement teams work to achieve significant cost savings, increase productivity and efficiency, improve design and quality, streamline operations and improve workplace safety. A continuous improvement culture is important to our business operations and to maintaining and improving our earnings.

          APS was implemented as part of Performance Plus, our initiative to improve operational performance and increase cash flow, earnings and shareowner value. The actions and programs that are part of Performance Plus focus on operational excellence (materials; manufacturing; and overhead) and commercial excellence (engineering, research and development; product strategy and growth; and aftermarket).

Products

          ArvinMeritor designs, develops, manufactures, markets, distributes, sells, services and supports 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 certain aftermarkets.

          In recent years, we have executed a strategy of analyzing our product portfolio and refocusing the business on our core competencies, resulting in divestiture of some businesses and product lines. Since the beginning of fiscal year 2006, we have sold the ET business and a significant portion of the LVA business and, as discussed above, have announced the intent to separate our LVS business (see “Strategic Initiatives” below). The ET and LVA operations have been reported in discontinued operations for accounting purposes.

          The following chart sets forth operating segment sales as a percentage of total sales from continuing operations by product for each of the three fiscal years ended September 30, 2008. A narrative description of the principal products of our continuing operations, as well as the principal products of our discontinued operations, during these periods follows the chart.

 

 

 

 

 

 

 

 

 

 

 

 

 

Fiscal Year Ended
September 30,

 

 

 


 

 

 

2008

 

2007

 

2006

 

 

 


 


 


 

CVS:

 

 

 

 

 

 

 

 

 

 

Undercarriage and Drivetrain Systems

 

 

60

%

 

59

%

 

60

%

Specialty Systems

 

 

7

%

 

6

%

 

5

%

 

 



 



 



 

Total CVS

 

 

67

%

 

65

%

 

65

%

 

 

 

 

 

 

 

 

 

 

 

LVS:

 

 

 

 

 

 

 

 

 

 

Body Systems

 

 

19

%

 

19

%

 

19

%

Chassis Systems

 

 

14

%

 

16

%

 

16

%

 

 



 



 



 

Total LVS

 

 

33

%

 

35

%

 

35

%

 

 



 



 



 

Total

 

 

100

%

 

100

%

 

100

%

 

 



 



 



 

7



          Commercial Vehicle Systems

          Undercarriage and Drivetrain Systems

          Truck Axles. We believe we are one of the world’s leading independent suppliers of axles for medium- and heavy-duty commercial vehicles, with axle manufacturing facilities located in North America, South America, Europe and the Asia/Pacific region. Our extensive 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 disc brakes, automatic slack adjusters, anti-lock braking systems and wheel end equipment.

          Drivelines and Other Products. We also supply universal joints and driveline components, including our Permalube™ universal joint and Permalube™ driveline, which are low maintenance, permanently lubricated designs used more often in the high mileage on-highway market and other demanding applications.

          Suspension Systems and Trailer Products. We believe we are one of the world’s leading manufacturers of heavy-duty trailer axles, with a leadership position in North America. 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 anti-lock braking systems (“ABS”). In addition, we supply trailer air suspension systems and products for which we have strong market positions in Europe and an increasing market presence in North America.

          Through a 50%-owned joint venture, we develop, manufacture and sell truck suspensions, trailer axles and suspensions and related wheel-end products in the South American market.

          Braking Systems. We believe we are a leading independent supplier of air and hydraulic brakes to medium- and heavy-duty commercial vehicle manufacturers in North America and Europe. In Brazil, one of the largest truck and trailer markets in the world, our 49%-owned joint venture with Randon S. A. Vehiculos e Implementos is a leading supplier of brakes and brake-related products.

          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- and medium-duty vehicles sold in the United States be equipped with ABS. Our 50%-owned joint venture with WABCO is a 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 and produces stability control and collision mitigation systems for tractors and trailers, which are designed to help maintain vehicle stability and aid in reducing tractor-trailer rollovers and other incidents.

          Transmissions. A marketing arrangement with ZF Friedrichshafen AG allows us to provide the redesigned FreedomLine™, a fully automated mechanical truck transmission without a clutch pedal to our customers. We also provide remanufactured Allison transmissions to our customers.

          Specialty Systems

          Off-Highway Vehicle Products. We supply heavy-duty axles and drivelines in certain global regions, for use in numerous off-highway vehicle applications, including construction, material handling, agriculture, mining and forestry. These products are designed to tolerate high tonnages and operate under extreme conditions. In addition, we have other off-highway vehicle products that are currently in development for certain other regions.

          Government Products. We supply axles, brakes and brake system components including ABS, trailer products, transfer cases, suspension modules and drivelines for use in medium-duty and heavy-duty military tactical wheeled vehicles, principally in North America. In fiscal year 2007, we were selected by three OEMs to provide drivetrain systems, consisting of front and rear axles, braking systems, drivelines and transfer cases, for Mine Resistant Ambush Protected (MRAP) vehicles, a new generation of armored personnel vehicles, for the U.S. military. We continue to create new Chassis modules for the replacement and next generation versions of these vehicles.

8



           Specialty Vehicle Products. We supply axles, brakes, suspension 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.

          Light Vehicle Systems

          Body Systems

          Roof Systems. We believe our LVS business is one of the world’s leading suppliers of sunroofs and roof system products, including panoramic roof modules, tilt and slide sunroof modules and complete roof systems, for use in passenger cars, light trucks and sport utility vehicles. Our roof system manufacturing facilities are located in North America and Europe and, through a joint venture, in the Asia/Pacific region.

          Door Systems. We believe we are a leading supplier of integrated door modules and systems, including manual and power window regulators and access control systems and components such as modular and integrated door latches, actuators, trunk and hood latches and fuel flap locking devices. Our power and manual door system products utilize numerous technologies, including our own electric motors with electronic function capabilities such as anti-squeeze technologies. We manufacture door system components at plants in North and South America, Europe and the Asia/Pacific region.

          Chassis Systems

          Suspension Systems and Modules. We believe 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 through our 57%-owned joint venture with Mitsubishi Steel Manufacturing Co. Our suspension system products, which are manufactured at facilities in the United States and Canada, include coil springs, stabilizer bars and torsion bars. We also offer final assembly of upper and complete corner modules as well as front and rear cross vehicle suspension modules.

          Ride Control Products. Our LVS business supplies ride control products, including twin tube and monotube shock absorbers and struts for light, medium and heavy-duty vehicles to OEMs and the aftermarket. This business includes our Gabriel® line of products. Our ride control products are manufactured in North America, South America, Europe and the Asia/Pacific region.

          Wheel Products. We believe we are a leading supplier of steel wheels to the light vehicle OEM market, principally in North and South America. Our wheel products include fabricated steel wheels, bead seat attached wheels, full-face designed wheels and clad wheels with the appearance of a chrome finish. Our cladding process offers enhanced styling options previously available only in aluminum wheels. We are also using our expertise in this area to develop wheel products for the medium- and heavy-duty truck markets. We have wheel manufacturing facilities in Brazil and Mexico.

          Discontinued Operations

          Light Vehicle Aftermarket. The principal LVA products included mufflers; exhaust and tail pipes; catalytic converters; shock absorbers; struts; gas lift supports and vacuum actuators; and automotive oil, air, and fuel filters. These products were sold under the brand names Arvin® (mufflers); Gabriel® (shock absorbers); and Purolator® (filters). LVA also marketed products under private label to some customers. In the second quarter of fiscal year 2007, we decided to retain the Gabriel ride control business as part of our LVS segment, and this business is now presented as continuing operations (see “Light Vehicle Systems – Chassis Systems” above). The remainder of the LVA businesses were sold in fiscal years 2006 and 2007 (see “Strategic Initiatives” below).

          Emissions Technologies. Prior to the sale of the ET business in May 2007 (see “Strategic Initiatives” below), ET was a supplier of a complete line of exhaust systems and exhaust system components, including mufflers, exhaust pipes, catalytic converters, diesel particulate filters and exhaust manifolds to light vehicle OEMs primarily as original equipment, while also supporting manufacturers’ needs for replacement parts and dealers’ needs for service parts. ET also adapted products and applications from the LVS emissions technologies business and introduced new technologies to develop a portfolio of products and applications to address increasingly stringent regulatory standards for diesel particulate matter and nitrogen oxide (NOx) emissions in commercial vehicles.

9



Customers; Sales and Marketing

          ArvinMeritor’s operating segments have numerous customers worldwide and have developed long-standing business relationships with many of these customers. Our ten largest customers accounted for approximately 44% of our total sales in fiscal year 2008.

          Both CVS and LVS market and sell products principally to OEMs and distributors. CVS and LVS 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. 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. CVS also provides truck and trailer products and off-highway and specialty products to OEMs, dealers and distributors in the aftermarket.

          Consistent with industry practice, CVS and LVS 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. CVS and LVS also sell products to certain customers under long-term arrangements that may require us to provide annual cost reductions (through price reductions or other cost benefits for the OEMs). If we are unable to generate sufficient cost savings in the future to offset such price reductions, our gross margins will be adversely affected (see Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations below).

          See Item 1A. Risk Factors for information on customers accounting for 10% or more of our consolidated revenues in fiscal year 2008 and certain risks associated with our dependence on large OEM customers.

Competition

          CVS and LVS compete worldwide with a number of North American and international providers of components and systems, some of which are owned by or associated with some of our customers. The principal competitive factors are price, quality, service, product performance, design and engineering capabilities, new product innovation and timely delivery. In addition, certain OEMs manufacture for their own use products of the types we supply.

          The major competitors of CVS are Dana Corporation and AxleTech International (truck axles and drivelines); Knorr/Bremse, Haldex and WABCO (braking systems); Hendrickson and Holland/Neway (suspension systems); Hendrickson and Dana Corporation (trailer products); Dana Corporation/Knorr, ZF, MAN and Voith AG (specialty products); and Eaton Corporation (transmissions). LVS has numerous competitors across its various product lines worldwide, including Webasto, Inalfa and Aisin (roof systems); Brose, Intier, Kiekert AG, Mitsui, Valeo, Aisin and Grupo Antolin (door and access control systems); ZF, ThyssenKrupp, Delphi, Visteon, TRW, Tenneco Automotive and Benteler (suspension modules); ThyssenKrupp, NHK Spring, San Luis Rassini, Mubea and Sogefi (suspension systems); Tenneco, Kayaba and Sachs (ride control); and Hayes-Lemmerz, Topy, Accuride and CMW (wheel products).

          See Item 1A. Risk Factors for information on certain risks associated with our competitive environment.

Raw Materials and Supplies

          We concentrate our purchases of certain raw materials and parts over a limited number of suppliers, some of which are located in developing countries and some of which may be adversely affected by weakening economic conditions. We are dependent upon the ability of our suppliers to meet performance and quality specifications and delivery schedules. The inability of a supplier to meet these requirements, the loss of a significant supplier, or any labor issues or work stoppages at a significant supplier, could have an adverse effect on our ability meet customer delivery requirements.

          The price of steel increased significantly during the first half of calendar year 2008 and continued to rise throughout the year. We continuously work to address these competitive challenges by reducing costs, improving productivity and restructuring operations. In addition, in certain circumstances, we have been successful in negotiating improved pricing, or material recovery arrangements, with our customers. To the extent these price increases are contractually limited to a short period of time or are not sustainable, we have pursued alternative means to offset any future price decreases by reducing costs and improving productivity.

          In May 2008, as a result of the sudden and extraordinary surges in the price of steel, energy and other commodities, we announced our intent to pursue recovery of, in some cases, monthly increases through surcharges or pricing arrangements with our entire affected customer base in order to mitigate the impact on our operating margins. Continued volatility in the commodity markets

10



– including a global shortage of scrap steel, a rapid escalation in the price of critical raw materials such as iron ore, coking coal and metal alloys, and higher fuel and energy costs – may require us to continue this practice until these costs stabilize. Although the prices of steel are expected to stabilize during fiscal year 2009, we expect a delayed effect of the decrease. In addition, if supplies are inadequate for our needs, or if prices remain at current levels or increase and we are unable to either pass these prices to our customer base or otherwise mitigate the costs, our operating income could be further adversely affected.

Strategic Initiatives

          As described above, our business strategies are focused on enhancing our market position by evaluating our product portfolio to focus on our core competencies, and growing the businesses that offer the most attractive returns. Implementing these strategies involves various types of strategic initiatives.

          Restructuring. As part of our strategy to rationalize our business, in fiscal year 2005, we announced restructuring plans to eliminate salaried and hourly positions and to consolidate, downsize, close or sell underperforming businesses or facilities. This program resulted in the reduction of approximately 900 salaried and 1,900 hourly employees and the sale, closure or consolidation of 11 global facilities, primarily in the LVS and ET businesses. These actions were intended to align capacity with industry conditions, utilize assets more efficiently and improve operations. Actions related to this program were substantially completed in fiscal year 2007. No amounts were recorded for this program in fiscal year 2008. Cumulative restructuring costs for this program, including amounts recorded in discontinued operations, were $128 million. The total costs include $90 million of employee termination benefits, $29 million of asset impairment charges and $9 million of other closure costs.

          The company implemented Performance Plus, a profit improvement and cost reduction initiative, in fiscal year 2007. As part of this program, we identified significant restructuring actions intended to improve our global footprint and cost competitiveness by eliminating up to 2,800 positions in North America and Europe and consolidating and combining certain global facilities, with costs to be incurred over the next several years. We recorded restructuring costs of $20 million and $72 million in fiscal years 2008 and 2007, respectively, related to these actions. These costs include $81 million primarily for estimated employee severance benefits, relating to a reduction of approximately 1,340 salaried and hourly employees, and $11 million of asset impairment charges associated with certain closures.

          See Note 5 of the Notes to Consolidated Financial Statements under Item 8. Financial Statements and Supplementary Data below for further information on our restructuring actions.

          Divestitures. As part of our strategy to refocus our business and dedicate our resources to our core capabilities, we regularly review the prospects of our existing businesses to determine whether any of them should be modified, restructured, sold or otherwise discontinued. We completed the following initiatives since the beginning of fiscal year 2007 (see Note 3 of the Notes to Consolidated Financial Statements under Item 8. Financial Statements and Supplementary Data below):

 

 

In the third quarter of fiscal year 2007, we sold our ET business to EMCON Technologies Holdings Limited, a private equity affiliate of JPMorgan Securities, Inc.

 

 

In the fourth quarter of fiscal year 2007, we sold our European aftermarket exhaust and filters operations to Klarius Group Limited. This transaction completed the sale of our LVA businesses (except the aftermarket ride control business, as described below).

