ARVINMERITOR INC - 10-K Annual Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED SEPTEMBER 29, 2002
COMMISSION FILE NUMBER 1-15983
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ARVINMERITOR, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

INDIANA 38-3354643
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)

2135 WEST MAPLE ROAD 48084-7186
TROY, MICHIGAN (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (248) 435-1000
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
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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 if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [X]

The aggregate market value of the registrant's voting stock held by
non-affiliates of the registrant on March 28, 2002 (the last business day of the
most recently completed second fiscal quarter) was approximately $1.918 billion.

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [X] No [ ]

67,942,966 shares of the registrant's Common Stock, par value $1 per share,
were outstanding on October 31, 2002.

DOCUMENTS INCORPORATED BY REFERENCE

Certain information contained in the Proxy Statement for the Annual Meeting of
Shareowners of the registrant to be held on February 19, 2003 is incorporated by
reference into Part III.

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PART I

ITEM 1. BUSINESS.

ArvinMeritor, Inc. (the "company" or "ArvinMeritor"), headquartered in
Troy, Michigan, is a leading global supplier of a broad range of integrated
systems, modules and components serving light vehicle, commercial truck, trailer
and specialty original equipment manufacturers and certain aftermarkets. The
company also provides coil coating applications to the transportation,
appliance, construction and furniture industries.

ArvinMeritor was incorporated in Indiana in March 2000 in connection with
the merger ("Merger") of Meritor Automotive, Inc. ("Meritor") and Arvin
Industries, Inc. ("Arvin"). The Merger of Meritor and Arvin into ArvinMeritor
was effective on July 7, 2000. As used in this Annual Report on Form 10-K, the
terms "company," "ArvinMeritor," "we," "us" and "our" include ArvinMeritor, its
consolidated subsidiaries and its predecessors unless the context indicates
otherwise.

Whenever an item of this Annual Report on Form 10-K refers to information
in the Proxy Statement for the Annual Meeting of Shareowners of ArvinMeritor to
be held on February 19, 2003 (the "2003 Proxy Statement"), or under specific
captions in Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations or Item 8. Financial Statements and Supplementary
Data, the information is incorporated in that item by reference.

ArvinMeritor serves a broad range of original equipment manufacturer
("OEM") customers worldwide, including truck OEMs, light vehicle OEMs,
semi-trailer producers and off-highway and specialty vehicle manufacturers, and
certain aftermarkets. Our total sales in fiscal year 2002 were $6.9 billion. Our
ten largest customers accounted for approximately 65% of fiscal year 2002 sales.
We operated 153 manufacturing facilities in 26 countries around the world in
fiscal year 2002, including facilities operated by joint ventures in which we
have interests. Sales outside the United States accounted for approximately 50%
of total sales in fiscal year 2002. We also participated in twelve joint
ventures that generated unconsolidated revenues of $1.6 billion in fiscal 2002.

We serve customers worldwide through three operating segments:

- Light Vehicle Systems ("LVS") supplies air and emissions systems,
aperture systems (roof and door systems and motion control products), and
undercarriage systems (suspension and ride control systems and wheel
products) for passenger cars, light trucks and sport utility vehicles to
OEMs.

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

- Light Vehicle Aftermarket ("LVA") supplies exhaust, ride control and
filter products to the passenger car, light truck and sport utility
aftermarket.

Our coil coating operation, which does not primarily focus on automotive
products, is classified as "Other."

Note 23 of the Notes to Consolidated Financial Statements under Item 8.
Financial Statements and Supplementary Data contains financial information by
segment for each of the three years ended September 30, 2002, including
information on sales and assets by geographic area for each segment. The heading
"Products" below includes information on LVS, CVS, LVA and Other sales by
product for each of the three years ended September 30, 2002.

References in this Annual Report on Form 10-K to our being a leading
supplier or the world's leading supplier, and other similar statements as to our
relative market position are based principally on calculations we have made.
These calculations are based on information we have collected, including company
and industry sales data obtained from internal and available external sources,
as well as our estimates. In addition

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to such quantitative data, our statements are based on other competitive factors
such as our technological capabilities, our research and development efforts and
innovations and the quality of our products and services, in each case relative
to that of our competitors in the markets we address.

ArvinMeritor began operations as a combined company on July 7, 2000 and,
accordingly, does not have an operating history as a combined company prior to
that date. Except where otherwise noted, the historic financial information
included in this Annual Report on Form 10-K for periods prior to July 7, 2000
reflects the results of Meritor and its consolidated subsidiaries. The
information for periods after July 7, 2000 represents the results of
ArvinMeritor and its consolidated subsidiaries. This information may not be
indicative of our future results of operations, financial position or cash
flows.

INDUSTRY DEVELOPMENTS AND OUTLOOK

The industry in which we operate is cyclical and has been characterized
historically by periodic fluctuations in demand for vehicles for which we supply
products. Industry cycles can have a positive or negative effect on our
financial results. Lower demand in several of our principal markets, including
commercial truck and light vehicle markets in North America and light vehicle
replacement markets, had a negative effect on our financial results for fiscal
years 2001 and 2002.

For fiscal year 2003, our most recent outlook shows continued weakness in
the North American commercial truck markets. We currently expect North American
and Western European light vehicle production in fiscal year 2003 to remain
relatively flat compared to fiscal year 2002 production. We also anticipate that
the light vehicle replacement market for our exhaust and ride control products
will remain soft. See "Seasonality; Cyclicality" and Item 7. Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Overview and Outlook and -- Results of Operations below.

We have sought to mitigate the effects of down cycles in our markets by
improving operational efficiencies and implementing restructuring programs and
cost-reduction initiatives, which include reducing our salaried workforce and
the number of our facilities. We undertook restructuring actions in fiscal years
2001 and 2002 to improve efficiency and realize cost savings. See "Strategic
Initiatives" below and Note 5 of the Notes to Consolidated Financial Statements
under Item 8. Financial Statements and Supplementary Data below.

