UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

 

QUARTERLY REPORT

 

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

For the Quarterly Period Ended July 1, 2007

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 

  

72,271,927 shares of Common Stock, $1.00 par value, of ArvinMeritor, Inc. were outstanding on July 1, 2007.

 

 



 

INDEX

 

PART I.

FINANCIAL INFORMATION:

 

 

 

 

 

 

Item 1.

Financial Statements:

Page

 

 

 

No.

 

 

Consolidated Statement of Operations - - Three and Nine Months

 

 

 

Ended June 30, 2007 and 2006

2

 

 

 

 

 

 

Consolidated Balance Sheet - -

 

 

 

June 30, 2007 and September 30, 2006

3

 

 

 

 

 

 

Condensed Consolidated Statement of Cash Flows - -

 

 

 

Nine  Months Ended June 30, 2007 and 2006

4

 

 

 

 

 

 

Notes to Consolidated Financial Statements

5

 

 

 

 

 

Item 2.

Management’s Discussion and Analysis

 

 

 

of Financial Condition and Results of Operations

35

 

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About

 

 

 

Market Risk

48

 

 

 

 

 

Item 4.

Controls and Procedures

48

 

 

 

 

PART II.

OTHER INFORMATION:

 

 

 

 

 

 

Item 5.

Other Information

49

 

 

 

 

 

Item 6.

Exhibits

49

 

 

 

 

 

 

 

 

Signatures

 

 

50

 

 

                                                                                                                       

 

 

 

 

 

 

 

 

 

 

 

 


PART I. FINANCIAL INFORMATION

ITEM 1. Financial Statements

 

ARVINMERITOR, INC.

CONSOLIDATED STATEMENT OF OPERATIONS

(in millions, except per share amounts)

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2007

 

2006

 

2007

 

2006

 

 

 

(Unaudited)

 

Sales

 

$

1,662

 

$

1,735

 

$

4,857

 

$

4,828

 

Cost of sales

 

 

(1,526

)

 

(1,618

)

 

(4,474

)

 

(4,442

)

GROSS MARGIN

 

 

136

 

 

117

 

 

383

 

 

386

 

Selling, general and administrative

 

 

(93

)

 

(95

)

 

(265

)

 

(262

)

Restructuring costs

 

 

(24

)

 

(1

)

 

(61

)

 

(10

)

Other income, net

 

 

 

 

3

 

 

12

 

 

23

 

OPERATING INCOME

 

 

19

 

 

24

 

 

69

 

 

137

 

Equity in earnings of affiliates

 

 

10

 

 

10

 

 

24

 

 

23

 

Interest expense, net

 

 

(27

)

 

(28

)

 

(88

)

 

(103

)

INCOME BEFORE INCOME TAXES

 

 

2

 

 

6

 

 

5

 

 

57

 

Benefit (provision) for income taxes

 

 

(1

)

 

2

 

 

(2

)

 

16

 

Minority interests

 

 

(5

)

 

(4

)

 

(10

)

 

(11

)

INCOME (LOSS) FROM CONTINUING OPERATIONS

 

 

(4

)

 

4

 

 

(7

)

 

62

 

INCOME (LOSS) FROM DISCONTINUED OPERATIONS

 

 

(66

)

 

16

 

 

(150

)

 

37

 

NET INCOME (LOSS)

 

 

(70

)

 

20

 

 

(157

)

 

99

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BASIC EARNINGS (LOSS) PER SHARE

 

 

 

 

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

(0.06

)

$

0.06

 

$

(0.10

)

$

0.90

 

Discontinued operations

 

 

(0.93

)

 

0.23

 

 

(2.14

)

 

0.53

 

Basic earnings (loss) per share

 

$

(0.99

)

$

0.29

 

$

(2.24

)

$

1.43

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

DILUTED EARNINGS (LOSS) PER SHARE

 

 

 

 

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

(0.06

)

$

0.06

 

$

(0.10

)

$

0.89

 

Discontinued operations

 

 

(0.93

)

 

0.23

 

 

(2.14

)

 

0.53

 

Diluted earnings (loss) per share

 

$

(0.99

)

$

0.29

 

$

(2.24

)

$

1.42

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic average common shares outstanding

 

 

70.8

 

 

69.3

 

 

70.1

 

 

69.2

 

Diluted average common shares outstanding

 

 

70.8

 

 

70.1

 

 

70.1

 

 

69.9

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash dividends per common share

 

$

0.10

 

$

0.10

 

$

0.30

 

$

0.30

 

 

See notes to consolidated financial statements. Amounts for the three and nine months ended June 30, 2006 have been restated for discontinued operations.

 

2

 


 

ARVINMERITOR, INC.

CONSOLIDATED BALANCE SHEET

(in millions)

 

 

 

June 30,

 

September 30,

 

 

 

2007

 

2006

 

 

 

(Unaudited)

 

 

ASSETS

 

 

 

 

 

 

 

CURRENT ASSETS:

 

 

 

 

 

 

 

    Cash and cash equivalents

 

$

284

 

$

350

 

    Receivables, trade and other, net

 

 

1,249

 

 

1,098

 

    Receivables, EMCON Technologies Holdings Limited

 

 

139

 

 

 

    Inventories

 

 

506

 

 

488

 

    Other current assets

 

 

246

 

 

248

 

    Assets of discontinued operations

 

 

130

 

 

1,206

 

      TOTAL CURRENT ASSETS

 

 

2,554

 

 

3,390

 

NET PROPERTY

 

 

708

 

 

719

 

GOODWILL

 

 

514

 

 

503

 

OTHER ASSETS 

 

 

1,006

 

 

896

 

      TOTAL ASSETS

 

$

4,782

 

$

5,508

 

 

 

 

 

 

 

 

 

LIABILITIES AND SHAREOWNERS’ EQUITY

 

 

 

 

 

 

 

CURRENT LIABILITIES:

 

 

 

 

 

 

 

    Short-term debt

 

$

108

 

$

56

 

    Accounts payable

 

 

1,191

 

 

1,106

 

    Other current liabilities

 

 

709

 

 

706

 

    Liabilities of discontinued operations

 

 

59

 

 

712

 

      TOTAL CURRENT LIABILITIES

 

 

2,067

 

 

2,580

 

LONG-TERM DEBT

 

 

1,118

 

 

1,174

 

RETIREMENT BENEFITS

 

 

473

 

 

487

 

OTHER LIABILITIES

 

 

224

 

 

259

 

MINORITY INTERESTS

 

 

77

 

 

64

 

SHAREOWNERS’ EQUITY:

 

 

 

 

 

 

 

    Common stock (June 30, 2007, 72.3 shares issued and outstanding;                 
      September 30, 2006, 71.0 shares issued and 70.6 outstanding)

 

 

72

 

 

71

 

    Additional paid-in capital

 

 

610

 

 

587

 

    Retained earnings

 

 

198

 

 

376

 

    Treasury stock (June 30, 2007 and September 30, 2006,
      0.0 and 0.4 shares, respectively)

 

 

(3

)

 

(11

)

    Accumulated other comprehensive loss

 

 

(54

)

 

(79

)

      TOTAL SHAREOWNERS’ EQUITY

 

 

823

 

 

944

 

      TOTAL LIABILITIES AND SHAREOWNERS’ EQUITY

 

$

4,782

 

$

5,508

 

 

See notes to consolidated financial statements. Amounts for prior periods have been restated for discontinued operations.