          We completed the sale of a significant part of our LVA businesses in fiscal years 2006 and 2007. In the second quarter of fiscal year 2007, we decided to retain the Gabriel aftermarket ride control business, as part of the core light vehicle strategy developed through our Performance Plus initiative. As a result, the financial position and results of this business are reported in continuing operations for all periods presented. See Note 3 of the notes to Consolidated Financial Statements under Item 8. Financial Statements and Supplementary Data below.

          In May 2008, we announced our intent to separate our LVS business by way of a spin-off to the company’s shareholders. In October 2008, we updated the earlier announcement indicating that, although the spin-off continues to be an option for the separation, we are investigating other alternatives. On November 18, 2008, we announced that a sale of the LVS business (excluding the Wheels business) was our primary path and that we were engaged in negotiations to sell the business.

          Acquisitions and Other Growth Initiatives. As part of our strategy to regenerate our profitable businesses, we regularly consider various strategic and business opportunities, including licensing agreements, marketing arrangements and acquisitions, as well as joint ventures (discussed below). We believe that the industry in which we operate could experience significant further

11



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. Speed is an important competitive factor, with the fastest industry participants able to maximize key resources and contain costs.

          In December 2007, our CVS business acquired Mascot, which remanufactures transmissions, drive axles, steering gears and drivelines in North America. In July 2008, our CVS business acquired Trucktechnic, a supplier of remanufactured brakes, components and testing equipment primarily to European markets.

          No assurance can be given as to whether or when any strategic growth initiatives will be consummated in the future. We will continue to consider acquisitions as a means of growing the company or adding needed technologies, but cannot predict whether our participation or lack of participation in industry consolidation will ultimately be beneficial to us.

          See Item 1A. Risk Factors for information on certain risks associated with strategic initiatives.

Joint Ventures

          As the automotive and commercial vehicle industries have become more globalized, joint ventures and other cooperative arrangements have become an important element of our business strategies. As of September 30, 2008, our continuing operations participated in 21 joint ventures with interests in the United States, Brazil, Canada, China, Colombia, France, Germany, India, Mexico, the Slovak Republic, Turkey and Venezuela. During fiscal year 2008, we entered into an agreement with TRW Automotive Aftermarket to form a joint venture to distribute shock absorbers in the European aftermarket.

          In accordance with accounting principles generally accepted in the United States, our consolidated financial statements include the operating results of those joint ventures in which we have control. For a list of our unconsolidated joint ventures and percentage ownership thereof see Note 13 of the Notes to Consolidated Financial Statements under Item 8. Financial Statements and Supplementary Data below.

Research and Development

          We have significant research, development, engineering and product design capabilities. We spent $136 million in fiscal year 2008, $124 million in fiscal year 2007, and $114 million in fiscal year 2006 on company-sponsored research, development and engineering. We employ professional engineers and scientists globally, and have additional engineering capabilities through contract arrangements in low-cost countries.

Patents and Trademarks

          We own or license many 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.

          Our registered trademarks ArvinMeritor® and Meritor® are important to our business. Other significant trademarks owned by us include Euclid™ (aftermarket products) with respect to CVS; and Fumagalli™ (wheels) and Gabriel® (shock absorbers and struts) with respect to LVS.

          Substantially all of our intellectual property is subject to a first priority perfected security interest securing our obligations to the lenders under our credit facility. See Note 16 of the Notes to Consolidated Financial Statements under Item 8. Financial Statements and Supplementary Data below.

Employees

          At September 30, 2008, we had approximately 19,800 full-time employees. At that date, approximately 1,300 employees in the United States and Canada were covered by collective bargaining agreements and most of our facilities outside of the United States and Canada were unionized. We believe our relationship with unionized employees is satisfactory.

          Our collective bargaining agreement with the Canadian Auto Workers (“CAW”) at our CVS brakes facility in Ontario, Canada, expired on June 3, 2006. On June 4, 2006, we announced that, after lengthy negotiations, a new tentative agreement with the

12



CAW had not yet been reached and, as a result, we had suspended operations at the facility. On June 12, 2006, we reached a tentative agreement with the CAW, which was subsequently ratified on June 14, 2006, and resumed operations. As a result of this work stoppage, we experienced temporary manufacturing inefficiencies and incurred certain costs in order to return to normal production. See Note 23 of the Notes to Consolidated Financial Statements under Item 8. Financial Statements and Supplementary Data below for information on the financial impact of this work stoppage in fiscal years 2007 and 2006. Other than the foregoing, 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, and will continue to have, an impact on our manufacturing operations. We record liabilities for environmental issues in the accounting period in which our 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, we record a liability for our allocable share of costs related to our involvement with the site, as well as an allocable share of costs related to insolvent parties or unidentified shares. At environmental sites in which we are the only potentially responsible party, we record a liability for the total estimated costs of remediation before consideration of recovery from insurers or other third parties.

          We have been designated as a potentially responsible party at seven Superfund sites, excluding sites as to which our records disclose no involvement or as to which our potential liability has been finally determined. In addition to Superfund sites, 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. We have established reserves for these liabilities when they are considered to be probable and reasonably estimable. See Note 23 of the Notes to Consolidated Financial Statements under Item 8. Financial Statements and Supplementary Data below for information as to our estimates of the total reasonably possible costs we could incur and the amounts recorded as a liability as of September 30, 2008, and as to changes in environmental accruals during fiscal year 2008.

          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 actual amount of costs or damages for which we may be held responsible could materially exceed our current 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 Vernon G. Baker, II, Esq., General Counsel of ArvinMeritor, and with outside advisors who specialize in environmental matters, 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. In addition, in future periods, new laws and regulations, changes in remediation plans, advances in technology and additional information about the ultimate clean-up remedy could significantly change our estimates. Management cannot assess the possible effect of compliance with future requirements.

International Operations

          Approximately 46% of our total assets related to continuing operations as of September 30, 2008 and 59% of fiscal year 2008 sales from continuing operations were outside North America. See Note 24 of the Notes to Consolidated Financial Statements under Item 8. Financial Statements and Supplementary Data below for financial information by geographic area for the three fiscal years ended September 30, 2008. Our international operations are subject to a number of risks inherent in operating abroad (see Item 1A. Risk Factors below). 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 operations are also exposed to global market risks, including foreign currency exchange rate risk related to our transactions denominated in currencies other than the U.S. dollar. We have implemented a foreign currency cash flow hedging program to help reduce the company’s exposure to changes in exchange rates. We use 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 foreign currency forward contracts. The contracts generally mature within 12 to 24 months. It is our policy not to enter into derivative financial instruments for speculative purposes and, therefore, we hold no derivative instruments for trading purposes. See Item 7A. Quantitative and Qualitative Disclosures About Market Risk and Note 17 of the Notes to Consolidated Financial Statements under Item 8. Financial Statements and Supplementary Data below.

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Seasonality; Cyclicality

          CVS and LVS may experience seasonal variations in the demand for products to the extent automotive vehicle production fluctuates. Historically, for both segments, 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 industries in which CVS and LVS operate have 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. Production and sales of the vehicles for which we supply products generally depend on economic conditions and a variety of other factors that are outside our control, including customer spending and preferences, labor relations and regulatory requirements. See Item 1A. Risk Factors below. Cycles in the major automotive industry markets of North America and Europe are not necessarily concurrent or related. We have sought and will continue to seek to expand our operations globally to help 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 CVS and LVS for the last five fiscal years:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended September 30,

 

 

 


 

 

 

2008

 

2007

 

2006

 

2005

 

2004

 

 

 


 


 


 


 


 

Commercial Vehicles (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

North America, Heavy-Duty Trucks

 

 

191

 

 

246

 

 

352

 

 

324

 

 

235

 

North America, Medium-Duty Trucks

 

 

124

 

 

172

 

 

216

 

 

208

 

 

172

 

United States and Canada, Trailers

 

 

170

 

 

275

 

 

312

 

 

327

 

 

284

 

Western Europe, Heavy- and Medium-Duty Trucks

 

 

562

 

 

480

 

 

439

 

 

421

 

 

376

 

Western Europe, Trailers

 

 

176

 

 

140

 

 

118

 

 

115

 

 

109

 

South America, Heavy- and Medium- Duty Trucks

 

 

158

 

 

127

 

 

107

 

 

112

 

 

96

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Light Vehicles (in millions):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

North America

 

 

13.6

 

 

15.1

 

 

15.7

 

 

15.6

 

 

15.9

 

South America

 

 

4.0

 

 

3.3

 

 

3.0

 

 

2.7

 

 

2.3

 

Western Europe (including Czech Republic)

 

 

16.5

 

 

16.5

 

 

16.4

 

 

16.4

 

 

16.9

 

Asia/Pacific

 

 

29.4

 

 

26.7

 

 

24.8

 

 

22.7

 

 

20.9

 

Source: Automotive industry publications and management estimates.

          We anticipate the North American heavy-duty truck market to remain flat in calendar year 2009, with production at an estimated 200,000 to 220,000 units. In Western Europe, we expect production of heavy- and medium-duty trucks to decrease significantly, with production at an estimated 400,000 to 450,000 units. Our most recent outlook shows North American and Western European light vehicle production during calendar year 2009 to be approximately 11.8 million and 14.0 million units, respectively. See Item 7. Management’s Discussion and Analysis of Financial Condition and Results of OperationsOverview and - Results of Operations below for information on the effects of recent market cycles on our sales and earnings.

Available Information

          We make available free of charge through our web site (www.arvinmeritor.com) our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, all amendments to those reports, and other filings with the Securities and Exchange Commission (“SEC”), as soon as reasonably practicable after they are filed.

Cautionary Statement

          This Annual Report on Form 10-K contains statements relating to future results of the company (including certain projections and business trends) that are “forward-looking statements” as defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements are typically identified by words or phrases such as “believe,” “expect,” “anticipate,” “estimate,”

14



“should,” “are likely to be,” “will” and similar expressions. There are risks and uncertainties relating to the company’s announced plans for LVS, including the timing and certainty of completion of any transaction, the terms upon which any purchase and sale agreement may be entered into and whether closing conditions (some of which may not be within the company’s control) will be met. In addition, 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 cycles and conditions, including the recent global economic crisis; the demand for commercial, specialty and light vehicles for which the company supplies products; availability and sharply rising costs of raw materials, including steel; risks inherent in operating abroad (including foreign currency exchange rates and potential disruption of production and supply due to terrorist attacks or acts of aggression); whether our liquidity will be affected by declining vehicle production volumes in the future; OEM program delays; demand for and market acceptance of new and existing products; successful development of new products; reliance on major OEM customers; labor relations of the company, its suppliers and customers, including potential disruptions in supply of parts to our facilities or demand for our products due to work stoppages; the financial condition of the company’s suppliers and customers, including potential bankruptcies; possible adverse effects of any future suspension of normal trade credit terms by our suppliers; potential difficulties competing with companies that have avoided their existing contracts in bankruptcy and reorganization proceedings; successful integration of acquired or merged businesses; the ability to achieve the expected annual savings and synergies from past and future business combinations and the ability to achieve the expected benefits of restructuring actions; success and timing of potential divestitures; potential impairment of long-lived assets, including goodwill; potential adjustment of the value of deferred tax assets; competitive product and pricing pressures; the amount of the company’s debt; the ability of the company to continue to comply with covenants in its financing agreements; the ability of the company to access capital markets; credit ratings of the company’s debt; the outcome of existing and any future legal proceedings, including any litigation with respect to environmental or asbestos-related matters; the outcome of actual and potential product liability, warranty and recall claims; rising costs of pension and other postretirement benefits; and possible changes in accounting rules; as well as other risks and uncertainties, including but not limited to those detailed herein and from time to time in other filings of the company with the SEC. See also the following portions of this Annual Report on Form 10-K: Item 1. Business, “Customers; Sales and Marketing”; “Competition”; “Raw Materials and Supplies”; “Strategic Initiatives”; “Employees”; “Environmental Matters”; “International Operations”; and “Seasonality; Cyclicality”; Item 1A. Risk Factors; Item 3. Legal Proceedings; and Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. These forward-looking statements are made only as of the date hereof, and the company undertakes no obligation to update or revise the forward-looking statements, whether as a result of new information, future events or otherwise, except as otherwise required by law.

 

 

Item 1A.

Risk Factors.

          Our business, financial condition and results of operations can be impacted by a number of risks, including those described below and elsewhere in this Annual Report on Form 10-K, any one of which could cause our actual results to vary materially from recent results or from anticipated future results. Any of these individual risks could materially and adversely affect our business, financial condition and results of operations. This effect could be compounded if multiple risks were to occur.

Disruptions in the financial markets are adversely impacting the availability and cost of credit which could negatively affect our business.

          Disruptions in the financial markets, including the bankruptcy, insolvency or restructuring of certain financial institutions, and the lack of liquidity generally are adversely impacting the availability and cost of incremental credit for many companies and may adversely affect the availability of credit already arranged. These disruptions are also adversely affecting the U.S. and world economy, further negatively impacting consumer spending patterns in the automotive and commercial vehicle industries. In addition, as our customers and suppliers respond to rapidly changing consumer preferences, they may require access to additional capital. If that capital is not available or its cost is prohibitively high, their business would be negatively impacted which could result in further restructuring or even reorganization under bankruptcy laws. Any such negative impact, in turn, could negatively affect our business either through loss of sales to any of our customers so affected or through inability to meet our commitments (or inability to meet them without excess expense) because of loss of supplies from any of our suppliers so affected. There are no assurances that government responses to these disruptions will restore consumer confidence or improve the liquidity of the financial markets.

Financial difficulties facing other automotive companies may have an adverse impact on us.

          A number of companies in the automotive industry are, and over the last several years have been, facing severe financial difficulties. As a result, there have been numerous recent bankruptcies of companies in the automotive industry. In addition, during the past several years, large U.S. OEMs, General Motors, Ford and Chrysler, have lost market share, particularly in the United States. Severe financial difficulties at any major automotive manufacturer or automotive supplier could have a significant disruptive effect on

15



the automotive industry in general and on our business, including by leading to labor unrest, supply chain disruptions and weakness in demand.

We may not be able to complete the sale of our LVS business (excluding the Wheels business)

          In May 2008, we announced our intent to separate our LVS and CVS businesses. Our original intention was to accomplish this through a spin off to our shareholders. Although the spin-off continues to be an option, the weakened financial market and other factors have prompted us to investigate other alternatives for the separation, including a potential sale of all or portions of the business. On November 18, 2008, we announced that a sale of the LVS business (excluding the Wheels business) is our primary path and that we were engaged in negotiations to sell the business. We believe this separation represents a major step in our corporate transformation by improving corporate clarity and management focus. However, there are risks and uncertainties as to the timing and certainty of completion of any transaction, the terms upon which any purchase and sale agreement may be entered into and whether closing conditions (some of which may not be within the company’s control) will be met. In addition, LVS results until closing of a transaction will be included in our financial results. The LVS short-term outlook continues to be weak and is subject to significant risks, including potentially large reductions in volume and significant cash requirements, which could affect our financial condition.

