UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

 

QUARTERLY REPORT

 

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

For the Quarterly Period Ended December 31, 2006

Commission File No. 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)

 

(248) 435-1000

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

 

Yes

X

No

 

 

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. (Check one)

 

Large accelerated filer

X

Accelerated filer

 

Non-accelerated filer

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 

Yes

 

No

X 

  

71,322,886 shares of Common Stock, $1.00 par value, of ArvinMeritor, Inc. were outstanding on January 31, 2007.

 

 

 

INDEX

 

PART I.

FINANCIAL INFORMATION:

 

 

 

 

 

 

Item 1.

Financial Statements:

Page

 

 

 

No.

 

 

Consolidated Statement of Income - - Three Months

 

 

 

Ended December 31, 2006 and 2005

2

 

 

 

 

 

 

Consolidated Balance Sheet - -

 

 

 

December 31, 2006 and September 30, 2006

3

 

 

 

 

 

 

Condensed Consolidated Statement of Cash Flows - -

 

 

 

Three  Months Ended December 31, 2006 and 2005

4

 

 

 

 

 

 

Notes to Consolidated Financial Statements

5

 

 

 

 

 

Item 2.

Management’s Discussion and Analysis

 

 

 

of Financial Condition and Results of Operations

33

 

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About

 

 

 

Market Risk

42

 

 

 

 

 

Item 4.

Controls and Procedures

43

 

 

 

 

PART II.

OTHER INFORMATION:

 

 

 

 

 

 

Item 5.

Other Information

44

 

 

 

 

 

Item 6.

Exhibits

44

 

 

 

 

 

 

 

 

Signatures

 

 

45

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1

 

 

PART I. FINANCIAL INFORMATION

ITEM 1. Financial Statements

ARVINMERITOR, INC.

CONSOLIDATED STATEMENT OF INCOME

(in millions, except per share amounts)

 

 

 

 

Three Months Ended December 31,

 

 

 

2006

 

2005

 

 

 

(Unaudited)

 

Sales

 

$

2,340

 

$

2,098

 

Cost of sales

 

 

(2,222

)

 

(1,966

)

GROSS MARGIN  

 

 

118

 

 

132

 

Selling, general and administrative

 

 

(86

)

 

(88

)

Restructuring costs

 

 

(1

)

 

(1

)

Gain on divestitures

 

 

2

 

 

23

 

OPERATING INCOME

 

 

33

 

 

66

 

Equity in earnings of affiliates

 

 

9

 

 

7

 

Interest expense, net and other

 

 

(27

)

 

(32

INCOME BEFORE INCOME TAXES

 

 

15

 

 

41

 

Provision for income taxes

 

 

(2

)

 

(10

)

Minority interests

 

 

(2

)

 

(3

)

INCOME FROM CONTINUING OPERATIONS

 

 

11

 

 

28

 

INCOME (LOSS) FROM DISCONTINUED OPERATIONS

 

 

(4

 

6

 

NET INCOME

 

$

7

 

$

34

 

 

 

 

 

 

 

 

 

BASIC EARNINGS (LOSS) PER SHARE

 

 

 

 

 

 

 

Continuing operations

 

$

0.16

 

$

0.40

 

Discontinued operations

 

 

(0.06

 

0.09

 

Basic earnings per share

 

$

0.10

 

$

0.49

 

 

 

 

 

 

 

 

 

DILUTED EARNINGS (LOSS) PER SHARE

 

 

 

 

 

 

 

Continuing operations

 

$

0.16

 

$

0.40

 

Discontinued operations

 

 

(0.06

 

0.09

 

Diluted earnings per share

 

$

0.10

 

$

0.49

 

 

 

 

 

 

 

 

 

Basic average common shares outstanding

 

 

69.4

 

 

69.0

 

Diluted average common shares outstanding

 

 

70.5

 

 

69.8

 

 

 

 

 

 

 

 

 

Cash dividends per common share

 

$

0.10

 

$

0.10

 

 

See notes to consolidated financial statements. Amounts for the three months ended December 31, 2005 have been restated for discontinued operations.

 

2

 

ARVINMERITOR, INC.

CONSOLIDATED BALANCE SHEET

(in millions)

 

 

 

 

December 31,

 

September 30,

 

 

 

2006

 

2006

 

 

 

(Unaudited)

 

 

ASSETS

 

 

 

 

 

 

 

CURRENT ASSETS:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

369

 

$

350

 

Receivables, net

 

 

1,564

 

 

1,645

 

Inventories

 

 

628

 

 

596

 

Other current assets

 

 

292

 

 

295

 

Assets of discontinued operations

 

 

204

 

 

207

 

TOTAL CURRENT ASSETS

 

 

3,057

 

 

3,093

 

NET PROPERTY

 

 

984

 

 

988

 

GOODWILL

 

 

510

 

 

503

 

OTHER ASSETS 

 

 

945

 

 

929

 

TOTAL ASSETS

 

$

5,496

 

$

5,513

 

 

 

 

 

 

 

 

 

LIABILITIES AND SHAREOWNERS’ EQUITY

 

 

 

 

 

 

 

CURRENT LIABILITIES:

 

 

 

 

 

 

 

Short-term debt

 

$

137

 

$

56

 

Accounts payable

 

 

1,551

 

 

1,649

 

Other current liabilities

 

 

698

 

 

741

 

Liabilities of discontinued operations

 

 

99

 

 

103

 

TOTAL CURRENT LIABILITIES

 

 

2,485

 

 

2,549

 

LONG-TERM DEBT

 

 

1,185

 

 

1,184

 

RETIREMENT BENEFITS

 

 

526

 

 

507

 

OTHER LIABILITIES

 

 

234

 

 

264

 

MINORITY INTERESTS

 

 

67

 

 

65

 

SHAREOWNERS’ EQUITY:

 

 

 

 

 

 

 

Common stock (December 31, 2006, 71.1 shares issued and outstanding; September 30, 2006, 71.0 shares issued and 70.6 outstanding)

 

 

71

 

 

71

 

Additional paid-in capital

 

 

591

 

 

587

 

Retained earnings

 

 

376

 

 

376

 

Treasury stock (December 31, 2006, none and September 30, 2006, 0.4 shares)

 

 

(11

)

 

(11

)

Accumulated other comprehensive loss

 

 

(28

)

 

(79

)

TOTAL SHAREOWNERS’ EQUITY

 

 

999

 

 

944

 

TOTAL LIABILITIES AND SHAREOWNERS’ EQUITY

 

$

5,496

 

$

5,513

 

 

See notes to consolidated financial statements

 

 

3

ARVINMERITOR, INC.

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

(in millions)

 

 

 

Three Months Ended December 31,

 

 

 

2006

 

2005

 

 

 

(Unaudited)

 

OPERATING ACTIVITIES

 

 

 

 

 

 

 

Income from continuing operations

 

$

11

 

$

28

 

Adjustments to income from continuing operations to arrive

 

 

 

 

 

 

 

at cash provided by (used for) operating activities:

 

 

 

 

 

 

 

Depreciation and amortization

 

 

43

 

 

40

 

Gain on divestitures

 

 

(2

)

 

(23

)

Restructuring costs, net of payments

 

 

(7

)

 

(7

)

Pension and retiree medical expense

 

 

33

 

 

33

 

Other adjustments to income

 

 

(1

)

 

1

 

Pension and retiree medical contributions

 

 

(39

)

 

(28

)

Changes in receivable securitization and factoring

 

 

15

 

 

37

 

Changes in assets and liabilities, excluding effects of

 

 

 

 

 

 

 

acquisitions, divestitures and foreign currency adjustments

 

 

(85

)

 

81

 

Cash flows provided by (used for) continuing operations

 

 

(32

)

 

162

 

Cash flows used for discontinued operations

 

 

(1

)

 

(11

)

CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES

 

 

(33

)

 

151

 

 

 

 

 

 

 

 

 

INVESTING ACTIVITIES

 

 

 

 

 

 

 

Capital expenditures

 

 

(30

)

 

(38

)

Acquisitions of businesses and investments, net of cash acquired

 

 

(5

)

 

(1

)

Proceeds from disposition of property and businesses

 

 

5

 

 

39

 

Proceeds from marketable securities

 

 

5

 

 

 

Net investing cash flows provided by (used for) discontinued operations

 

 

(1

)

 

8

 

CASH PROVIDED BY (USED FOR) INVESTING ACTIVITIES

 

 

(26

)

 

8

 

 

 

 

 

 

 

 

 

FINANCING ACTIVITIES

 

 

 

 

 

 

 

Borrowings (payments) on accounts receivable securitization program

 

 

80

 

 

(24

)

Repayment of notes

 

 

 

 

(3

)

Borrowings (payments) on lines of credit and other, net

 

 

1

 

 

(12

)

Net change in debt

 

 

81

 

 

(39

)

Cash dividends

 

 

(7

)

 

(7

)

CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES

 

 

74

 

 

(46

)

EFFECT OF CHANGES IN FOREIGN CURRENCY EXCHANGE

 

 

 

 

 

 

 

RATES ON CASH AND CASH EQUIVALENTS

 

 

4

 

 

2

 

CHANGE IN CASH AND CASH EQUIVALENTS

 

 

19

 

 

115

 

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD

 

 

350

 

 

187

 

CASH AND CASH EQUIVALENTS AT END OF PERIOD

 

$

369

 

$

302

 

See notes to consolidated financial statements. Amounts for the three months ended December 31, 2005 have been restated for discontinued operations.

 

4

ARVINMERITOR, INC.

NOTES TO CONSOLIDATED STATEMENTS

(Unaudited)

 

1.

Basis of Presentation

ArvinMeritor, Inc. (the company or ArvinMeritor) is a global supplier of a broad range of integrated systems, modules and components serving light vehicle, commercial truck, trailer and specialty original equipment manufacturers and certain aftermarkets. The consolidated financial statements are those of the company and its consolidated subsidiaries.

The company’s Light Vehicle Aftermarket (LVA) businesses and Light Vehicle Systems (LVS) ride control business are presented as discontinued operations in the consolidated statement of income and related notes. The company sold its LVA North American filters, exhaust and motion control businesses, its Gabriel South Africa LVA ride control business and its 39 percent interest in its Purolator India joint venture during fiscal year 2006. Results of operations related to these businesses are presented as discontinued operations in the consolidated statement of income through the date of sale. The assets and liabilities of LVA are classified as held for sale and included in assets and liabilities of discontinued operations in the consolidated balance sheet. In the fourth quarter of fiscal year 2006, the company decided to retain its 51 percent interest in its Gabriel de Venezuela light vehicle aftermarket joint venture. As a result, the results of operations, assets and liabilities and cash flows of this business are presented in continuing operations in the consolidated financial statements and prior periods have been restated to reflect this presentation (see Note 4).

In the opinion of the company, the unaudited financial statements contain all adjustments, consisting solely of adjustments of a normal, recurring nature, necessary to present fairly the financial position, results of operations and cash flows for the periods presented. These statements should be read in conjunction with the company’s audited consolidated financial statements and notes thereto included in the Annual Report on Form 10-K for the fiscal year ended September 30, 2006. The results of operations for the three months ended December 31, 2006, are not necessarily indicative of the results for the full year.