BUSINESS STRATEGIES

We are a global supplier of a broad range of integrated systems, modules
and components for use in commercial, specialty and light vehicles worldwide and
we have developed market positions as a leader in most of our served markets. In
the short term, we seek to maintain these market positions in the face of the
industry downturns described above. In the longer term, we work to enhance our
leadership positions and capitalize on our existing customer, product and
geographic strengths, and to increase sales, earnings and profitability. We
employ various business strategies to achieve these goals.

Several significant factors and trends in the automotive industry present
opportunities and challenges to industry suppliers and influence our business
strategies. These factors and trends include the cyclicality of the industry,
consolidation and globalization of OEMs and their suppliers, increased
outsourcing by OEMs, increased demand for modules and systems by OEMs, and an
increasing emphasis on engineering and technology. Our business strategies,
which are influenced by these industry factors and trends, include the
following:

Minimize the Risks of Cyclicality Through Business Diversity. As noted
above, the automotive industry is cyclical in nature and subject to periodic
fluctuations in demand for vehicles. This in turn results in fluctuation in
demand for our products. We seek to diversify our business in order to mitigate
the effects of market downturns and better accommodate the changing needs of
OEMs. We strive to maintain diversity in three areas:

- Revenues. We manufacture and sell a wide range of products in various
segments of the automotive market. For fiscal year 2002, our annual sales
include $3.6 billion for LVS, $2.3 billion for CVS,
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$0.8 billion for LVA and $0.2 billion for Other. Our goal is to maintain
this sales diversity rather than to focus primarily on one segment, and
to be a leader in all three of our markets.

- Customers. A diverse customer base helps to mitigate market
fluctuations. We have a large customer base comprised of most major
vehicle producers. Our top ten customers comprised approximately 65% of
our sales in fiscal year 2002.

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

Focus on Organic Growth While Reviewing Strategic Opportunities. We have
identified the most successful aspects of our business, and we are working to
grow those areas. We seek to take advantage of opportunities for operating
synergies and cross selling of products between our light vehicle and commercial
vehicle businesses. The Merger provided opportunities for cross-marketing of
products and services to customers of the two constituent companies, and we
continue to pursue these opportunities. For example, CVS has been awarded its
first contract to supply Caterpillar Inc. with exhaust products for commercial
vehicles in North America.

We also consider strategic opportunities that could enhance the company's
growth. Automotive suppliers continue to consolidate into larger, more efficient
and more capable companies and collaborate with each other in an effort to
better serve the global needs of their OEM customers. We regularly evaluate
various strategic and business development opportunities, including licensing
agreements, marketing arrangements, joint ventures, acquisitions and
dispositions. We remain committed to selectively pursuing alliances and
acquisitions that would allow us to gain access to new customers and
technologies, enter new product markets and implement our business strategies.
We also intend to continue to review the prospects of our existing businesses to
determine whether any of them should be modified, restructured, sold or
otherwise discontinued. See "Strategic Initiatives" and "Joint Ventures" for
information on initiatives in these areas.

Grow Content Per Vehicle Through Technologically Advanced Systems and
Modules. Increased outsourcing by OEMs has resulted in higher overall per
vehicle sales by independent suppliers and presents an opportunity for supplier
sales growth at a faster rate than the overall automotive industry growth trend.
OEMs are also demanding modules and integrated systems that require little
assembly by the OEM customer. In both light and commercial vehicle markets, we
believe that the trend is also away from sales of components to customers, and
toward integration of components into systems and eventual joint development of
integrated vehicles with development partners.

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

- LVS has developed the Air2Air(TM) system, an integrated airflow system
that expands our existing exhaust system products to incorporate air
induction components that are customarily produced internally by OEMs.
The first integrated system is scheduled for production on the 2003
Chevrolet SSR.

- LVS is a leading supplier of complete roof modules comprised of a roof
head liner bound to an outer shell using a patented process. These
modules can also incorporate LVS sunroof technology and such items as sun
visors, grab handles and interior lighting, as well as antennae and
speakers. Our roof

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module is featured in the DaimlerChrysler SMART car and has been accepted
by a second global OEM.

- LVS has been awarded a $300 million annual contract to provide a complete
front suspension module for a popular sport utility vehicle.

- CVS has a contract to provide advanced front and rear suspension systems
for the new Blue Bird Wanderlodge M380 luxury motor coach.

Management believes that the strategy of continuing to introduce new and
improved systems and technologies will be an important factor in our efforts to
achieve our growth objectives. We will draw upon the engineering resources of
our Technical Centers in Troy, Michigan, and Columbus, Indiana, and our
engineering centers of expertise in the United States, Brazil, Canada, France,
Germany and the United Kingdom. See "Research and Development" below.

Enhance Core Products to Address Safety and Environmental Issues. Another
industry trend is the increasing amount of vehicle content that responds to
changes in environmental and safety-related regulatory requirements. OEMs select
suppliers based not only on the cost and quality of products, but also on
responsiveness to these customer needs. In order to meet these demands, we focus
significant attention on our core products and seek to develop products that
address safety and environmental concerns.

To address safety, our LVS group designs its aperture systems with stronger
materials, creates designs that enhance the vehicle's crashworthiness and
develops undercarriage systems that offer improved ride and vehicle control
dynamics. Our CVS group, for example, is focusing on the integration of braking
and stability products and suspension products, as well as the development of
electronic control capabilities. CVS is also developing braking systems
technology that would assist customers in meeting proposed U.S. regulations to
improve braking performance and reduce stopping distances for commercial motor
vehicles.