Continued escalation in the prices of raw materials and transportation costs could adversely affect our business and, together with other factors, will continue to pose challenges to our financial results.

          Prices of raw materials, primarily steel and oil, for our manufacturing needs and costs of transportation continued to increase sharply and to have a negative impact on our operating income in fiscal year 2007 and 2008. The price of steel continues to challenge our industry. If we are unable to pass price increases on to our customer base or otherwise mitigate the costs, our operating income could continue to be adversely affected.

          These expected raw material price increases, together with the volatility of the commodity markets, continued OEM production cuts in our North American markets, an economic slowdown and intense competition in global markets, will continue to pose challenges to our financial results.

We operate in an industry that is cyclical and that has periodically experienced significant year-to-year fluctuations in demand for vehicles; we also experience seasonal variations in demand for our products.

          The industries in which CVS and LVS operate have 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. The cyclical nature of the automotive industry cannot be predicted with certainty.

          Production and sales of the vehicles for which we supply products generally depend on economic conditions and a variety of other factors that are outside our control, including customer spending and preferences, labor relations and regulatory requirements. In particular, demand for CVS products can be affected by pre-buy before the effective date of new regulatory requirements, such as changes in emissions standards. Implementation of new, more stringent, emissions standards is scheduled for 2010 in the U.S., and we believe that heavy-duty truck demand in the U.S. market could increase prior to the effective date of the new regulations, and correspondingly decrease after the new standards are implemented. However, any expected increase in the heavy-duty truck demand prior to the effective date of new emissions standards may be offset by the current instability in the financial markets and resulting economic contraction in the U.S. and worldwide markets.

          CVS and LVS may also experience seasonal variations in the demand for products to the extent that automotive vehicle production fluctuates. Historically, for both segments, 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.

We depend on large OEM customers, and loss of sales to these customers could have an adverse impact on our business.

          Both CVS and LVS are dependent upon large OEM customers with substantial bargaining power with respect to price and other commercial terms. 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 market share by these customers, loss of contracts, insolvency of such customers, reduced or delayed customer requirements, plant shutdowns, strikes or other work stoppages affecting production by such customers), or continued reduction of prices to these customers, could have a significant adverse effect on our financial results. There can be no assurance that we will not lose all or a portion of sales to our large volume customers, or that we will be able to offset continued reduction of prices to these customers with reductions in our costs.

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          During fiscal year 2008, AB Volvo accounted for approximately 14% of our total sales. No other customer accounted for 10% or more of our total sales in fiscal year 2008.

          The level of our sales to large OEM customers, including the realization of future sales from awarded business, is inherently subject to a number of risks and uncertainties, including the number of vehicles that these OEM customers actually produce and sell. In North America, OEM production levels of sport utility vehicles and large passenger cars have been decreasing as demand for smaller more fuel efficient cars has increased. Several of our significant customers have major union contracts that expire periodically and are subject to renegotiation. Any strikes or other actions that affect our customers’ production during this process would also affect our sales. Further, to the extent that the financial condition, including bankruptcy or market share of any of our largest customers deteriorates or their sales otherwise continue to decline, our financial position and results of operations could be adversely affected. In addition, our customers generally have the right to replace us with another supplier at any time for a variety of reasons. Accordingly, we may not in fact realize all of the future sales represented by our awarded business. Any failure to realize these sales could have a material adverse effect on our financial condition and results of operations.

          CVS Aftermarket sales depend on overall levels of truck ton miles and gross domestic product (GDP) and may be influenced in times of slower economic growth or economic contraction based on the average age of truck fleets.

Escalating price pressures from customers may adversely affect our business.

          Pricing pressure by automotive OEMs is a characteristic of the automotive industry. Virtually all automakers have aggressive price reduction initiatives and objectives each year with their suppliers, and such actions are expected to continue in the future. Accordingly, automotive suppliers must be able to reduce their operating costs in order to maintain their profit margins. Price reductions have impacted our profit margins and may do so in the future. There can be no assurance that we will be able to resist future customer price reductions or offset future customer price reductions through improved operating efficiencies, new manufacturing processes, sourcing alternatives or other cost reduction initiatives.

We operate in a highly competitive industry.

          Each of ArvinMeritor’s businesses operates in a highly competitive environment. CVS and LVS compete worldwide with a number of North American and international providers of components and systems, some of which are owned by or associated with some of our customers. Some of these competitors are larger and have greater financial resources or have established relationships with significant customers. In addition, certain OEMs manufacture for their own use products of the types we supply, and any future increase in this activity could displace CVS and LVS sales.

          Many companies in the automotive industry have undertaken substantial contractual obligations to current and former employees, primarily with respect to pensions and other postretirement benefits. The bankruptcy or insolvency of a major competitor could result in that company’s eliminating or reducing some or all of these obligations, which could give that competitor a cost advantage over us.

Exchange rate fluctuations could adversely affect our financial condition and results of operations.

          As a result of our substantial international operations, we are exposed to foreign currency risks that arise from our normal business operations, including in connection with our transactions that are denominated in foreign currencies. While we employ financial instruments to hedge certain of our foreign currency exchange risks relating to these transactions, our efforts to manage these risks may not be successful.

          In addition, we translate sales and other results denominated in foreign currencies into U.S. dollars for purposes of our consolidated financial statements. As a result, appreciation of the U.S. dollar against these foreign currencies generally will have a negative impact on our reported revenues and operating income while depreciation of the U.S. dollar against these foreign currencies will generally have a positive effect on reported revenues and operating income. For fiscal years 2008 and 2007, our reported financial results have benefited from depreciation of the U.S. dollar against foreign currencies. We do not hedge against our foreign currency exposure related to translations to U.S. dollars of our financial results denominated in foreign currencies.

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A disruption in supply of raw materials or parts could impact our production and increase our costs.

          Some of our significant suppliers have experienced weakening financial condition in recent years that resulted, for some companies, in filing for protection under the bankruptcy laws. In addition, some of our significant suppliers are located in developing countries. We are dependent upon the ability of our suppliers to meet performance and quality specifications and delivery schedules. The inability of a supplier to meet these requirements, the loss of a significant supplier, or any labor issues or work stoppages at a significant supplier, could disrupt the supply of raw materials and parts to our facilities and could have an adverse effect on us.

Work stoppages or similar difficulties could significantly disrupt our operations.

          A work stoppage at one or more of our manufacturing facilities could have material adverse effects on our business. In addition, if a significant customer were to experience a work stoppage, that customer could halt or limit purchases of our products, which could result in shutting down the related manufacturing facilities. Also, a significant disruption in the supply of a key component due to a work stoppage at one of our suppliers could result in shutting down manufacturing facilities, which could have a material adverse effect on our business.

Our international operations are subject to a number of risks.

          We have a significant amount of facilities and operations outside the United States, including investments and joint ventures in developing countries. During fiscal 2008, approximately 59% of our sales were generated outside of the United States. These 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 (as more fully discussed above);

 

 

local economic and political conditions;

 

 

disruptions of capital and trading markets;

 

 

possible terrorist attacks or acts of aggression that could affect vehicle production or the availability of raw materials or supplies;

 

 

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;

 

 

high inflationary conditions;

 

 

difficulty in obtaining distribution and support;

 

 

nationalization;

 

 

the laws and policies of the United States affecting trade, foreign investment and loans;

 

 

the ability to attract and retain qualified personnel;

 

 

tax laws; and

 

 

labor disruptions.

          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 working capital requirements may negatively affect our liquidity and capital resources.

          Our working capital requirements can vary significantly, depending in part on the level, variability and timing of our customers’ worldwide vehicle production and the payment terms with our customers and suppliers. Our cash flow has been affected by increased working capital requirements driven by our expansion efforts in South America and Asia-Pacific, higher receivable balances in non-US operations and lower accounts payable balances reflecting more normalized levels. If our working capital needs exceed our cash flows from operations, we would look to our cash balances and availability for borrowings under our borrowing arrangements to satisfy those needs, as well as potential sources of additional capital, which may not be available on satisfactory terms and in adequate amounts.

18



Our liquidity, including our access to capital markets and financing, could be constrained by our limitations in the overall credit market, credit ratings, our ability to comply with financial covenants in our debt instruments, and our suppliers suspending normal trade credit terms on our purchases.

          Our corporate credit rating at Standard & Poor’s is B+, at Moody’s Investors Service is B1, and at Fitch Ratings is B. Standard & Poor’s and Fitch Ratings have our credit ratings on negative outlook and it is stable at Moody’s. There are a number of factors, including our ability to achieve the intended benefits from restructuring and other strategic activities on a timely basis, that could result in further lowering of our credit ratings. The rating agencies’ opinions about our creditworthiness may also be affected by their views of conditions in the automotive and trucking industry generally, including their views concerning the financial condition of our major OEM customers. If the credit rating agencies perceive further weakening in the industry, they could lower our ratings. Further declines in our ratings could reduce our access to capital markets, further increase our borrowing costs and result in lower trading prices for our securities.

          Our ability to borrow under our existing financing arrangements depends on our compliance with covenants in the related agreements, and on our performance against covenants in our bank credit facility that require compliance with certain financial ratios as of the end of each fiscal quarter. In December 2007, we amended these financial ratio covenants. To the extent that we are unable to maintain compliance with these requirements or to perform against the financial ratio covenants, due to one or more of the various risk factors discussed herein or otherwise, our ability to borrow, and our liquidity, would be adversely impacted.

          Our liquidity could also be adversely impacted if our suppliers were to suspend normal trade credit terms and require payment in advance or payment on delivery of purchases. If this were to occur, we would be dependent on other sources of financing to bridge the additional period between payment of our suppliers and receipt of payments from our customers.

Our strategic initiatives may be unsuccessful, may take longer than anticipated, or may result in unanticipated costs.

          In 2008, we determined to explore strategic alternatives to separate our LVS business, including a sale or spin-off. There can no assurance that a transaction will be completed. In addition, our future strategic initiatives could include divestitures, acquisitions and restructurings.

          The success and timing of any future divestitures and acquisitions will depend on a variety of factors, many of which are not within our control. If we engage in acquisitions, we may finance these transactions by issuing 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. There is no assurance that the total costs and total cash costs associated with any current and future restructuring will not exceed our estimates, or that we will be able to achieve the intended benefits of these restructurings.

We are exposed to environmental, health and safety and product liabilities.

          Our business is subject to liabilities related to the outcome of litigation with respect to environmental and health and safety matters. In addition, we are required to comply with federal, state, local and foreign laws and regulations governing the protection of the environment and occupational health and safety, and we could be held liable for damages arising out of human exposure to hazardous substances or other environmental or natural resource damages. There is also an inherent risk of exposure to warranty and product liability claims, as well as product recalls, in the automotive and commercial vehicle industry if our products fail to perform to specifications and are alleged to cause property damage, injury or death.

          With respect to environmental liabilities, we have been designated as a potentially responsible party at seven Superfund sites, and 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. We have established reserves for these liabilities, but the process of estimating environmental liabilities is complex and dependent on evolving 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 actual amount of costs or damages for which we may be held responsible could materially exceed our current estimates because of a number of uncertainties that make it difficult to predict actual costs accurately. In future periods, new laws and regulations, changes in remediation plans, advances in technology and additional information about the ultimate clean-up remedy could significantly change our estimates, and management cannot assess the possible effect of compliance with future requirements.

19



We are exposed to asbestos litigation liability.

          One of our subsidiaries, Maremont Corporation, manufactured friction products containing asbestos from 1953 through 1977, when it sold its friction product business. We acquired Maremont in 1986. Maremont and many other companies are defendants in suits brought by individuals claiming personal injuries as a result of exposure to asbestos-containing products. We, along with many other companies, have also been named as a defendant in lawsuits alleging personal injury as a result of exposure to asbestos used in certain components of products of Rockwell International Corporation (now Rockwell Automation, Inc., and referred to in this Annual Report on Form 10-K as “Rockwell”). Liability for these claims was transferred to us at the time of the spin-off of the automotive business to Meritor from Rockwell in 1997.

          The uncertainties of asbestos claim litigation and the outcome of litigation with insurance companies regarding the scope of coverage and the long term solvency of our insurance companies make it difficult to predict accurately the ultimate resolution of asbestos claims. The possibility of adverse rulings or new legislation affecting asbestos claim litigation or the settlement process increases that uncertainty. Although we have established reserves to address asbestos liability and corresponding recoveries from insurance companies, 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 liability for asbestos-related claims, and the effect on us, could differ materially from our current estimates and, therefore, could have a material impact on our financial position and results of operations.

We are exposed to the rising cost of pension and other postretirement benefits, and are currently involved in litigation the outcome of which could further increase these costs.

          The automotive and commercial vehicle industry, like other industries, continues to be impacted by the rising cost of pension and other postretirement benefits. In estimating our expected obligations under the pension and postretirement benefit plans, we make certain assumptions as to economic and demographic factors, such as discount rates, investment returns and health care cost trends. If actual experience as to these factors is worse than our assumptions, our obligations could increase.

          To partially address the impact of rising post-retirement benefit costs, we amended certain retiree medical plans in fiscal years 2002 and 2004, to phase out current benefits by no later than fiscal year 2023, and to eliminate benefits for Medicare eligible retirees beginning in January 2006.

          Three separate class action lawsuits were filed in the United States District Court for the Eastern District of Michigan against us as a result of these amendments. The lawsuits allege that the changes breach the terms of various collective bargaining agreements entered into with the United Auto Workers (the UAW lawsuit) and the United Steel Workers (the USW lawsuit) at facilities that have either been closed or sold, and allege a companion claim restating these claims and seeking to bring them under the Employee Retirement Income Security Act of 1974.

          On December 22, 2005, the court issued an order granting a motion by the United Auto Workers for a preliminary injunction. The order enjoined us from implementing the changes to retiree health benefits that had been scheduled to become effective on January 1, 2006, and ordered us to reinstate and resume paying the full cost of health benefits for the United Auto Workers retirees at the levels existing prior to the changes approved in 2002 and 2004. On August 17, 2006, the District Court granted a motion by the UAW for summary judgment; ordered the defendants to reimburse the plaintiffs for out-of-pocket expenses incurred since the date of the earlier modifications to benefits; and granted the UAW’s request to make the terms of the preliminary injunction permanent.