The company’s fiscal year ends on the Sunday nearest September 30. The company’s fiscal quarters end on the Sundays nearest December 31, March 31 and June 30. The first quarter of fiscal years 2007 and 2006 ended on December 31, 2006, and January 1, 2006, respectively. All year and quarter references relate to the company’s fiscal year and fiscal quarters, unless otherwise stated. For ease of presentation, September 30 and December 31 are used consistently throughout this report to represent the fiscal year end and first quarter end, respectively.

For each interim reporting period, the company makes an estimate of the effective tax rate expected to be applicable for the full fiscal year. The rate so determined is used in providing for income taxes on a year-to-date basis.

2.

Earnings per Share

Basic earnings per share is calculated using the weighted average number of shares outstanding during each period. The diluted earnings per share calculation includes the impact of dilutive common stock options, restricted stock, performance share awards and convertible securities, if applicable.

A reconciliation of basic average common shares outstanding to diluted average common shares outstanding is as follows (in millions):

 

 

 

Three Months Ended

 

 

 

December 31,

 

 

 

2006

 

2005

 

 

 

 

 

 

 

Basic average common shares outstanding

 

69.4

 

69.0

 

Impact of restricted stock

 

0.9

 

0.8

 

Impact of stock options

 

0.2

 

 

Diluted average common shares outstanding

 

70.5

 

69.8

 

 

 

5

ARVINMERITOR, INC.

NOTES TO CONSOLIDATED STATEMENTS – (Continued)

(Unaudited)

 

At December 31 2006 and 2005, options to purchase 3.2 million and 4.9 million shares of common stock, respectively, were not included in the computation of diluted earnings per share because their inclusion would be anti-dilutive.

The company issued $300 million of convertible senior unsecured notes in the second quarter of fiscal year 2006 (see Note 14). Since the company’s stock price during the quarter is less than the conversion price, these convertible notes are not included in the computation of diluted earnings per share because their inclusion would be anti-dilutive.

3.

New Accounting Standards

In July 2006, the Financial Accounting Standards Board (FASB) issued Interpretation No. 48 (FIN 48), “Accounting for Uncertainty in Income Taxes” which prescribes a recognition threshold and measurement process for recording in the financial statements uncertain tax positions taken or expected to be taken in a tax return. Additionally, FIN 48 provides criteria for subsequently recognizing, derecognizing and measuring changes in uncertain tax positions and requires expanded disclosures with respect to the uncertainty of income taxes. The accounting provisions of FIN 48 will be effective for the company beginning October 1, 2007 with the cumulative effect of the change in accounting principle recorded as an adjustment to opening retained earnings. The company is in the process of determining the effect the adoption of FIN 48 will have on its consolidated financial statements.

In September 2006, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 157, “Fair Value Measurements” which provides a definition of fair value, establishes a framework for measuring fair value and requires expanded disclosures about fair value measurements. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those years. The provisions of SFAS 157 will be applied prospectively.

In September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans – an amendment of FASB Statements No. 87, 88, 106, and 132(R)”. This statement requires an entity to recognize the funded status of its defined benefit pension plans and other postretirement benefit plans, such as a retiree health care plan, on the balance sheet and to recognize changes in the funded status that arise during the period but are not recognized as components of net periodic benefit cost, within other comprehensive income, net of income taxes. SFAS 158 also requires measurement of the funded status of the plans as of the balance sheet date. SFAS 158 is effective for recognition of the funded status of the plans for fiscal years ending after December 15, 2006 and is effective for the measurement date provisions for fiscal years ending after December 15, 2008. The impact of this statement will be dependent upon the company’s June 30, 2007 actuarial valuation of these liabilities and related changes in assumptions compared to the current year’s valuation. However, if this standard had been effective for the year ended September 30, 2006, the impact would have been a reduction to shareowners’ equity, net of tax, of approximately $300 million.

In September 2006, the SEC issued Staff Accounting Bulletin (SAB) No. 108, “Quantifying Financial Misstatements”, which expresses the Staff’s views regarding the process of quantifying financial statement misstatements. Registrants are required to quantify the impact of correcting all misstatements, including both the carryover and reversing effects of prior year misstatements, on the current year financial statements. The financial statements would require adjustment when either approach results in quantifying a misstatement that is material, after considering all relevant quantitative and qualitative factors. SAB 108 is effective for financial statements covering the first fiscal year ending after November 15, 2006. The company will adopt SAB 108 in the fourth quarter of fiscal year 2007 and is in the process of determining the effect, if any, it will have on its consolidated financial statements.  

4.

Discontinued Operations

Light Vehicle Aftermarket

In October 2004, the company announced plans to divest its LVA business. This plan is part of the company’s long-term strategy to focus on core competencies and support its global light vehicle systems original equipment manufacturing (OEM) customers and its commercial vehicle systems OEM and aftermarket customers. LVA supplied exhaust, ride control, motion control and filter products, as well as other automotive parts to the passenger car, light truck and sport utility vehicle aftermarket. LVA is reported as discontinued operations in the consolidated statement of income. The assets and liabilities of LVA are held for sale and included in assets and liabilities of discontinued operations in the consolidated balance sheet. Accordingly, net property and amortizable intangible assets are no longer being depreciated or amortized. In the fourth quarter of fiscal year 2006, the company decided to retain its 51 percent interest in its Gabriel de Venezuela light vehicle aftermarket joint venture. As a result, the results of operations, assets and liabilities and cash flows of this business are presented in continuing operations in the consolidated financial statements and prior periods have been restated to reflect this presentation.

 

6

ARVINMERITOR, INC.

NOTES TO CONSOLIDATED STATEMENTS – (Continued)

(Unaudited)

 

In November 2005, the company sold its 39-percent equity ownership interest in its light vehicle aftermarket joint venture, Purolator India. Cash proceeds from the sale were $9 million, resulting in a $2 million after-tax gain, which is recorded in income from discontinued operations.

In order to reduce costs and improve profitability, LVA recorded restructuring costs of $2 million in the first quarter of fiscal year 2006. At December 31 and September 30, 2006, $3 million and $4 million of restructuring reserves primarily related to unpaid employee termination benefits are included in liabilities of discontinued operations.

Light Vehicle Ride Control

In December 2005, the company sold its light vehicle ride control business located in Asti, Italy and recorded an after-tax loss on the sale of $2 million. This sale, along with the previous divestiture of the company’s 75-percent shareholdings in AP Amortiguadores, S.A. (APA) in the second quarter of fiscal year 2004, substantially completed the company’s plan to exit its LVS ride control business (ride control). Therefore, ride control is presented as discontinued operations in the consolidated statement of income and consolidated statement of cash flows for all periods presented. Ride control provides shock absorbers, struts, ministruts, and corner modules to the light vehicle industry. The company previously expected to close the ride control business in Asti, Italy during fiscal year 2006 and recorded approximately $31 million of restructuring costs in fiscal year 2005 related to the expected closure. These costs included $16 million of employee termination benefits and $15 million of asset impairment charges. As a result of the sale of the ride control operations located in Asti, Italy in the first quarter of fiscal year 2006, the company reversed $12 million of restructuring costs related to employee termination benefits that will no longer be paid by the company. These restructuring costs, including the subsequent reversals, are recorded in discontinued operations in the consolidated statement of income.

Results of the discontinued operations are summarized as follows (in millions):

 

  

 

Three Months Ended

 

 

 

December 31,

 

 

 

2006

 

2005

 

Sales:

 

 

 

 

 

 

 

Light Vehicle Aftermarket

 

$

78

 

$

182

 

Ride Control

 

 

6

 

 

15

 

Total sales

 

$

84

 

$

197

 

 

 

 

 

 

 

 

 

Income (loss) before income taxes

 

$

(4)

 

$

 

Provision for income taxes

 

 

 

 

(3)

 

Income (loss) from discontinued operations

 

$

(4)

 

$

 

 

Assets and liabilities of the discontinued operations are summarized as follows (in millions):

 

 

 

December 31,

 

September 30,

 

 

 

2006

 

2006

 

 

 

 

 

 

 

 

 

Current assets                  

 

$

132

 

$

137

 

Net property                           

 

 

46

 

 

44

 

Other assets                            

 

 

26

 

 

26

 

Assets of discontinued operations      

 

$

204

 

$

207

 

 

 

 

 

 

 

 

 

Current liabilities     

 

$

93

 

$

96

 

Other liabilities               

 

 

6

 

 

7

 

Liabilities of discontinued operations       

 

$

99

 

$

103

 

 

 

7

ARVINMERITOR, INC.

NOTES TO CONSOLIDATED STATEMENTS – (Continued)

(Unaudited)

 

5.

Goodwill

Goodwill is reviewed for impairment annually or more frequently if certain indicators arise. If business conditions or other factors cause the profitability and cash flows of the reporting unit to decline, the company may be required to record impairment charges for goodwill at that time. The goodwill impairment review is a two-step process. Step one consists of a comparison of the fair value of a reporting unit with its carrying amount. An impairment loss may be recognized if the review indicates that the carrying value of a reporting unit exceeds its fair value. Estimates of fair value are primarily determined by using discounted cash flows and market multiples on earnings. If the carrying amount of a reporting unit exceeds its fair value, step two requires the fair value of the reporting unit to be allocated to the underlying assets and liabilities of that reporting unit, resulting in an implied fair value of goodwill. If the carrying amount of the goodwill of the reporting unit exceeds the implied fair value, an impairment charge is recorded equal to the excess.

The impairment review is highly judgmental and involves the use of significant estimates and assumptions. These estimates and assumptions have a significant impact on the amount of any impairment charge recorded. Discounted cash flow methods are dependent upon assumption of future sales trends, market conditions and cash flows of each reporting unit over several years. Actual cash flows in the future may differ significantly from those previously forecasted. Other significant assumptions include growth rates and the discount rate applicable to future cash flows.

In fiscal year 2006, our light vehicle emissions technologies reporting unit continued to face significant challenges, including higher raw material costs, intense pricing pressures and increased competition. These factors were greater than previously anticipated and partially offset the expected benefits from the company’s fiscal year 2005 restructuring actions. In addition, higher stainless steel prices and recent downturns in production at certain North American manufacturers are expected to further negatively impact the financial performance of this reporting unit in fiscal year 2007. These combined factors resulted in a decline in the fair value of the light vehicle emissions technologies reporting unit in fiscal year 2006.

Step one of the company’s fiscal 2006 annual goodwill impairment review indicated the carrying value of its LVS emissions technology reporting unit exceeded its fair value. The fair value of this reporting unit was estimated using a probability weighted average cash flow analysis. This analysis considered multiple cash flow scenarios, including earnings multiples and the expected present value of future cash flows. Based on the step one analysis, the company recorded a $310 million non-cash goodwill impairment charge in the fourth quarter of fiscal year 2006 as its best estimate of the impairment loss. The company completed the step two analysis in the first quarter of fiscal year 2007, which supported the original goodwill impairment charge recorded in the prior year.

 

A summary of the changes in the carrying value of goodwill, by segment, is as follows (in millions):

 

 

 

 

LVS

 

 

CVS

 

 

Total

 

Balance at September 30, 2006

 

$

70

 

$

433

 

$

503

 

Foreign currency translation

 

 

 

 

7

 

 

7

 

Balance at December 31, 2006

 

$

70

 

$

440

 

$

510

 

 

6.