With respect to environmental regulations, LVS is an industry leader in air
and emissions systems that improve fuel economy and reduce air pollutants, and
CVS is applying our expertise in light vehicle air and emissions to the
commercial vehicle market. Looking forward, we continue to develop technical
expertise that will permit us to assist customers in meeting new and more
stringent emissions requirements that will be phased in over the next ten years
in our primary markets in North America and Europe.

Drive a Continuous Improvement Culture Focused on Economic Profit and
Return on Capital. In 2001, we implemented the ArvinMeritor Performance System,
a continuous improvement initiative that guides our philosophy for achieving
operational excellence, eliminating waste, improving quality and earning
customer loyalty. Throughout the company, continuous improvement teams have
achieved significant cost savings, increased productivity and efficiency and
streamlined operations. They have focused on eliminating non-value-added tasks,
reducing lead and cycle times and improving customer service.

A continuous improvement culture is important to our business operations
and to maintaining and improving our earnings. Process improvement initiatives
should help us achieve our goals with respect to economic profit, which is net
operating profit after taxes less a cost of capital charge for net assets
employed. We believe that economic profit is a key performance measure, and that
our focus on economic profit in fiscal year 2002 helped us achieve strong cash
flow and debt reduction.

PRODUCTS

ArvinMeritor designs, develops, manufactures, markets, distributes, sells,
services and supports a broad range of products for use in commercial, specialty
and light vehicles. In addition to sales of original equipment systems and
components, we provide our products to OEMs, dealers, distributors, fleets and
other end-users in certain aftermarkets.

The following chart sets forth operating segment sales by product for each
of the three fiscal years ended September 30, 2002. Product sales by Arvin and
its subsidiaries are included only for periods after the date of

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the Merger. A narrative description of the principal products of our three
operating segments and other operations follows the chart.

SALES BY PRODUCT

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(1) Sales relating to motion control products (included in aperture systems),
ride control systems (included in undercarriage systems and suspension
systems and trailer products), air and emissions systems, LVA products and
Other are included only for periods after the date of the Merger, July 7,
2000.

Light Vehicle Systems

A key strategy of LVS is to enhance our market position in air and
emissions systems, aperture systems (including roof and door systems and motion
control products), and undercarriage components and systems (including
suspension and ride control systems and wheel products). The following products
comprise our LVS portfolio.

Air and Emissions Systems

We are a leading global supplier of a complete line of exhaust system
components, including mufflers, exhaust pipes, catalytic converters and exhaust
manifolds. We sell these products to OEMs primarily as original equipment, while
also supporting manufacturers' needs for replacement parts and dealers' needs
for service parts. We also produce our Air2Air(TM) system, which combines air
induction and exhaust systems into an integrated airflow system for OEM
customers and provides an overall improved airflow system for better system
performance with less development time.

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We participate in this business both directly and through joint ventures
and affiliates. These alliances include our 50% interest in Arvin Sango Inc., an
exhaust joint venture based in North America, and our 49% interest in Zeuna
Starker GmbH & Co., an exhaust systems supplier headquartered in Germany. See
"Joint Ventures" below.

Aperture Systems

Roof Systems. ArvinMeritor is one of the world's leading independent
suppliers of sunroofs and roof systems products for use in passenger cars, light
trucks and sport utility vehicles. We make one-piece, modular roof systems, some
of which incorporate sunroofs, that provide OEMs with cost savings by reducing
assembly time and parts. Our roof system manufacturing facilities are located in
North America, Europe and the Asia/ Pacific region.

Door Systems. We are a leading supplier of integrated door modules and
systems, including manual and power window regulators and latch systems. Our
wide range of power and manual door system products utilize numerous
technologies, including our own electric motors, which are designed for
individual applications and to maximize operating efficiency and reduce noise
levels. We manufacture window regulators at plants in North and South America,
Europe and the Asia/Pacific region for light vehicle and heavy-duty commercial
vehicle OEMs.

We also supply manual and power activated latch systems to light vehicle
and heavy-duty commercial vehicle manufacturers. Our access control products
include modular and integrated door latches, actuators, trunk and hood latches
and fuel flap locking devices with leadership market positions in Europe and a
market presence in North America and the Asia/Pacific region. We have access
control systems manufacturing and/or assembly facilities in North and South
America, Europe and the Asia/Pacific region.

Motion Control Products. We are a worldwide leader in the manufacture and
supply of motion control and counterbalancing products for the automotive
industry. Our products include gas lift supports and vacuum actuators. We have
motion control products manufacturing facilities in the United States and the
United Kingdom.

Undercarriage Systems

Suspension Systems. Through our 57%-owned joint venture with Mitsubishi
Steel Manufacturing Co., we are one of the leading independent suppliers of
products used in suspension systems for passenger cars, light trucks and sport
utility vehicles in North America. Our suspension system products, which are
manufactured at facilities in the United States and Canada, include coil
springs, stabilizer bars and torsion bars. In addition, we supply automotive
suspension components for the European light vehicle market from a manufacturing
facility in England.

Ride Control Systems. We provide ride control products, including shock
absorbers, struts, ministruts and corner modules. We participate in this
business both directly and through a joint venture. We manufacture ride control
products and are a leading supplier in the European OEM market through a joint
venture with Kayaba Industries, Inc. ("Kayaba"). See "Joint Ventures" below.

Wheel Products. We are a leading supplier of steel wheel products to the
light vehicle OEM market, principally in North and South America. We have wheel
manufacturing facilities in Brazil and Mexico. Our wheel products include
fabricated steel wheels, bead seat attached wheels, full-face designed wheels
and clad wheels with the appearance of a chrome finish. Our cladding process
offers enhanced styling options previously available only in aluminum wheels.