 

 

3

 


ARVINMERITOR, INC.

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

(in millions) 

 

 

Nine Months Ended June 30,

 

 

 

2007

 

2006

 

 

 

(Unaudited)

 

OPERATING ACTIVITIES

 

 

 

 

 

 

 

Income (loss) from continuing operations

 

$

(7

)

$

62

 

Adjustments to income (loss) from continuing operations to arrive

 

 

 

 

 

 

 

    at cash provided by (used for) operating activities:

 

 

 

 

 

 

 

    Depreciation and amortization

 

 

96

 

 

91

 

    Adjustment to impairment reserves

 

 

(10

)

 

 

    Gain on divestitures

 

 

(2

)

 

(28

)

    Restructuring costs, net of payments

 

 

38

 

 

(17

)

    Loss on debt extinguishment

 

 

6

 

 

9

 

    Pension and retiree medical expense

 

 

99

 

 

102

 

    Other adjustments to income (loss)

 

 

6

 

 

7

 

Pension and retiree medical contributions

 

 

(182

)

 

(79

)

Changes in receivable securitization and factoring

 

 

115

 

 

105

 

Changes in assets and liabilities, excluding effects of

 

 

 

 

 

 

 

    acquisitions, divestitures and foreign currency adjustments

 

 

(231

)

 

(48

)

Cash flows provided by (used for) continuing operations

 

 

(72

)

 

204

 

Cash flows provided by (used for) discontinued operations

 

 

(118

)

 

108

 

CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES

 

 

(190

)

 

312

 

INVESTING ACTIVITIES

 

 

 

 

 

 

 

    Capital expenditures

 

 

(72

)

 

(77

)

    Proceeds from disposition of property and businesses

 

 

11

 

 

44

 

    Investment in debt defeasance trust

 

 

 

 

(12

)

    Proceeds from marketable securities

 

 

5

 

 

 

    Other investing activities

 

 

(2

)

 

(1

)

    Net investing cash flows provided by discontinued operations

 

 

177

 

 

174

 

CASH PROVIDED BY INVESTING ACTIVITIES

 

 

119

 

 

128

 

FINANCING ACTIVITIES

 

 

 

 

 

 

 

      Borrowings (payments) on accounts receivable securitization program

 

 

49

 

 

(66

)

      Issuance of convertible notes

 

 

200

 

 

470

 

      Repayment of notes

 

 

(249

)

 

(603

)

      Payments on lines of credit and other, net

 

 

 

 

(14

)

    Net change in debt

 

 

 

 

(213

)

    Debt issuance and extinguishment costs

 

 

(10

)

 

(28

)

    Proceeds from exercise of stock options

 

 

21

 

 

1

 

    Cash dividends

 

 

(21

)

 

(21

)

    Other financing activities

 

 

(1

)

 

 

    Net financing cash flows used for discontinued operations

 

 

 

 

(3

)

CASH USED FOR FINANCING ACTIVITIES

 

 

(11

)

 

(264

)

EFFECT OF CHANGES IN FOREIGN CURRENCY EXCHANGE

 

 

 

 

 

 

 

    RATES ON CASH AND CASH EQUIVALENTS

 

 

16

 

 

2

 

CHANGE IN CASH AND CASH EQUIVALENTS

 

 

(66

)

 

178

 

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD

 

 

350

 

 

187

 

CASH AND CASH EQUIVALENTS AT END OF PERIOD

 

$

284

 

$

365

 

See notes to consolidated financial statements. Amounts for the nine months ended June 30, 2006 have been restated for discontinued operations.

 

4

 


ARVINMERITOR, INC.

NOTES TO CONSOLIDATED FINANCIAL 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 (OE) manufacturers and certain aftermarkets. The consolidated financial statements are those of the company and its consolidated subsidiaries.

On February 2, 2007, the company signed a definitive agreement to sell its Emissions Technologies (ET) business and subsequently completed the sale on May 17, 2007. Results of operations related to this business are included in discontinued operations in the consolidated statement of operations through the date of sale. The assets and liabilities of ET, excluding retained assets and liabilities, are included in assets and liabilities of discontinued operations through the date of sale. In addition, the company has made decisions to retain certain businesses previously held for sale. Results of operations, assets and liabilities and cash flows of prior periods have been restated to reflect these businesses as continuing operations as of June 30, 2007. Additional information regarding discontinued operations is discussed in 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 and Current Report on Form 8-K dated June 8, 2007 updating the historical financial statements included in the Annual Report on Form 10-K for the presentation of the ET business as discontinued operations. The results of operations for the three and nine months ended June 30, 2007 are not necessarily indicative of the results for the full year.

The company’s fiscal year ends on the Sunday nearest September 30. The company’s fiscal quarters end on the Sundays nearest December 31, March 31 and June 30. The third quarter of fiscal years 2007 and 2006 ended on July 1, 2007, and July 2, 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 June 30 are used consistently throughout this report to represent the fiscal year end and third 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

 

Nine Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2007

 

2006

 

2007

 

2006

 

 

 

 

 

 

 

 

 

 

 

Basic average common shares outstanding

 

70.8

 

69.3

 

70.1

 

69.2

 

Impact of restricted stock

 

 

0.6

 

 

0.5

 

Impact of stock options

 

 

0.2

 

 

0.2

 

Diluted average common shares outstanding

 

70.8

 

70.1

 

70.1

 

69.9

 

 

The potential effects of restricted stock and stock options were excluded from the diluted earnings per share calculation for the three and nine months ended June 30, 2007 because their inclusion in a net loss period would reduce the net loss per share. Therefore, at June 30, 2007, options to purchase 2.9 million shares of common stock were excluded from the computation of diluted earnings per share. At June 30, 2006, options to purchase 3.5 million shares of common stock were not included in the computation of diluted earnings per share because their exercise price exceeded the average market price for the period and thus their inclusion would

5

 


ARVINMERITOR, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

be anti-dilutive. The company’s convertible senior unsecured notes are excluded from the computation of diluted earnings per share, as the company’s average stock price during the quarter is less than the conversion price.

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 any cumulative effect of any 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 quarter ended June 30, 2007, the impact would have been a reduction to shareowners’ equity, net of tax, of approximately $235 million.