Restructuring Costs

The company recorded restructuring charges of $1 million during the first three months of each of fiscal years 2007 and 2006. At December 31 and September 30, 2006, $32 million and $40 million, respectively, of restructuring reserves primarily related to unpaid employee termination benefits remained in the consolidated balance sheet.

Fiscal year 2005 program:  In the second quarter of fiscal year 2005, the company announced the elimination of approximately 400 to 500 salaried positions and approved plans to consolidate, downsize, close or sell certain underperforming businesses or facilities. During fiscal year 2006, the company identified approximately 550 additional salaried and hourly headcount reductions in its LVS and ET business segments. Including these additional headcount reductions, the fiscal year 2005 actions 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 business segments. These actions were intended to align capacity with industry conditions, utilize assets more efficiently, and improve operations. The total estimated cost of these actions is approximately $132 million over the life of the program, of which approximately $105 million is estimated to be cash costs. Estimated costs included employee severance and other exit costs, as well as asset impairments. Asset impairment charges related to manufacturing facilities that were closed or sold and machinery and equipment that have become idle and obsolete as a result of the facility closures.

 

8

ARVINMERITOR, INC.

NOTES TO CONSOLIDATED STATEMENTS – (Continued)

(Unaudited)

Cumulative restructuring costs recorded for the fiscal year 2005 program, including amounts recorded in discontinued operations, are $127 million as of December 31, 2006. These costs include $92 million of employee termination benefits, $29 million of asset impairment charges and $6 million of other closure costs.

The changes in the restructuring reserves for the three months ended December 31, 2006 are as follows (in millions):

 

 

 

Employee

 

 

 

Termination

 

 

 

Benefits

 

Balance at September 30, 2006         

 

$

40

 

Activity during the period:

 

 

 

 

Charges to expense                       

 

 

1

 

Ride control reversal (1)                 

 

 

(1

)

Cash payments                     

 

 

(8

)

Balance at December 31, 2006         

 

$

32

 

  (1) Restructuring charges related to ride control are included in discontinued operations in the consolidated statement of income.

7.

Acquisitions and Divestitures

In October 2005, the company completed the sale of certain assets of its commercial vehicle off-highway brake business for cash proceeds of approximately $39 million and recognized a pre-tax gain on the sale of $23 million. The sale includes equipment and certain assets from manufacturing facilities in York, South Carolina and Cwmbran, U.K. The divestiture of the off-highway brakes operation is aligned with the company's strategy to focus on its core products.

8.

Accounts Receivable Securitization and Factoring

In March 2006, the company entered into a European arrangement to sell trade receivables through one of its European subsidiaries. Under this arrangement, the company can sell up to, at any point in time, €100 million of eligible trade receivables. The receivables under this program are sold at face value and excluded from the company’s consolidated balance sheet. The company continues to perform collection and administrative functions related to these receivables. Costs associated with this securitization arrangement were $1 million in the three months ended December 31, 2006 and are included in operating income in the consolidated statement of income. The gross amount of proceeds received from the sale of receivables under this arrangement was $116 million for the three months ended December 31, 2006. The company’s retained interest in receivables sold is $14 million and $6 million at December 31 and September 30, 2006, respectively. The company had utilized €48 million ($63 million) and €48 million ($61 million) of this accounts receivable securitization facility as of December 31 and September 30, 2006, respectively.

The company also participates in a U.S. accounts receivable securitization program to enhance financial flexibility and lower interest costs. Under this $250 million program, which was established in September 2005, and amended in fiscal year 2006, the company sells substantially all of the trade receivables of certain U.S. subsidiaries to ArvinMeritor Receivables Corporation (ARC), a wholly-owned, special purpose subsidiary. ARC funds these purchases with borrowings under a loan agreement with a bank. Amounts outstanding under this agreement are collateralized by eligible receivables purchased by ARC and are reported as short-term debt in the consolidated balance sheet (see Note 14). As of December 31, 2006 and September 30, 2006 the company had utilized $120 million and $40 million, respectively, of this accounts receivable securitization facility. Borrowings under this arrangement are collateralized by approximately $311 million of receivables held at ARC at December 31, 2006. If certain receivables performance-based covenants are not met, it would constitute a termination event, which, at the option of the banks, could result in termination of the accounts receivable securitization arrangement. At December 31, 2006, the company was in compliance with all covenants.

In addition, several of the company’s European subsidiaries factor eligible accounts receivable with financial institutions. Certain receivables are factored without recourse to the company and are excluded from accounts receivable. The amount of factored receivables excluded from accounts receivable was $105 million and $84 million at December 31, 2006 and September 30, 2006, respectively.

 

9

ARVINMERITOR, INC.

NOTES TO CONSOLIDATED STATEMENTS – (Continued)

(Unaudited)

 

   

9.

Inventories

Inventories are stated at the lower of cost (using first-in, first-out (FIFO) or average cost methods) or market (determined on the basis of estimated realizable values) and are summarized as follows (in millions):

 

 

 

December 31,

 

September 30,

 

 

 

2006

 

2006

 

Finished goods          

 

$

209

 

$

198

 

Work in process     

 

 

150

 

 

147

 

Raw materials, parts and supplies     

 

 

269

 

 

251

 

Total   

 

$

628

 

$

596

 

 

10.

Other Current Assets

Other current assets are summarized as follows (in millions): 

 

 

December 31,

 

September 30,

 

 

 

2006

 

2006

 

 

 

 

 

 

 

 

 

Current deferred income tax assets

 

$

147

 

$

134

 

Customer reimbursable tooling and engineering

 

 

61

 

 

63

 

Asbestos-related recoveries (see Note 17)

 

 

8

 

 

8

 

Assets held for sale

 

 

6

 

 

7

 

Prepaid and other

 

 

70

 

 

83

 

Other current assets

 

$

292

 

$

295

 

             

Costs incurred for tooling and engineering, principally for light vehicle products, for which customer reimbursement is contractually guaranteed, are classified as customer reimbursable tooling and engineering. These costs are billed to the customer based on the terms of the contract. Provisions for losses are recorded at the time management expects costs to exceed anticipated customer reimbursements.

The company records certain assets as held for sale. These assets primarily relate to land and buildings that have been previously closed through restructuring and other rationalization actions.

 

10

ARVINMERITOR, INC.

NOTES TO CONSOLIDATED STATEMENTS – (Continued)

(Unaudited)

 

 

11.

Other Assets

 

Other assets are summarized as follows (in millions):

 

 

 

December 31,

 

September 30,

 

 

2006

 

2006

Non-current deferred income tax assets

 

$

555

 

$

560

Investments in non-consolidated joint ventures

 

 

143

 

 

133

Long-term receivables

 

 

41

 

 

41

Prepaid pension costs

 

 

46

 

 

35

Unamortized debt issuance costs

 

 

30

 

 

31

Capitalized software costs, net

 

 

26

 

 

27

Asbestos-related recoveries (see Note 17)

 

 

30

 

 

30

Patents, licenses and other intangible assets (less accumulated amortization: $7 at December 31 and September 30, 2006)

 

 

17

 

 

20

Investment in debt defeasance trust (see Note 14)

 

 

11

 

 

11

Other

 

 

46

 

 

41

Other assets

 

$

945

 

$

929

             

In accordance with Statement of Position (SOP) 98-1, “Accounting for the Costs of Computer Software Developed or Obtained for Internal Use,” costs relating to internally developed or purchased software in the preliminary project stage and the post-implementation stage are expensed as incurred. Costs in the application development stage that meet the criteria for capitalization are capitalized and amortized using the straight-line basis over the estimated economic useful life of the software.

 

Patents, licenses and other intangible assets include trademarks and other indefinite lived intangibles of $5 million, an intangible asset associated with the retirement pension plans of $9 million and other amortizable intangible assets of $3 million. The company’s trademarks, which were determined to have an indefinite life, and pension intangible asset are not amortized. Patents, licenses and other intangible assets are amortized over their contractual or estimated useful lives, as appropriate. The company anticipates amortization expense for patents, licenses and other intangible assets of approximately $1 million for fiscal year 2007 and $2 million total thereafter.

 

11

ARVINMERITOR, INC.

NOTES TO CONSOLIDATED STATEMENTS – (Continued)

(Unaudited)

 

12.

Other Current Liabilities

Other current liabilities are summarized as follows (in millions): 

 

 

December 31,

 

September 30,

 

 

 

2006

 

2006

 

 

 

 

 

 

 

 

 

Compensation and benefits

 

$

191

 

$

251

 

Income taxes

 

 

150

 

 

163

 

Taxes other than income taxes

 

 

55

 

 

53

 

Product warranties

 

 

66

 

 

51

 

Restructuring (see Note 6)

 

 

32

 

 

40

 

Reserve for labor disruption (see Note 17)

 

 

17

 

 

29

 

Current deferred income tax liabilities

 

 

8

 

 

7

 

Asbestos-related liabilities (see Note 17)

 

 

11

 

 

11

 

Interest

 

 

26

 

 

8

 

AB Volvo joint venture payable

 

 

23

 

 

 

Environmental (see Note 17)

 

 

14

 

 

14

 

Other               

 

 

105

 

 

114

 

Other current liabilities      

 

$

698

 

$

741

 

 

On October 4, 2004, the company formed two joint ventures in France with AB Volvo to manufacture and distribute axles. The company acquired its 51-percent interest for a purchase price of €19 million ($25 million). The company has an option to purchase and AB Volvo has an option to require the company to purchase the remaining 49-percent interest in one of the joint ventures beginning in the first quarter of fiscal year 2008 for €16 million ($21 million) plus interest at EURIBOR rates, plus a margin. This option to purchase the minority interest is essentially a financing arrangement as the minority shareholder does not participate in any profits or losses of the joint venture. Therefore, this option, including accreted interest to date, is recorded as a current obligation of the company and included in Other Current Liabilities and no minority interest is recognized for the 49-percent interest in this joint venture. At September 30, 2006, this obligation is recorded in Other Long-term Liabilities.

The company’s CVS segment records product warranty costs at the time of shipment of products to customers. Warranty reserves are primarily based on factors that include past claims experience, sales history, product manufacturing and engineering changes and industry developments. Liabilities for product recall campaigns are recorded at the time the company’s obligation is known and can be reasonably estimated. Product warranties, including recall campaigns, not expected to be paid within one year are recorded as a non-current liability.

The company’s LVS segment records product warranty liabilities based on individual customer or warranty-sharing agreements. Product warranties are recorded for known warranty issues when amounts can be reasonably estimated.

 

12

ARVINMERITOR, INC.