Commercial Vehicle Systems

Drivetrain Systems

Truck Axles. We are one of the world's leading independent suppliers of
axles for medium- and heavy-duty commercial vehicles, with axle manufacturing
facilities located in North America, South America,

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Europe and the Asia/Pacific region. Our extensive truck axle product line
includes a wide range of drive and non-drive front steer axles and single and
tandem rear drive axles, which can include driver-controlled differential lock
for extra traction, aluminum carriers to reduce weight and pressurized filtered
lubrication systems for longer life. Our front steer and rear drive axles can be
equipped with our cam, wedge or air disc brakes, automatic slack adjusters and
anti-lock braking systems.

Drivelines and Other Products. We also supply universal joints and
driveline components, including our Permalube(TM) universal joint, a permanently
lubricated universal joint used in the high mileage on-highway market.

Braking Systems

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

Through manufacturing facilities located in North America and Europe, we
manufacture a broad range of foundation air brakes, as well as automatic slack
adjusters for brake systems. Our foundation air brake products include cam drum
brakes, which offer improved lining life and tractor/trailer interchangeability;
air disc brakes, which provide fade resistant braking for demanding
applications; wedge drum brakes, which are lightweight and provide automatic
internal wear adjustment; hydraulic brakes; and wheel end components such as
hubs, drums and rotors.

Federal regulations require that new heavy- and medium-duty vehicles sold
in the United States be equipped with anti-lock braking systems ("ABS"). Our
50%-owned joint venture with WABCO Automotive Products ("WABCO"), a wholly-owned
subsidiary of American Standard, Inc., is the leading supplier of ABS and a
supplier of other electronic and pneumatic control systems for North American
heavy-duty commercial vehicles. The joint venture also supplies hydraulic ABS to
the North American medium-duty truck market.

Specialty Systems

Off-Highway Vehicle Products. We supply heavy-duty axles, brakes and
drivelines for use in numerous off-highway vehicle applications, including
construction, material handling, agriculture, mining and forestry, in North
America, South America, Europe and the Asia/Pacific region. These products are
designed to tolerate high tonnages and operate under extreme conditions. In
October 2002, we announced an agreement to sell our off-highway planetary axle
business. See "Strategic Initiatives" below.

Government Products. We supply axles, brakes and brake system components
including ABS, trailer products, transfer cases and drivelines for use in
medium-duty and heavy-duty military tactical wheeled vehicles, principally in
North America.

Specialty Vehicle Products. We supply axles, brakes and transfer cases for
use in buses, coaches and recreational, fire and other specialty vehicles in
North America and Europe, and we are the leading supplier of bus and coach axles
and brakes in North America.

Suspension Systems and Trailer Products

We believe we are the world's leading manufacturer of heavy-duty trailer
axles, with leadership positions in North America and in Europe. Our trailer
axles are available in over 40 models in capacities from 20,000 to 30,000 pounds
for virtually all heavy trailer applications and are available with our broad
range of brake products, including ABS. In addition, we supply trailer air
suspension systems and products for which we have strong market positions in
Europe and an increasing market presence in North America.

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In August 2002, we entered into a 50%-owned joint venture with Randon
Participacoes to develop, manufacture and sell truck suspensions, trailer axles
and suspensions and related wheel-end products in the South American market. See
"Joint Ventures" below.

Transmissions

Our 50%-owned joint venture with ZF Friedrichshafen AG ("ZF")produces
technologically advanced transmission components and systems for heavy vehicle
OEMs and the aftermarket in the United States, Canada and Mexico. This
transmission product line enables us to supply a complete drivetrain system to
heavy-duty commercial vehicle manufacturers in North America. The most recent
additions to the joint venture's range of transmission models include
FreedomLine(TM), a fully automated mechanical truck transmission without a
clutch pedal, and SureShift(TM), a shift-by-wire system that provides the
operating ease of an automatic transmission with full manual control by the
driver.

Light Vehicle Aftermarket

The principal LVA products include mufflers; exhaust and tail pipes;
catalytic converters; shock absorbers; struts; and automotive oil, air, and fuel
filters. These products are sold under the brand names Arvin(R)(mufflers);
Gabriel(R) (shock absorbers); and Purolator(R) (filters). LVA also markets
products under private label to customers such as Pep Boys and CARQUEST (ride
control) and Quaker State (filters).

Other

"Other" consists of business units that are not focused predominantly on
automotive products and includes our coil coating operation. Coated steel and
aluminum substrates are used in a variety of applications, which include
consumer appliances; roofing and siding; garage and entry doors; heating,
ventilation and air conditioning (HVAC); and transportation.

CUSTOMERS; SALES AND MARKETING

ArvinMeritor's operating segments have numerous customers worldwide and
have developed long-standing business relationships with many of these
customers. Our ten largest customers accounted for approximately 65% of our
total sales in fiscal year 2002.

Original Equipment. Both LVS and CVS market and sell products principally
to OEMs. In North America, CVS also markets truck and trailer products directly
to dealers, fleets and other end-users, which may designate the components and
systems of a particular supplier for installation in the vehicles they purchase
from OEMs.

Consistent with industry practice, LVS and CVS make most of their sales to
OEMs through open purchase orders, which do not require the purchase of a
minimum number of products. The customer typically may cancel these purchase
orders on reasonable notice. LVS and CVS also sell products to certain customers
under long-term arrangements that require us to provide annual cost reductions
(through price reductions or other cost benefits for the OEMs). If we were
unable to generate sufficient cost savings in the future to offset such price
reductions, our gross margins would be adversely affected.