In September 2006, the Securities and Exchange Commission (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

Emissions Technologies

The company’s ET business supplied exhaust systems and exhaust system components, including mufflers, exhaust pipes, catalytic converters, diesel particulate filters and exhaust manifolds, primarily to original equipment manufacturers. On February 2, 2007, the company signed a definitive agreement to sell its ET business to EMCON Technologies Holdings Limited (EMCON), a private equity affiliate of J.P. Morgan Securities Inc. On May 17, 2007, the sale was completed. Total consideration was $310 million, including cash and a $20 million note less the assumption of certain liabilities, and is subject to adjustments for working capital and other items. The company recorded an initial impairment of $115 million during the second quarter of fiscal year 2007 based on preliminary asset values versus expected sale price. An additional loss of $55 million was recorded in the third quarter upon closing the transaction and is subject to the settlement of working capital adjustments. Charges associated with the sale of ET are included in the results of discontinued operations in the consolidated statement of operations. ET is reported in discontinued operations in the consolidated statement of operations, statement of cash flows and related notes through the date of sale and all prior periods have been restated to reflect this presentation. The assets and liabilities of ET, as defined by the definitive agreement, are included in assets and liabilities of discontinued operations through the date of sale.

As of the May 17, 2007 closing date, assets and liabilities of certain businesses were not legally transferred to EMCON due to delays in certain procedures required to be completed by the buyer. Pursuant to the sale agreement, legal ownership will be transferred upon receipt by the buyer of required licenses and establishment of appropriate entities to receive the transferred assets.

 

6

 


ARVINMERITOR, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Sale values were fixed and EMCON assumed operational control of the businesses as of the May 17, 2007 closing date. The steps required to complete the legal transfer were considered perfunctory by the company and the company recorded these assets and liabilities as sold and excluded them from the consolidated balance sheet effective on May 17, 2007. Consideration for these assets and assumed liabilities was deposited in an escrow account by EMCON and is reflected as a receivable due from EMCON in the consolidated balance sheet at June 30, 2007. The company expects to complete the legal transfer of these assets and liabilities during the fourth quarter of fiscal year 2007.

Receivables due from EMCON also include a preliminary estimate of adjustments to the purchase price based upon closing working capital. Settlement of working capital adjustments is expected to occur within 120 days from the date of sale pursuant to the terms of the sale agreement. Pre-sale funding obligations that were completed subsequent to June 30, 2007 resulted in an additional receivable from EMCON and an offsetting payable that is included in other current liabilities on the consolidated balance sheet at June 30, 2007. In addition, as part of the sale of ET, the company retained certain assets and liabilities which will be settled directly with EMCON. These amounts are recorded in receivables and other current liabilities in the consolidated balance sheet at June 30, 2007.

As a result of declines in the fair value of ET, the company recorded a $310 million non-cash goodwill impairment charge in the fourth quarter of fiscal year 2006 as its best estimate of an impairment loss. The company completed its step two goodwill impairment analysis in the first quarter of fiscal year 2007, which supported the original goodwill impairment charge recorded in the prior year.

Light Vehicle Aftermarket

In October 2004, the company announced plans to divest its Light Vehicle Aftermarket (LVA) businesses. This plan was part of the company’s long-term strategy to focus on core competencies and support its global light vehicle systems 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. Except as noted below, LVA is reported as discontinued operations in the consolidated statement of operations. Accordingly, net property and amortizable intangible assets are no longer depreciated or amortized.

In the second quarter of fiscal year 2007, the company made a strategic decision to retain its Gabriel LVA ride control business. Restructuring actions contemplated through the company’s Performance Plus initiative (see Note 5) are expected to make this business viable as part of the company’s core light vehicle strategy. Accordingly, 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. As a result of this decision, the company reduced certain inventory and accounts receivable reserves by $12 million to reflect the net realizability of these assets on a continuing operations basis. In addition, the company recorded a cumulative $2 million adjustment for depreciation expense related to the European LVA ride control business not recorded in fiscal years 2005 and 2006. The net amount of these adjustments is recorded in other income, net in the consolidated statement of operations (see Note 8). The net property and equipment of Gabriel North American LVA ride control was written off in a previous period. Sales of Gabriel LVA ride control were $112 million for the nine months ended June 30, 2007. In the fourth quarter of fiscal year 2006, the company decided to retain its 51 percent interest in its Gabriel de Venezuela LVA 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.

In March 2006, the company completed the sale of its LVA North American filters and exhaust businesses. Cash proceeds from these sales were $194 million, resulting in a net pre-tax gain on sale of $34 million ($22 million after-tax). The company also recorded in the second quarter of fiscal year 2006 a non-cash impairment charge of $19 million ($12 million after-tax) to record certain LVA businesses at fair value. The net gain on the sales of the North American filters and exhaust businesses and the impairment charge are recorded in income from discontinued operations. In November 2005, the company sold its 39-percent equity ownership interest in its LVA 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.

As of June 30, 2007, the company had completed the sale of a majority of the LVA businesses. The assets and liabilities of the LVA European exhaust and filters (LVA Europe) businesses are still held for sale and included in assets and liabilities of discontinued operations in the consolidated balance sheet. The company is actively negotiating to complete the sale of LVA Europe in fiscal year 2007. Based on the contemplated sale value, a non-cash impairment charge of $8 million ($5 million after tax) was recorded in the third quarter of fiscal year 2007. The impairment charge is recorded in loss from discontinued operations in the consolidated statement of operations.

 

7

 


ARVINMERITOR, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

In order to reduce costs and improve profitability, LVA recorded restructuring costs of $5 million in the first nine months of fiscal year 2006. These costs related to employee severance benefits associated with the reduction of approximately 75 employees. At June 30, 2007 and September 30, 2006, $1 million and $4 million, respectively, of restructuring reserves primarily related to unpaid employee termination benefits are included in liabilities of discontinued operations.

Light Vehicle OE Ride Control

The company’s light vehicle OE ride control business provided shock absorbers, struts, ministruts, and corner modules to the light vehicle industry and is presented as discontinued operations in the consolidated statement of operations and consolidated statement of cash flows for all periods presented. 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 light vehicle OE ride control business. As a result of the sale of the ride control operations located in Asti, Italy, in the nine months ended June 30, 2006 the company reversed $11 million of restructuring costs related to employee termination benefits that would no longer be paid by the company.

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

  

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2007

 

2006

 

2007

 

2006

 

Sales:

 

 

 

 

 

 

 

 

 

 

 

 

 

Emissions Technologies

 

$

440

 

$

802

 

$

2,143

 

$

2,218

 

Light Vehicle Aftermarket and other

 

 

59

 

 

80

 

 

159

 

 

392

 

Total Sales

 

$

499

 

$

882

 

$

2,302

 

$

2,610

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) before income taxes

 

$

(77)

 

$

20

 

$

(182)

 

$

56

 

Benefit (provision) for income taxes

 

 

11

 

 

(4)

 

 

32

 

 

(18)

 

Minority interests

 

 

 

 

 

 

 

 

(1)

 

Income (loss) from discontinued operations

 

$

(66)

 

$

16

 

$

(150)

 

$

37

 

 

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

 

 

 

June 30,

 

September 30,

 

 

 

2007

 

2006

 

 

 

 

 

 

 

 

 

Current assets

 

$

90

 

$

842

 

Net property

 

 

34

 

 

311

 

Other assets

 

 

6

 

 

53

 

Assets of discontinued operations

 

$

130

 

$

1,206

 

 

 

 

 

 

 

 

 

Current liabilities

 

$

54

 

$

673

 

Other liabilities

 

 

5

 

 

39

 

Liabilities of discontinued operations

 

$

59

 

$

712

 

 

 

 

 

8

 


ARVINMERITOR, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

5.