          Due to the uncertainty related to the UAW lawsuit and because the injunction has the impact of at least temporarily changing the benefits provided under the existing postretirement medical plans, we have accounted for the injunction as a rescission of the 2002 and 2004 plan amendments that modified UAW retiree healthcare benefits. We recalculated the accumulated postretirement benefit obligation, or APBO, as of December 22, 2005, which resulted in an increase in the APBO of $168 million. The increase in APBO will offset the remaining unamortized negative prior service cost of the 2002 and 2004 plan amendments and will increase retiree medical expense over the average remaining service period associated with the original plan amendments of approximately ten years. In addition, the increase in APBO resulted in higher interest cost, a component of retiree medical expense. We began recording the impact of the injunction in March 2006, 90 days from the December 22, 2005 measurement date, which is consistent with the 90-day lag between our normal plan measurement date of June 30 and our fiscal year-end. In addition, the injunction required the defendants to reimburse the plaintiffs for out-of-pocket expenses incurred since the date of the earlier benefit modifications. We have recorded a $5 million reserve at September 30, 2008 and 2007 as the best estimate of our liability for these retroactive benefits. We have appealed the District Court’s order to the U.S. Court of Appeals for the Sixth Circuit. The ultimate outcome of the UAW lawsuit may result in future plan amendments. The impact of any future plan amendments cannot be currently estimated.

20



          On November 12, 2008, the company settled the USW lawsuit for $28 million, which was paid in November 2008. This settlement will result in an increase in APBO of $23 million. The increase in APBO will be reflected as an increase in actuarial losses that will be amortized into periodic retiree medical expense over an average expected remaining service life of approximately ten years.

Impairment in the carrying value of long-lived assets and goodwill could negatively affect our operating results and financial condition.

          We have a significant amount of long-lived assets and goodwill on our consolidated balance sheet. Under generally accepted accounting principles, long-lived assets, excluding goodwill, are required to be reviewed for impairment whenever adverse events or changes in circumstances indicate a possible impairment. If business conditions or other factors cause the profitability and cash flows to decline, we may be required to record non-cash impairment charges. Goodwill must be evaluated for impairment at least annually. If the carrying value of our reporting units exceeds their current fair value as determined based on the discounted future cash flows of the related business, the goodwill is considered impaired and is reduced to fair value via a non-cash charge to earnings. Events and conditions that could result in impairment in the value of our long-lived assets and goodwill include changes in the industries in which we operate, particularly the impact of the current downturn in the global economy, as well as competition and advances in technology, adverse changes in the regulatory environment, or other factors leading to reduction in expected long-term sales or profitability. In addition, a sale of our LVS business could result in a significant loss or impairment. If the value of long-lived assets or goodwill is impaired, our earnings and financial condition could be adversely affected.

The value of our U.S. deferred tax assets could become impaired, which could materially and adversely affect our results of operations and financial condition.

          As of September 30, 2008, the company had approximately $519 million in U.S. net deferred tax assets. These deferred tax assets include net operating loss carryovers that can be used to offset taxable income in future periods and reduce income taxes payable in those future periods. Many of these deferred tax assets will expire if they are not utilized within certain time periods. It is possible that some or all of these deferred tax assets could ultimately expire unused.

          We periodically determine the probability of the realization of deferred tax assets, using significant judgments and estimates with respect to, among other things, historical operating results, expectations of future earnings, tax planning strategies. If we determine in the future that there is not sufficient positive evidence to support the valuation of these assets, due to the risk factors described herein or other factors, we may be required to adjust the valuation allowance to reduce our U.S. deferred tax assets. Such a reduction could result in material non-cash expenses in the period in which the valuation allowance is adjusted and could have a material adverse effect on our results of operations and financial condition.

Our expected annual effective tax rate could be volatile and materially change as a result of changes in mix of earnings and other factors.

          Our overall effective tax rate is equal to our total tax expense as a percentage of our total earnings before tax. However, tax expenses and benefits are determined separately for each tax paying component (an individual entity) or group of entities that is consolidated for tax purposes in each jurisdiction. Losses in certain jurisdictions provide no current financial statement tax benefit. As result, changes in the mix of projected earnings between jurisdictions, among other factors, could have a significant impact on our overall effective tax rate. The separation of our LVS business could negatively impact our effective tax rate.

Our unrecognized tax benefits related to the adoption of Financial Accounting Standards Board Interpretation No. 48 could significantly change.

          In June 2006, the Financial Accounting Standards Board (FASB) issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (FIN 48), which supplements Statement of Financial Accounting Standards (SFAS) No. 109, “Accounting for Income Taxes,” by defining the confidence level that a tax position must meet in order to be recognized in the financial statements. FIN 48 requires that the tax effects of a position be recognized only if it is “more-likely-than-not” to be sustained based solely on its technical merits as of the reporting date. The more-likely-than-not threshold represents a positive assertion by management that a company is entitled to the economic benefits of a tax position. If a tax position is not considered more-likely-than-not to be sustained based solely on its technical merits, no benefits of the position are to be recognized. Moreover, the more-likely-than-not threshold must continue to be met in each reporting period to support continued recognition of a benefit. At adoption, companies must adjust

21



their financial statements to reflect only those tax positions that are more-likely-than-not to be sustained as of the adoption date. Any necessary adjustment would be recorded directly to retained earnings in the period of adoption and reported as a change in accounting principle.

          The total amount of our unrecognized tax benefits upon adoption of FIN 48 as of October 1, 2007 was $207 million, of which $151 million represents the amount, if recognized, which would favorably affect our effective tax rate in future periods. At September 30, 2008 the amount of gross unrecognized tax benefits and the amount that would favorably affect our effective income tax rate in future periods were $131 million and $87 million, respectively.

          It is reasonably possible that audit settlements, the conclusion of current examinations or the expiration of the statute of limitations in several jurisdictions could significantly change our unrecognized tax benefits during the next twelve months. However, quantification of an estimated range cannot be made at this time.

Developments or assertions by or against us relating to intellectual property rights could materially impact our business.

          We own significant intellectual property, including a large number of patents, trademarks and trade secrets, and we are a party to a number of technology license agreements. Developments or assertions by or against us relating to intellectual property rights could materially impact our business. Significant technological developments by others also could materially and adversely affect our business and results of operations and financial condition.

 

 

Item 1B.

Unresolved Staff Comments.

 

 

          None.

 

 

Item 2.

Properties.

          At September 30, 2008, our operating segments and our majority owned and minority owned joint ventures had the following facilities in the United States, Europe, South America, Canada, Mexico, Australia, South Africa and the Asia/Pacific region. For purposes of these numbers, multiple facilities in one geographic location are counted as one facility.

 

 

 

 

 

 

 

 

 

 

Manufacturing Facilities

 

Engineering Facilities, Sales
Offices, Warehouses and
Service Centers

 

 

 


 


 

CVS

 

 

41

 

 

22

 

LVS

 

 

37

 

 

10

 

Other

 

 

4

 

 

11

 

 

 



 



 

 

 

 

82

 

 

43

 

 

 



 



 

          These facilities had an aggregate floor space of approximately 17 million square feet, substantially all of which is in use. We owned approximately 74% and leased approximately 26% of this floor space. Substantially all of our domestic plants and equipment are subject to liens securing our obligations under a $700 million credit facility with a group of banks (see Note 16 of the Notes to Consolidated Financial Statements under Item 8. Financial Statements and Supplementary Data). 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, 2008, is as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Owned Facilities

 

Leased Facilities

 

 

 

 

 


 


 

 

 

Location

 

LVS

 

CVS

 

Other

 

LVS

 

CVS

 

Other

 

Total

 

 

 


 


 


 


 


 


 


 

United States

 

 

833,471

 

 

2,631,698

 

 

457,806

 

 

368,062

 

 

1,025,644

 

 

5,600

 

 

5,322,301

 

Canada

 

 

669,233

 

 

364,319

 

 

 

 

 

 

148,925

 

 

 

 

1,182,477

 

Europe

 

 

516,728

 

 

2,996,370

 

 

455,856

 

 

840,737

 

 

228,268

 

 

94,173

 

 

5,132,132

 

Asia/Pacific

 

 

235,019

 

 

482,151

 

 

 

 

181,317

 

 

893,098

 

 

43,931

 

 

1,835,516

 

Latin America

 

 

660,086

 

 

2,049,913

 

 

 

 

552,972

 

 

 

 

7,500

 

 

3,270,471

 

 

 



 



 



 



 



 



 



 

Total

 

 

2,914,537

 

 

8,524,451

 

 

913,662

 

 

1,943,088

 

 

2,295,955

 

 

151,204

 

 

16,742,897

 

 

 



 



 



 



 



 



 



 

22



 

 

Item 3.

Legal Proceedings

          1. See Note 20 of the Notes to Consolidated Financial Statements under Item 8. Financial Statements and Supplementary Data for information with respect to three class action lawsuits filed against the company as a result of modifications made to its retiree medical benefits.

          2. See Note 23 of the Notes to Consolidated Financial Statements under Item 8. Financial Statements and Supplementary Data for information with respect to litigation related to alleged asbestos-related liabilities.

          3. See Item 1. Business, “Environmental Matters” for information relating to environmental proceedings.

          4. On October 5, 2006, ZF Meritor LLC, a joint venture between an ArvinMeritor subsidiary and ZF Friedrichshafen AG, filed a lawsuit against Eaton Corporation in the United States District Court for the District of Delaware, alleging that Eaton had engaged in exclusionary, anticompetitive conduct in the markets for heavy-duty truck transmissions, in violation of the U.S. antitrust laws. The plaintiffs seek an injunction prohibiting Eaton from engaging in such anticompetitive conduct and monetary damages. A motion by Eaton to dismiss the complaint was denied, and discovery is underway.

          5. On March 31, 2008, S&E Quick Lube, a filter distributor, filed suit in U.S. District Court for the District of Connecticut alleging that twelve filter manufacturers, including a prior subsidiary of the company, engaged in a conspiracy to fix prices, rig bids and allocate U.S. customers for aftermarket automotive filters. This suit is a purported class action on behalf of direct purchasers of filters from the defendants. Several parallel purported class actions, including on behalf of indirect purchasers of filters, have been filed by other plaintiffs in a variety of jurisdictions in the United States and Canada. We intend to vigorously defend the claims raised in all of these actions. The Antitrust Division of the U.S. Department of Justice (DOJ) and the Office of the Attorney General of the State of Florida are also investigating the allegations raised in these suits. The DOJ has issued subpoenas to certain employees of the defendants, which include the company. We are fully cooperating with both investigations.

          6. Various other lawsuits, claims and proceedings have been or may be instituted or asserted against ArvinMeritor or our subsidiaries relating to the conduct of our 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 ArvinMeritor, management believes, after consulting with Vernon G. Baker, II, Esq., ArvinMeritor’s General Counsel, that the disposition of matters that are pending will not have a material adverse effect on our business, financial condition or results of operations.

 

 

Item 4.

Submission of Matters to a Vote of Security Holders.

          There were no matters submitted to a vote of security holders during the fourth quarter of fiscal year 2008.

 

 

Item 4A.

Executive Officers of the Registrant.

          The name, age, positions and offices held with ArvinMeritor and principal occupations and employment during the past five years of each of our executive officers as of November 15, 2008, are as follows:

 

 

Charles G. McClure, Jr.,  55 - Chairman of  the Board, Chief Executive   Officer and President since  August

 

2004. Chief Executive  Officer of Federal-Mogul Corporation (automotive component supplier) from July

 

2003 to July 2004; and President and Chief Operating Officer of Federal-Mogul Corporation from January 2001 to July 2003.

 

 

Vernon G. Baker, II, 55 - Senior Vice President and General Counsel since July 2000.

 

 

Jeffrey A. Craig,  48 – Senior Vice President, Chief  Financial Officer and Acting Controller since May 2008.

 

Senior Vice President and Controller from July 2007 to May 2008. Vice President and Controller of ArvinMeritor from May 2006 to July 2007; and President and Chief Executive Officer, Commercial Finance, of General Motors Acceptance Corporation (automotive and commercial finance, mortgage, real estate and insurance businesses) from 2001 to May 2006.

 

 

Linda M. Cummins, 61 - Senior Vice President, Communications, since July 2000.

 

 

James D. Donlon, III,   62 – Executive Vice   President and   Acting  Chief  Financial Officer, Light   Vehicle

 

Systems, since May 2008. Executive Vice President and Chief Financial Officer from July 2007 to May 2008. Senior Vice President and Chief Financial Officer of ArvinMeritor from April 2005 to July 2007; Senior Vice President and Chief Financial Officer of Kmart Corporation

23



 

 

 

(retailer) from January 2004 to March 2005; and Senior Vice President and Controller of the Chrysler Division of DaimlerChrysler AG (automotive) from 2001 to 2003.

 

 

Mary A. Lehmann,  49 – Senior  Vice President, Strategic Initiatives,  and  Treasurer since July 2007. Vice

 

President and Treasurer of ArvinMeritor from January 2006 to July 2007; Assistant Treasurer of ArvinMeritor from 2004 to January 2006; and Director, Affiliate Financing, of Ford Motor Company (automotive) from 2001 to 2004.

 

 

Philip R. Martens, 48 – Senior Vice President and President, Light Vehicle Systems, since September 2006.

 

President and Chief Operating Officer of Plastech Engineered Products, Inc. (automotive component supplier) from 2005 to 2006; Group Vice President, Product Creation, of Ford Motor Company (automotive) from 2003 to 2005; Vice President, North American Product Creation, of Ford Motor Company in 2003; Vice President, North American Product Development of Ford Motor Company from 2002 to 2003; and Managing Director, Planning, Design and Product Development of Mazda Motor Company (automotive) from 1999 to 2002.

 

 

Carsten J. Reinhardt, 41 – Senior Vice President and President, Commercial Vehicle Systems since

 

September 2006. Chief Executive Officer and President of Detroit Diesel Corporation (a subsidiary of DaimlerChrysler AG) from March 2003 to September 2006; and General Manager and Vice President-Operations for Western Star Trucks (a subsidiary of DaimlerChrysler AG) from March 2001 to March 2003.

          There are no family relationships, as defined in Item 401 of Regulation S-K, between any of the above executive officers and any director, executive officer or person nominated to become a director or executive officer. No officer of ArvinMeritor was selected pursuant to any arrangement or understanding between him or her and any person other than ArvinMeritor. All executive officers are elected annually.

PART II

 

 

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

          ArvinMeritor’s common stock, par value $1 per share (“Common Stock”), is listed on the New York Stock Exchange (“NYSE”) and trades under the symbol “ARM.” On November 2, 2008, there were 24,825 shareowners of record of ArvinMeritor’s Common Stock.

