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 June 29, 2008

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 


73,658,781 shares of Common Stock, $1.00 par value, of ArvinMeritor, Inc. were outstanding on June 29, 2008.


INDEX

 

PART I.

FINANCIAL INFORMATION:

 

 

 

 

 

 

Item 1.

Financial Statements:

Page

 

 

 

No.

 

 

Consolidated Statement of Operations - - Three and Nine Months

 

 

 

Ended June 30, 2008 and 2007

2

 

 

 

 

 

 

Consolidated Balance Sheet - -

 

 

 

June 30, 2008 and September 30, 2007

3

 

 

 

 

 

 

Condensed Consolidated Statement of Cash Flows - -

 

 

 

Nine Months Ended June 30, 2008 and 2007

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

49

 

 

 

 

PART II.

OTHER INFORMATION:

 

       
 

Item 1.

Legal Proceedings

49

       
 

Item 1A.

Risk Factors

50

       

 

Item 5.

Other Information

51

 

 

 

 

 

Item 6.

Exhibits

52

 

 

 

 

 

 

 

 

Signatures

 

 

53

   

1

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,

 
   

2008

 

2007

 

2008

 

2007

 
   

(Unaudited)

 

Sales

 

$

2,003

 

$

1,662

 

$

5,447

 

$

4,857

 

Cost of sales

   

(1,807

)

 

(1,526

)

 

(4,954

)

 

(4,474

)

GROSS MARGIN

   

196

   

136

   

493

   

383

 

Selling, general and administrative

   

(130

)

 

(93

)

 

(327

)

 

(265

)

Restructuring costs

   

(4

)

 

(24

)

 

(19

)

 

(61

)

Other income (expense), net

   

   

   

(1

)

 

12

 

OPERATING INCOME

   

62

   

19

   

146

   

69

 

Equity in earnings of affiliates

   

12

   

10

   

29

   

24

 

Interest expense, net

   

(19

)

 

(27

)

 

(66

)

 

(88

)

INCOME BEFORE INCOME TAXES

   

55

   

2

   

109

   

5

 

Benefit (provision) for income taxes

   

3

   

(1

)

 

(21

)

 

(2

)

Minority interests

   

(7

)

 

(5

)

 

(14

)

 

(10

)

INCOME (LOSS) FROM CONTINUING OPERATIONS

   

51

   

(4

)

 

74

   

(7

)

LOSS FROM DISCONTINUED OPERATIONS

   

(7

)

 

(66

)

 

(22

)

 

(150

)

NET INCOME (LOSS)

 

$

44

 

$

(70

)

$

52

 

$

(157

)

                           

BASIC EARNINGS (LOSS) PER SHARE

                         

Continuing operations

 

$

0.71

 

$

(0.06

)

$

1.03

 

$

(0.10

)

Discontinued operations

   

(0.10

)

 

(0.93

)

 

(0.31

)

 

(2.14

)

Basic earnings (loss) per share

 

$

0.61

 

$

(0.99

)

$

0.72

 

$

(2.24

)

                           

DILUTED EARNINGS (LOSS) PER SHARE

                         

Continuing operations

 

$

0.70

 

$

(0.06

)

$

1.02

 

$

(0.10

)

Discontinued operations

   

(0.10

)

 

(0.93

)

 

(0.30

)

 

(2.14

)

Diluted earnings (loss) per share

 

$

0.60

 

$

(0.99

)

$

0.72

 

$

(2.24

)

                           

Basic average common shares outstanding

   

72.2

   

70.8

   

72.1

   

70.1

 

Diluted average common shares outstanding

   

72.9

   

70.8

   

72.6

   

70.1

 
                           

Cash dividends per common share

 

$

0.10

 

$

0.10

 

$

0.30

 

$

0.30

 

See notes to consolidated financial statements.

2

ARVINMERITOR, INC.

CONSOLIDATED BALANCE SHEET

(in millions)

 

 

 

June 30,

 

September 30,

 

 

 

2008

 

2007

 

 

 

(Unaudited) 

 

ASSETS

 

 

 

 

 

 

 

CURRENT ASSETS:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

432

 

$

409

 

Receivables, trade and other, net

 

 

1,340

 

 

1,144

 

Receivables, EMCON Technologies Holdings Limited

 

 

16

 

 

79

 

Inventories

 

 

638

 

 

541

 

Other current assets

 

 

242

 

 

216

 

TOTAL CURRENT ASSETS

 

 

2,668

 

 

2,389

 

NET PROPERTY

 

 

771

 

 

738

 

GOODWILL

 

 

525

 

 

520

 

OTHER ASSETS 

 

 

1,123

 

 

1,142

 

TOTAL ASSETS

 

$

5,087

 

$

4,789

 

 

 

 

   

 

 

 

LIABILITIES AND SHAREOWNERS’ EQUITY

 

 

   

 

 

 

CURRENT LIABILITIES:

 

 

   

 

 

 

Short-term debt

 

$

231

 

$

18

 

Accounts payable

 

 

1,347

 

 

1,342

 

Liabilities, EMCON Technologies Holdings Limited

 

 

48

 

 

61

 

Other current liabilities

 

 

614

 

 

658

 

TOTAL CURRENT LIABILITIES

 

 

2,240

 

 

2,079

 

LONG-TERM DEBT

 

 

1,061

 

 

1,130

 

RETIREMENT BENEFITS

 

 

790

 

 

763

 

OTHER LIABILITIES

 

 

238

 

 

209

 

MINORITY INTERESTS

 

 

78

 

 

65

 

SHAREOWNERS’ EQUITY:

 

 

   

 

 

 

Common stock (June 30, 2008 and September 30, 2007, 73.7 and 72.6 shares issued and outstanding, respectively)

 

 

72

 

 

72

 

Additional paid-in capital

 

 

626

 

 

618

 

Retained earnings

 

 

152

 

 

128

 

Treasury stock (June 30, 2008 and September 30, 2007, 0.1 shares)

 

 

(3

)

 

(3

)

Accumulated other comprehensive loss

 

 

(167

)

 

(272

)

TOTAL SHAREOWNERS’ EQUITY

 

 

680

 

 

543

 

TOTAL LIABILITIES AND SHAREOWNERS’ EQUITY

 

$

5,087

 

$

4,789

 


See notes to consolidated financial statements.

3

ARVINMERITOR, INC.