Restructuring Costs

The following summarizes restructuring costs and related adjustments recorded during the three and nine months ended June 30, 2007 and 2006 (in millions).

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

June 30

 

June 30

 

 

 

Continuing
Operations

 

Discontinued
Operations

 

Continuing
Operations

 

Discontinued
Operations

 

Restructuring Costs – Fiscal Year 2007

 

 

 

 

 

 

 

 

 

 

 

 

 

Performance Plus charges

 

$

24

 

$

 

$

61

 

$

 

Fiscal 2005 Program charges

 

 

 

 

1

 

 

 

 

3

 

Adjustments and Reversals

 

 

 

 

 

 

 

 

(9)

 

Total Restructuring Costs

 

$

24

 

$

1

 

$

61

 

$

(6)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Restructuring Costs – Fiscal Year 2006

 

 

 

 

 

 

 

 

 

 

 

 

 

Fiscal 2005 Program charges

 

$

1

 

$

1

 

$

10

 

$

15

 

LVA charges

 

 

 

 

1

 

 

 

 

5

 

Adjustments and Reversals

 

 

 

 

 

 

 

 

(17)

 

Total Restructuring Costs

 

$

1

 

$

2

 

$

10

 

$

3

 

Performance Plus: During fiscal year 2007 the company launched a profit improvement and cost reduction initiative called “Performance Plus.” As part of this program the company identified significant restructuring actions which would eliminate up to 2,800 positions in North America and Europe and consolidate and combine certain global facilities. Costs of these actions will be incurred over the next several years. The company recorded restructuring costs of $61 million during the first nine months of fiscal year 2007 related to these actions. These costs include $53 million of estimated employee severance benefits and $8 million of asset impairment charges associated with certain closures, primarily in LVS and salaried headcount reductions in CVS. The employee severance costs relate to the reduction of approximately 211 salaried and 688 hourly employees.

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 businesses. Including these additional headcount reductions, the fiscal year 2005 program resulted in the reduction of approximately 900 salaried and 1,900 hourly employees and the sale, closure or consolidation of 11 global facilities, primarily in the LVS and ET businesses. These actions were intended to align capacity with industry conditions, utilize assets more efficiently and improve operations. As of June 30, 2007, actions related to the fiscal year 2005 program were substantially complete. Cumulative restructuring costs recorded for the fiscal year 2005 program, including amounts recorded in discontinued operations, were $130 million as of June 30, 2007. These costs include $95 million of employee termination benefits, $29 million of asset impairment charges and $6 million of other closure costs. Asset impairment charges related to manufacturing facilities that were closed or sold and machinery and equipment that became idle and obsolete as a result of the facility closures.

Reversals and Adjustments: In the first nine months of fiscal year 2007 and 2006, the company reversed $9 million and $17 million of restructuring costs, respectively, related to previously recorded employee severance benefits. Due to the sale of ET in fiscal year 2007, it was determined that payment of certain severance benefits by the company was no longer probable, resulting in the $9 million reversal. Prior year reversals of costs primarily relate to employee severance costs that will no longer be paid or were lower than previously expected. The company sold the operations at two separate facilities and no longer had to pay severance costs to the related employees.

 

 

 

9

 


ARVINMERITOR, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

At June 30, 2007 and September 30, 2006, $62 million and $40 million, respectively, of restructuring reserves primarily related to unpaid employee termination benefits remained in the consolidated balance sheet. The changes in restructuring reserves for the nine months ended June 30, 2007 are as follows (in millions):

 

 

 

Employee

 

 

 

 

 

 

 

Termination

 

Asset

 

 

 

 

 

Benefits

 

Impairment

 

Total

 

Balance at September 30, 2006

 

$

40

 

$

 

$

40

 

Activity during the period:

 

 

 

 

 

 

 

 

 

 

Charges to continuing operations

 

 

53

 

 

8

 

 

61

 

Adjustment to discontinued operations reserves (1)

 

 

(6

)

 

 

 

(6

)

Asset write-offs

 

 

 

 

(8

)

 

(8

)

Cash payments and other

 

 

(25

)

 

 

 

(25

)

Balance at June 30, 2007

 

$

62

 

$

 

$

62

 

  (1) Adjustments to discontinued operations reserves are included in discontinued operations in the consolidated statement of operations.

6.

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 included 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.

7.

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 the arrangement, the company sells 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 $3 million in the nine months ended June 30, 2007 and are included in operating income in the consolidated statement of operations. Costs of this securitization arrangement were not significant for the nine months ended June 30, 2006. The gross amount of proceeds received from the sale of receivables under this arrangement were $396 million and $129 million for the nine months ended June 30, 2007 and 2006, respectively. The company’s retained interest in receivables sold was $16 million and $6 million at June 30, 2007 and September 30, 2006, respectively. The company had utilized, net of retained interests, €87 million ($117 million) and €41 million ($55 million) of this accounts receivable securitization facility as of June 30, 2007 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). At June 30, 2007 and September 30, 2006, the company had utilized $89 million and $40 of this accounts receivable securitization facility, respectively. Borrowings under this arrangement are collateralized by approximately $258 million of receivables held at ARC at June 30, 2007. 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 June 30, 2007, 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 $137 million and $84 million at June 30, 2007 and September 30, 2006, respectively.

 

10

 


ARVINMERITOR, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

8.

Other Income, net

Other income, net is comprised of the following (in millions):

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

June 30,

 

 

June 30,

 

 

 

2007

 

2006

 

 

2007

 

2006

 

Gains on divestitures

 

$

 

$

 

 

$

2

 

$

23

 

Gain on liquidation of joint venture

 

 

 

 

5

 

 

 

 

 

5

 

Adjustment to impairment reserves, net

 

 

 

 

 

 

 

10

 

 

 

Environmental remediation costs

 

 

 

 

(2

)

 

 

 

 

(5

)

Other income, net

 

$

 

$

3

 

 

$

12

 

$

23

 

 

In fiscal year 2005, the company closed its stabilizer bar facility located in Sheffield, England and sold the land and buildings. This facility was the primary operation of Meritor Suspensions Systems Holdings (UK) Ltd (MSSH), a 57-percent owned consolidated joint venture. During fiscal year 2006, the company substantially completed the liquidation of MSSH and recorded a $5 million gain, primarily related to the extinguishment of debt owed to the minority partner.

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):

 

 

 

June 30,

 

September 30,

 

 

 

2007

 

2006

 

Finished goods

 

$

210

 

$

186

 

Work in process

 

 

101

 

 

128

 

Raw materials, parts and supplies

 

 

195

 

 

174

 

Total

 

$

506

 

$

488

 

 

10.