NOTES TO CONSOLIDATED STATEMENTS – (Continued)

(Unaudited)

 

A summary of the changes in product warranties is as follows (in millions):

 

 

 

Three Months Ended

 

 

 

December 31,

 

 

 

2006

 

2005

 

Total product warranties -- beginning of period            

 

$

121

 

$

93

 

Accruals for product warranties               

 

 

15

 

 

11

 

Payments                       

 

 

(11

)

 

(12

)

Change in estimates and other                   

 

 

 

 

(3

)

Total product warranties – end of period              

 

 

125

 

 

89

 

Less: Non-current product warranties (see Note 13)     

 

 

(59

)

 

(39

)

Product warranties – current portion            

 

$

66

 

$

50

 

In fiscal year 2004, the company, as a result of receiving the wrong grade of steel from one of its steel suppliers, manufactured and shipped certain products that were out of specification with various customers’ orders. The company was notified by a customer in fiscal year 2005 that it was initiating a field service campaign covering approximately 35,000 vehicles that were manufactured by the customer during the relevant time frame, prior to the aforementioned steel issue being identified, and would expect the company to reimburse it for the cost of the campaign. Associated with this matter, in fiscal year 2005, the company recorded a warranty charge of $4 million, net of probable recoveries from the supplier, which are recorded in receivables. In the first quarter of fiscal year 2006, the company reached a settlement with the supplier regarding the field service campaign. This settlement resulted in a $1 million reduction in the company’s recorded liability, net of recoveries, related to this matter. Additionally, in fiscal year 2005 another customer notified the company that it has initiated a field service campaign to replace an affected part in approximately 8,300 vehicles. Although this field service campaign is associated with the same steel issue and the same supplier, it relates to a different part on the vehicle. Based on the currently available facts and circumstances, the company does not believe it has a probable liability, net of recoveries, related to this matter.

13.

Other Liabilities

Other Liabilities are summarized as follows (in millions):

 

 

 

December 31,

 

September 30,

 

 

 

2006

 

2006

 

 

 

 

 

 

 

 

 

Asbestos-related liabilities (see Note 17)

 

$

46

 

$

46

 

Non-current deferred income tax liabilities

 

 

30

 

 

30

 

Product warranties (see Note 12)

 

 

59

 

 

70

 

Environmental (see Note 17)

 

 

11

 

 

13

 

Long-term payable

 

 

41

 

 

64

 

Fair value of interest rate swaps

 

 

6

 

 

 

Other

 

 

41

 

 

41

 

Other liabilities

 

$

234

 

$

264

 

 

13

ARVINMERITOR, INC.

NOTES TO CONSOLIDATED STATEMENTS – (Continued)

(Unaudited)

 

 

14.

Long-Term Debt

Long-Term Debt, net of discount where applicable, is summarized as follows (in millions):

 

 

 

December 31,

 

September 30,

 

 

 

2006

 

2006

 

6-5/8 percent notes due 2007

 

$

5

 

$

5

 

6-3/4 percent notes due 2008

 

 

5

 

 

5

 

7-1/8 percent notes due 2009

 

 

6

 

 

6

 

6.8 percent notes due 2009

 

 

77

 

 

77

 

8-3/4 percent notes due 2012

 

 

311

 

 

311

 

Term Loan B due 2012

 

 

170

 

 

170

 

8-1/8 percent notes due 2015

 

 

251

 

 

251

 

4.625 percent convertible notes due 2026(1)

 

 

300

 

 

300

 

9.5 percent subordinated debentures due 2027

 

 

39

 

 

39

 

Bank revolving credit facilities

 

 

 

 

 

Accounts receivable securitization (see Note 8)

 

 

120

 

 

40

 

Lines of credit and other

 

 

30

 

 

28

 

Fair value adjustment of notes

 

 

8

 

 

8

 

Subtotal

 

 

1,322

 

 

1,240

 

Less: current maturities

 

 

(137

)

 

(56

)

Long-term debt                  

 

$

1,185

 

$

1,184

 

(1) These convertible notes contain a put and call feature, which allows for earlier redemption beginning in 2016 (see Convertible Securities below).

 

Debt Securities

The company previously filed a shelf registration statement with the Securities and Exchange Commission registering $750 million aggregate principal amount of debt securities to be offered in one or more series on terms determined at the time of sale. At December 31, 2006 the company had $150 million of debt securities available for issuance under this shelf registration.

Investment in Debt Defeasance Trust

During fiscal year 2006, the company purchased $12 million of U.S. government securities and placed those securities into an irrevocable trust, for the sole purpose of funding payments of principal and interest through the stated maturity on the $5 million of outstanding 6-3/4 percent notes due 2008 and the $6 million of outstanding 7-1/8 percent notes due 2009, in order to defease certain covenants under the associated indenture. As these securities are restricted and can only be withdrawn and used for payments of the principal and interest on the aforementioned notes, the assets of the trust are primarily recorded in Other Assets (see Note 11) in the consolidated balance sheet.

 

Convertible Securities

In March 2006, the company issued $300 million of 4.625 percent convertible senior unsecured notes due 2026 (convertible notes). The convertible notes were sold by the company to qualified institutional buyers in a private placement exempt from the registration requirements of the Securities Act of 1933. These convertible notes were registered with the Securities and Exchange Commission under the Securities Act of 1933 on May 23, 2006. Net proceeds received by the company, after issuance costs, were $289 million. The related debt issuance costs are being amortized over a ten-year term, which represents the earliest date that the company can redeem the convertible notes. The company used the net proceeds from this offering, together with proceeds from the sales of its LVA North American filters and exhaust businesses and other sources to fund the repurchase of $600 million aggregate principal amount of previously outstanding notes

 

14

ARVINMERITOR, INC.

NOTES TO CONSOLIDATED STATEMENTS – (Continued)

(Unaudited)

 

Cash interest at a rate of 4.625 percent per annum from the date of issuance through March 1, 2016 is payable semi-annually in arrears on March 1 and September 1 of each year. After March 1, 2016, the principal amount of the convertible notes will be subject to accretion at a rate that provides holders with an aggregate annual yield to maturity of 4.625 percent.

The notes are convertible into shares of the company’s common stock at an initial conversion rate, subject to adjustment, equivalent to 47.6667 shares of common stock per $1,000 initial principal amount of notes, which represents an initial conversion price of approximately $20.98 per share. If converted, the accreted principal amount will be settled in cash and the remainder of the company’s conversion obligation, if any, in excess of such accreted principal amount will be settled in cash, shares of common stock, or a combination thereof, at the company’s election.         

Holders may convert their notes at any time on or after March 1, 2024. Prior to March 1, 2024, holders may convert their notes only under the following circumstances:

during any calendar quarter, after the calendar quarter ending June 30, 2006, if the closing price of the company’s common stock for 20 or more trading days in a period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter exceeds 120 percent of the applicable conversion price;

during the five business day period after any five consecutive trading day period in which the average trading price per $1,000 initial principal amount of notes is equal to or less than 97 percent of the average conversion value of the notes during such five consecutive trading day period;

upon the occurrence of specified corporate transactions; or

if the notes are called by us for redemption.

On or after March 1, 2016, the company may redeem the convertible notes, in whole or in part, for cash at a redemption price equal to 100 percent of the accreted principal amount plus any accrued and unpaid interest. On each of March 1, 2016, 2018, 2020, 2022, and 2024, or upon certain fundamental changes, holders may require the company to purchase all or a portion of their convertible notes at a purchase price in cash equal to 100 percent of the accreted principal amount plus any accrued and unpaid interest.

The convertible notes are fully and unconditionally guaranteed by certain subsidiaries of the company that currently guarantee the company’s obligations under its senior secured credit facilities and other publicly-held notes (see Senior Secured Credit Facilities below).

Subordinated Debentures

The company, through Arvin Capital I (the trust), a wholly-owned finance subsidiary trust, issued $39 million of 9.5 percent Company-Obligated Mandatorily Redeemable Preferred Capital Securities of a Subsidiary Trust (preferred capital securities), due February 1, 2027, and callable in February 2007 at a premium and in February 2017 at par. The proceeds from the capital securities are invested entirely in 9.5 percent junior subordinated debentures of the company, which are the sole assets of the trust. The company fully and unconditionally guarantees the trust’s obligation to the holders of the preferred capital securities.

Under the provisions of FASB Interpretation No. 46, it was determined that the trust is a variable interest entity in which the company does not have a variable interest and therefore is not the primary beneficiary and accordingly has included in long-term debt $39 million of junior subordinated debentures due to the trust.

Senior Secured Credit Facilities

In June 2006, the company replaced its $900 million revolving credit facility that was to expire in 2008 with two new senior secured credit facilities totaling $1.15 billion (the new credit facilities). The new credit facilities include a $980 million revolving credit facility and a $170 million term loan maturing in 2011 and 2012, respectively. Debt issuance costs associated with the new credit facilities of $10 million are being amortized over the five year term of the revolving credit facility. Borrowings under the new revolving credit facility are subject to interest based on quoted LIBOR rates plus a margin, and a commitment fee on undrawn amounts, both of which are based upon the company’s current credit rating for the senior secured facilities. At December 31, 2006, the margin over the LIBOR rate was 150 basis points, and the commitment fee was 30 basis points. Similar to the prior revolving credit facility, the new revolving credit facility includes a $150 million limit on the issuance of letters of credit. At December 31 and September 30, 2006, approximately $30 million and $25 million letters of credit, respectively, were issued.

 

15

ARVINMERITOR, INC.

NOTES TO CONSOLIDATED STATEMENTS – (Continued)

(Unaudited)

 

The term loan is payable in quarterly installments of $0.25 million with the remaining balance due at maturity. Borrowings under the term loan are subject to interest based on quoted LIBOR rates plus a margin. At December 31, 2006, the margin over the LIBOR rate was 175 basis points.

Borrowings under the revolving credit facility and term loan are collateralized by approximately $1.0 billion of the company’s assets, primarily consisting of eligible domestic U.S. accounts receivable, inventory, plant, property, and equipment, intellectual property and the company’s investment in all or a portion of certain of its wholly-owned subsidiaries.

The new credit facilities require the company to maintain a total net debt to earnings before interest, taxes, depreciation and amortization (EBITDA) ratio no greater than 4.25x and a minimum fixed charge coverage ratio (EBITDA less capital expenditures to interest expense) no less than 1.50x. At December 31, 2006 the company was in compliance with all covenants. 

Certain of the company’s subsidiaries, as defined in the credit agreement, irrevocably and unconditionally guarantee amounts outstanding under the new credit facilities. Similar subsidiary guarantees are provided for the benefit of the holders of the publicly-held notes outstanding under the company’s indentures (see Note 21).

Accounts Receivable Securitization

In September 2005, the company entered into a new $250 million accounts receivable securitization arrangement. As discussed in Note 8, the company’s previous accounts receivable securitization facility expired in September 2005. Under the accounts receivable securitization arrangement, the company sells substantially all of the trade receivables of certain U.S. subsidiaries to ARC. ARC funds these purchases with borrowings under a loan agreement with a bank. The weighted average interest rate on borrowings under this arrangement was approximately 5.30 percent at December 31, 2006. Amounts outstanding under this agreement are reported as short-term debt in the consolidated balance sheet and are collateralized by $311 million of eligible receivables purchased and held by ARC at December 31, 2006. If certain receivables performance-based covenants are not met, it would constitute a termination event, which, at the option of the banks, could result in termination of the accounts receivable securitization arrangement. At December 31, 2006, the company was in compliance with all covenants.

Related Parties

 

A 57-percent owned consolidated joint venture of the company has a $6 million, 6.5-percent loan with its minority partner that matures in fiscal year 2009. This loan is included in long-term debt in the consolidated balance sheet.

 

The company also has an arrangement with a non-consolidated joint venture that allows the company to borrow funds from time to time, at LIBOR plus 50 basis points. No amounts were outstanding under this arrangement at December 31 and September 30, 2006.