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

(in millions) 

 

 

Nine Months Ended June 30,

 

 

2008

 

2007

 

 

 

(Unaudited)

OPERATING ACTIVITIES

 

 

 

 

 

 

 

Net income (loss)

 

$

52

 

$

(157

)

Less: loss from discontinued operations, net of tax

   

(22

)

 

(150

)

Income (loss) from continuing operations

   

74

   

(7

)

Adjustments to income (loss) from continuing operations to arrive at operating cash flows provided by (used for) continuing operations:

 

 

   

 

   

Depreciation and amortization

 

 

106

 

 

96

 

Pension and retiree medical expense

   

78

   

99

 

Gain on divestitures

   

   

(2

)

Adjustment to impairment reserves, net

 

 

 

 

(10

)

Restructuring costs, net of payments

 

 

(7

)

 

38

 

Loss on debt extinguishment

   

3

   

6

 

Other adjustments to income (loss) from continuing operations

 

 

(3

)

 

6

 

Pension and retiree medical contributions

 

 

(62

)

 

(182

)

Proceeds from terminations of interest rate swaps

   

28

   

 

Changes in off-balance sheet receivable securitization and factoring

 

 

209

 

 

115

 

Changes in assets and liabilities, excluding effects of acquisitions, divestitures,

foreign currency adjustments and discontinued operations

 

 

(403

)

 

(231

)

Cash flows provided by (used for) continuing operations

 

 

23

 

 

(72

)

Cash flows used for discontinued operations

 

 

(17

)

 

(118

)

CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES

 

 

6

 

 

(190

)

INVESTING ACTIVITIES

 

 

   

 

   

Capital expenditures

 

 

(118

)

 

(72

)

Acquisitions of businesses and investments, net of cash acquired

 

 

(41

)

 

(2

)

Proceeds from disposition of property and businesses

   

9

   

11

 

Proceeds from investments and marketable securities

   

5

   

5

 

Net investing cash flows provided by discontinued operations

 

 

55

 

 

177

 

CASH PROVIDED BY (USED FOR) INVESTING ACTIVITIES

 

 

(90

)

 

119

 

FINANCING ACTIVITIES

 

 

   

 

   

Borrowings on accounts receivable securitization program

 

 

118

 

 

49

 

Issuance of convertible notes

   

   

200

 

Repayment of notes and term loan

 

 

(5

)

 

(249

)

Borrowings on lines of credit and other, net

 

 

8

 

 

 

Net change in debt

 

 

121

 

 

 

Debt issuance and extinguishment costs

   

(6

)

 

(10

)

Proceeds from exercise of stock options

   

   

21

 

Cash dividends

 

 

(23

)

 

(21

)

Other financing activities

   

   

(1

)

CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES

 

 

92

 

 

(11

)

EFFECT OF CHANGES IN FOREIGN CURRENCY EXCHANGE

 

 

   

 

   

RATES ON CASH AND CASH EQUIVALENTS

 

 

15

 

 

16

 

CHANGE IN CASH AND CASH EQUIVALENTS

 

 

23

 

 

(66

)

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD

 

 

409

 

 

350

 

CASH AND CASH EQUIVALENTS AT END OF PERIOD

 

$

432

 

$

284

 

See notes to consolidated financial statements.

4

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 commercial truck, trailer, light vehicle and specialty original equipment manufacturers (OEM) and certain aftermarkets. The consolidated financial statements are those of the company and its consolidated subsidiaries.

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, 2007. The results of operations for the nine months ended June 30, 2008, 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 2008 and 2007 ended on June 29, 2008, and July 1, 2007, 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.

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,

 
   

2008

 

2007

 

2008

 

2007

 
                   

Basic average common shares outstanding

 

72.2

 

70.8

 

72.1

 

70.1

 

Impact of restricted stock

 

0.7

 

 

0.5

 

 

Diluted average common shares outstanding

 

72.9

 

70.8

 

72.6

 

70.1

 

 

At June 30, 2008, options to purchase 1.8 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 be anti-dilutive. 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. 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.

 

5

 

3.

New Accounting Standards


New accounting standards to be implemented:

In September 2006, the Financial Accounting Standards Board (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 No. 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 No. 157 will be applied prospectively and are not expected to have a material impact on the company’s consolidated financial position, results of operations or cash flows.

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. The recognition requirements of SFAS No. 158 were adopted by the company as of September 30, 2007. The initial adoption of SFAS No. 158 resulted in a reduction in shareowners’ equity of $357 million. This reduction is net of taxes of $193 million and is recorded in Accumulated Other Comprehensive Loss in the Consolidated Statement of Shareowners’ Equity. SFAS No. 158 also requires that companies measure the funded status of their defined benefit pension plans and other postretirement benefit plans as of the balance sheet date. Currently, the company uses a measurement date of June 30 for its defined benefit and other postretirement benefit plans. The measurement date provisions of SFAS No. 158 are effective for fiscal years ending after December 15, 2008 and will require the company to change its measurement date to September 30 from June 30.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities Including an Amendment of SFAS No. 115”, which permits an entity to measure certain financial assets and financial liabilities at fair value that are not currently required to be measured at fair value. Entities that choose to elect the fair value option will report unrealized gains and losses in earnings at each subsequent reporting date. The fair value option may be elected on an instrument-by-instrument basis, with a few exceptions. SFAS No. 159 amends previous guidance to extend the use of the fair value option to available-for-sale and held-to-maturity securities. The statement also establishes presentation and disclosure requirements to help financial statement users understand the effect of the election. SFAS No. 159 is effective as of the beginning of the first fiscal year beginning after November 15, 2007. We are currently assessing the potential impact, if any, of the standard on our financial condition and results of operations.

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements - an Amendment of ARB No. 51”. This Statement establishes accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a noncontrolling interest in a subsidiary should be reported as equity in the consolidated financial statements. SFAS No. 160 also changes the way the consolidated income statement is presented by requiring consolidated net income to be reported at amounts that include the amounts attributable to both the parent and the noncontrolling interest. It also requires disclosure, on the face of the consolidated statement of income, of the amounts of consolidated net income attributable to the parent and to the noncontrolling interest. The statement also requires that a parent recognize a gain or loss in net income when a subsidiary is deconsolidated. If a parent retains a noncontrolling equity investment in the former subsidiary, that investment is measured at its fair value. SFAS No. 160 is effective for fiscal years and interim periods within those fiscal years, beginning on or after December 15, 2008 and will be applied prospectively as of the beginning of the fiscal year in which it is initially applied, except for the presentation and disclosure requirements. The presentation and disclosure requirements will be applied retrospectively for all periods presented. We are currently assessing the potential impact of the standard on our financial position and results of operations.