Other Current Assets

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

 

 

 

June 30,

 

September 30,

 

 

 

2007

 

2006

 

Current deferred income tax assets

 

$

153

 

$

137

 

Customer reimbursable tooling and engineering

 

 

21

 

 

21

 

Asbestos-related recoveries (see Note 17)

 

 

7

 

 

8

 

Investment in debt defeasance trust

 

 

6

 

 

1

 

Assets held for sale

 

 

7

 

 

7

 

Prepaids and other

 

 

52

 

 

74

 

Other current assets

 

$

246

 

$

248

 

 

 

 

11

 


ARVINMERITOR, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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, buildings and equipment associated with previous restructuring and other rationalization actions.

11.

Other Assets

Other Assets are summarized as follows (in millions): 

 

 

June 30,

 

September 30,

 

 

 

2007

 

2006

 

Non-current deferred income tax assets

 

$

587

 

$

570

 

Investments in non-consolidated joint ventures

 

 

107

 

 

95

 

Long-term receivables

 

 

44

 

 

41

 

Prepaid pension costs

 

 

109

 

 

35

 

Unamortized debt issuance costs

 

 

32

 

 

31

 

Capitalized software costs, net

 

 

25

 

 

27

 

Asbestos-related recoveries (see Note 17)

 

 

27

 

 

30

 

Patents, licenses and other intangible assets (less accumulated 
amortization: $4 at June 30, 2007 and $7 at September 30, 2006)

 

 

12

 

 

20

 

Investment in debt defeasance trust

 

 

6

 

 

11

 

Note receivable due from EMCON, net of $9 million discount (see Note 4)

 

 

11

 

 

 

Other

 

 

46

 

 

36

 

Other assets

 

$

1,006

 

$

896

 

The note receivable due from EMCON bears interest at rate of 4 percent per annum and is payable in June 2012 or earlier upon a change in control. EMCON may prepay the note at any time. The company recorded the note, net of a $9 million discount, to reflect the difference between the stated rate per the agreement of 4 percent and the effective interest rate of approximately 9 percent. This discount will be amortized over the term of the note as interest income.

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 economic useful life of the software.

Patents, licenses and other intangible assets include an intangible asset associated with the retirement pension plans of $10 million and other amortizable intangible assets of $2 million. The company’s pension intangible asset is 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 in total thereafter.

 

 

 

 

 

 

 

12

 


ARVINMERITOR, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

12.

Other Current Liabilities

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

 

 

 

June 30,

 

 

September 30,

 

 

 

 

2007

 

 

2006

 

 

 

 

 

 

 

 

 

Compensation and benefits

 

$

206

 

227

 

Income taxes

 

 

99

 

 

164

 

Taxes other than income taxes

 

 

59

 

 

54

 

Product warranties

 

 

42

 

 

52

 

Restructuring (see Note 5)

 

 

62

 

 

40

 

Reserve for labor disruption (see Note 17)

 

 

2

 

 

29

 

Current deferred income tax liabilities

 

 

8

 

 

7

 

Asbestos-related liabilities (see Note 17)

 

 

10

 

 

11

 

Interest

 

 

25

 

 

8

 

Environmental (see Note 17)

 

 

14

 

 

14

 

Due to EMCON (see Note 4)

 

 

67

 

 

 

AB Volvo joint venture payable

 

 

25

 

 

 

Other               

 

 

90

 

 

100

 

Other current liabilities      

 

$

709

 

$

706

 

 

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. This obligation was recorded in Other Liabilities at September 30, 2006 (see Note 13).

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.

 

 

 

 

 

13

 


ARVINMERITOR, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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

 

 

 

Nine Months Ended

 

 

 

June 30,

 

 

 

2007

 

2006

 

Total product warranties -- beginning of period            

 

$

122

 

$

95

 

Accruals for product warranties               

 

 

45

 

 

42

 

Payments                       

 

 

(41

)

 

(41

)

Retained obligations due to EMCON

 

 

(13

)

 

 

Product warranties assumed by EMCON

 

 

(11

)

 

 

Change in estimates and other                   

 

 

(2

 

(3

)

Total product warranties – end of period              

 

 

100

 

 

93

 

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

 

 

(58

)

 

(42

)

Product warranties – current portion            

 

$

42

 

$

51

 

 

13.

Other Liabilities

Other Liabilities are summarized as follows (in millions):

 

 

June 30,

 

September 30,

 

 

 

2007

 

2006

 

 

 

 

 

 

 

 

 

Asbestos – related liabilities (see Note 17)

 

$

39

 

$

46

 

Non-current deferred income tax liabilities

 

 

29

 

 

25

 

Product warranties (see Note 12)

 

 

58

 

 

70

 

Environmental (see Note 17)

 

 

10

 

 

13

 

Fair value of interest rate swaps, net of collateral of $2 million
  and $6 million, respectively

 

 

8

 

 

 

AB Volvo joint venture payable (see Note 12)

 

 

 

 

23

 

Other

 

 

80

 

 

82

 

Other liabilities

 

$

224

 

$

259

 

 

 

 

 

 

 

 

 

 

14

 


ARVINMERITOR, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

14.

Long-Term Debt

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

 

 

 

June 30,

 

September 30,

 

 

 

2007

 

2006

 

6-5/8 percent notes due 2007

 

$

 

$

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

 

 

276

 

 

311

 

Term Loan B due 2012

 

 

 

 

170

 

8-1/8 percent notes due 2015

 

 

251

 

 

251

 

4.625 percent convertible senior notes due 2026(1)

 

 

300

 

 

300

 

9.5 percent subordinated debentures due 2027

 

 

 

 

39

 

4.0 percent convertible senior notes due 2027(1)

 

 

200

 

 

 

Accounts receivable securitization (see Note 7)

 

 

89

 

 

40

 

Lines of credit and other

 

 

21

 

 

18

 

Fair value adjustment of notes

 

 

1

 

 

8

 

Subtotal

 

 

1,226

 

 

1,230

 

Less: current maturities

 

 

(108

)

 

(56

)

Long-term debt                  

 

$

1,118

 

$

1,174

 

(1) The 4.625 percent and 4.0 percent convertible notes contain a put and call feature, which allows for earlier redemption beginning in 2016 and 2019, respectively (see Convertible Securities below).

Debt Securities

In March and June 2007, the company purchased, at a premium, $18 million and $17 million, respectively, of outstanding 8-3/4 percent notes on the open market. In March 2006, the company completed the repurchase of $600 million aggregate principal amount of its previously outstanding notes in the following amounts: $195 million of its outstanding $200 million 6.625 percent notes due in 2007; $95 million of its outstanding $100 million 6.75 percent notes due in 2008; $225 million of its outstanding $302 million 6.8 percent notes due in 2009; and $85 million of its outstanding $91 million 7.125 percent notes also due in 2009. The repurchase was accounted for as an extinguishment of debt and, accordingly, $9 million was recognized as a loss on debt extinguishment and is included in interest expense, net in the consolidated statement of operations. The loss primarily consists of debt reacquisition costs associated with the note repurchase, unamortized debt issuance costs and debt discount, and the premium paid to repurchase the notes.