          The high and low sale prices per share of ArvinMeritor Common Stock for each quarter of fiscal years 2008 and 2007 were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fiscal Year 2008

 

Fiscal Year 2007

 

 

 


 


 

Quarter Ended

 

High

 

Low

 

High

 

Low

 


 


 


 


 


 

December 31

 

$

17.60

 

$

9.17

 

$

18.99

 

$

13.74

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31

 

 

14.24

 

 

9.08

 

 

20.21

 

 

17.21

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30

 

 

17.40

 

 

12.11

 

 

22.56

 

 

17.18

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30

 

 

18.11

 

 

9.99

 

 

23.65

 

 

15.59

 

          Quarterly cash dividends in the amount of $0.10 per share were declared and paid in each quarter of the last two fiscal years. Our payment of cash dividends and the amount of the dividend are subject to review and change at the discretion of our Board of Directors.

          See Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters for information on securities authorized for issuance under equity compensation plans.

          On January 25, 2008, the company issued 14,100 shares of Common Stock to a retiring non-employee director in settlement of restricted share units that were awarded to him in 2005, 2006 and 2007 as annual grants under the 2004 Directors Stock Plan. The issuance of these securities was exempt from registration under the Securities Act of 1933, as a transaction not involving a public offering under Section 4(2).

24



     Issuer repurchases

          The independent trustee of our 401(k) plans purchases shares in the open market to fund investments by employees in our common stock, one of the investment options available under such plans, and any matching contributions in Company stock we provide under certain of such plans. In addition, our stock incentive plans permit payment of an option exercise price by means of cashless exercise through a broker and permit the satisfaction of the minimum statutory tax obligations upon exercise of options and the vesting of restricted stock units through stock withholding. However, the Company does not believe such purchases or transactions are issuer repurchases for the purposes of this Item 5 of this Report on Form 10-K. In addition, although our stock incentive plans also permit the satisfaction of tax obligations upon the vesting of restricted stock through stock withholding, there was no such withholding in the fourth quarter of 2008.

Shareowner Return Performance Presentation

          The line graph below compares the cumulative total shareowner return on an investment in ArvinMeritor’s common stock against the cumulative total return of the S&P 500 and a peer group of companies for the period from September 30, 2003 to September 30, 2008, assuming a fixed investment of $100 at the respective closing prices on the last day of each fiscal year and reinvestment of all cash dividends.

Comparison of Total Return
Common Stock, S&P 500 Index1 and Peer Group Index2

(LINE GRAPH)

          1 Standard & Poor’s 500 Market Index.

          2 We believe that a peer group of representative independent automotive suppliers of approximately comparable size and products to ArvinMeritor is appropriate for comparing shareowner return. The peer group consists of BorgWarner, Inc., Cummins Inc., Dana Holding Corp., Delphi Corporation, Eaton Corporation, Johnson Controls, Inc., Lear Corporation, Superior Industries International, Inc., Tenneco, Inc. and Visteon Corporation. This peer group is the same as the group utilized in the performance chart in the Annual Report on Form 10-K for the fiscal year ended September 30, 2007.

25



          The information included under the heading “Shareowner Return Performance Presentation” is not to be treated as “soliciting material” or as “filed” with the SEC, and is not incorporated by reference into any filing by the company under the Securities Act of 1933 or the Securities Exchange Act of 1934 that is made on, before or after the date of filing of this Annual Report on Form 10-K.

 

 

Item 6.

Selected Financial Data.

          The following sets forth selected consolidated financial data. The data should be read in conjunction with the information included under Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations and Item 8. Financial Statements and Supplementary Data below.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended September 30,

 

 

 


 

 

 

2008

 

2007

 

2006

 

2005

 

2004

 

 

 


 


 


 


 


 

SUMMARY OF OPERATIONS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial Vehicle Systems

 

$

4,819

 

$

4,205

 

$

4,179

 

$

3,972

 

$

3,132

 

Light Vehicle Systems

 

 

2,348

 

 

2,244

 

 

2,236

 

 

2,399

 

 

2,243

 

 

 



 



 



 



 



 

Total

 

$

7,167

 

$

6,449

 

$

6,415

 

$

6,371

 

$

5,375

 

 

 



 



 



 



 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating Income

 

$

186

 

$

53

 

$

171

 

$

114

 

$

146

 

Income (Loss) Before Income Taxes

 

 

141

 

 

(23

)

 

72

 

 

16

 

 

66

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (Loss) from Continuing Operations (1)

 

$

(91

)

$

(30

)

$

112

 

$

20

 

$

49

 

Loss from Discontinued Operations (2)

 

 

(10

)

 

(189

)

 

(287

)

 

(8

)

 

(91

)

 

 



 



 



 



 



 

Net Income (Loss)

 

$

(101

)

$

(219

)

$

(175

)

$

12

 

$

(42

)

 

 



 



 



 



 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BASIC EARNINGS (LOSS) PER SHARE

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Continuing Operations (1)

 

$

(1.26

)

$

(0.43

)

$

1.62

 

$

0.29

 

$

0.73

 

Discontinued Operations (2)

 

 

(0.14

)

 

(2.68

)

 

(4.14

)

 

(0.12

)

 

(1.35

)

 

 



 



 



 



 



 

Basic Earnings (Loss) per Share

 

$

(1.40

)

$

(3.11

)

$

(2.52

)

$

0.17

 

$

(0.62

)

 

 



 



 



 



 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

DILUTED EARNINGS (LOSS) PER SHARE

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Continuing Operations (1)

 

$

(1.26

)

$

(0.43

)

$

1.60

 

$

0.29

 

$

0.72

 

Discontinued Operations (2)

 

 

(0.14

)

 

(2.68

)

 

(4.09

)

 

(0.12

)

 

(1.33

)

 

 



 



 



 



 



 

Diluted Earnings (Loss) per Share

 

$

(1.40

)

$

(3.11

)

$

(2.49

)

$

0.17

 

$

(0.61

)

 

 



 



 



 



 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash Dividends per Share

 

$

0.40

 

$

0.40

 

$

0.40

 

$

0.40

 

$

0.40

 

 

 



 



 



 



 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

FINANCIAL POSITION AT SEPTEMBER 30

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Assets

 

$

4,674

 

$

4,789

 

$

5,508

 

$

5,872

 

$

5,642

 

Short-term Debt

 

 

240

 

 

18

 

 

56

 

 

136

 

 

5

 

Long-term Debt

 

 

1,063

 

 

1,130

 

 

1,174

 

 

1,436

 

 

1,469

 


 


(1) Fiscal year 2008 loss from continuing operations includes $20 million ($14 million after-tax) of restructuring charges, $19 million ($12 million after-tax) of costs associated with the planned separation of the company’s LVS business and approximately $183 million of non-cash income tax charges related to the repatriation of earnings of certain foreign subsidiaries of the company to the United States and establishing valuation allowances related to certain foreign deferred tax assets. Fiscal year 2007 loss from continuing operations includes $71 million ($54 million after-tax) of restructuring charges and favorable adjustments to certain impairment reserves of $10 million, net ($6 million after-tax). Fiscal year 2006 income from continuing operations includes $18 million ($11 million after-tax) of restructuring charges, gains on divestitures of $28 million ($17 million after-tax) and environmental remediation charges of $8 million ($5 million after-tax). Fiscal year 2005 income from continuing operations includes restructuring charges of $56 million ($34 million after-tax), charges associated with certain customer bankruptcies of $6 million ($4 million after-tax), environmental charges of $7 million ($4 million after-tax) and a $34 million non-cash impairment charge ($22 million after-tax) in our Gabriel Ride Control Aftermarket business. Fiscal year 2004 income from continuing operations includes restructuring charges of $5 million ($3 million after-tax), environmental remediation charges of $11 million ($8 million after-tax), and a withdrawn tender offer net charge of $9 million ($6 million after-tax).

26



(2) Fiscal year 2008 includes charges associated with certain close out activities related to previously sold ET and LVA Europe businesses of $19 million ($10 million after-tax). Fiscal year 2007 includes a loss, including related impairment charges, on the sale of our ET and LVA Europe businesses of $200 million ($166 million after-tax) and a restructuring benefit of $6 million ($4 million after-tax). Fiscal year 2006 includes a $310 million ($310 million after-tax) non-cash goodwill impairment charge in our ET business, a net gain on the sale of certain LVA businesses of $28 million ($18 million after-tax), other non-cash impairment charges of $22 million ($14 million after-tax) to record certain North American LVA businesses at fair value and restructuring costs of $14 million ($9 million after-tax). Fiscal year 2005 includes a non-cash impairment charge of $9 million ($6 million after-tax) to record certain North American LVA businesses at fair value and restructuring costs of $63 million ($41 million after-tax). Fiscal year 2004 includes a non-cash goodwill impairment charge of $190 million in our LVA business and restructuring costs of $13 million ($8 million after-tax).

 

 

Item 7.

Management’s Discussion and Analysis of Financial Conditions and Results of Operations.

Overview

          ArvinMeritor, Inc. is a global supplier of a broad range of integrated systems, modules and components to the motor vehicle industry. The company serves light vehicle, commercial truck, trailer and specialty original equipment manufacturers and certain aftermarkets. Headquartered in Troy, Michigan, the company employs approximately 19,800 people at 82 manufacturing facilities in 22 countries. ArvinMeritor common stock is traded on the New York Stock Exchange under the ticker symbol ARM.

          In fiscal year 2008, we made a strategic decision to separate our Light Vehicle Systems (LVS) and Commercial Vehicle Systems (CVS) businesses. Upon completion of the separation, the commercial vehicle business – consisting of truck, trailer, specialty products and the commercial vehicle aftermarket – will remain with ArvinMeritor. We initially determined that the separation would be accomplished through a spin-off of the LVS business via a tax-free distribution to ArvinMeritor stockholders. Although the spin-off continues to be an option, the weakened financial markets, as well as further slow down in the automotive market, and other factors have prompted us to investigate other alternatives for the separation, including a potential sale of all or portions of the business. On November 18, 2008 we announced that a sale of LVS will be the primary path and that the wheels business of LVS will be retained by the company. Upon closing a sale transaction, we expect to incur a significant loss. However, we are unable to estimate a range of loss. In fiscal year 2008, we incurred approximately $19 million of costs associated with separation related activities, which are included in the selling, general and administrative expenses in the consolidated statement of operations included in the Consolidated Financial Statements under Item 8. Financial Statements and Supplementary Data.

          In December 2007, the company’s CVS business acquired Mascot Truck Parts Ltd (Mascot) for a cash purchase price of $19 million. Mascot remanufactures transmissions, drive axles, steering gears and drivelines in North America. In addition, in July 2008, the CVS business acquired Trucktechnic SA (Trucktechnic), a supplier of remanufactured brakes, components and testing equipment primarily to European markets, for a cash purchase price of approximately €11 million ($17 million). These acquisitions will expand and complement our existing North American and European aftermarket portfolio both in terms of product breadth and market depth. The acquisitions did not have a material impact on the company’s consolidated financial position or results of operations for the fiscal year ended September 30, 2008.

          Our pre-tax financial results for fiscal year 2008 significantly improved compared to the prior year. Improved earnings in our CVS business segment reflect higher sales and profitability in all regions outside North America and growth in our specialty and aftermarket businesses. Volumes in the North American heavy-duty commercial vehicle truck markets (commonly referred to as Class 8) were lower in fiscal year 2008 primarily due to pre-buy activity during the first quarter of fiscal year 2007 associated with the adoption of new emissions standards in calendar year 2007 and general economic conditions currently affecting truck tonnage volume. The improved profitability in fiscal year 2008 also reflects Performance Plus cost reduction initiatives and other operational improvements partially offset by increasing costs of raw material, primarily steel. Financial results for our LVS business segment also improved compared to the prior year due to lower restructuring costs and a strong presence in markets outside of North America.

          Our after-tax earnings from continuing operations in fiscal year 2008 declined from the prior year. Included in after-tax earnings from continuing operations in fiscal year 2008 are $183 million of non-cash income tax charges of which $137 million is related to the repatriation of earnings of certain foreign subsidiaries to the United States and $46 million is related to recording valuation allowances on certain foreign deferred tax assets. The repatriation of foreign earnings provides the company with improved liquidity flexibility by pooling cash in accessible jurisdictions while utilizing deferred tax assets in the U.S., resulting in no additional cash tax expense.

          Highlights of our consolidated results from continuing operations for the fiscal year ended September 30, 2008, are as follows:

 

 

 

 

Sales were $7.2 billion, up 11.1 percent compared to the same period last year. Excluding the impact of foreign currency exchange rates, which increased sales by $485 million, sales increased by 4 percent year over year.

 

 

 

 

Segment EBITDA margin for our reportable segments was 5.8 percent, up from 4.0 percent a year ago.

27



 

 

 

 

Operating margins were 2.6 percent, up from 0.8 percent a year ago.

 

 

 

 

Diluted loss per share from continuing operations was $1.26, compared to $0.43 in fiscal year 2007. The increase in loss per share is primarily due to the non-cash income tax charges discussed above.

          During fiscal year 2007, we launched a profit improvement and cost reduction initiative called “Performance Plus.” As part of this program we identified significant restructuring actions in our LVS and CVS businesses which would eliminate up to 2,800 positions in North America and Europe and consolidate and combine certain global facilities. We recorded restructuring costs of $20 million during fiscal year 2008 related to these actions, primarily related to employee severance costs in our LVS business. Cumulative costs recorded for this program are approximately $92 million.

          Cash provided by operating activities for the fiscal year ended September 30, 2008 was $163 million, compared to $36 million in the prior fiscal year. The improvement in cash flow is primarily attributable to higher cash earnings, lower pension and retiree medical contributions and lower use of cash for discontinued operations. These increases were offset by an increased level of working capital compared to the prior year. Working capital levels reflect both an increase in inventory balances and a decrease in accounts payable balances at September 30, 2008. The higher working capital levels are primarily a result of the higher sales volumes compared to the prior year. However, we were able to balance the increased requirements for working capital through operational improvements, cash collection efforts, higher utilization of our accounts receivables securitization and factoring programs, and improved collections.