6

In December 2007, the FASB issued SFAS No. 141 (Revised 2007) (“SFAS 141R”), “Business Combinations”, which replaces SFAS No. 141, Business Combinations. SFAS No. 141R retains the fundamental requirements in Statement No. 141 that the acquisition method of accounting (which Statement No. 141 called the purchase method) be used for all business combinations and for an acquirer to be identified for each business combination. The new standard extends the acquisition method of accounting to all transactions and other events in which one entity obtains control over one or more other businesses. It retains the guidance in Statement No. 141 for identifying and recognizing intangible assets separately from goodwill; however, it differs from Statement No. 141 in accounting for the negative goodwill and requires it to be recognized as a gain from a bargain purchase. The statement requires the acquirer to recognize the assets acquired, the liabilities assumed and any noncontrolling interest in the acquiree at the acquisition date, measured at their fair values as of that date, with limited exceptions specified in the statement. SFAS No. 141R applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The adoption of SFAS No. 141R is not expected to have a material impact on the company’s consolidated financial position and results of operations.

In March 2008, FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities – an Amendment of FASB Statement No. 133” which requires expanded disclosures about derivative and hedging activities. SFAS No. 161 has the same scope as SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities”. This statement changes the disclosure requirements for derivative instruments and hedging activities. Entities are required to provide enhanced disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under Statement No. 133 and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance and cash flows. SFAS No. 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. It encourages, but does not require, comparative disclosures for earlier periods at initial adoption. We are currently assessing the potential impact of the standard on disclosures in the company’s consolidated financial statements.

Accounting standards implemented in fiscal year 2008:

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

During the first quarter of fiscal year 2008, the company adopted FIN No. 48 and recognized a $5 million decrease to retained earnings in the consolidated balance sheet as of October 1, 2007 as the cumulative effect of a change in accounting principle. See Note 6 for further information regarding the adoption of FIN No. 48.

4.

Discontinued Operations


Emissions Technologies

The company’s Emissions Technologies (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 May 17, 2007, the company sold its ET business to EMCON Technologies Holdings Limited (EMCON), a private equity affiliate of J.P. Morgan Securities Inc. Total consideration was $310 million, including cash, a $20 million note and the assumption of certain liabilities, and adjustments for working capital and other items (see below). The ET business and any charges associated with the sale of ET are reported in discontinued operations in the consolidated statement of operations, statement of cash flows and related notes for all periods presented.

Gross amounts due from (to) EMCON were $16 million and ($48) million, respectively, at June 30, 2008 and primarily relate to amounts received (paid) by EMCON associated with certain assets and liabilities of ET that were retained by the company. Gross amounts due from (to) EMCON were $79 million and ($61) million, respectively, at September 30, 2007. Included in the amount due from EMCON at September 30, 2007 was the final working capital purchase price adjustment of $28 million, which was received in the second quarter of fiscal year 2008. In addition, pre-sale funding obligations, which were recorded as a receivable from EMCON and an offsetting payable in the consolidated balance sheet at September 30, 2007, were settled in the second quarter of fiscal year 2008.

7

Also recorded as a receivable due from EMCON at September 30, 2007, were amounts deposited in escrow related to the purchase price consideration for certain assets and assumed liabilities. 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 was to be transferred upon receipt by the buyer of required licenses and establishment of appropriate entities to receive the transferred assets. 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. The legal transfer of these operations was completed and related proceeds were received by the company in fiscal year 2008.

In the third quarter of fiscal year 2008, the company recognized approximately $8 million of pre-tax additional costs ($19 million pre-tax during the first nine months of fiscal year 2008) related to the sale of the ET business. These costs are primarily related to revised estimates for certain pre-sale liabilities retained by the company. In the nine months ended June 30, 2007, the company recognized approximately $170 million of pre-tax loss related to the sale of ET.

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. As of September 30, 2007, the company had completed the sale of its LVA filters, exhaust and motion control businesses, and its Gabriel South Africa ride control business. These businesses represented a significant portion of its combined LVA business and are reported as discontinued operations in the consolidated statement of operations through the date of sale.

In the third quarter of fiscal year 2007, the company recorded a non-cash impairment charge of $8 million to record its LVA European exhaust and filters business at fair value. This impairment charge is recorded in loss from discontinued operations in the consolidated statement of operations.

In the second quarter of fiscal year 2007, the company made a strategic decision to retain its Gabriel North America and Europe ride control aftermarket 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. As a result of this decision, the results of operations, assets and liabilities and cash flows of the Gabriel Ride Control aftermarket business are presented in continuing operations in the consolidated financial statements for all periods presented.

At September 30, 2007, $2 million of restructuring reserves primarily related to unpaid employee termination benefits are included in liabilities of continuing operations. At June 30, 2008, this amount was not significant (see Note 5).

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

  

   

Three Months Ended

 

Nine Months Ended

 
   

June 30,

 

June 30,

 
   

2008

 

2007

 

2008

 

2007

 

Sales:

                         

Emissions Technologies

 

$

 

$

440

 

$

 

$

2,143

 

Light Vehicle Aftermarket and other

   

1

   

59

   

7

   

159

 

Total Sales

 

$

1

 

$

499

 

$

7

 

$

2,302

 
                           

Loss before income taxes

 

$

(10

)

$

(77

)

$

(25

)

$

(182

)

Benefit for income taxes

   

3

   

11

   

3

   

32

 

Loss from discontinued operations

 

$

(7

)

$

(66

)

$

(22

)

$

(150

)

 

8

 

5.

Restructuring Costs


At June 30, 2008 and September 30, 2007, $51 million and $59 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, 2008 are as follows (in millions):

                                 
   

Employee Termination
Benefits

 

Asset Impairment

 

Plant Shutdown

& Other

 

 

 

Total

Balance at September 30, 2007

   

$

59

     

$

     

$

     

$

59

 

Activity during the period:

                                       

Charges to continuing operations

     

20

       

2

       

1

       

23

 

Asset write-offs

     

       

(2

)

     

       

(2

)

Cash payments

     

(27

)

     

       

(1

)

     

(28

)

Reversals and adjustments

     

(4

)

     

       

       

(4

)

Currency translation and other

     

3

       

       

       

3

 

Balance at June 30, 2008

   

$

51

     

$

     

$

     

$

51

 

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. The company’s Light Vehicle Systems (LVS) business recorded $19 million of net costs associated with this restructuring program in the first nine months of fiscal year 2008. Cumulative restructuring costs recorded for this program are $94 million as of June 30, 2008 and primarily relate to employee termination costs of $83 million in connection with a reduction of approximately 875 salaried and hourly employees. Remaining costs of this restructuring program will be incurred over the next several years.

6.