 

Convertible Securities

In February 2007, the company issued $200 million of 4.00 percent convertible senior unsecured notes due 2027 (the “2007 convertible notes”). The 2007 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. The 2007 convertible notes were registered for resale under the Securities Act of 1933 in June 2007. Net proceeds received by the company, after issuance costs, were $194 million. The related debt issuance costs are being amortized over a twelve-year term, which represents the earliest date that the company can redeem the 2007 convertible notes. The company used the net proceeds from this offering to pay in full the $170 million aggregate principal amount outstanding on the Term Loan B (see Senior Secured Credit Facilities below).

Cash interest at a rate of 4.00 percent per annum from the date of issuance through February 15, 2019 is payable semi-annually in arrears on February 15 and August 15 of each year. After February 15, 2019, the principal amount of the 2007 convertible notes will be subject to accretion at a rate that provides holders with an aggregate annual yield to maturity of 4.00 percent.

 

15

 


ARVINMERITOR, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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.     

Holders may convert their notes at any time on or after February 15, 2025. Prior to February 15, 2025, holders may convert their notes only under the following circumstances:

during any calendar quarter, after the calendar quarter ended March 31, 2007, 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 the company for redemption.

On or after February 15, 2019, the company may redeem the 2007 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 2022, or upon certain fundamental changes, holders may require the company to purchase all or a portion of their 2007 convertible notes at a purchase price in cash equal to 100 percent of the accreted principal amount plus any accrued and unpaid interest.

The 2007 convertible notes are fully and unconditionally guaranteed by certain domestic subsidiaries of the company that currently guarantee the company’s obligation under its senior secured credit facility and other publicly-held notes (see Senior Secured Credit Facilities below).

Subordinated Debentures

In March 2007, the company redeemed the $39 million of outstanding junior subordinated debentures at a premium and recognized $2 million as a loss on debt extinguishment, which is included in interest expense, net in the consolidated statement of operations.

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 included a $980 million revolving credit facility and a $170 million term loan (Term Loan B) maturing in 2011 and 2012, respectively.

In February 2007, the company amended the revolving credit facility, reducing the borrowing capacity to $900 million, and used the net proceeds from the issuance of the 2007 convertible notes to pay in full the $170 million aggregate principal amount outstanding on the Term Loan B. As a result of the repayment, the company recognized a $3 million loss on debt extinguishment, which is included in interest expense, net in the consolidated statement of operations.

Borrowings under the amended 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 facility. At June 30, 2007, 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 amended revolving credit facility includes a $150 million limit on the issuance of letters of credit. At June 30, 2007 and September 30, 2006, approximately $30 million and $25 million letters of credit, respectively, were issued.

Borrowings under the amended revolving credit facility are collateralized by approximately $950 million 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 amended revolving credit facility requires the company to maintain a total net debt to earnings before interest, taxes, depreciation and amortization (EBITDA) ratio no greater than 5.00x and a minimum fixed charge coverage ratio (EBITDA less capital expenditures to interest expense) no less than 1.25x. At June 30, 2007, the company was in compliance with all covenants. 

 

16

 


ARVINMERITOR, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Certain of the company’s subsidiaries, as defined in the credit agreement, irrevocably and unconditionally guarantee amounts outstanding under the amended revolving credit facility. Similar subsidiary guarantees are provided for the benefit of the holders of the publicly-held notes outstanding under the company’s indentures (see Note 20).

Accounts Receivable Securitization

The company participates in a U.S. accounts receivable securitization program to enhance financial flexibility and lower interest costs (see Note 7). 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 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 5.31 percent at June 30, 2007. Amounts outstanding under this agreement are reported as short-term debt in the consolidated balance sheet and are collateralized by approximately $258 million of eligible receivables purchased and held by ARC at June 30, 2007. 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 June 30, 2007, 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.

Interest Rate Swap Agreements

As of June 30, 2007, 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 $175 million of the 8-1/8 percent notes to variable interest rates. As of June 30, 2007, the fair values of the 8-3/4 and 8-1/8 percent swaps were liabilities of $8 million and $2 million, respectively, and are included in Other Liabilities. The fair value of the 6.8 percent swaps was not significant as of June 30, 2007 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 June 30, 2007 and September 30, 2006, the company had placed $2 million and $6 million, respectively, on deposit with the counterparty as collateral and recorded such deposits as reductions in the carrying value of the associated interest rate swaps. 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 $175 million, respectively, and pays variable rates based on three-month LIBOR plus a weighted-average spread of 3.13 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. Included in the fair value adjustment of notes is $9 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.

In April 2007, the company entered into interest rate swaption contracts with various banks. A swaption is an option to enter into a swap agreement. The seller of a swaption receives a premium in exchange for the obligation to enter into the agreed-upon underlying swap if the option is exercised. The option with respect to one contract was exercised by the bank and the company entered into the underlying $25 million notional interest rate swap agreement. The other contracts with a total notional amount of $75 million were early terminated in June 2007. The company recognized a loss on the termination and exercise of approximately $2 million in the third quarter of fiscal year 2007, which is recorded in interest expense, net in the consolidated statement of operations.

The company classifies the cash flows associated with the interest rate swaps 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.

Leases

The company has various operating leasing arrangements. Future minimum lease payments under non-cancelable operating leases are $21 million in 2007, $16 million in 2008, $13 million in 2009, $10 million in 2010, $8 million in 2011 and $11 million thereafter.

 

 

 

 

17

 


ARVINMERITOR, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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 nine months ended June 30, 2007 and 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 Value

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

 

 

 

June 30,

 

September 30,

 

 

 

2007

 

2006

 

 

 

 

Carrying

 

 

Fair

 

 

Carrying

 

 

Fair

 

 

 

 

Value

 

 

Value

 

 

Value

 

 

Value

 

Cash and cash equivalents

 

$

284

 

 

284

 

$

350

 

$

350

 

Short-term investments

 

 

 

 

 

 

5

 

 

5

 

Interest rate swaps - asset

 

 

 

 

 

 

1

 

 

1

 

Investment in debt defeasance trust

 

 

12

 

 

12

 

 

12

 

 

12

 

Collateral on interest rate swap liability

 

 

2

 

 

2

 

 

6

 

 

6

 

Interest rate swaps - liability

 

 

10

 

 

10

 

 

6

 

 

6

 

Foreign exchange contracts - liability

 

 

4

 

 

4

 

 

1

 

 

1

 

Short-term debt

 

 

108

 

 

108

 

 

56

 

 

56

 

Long-term debt

 

 

1,118

 

 

1,203

 

 

1,174

 

 

1,141

 

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.