Both LVS and CVS are dependent upon large OEM customers with substantial
bargaining power with respect to price and other commercial terms. Although we
believe that our businesses generally enjoy good relations with our OEM
customers, loss of all or a substantial portion of sales to any of our large
volume customers for whatever reason (including, but not limited to, loss of
contracts, reduced or delayed customer requirements, plant shutdowns, strikes or
other work stoppages affecting production by such customers) could have a
significant adverse effect on our financial results. During fiscal year 2002,
DaimlerChrysler AG (which owns Chrysler, Mercedes-Benz AG and Freightliner
Corporation) accounted for approximately $670 million of sales for LVS, $410
million of sales for CVS and $20 million of sales for LVA, or 16% of our total
sales. In addition, General Motors Corporation accounted for approximately $840
million of sales for LVS, $65 million of sales for CVS and $15 million of sales
for LVA, or 13% of our total sales, and Ford Motor Company

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accounted for approximately $605 million of sales for LVS, $30 million of sales
for CVS and $90 million of sales for LVA, or 11% of our total sales. No other
customer accounted for over 10% of our total sales in fiscal year 2002.

Except as noted above with respect to the North American market for
heavy-duty trucks and trailers, LVS and CVS generally compete for new business
from OEMs, both at the beginning of the development of new vehicle platforms and
upon the redesign of existing platforms. New platform development generally
begins two to four years prior to start-up of production. Once a supplier has
been designated to supply products to a new platform, an OEM will generally
continue to purchase those products from the supplier for the life of the
platform, which typically lasts three to six years.

Aftermarkets. CVS also provides truck and trailer products and off-highway
and specialty products to OEMs, dealers and distributors in the aftermarket. LVA
sells products primarily to wholesale distributors, retailers and installers.
The light vehicle aftermarket includes fewer and larger customers as the market
consolidates and as OEMs increase their presence in the market.

Coil Coating. Our coil coating customers include steel companies, service
centers and end manufacturers engaged in the transportation, appliance,
construction and furniture industries.

COMPETITION

Each of ArvinMeritor's businesses operates in a highly competitive
environment. LVS and CVS compete worldwide with a number of North American and
international providers of components and systems, some of which belong to, or
are associated with, some of our customers. Some of these competitors are larger
and some are smaller than the company in terms of resources and market shares.
The principal competitive factors are price, quality, service, product
performance, design and engineering capabilities, new product innovation and
timely delivery. LVS has numerous competitors across its various product lines
worldwide, including Tenneco, Faurecia and Eberspaecher (air and emissions
systems); Webasto and Inalfa (roof systems); Brose, Magna, Hi-Lex and Grupo
Antolin (door systems); Kiekert and Valeo (latch systems); Stabilus (motion
control products); Thyssen-Krupp and NHK Spring (suspension systems); Kayaba,
Tenneco and Sachs (ride control systems); and Hayes-Lemmerz and Michelin (wheel
products). The major competitors of CVS are Dana Corporation and Eaton
Corporation (truck axles and drivelines); Knorr/Bendix and Haldex Braking
Systems (braking systems); Hendrickson and Holland-Neway (suspension systems);
Hendrickson and Dana (trailer products); and Eaton Corporation (transmissions).
In addition, certain OEMs manufacture for their own use products of the types we
supply, and any future increase in this activity could displace our sales.

LVA competes with both OEMs and independent suppliers in North America and
Europe and serves the market through our own sales force, as well as through a
network of manufacturers' representatives. Major competitors include Tenneco,
Goerlicks, Bosal, Flowmaster, Sebring and Remus (exhaust products); Tenneco,
Kayaba and Sachs (ride control products); and Champion Laboratories, Honeywell,
Dana, Mann & Hummel, Sogefi Filtration and Mahle (filtration products).
Competitive factors include customer loyalty, competitive pricing, customized
service, quality, timely delivery, product development and manufacturing process
efficiency.

Our coil coating operation competes with other coil coaters and with
customers' internal painting systems.

RAW MATERIALS AND SUPPLIES

We believe we have adequate sources for the supply of raw materials and
components for our business segments' manufacturing needs with suppliers located
around the world. We do, however, concentrate our purchases of certain raw
materials and parts over a limited number of suppliers, some of which are
located in developing countries, and we are dependent upon the ability of our
suppliers to meet performance and quality specifications and delivery schedules.
Although we historically have not experienced any significant difficulties in
obtaining an adequate supply of raw materials and components necessary for our
manufacturing operations,

9

the loss of a significant supplier or the inability of a supplier to meet
performance and quality specifications or delivery schedules could have an
adverse effect on us.

On March 5, 2002, President Bush, acting under Section 201 of the Trade Act
of 1974, imposed tariffs of up to 30% on imports of most flat rolled carbon
steel products for a three-year period. Imports of finished steel have decreased
since imposition of the tariffs, and we began to experience rising steel prices
and spot shortages of certain steel products as a result of these tariffs in the
second half of fiscal year 2002. We cannot predict the effect of the tariffs on
availability of steel in fiscal year 2003. If supplies are inadequate for our
needs, or if prices increase significantly and we are unable to either pass
these price increases to our customer base or mitigate the cost increases by
alternative sourcing of material or components, our sales and operating income
could be adversely affected.

STRATEGIC INITIATIVES

We regularly consider various strategic and business opportunities,
including licensing agreements, marketing arrangements and acquisitions, and
review the prospects of our existing businesses to determine whether any of them
should be modified, restructured, sold or otherwise discontinued.

The industry in which we operate continues to experience significant
consolidation among suppliers. This trend is due in part to globalization and
increased outsourcing of product engineering and manufacturing by OEMs, and in
part to OEMs reducing the total number of their suppliers by more frequently
awarding long-term, sole-source or preferred supplier contracts to the most
capable global suppliers. Scale is an important competitive factor, with the
largest industry participants able to maximize key resources and contain costs.

Consistent with this trend, we completed the Merger of Arvin and Meritor in
fiscal year 2000 in order to enhance the financial strength, diversity of
operations and product lines of both companies and to better position ourselves
to take advantage of global opportunities. In addition, we believe that
efficiencies and cost savings resulting from the Merger enable us to improve
upon and increase our strategic options and lower our average cost of capital.