 

Interest Rate Swap Agreements

As of December 31, 2006, the company had interest rate swap agreements that effectively convert $221 million of the company’s 8-3/4 percent notes, $63 million of the 6.8 percent notes, and $25 million of the 8-1/8 percent notes to variable interest rates. The fair value of the 8-3/4 percent swaps was a liability of $6 million and is included in Other Liabilities and the fair value of the 6.8 percent swaps and 8-1/8 percent notes were not significant as of December 31 and September 30, 2006. The terms of the interest rate swap agreements require the company to place cash on deposit as collateral if the fair value of the interest rate swaps is greater than a liability position of $10 million. At September 30, 2006, the company had placed $6 million on deposit with the counterparty as collateral and recorded such deposit as a reduction in the carrying value of the associated interest rate swap. At December 31, 2006 no amounts were on deposit with the counterparty as collateral. The swaps have been designated as fair value hedges and the impact of the changes in their fair values is offset by an equal and opposite change in the carrying value of the related notes. Under the terms of the swap agreements, the company receives a fixed rate of interest of 8.75 percent, 6.8 percent and 8.125 percent on notional amounts of $221 million, $63 million and $25 million, respectively, and pays variable rates based on three-month LIBOR plus a weighted-average spread of 3.41 percent. The payments under the agreements coincide with the interest payment dates on the hedged debt instruments, and the difference between the amounts paid and received is included in interest expense, net and other. Included in the fair value adjustment of notes is $12 million related to previously terminated interest rate swaps, which is being amortized to earnings as a reduction of interest expense over the remaining life of the related debt.

16

ARVINMERITOR, INC.

NOTES TO CONSOLIDATED STATEMENTS – (Continued)

(Unaudited)

 

The company classifies the cash flows associated with its interest rate swaps in cash flows from operating activities in its consolidated statement of cash flows. This is consistent with the classification of the cash flows associated with the underlying hedged item.

 

Leases

 

The company has various operating leasing arrangements. Future minimum lease payments under these operating leases are $23 million in 2007, $17 million in 2008, $14 million in 2009, $10 million in 2010, $8 million in 2011 and $11 million thereafter.

15.

Financial Instruments

 

The company’s financial instruments include cash and cash equivalents, short-term debt, long-term debt, interest rate swaps, and foreign exchange forward contracts. The company uses derivatives for hedging and non-trading purposes in order to manage its interest rate and foreign exchange rate exposures. The company’s interest rate swap agreements are discussed in Note 14.

 

Foreign Exchange Contracts

The company’s operations are exposed to global market risks, including the effect of changes in foreign currency exchange rates. The company has a foreign currency cash flow hedging program to reduce the company’s exposure to changes in exchange rates. The company uses foreign currency forward contracts to manage the company’s exposures arising from foreign currency exchange risk. Gains and losses on the underlying foreign currency exposures are partially offset with gains and losses on the foreign currency forward contracts.

Under this program, the company has designated the foreign exchange contracts (the “contracts”) as cash flow hedges of underlying forecasted foreign currency purchases and sales. The effective portion of changes in the fair value of the contracts is recorded in Accumulated Other Comprehensive Income (AOCI) in the consolidated statement of shareowners’ equity and is recognized in operating income when the underlying forecasted transaction impacts earnings. The contracts generally mature within 12 months. The impact to operating income associated with hedge ineffectiveness was not significant in the three months ended December 31, 2006 and 2005.

Amounts recorded in AOCI were not material at December 31, 2006. At September 30, 2006, there was a $1 million loss recorded in AOCI. Amounts recorded in AOCI are generally recorded in operating income over the next twelve months as the forecasted hedged transactions are recognized in earnings.

The company classifies the cash flows associated with the contracts in cash flows from operating activities in the consolidated statement of cash flows. This is consistent with the classification of the cash flows associated with the underlying hedged item.

 

Fair values of financial instruments are summarized as follows (in millions):

 

 

 

December 31,

 

September 30,

 

 

 

2006

 

2006

 

 

 

 

Carrying

 

 

Fair

 

 

Carrying

 

 

Fair

 

 

 

 

Value

 

 

Value

 

 

Value

 

 

Value

 

Cash and cash equivalents

 

$

369

 

 

369

 

$

350

 

$

350

 

Short-term investments

 

 

 

 

 

 

5

 

 

5

 

Interest rate swaps - asset

 

 

 

 

 

 

1

 

 

1

 

Foreign exchange contracts - asset

 

 

2

 

 

2

 

 

 

 

 

Investment in debt defeasance trust

 

 

12

 

 

12

 

 

12

 

 

12

 

Collateral on interest rate swap liability

 

 

 

 

 

 

6

 

 

6

 

Interest rate swaps - liability

 

 

6

 

 

6

 

 

6

 

 

6

 

Foreign exchange contracts - liability

 

 

2

 

 

2

 

 

1

 

 

1

 

Short-term debt

 

 

137

 

 

137

 

 

56

 

 

56

 

Long-term debt

 

 

1,185

 

 

1,200

 

 

1,184

 

 

1,151

 

 

 

17

ARVINMERITOR, INC.

NOTES TO CONSOLIDATED STATEMENTS – (Continued)

(Unaudited)

 

Cash and cash equivalents — All highly liquid investments purchased with an original maturity of three months or less are considered to be cash equivalents. The carrying value approximates fair value because of the short maturity of these instruments.

 

Interest rate swaps and foreign exchange forward contracts — Fair values are estimated by obtaining quotes from external sources.

 

Short-term debt — The carrying value of short-term debt approximates fair value because of the short maturity of these borrowings.

 

Long-term debt — Fair values are based on interest rates that would be currently available to the company for issuance of similar types of debt instruments with similar terms and remaining maturities.

16.

Retirement Benefit Liabilities

Retirement Benefit Liabilities consisted of the following (in millions):

 

 

 

December 31,

 

September 30,

 

 

 

2006

 

2006

 

Retiree medical liability            

 

$

258

 

$

255

 

Pension liability          

 

 

267

 

 

259

 

Other                 

 

 

55

 

 

47

 

Subtotal                      

 

 

580

 

 

561

 

Less: current portion (included in compensation and benefits)       

 

 

(54

)

 

(54

)

Retirement benefit liabilities                

 

$

526

 

$

507

 

The components of net periodic pension and retiree medical expense, including discontinued operations, for the three months ended December 31, are as follows:

 

 

 

2006

 

2005

 

 

 

Pension

 

Retiree Medical

 

Pension

 

Retiree Medical

 

Service cost        

 

$

9

 

$

1

 

$

12

 

$

1

 

Interest cost       

 

 

25

 

 

9

 

 

23

 

 

5

 

Assumed return on plan assets     

 

 

(26

)

 

 

 

(24

)

 

 

Amortization of prior service costs 

 

 

1

 

 

(2

)

 

1

 

 

(6

)

Recognized actuarial loss        

 

 

10

 

 

6

 

 

14

 

 

7

 

Total expense       

 

$

19

 

$

14

 

$

26

 

$

7

 

Retirement Medical Plans

The company approved amendments to certain retiree medical plans in fiscal years 2002 and 2004. The cumulative effect of these amendments was a reduction in the accumulated postretirement benefit obligation (APBO) of $293 million, which is being amortized as a reduction of retiree medical expense over the average remaining service period of approximately 12 years. These plan amendments have been challenged in three separate class action lawsuits that have been filed in the United States District Court for the Eastern District of Michigan (District Court). 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. The complaints also allege a companion claim under the Employee Retirement Income Security Act of 1974 (ERISA) essentially restating the alleged collective bargaining breach claims and seeking to bring them under ERISA. Plaintiffs sought injunctive relief requiring the company to provide lifetime retiree health care benefits under the applicable collective bargaining agreements. 

 

18

ARVINMERITOR, INC.

NOTES TO CONSOLIDATED STATEMENTS – (Continued)

(Unaudited)

 

On December 22, 2005, the District Court issued an order granting a motion by the UAW for a preliminary injunction. The order enjoined the company from implementing the changes to retiree health benefits that had been scheduled to become effective on January 1, 2006, and ordered the company to reinstate and resume paying the full cost of health benefits for the UAW retirees at the levels existing prior to the changes approved in 2002 and 2004. On August 17, 2006, the District Court denied a motion by the company and the other defendants for summary judgment, granted a motion by the UAW for summary judgment, and granted the UAW’s request to make the terms of the preliminary injunction permanent (the injunction). Due to the uncertainty related to the ongoing lawsuits and since the injunction has the impact of at least temporarily changing the benefits provided under the existing postretirement medical plans, the company accounted for the injunction as a partial rescission of the 2002 and 2004 plan amendments. The company recalculated the 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 10 years. In addition, the increase in APBO will result in higher interest cost, a component of retiree medical expense. The company 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 the company’s normal plan measurement date of June 30 and its fiscal year-end. In addition, the injunction ordered defendants to reimburse the plaintiffs for out-of-pocket expenses incurred since the date of the earlier benefit modifications. The company recorded a $5 million reserve at September 30, 2006 as the best estimate of its liability for these retroactive benefits. The company continues to believe it has meritorious defenses to these actions and has 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.

Based on management’s assessment of the USW lawsuit, the 2002 and 2004 plan amendments are still in effect for USW retirees. The ultimate outcome of the USW lawsuit may result in future plan amendments. The impact of any future plan amendments cannot be currently estimated.

17.

Contingencies

Environmental

Federal, state and local requirements relating to the discharge of substances into the environment, the disposal of hazardous wastes and other activities affecting the environment have, and will continue to have, an impact on the manufacturing operations of the company. The process of estimating environmental liabilities is complex and dependent on physical and scientific data at the site, uncertainties as to remedies and technologies to be used and the outcome of discussions with regulatory agencies. The company records liabilities for environmental issues in the accounting period in which its responsibility and remediation plans are established and the cost can be reasonably estimated. At environmental sites in which more than one potentially responsible party has been identified, the company records a liability for its allocable share of costs related to its involvement with the site, as well as an allocable share of costs related to insolvent parties or unidentified shares. At environmental sites in which ArvinMeritor is the only potentially responsible party, the company records a liability for the total estimated costs of remediation before consideration of recovery from insurers or other third parties.

The company has been designated as a potentially responsible party at seven Superfund sites, excluding sites as to which the company’s records disclose no involvement or as to which the company’s potential liability has been finally determined. Management estimates the total reasonably possible costs the company could incur for the remediation of Superfund sites at December 31, 2006 to be approximately $25 million, of which $9 million is recorded as a liability.

In addition to the Superfund sites, various other lawsuits, claims and proceedings have been asserted against the company, alleging violations of federal, state and local environmental protection requirements, or seeking remediation of alleged environmental impairments, principally at previously disposed-of properties. For these matters, management has estimated the total reasonably possible costs the company could incur at December 31, 2006 to be approximately $65 million, of which $16 million is recorded as a liability.

Included in the company’s environmental liabilities are costs for on-going operating, maintenance and monitoring at environmental sites in which remediation have been put into place. This liability is discounted using a discount rate of 5-percent and is approximately $9 million at December 31, 2006. The undiscounted estimate of these costs is approximately $12 million.

 

19

ARVINMERITOR, INC.

NOTES TO CONSOLIDATED STATEMENTS – (Continued)

(Unaudited)

 

Following are the components of the Superfund and Non-Superfund Environmental reserves (in millions):

 

 

 

Superfund Sites

 

Non-Superfund Sites

 

Total

 

Balance at September 30, 2006  

 

$

10

 

$

17

 

$

27

 

Payments       

 

 

(1

)

 

(1

)

 

(2

)

Balance at December 31, 2006    

 

$

9

 

 

16

 

 

25

 

Environmental reserves are included in Other Current Liabilities (see Note 12) and Other Liabilities (see Note 13).