 

18

 


ARVINMERITOR, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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):

 

 

 

June 30,

 

September 30,

 

 

 

2007

 

2006

 

Retiree medical liability

 

$

260

 

$

255

 

Pension liability

 

 

219

 

 

243

 

Other

 

 

48

 

 

43

 

Subtotal

 

 

527

 

 

541

 

Less: current portion (included in other current liabilities)

 

 

(54

)

 

(54

)

Retirement benefit liabilities

 

$

473

 

$

487

 

The components of net periodic pension and retiree medical expense, including discontinued operations, for the three months ended June 30, are as follows:

 

 

 

2007

 

2006

 

 

 

Pension

 

Retiree Medical

 

Pension

 

Retiree Medical

 

Service cost

 

$

9

 

$

1

 

$

11

 

$

1

 

Interest cost

 

 

25

 

1

10

 

 

24

 

 

8

 

Assumed return on plan assets

 

 

(27

)

 

 

 

(24

)

 

 

Amortization of prior service costs (1)

 

 

(15

)

 

(2

)

 

2

 

 

(2

)

Recognition of transition asset

 

 

 

 

 

 

(1

)

 

 

Recognized actuarial loss

 

 

11

 

 

6

 

 

11

 

 

6

 

Total expense

 

$

3

 

$

15

 

$

23

 

$

13

 

The components of net periodic pension and retiree medical expense, including discontinued operations, for the nine months ended June 30, are as follows:

 

 

 

2007

 

2006

 

 

 

Pension

 

Retiree Medical

 

Pension

 

Retiree Medical

 

Service cost

 

$

27

 

$

2

 

$

33

 

$

3

 

Interest cost

 

 

75

 

 

28

 

 

70

 

 

19

 

Assumed return on plan assets

 

 

(80

)

 

 

 

(73

)

 

 

Amortization of prior service costs (1)

 

 

(13

)

 

(6

)

 

5

 

 

(14

)

Recognition of transition asset

 

 

 

 

 

 

(1

)

 

 

Recognized actuarial loss

 

 

32

 

 

19

 

 

39

 

 

21

 

Total expense

 

$

41

 

$

43

 

$

73

 

$

29

 

 

(1) The company recorded a reduction in pension expense of $15 million in the third quarter of fiscal year 2007 to fully amortize negative prior service cost as a result of a pension curtailment triggered by the sale if its ET business. This reduction in pension expense was included in the loss on the sale of ET and recorded in discontinued operations in the consolidated statement of operations.

 

Retirement Pension Plans

In April 2007, the company announced a freeze of its defined benefit pension plan for salaried and non-represented employees in the United States, effective January 1, 2008. The change will affect approximately 3,800 employees including certain

 

19

 


ARVINMERITOR, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

employees who will continue to accrue benefits for an additional transition period, ending June 30, 2011. After these freeze dates, the company will instead make additional contributions to its defined contribution savings plan on behalf of the affected employees. The amount of the savings plan contribution will be based on a percentage of the employee’s pay, with the contribution percentage increasing as the employee ages. These changes do not affect current retirees or represented employees. The company will begin recording the impact of the freeze in the fourth quarter of fiscal year 2007, 90 days from the plan amendment, which is consistent with the 90-day lag between the company’s normal plan measurement date of June 30 and its fiscal year-end.

The sale of the company’s LVA North American filters and exhaust businesses in the second quarter of fiscal year 2006 (see Note 4) triggered a pension curtailment, which required a new valuation of the U.S. pension plan. The measurement date of this valuation was March 31, 2006 and resulted in an $81 million reduction in the additional minimum pension liability. For accounting purposes, the company recorded the impact of this valuation in June 2006, 90 days from the March 31 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. This adjustment, net of a deferred tax asset of $31 million, was charged to accumulated other comprehensive loss in the consolidated balance sheet. The reduction in the additional minimum pension liability was primarily due to an increase in the discount rate to 6.3 percent from 5.8 percent. The pension curtailment did not have a material impact on the company’s results of operations for the quarter ended June 30, 2006.

In the second quarter of fiscal year 2006, the company changed its U.S. pension plan actuary and obtained a new U.S. plan valuation as a result of this change. The measurement date of this valuation was October 1, 2005. Accounting rules require the company to use the June 30 valuation unless a more current valuation is available. Since a more current valuation was available, the company recorded a $91 million reduction in the additional minimum pension liability in the second quarter of fiscal year 2006. This adjustment, net of a deferred tax asset of $35 million, was charged to accumulated other comprehensive loss in the consolidated balance sheet. The reduction in additional minimum pension liability was primarily due to an increase in the discount rate to 5.8 percent from 5.3 percent.

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 June 30, 2007 to be approximately $23 million, of which $8 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 June 30, 2007 to be approximately $57 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 has been put into place. This liability is discounted using a discount rate of 5-percent and is approximately $10 million at June 30, 2007. The undiscounted estimate of these costs is approximately $15 million.

 

 

 

 

20

 


ARVINMERITOR, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(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 and other

 

 

(2

)

 

(2

)

 

(4

)

Change in cost estimate

 

 

 

 

1

 

 

1

 

Balance at June 30, 2007

 

$

8

 

16

 

24

 

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 Industries, Inc. 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 40,134 and 51,895 pending asbestos-related claims at June 30, 2007 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):

 

 

 

June 30, 2007

 

September 30, 2006

 

Pending and future claims     

 

$

36

 

$

41

 

Shortfall and other     

 

 

6

 

 

9

 

Asbestos-related reserves    

 

$

42

 

$

50

 

Asbestos-related recoveries        

 

$

27

 

$

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 payments 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.

 

21

 


ARVINMERITOR, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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.

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 March 31, 2007.

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 $28 million to $38 million. After consultation with Bates White, Maremont determined that as of March 31, 2007, the most likely and probable liability for pending and future claims over the next four years is $36 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 indemnity cost of resolving nonmalignant claims with plaintiff’s 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 nine months ended June 30, 2007 and 2006.

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 $27 million. The difference between the estimated liability and the 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

 

22

 


ARVINMERITOR, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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 curre nt estimates and, therefore, could have a material impact on the company’s financial position and results of operations.

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 Automotive, Inc. 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 June 30, 2007 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 (described below) 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 June 30, 2007 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,

 

23

 


ARVINMERITOR, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

expedited freight and logistical costs and other costs associated with production disruptions at certain customers’ facilities. During the second quarter of fiscal year 2007 the company reached final settlement for a portion of the remaining contingent liability. Accordingly, the liability was reduced and a benefit to income of $9 million was recorded in the consolidated statement of operations. The company believes that any future adjustments related to this matter will not have a material effect on the company’s results of operations and financial position.

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 it 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.

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. In the second quarter of fiscal year 2007, the purchaser reached a settlement for these claims. As a result the company reduced its recorded liability by $3 million, the benefit of which is recorded in discontinued operations in the consolidated statement of operations.

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

 

Nine Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2007

 

2006

 

2007

 

2006

 

Net income (loss)

 

$

(70

)

$

20

 

$

(157

)

$

99

 

Foreign currency translation adjustments

 

 

52

 

 

43

 

 

115

 

 

62

 

Recognition of accumulated ET currency translation adjustments

 

 

(91

)

 

 

 

(91

)

 

 

Minimum pension liability, net of tax

 

 

 

 

50

 

 

 

 

105

 

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

 

 

2

 

 

(2

)

 

1

 

 

(3

)

Comprehensive income (loss)

 

$

(107

)

$

111

 

$

(132

)

$

263

 

 

 

 

 

24

 


ARVINMERITOR, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(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 the second quarter of fiscal year 2007, the company began reporting operating results under two segments: Light Vehicle Systems (LVS) and Commercial Vehicle Systems (CVS). 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.