Income Taxes


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. Jurisdictions with a projected loss for the year or an actual year-to-date loss where no tax benefit can be recognized are excluded from the estimated annual effective tax rate. The impact of including these jurisdictions on the quarterly effective rate calculation could result in a higher or lower effective tax rate during a particular quarter, based upon the mix and timing of actual earnings versus annual projections. In the first nine months of fiscal year 2008, the company recorded approximately $11 million of net favorable tax items discrete to this period primarily related to the favorable conclusion and settlement of certain tax audits and expiration of statute of limitations. These discrete items decreased the company’s effective tax rate for the nine months ended June 30, 2008.

As of June 30, 2008, the company had approximately $689 million in U.S. net deferred tax assets. These deferred tax assets include net operating loss carryovers that can be used to offset taxable income in future periods and reduce income taxes payable in those future periods. However, many of these deferred tax assets will expire if they are not utilized within certain time periods. At this time, the company considers it more-likely-than-not that it will have U.S. taxable income in the future that will allow it to realize these deferred tax assets. Significant factors considered by management in its determination of the probability of the realization of the deferred tax benefits include: (a) historical operating results, (b) expectations of future earnings, and (c) tax planning strategies.

It is possible that some or all of these deferred tax assets could ultimately expire unused. Risk factors include (a) a slower then anticipated recovery in the fiscal year 2009 outlook for the company’s CVS segment, which has significant U.S. operations, (b) higher than planned volume or price reductions from the company’s key customers and (c) higher than planned material cost increases.

9

These risk factors are offset by the following strategic initiatives: (a) the company has undertaken numerous restructuring initiatives in 2007 which are expected to result in significant savings in future periods, (b) the continuing recovery of the commercial vehicle market in the United States in 2009, significantly benefiting the company and (c) the company is implementing a major cost reduction and value creation program that is expected to generate improvements in earnings in future periods.

On October 1, 2007, the company adopted FIN No. 48. The effect of applying the provisions of FIN No. 48 on the company’s consolidated balance sheet as of October 1, 2007 is as follows (in millions):

 

 Before 

     

   

     

 After 

 

 Adoption

 

   

 

 Adoption

 

 of FIN 48 

 

 Adjustments 

 

 of FIN 48 

Non-current deferred income tax assets - other assets (see Note 13)

$

781

 

 

$

(99

 

$

682

 

Other assets (see Note 13)

 

361

 

 

 

42

 

 

 

403

 

Income taxes - other current liabilities (see Note 14)

 

(130

 

 

97

 

 

 

(33

Other liabilities (see Note 15)      

 

(209

 

 

(45

 

 

(254

Retained earnings

 

(128

 

 

5

 

 

 

(123


Upon adoption of FIN No. 48 as of October 1, 2007, the company had approximately $200 million of gross unrecognized tax benefits of which $151 million represents the amount that, if recognized, would favorably affect the effective income tax rate in future periods. At June 30, 2008, the amount of gross unrecognized tax benefits and the amount that would favorably affect the effective income tax rate in future periods are $175 million and $124 million, respectively. The change in the gross unrecognized tax benefit from October 1, 2007 to June 30, 2008 is primarily due to the favorable conclusion and settlement of certain tax audits and expiration of statute of limitations.

The company files tax returns in multiple jurisdictions and is subject to examination by taxing authorities throughout the world. The company’s Canadian federal income tax returns for fiscal years 2003 through 2005 are currently under audit. The company’s French subsidiary is currently under audit for fiscal years 2005 through 2007. The company’s German subsidiary is under audit for fiscal years 2002 through 2006. In addition, the company is under audit in various U.S. state tax jurisdictions for various years. It is reasonably possible that audit settlements, the conclusion of current examinations or the expiration of the statute of limitations in several jurisdictions could significantly change the company’s unrecognized tax benefits during the next twelve months. However, quantification of an estimated range cannot be made at this time.

In addition to the audits discussed above, the company has open tax years primarily from 1999-2007 with various significant taxing jurisdictions including the United States, Brazil, Canada, France, Germany, Mexico and the United Kingdom. These open years contain matters that could be subject to differing interpretations of applicable tax laws and regulations as they relate to the amount, timing or inclusion of revenue and expenses or the sustainability of income tax credits for a given audit cycle. The company has recorded a tax benefit only for those positions that meet the more-likely-than-not standard.

The company’s continuing practice is to recognize interest and penalties on uncertain tax positions in the provision for income taxes in the consolidated statement of operations. At June 30, 2008 and at October 1, 2007, the company has recorded $4 million and $2 million, respectively, of interest on uncertain tax positions in the consolidated balance sheet. In addition, penalties of $9 million and $8 million were recorded at June 30, 2008 and October 1, 2007, respectively.

10

 

7.

Acquisitions and Divestitures


            On May 6, 2008, ArvinMeritor announced its intent to spin-off its LVS business to ArvinMeritor shareholders, with the commercial vehicle business – consisting of truck, trailer, specialty products and the commercial vehicle aftermarket – remaining with ArvinMeritor. The new LVS business will be named Arvin Innovation, Inc. (Arvin Innovation). ArvinMeritor plans to accomplish this separation through a distribution of Arvin Innovation shares to ArvinMeritor stockholders that is tax-free for U.S. federal income tax purposes. Immediately following the separation, the stockholders of ArvinMeritor will own 100 percent of Arvin Innovation. The company expects to complete the spin-off by May 2009.

On December 19, 2007, the company’s Commercial Vehicle Systems (CVS) business acquired Mascot Truck Parts Ltd (Mascot) for a cash purchase price of $19 million. Mascot remanufactures transmissions, drive axles, steering gears and drivelines. This acquisition did not have a material impact on the company’s consolidated financial position or results of operations for the nine months ended June 30, 2008.

8.

Accounts Receivable Securitization and Factoring


The company participates in an arrangement to sell trade receivables through certain of its European subsidiaries. Under the arrangement, the company sells up to, at any point in time, €125 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 $6 million and $3 million in the nine months ended June 30, 2008 and 2007, respectively, and are included in operating income in the consolidated statement of operations. The gross amount of proceeds received from the sale of receivables under this arrangement was $469 million and $396 million for the nine months ended June 30, 2008 and 2007, respectively. The company’s retained interest in receivables sold was $18 million and $5 million at June 30, 2008 and September 30, 2007, respectively. The company had utilized, net of retained interests, €112 million ($176 million) and €73 million ($104 million) of this accounts receivable securitization facility as of June 30, 2008 and September 30, 2007, respectively.

In addition, several of the company’s subsidiaries, primarily in Europe, 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 $317 million and $181 million at June 30, 2008 and September 30, 2007, respectively. Costs associated with these factoring arrangements were $9 million and $3 million in the nine months ended June 30, 2008 and 2007, respectively, and are included in operating income in the consolidated statement of operations.