MARKET OUTLOOK

          Historically, the company has experienced periodic fluctuations in demand for light, commercial and specialty vehicles and certain aftermarkets, most notably in our commercial vehicle markets in North America. Vehicle production in our principal markets for the last five fiscal years is shown below:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended September 30

 

 

 


 

 

 

2008

 

2007

 

2006

 

2005

 

2004

 

 

 


 


 


 


 


 

Commercial Vehicles (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

North America, Heavy-Duty Trucks

 

 

191

 

 

246

 

 

352

 

 

324

 

 

235

 

North America, Medium-Duty Trucks

 

 

124

 

 

172

 

 

216

 

 

208

 

 

172

 

United States and Canada, Trailers

 

 

170

 

 

275

 

 

312

 

 

327

 

 

284

 

Western Europe, Heavy- and Medium-Duty Trucks

 

 

562

 

 

480

 

 

439

 

 

421

 

 

376

 

Western Europe, Trailers

 

 

176

 

 

140

 

 

118

 

 

115

 

 

109

 

South America, Heavy- and Medium-Duty Trucks

 

 

158

 

 

127

 

 

107

 

 

112

 

 

96

 

Light Vehicles (in millions):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

North America

 

 

13.6

 

 

15.1

 

 

15.7

 

 

15.6

 

 

15.9

 

South America

 

 

4.0

 

 

3.3

 

 

3.0

 

 

2.7

 

 

2.3

 

Western Europe (including Czech Republic)

 

 

16.5

 

 

16.5

 

 

16.4

 

 

16.4

 

 

16.9

 

Asia/Pacific

 

 

29.4

 

 

26.7

 

 

24.8

 

 

22.7

 

 

20.9

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Source: Automotive industry publications and management estimates

 

 

 

 

 

 

 

 

 

 

          We anticipate the North American heavy-duty truck market to remain flat in calendar year 2009, with production at an estimated 200,000 to 220,000 units. In Western Europe we expect production of heavy- and medium-duty trucks to decrease significantly, with production at an estimated 400,000 to 450,000 units. Our most recent outlook shows North American and Western European light vehicle production during calendar year 2009 to be approximately 11.8 million and 14.0 million units, respectively.

COMPANY OUTLOOK

          Our business continues to address a number of challenging industry-wide issues including the following:

 

 

 

 

Excess capacity;

 

 

 

 

Weakened financial strength of some of the original equipment (OE) manufacturers and some suppliers;

 

 

 

 

Reduced production volumes in the light and commercial vehicle industry and changes in product mix in North America;

 

 

 

 

Higher energy and transportation costs;

 

 

 

 

OE pricing pressures;

 

 

 

 

Sharply rising costs for steel and other raw materials;

 

 

 

 

Pension and retiree medical health care costs; and

28



 

 

 

 

Currency exchange rate volatility.

          We believe that the substantial uncertainty and significant deterioration in the worldwide credit markets, the global economic downturn and the current climate in the U.S. economy has impacted the demand for the company’s products. As a result, we are not expecting to see any significant increase in commercial vehicle production volumes in North America during fiscal year 2009. We expect light vehicle production volumes to decline in North America in fiscal year 2009. In addition, anticipated production cuts in European and other commercial and light vehicle markets will pose short term challenges to our fiscal year 2009 results. However, we believe that our strategic direction, aggressive cost reductions, diversified customer base and global footprint should allow us to weather these short-term challenges while continuing to focus on product strategies and long-term growth initiatives.

          The price of steel increased significantly during fiscal year 2008. Although the prices of steel are expected to stabilize during fiscal year 2009, we expect a delayed effect of the decrease. Steel costs, along with increasing transportation costs and overall volatility of the commodity markets, could unfavorably impact our financial results in the future. In addition, these factors, together with continued volatility in credit markets, OEM production cuts resulting from an extended economic slowdown and intense competition in global markets have created pressure on our profit margins. We continuously work to address these competitive challenges by reducing costs, improving productivity and restructuring operations. In addition, in certain circumstances, we have been successful in negotiating improved pricing with our customers. To the extent these price increases are contractually limited to a short period of time or are not sustainable, we intend to pursue alternative means to offset any future price decreases by reducing costs and improving productivity.

          We have begun implementing a number of immediate restructuring and cost reduction initiatives aimed at mitigating current market conditions. In fiscal year 2009, we expect to achieve $125 million in annualized savings related to these significant actions of which $80 million is expected to be in our CVS business and $45 million is expected to be in our LVS business. We are reducing our global workforce by 1,250 employees, or approximately seven percent, which is comprised of 450 salaried and 800 hourly positions, including full-time, contract and temporary workers. The majority of these actions have already been completed; while the remainder are in process. We expect to incur approximately $35 million of cash expenditures in connection with these actions for severance. In addition, we are implementing proactive cost reduction actions to keep a strong focus on cash flow by maintaining tight controls on global inventory, pursuing working capital improvements and significantly reducing discretionary spending.

          Cash flow has been affected by increased working capital requirements driven by higher sales volumes in certain regions of the world during fiscal year 2008 and may be impacted in fiscal year 2009 by the current volatility in the financial markets, which could affect certain of our customers. We believe that our current financing arrangements provide us with sufficient financial flexibility to fund our on-going operations, near-term debt service requirements, restructuring activities, and planned investments. At September 30, 2008 we had $497 million in available cash and an undrawn, available amount of $626 million under our revolving credit facility. Also, as discussed above, during the fourth quarter of fiscal year 2008 the company made a strategic decision to repatriate earnings of certain foreign subsidiaries in the form of dividends. The repatriation of cash from foreign subsidiaries will further increase the company’s flexibility with respect to working capital requirements and the ability to utilize a portion of the U.S. deferred tax assets, resulting in no additional cash tax expense. We recognized a non-cash income tax charge of approximately $137 million during the fourth quarter of fiscal year 2008 related to this decision.

          Significant factors that could affect our results in fiscal year 2009 include:

 

 

 

 

Volatility in financial markets around the world;

 

 

 

 

Our ability to successfully separate our light vehicles business from the company;

 

 

 

 

Higher than planned price reductions to our customers;

 

 

 

 

Additional restructuring actions and the timing and recognition of restructuring charges;

 

 

 

 

The financial strength of our suppliers and customers, including potential bankruptcies;

 

 

 

 

Any unplanned extended shutdowns or production interruptions;

 

 

 

 

Our ability to implement planned productivity and cost reduction initiatives;

 

 

 

 

The impact of any acquisitions or divestitures;

 

 

 

 

Significant awards or losses of existing contracts;

 

 

 

 

The ultimate outcome of class action lawsuits concerning our retiree medical plans;

 

 

 

 

The impact of currency fluctuations on sales and operating income;

 

 

 

 

Higher than planned warranty expenses, including the outcome of known or potential recall campaigns;

 

 

 

 

Our ability to continue to access our bank revolving credit facilities, accounts receivable securitization and factoring arrangements and capital markets;

 

 

 

 

A significant deterioration or slow down in economic activity in the key markets we operate;

29



 

 

 

 

Timing and extent of recovery of the Class 8 downturn in North America;

 

 

 

 

Lower volume of orders from key customers;

 

 

 

 

Ability to implement enterprise resource planning systems at our locations successfully;

 

 

 

 

Our continued ability to recover steel price increases from our customers;

 

 

 

 

The impact of any new accounting rules; and

 

 

 

 

Recoverability and valuation of deferred tax assets, including our ability to successfully implement tax planning strategies.

NON-GAAP MEASURES

          In addition to the results reported in accordance with accounting principles generally accepted in the United States (GAAP), we have provided information regarding “segment EBITDA”. Segment EBITDA is defined as income (loss) from continuing operations before interest, income taxes, depreciation and amortization and loss on sale of receivables. We use segment EBITDA as the primary basis to evaluate the performance of each of our reportable segments. For a reconciliation of segment EBITDA to income (loss) from continuing operations see “Results of Operations” below.

          Management believes segment EBITDA is a meaningful measure of performance as it is commonly utilized by management and investors to analyze operating performance and entity valuation. Management, the investment community and banking institutions routinely use segment EBITDA, together with other measures, to measure operating performance in our industry. Further, management uses segment EBITDA for planning and forecasting future periods.

          Segment EBITDA should not be considered a substitute for the reported results prepared in accordance with GAAP and should not be considered as an alternative to net income as an indicator of our operating performance or to cash flows as a measure of liquidity. Segment EBITDA, as determined and presented by the company, may not be comparable to related or similarly titled measures reported by other companies.

Results of Operations

          The following is a summary of our financial results for the last three fiscal years.

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended September 30,

 

 

 


 

 

 

2008

 

2007

 

2006

 

 

 


 


 


 

 

 

(in millions, except per share amounts)

 

Sales:

 

 

 

 

 

 

 

 

 

 

Commercial Vehicle Systems

 

$

4,819

 

$

4,205

 

$

4,179

 

Light Vehicle Systems

 

 

2,348

 

 

2,244

 

 

2,236

 

 

 



 



 



 

SALES

 

 

7,167

 

 

6,449

 

 

6,415

 

 

 



 



 



 

SEGMENT EBITDA:

 

 

 

 

 

 

 

 

 

 

Commercial Vehicle Systems

 

$

355

 

$

221

 

$

293

 

Light Vehicle Systems

 

 

61

 

 

36

 

 

58

 

 

 



 



 



 

SEGMENT EBITDA

 

 

416

 

 

257

 

 

351

 

Unallocated legacy and corporate costs (1)

 

 

(40

)

 

(11

)

 

(8

)

ET corporate allocations (2)

 

 

 

 

(36

)

 

(29

)

Loss on sale of receivables

 

 

(22

)

 

(9

)

 

(1

)

Depreciation and amortization

 

 

(145

)

 

(129

)

 

(124

)

Interest expense, net

 

 

(83

)

 

(110

)

 

(131

)

Benefit (provision) for income taxes

 

 

(217

)

 

8

 

 

54

 

 

 



 



 



 

INCOME (LOSS) FROM CONTINUING OPERATIONS

 

 

(91

)

 

(30

)

 

112

 

LOSS FROM DISCONTINUED OPERATIONS, net of tax

 

 

(10

)

 

(189

)

 

(287

)

 

 



 



 



 

NET LOSS

 

$

(101

)

$

(219

)

$

(175

)

 

 



 



 



 

 

 

 

 

 

 

 

 

 

 

 

DILUTED EARNINGS (LOSS) PER SHARE

 

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

(1.26

)

$

(0.43

)

$

1.60

 

Discontinued operations

 

 

(0.14

)

 

(2.68

)

 

(4.09

)

 

 



 



 



 

Diluted loss per share

 

$

(1.40

)

$

(3.11

)

$

(2.49

)

 

 



 



 



 

 

 

 

 

 

 

 

 

 

 

 

DILUTED AVERAGE COMMON SHARES OUTSTANDING

 

 

72.1

 

 

70.5

 

 

70.2

 

30



(1) Unallocated legacy and corporate costs represent items that are not directly related to our business segments. These costs primarily include pension and retiree medical costs associated with recently sold businesses and other legacy costs for environmental and product liability. Fiscal year 2008 unallocated legacy and corporate costs include $19 million of costs associated with the separation of the LVS business and $12 million associated with legacy costs, primarily for pension and retiree medical.

(2) As a result of the sale of ET, certain corporate and legacy costs previously allocated to ET’s segment results are reported in continuing operations. In fiscal year 2007, these costs were not allocated to the company’s two business segments and are included in “ET Corporate Allocations” in the above segment information.

2008 Compared to 2007

     Sales

          The following table reflects total company and geographical business segment sales for fiscal years 2008 and 2007. The reconciliation is intended to reflect the trend in business segment sales and to illustrate the impact that changes in foreign currency exchange rates, volumes and other factors had on sales (in millions).

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dollar Change Due To

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


 

 

 

2008

 

2007

 

Dollar
Change

 

%
Change

 

Currency

 

Volume
/ Other

 

 

 


 


 


 


 


 


 

CVS:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

North America

 

$

2,179

 

$

2,328

 

$

(149

)

 

(6

)%

$

10

 

$

(159

)

Europe

 

 

1,663

 

 

1,221

 

 

442

 

 

36

%

 

196

 

 

246

 

Asia and Other

 

 

977

 

 

656

 

 

321

 

 

49

%

 

89

 

 

232

 

 

 



 



 



 

 

 

 



 



 

Sub-total

 

 

4,819

 

 

4,205

 

 

614

 

 

15

%

 

295

 

 

319

 

 

 



 



 



 

 

 

 



 



 

LVS:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

North America

 

 

744

 

 

885

 

 

(141

)

 

(16

)%

$

13

 

$

(154

)

Europe

 

 

1,069

 

 

937

 

 

132

 

 

14

%

 

139

 

 

(7

)

Asia and Other

 

 

535

 

 

422

 

 

113

 

 

27

%

 

38

 

 

75

 

 

 



 



 



 

 

 

 



 



 

Sub-total

 

 

2,348

 

 

2,244

 

 

104

 

 

5

%

 

190

 

 

(86

)

 

 



 



 



 

 

 

 



 



 

TOTAL SALES

 

$

7,167

 

$

6,449

 

$

718

 

 

11

%

$

485

 

$

233

 

 

 



 



 



 

 

 

 



 



 

          Commercial Vehicle Systems (CVS) sales were $4,819 million in fiscal year 2008, up 15 percent from fiscal year 2007. The effect of foreign currency translation increased sales by $295 million. Higher sales reflect strong heavy- and medium-duty truck markets in all regions except North America and growth in our specialty and aftermarket businesses. Volumes in the North American heavy-duty commercial vehicle truck markets (commonly referred to as Class 8) were lower in fiscal year 2008 primarily due to pre-buy activity during the first quarter of fiscal year 2007 associated with the adoption of new emissions standards in calendar year 2007 and general economic conditions currently affecting truck tonnage volume. Compared to fiscal year 2007, production volumes in North America for Class 8 trucks decreased approximately 22 percent. The Class 8 truck market started a partial recovery during the third quarter of fiscal year 2008; however, the current volatility in credit markets is expected to delay any further recovery until markets are stabilized. Continuing sales strength in Europe throughout fiscal year 2008 reflects strong heavy- and medium-duty truck volumes in this region. Western European truck volumes increased 17 percent versus 2007. However, sales volumes in these markets are expected to decline significantly in the first half of fiscal year 2009 due to current uncertainty over the financial markets coupled with cyclical downturns in Western Europe. South America volumes increased during fiscal year 2008 by 24 percent. Sales in China and other Asia Pacific areas increased 33 percent; however, this sales growth is not expected to continue into fiscal year 2009. The acquisitions of Mascot and Trucktechnic in fiscal year 2008 increased sales by $31 million.