On October 31, 2002, we announced that we had entered into an agreement to
sell our off-highway planetary axle business to Axle Tech International, an
affiliate of Wynnchurch Capital, Ltd. The sale includes manufacturing sites at
Oshkosh, Wisconsin and St. Etienne, France and the planetary axle operations in
Osasco, Brazil, and Seoul, Korea and is contingent on the satisfaction of
certain conditions. We expect to complete the transaction in the first half of
fiscal year 2003.

In the first quarter of fiscal 2002, we recorded a restructuring charge of
$15 million to realign certain operations to reflect the weak demand in our
major markets. The charge related to employee severance benefits for
approximately 450 salaried employees. See Note 5 of the Notes to Consolidated
Financial Statements under Item 8. Financial Statements and Supplementary Data
below.

No assurance can be given as to whether or when any additional strategic
initiatives will be consummated in the future. We will continue to consider
acquisitions as a means of growing the company or adding needed technologies,
but cannot predict whether our participation or lack of participation in
industry consolidation will ultimately be beneficial to us. If an agreement with
respect to any additional acquisitions were to be reached, we could finance such
acquisitions by issuance of additional debt or equity securities or by using our
accounts receivable securitization facility. The additional debt from any such
acquisitions, if consummated, could increase our debt to capitalization ratio.
In addition, the ultimate benefit of any acquisition would depend on our ability
to successfully integrate the acquired entity or assets into our existing
business and to achieve any projected synergies.

JOINT VENTURES

As the automotive industry has become more globalized, joint ventures and
other cooperative arrangements have become an important element of our business
strategies. At September 30, 2002, we participated in 26 joint ventures with
interests in the United States, Brazil, Canada, China, Colombia, the Czech
Republic,

10

Germany, Hungary, India, Italy, Japan, Mexico, South Africa, Spain, Turkey,
Venezuela and the United Kingdom.

In accordance with accounting principles generally accepted in the United
States, our consolidated financial statements include the operating results of
those majority-owned joint ventures in which we have control. Significant
consolidated joint ventures include our 57%-owned North American joint venture
with Mitsubishi Steel Manufacturing Co. (suspension products for passenger cars,
light trucks and sport utility vehicles); and our 75% interest in a joint
venture in Spain with Kayaba (ride control products). Significant unconsolidated
joint ventures include our 50%-owned North American joint venture with WABCO
(ABS systems for heavy-duty commercial vehicles); our 50%-owned joint venture in
the United States with ZF (transmissions); our 50% interest in Arvin Sango Inc.
in the United States and our 49% interest in Zeuna Starker GmbH & Co. in Germany
(air and emissions systems).

In August 2002, we formed a 50%-owned joint venture with Randon
Participacoes to develop, manufacture and sell truck suspensions, trailer axles
and suspensions and related wheel-end products in the South American market. The
joint venture will combine our product technology and customer contacts with
Randon's manufacturing and operations expertise and could enhance both our
market penetration in South America and our product portfolio outside of the
region.

In October 2002, Kayaba purchased our 40% interest in a Spanish joint
venture that manufactures steering pumps, and our participation in this joint
venture was terminated.

On December 17, 2002, we entered into agreements to purchase the remaining
51% interest in Zeuna Starker GmbH & Co. See Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity.

RESEARCH AND DEVELOPMENT

We have significant research, development, engineering and product design
capabilities. We spent $132 million in fiscal year 2002, $136 million in fiscal
year 2001, and $115 million in fiscal year 2000 on research, development and
engineering. At September 30, 2002, we employed approximately 1,700 professional
engineers and scientists.

PATENTS AND TRADEMARKS

We own or license many United States and foreign patents and patent
applications in our manufacturing operations and other activities. While in the
aggregate these patents and licenses are considered important to the operation
of our businesses, management does not consider them of such importance that the
loss or termination of any one of them would materially affect a business
segment or ArvinMeritor as a whole. (See Item 3. Legal Proceedings for
information regarding a patent infringement lawsuit filed against the company by
Eaton Corporation and adverse judgments in the case.)

Our registered trademarks ArvinMeritor(R), Arvin(R) and Meritor(R) are
important to our business. Other significant trademarks owned by us include
Gabriel(R) (shock absorbers and struts) and Purolator(R) (filters) with respect
to LVA, and ROR(TM) (trailer axles) with respect to CVS. In connection with the
1997 spin-off of Meritor's common stock to the shareowners of Rockwell
International Corporation (now Rockwell Automation, Inc., and referred to in
this Annual Report on Form 10-K as "Rockwell") and the transfer of Rockwell's
automotive businesses to Meritor, Meritor entered into an agreement that allows
us to continue to apply the "Rockwell" brand name to our products until
September 30, 2007.

EMPLOYEES

At September 30, 2002, we had approximately 32,000 full-time employees. At
that date, approximately 4,500 employees in the United States and Canada were
covered by collective bargaining agreements and most

11

of our facilities outside of the United States and Canada were unionized. We
believe our relationship with unionized employees is satisfactory. No
significant work stoppages have occurred in the past five years.

ENVIRONMENTAL MATTERS

Federal, state and local requirements relating to the discharge of
substances into the environment, the disposal of hazardous wastes and other
activities affecting the environment have, and will continue to have, an impact
on our manufacturing operations. We record liabilities for environmental issues
in the accounting period in which our responsibility is established and the cost
can be reasonably estimated. At environmental sites in which more than one
potentially responsible party has been identified, we record a liability for our
allocable share of costs related to our involvement with the site, as well as an
allocable share of costs related to insolvent parties or unidentified shares. At
environmental sites in which we are the only potentially responsible party, we
record a liability for the total estimated costs of remediation before
consideration of recovery from insurers or other third parties.