Effective with the 2007 fiscal year, the company measures segment operating performance based on income (loss) from continuing operations 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.

Segment information is summarized as follows (in millions):

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2007

 

2006

 

2007

 

2006

 

Sales:

 

 

 

 

 

 

 

 

 

 

 

 

 

Light Vehicle Systems

 

$

613

 

$

609

 

$

1,687

 

$

1,731

 

Commercial Vehicle Systems

 

 

1,049

 

 

1,126

 

 

3,170

 

 

3,097

 

Total sales

 

$

1,662

 

$

1,735

 

$

4,857

 

$

4,828

 

EBITDA:

 

 

 

 

 

 

 

 

 

 

 

 

 

Light Vehicle Systems

 

$

12

 

$

28

 

$

34

 

$

46

 

Commercial Vehicle Systems

 

 

63

 

 

41

 

 

186

 

 

219

 

Segment EBITDA

 

 

75

 

 

69

 

 

220

 

 

265

 

Unallocated corporate costs

 

 

(7

)

 

(2

)

 

(8

)

 

(4

)

ET corporate allocations (1)

 

 

(9

)

 

(7

)

 

(27

)

 

(21

)

Depreciation and amortization

 

 

(32

)

 

(30

)

 

(96

)

 

(91

)

Loss on sale of receivables

 

 

(3

)

 

 

 

(6

)

 

 

Interest expense, net and other

 

 

(27

)

 

(28

)

 

(88

)

 

(103

)

Benefit (provision) for income taxes

 

 

(1

)

 

2

 

 

(2

)

 

16

 

Income (loss) from continuing operations

 

$

(4

)

$

4

 

$

(7

)

$

62

 

(1) As a result of the sale of ET, certain corporate costs previously allocated to ET’s segment results are reported in continuing operations. These costs have not been allocated to the company’s two business segments and are included in “ET corporate allocations” in the above segment information.

 

 

 

25

 


ARVINMERITOR, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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

 

 

 

 

11

 

 

11

 

Balance at June 30, 2007

 

$

70

 

$

444

 

$

514

 

 

 

20.

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 secured revolving credit facility. 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, 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 FINANCIAL STATEMENTS

(Unaudited)

 

Condensed Consolidating Statement of Operations

(In millions)

 

 

 

Three Months Ended June 30, 2007

 

 

 

Parent

 

Guarantors

 

Non-Guarantors

 

Elims

 

Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

External

 

$

 

$

604

 

$

1,058

 

$

 

$

1,662

 

Subsidiaries

 

 

 

 

39

 

 

65

 

 

(104

)

 

 

Total sales

 

 

 

 

643

 

 

1,123

 

 

(104

)

 

1,662

 

Cost of sales

 

 

(6

)

 

(589

)

 

(1,035

)

 

104

 

 

(1,526

)

GROSS MARGIN

 

 

(6

)

 

54

 

 

88

 

 

 

 

136

 

Selling, general and administrative

 

 

(32

)

 

(23

)

 

(38

)

 

 

 

(93

)

Restructuring costs

 

 

(5

 

(11

)

 

(8

)

 

 

 

(24

)

OPERATING INCOME (LOSS)

 

 

(43

)

 

20

 

 

42

 

 

 

 

19

 

Equity in earnings of affiliates

 

 

 

 

7

 

 

3

 

 

 

 

10

 

Other income (expense), net

 

 

15

 

 

(6

)

 

(9

)

 

 

 

 

Interest expense, net

 

 

(27

)

 

9

 

 

(9

)

 

 

 

(27

)

INCOME (LOSS) BEFORE INCOME TAXES

 

 

(55

)

 

30

 

 

27

 

 

 

 

2

 

Benefit (provision) for income taxes

 

 

17

 

 

(12

)

 

(6

)

 

 

 

(1

)

Minority interests

 

 

 

 

 

 

(5

)

 

 

 

(5

)

Equity in net income (loss) of consolidated subsidiaries        

 

 

34

 

 

11

 

 

 

 

(45

)

 

 

INCOME (LOSS) FROM CONTINUING OPERATIONS

 

 

(4

)

 

29

 

 

16

 

 

(45

)

 

(4

)

INCOME (LOSS) FROM DISCONTINUED OPERATIONS

 

 

(66

)

 

(59

)

 

(41

)

 

100

 

 

(66

)

NET INCOME (LOSS)

 

$

(70

)

$

(30

)

$

(25

)

$

55

 

$

(70

)

 

 

 

 

 

 

 

27

 


ARVINMERITOR, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Condensed Consolidating Statement of Income

(In millions)

  

 

 

Three Months Ended June 30, 2006

 

 

 

Parent

 

Guarantors

 

Non-Guarantors

 

Elims

 

Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

External

 

$

 

$

705

 

$

1,030

 

$

 

$

1,735

 

Subsidiaries

 

 

 

 

53

 

 

158

 

 

(211

)

 

 

Total sales

 

 

 

 

758

 

 

1,188

 

 

(211

)

 

1,735

 

Cost of sales

 

 

(6

)

 

(777

)

 

(1,046

)

 

211

 

 

(1,618

)

GROSS MARGIN

 

 

(6

)

 

(19

)

 

142

 

 

 

 

117

 

Selling, general and administrative

 

 

(25

)

 

(52

)

 

(18

)

 

 

 

(95

)

Restructuring costs

 

 

 

 

27

 

 

(28

)

 

 

 

(1

)

Other income (expense)

 

 

(2

)

 

 

 

5

 

 

 

 

3

 

OPERATING INCOME (LOSS)

 

 

(33

)

 

(44

)

 

101

 

 

 

 

24

 

Equity in earnings of affiliates

 

 

 

 

6

 

 

4

 

 

 

 

10

 

Other income (expense), net

 

 

16

 

 

(9

)

 

(7

)

 

 

 

 

Interest expense, net

 

 

(27

)

 

1

 

 

(2

)

 

 

 

(28

)

INCOME (LOSS) BEFORE INCOME TAXES

 

 

(44

)

 

(46

)

 

96

 

 

 

 

6

 

Benefit (provision) for income taxes

 

 

15

 

 

3

 

 

(16

)

 

 

 

2

 

Minority interests

 

 

 

 

 

 

(4

)

 

 

 

(4

)

INCOME (LOSS) FROM CONTINUING OPERATIONS

 

 

(29

)

 

(43

)

 

76

 

 

 

 

4

 

INCOME (LOSS) FROM DISCONTINUED OPERATIONS

 

 

2

 

 

50

 

 

(36

)

 

 

 

16

 

Equity in net income (loss) of consolidated subsidiaries

 

 

47

 

 

9

 

 

 

 

(56

)

 

 

NET INCOME (LOSS)

 

$

20

 

$

16

 

$

40

 

$

(56

)

$

20

 

 

 

 

 

 

 

28

 


ARVINMERITOR, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Condensed Consolidating Statement of Operations

(In millions)

 

 

 

 

Nine Months Ended June 30, 2007

 

 

 

Parent

 

Guarantors

 

Non-Guarantors

 

Elims

 

Consolidated