The company also participates in a U.S. accounts receivable securitization program to enhance financial flexibility and lower interest costs. Under this $175 million program, which was established in September 2005, and amended in fiscal years 2006, 2007 and 2008, 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 16). At June 30, 2008, the company had utilized $118 million of this accounts receivable securitization facility. As of September 30, 2007, no amounts were outstanding under this program. Borrowings under this arrangement are collateralized by approximately $229 million of receivables held at ARC at June 30, 2008. 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, 2008, the company was in compliance with all covenants. This accounts receivable securitization agreement expires in September 2008. However, the company intends to renew this facility with the current lender at that time.

11

 

9.

Other Income (Expense), net


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

   

Three Months Ended

   

Nine Months Ended

 
   

June 30,

   

June 30,

 
   

2008

 

2007

   

2008

 

2007

 

Gains on divestitures

 

$

 

$

   

$

 

$

2

 

Adjustment to impairment reserves, net

   

   

     

   

10

 

Environmental remediation costs

   

   

     

(1

)

 

 

Other income (expense), net

 

$

 

$

   

$

(1

)

$

12

 

10.

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,

 

 

 

2008

 

2007

 

Finished goods          

 

$

245

 

$

218

 

Work in process     

 

 

114

 

 

103

 

Raw materials, parts and supplies     

 

 

279

 

 

220

 

Total   

 

$

638

 

$

541

 


11.

Other Current Assets


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

 

 

June 30,

 

September 30,

 

 

 

2008

 

2007

 

Current deferred income tax assets

 

$

120

 

$

111

 

Customer reimbursable tooling and engineering

 

 

26

 

 

22

 

Asbestos-related recoveries (see Note 19)

 

 

7

 

 

8

 

Investment in debt defeasance trust

   

7

   

6

 

Assets held for sale

 

 

4

 

 

19

 

Foreign currency hedge contracts (see Note 17)

   

16

   

6

 

Prepaid and other

 

 

62

 

 

44

 

Other current assets

 

$

242

 

$

216

 

            

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 provided at the time management expects costs to exceed anticipated customer reimbursements.

The company holds certain assets for sale. These assets primarily relate to land and buildings that have been previously closed through restructuring and other rationalization actions. The company sold certain of these properties in the first nine months of fiscal year 2008 and expects to complete the sale of the remainder of these properties in fiscal year 2008. 

12

 

 12.

Goodwill


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, 2007

 

$

71

 

$

449

 

$

520

 

   Acquisition of Mascot (see Note 7)

   

   

3

   

3

 

   Foreign currency translation

 

 

   

2

   

2

 

Balance at June 30, 2008

 

$

71

 

$

454

 

$

525

 


13.

Other Assets


Other assets are summarized as follows (in millions):

 

 

June 30,

 

September 30,

 

 

 

2008

 

2007

 

Non-current deferred income tax assets (see Note 6)

 

$

724

 

$

781

 

Investments in non-consolidated joint ventures

 

 

137

 

 

116

 

Long-term receivables (see Note 15)

   

46

   

47

 

Assets for uncertain tax positions (see Note 6)

   

31

   

 

Prepaid pension costs

 

 

33

 

 

32

 

Unamortized debt issuance costs

 

 

30

 

 

31

 

Capitalized software costs, net

 

 

26

 

 

25

 

Asbestos-related recoveries (see Note 19)

 

 

31

 

 

32

 

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

   

13

   

11

 

Patents, licenses and other intangible assets (less accumulated amortization: $4 at June 30, 2008 and September 30, 200 7)

 

 

5

 

 

3

 

Investment in debt defeasance trust

   

   

6

 

Other

   

47

   

58

 

Other assets

 

$

1,123

 

$

1,142

 


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 an $8 million and $9 million discount at June 30, 2008 and September 30, 2007, respectively, 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 estimated economic useful life of the software.

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 $5 million to be recorded over the remaining five years of the assets’ useful lives.

13

 

14.

Other Current Liabilities


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

 

 

June 30,

 

September 30,

 

 

 

2008

 

2007

 

 

 

 

 

 

 

 

 

Compensation and benefits

 

$

240

 

$

223

 

Income taxes (see Note 6)

 

 

27

 

 

130

 

Taxes other than income taxes

 

 

62

 

 

56

 

Product warranties

 

 

59

 

 

50

 

Restructuring (see Note 5)

 

 

51

 

 

59

 

AB Volvo joint venture payable

   

   

27

 

Asbestos-related liabilities (see Note 19)

 

 

14

 

 

11

 

Reserve for commercial dispute (see Note 19)

   

25

   

11

 

Interest

 

 

25

 

 

7

 

Environmental (see Note 19)

 

 

7

 

 

11

 

Current deferred income tax liabilities

 

 

7

 

 

6

 

Foreign currency hedge contracts (see Note 17)

   

26

   

5

 

Other               

 

 

71

 

 

62

 

Other current liabilities      

 

$

614

 

$

658

 


  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 had an option to purchase and AB Volvo had 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 ($23 million) plus interest at EURIBOR rates, plus a margin. In December 2007, this option was exercised and the related liability was settled. The option to purchase the minority interest was essentially a financing arrangement, as the minority shareholder did not participate in any profits or losses of the joint venture. Therefore, no minority interest was recognized in prior periods for the 49-percent interest in this joint venture.

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.

14

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

 

 

Nine Months Ended

 

 

 

June 30,

 

 

 

2008

 

2007

 

Total product warranties -- beginning of period

$

103

 

$

122

 

Accruals for product warranties

 

52

 

 

45

 

Payments                       

 

(52

)

 

(41

)

Retained obligations due to EMCON

 

 

 

(13

)

Product warranties assumed by EMCON 

 

   

(11

)

Change in estimates and other 

 

4

   

(2

)

Total product warranties – end of period    

 

107

 

 

100

 

Less: Non-current product warranties (see Note 15)    

 

(48

)

 

(58

)

Product warranties – current

$

59

 

$

42

 


15.

Other Liabilities


Other liabilities are summarized as follows (in millions):

 

 

 

June 30,

 

September 30,

 

 

 

2008

 

2007

 

 

 

 

 

 

 

 

 

Asbestos-related liabilities (see Note 19)

 

$

39

 

$

44

 

Non-current deferred income tax liabilities

 

 

6

 

 

6

 

Liabilities for uncertain tax positions (see Note 6)

   

48

   

 

Product warranties (see Note 14)

 

 

48

 

 

53

 

Environmental (see Note 19)

 

 

11

 

 

13

 

Long-term payable (see Note 13)

 

 

45

 

 

47

 

Other

 

 

41

 

 

46

 

Other liabilities

 

$

238

 

$

209

 


16.