We have been designated as a potentially responsible party at eight
Superfund sites, excluding sites as to which our records disclose no involvement
or as to which our potential liability has been finally determined. Management
estimates the total reasonably possible costs we could incur for the remediation
of Superfund sites at September 30, 2002, to be approximately $34 million, of
which $13 million is recorded as a liability.

In addition to Superfund sites, various other lawsuits, claims and
proceedings have been asserted against us, alleging violations of federal, state
and local environmental protection requirements or seeking remediation of
alleged environmental impairments, principally at previously disposed-of
properties. For these matters, management has estimated the total reasonably
possible costs we could incur at September 30, 2002, to be approximately $50
million, of which $21 million is recorded as a liability.

The process of estimating environmental liabilities is complex and
dependent on physical and scientific data at the site, uncertainties as to
remedies and technologies to be used, and the outcome of discussions with
regulatory agencies. The actual amount of costs or damages for which we may be
held responsible could materially exceed the foregoing estimates because of
these uncertainties and others (including the financial condition of other
potentially responsible parties and the success of the remediation) that make it
difficult to accurately predict actual costs. However, based on management's
assessment, after consulting with Vernon G. Baker, II, Esq., General Counsel of
ArvinMeritor, and subject to the difficulties inherent in estimating these
future costs, we believe that our expenditures for environmental capital
investment and remediation necessary to comply with present regulations
governing environmental protection and other expenditures for the resolution of
environmental claims will not have a material adverse effect on our business,
financial condition or results of operations. In addition, in future periods,
new laws and regulations, advances in technology and additional information
about the ultimate clean-up remedy could significantly change our estimates.
Management cannot assess the possible effect of compliance with future
requirements.

INTERNATIONAL OPERATIONS

Approximately 40% of our total assets as of September 30, 2002 and 38% of
fiscal year 2002 sales were outside North America. See Note 23 of the Notes to
Consolidated Financial Statements under Item 8. Financial Statements and
Supplementary Data below for financial information by geographic area for the
three fiscal years ended September 30, 2002.

Management believes that international operations have significantly
benefited our financial performance. However, our international operations are
subject to a number of risks inherent in operating abroad, including, but not
limited to:

- risks with respect to currency exchange rate fluctuations;

- local economic and political conditions;

12

- disruptions of capital and trading markets;

- restrictive governmental actions (such as restrictions on transfer of
funds and trade protection measures, including export duties and quotas
and customs duties and tariffs);

- changes in legal or regulatory requirements;

- import or export licensing requirements;

- limitations on the repatriation of funds;

- difficulty in obtaining distribution and support;

- nationalization;

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

- tax laws; and

- labor disruptions.

There can be no assurance that these risks will not have a material adverse
impact on our ability to increase or maintain our foreign sales or on our
financial condition or results of operations.

The impact that the euro and other currencies will have on our sales and
operating income is difficult to predict in fiscal year 2003. We enter into
foreign currency contracts to help minimize the risk of loss from currency rate
fluctuations on foreign currency commitments entered into in the ordinary course
of business. It is our policy not to enter into derivative financial instruments
for speculative purposes and, therefore, we hold no derivative instruments for
trading purposes. We have not experienced any material adverse effect on our
business, financial condition or results of operations related to these foreign
currency contracts. See Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Quantitative and Qualitative
Disclosures About Market Risk below.

SEASONALITY; CYCLICALITY

LVS and CVS may experience seasonal variations in the demand for products
to the extent automotive vehicle production fluctuates. Historically, for both
segments, such demand has been somewhat lower in the quarters ended September 30
and December 31, when OEM plants may close during model changeovers and vacation
and holiday periods.

In addition, the industry in which LVS and CVS operate has been
characterized historically by periodic fluctuations in overall demand for
trucks, passenger cars and other vehicles for which we supply products,
resulting in corresponding fluctuations in demand for our products. The cyclical
nature of the automotive industry is outside our control and cannot be predicted
with certainty. Cycles in the major automotive industry markets of North America
and Europe are not necessarily concurrent or related.

13

The following table sets forth vehicle production in principal markets
served by LVS and CVS for the last five fiscal years:

- ---------------
Source: Automotive industry publications and management estimates.

We believe that the stronger heavy-duty truck demand in North America in
fiscal year 2002 was partially due to the pre-buy before new U.S. emission
standards went into effect on October 1, 2002. As a result, we anticipate the
North American heavy-duty truck market to be slightly weaker in fiscal year
2003, with production at an estimated 161,000 units. In Western Europe, we
expect production of heavy- and medium-duty trucks to decrease approximately 5%
to 337,000 units. Our most recent outlook shows North American and Western
European light vehicle production to be 16.0 million and 16.5 million vehicles,
respectively, during fiscal year 2003. See "Industry Developments and Outlook"
above and Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Overview and Outlook and -- Results of Operations
below for information on downturns in certain markets and their effects on our
sales and earnings.