          Light Vehicle Systems (LVS) sales were $2,348 million in fiscal year 2008, up from $2,244 million in fiscal year 2007. The effect of foreign currency translation increased sales by $190 million. Excluding the impact of foreign currency translation, sales decreased by $86 million or 4% compared to the prior year. Sales in North America decreased primarily due to lower sales in our suspension systems and modules business, including lower pass-through sales. Pass-through sales are products sold to our customers where we acquire certain components and assemble them into the final product and were approximately $167 million in fiscal year 2008, compared to approximately $209 million in fiscal year 2007. These pass-through sales carry minimal margins, as we have little engineering or manufacturing responsibility. The closure of our door module facility in Brussels, Belgium in fiscal year 2007 unfavorably impacted sales by $36 million when compared to the prior year. Strong sales volumes in the Asia Pacific and South American regions partially offset the lower volumes in North America. Due to the current uncertainty in the financial markets we expect production volumes in North America and Europe to be significantly lower in fiscal year 2009.

31



Segment EBITDA and EBITDA Margins

          The following table reflects segment EBITDA and EBITDA margins for fiscal years 2008 and 2007 (dollars in millions).

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Segment EBITDA

 

Segment EBITDA Margins

 

 

 


 


 

 

 

2008

 

2007

 

$ Change

 

% Change

 

2008

 

2007

 

Change

 

 

 


 


 


 


 


 


 


 

CVS

 

$

355

 

$

221

 

$

134

 

61

%

7.4

%

5.3

%

2.1

pts

LVS

 

 

61

 

 

36

 

 

25

 

69

%

2.6

%

1.6

%

1.0

pts

 

 



 



 



 

 

 

 

 

 

 

 

 

Segment EBITDA

 

$

416

 

$

257

 

$

159

 

62

%

5.8

%

4.0

%

1.8

pts

 

 



 



 



 

 

 

 

 

 

 

 

 

          Restructuring costs included in our business segment results during fiscal years 2008 and 2007 are as follows (in millions):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CVS

 

LVS

 

Total

 

 

 


 


 


 

 

 

2008

 

2007

 

2008

 

2007

 

2008

 

2007

 

 

 


 


 


 


 


 


 

Performance Plus program:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Salaried reduction in force

 

$

 

$

7

 

$

 

$

 

$

 

$

7

 

Facility rationalization, primarily employee severance benefits

 

 

(1

)

 

3

 

 

17

 

 

52

 

 

16

 

 

55

 

Asset impairments

 

 

 

 

 

 

3

 

 

4

 

 

3

 

 

4

 

 

 



 



 



 



 



 



 

Total Performance Plus program

 

 

(1

)

 

10

 

 

20

 

 

56

 

 

19

 

 

66

 

 

 



 



 



 



 



 



 

Fiscal year 2005 program (1):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Adjustments and reversals

 

 

 

 

 

 

 

 

(1

)

 

 

 

(1

)

 

 



 



 



 



 



 



 

Total restructuring costs (2)

 

$

(1

)

$

10

 

$

20

 

$

55

 

$

19

 

$

65

 

 

 



 



 



 



 



 



 


 

 

 

 

(1)

The fiscal year 2005 program relates to the restructuring actions announced in May 2005.

 

 

 

 

(2)

Total segment restructuring costs do not include those recorded in unallocated corporate costs related to the Performance Plus program. These costs were $1 million in fiscal year 2008, primarily related to employee termination benefits, and $6 million in fiscal year 2007, primarily related to asset impairment charges.

 

 

 

 

Significant items impacting year over year segment EBITDA include the following:


 

 

 

 

 

 

 

 

 

 

 

CVS

 

LVS

 

TOTAL

 

 

 


 


 


 

Segment EBITDA–Year ended September 30, 2007

 

$

221

 

36

 

257

 

Impact of prior year product disruptions and work stoppages settlement, net

 

 

4

 

 

4

 

Lower restructuring costs

 

 

11

 

35

 

46

 

Charges for legal and commercial dispute

 

 

 

(14

)

(14

)

Impact of change in employee vacation policy

 

 

10

 

3

 

13

 

Foreign currency translation

 

 

9

 

7

 

16

 

Favorable adjustment to impairment reserves in prior year

 

 

 

(12

)

(12

)

Volume, pricing, performance and other, net

 

 

100

 

6

 

106

 

 

 



 


 


 

Segment EBITDA – Year ended September 30, 2008

 

$

355

 

61

 

416

 

 

 



 


 


 

          CVS EBITDA was $355 million in fiscal year 2008, up $134 million compared to the prior year. EBITDA margin increased to 7.4 percent from 5.3 percent a year ago. Higher truck volumes in all regions except North America and higher sales in our aftermarket and specialty businesses, along with improved pricing, material and manufacturing performance contributed to the increase in EBITDA during the fiscal year 2008. EBITDA in fiscal year 2007 was unfavorably impacted by $13 million due to production interruptions and higher costs at a European axle facility and the simultaneous launch of a new axle product line and the implementation of a new ERP system. This impact was partially offset by a $9 million favorable settlement of claims relating to a 2006 labor disruption. Also included in EBITDA for fiscal year 2007 were restructuring costs of $10 million associated with Performance Plus program.

32



          LVS EBITDA was $61 million in fiscal year 2008, compared to EBITDA of $36 million in the prior year. Included in EBITDA for fiscal year 2008 are restructuring costs of $20 million ($55 million in fiscal year 2007). The restructuring costs are part of our Performance Plus program and primarily relate to employee severance costs and asset impairment charges for certain planned facility closures. During fiscal year 2008, LVS realized certain savings related to prior restructuring and other cost reduction actions, which are reflected in “volume, pricing performance and other, net” in the above table. These savings were partially offset by the lower sales volumes and a $14 million charge related to recording an additional contingency reserve for a legal and commercial dispute with a customer which has been settled as of September 30, 2008.

          Included in LVS EBITDA for fiscal year 2007 is a $12 million benefit related to the reversal of certain impairment reserves in the light vehicle aftermarket ride control business presented within continuing operations in fiscal year 2007 (this business was presented in discontinued operations prior to fiscal year 2007). This reversal is related to a $34 million impairment reserve recognized in fiscal year 2005 to record this business at its estimated fair value when it was classified as held for sale. At September 30, 2005, $11 million of the total impairment reserve was allocated to a portion of the long-lived assets and $23 million was considered a reserve for the estimated loss on sale. Subsequent to September 2005, an additional $7 million of this reserve was allocated to long-lived assets whose fair value had further deteriorated. Therefore, at March 31, 2007, the reserve for the estimated loss on sale had decreased to $16 million. As a result of the decision to retain the light vehicle aftermarket ride control business, the reserve for the loss on sale was no longer required and $12 million was reversed. The remaining portion of this reserve was not reversed and was allocated to reserves associated with certain current assets that were impaired as of March 31, 2007.

Other Income Statement Items

          Selling, general and administrative expenses for fiscal years 2008 and 2007 are summarized as follows (in millions):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2008

 

2007

 

Increase (Decrease)

 

 


 


 


 

 

Amount

 

% of sales

 

Amount

 

% of sales

 

 

 

 

 

 

 


 


 


 


 

 

 

 

 

SG&A

 

 

 

 

 

 

 

 

 

 

 

 

 

LVS separation costs

 

$

(19

)

0.3

%

$

 

%

$

19

 

0.3

pts

Loss on sale of receivables

 

 

(22

)

0.3

%

 

(9

)

0.2

%

 

13

 

0.1

pts

All other SG&A

 

 

(403

)

5.6

%

 

(370

)

5.7

%

 

33

 

(0.1

)pts

 

 



 

 

 



 

 

 



 

 

 

Total SG&A

 

$

(444

)

6.2

%

$

(379

)

5.9

%

$

65

 

0.3

pts

 

 



 

 

 



 

 

 



 

 

 

          All other SG&A represents normal selling, general and administrative expenses. The increase in fiscal year 2008 primarily relates to higher labor costs (primarily due to higher variable incentive compensation costs in view of improved financial performance compared to targets) and marketing investments in our commercial vehicle aftermarket business. These increases were partially offset by a corresponding decrease in costs associated with our Performance Plus program compared to fiscal year 2007. Costs associated with our Performance Plus program decreased during fiscal year 2008 as most of the activities under this program were transferred to the respective business units. Savings generated by the program are primarily recorded in cost of sales in the consolidated statement of operations and are reflected in the segment EBITDA results previously discussed.

          Operating income for fiscal year 2008 was $186 million, an increase of $133 million compared to fiscal year 2007. Operating margin was 2.6 percent, up from 0.8 percent in 2007. Higher depreciation and amortization expenses of $16 million, increased costs associated with our off-balance sheet securitization and factoring programs of $13 million and costs of $19 million associated with the separation of our LVS business partially offset the $159 million increase in segment EBITDA compared to fiscal year 2007.

          Interest expense, net was $83 million, compared to $110 million in the prior year. The decrease in interest expense is primarily due to refinancing activities in recent years, which replaced higher interest rate debt with lower rate debt. Interest expense reductions also reflect increased use of off-balance sheet accounts receivable factoring programs during fiscal year 2008. The cost of these factoring programs is included within selling, general and administrative expenses discussed above. Also included in interest expense, net are net losses on debt extinguishments of $3 million and $6 million in the fiscal years 2008 and 2007, respectively. These losses include legal and other professional fees, unamortized debt issuance costs and premiums paid to repurchase and pay down debt. See “Liquidity and Contractual Obligations” for further details concerning these debt extinguishments.

          Income tax provision in fiscal year 2008 is $217 million, representing a 154 percent effective tax rate, compared to a benefit of $8 million, or 35 percent effective tax rate, in the prior year. Included in the current year tax provision are non-cash income tax charges of $183 million of which $137 million related to the repatriation of certain foreign subsidiary earnings to the U.S. and $46 million related to recording valuation allowances on certain foreign deferred tax assets. During the fourth quarter of fiscal year 2008, the company made a strategic decision to repatriate earnings of certain foreign subsidiaries in the form of dividends. The planned

33



repatriation will provide the company with additional flexibility to reallocate funds to other operations as necessary based on working capital requirements and at the same time the ability to utilize deferred tax assets in the U.S., resulting in no additional cash tax expense. These non-cash income tax charges were partially offset in fiscal year 2008 by $16 million of net favorable tax items related to the conclusion and settlement of certain tax audits and expiration of the statute of limitations. Also impacting income tax expense in fiscal year 2008 are higher pre-tax earnings. The prior year tax provision was favorably impacted by increased earnings from foreign subsidiaries whose tax rates are less than the statutory rate and the favorable impact of enacted tax rate changes in certain foreign jurisdictions.

          Loss from continuing operations for fiscal year 2008 was $91 million, or $1.26 per diluted share, compared to $30 million, or $0.43 per diluted share in fiscal year 2007. The increase in loss is primarily attributable to the higher income tax provision discussed above partially offset by higher pre-tax earnings.

          Loss from discontinued operations was $10 million in fiscal year 2008 compared to $189 million in fiscal year 2007. In fiscal year 2008, we recognized additional expenses of approximately $10 million, net, primarily associated with the sale of our ET and LVA businesses, including final adjustments related to changes in estimates for certain retained assets and liabilities. In fiscal year 2007, we recorded a $180 million ($146 million after-tax) loss on the sale of ET. The loss on sale includes a $115 million ($90 million after-tax) non-cash impairment charge recorded in the second quarter of fiscal year 2007 to record ET at estimated fair value based upon the sale agreement. We also recorded a $20 million ($20 million after-tax) loss on the sale of our LVA European exhaust and filters business. The loss on sale includes an $8 million after-tax non-cash impairment charge recorded in the third quarter of fiscal year 2007 to record our LVA European businesses at estimated fair value. Also included in loss from discontinued operations is a reversal of $9 million of restructuring costs in ET related to employee severance benefits. Due to the sale of ET, it was determined that payment of these severance benefits was no longer probable. This reversal was more than offset by operating losses in ET and LVA Europe during the fiscal year 2007.

2007 Compared to 2006

     Sales

          The following table reflects the company and geographical business segment sales for fiscal years 2007 and 2006. The reconciliation is intended to reflect the trend in business segment sales and to illustrate the impact that changes in foreign currency exchange rates, volumes and other factors had on sales (in millions).

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dollar Change Due To

 

 

 

 

 

 

 

 

 

 

 


 

 

 

2007

 

2006

 

Dollar
Change

 

%
Change

 

Currency

 

Volume
/ Other

 

 

 


 


 


 


 


 


 

CVS:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

North America

 

$

2,328

 

$

2,621

 

$

(293

)

(11

)%

$

 

$

(293

)

Europe

 

 

1,221

 

 

1,070

 

 

151

 

14

%

 

97

 

 

54

 

Asia and Other

 

 

656

 

 

488

 

 

168

 

34

%

 

35

 

 

133

 

 

 



 



 



 

 

 



 



 

Total

 

 

4,205

 

 

4,179

 

 

26

 

1

%

 

132

 

 

(106

)

 

 



 



 



 

 

 



 



 

LVS:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

North America

 

 

885

 

 

1,012

 

 

(127

)

(12

)%

$

4

 

$

(131

)

Europe

 

 

937

 

 

903

 

 

34

 

4

%

 

70

 

 

(36

)

Asia and Other

 

 

422

 

 

321

 

 

101

 

31

%

 

14

 

 

87

 

 

 



 



 



 

 

 



 



 

Total

 

 

2,244

 

 

2,236

 

 

8

 

%

 

88

 

 

(80

)

 

 



 



 



 

 

 



 



 

TOTAL SALES

 

$

6,449

 

$

6,415

 

$

34

 

1

%

$

220

 

$

(186

)

 

 



 



 



 

 

 



 



 

          Commercial Vehicle Systems (CVS) sales were $4,205 million in fiscal year 2007, up slightly, from fiscal year 2006. The effect of foreign currency translation increased sales by $132 million. Volumes in the North American Class 8 truck markets were lower primarily due to pre-buy activity during 2007 associated with the adoption of new emissions standards. Compared to fiscal year 2006, production volumes in North America for Class 8 trucks decreased approximately 30 percent. Continuing sales strength in Europe and Asia Pacific reflect strong heavy and medium duty truck volumes in these regions. Western European truck volumes increased 9 percent versus 2006 and are expected to maintain such trends in the near term.

          Light Vehicle Systems (LVS) sales were $2,244 million in fiscal year 2007, up slightly, from $2,236 million in fiscal year 2006. The effect of foreign currency translation increased sales by $88 million. Sales in North America decreased primarily due to lower sales in our suspension systems and modules business, including lower pass through sales. Pass-through sales were

34



approximately $209 million in fiscal year 2007, compared to approximately $246 million in fiscal year 2006. These pass-through sales carry minimal margins, as we have little engineering or manufacturing responsibility. The closure of our door module facility in Brussels, Belgium unfavorably impacted 2007 sales by $77 million when compared to the prior year. Strong sales volumes in the Asia Pacific markets partially offset the lower volumes in North America and Europe.