Long-Term Debt


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

 

 

 

June 30,

 

September 30,

 

 

 

2008

 

2007

 

6-3/4 percent notes due 2008

 

$

 

$

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

 

 

276

 

8-1/8 percent notes due 2015

 

 

251

 

 

251

 

4.625 percent convertible notes due 2026(1)

 

 

300

 

 

300

 

4.0 percent convertible notes due 2027(1)

 

 

200

 

 

200

 

Accounts receivable securitization (see Note 8)

 

 

118

 

 

 

Lines of credit and other

 

 

32

 

 

20

 

Unamortized gain on swap unwind

   

32

   

9

 

Fair value adjustment of notes

 

 

 

 

4

 

Subtotal

 

 

1,292

 

 

1,148

 

Less: current maturities

 

 

(231

)

 

(18

)

Long-term debt                  

 

$

1,061

 

$

1,130

 


(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.

15

Senior Secured Credit Facilities

In October and December 2007, the company amended its revolving credit facility. Under the terms of the December amendment, the borrowing capacity of the revolving credit facility was reduced to $700 million from $900 million. The amended revolving credit facility replaced the existing financial covenants with new financial covenants based on (i) the ratio of the company’s senior secured indebtedness to EBITDA and (ii) the amount of annual capital expenditures. The company is required to maintain a total senior secured-debt-to-EBITDA ratio, as defined in the agreement, no greater than 2.50x on the last day of any fiscal quarter through and including the fiscal quarter ending March 31, 2009 and (ii) 2.00 to 1.00 on the last day of any fiscal quarter thereafter. At June 30, 2008, the company was in compliance with all covenants. As a result of the amendments, the company recognized a $3 million loss on debt extinguishment associated with the write-off of debt issuance costs. The remaining unamortized debt issuance costs are being amortized over the remaining term of the amended credit facility.

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, 2008, the margin over the LIBOR rate was 225 basis points, and the commitment fee was 50 basis points. The amended revolving credit facility includes a $150 million limit on the issuance of letters of credit. At June 30, 2008, and September 30, 2007, approximately $34 million and $30 million letters of credit, respectively, were issued. The company had an additional $12 million and $11 million outstanding at June 30, 2008 and at September 30, 2007, respectively, on letters of credit available through other facilities.

Borrowings under the amended revolving credit facility are collateralized by approximately $900 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.

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 22).

Convertible Securities

In February 2007, the company issued $200 million of 4.00 percent convertible senior unsecured notes due 2027 (the 2007 convertible notes).  In March 2006, the company issued $300 million of 4.625 percent convertible senior unsecured notes due 2026 (the 2006 convertible notes). The 2007 convertible notes bear cash interest at a rate of 4.00 percent per annum from the date of issuance through February 15, 2019, payable semi-annually in arrears on February 15 and August 15 of each year. After February 15, 2019, the principal amount of the notes will be subject to accretion at a rate that provides holders with an aggregate annual yield to maturity of 4.00 percent. The 2006 convertible notes bear cash interest at a rate of 4.625 percent per annum from the date of issuance through March 1, 2016, payable semi-annually in arrears on March 1 and September 1 of each year. After March 1, 2016, the principal amount of the notes will be subject to accretion at a rate that provides holders with an aggregate annual yield to maturity of 4.625 percent.

The 2007 and 2006 convertible notes are convertible in to shares of the company’s common stock at an initial conversion rate, subject to adjustment, equivalent to 37.4111 and 47.6667 shares of common stock, respectively, per $1,000 initial principal amount of notes. The maximum number of shares the 2007 and 2006 convertible notes are convertible into is approximately 7 million and 14 million, respectively.

16

Accounts Receivable Securitization

The company participates in a U.S. accounts receivable securitization program to enhance financial flexibility and lower interest costs (see Note 8). Under this $175 million program, which was established in September 2005, and amended in fiscal years 2006, 2007 and 2008, 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 3.10 percent at June 30, 2008. Amounts outstanding under this agreement are reported as short-term debt in the consolidated balance sheet and are collateralized by $229 million of eligible receivables purchased and held by ARC at June 30, 2008. 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, 2008, 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. This loan matures in fiscal year 2009 and is included in short-term debt in the consolidated balance sheet.

Interest Rate Swap Agreements

In January 2008, the company terminated all of its interest rate swap agreements and received proceeds from these terminations, including interest received, of $28 million. The fair value adjustment to the notes associated with these interest rate swaps was $23 million, and is amortized to earnings as a reduction of interest expense over the remaining term of the debt. Also included in the fair value adjustment of notes is $8 million related to previously terminated interest rate swaps. The fair value adjustment of the notes is classified as Long-Term debt in the consolidated balance sheet.

These interest rate swaps agreements effectively converted $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. The fair value of the 8-3/4 percent swaps was a liability of $2 million at September 30, 2007 and is included in Other Liabilities. The fair value of the 6.8 percent swap was not significant at September 30, 2007. The fair value of the 8-1/8 percent swaps was $4 million at September 30, 2007 and is included in Other Assets. The swaps were designated as fair value hedges and the impact of the changes in their fair values was offset by an equal and opposite change in the carrying value of the related notes.

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

17.

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 16.

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 Loss (AOCL) 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 12-24 months. The impact to operating income associated with hedge ineffectiveness was not significant for the nine months ended June 30, 2008 and 2007.

17

At June 30, 2008, there was a loss of $9 million recorded in AOCL. The company expects to reclassify this amount from AOCL to operating income during the next 12 to 15 months as the forecasted hedged transactions are recognized in earnings. At September 30, 2007, the gain recorded in AOCL was $1 million.

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,

 

 

 

2008

 

2007

 

 

 

 

Carrying

 

 

Fair

 

 

Carrying

 

 

Fair

 

 

 

 

Value

 

 

Value

 

 

Value

 

 

Value

 

Cash and cash equivalents

 

$

432

   

432

   

409

   

409

 

Interest rate swaps - asset

 

 

   

   

4

   

4

 

Foreign exchange contracts - asset

 

 

16

   

16

   

6

   

6

 

Investment in debt defeasance trust

 

 

7

   

7

   

12

   

12

 

Interest rate swaps – liability

 

 

   

   

2

   

2

 

Foreign exchange contracts - liability

 

 

28

   

28

   

5

   

5

 

Short-term debt

 

 

231

   

230

   

18

   

18

 

Long-term debt

 

 

1,061

   

869

   

1,130

   

1,127

 

 

      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 and 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.