 

The actual amount of costs or damages for which the company may be held responsible could materially exceed the foregoing estimates because of uncertainties, including the financial condition of other potentially responsible parties, the success of the remediation and other factors that make it difficult to predict actual costs accurately. However, based on management’s assessment, after consulting with outside advisors that specialize in environmental matters, and subject to the difficulties inherent in estimating these future costs, the company believes that its expenditures for environmental capital investment and remediation necessary to comply with present regulations governing environmental protection and other expenditures for the resolution of environmental claims will not have a material adverse effect on the company’s business, financial condition or results of operations. In addition, in future periods, new laws and regulations, changes in the remediation plan, advances in technology and additional information about the ultimate clean-up remedy could significantly change the company’s estimates. Management cannot assess the possible effect of compliance with future requirements.

Asbestos

Maremont Corporation (Maremont), a subsidiary of ArvinMeritor, manufactured friction products containing asbestos from 1953 through 1977, when it sold its friction product business. Arvin 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. Maremont had approximately 44,049 and 51,895 pending asbestos-related claims at December 31, and September 30, 2006, respectively. Although Maremont has been named in these cases, in the cases where actual injury has been alleged very few claimants have established that a Maremont product caused their injuries. Plaintiffs’ lawyers often sue dozens or even hundreds of defendants in individual lawsuits on behalf of hundreds or thousands of claimants, seeking damages against all named defendants irrespective of the disease or injury and irrespective of any causal connection with a particular product. For these reasons, Maremont does not consider the number of claims filed or the damages alleged to be a meaningful factor in determining its asbestos-related liability.

Maremont’s asbestos-related reserves and corresponding asbestos-related recoveries are summarized as follows (in millions):

 

 

 

December 31, 2006

 

September 30, 2006

 

Pending and future claims     

 

$

41

 

$

41

 

Shortfall and other     

 

 

9

 

 

9

 

Asbestos-related reserves    

 

$

50

 

$

50

 

 

 

 

 

 

 

 

 

Asbestos-related recoveries        

 

$

31

 

$

31

 

 

A portion of the asbestos-related recoveries and reserves are included in Other Current Assets and Liabilities, with the majority of the amounts recorded in Other Assets and Liabilities (see Notes 10, 11, 12 and 13).

 

Prior to February 2001, Maremont participated in the Center for Claims Resolution (“CCR”) and shared with other CCR members in the payment of defense and indemnity costs for asbestos-related claims. The CCR handled the resolution and processing of asbestos claims on behalf of its members until February 2001, when it was reorganized and discontinued negotiating shared settlements. Upon dissolution of the CCR in February 2001, Maremont began handling asbestos-related claims through its own defense counsel and has taken a more aggressive defensive approach that involves examining the merits of each asbestos-related claim. Although the company expects legal defense costs to continue at higher levels than when it participated in the CCR, the company believes its litigation strategy has reduced the average indemnity cost per claim.

 

Pending and Future Claims: At the end of fiscal year 2004 and through the third quarter of fiscal year 2005, Maremont established reserves for pending asbestos-related claims that reflected internal estimates of its defense and indemnity costs. These estimates were based on the history and nature of filed claims to date and Maremont’s experience. Maremont developed experience factors for estimating indemnity and litigation costs using data on actual experience in resolving claims since dissolution of the CCR and its assessment of the nature of the claims. Maremont did not accrue reserves for its potential liability for asbestos-related claims that may be asserted against it in the future, because it did not have sufficient information to make a reasonable estimate of these unknown claims.

 

20

ARVINMERITOR, INC.

NOTES TO CONSOLIDATED STATEMENTS – (Continued)

(Unaudited)

 

Maremont engaged Bates White LLC (Bates White), a consulting firm with extensive experience estimating costs associated with asbestos litigation, to assist with determining whether it would be possible to estimate the cost of resolving pending and future asbestos-related claims that have been, and could reasonably be expected to be, filed against Maremont, as well as the cost of Maremont’s share of committed but unpaid settlements entered into by the CCR. Although it is not possible to estimate the full range of costs because of various uncertainties, Bates White advised Maremont that it would be able to determine an estimate of probable costs to resolve pending and future asbestos-related claims, based on historical data and certain assumptions with respect to events that occur in the future. The company engaged Bates White to update the study as of September 30, 2006.

Bates White provided an estimate of the reasonably possible range of Maremont’s obligation for asbestos personal injury claims over the next three to four years of $31 million to $44 million. After consultation with Bates White, Maremont determined that as of September 30, 2006 the most likely and probable liability for pending and future claims over the next four years is $41 million. The ultimate cost of resolving pending and future claims is estimated based on the history of claims and expenses for plaintiffs represented by law firms in jurisdictions with an established history with Maremont.

 

The following assumptions were made by Maremont after consultation with Bates White and are included in their study:

• Pending and future claims were estimated for a four year period ending in fiscal year 2010. Maremont believes that the litigation environment will change significantly in several years, and that the reliability of estimates of future probable expenditures in connection with asbestos-related personal injury claims declines for each year further in the future. As a result, estimating a probable liability beyond four years is difficult and uncertain;

 

• The ultimate cost of resolving pending and future claims filed in Madison County, Illinois, a jurisdiction where a substantial amount of Maremont’s claims are filed, will decline to reflect average outcomes throughout the United States;

 

• Defense and processing costs for pending and future claims filed outside of Madison County, Illinois will be at the level consistent with Maremont’s prior experience; and

 

• The ultimate cost of resolving nonmalignant claims with plaintiffs’ law firms in jurisdictions without an established history with Maremont cannot be reasonably estimated. Recent changes in tort law and insufficient settlement history make estimating a liability for these nonmalignant claims difficult and uncertain.

 

Shortfall and other: Several former members of the CCR have filed for bankruptcy protection, and these members have failed, or may fail, to pay certain financial obligations with respect to settlements that were reached while they were CCR members. Maremont is subject to claims for payment of a portion of these defaulted member shares (shortfall). In an effort to resolve the affected settlements, Maremont has entered into negotiations with plaintiffs’ attorneys, and an estimate of Maremont’s obligation for the shortfall is included in the total asbestos-related reserves. In addition, Maremont and its insurers are engaged in legal proceedings to determine whether existing insurance coverage should reimburse any potential liability related to this issue. Payments by the company related to shortfall and other were not significant in the three months ended December 31, 2006 and 2005.

 

Recoveries: Maremont has insurance that reimburses a substantial portion of the costs incurred defending against asbestos-related claims. The coverage also reimburses Maremont for any indemnity paid on those claims. The coverage is provided by several insurance carriers based on insurance agreements in place. Incorporating historical information with respect to buy-outs and settlements of coverage, and excluding any policies in dispute, the insurance receivable related to asbestos-related liabilities is $31 million. The difference between the estimated liability and insurance receivable is related to proceeds received from settled insurance policies and liabilities for shortfall and other. Certain insurance policies have been settled in cash prior to the ultimate settlement of related asbestos liabilities. Amounts received from insurance settlements generally reduce recorded insurance receivables. Receivables for policies in dispute are not recorded.

 

The amounts recorded for the asbestos-related reserves and recoveries from insurance companies are based upon assumptions and estimates derived from currently known facts. All such estimates of liabilities and recoveries for asbestos-related claims are subject to considerable uncertainty because such liabilities and recoveries are influenced by variables that are difficult to predict. The future litigation environment for Maremont could change significantly from its past experience, due, for example, to changes in the mix of claims filed against Maremont in terms of plaintiffs’ law firm, jurisdiction and disease; legislative or regulatory developments; Maremont’s approach to defending claims; or payments to plaintiffs from other defendants. Estimated recoveries are influenced by coverage issues among insurers, and the continuing solvency of various 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 Maremont’s asbestos-related claims, and the effect on the company, could differ materially from current estimates and, therefore, could have a material impact on the company’s financial position and results of operations.

 

21

ARVINMERITOR, INC.

NOTES TO CONSOLIDATED STATEMENTS – (Continued)

(Unaudited)

 

Rockwell — ArvinMeritor, along with many other companies, has also been named as a defendant in lawsuits alleging personal injury as a result of exposure to asbestos used in certain components of Rockwell products many years ago. Liability for these claims was transferred to the company at the time of the spin-off of the automotive business to Meritor from Rockwell in 1997. Currently there are thousands of claimants in lawsuits that name the company, together with many other companies, as defendants. However, the company does not consider the number of claims filed or the damages alleged to be a meaningful factor in determining asbestos-related liabilities. A significant portion of the claims do not identify any of Rockwell’s products or specify which of the claimants, if any, were exposed to asbestos attributable to Rockwell’s products, and past experience has shown that the vast majority of the claimants will never identify any of Rockwell’s products. For those claimants who do show that they worked with Rockwell’s products, management nevertheless believes it has meritorious defenses, in substantial part due to the integrity of the products involved, the encapsulated nature of any asbestos-containing components, and the lack of any impairing medical condition on the part of many claimants. The company defends these cases vigorously. Historically, ArvinMeritor has been dismissed from the vast majority of these claims with no payment to claimants. 

 

In the fourth quarter of fiscal year 2006, the company engaged Bates White to assist with determining whether it would be possible to estimate the cost of resolving pending and future Rockwell legacy asbestos-related claims that have been, and could reasonably be expected to be, filed against the company. Although it is not possible to estimate the full range of costs because of various uncertainties, Bates White advised the company that it would be able to determine an estimate of probable defense costs which could be incurred to resolve pending and future Rockwell legacy asbestos-related claims. Accordingly, the company has recorded a $7 million liability at December 31 and September 30, 2006 for defense costs associated with these claims. This estimate was based on historical data and certain assumptions with respect to events that occur in the future. Bates White was unable to determine an estimate of indemnity costs for pending or future Rockwell legacy asbestos-related claims. Bates White and management cannot reasonably estimate the ultimate liabilities for these costs, primarily because the company does not have a sufficient history of claims settlement from which to develop reliable assumptions. The uncertainties of asbestos claim litigation and resolution of the litigation with the insurance companies make it difficult to predict accurately the ultimate resolution of asbestos claims. That uncertainty is increased by the possibility of adverse rulings or new legislation affecting asbestos claim litigation or the settlement process. Subject to these uncertainties and based on the company’s experience defending these asbestos claims, the company does not believe these lawsuits will have a material adverse effect on its financial condition or results of operations. Rockwell was not a member of the CCR and handled its asbestos-related claims using its own litigation counsel. As a result, the company does not have any additional potential liabilities for committed CCR settlements or shortfall (as described above) in connection with the Rockwell-legacy cases.

 

Rockwell maintained insurance coverage that management believes covers indemnity and defense costs, over and above self-insurance retentions, for most of these claims. The company has initiated claims against these carriers to enforce the insurance policies. Although the status of one carrier as a financially viable entity is in question, the company expects to recover the majority of defense and indemnity costs it has incurred to date, over and above self-insured retentions, and a substantial portion of the costs for defending asbestos claims going forward. Accordingly, the company has recorded an insurance receivable related to Rockwell legacy asbestos-related liabilities of $7 million at December 31 and September 30, 2006.