     Segment EBITDA and EBITDA Margins

          The following table reflects segment EBITDA and EBITDA margins for fiscal years 2007 and 2006 (dollars in millions).

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Segment EBITDA

 

Segment EBITDA Margins

 

 

 


 


 

 

 

2007

 

2006

 

$ Change

 

% Change

 

2007

 

2006

 

Change

 

 

 


 


 


 


 


 


 


 

CVS

 

$

221

 

$

293

 

$

(72

)

(24

)%

5.3

%

7.0

%

(1.7

)pts

LVS

 

 

36

 

 

58

 

 

(22

)

(38

)%

1.6

%

2.6

%

(1.0

)pts

 

 



 



 



 

 

 

 

 

 

 

 

 

Segment EBITDA

 

$

257

 

$

351

 

$

(94

)

(27

)%

4.0

%

5.5

%

(1.5

)pts

 

 



 



 



 

 

 

 

 

 

 

 

 

          Restructuring costs included in our business segment results during fiscal years 2007 and 2006 are as follows (in millions):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CVS

 

LVS

 

Total

 

 

 


 


 


 

 

 

2007

 

2006

 

2007

 

2006

 

2007

 

2006

 

 

 


 


 


 


 


 


 

Performance Plus program:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Salaried reduction in force

 

$

7

 

$

 

$

 

$

 

$

7

 

$

 

Facility rationalization, primarily employee severance benefits

 

 

3

 

 

 

 

52

 

 

 

 

55

 

 

 

Asset impairments

 

 

 

 

 

 

4

 

 

 

 

4

 

 

 

 

 



 



 



 



 



 



 

Total Performance Plus program

 

 

10

 

 

 

 

56

 

 

 

 

66

 

 

 

 

 



 



 



 



 



 



 

Fiscal year 2005 program (1):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Salaried reduction in force

 

 

 

 

 

 

 

 

12

 

 

 

 

12

 

Facility rationalization, primarily employee severance benefits

 

 

 

 

7

 

 

 

 

2

 

 

 

 

9

 

Adjustments and reversals

 

 

 

 

(1

)

 

(1

)

 

(3

)

 

(1

)

 

(4

)

 

 



 



 



 



 



 



 

Total Fiscal Year 2005 program

 

 

 

 

6

 

 

(1

)

 

11

 

 

(1

)

 

17

 

Other actions

 

 

 

 

 

 

 

 

1

 

 

 

 

1

 

 

 



 



 



 



 



 



 

Total restructuring costs (2)

 

$

10

 

$

6

 

$

55

 

$

12

 

$

65

 

$

18

 

 

 



 



 



 



 



 



 


 

 

 

 

(1)

The fiscal year 2005 program relates to the restructuring actions announced in May 2005.

 

 

 

 

(2)

Total segment restructuring costs do not include $6 million of restructuring costs, primarily asset impairment charges, recorded in unallocated corporate costs in fiscal year 2007. These costs are part of the Performance Plus program.

          Significant items impacting year over year segment EBITDA include the following:

 

 

 

 

 

 

 

 

 

 

 

 

 

CVS

 

LVS

 

TOTAL

 

 

 


 


 


 

Segment EBITDA–Year ended September 30, 2006

 

$

293

 

$

58

 

$

351

 

Product disruptions and work stoppages

 

 

41

 

 

(13

)

 

28

 

Restructuring costs

 

 

(4

)

 

(43

)

 

(47

)

Impact of supplier reorganizations

 

 

(6

)

 

(4

)

 

(10

)

Adjustment to impairment reserves

 

 

 

 

12

 

 

12

 

Gain on divestitures

 

 

(23

)

 

(5

)

 

(28

)

Pension and retiree medical costs

 

 

(7

)

 

4

 

 

(3

)

Volume, performance and other

 

 

(73

)

 

27

 

 

(46

)

 

 



 



 



 

Segment EBITDA – Year ended September 30, 2007

 

$

221

 

$

36

 

$

257

 

 

 



 



 



 

          CVS EBITDA was $221 million, down $72 million compared to the same period last year. EBITDA margin decreased to 5.3 percent from 7.0 percent a year ago. In 2007, the downturn in the North American commercial vehicle truck markets and operational issues in our European CVS business, compounded by record truck sales in that region, unfavorably impacted EBITDA. A labor

35



disruption and work stoppage at our commercial vehicle brakes operation in Tilbury, Ontario, in 2006 unfavorably impacted EBITDA in fiscal year 2006 by $45 million. The settlement of claims relating to this labor disruption favorably impacted fiscal year 2007 by $9 million. Production interruptions and higher costs at a European axle facility and the simultaneous launch of a new axle product line and the implementation of a new ERP system unfavorably impacted EBITDA by $13 million in fiscal year 2007. Higher pension and retiree medical costs are associated with a permanent injunction reinstating retiree medical benefits to certain UAW retirees granted by a federal district court in fiscal year 2006. The ongoing impact of this injunction was recorded beginning in March 2006. Also included in EBITDA for fiscal year 2007 were higher restructuring costs, primarily associated with Performance Plus, of $4 million. Included in EBITDA for fiscal year 2006 was a $23 million gain on the sale of certain assets of CVS’ off-highway brakes business.

          LVS EBITDA was $36 million in fiscal year 2007, compared to EBITDA of $58 million in the prior year. Included in EBITDA for fiscal year 2007 are higher restructuring costs of $43 million. The restructuring costs are part of our Performance Plus program and primarily relate to employee severance costs and asset impairment charges for certain planned facility closures. Production disruptions caused by work stoppages at our Brussels facility reduced EBITDA in fiscal year 2007 by $13 million compared to fiscal year 2006. Net of these items, EBITDA margins improved compared to fiscal year 2006 due to material savings and cost savings resulting from prior restructuring actions, which is reflected in “volume, performance and other” in the above table. Included in EBITDA for fiscal year 2006 was a $5 million gain on the liquidation of Meritor Suspension Systems Holding (UK) Ltd. (“MSSH”), a joint venture. This gain primarily related to the extinguishment of debt owed to the minority partner.

          Also included in LVS EBITDA for fiscal year 2007 is a $12 million benefit related to the reversal of certain impairment reserves in the light vehicle aftermarket ride control business presented within continuing operations in fiscal year 2007 (this business was presented in discontinued operations prior to fiscal year 2007). This reversal is related to a $34 million impairment reserve recognized in fiscal year 2005 to record this business at its estimated fair value when it was classified as held for sale. At September 30, 2005, $11 million of the total impairment reserve was allocated to a portion of the long-lived assets and $23 million was considered a reserve for the estimated loss on sale. Subsequent to September 2005, an additional $7 million of this reserve was allocated to long-lived assets whose fair value had further deteriorated. Therefore, at March 31, 2007, the reserve for the estimated loss on sale had decreased to $16 million. As a result of the decision to retain the light vehicle aftermarket ride control aftermarket business, the reserve for the loss on sale was no longer required and $12 million was reversed. The remaining portion of this reserve was not reversed and was allocated to reserves associated with certain current assets that were impaired as of March 31, 2007.

Other Income Statement Items

          Selling, general and administrative expenses for fiscal years 2007 and 2006 are summarized as follows (in millions):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2007

 

2006

 

Increase (Decrease)

 

 


 


 


 

 

Amount

 

% of sales

 

Amount

 

% of sales

 

 

 

 

 

 

 


 


 


 


 

 

 

 

 

SG&A

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss on sale of receivables

 

$

(9

)

0.2

%

$

(1

)

%

$

8

 

0.2

pts

All other SG&A

 

 

(370

)

5.7

%

 

(335

)

5.2

%

 

35

 

0.5

pts

 

 



 

 

 



 

 

 



 

 

 

Total SG&A

 

$

(379

)

5.9

%

$

(336

)

5.2

%

$

43

 

0.7

pts

 

 



 

 

 



 

 

 



 

 

 

          The increase in all other SG&A is primarily costs associated with our Performance Plus program, partially offset by lower incentive compensation expenses due to the company’s financial performance versus targets. Savings generated by the program are primarily recorded in cost of sales in the consolidated statement of operations and are reflected in the segment EBITDA results previously discussed.

          Operating income for fiscal year 2007 was $53 million, a decrease of $118 million compared to fiscal year 2006. Operating margin was 0.8 percent, down from 2.7 percent. Higher depreciation and amortization expenses of $5 million, increased costs associated with our off-balance sheet securitization and factoring programs of $8 million along with the $94 million decrease in segment EBITDA resulted in the decrease in operating income compared to fiscal year 2006.

          Interest expense, net was $110 million, compared to $131 million in the prior year. The decrease in interest expense is primarily due to lower debt levels and reduced fixed interest rates compared with the prior year due to refinancing activities. Interest expense reductions also reflect increased use of off-balance sheet accounts receivable factoring programs during fiscal year 2007. The cost of these factoring programs is included within selling, general and administrative expenses discussed above. The favorable impact of reduced fixed rate debt and fixed interest rates was partially offset by higher levels of short term borrowings and higher interest rates on our variable rate debt compared with the prior year. Costs to terminate certain interest rate swaption contracts totaled $2 million in fiscal year 2007. Also included in interest expense, net and other are net losses on debt extinguishments of $6 million in the fiscal year ended September 30, 2007 and 2006. These losses include legal and other professional fees, unamortized debt issuance

36



costs and premiums paid to repurchase and pay down debt. See “Liquidity and Contractual Obligations” for further details concerning these debt extinguishments.

          Income tax benefit from continuing operations in fiscal year 2007 was $8 million, representing a 35 percent effective tax rate, compared to $54 million, or negative 75 percent effective tax rate, in the prior year. In fiscal year 2006, we recorded a $21 million tax benefit related to the expiration of certain statutes of limitations and the completion of various worldwide tax audits of certain of the company’s income tax returns. We also repatriated approximately $131 million in dividends in the fourth quarter of fiscal year 2006 as part of the American Jobs Creation Act of 2004. The dividends are subject to the elective 85 percent dividend received deduction and accordingly we recorded a corresponding tax benefit of $31 million related to the reversal of previously provided U.S. deferred tax liability on these unremitted foreign subsidiary earnings.

          Minority interest expense was $15 million in fiscal year 2007 compared to $14 million in fiscal year 2006. Minority interests represent our minority partners’ share of income or loss associated with our less than 100-percent owned consolidated joint ventures.

          Loss from continuing operations for fiscal year 2007 was $30 million, or $0.43 per diluted share, compared to income from continuing operations of $112 million, or $1.60 per diluted share in fiscal year 2006. The decrease is primarily attributable to higher restructuring costs of $53 million and lower income tax benefits previously mentioned.

          Loss from discontinued operations was $189 million in fiscal year 2007 compared to $287 million in fiscal year 2006. In fiscal year 2007, we recorded a $180 million ($146 million after-tax) loss on the sale of ET. The loss on sale includes a $115 million ($90 million after-tax) non-cash impairment charge recorded in the second quarter of fiscal year 2007 to record ET at estimated fair value based upon the sale agreement. We also recorded a $20 million ($20 million after-tax) loss on the sale of our LVA European exhaust and filters business. The loss on sale includes an $8 million after-tax non-cash impairment charge recorded in the third quarter of fiscal year 2007 to record our LVA European businesses at estimated fair value. Also included in loss from discontinued operations is a reversal of $9 million of restructuring costs in ET related to employee severance benefits. Due to the sale of ET, it was determined that payment of these severance benefits was no longer probable. This reversal was more than offset by operating losses in ET and LVA Europe during the year.

          In fiscal year 2006, we completed the sale of our LVA North American filters, exhaust and motion control businesses, our Gabriel South Africa ride control business and our 39 percent interest in our Purolator India joint venture. Cash proceeds from these divestitures were approximately $222 million, resulting in a net pre-tax gain of $28 million ($18 million after-tax). We also recorded non-cash impairment charges of $22 million ($14 million after-tax) during fiscal year 2006 in certain of our LVA businesses.

          Loss from discontinued operations in fiscal year 2006 includes after-tax restructuring costs of $16 million related to our LVA and ET businesses, primarily related to our fiscal year 2005 restructuring program. These after-tax restructuring costs are net of after-tax reversals of costs recorded in previous periods of $6 million and include $26 million related to employee severance benefits, $5 million of asset impairment charges, and $3 million of other plant closure costs.

          Also included in loss from discontinued operations in fiscal year 2006 is an after-tax loss of $2 million on the sale of our light vehicle OE ride control business located in Asti, Italy and a reversal of approximately $7 million of after-tax employee severance benefits that were recorded in the prior year as part of our fiscal year 2005 restructuring actions. As a result of the sale of the light vehicle OE ride control operations, these employee termination benefits were not paid.

Non-Consolidated Joint Ventures

          At September 30, 2008, our continuing operations had investments in 9 joint ventures that were not majority-owned or controlled and were accounted for under the equity method of accounting. Our investments in non-consolidated joint ventures totaled $134 million and $116 million at September 30, 2008 and 2007, respectively.

          These strategic alliances provide for sales, product design, development and manufacturing in certain product and geographic areas. Aggregate sales of our non-consolidated joint ventures were $1,481 million, $1,182 million and $1,021 million in fiscal years 2008, 2007 and 2006, respectively.

          Our equity in the earnings of affiliates was $38 million, $34 million and $32 million in fiscal years 2008, 2007 and 2006, respectively. We received cash dividends from our affiliates of $20 million, $22 million and $22 million in fiscal years 2008, 2007 and 2006, respectively.

          For more information about our non-consolidated joint ventures, see Note 13 of the Notes to Consolidated Financial Statements.

37



Financial Condition

          Cash Flows (in millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

Fiscal Year Ended September 30,

 

 

 


 

 

 

2008

 

2007

 

2006

 

 

 


 


 


 

OPERATING CASH FLOWS

 

 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations

 

$

(91

)

$

(30

)

$

112

 

Depreciation and amortization

 

 

145

 

 

129

 

 

124

 

Gain on divestitures

 

 

 

 

(3

)

 

(28

)

Adjustments to impairment reserves, net

 

 

 

 

(10

)

 

 

Deferred income tax expense (benefit)

 

 

109

 

 

(36

)

 

(103

)

Pension and retiree medical expense

 

 

105

 

 

129

 

 

142

 

Pension and retiree medical contributions

 

 

(82

)

 

(202

)

 

(114

)

Restructuring costs, net of payments

 

 

(23

)

 

39

 

 

(21

)

Proceeds from termination of interest rate swaps

 

 

28

 

 

 

 

 

Decrease (increase) in working capital

 

 

(235

)

 

(29

)

 

80

 

Changes in sale of receivables

 

 

125

 

 

139