18.

Retirement Benefit Liabilities


Retirement benefit liabilities consisted of the following (in millions):

 

 

 

June 30,

 

September 30,

 

 

 

2008

 

2007

 

Retiree medical liability            

 

$

576

 

$

573

 

Pension liability          

 

 

230

 

 

208

 

Other                 

 

 

47

 

 

45

 

Subtotal                      

 

 

853

 

 

826

 

Less: current portion (included in compensation and benefits)       

 

 

(63

)

 

(63

)

Retirement benefit liabilities                

 

$

790

 

$

763

 

18

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

 

   

2008

 

2007

 
   

Pension

 

Retiree Medical

 

Pension

 

Retiree Medical

 

Service cost

 

$

7

 

$

1

 

$

9

 

$

1

 

Interest cost

   

26

 

 

9

   

25

   

10

 

Assumed return on plan assets

   

(31

)

 

   

(27

)

 

 

Amortization of prior service costs (1)

   

   

(2

)

 

(15

)

 

(2

)

Recognized actuarial loss

   

9

   

7

   

11

   

6

 

Total expense

 

$

11

 

$

15

 

$

3

 

$

15

 

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

 

   

2008

 

2007

 
   

Pension

 

Retiree Medical

 

Pension

 

Retiree Medical

 

Service cost

 

$

21

 

$

2

 

$

27

 

$

2

 

Interest cost

   

78

   

27

   

75

   

28

 

Assumed return on plan assets

   

(94

)

 

   

(80

)

 

 

Amortization of prior service costs (1)

   

2

   

(6

)

 

(13

)

 

(6

)

Recognized actuarial loss

   

27

   

21

   

32

   

19

 

Total expense

 

$

34

 

$

44

 

$

41

 

$

43

 

(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 costs as a result of a pension curtailment triggered by the sale of its ET business. This reduction in pension expense is included in the loss on the sale of ET and recorded in discontinued operations in the consolidated statement of operations.

19.

Contingencies


Environmental

Federal, state and local requirements relating to actual or threatened release of hazardous 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 evolving physical and scientific data at the site, uncertainties as to remedies and technologies to be used and the outcome of discussions with regulatory agencies. The 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 probable and estimable costs of remediation before consideration of recovery from insurers or other third parties.

The company currently is designated as a potentially responsible party at seven third party 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, 2008 to be approximately $21 million, of which $3 million is recorded as a liability.

19

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, 2008 to be approximately $44 million, of which $15 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 at which remediation has been put into place. This liability is discounted using a discount rate of 5-percent and is approximately $18 million at June 30, 2008. The undiscounted estimate of these costs is approximately $22 million.

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

 

 

 

Superfund Sites

 

Non-Superfund Sites

 

Total

 

Balance at September 30, 2007

 

$

8

 

$

16

 

$

24

 

Payments and other

 

 

(5

)

 

(3

)

 

(8

)

Change in cost estimate (1)

   

   

2

   

2

 

Balance at June 30, 2008

 

$

3

 

15

 

18

 

(1)      Environmental remediation costs of $1 million were recorded in loss from discontinued operations in the consolidated statement of operations during the first nine months of fiscal year 2008.

Environmental reserves are included in Other Current Liabilities (see Note 14) and Other Liabilities (see Note 15).

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, discovery of new contamination 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 investigation 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.

Asset Retirement Obligations

The company has identified conditional asset retirement obligations for which a reasonable estimate of fair value could not be made because the potential settlement dates cannot be determined at this time. Due to the long term, productive nature of the company’s manufacturing operations, absent plans or expectations of plans to initiate asset retirement activities, the company was not able to reasonably estimate the settlement date for the related obligations. Therefore, the company has not recognized conditional asset retirement obligations for which there are no plans or expectations of plans to retire the asset.

20

Asbestos

Maremont Corporation (“Maremont”), a subsidiary of ArvinMeritor, manufactured friction products containing asbestos from 1953 through 1977, when it sold its friction product business. Arvin acquired Maremont in 1986. Maremont and many other companies are defendants in suits brought by individuals claiming personal injuries as a result of exposure to asbestos-containing products. Maremont had approximately 37,000 pending asbestos-related claims at June 30, 2008 and September 30, 2007. 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, 2008

 

September 30, 2007

 

Pending and future claims     

 

$

35

 

$

37

 

Shortfall and other     

 

 

6

 

 

6

 

Asbestos-related reserves    

 

$

41

 

$

43

 

Asbestos-related recoveries        

 

$

26

 

$

28

 


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 11, 13, 14 and 15).

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

Pending and Future Claims: Maremont engages Bates White LLC (Bates White), a consulting firm with extensive experience estimating costs associated with asbestos litigation, to assist with determining the estimated 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. Bates White prepares these cost estimates on a semi-annual basis in March and September each year. Although it is not possible to estimate the full range of costs because of various uncertainties, Bates White advised Maremont that it would be possible to determine an estimate of a reasonable forecast of the cost of resolving pending and future asbestos-related claims, based on historical data and certain assumptions with respect to events that occur in the future.

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 $26 million to $35 million. After consultation with Bates White, Maremont determined that as of March 31, 2008 the most likely and probable liability for pending and future claims over the next four years is $35 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.

21

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 2012. 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, 2008 and 2007.

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 $26 million. The difference between the estimated liability and insurance receivable is related to proceeds received from settled insurance policies and liabilities for shortfall and other. Certain insurance policies have been settled in cash prior to the ultimate settlement of related asbestos liabilities. Amounts received from insurance settlements generally reduce recorded insurance receivables. Receivables for policies in dispute are not recorded.

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

22

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

The company engages 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 and indemnity costs which could be incurred to resolve pending and future Rockwell legacy asbestos-related claims. Accordingly, the company has recorded a $12 million liability for defense and indemnity costs associated with these claims at June 30, 2008 and September 30, 2007. This estimate was based on historical data and certain assumptions with respect to events that occur in the future. The uncertainties of asbestos claim litigation and resolution of the litigation with the insurance companies make it difficult to predict accurately the ultimate resolution of asbestos claims. That uncertainty is increased by the possibility of adverse rulings or new legislation affecting asbestos claim litigation or the settlement process. Subject to these uncertainties and based on the company’s experience defending these asbestos claims, the company does not believe these lawsuits will have a material adverse effect on its financial condition or results of operations. Rockwell was not a member of the CCR and handled its asbestos-related claims using its own litigation counsel. As a result, the company does not have any additional potential liabilities for committed CCR settlements or shortfall (as described above) in connection with the Rockwell-legacy cases.