 

Contingencies Related to Work Stoppage

The company’s collective bargaining agreement with the Canadian Auto Workers (“CAW”) at its CVS brakes facility in Tilbury, Ontario, Canada, expired on June 3, 2006. On June 4, 2006, the company announced that, after lengthy negotiations, a new tentative agreement with the CAW had not yet been reached and, as a result, the company had suspended operations at the facility. On June 12, 2006, the company 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, the company experienced temporary manufacturing inefficiencies and incurred certain costs in order to return to normal production. The company was temporarily unable to completely fulfill certain customer orders, resulting in temporary production interruptions at some customer manufacturing facilities. The impact of this labor disruption on operating income in fiscal year 2006 was $45 million. Included in this amount are premium labor costs, expedited freight and logistical costs and other costs associated with production disruptions at certain customers’ facilities. At December 31, 2006, $17 million is recorded as a contingent liability in the consolidated balance sheet. The ultimate settlement of this liability will be determinable over a period of time and may be negotiated, as a commercial matter, with the affected customers. The amount of this liability may change in future periods depending on our customers’ ability to schedule additional production to compensate for prior disruptions, the results of the negotiations with the affected customers and other factors. The company believes that any future adjustment to this liability will not have a material effect on the company’s results of operations and financial position.

 

22

ARVINMERITOR, INC.

NOTES TO CONSOLIDATED STATEMENTS – (Continued)

(Unaudited)

 

Guarantees

In December 2005, the company guaranteed a third party’s obligation to reimburse another party (the other party) for payment of health and prescription drug benefits to a group of retired employees. The retirees were former employees of a wholly-owned subsidiary of the company prior to the subsidiary’s being acquired by the company. To date, the third party has met its obligations to reimburse the other party. The APBO associated with these retiree medical benefits is considered the maximum potential exposure under this guarantee, and is estimated to be approximately $25 million. No amount has been recorded for this guarantee based on the probability of the company having to perform under the guarantee. Due to the nature of this guarantee it is difficult to estimate its approximate term.

The company has guaranteed certain trade payable balances of one of its non-consolidated joint ventures. In the event of a default by the joint venture, the company would be required to pay the guaranteed party. The maximum exposure under the guarantee is $4 million and can be terminated by the company at any time on thirty days written notice. The estimated fair value of this guarantee is not significant, and therefore, no liability is recorded.

Indemnifications

The company has provided indemnifications in conjunction with certain transactions, primarily divestitures. These indemnities address a variety of matters, which may include environmental, tax, asbestos, and employment-related matters, and the periods of indemnification vary in duration. The company’s maximum obligations under such indemnifications cannot be reasonably estimated. The company is not aware of any claims or other information that would give rise to material payments under such indemnifications.

 

In connection with the sale of the LVA North American filters business, the company agreed to indemnify the purchaser against liabilities from litigation and commercial losses in connection with specific intellectual property claims, with a maximum indemnity of $4 million for commercial losses, which is included in the consolidated balance sheet at December 31, 2006.

 

Other

 

Various other lawsuits, claims and proceedings have been or may be instituted or asserted against the company, relating to the conduct of the company’s business, including those pertaining to product liability, intellectual property, safety and health, and employment matters. Although the outcome of litigation cannot be predicted with certainty, and some lawsuits, claims or proceedings may be disposed of unfavorably to the company, management believes the disposition of matters that are pending will not have a material adverse effect on the company’s business, financial condition or results of operations.

18.

Comprehensive Income

On an annual basis, disclosure of comprehensive income is incorporated into the Consolidated Statement of Shareowners’ Equity. This statement is not presented on a quarterly basis. Comprehensive income includes net income and components of other comprehensive income, such as foreign currency translation adjustments, and unrealized gains and losses on derivatives and equity securities.

Comprehensive income is summarized as follows (in millions):

  

 

 

Three Months Ended

 

 

 

December 31,

 

 

 

2006

 

2005

 

Net income                    

 

$

7

 

$

34

 

Foreign currency translation adjustments     

 

 

50

 

 

(27

)

Unrealized gain (loss) on foreign exchange contracts, net of tax 

 

 

1

 

 

(2

)

Comprehensive income   

 

$

58

 

$

5

 

 

 

23

ARVINMERITOR, INC.

NOTES TO CONSOLIDATED STATEMENTS – (Continued)

(Unaudited)

 

19.

Business Segment Information

The company defines its operating segments as components of its business where separate financial information is available and is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. The company’s chief operating decision maker (CODM) is the Chief Executive Officer.

Beginning in fiscal year 2007, the company changed its reportable operating segments to three: Light Vehicle Systems (LVS), Commercial Vehicle Systems (CVS), and Emissions Technologies (ET). All prior period segment information has been restated to reflect the new segment structure. LVS is a major supplier of aperture systems (roof and door systems), chassis systems (suspension systems and modules) and wheel products for passenger cars, motorcycles and all-terrain vehicles, light trucks and sport utility vehicles to original equipment manufacturers (OEMs). 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 the commercial vehicle aftermarket. ET is a major supplier of exhaust systems and exhaust system components, including mufflers, exhaust pipes, catalytic converters, diesel particulate filters and exhaust manifolds, for light and commercial vehicles to OEMs primarily as original equipment, while also supporting manufacturers’ needs for replacement parts and dealers’ needs for service parts.

Effective with the 2007 fiscal year, the company measures segment operating performance based on earnings before interest, taxes, depreciation and amortization, and loss on sale of receivables (EBITDA). The company uses EBITDA as the primary basis for the CODM to evaluate the performance of each of the company’s reportable segments.

The accounting policies of the segments are the same as those applied in the Consolidated Financial Statements, except for the use of EBITDA. The company may allocate certain common costs, primarily corporate functions, between the segments differently than the company would for stand alone financial information prepared in accordance with GAAP. These allocated costs include expenses for shared services such as information technology, finance, communications, legal and human resources. The company does not allocate interest expense, equity in earnings of affiliates and certain legacy and other corporate costs not directly associated with the segments’ operating income.

 

24

ARVINMERITOR, INC.

NOTES TO CONSOLIDATED STATEMENTS – (Continued)

(Unaudited)

 

Segment information is summarized as follows (in millions):

 

 

 

Three Months Ended

 

 

 

December 31,

 

 

 

2006

 

2005

 

Sales:

 

 

 

 

 

 

 

Light Vehicle Systems

 

$

470

 

$

497

 

Commercial Vehicle Systems

 

 

1,062

 

 

931

 

Emissions Technologies

 

 

808

 

 

670

 

Total sales

 

$

2,340

 

$

2,098

 

 

 

 

Three Months Ended

 

 

 

December 31,

 

 

 

2006

 

2005

 

EBITDA:

 

 

 

 

 

 

 

Light Vehicle Systems

 

$

15

 

$

13

 

Commercial Vehicle Systems

 

 

64

 

 

92

 

Emissions Technologies

 

 

6

 

 

5

 

Segment EBITDA

 

 

85

 

 

110

 

Depreciation and amortization

 

 

(43

)

 

(40

)

Loss on sale of receivables

 

 

(2

)

 

 

Interest expense, net and other

 

 

(27

)

 

(32

)

Provision for income taxes

 

 

(2

)

 

(10

)

Income from continuing operations

 

$

11

 

$

28

 

 

 

 

December 31,

 

September 30,

 

 

 

2006

 

2005

 

Segment Assets:

 

 

 

 

 

 

 

Light Vehicle Systems

 

$

920

 

$

951

 

Commercial Vehicle Systems

 

 

2,203

 

 

2,246

 

Emissions Technologies

 

 

1,162

 

 

1,117

 

Segment total assets

 

 

4,285

 

 

4,314

 

Corporate (1)

 

 

1,007

 

 

992

 

Discontinued operations

 

 

204

 

 

207

 

Total assets

 

$

5,496

 

$

5,513

 

 

(1) Corporate assets consist primarily of cash, taxes and prepaid pension costs. For December 31 and September 30, 2006 segment assets include $311 million and $384 million, respectively, of receivables sold to ARC under the accounts receivable securitization and factoring agreements (see Note 8).

 

25

ARVINMERITOR, INC.

NOTES TO CONSOLIDATED STATEMENTS – (Continued)

(Unaudited)

 

20.

Subsequent Events

 

On February 2, 2007, the company signed a definitive agreement to sell its Emissions Technologies business to an affiliate of One Equity Partners II, L.P., a private equity affiliate of J.P. Morgan Securities Inc. Total consideration is expected to be approximately $310 million, including cash, a $20 million note and the assumption of certain liabilities, and is subject to adjustments for working capital and other items. The transaction is expected to close during the third quarter of the company’s 2007 fiscal year subject to customary conditions, including receipt of necessary regulatory consents and approvals and receipt by the purchaser of financing under its debt financing commitment letter.

 

On February 8, 2007, the company completed a private placement to qualified institutional buyers of $175 million aggregate principal amount of convertible senior unsecured notes due 2027 (the "notes"). The company has granted to the initial purchasers of the notes a 30-day option to purchase up to an additional $25 million aggregate principal amount of notes. Net proceeds from the notes were approximately $169 million before exercise of the initial purchasers’ over-allotment option. Proceeds will be used for general corporate purposes, including retiring other indebtedness or funding certain pension or other long-term liabilities.

The notes will rank equally in right of payment to all of the company’s existing and future senior unsecured indebtedness. The notes bear cash interest at a rate of 4.0 percent per annum payable semiannually in arrears until February 15, 2019, after which no cash interest will be paid. Commencing February 15, 2019, the principal amount of the notes will be subject to accretion at a rate that provides holders with an aggregate annual yield to maturity of 4.0%.

The notes are convertible into shares of the company’s common stock at an initial conversion rate, subject to adjustment, equivalent to 37.4111 shares of common stock per $1,000 initial principal amount of notes, which represents an initial conversion price of approximately $26.73 per share. If converted, the accreted principal amount will be settled in cash and the remainder of the company’s conversion obligation, if any, in excess of such accreted principal amount will be settled in cash, shares of common stock, or a combination thereof, at the company’s election.  General conversion terms are substantially consistent with the company’s existing 4.625% convertible senior notes due 2026.      

 

On or after February 15, 2019, the company may redeem the convertible notes, in whole or in part, for cash at a redemption price equal to 100 percent of the accreted principal amount plus any accrued and unpaid interest. On each of February 15, 2019 and February 15, 2022, or upon certain fundamental changes, holders may require the company to purchase all or a portion of their convertible notes at a purchase price in cash equal to 100 percent of the accreted principal amount plus any accrued and unpaid interest.

21.

Supplemental Guarantor Condensed Consolidating Financial Statements

 

Certain of the company’s wholly-owned subsidiaries, as defined in the credit agreement (the Guarantors) irrevocably and unconditionally guarantee amounts outstanding under the senior credit facilities. Similar subsidiary guarantees were provided for the benefit of the holders of the publicly-held notes outstanding under the company’s indentures (see Note 14).

In lieu of providing separate audited financial statements for the Guarantors subsidiaries, the company has included the accompanying condensed consolidating financial statements. These condensed consolidating financial statements are presented on the equity method. Under this method, the investments in subsidiaries are recorded at cost and adjusted for the parent’s share of the subsidiary’s cumulative results of operations, capital contributions and distributions and other equity changes. The Guarantor subsidiaries are combined in the condensed consolidating financial statements.