Rockwell maintained insurance coverage that management believes covers indemnity and defense costs, over and above self-insurance retentions, for most of these claims. The company has initiated claims against these carriers to enforce the insurance policies. Although the status of one carrier as a financially viable entity is in question, the company expects to recover the majority of defense and indemnity costs it has incurred to date, over and above self-insured retentions, and a substantial portion of the costs for defending asbestos claims going forward. Accordingly, the company has recorded an insurance receivable related to Rockwell legacy asbestos-related liabilities of $12 million at June 30, 2008 and September 30, 2007.

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 Accumulated Postretirement Benefit Obligation 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.

23

Other

In fiscal year 2006, a light vehicle systems customer of the company initiated a field service campaign related in part to a product of the company, which covered approximately 750,000 vehicles. The customer has filed suit against the company seeking reimbursement of costs associated with the field service campaign as well as other warranty costs. In fiscal year 2006, the company recorded a contingency reserve of approximately $11 million related to this matter. In the first nine months of fiscal year 2008, the company recognized an additional charge of approximately $14 million increasing its reserve to $25 million. The reserve of $25 million represents a best estimate of the expected settlement based on the status of negotiations with the customer. The company does not expect the reserve amount to be materially different than the anticipated settlement with the customer.

Litigation associated with the company’s retiree medical plans is discussed in Note 20 of the Notes to Consolidated Financial Statements in the company’s Form 10-K for the fiscal year ended September 30, 2007. The ultimate outcome of these lawsuits may result in future plan amendments.

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

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, warranty or recall claims, 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.

20.

Comprehensive Income (Loss)


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

Comprehensive income (loss) is summarized as follows (in millions):

  

   

Three Months Ended

 

Nine Months Ended

 
   

June 30,

 

June 30,

 
   

2008

 

2007

 

2008

 

2007

 

Net income (loss)

 

$

44

 

$

(70

)

$

52

 

$

(157

)

Foreign currency translation adjustments

   

36

   

52

   

118

   

115

 

Recognition of accumulated ET currency translation adjustments

   

   

(91

)

 

   

(91

)

Unrealized gain (loss) on investments and foreign currency contracts, net

   

3

   

2

   

(10

)

 

1

 

Other

   

   

   

(3

)

 

 

Comprehensive income (loss)

 

$

83

 

$

(107

)

$

157

 

$

(132

)

 

24

 

21.

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.

The company reports operating results under two segments: Commercial Vehicle Systems (CVS) and Light Vehicle Systems (LVS). CVS supplies drivetrain systems and components, including axles and drivelines, braking systems, and suspension systems, for medium- and heavy-duty trucks, trailers and specialty vehicles to original equipment manufacturers (OEMs) and the commercial vehicle aftermarket. LVS is a major supplier of aperture systems (roof and door systems), chassis systems (ride control, suspension systems and modules) and wheel products for passenger cars, motorcycles and all-terrain vehicles, light trucks and sport utility vehicles to OEMs.

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

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

Segment information is summarized as follows (in millions):

 

   

Three Months Ended

 

Nine Months Ended

 
   

June 30,

 

June 30,

 
   

2008

 

2007

 

2008

 

2007

 

Sales:

                         

Commercial Vehicle Systems

 

$

1,356

 

$

1,049

 

$

3,628

 

$

3,170

 

Light Vehicle Systems

   

647

   

613

   

1,819

   

1,687

 

Total sales

 

$

2,003

 

$

1,662

 

$

5,447

 

$

4,857

 

EBITDA:

                         

Commercial Vehicle Systems

 

$

101

 

$

63

 

$

256

 

$

186

 

Light Vehicle Systems

   

23

   

12

   

44

   

34

 

Segment EBITDA

   

124

   

75

   

300

   

220

 

Unallocated corporate costs

   

(13

)

 

(7

)

 

(18

)

 

(8

)

ET corporate allocations (1)

   

   

(9

)

 

   

(27

)

Depreciation and amortization

   

(38

)

 

(32

)

 

(106

)

 

(96

)

Loss on sale of receivables

   

(6

)

 

(3

)

 

(15

)

 

(6

)

Interest expense, net

   

(19

)

 

(27

)

 

(66

)

 

(88

)

Benefit (provision) for income taxes

   

3

   

(1

)

 

(21

)

 

(2

)

Income (loss) from continuing operations

 

$

51

 

$

(4

)

$

74

 

$

(7

)


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

25

 

22.

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 16).

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

Condensed Consolidating Statement of Operations

(In millions)

 

 

Three Months Ended June 30, 2008

 

 

 

Parent

 

Guarantors

 

Non-Guarantors

 

Elims

 

Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

External

 

$

 

$

647

 

$

1,356

 

$

 

$

2,003

 

Subsidiaries

 

 

 

 

35

 

 

80

 

 

(115

)

 

 

Total sales

 

 

 

 

682

   

1,436

 

 

(115

)

 

2,003

 

Cost of sales

 

 

(13

)

 

(607

)

 

(1,302

)

 

115

 

 

(1,807

)

GROSS MARGIN

 

 

(13

)

 

75

 

 

134

 

 

 

 

196

 

Selling, general and administrative

 

 

(37

)

 

(45

)

 

(48

)

 

 

 

(130

)

Restructuring costs

 

 

 

 

1

 

 

(5

)

 

 

 

(4

)

OPERATING INCOME (LOSS)

 

 

(50

)

 

31

 

 

81

 

 

 

 

62

 

Equity in earnings of affiliates

 

 

 

 

5

 

 

7

 

 

 

 

12

 

Other income (expense), net

 

 

17

 

 

(8

)

 

(9

)

 

 

 

 

Interest income (expense), net

 

 

(21

)

 

7

 

 

(5

)

 

 

 

(19

)

INCOME (LOSS) BEFORE INCOME TAXES

 

 

(54

)

 

35

 

 

74

 

 

 

 

55

 

Benefit (provision) for income taxes

 

 

21

 

 

7

 

 

(25

)

 

 

 

3

 

Minority interests

 

 

 

 

 

 

(7

)

 

 

 

(7

)

Equity income from continuing operations of subsidiaries        

   

85

   

36

   

   

(121

)

 

 

INCOME FROM CONTINUING OPERATIONS

 

 

52

 

 

78

 

 

42

 

 

(121

)

 

51

 

LOSS FROM DISCONTINUED OPERATIONS

 

 

(8

)

 

(8

)

 

(8

)

 

17

 

 

(7

)

NET INCOME

 

$

44

 

$

70

 

$

34

 

$

(104

)

$

44

 
27

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