 

26

ARVINMERITOR, INC.

NOTES TO CONSOLIDATED STATEMENTS – (Continued)

(Unaudited)

Condensed Consolidating Statement of Income

(In millions)

 

 

 

Three Months Ended December 31, 2006

 

 

 

Parent

 

Guarantors

 

Non-Guarantors

 

Elims

 

Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

External                   

 

$

 

$

839

 

$

1,501

 

$

 

$

2,340

 

Subsidiaries                   

 

 

 

 

25

 

 

97

 

 

(122

)

 

 

Total sales           

 

 

 

 

864

 

 

1,598

 

 

(122

)

 

2,340

 

Cost of sales              

 

 

(4

)

 

(801

)

 

(1,539

)

 

122

 

 

(2,222

)

GROSS MARGIN  

 

 

(4

)

 

63

 

 

59

 

 

 

 

118

 

Selling, general and administrative              

 

 

(18

)

 

(31

)

 

(37

)

 

 

 

(86

)

Gain on divestitures                         

 

 

 

 

(3

)

 

5

 

 

 

 

2

 

Restructuring costs                           

 

 

 

 

 

 

(1

)

 

 

 

(1

)

OPERATING INCOME (LOSS)          

 

 

(22

)

 

29

 

 

26

 

 

 

 

33

 

Equity in earnings of affiliates                     

 

 

1

 

 

7

 

 

1

 

 

 

 

9

 

Other income (expense), net            

 

 

 

 

(2

 

2

 

 

 

 

 

Interest expense, net and other    

 

 

(24

)

 

8

 

 

(11

)

 

 

 

(27

)

INCOME (LOSS) BEFORE INCOME TAXES    

 

 

(45

)

 

42

 

 

18

 

 

 

 

15

 

Benefit (provision) for income taxes         

 

 

15

 

 

(22

 

5

 

 

 

 

(2

)

Minority interests       

 

 

 

 

 

 

(2

)

 

 

 

(2

)

Equity in income of consolidated subsidiaries        

 

 

41

 

 

19

 

 

 

 

(60)

 

 

 

INCOME (LOSS) FROM CONTINUING OPERATIONS

 

 

11

 

 

39

 

 

21

 

 

(60)

 

 

11

 

INCOME FROM DISCONTINUED OPERATIONS        

 

 

(4)

 

 

(4)

 

 

(2)

 

 

 

 

(4)

 

NET INCOME (LOSS)           

 

$

7

 

$

35

 

$

19

 

$

(54)

 

$

7

 

 

 

27

ARVINMERITOR, INC.

NOTES TO CONSOLIDATED STATEMENTS – (Continued)

(Unaudited)

 

Condensed Consolidating Statement of Income

(In millions)

 

 

 

Three Months Ended December 31, 2005

 

 

 

Parent

 

Guarantors

 

Non-Guarantors

 

Elims

 

Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

External                  

 

$

 

$

805

 

$

1,293

 

$

 

$

2,098

 

Subsidiaries              

 

 

 

 

30

 

 

92

 

 

(122

)

 

 

Total sales            

 

 

 

 

835

 

 

1,385

 

 

(122

)

 

2,098

 

Cost of sales                          

 

 

(5

)

 

(787

)

 

(1,296

)

 

122

 

 

(1,966

)

GROSS MARGIN  

 

 

(5

)

 

48

 

 

89

 

 

 

 

132

 

Selling, general and administrative       

 

 

(16

)

 

(36

)

 

(36

)

 

 

 

(88

)

Gain on divestitures                         

 

 

 

 

17

 

 

6

 

 

 

 

23

 

Restructuring costs                           

 

 

 

 

(2

)

 

1

 

 

 

 

(1

OPERATING INCOME (LOSS)        

 

 

(21

)

 

27

 

 

60

 

 

 

 

66

 

Equity in earnings of affiliates     

 

 

1

 

 

4

 

 

2

 

 

 

 

7

 

Other income (expense), net          

 

 

15

 

 

(159

 

144

 

 

 

 

 

Interest expense, net and other           

 

 

(29

)

 

(4

 

1

 

 

 

 

(32

INCOME (LOSS) BEFORE INCOME TAXES    

 

 

(34

)

 

(132

)

 

207

 

 

 

 

41

 

Benefit (provision) for income taxes        

 

 

12

 

 

72

 

 

(94

)

 

 

 

(10

)

Minority interests         

 

 

 

 

 

 

(3

)

 

 

 

(3

INCOME (LOSS) FROM CONTINUING OPERATIONS     

 

 

(22

)

 

(60

 

110

 

 

 

 

28

 

INCOME FROM DISCONTINUED OPERATIONS   

 

 

 

 

1

 

 

5

 

 

 

 

6

 

Equity in net income of consolidated subsidiaries          

 

 

56

 

 

115

 

 

 

 

(171)

 

 

 

NET INCOME (LOSS)         

 

$

34

 

$

56

 

$

115

 

$

(171)

 

$

34

 

 

 

28

ARVINMERITOR, INC.

NOTES TO CONSOLIDATED STATEMENTS – (Continued)

(Unaudited)

Condensed Consolidating Balance Sheet

(In millions)

 

 

 

December 31, 2006

 

 

 

Parent

 

Guarantors

 

Non-Guarantors

 

Elims

 

Consolidated

 

CURRENT ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents          

 

$

136

 

$

2

 

$

231

 

$

 

$

369

 

Receivables, net       

 

 

3

 

 

157

 

 

1,404

 

 

 

 

1,564

 

Inventories                       

 

 

 

 

249

 

 

379

 

 

 

 

628

 

Other current assets           

 

 

43

 

 

125

 

 

124

 

 

 

 

292

 

Assets of discontinued operations             

 

 

 

 

48

 

 

156

 

 

 

 

204

 

TOTAL CURRENT ASSETS                

 

 

182

 

 

581

 

 

2,294

 

 

 

 

3,057

 

NET PROPERTY      

 

 

33

 

 

306

 

 

645

 

 

 

 

984

 

GOODWILL               

 

 

 

 

 

341

 

 

169

 

 

 

 

510

 

OTHER ASSETS     

 

 

416

 

 

136

 

 

393

 

 

 

 

945

 

INVESTMENTS IN CONSOLIDATED SUBSIDIARIES  

 

 

3,520

 

 

1,172

 

 

 

 

(4,692)

 

 

 

TOTAL ASSETS           

 

$

4,151

 

$

2,536

 

$

3,501

 

$

(4,692)

 

$

5,496

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CURRENT LIABILITIES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Short-term debt 

 

$

7

 

$

 

$

130

 

$

 

$

137

 

Accounts payable              

 

 

24

 

 

437

 

 

1,090

 

 

 

 

1,551

 

Other current liabilities           

 

 

191

 

 

136

 

 

371

 

 

 

 

698

 

Liabilities of discontinued operations       

 

 

 

 

48

 

 

51

 

 

 

 

99

 

TOTAL CURRENT LIABILITIES        

 

 

222

 

 

621

 

 

1,642

 

 

 

 

2,485

 

LONG-TERM DEBT         

 

 

1,164

 

 

 

 

21

 

 

 

 

1,185

 

RETIREMENT BENEFITS     

 

 

348

 

 

 

 

178

 

 

 

 

526

 

INTERCOMPANY PAYABLE (RECEIVABLE)   

 

 

1,363

 

 

(1,803

)

 

440

 

 

 

 

 

OTHER LIABILITIES       

 

 

55

 

 

131

 

 

48

 

 

 

 

234

 

MINORITY INTERESTS             

 

 

 

 

 

 

67

 

 

 

 

67

 

SHAREOWNERS’ EQUITY        

 

 

999

 

 

3,587

 

 

1,105

 

 

(4,692)

 

 

999

 

TOTAL LIABILITIES AND SHAREOWNERS’ EQUITY      

 

$

4,151

 

$

2,536

 

$

3,501

 

$

(4,692)

 

$

5,496

 

 

29

ARVINMERITOR, INC.

NOTES TO CONSOLIDATED STATEMENTS – (Continued)

(Unaudited)

Condensed Consolidating Balance Sheet

(In millions)

 

 

 

September 30, 2006

 

 

 

Parent

 

Guarantors

 

Non-Guarantors

 

Elims

 

Consolidated

 

CURRENT ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents           

 

$

97

 

$

3

 

$

250

 

$

 

$

350

 

Receivables, net                        

 

 

14

 

 

166

 

 

1,465

 

 

 

 

1,645

 

Inventories                      

 

 

 

 

264

 

 

332

 

 

 

 

596

 

Other current assets                       

 

 

49

 

 

109

 

 

137

 

 

 

 

295

 

Assets of discontinued operations         

 

 

 

 

54

 

 

153

 

 

 

 

207

 

TOTAL CURRENT ASSETS               

 

 

160

 

 

596

 

 

2,337

 

 

 

 

3,093

 

NET PROPERTY      

 

 

34

 

 

313

 

 

641

 

 

 

 

988

 

GOODWILL                  

 

 

 

 

341

 

 

162

 

 

 

 

503

 

OTHER ASSETS     

 

 

418

 

 

143

 

 

368

 

 

 

 

929

 

INVESTMENTS IN CONSOLIDATED SUBSIDIARIES  

 

 

3,435

 

 

1,047

 

 

 

 

(4,482

)

 

 

TOTAL ASSETS          

 

$

4,047

 

$

2,440

 

$

3,508

 

$

(4,482

)

$

5,513

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CURRENT LIABILITIES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Short-term debt              

 

$

7

 

$

 

$

49

 

$

 

$

56

 

Accounts payable           

 

 

27

 

 

521

 

 

1,101

 

 

 

 

1,649

 

Other current liabilities          

 

 

207

 

 

192

 

 

342

 

 

 

 

741

 

Liabilities of discontinued operations       

 

 

 

 

53

 

 

50

 

 

 

 

103

 

TOTAL CURRENT LIABILITIES     

 

 

241

 

 

766

 

 

1,542

 

 

 

 

2,549

 

LONG-TERM DEBT          

 

 

1,165

 

 

 

 

19

 

 

 

 

1,184

 

RETIREMENT BENEFITS     

 

 

337

 

 

 

 

170

 

 

 

 

507

 

INTERCOMPANY PAYABLE (RECEIVABLE)

 

 

1,311

 

 

(1,535

)

 

224

 

 

 

 

 

OTHER LIABILITIES        

 

 

49

 

 

136

 

 

79

 

 

 

 

264

 

MINORITY INTERESTS      

 

 

 

 

 

 

65

 

 

 

 

65

 

SHAREOWNERS’ EQUITY       

 

 

944

 

 

3,073

 

 

1,409

 

 

(4,482

)

 

944

 

TOTAL LIABILITIES AND SHAREOWNERS’ EQUITY     

 

$

4,047

 

$

2,440

 

$

3,508

 

$

(4,482

)

$

5,513

 

 

30

ARVINMERITOR, INC.

NOTES TO CONSOLIDATED STATEMENTS – (Continued)

(Unaudited)

Condensed Consolidating Statement of Cash Flows

(In millions)

  

 

 

Three Months Ended December 31, 2006

 

 

 

Parent

 

Guarantors

 

Non-Guarantors

 

Elims

 

Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CASH FLOWS PROVIDED BY OPERATING ACTIVITIES