AVAILABLE INFORMATION

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

CAUTIONARY STATEMENT

This Annual Report on Form 10-K contains statements relating to future
results of the company (including certain projections and business trends) that
are "forward-looking statements" as defined in the Private Securities Litigation
Reform Act of 1995. Forward-looking statements are typically identified by words
or phrases such as "believe," "expect," "anticipate," "estimate," "should," "are
likely to be" and similar expressions. Actual results may differ materially from
those projected as a result of certain risks and uncertainties, including but
not limited to global economic and market conditions; the demand for commercial,
specialty and light vehicles for which the company supplies products; risks
inherent in operating abroad, including foreign currency exchange rates; the
availability and cost of raw materials; OEM program delays; demand for and
market acceptance of new and existing products; successful development of new
products; reliance on major OEM customers; labor relations of the company, its
customers and suppliers; successful integration of acquired or merged
businesses; achievement of the expected annual savings and synergies from past
and future business combinations; competitive product and pricing pressures; the
amount of the company's debt; the ability of the company to access capital
markets; the credit ratings of the company's debt; the outcome of existing and
any future legal proceedings, including any litigation with respect to
environmental or asbestos-related matters; as well as other risks and
uncertainties, including but not limited to those

14

detailed herein and from time to time in other filings of the company with the
Securities and Exchange Commission. See also the following portions of this
Annual Report on Form 10-K: Item 1. Business -- "Industry Developments and
Outlook"; "Customers; Sales and Marketing"; "Competition"; "Raw Materials and
Supplies"; "Strategic Initiatives"; "Environmental Matters"; "International
Operations"; and "Seasonality; Cyclicality"; Item 3. Legal Proceedings; and Item
7. Management's Discussion and Analysis of Financial Condition and Results of
Operations. These forward-looking statements are made only as of the date
hereof, and the company undertakes no obligation to update or revise the
forward-looking statements, whether as a result of new information, future
events or otherwise, except as otherwise required by law.

ITEM 2. PROPERTIES.

At September 30, 2002, our operating segments and joint ventures had the
following facilities in the United States, Europe, South America, Canada,
Mexico, Australia, South Africa and the Asia/Pacific region:

These facilities had an aggregate floor space of approximately 33.2 million
square feet, substantially all of which is in use. We owned approximately 74%
and leased approximately 26% of this floor space. There are no major
encumbrances (other than financing arrangements that in the aggregate are not
material) on any of our plants or equipment. In the opinion of management, our
properties have been well maintained, are in sound operating condition and
contain all equipment and facilities necessary to operate at present levels. A
summary of floor space of these facilities at September 30, 2002, is as follows:

In October 2002, we announced an agreement to sell our off-highway
planetary axle business. The sale includes two owned manufacturing facilities,
in Oshkosh, Wisconsin, USA and St. Etienne, France, with a total of 834,000
square feet of floor space.

ITEM 3. LEGAL PROCEEDINGS.

On July 17, 1997, Eaton Corporation filed suit against Rockwell in the U.S.
District Court in Wilmington, Delaware, asserting infringement of Eaton's U.S.
Patent No. 4850236, which covers certain aspects of heavy-duty truck
transmissions, by our Engine SynchroShift(TM) transmission for heavy-duty
trucks, and seeking damages and injunctive relief. Meritor was joined as a
defendant on June 11, 1998. The following judgments and orders have been issued
in this case:

- After trial, on July 1, 1998, a jury rendered a verdict in favor of
Eaton, finding that Meritor had infringed Eaton's patent and awarding
compensatory damages in an amount equal to 13% of total

15

product sales. On October 11, 2001, the judge entered an order granting damages
to Eaton in the amount of $2.9 million, plus post-judgment interest.

- A separate phase of the trial was held in April 1999, without a jury,
with respect to Meritor's allegations that Eaton had engaged in
inequitable conduct in obtaining its patent and that the patent was
therefore unenforceable. On February 9, 2001, the judge ruled against us
on the second phase of the proceedings, finding that we had not provided
clear and convincing evidence of inequitable conduct by Eaton in
obtaining its patent.

- On September 19, 2001, the judge granted Eaton's request for a permanent
injunction against our manufacturing or selling the Engine
SynchroShift(TM) transmission and any "colorable variations."

- On October 11, 2001, the judge denied our motions for a new trial and for
judgment as a matter of law.

We have appealed these judgments and orders to the United States Court of
Appeals for the Federal Circuit and oral arguments were held in October 2002.
Based on advice of M. Lee Murrah, Esq., Chief Intellectual Property Counsel of
ArvinMeritor, management believes our truck transmissions do not infringe
Eaton's patent. We intend to continue to defend this suit vigorously.

Maremont Corporation ("Maremont," a subsidiary of ArvinMeritor) and many
other companies are defendants in suits brought by individuals claiming personal
injuries as a result of exposure to asbestos-containing products. Maremont
manufactured friction products containing asbestos from 1953 through 1977, when
it sold its friction product business. Arvin acquired Maremont in 1986. During
fiscal years 1997 through 2002, Maremont paid approximately $52 million to
address asbestos-related claims, substantially all of which was reimbursed by
insurance.

Maremont's potential liabilities for asbestos-related claims include the
following:

- Unbilled committed settlements entered into by the Center for Claims
Resolution: Maremont participated in the Center for Claims Resolution
("CCR") and agreed to share with other CCR members in the payments of
defense and indemnity costs for asbestos-related claims. The CCR handled
the resolution and processing of asbestos claims on behalf of its members
until February 1, 2001, when it was reorganized and discontinued
negotiating shared settlements.

- Pending claims: Since February 1, 2001, Maremont has hired its own
litigation counsel and is committed to examining the merits of each
asbestos-related claim. For purposes of establishing reserves for pending
asbestos-related claims, Maremont estimates its defense and indemnity
costs based on the history and nature of filed claims to date and
Maremont's experience since February 1, 2001. Maremont had approximately
37,500 and 27,500 pending asbestos-related claims at September 30, 2002
and 2001, respectively. Although Maremont has been named in these cases,
in the cases where actual injury has been alleged, very few claimants
have established that a Maremont product caused their injuries.

- Shortfall: Several former members of the CCR have filed for bankruptcy
protection, and these members have failed, or may fail, to pay certain
financial obligations with respect to settlements that were reached while
they were CCR members. Maremont is subject to claims for payment of a
portion of these defaulted member shares. 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 (discussed
below). 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.

Maremont has insurance that reimburses a substantial portion of the costs
incurred defending against asbestos-related claims. The coverage also reimburses
Maremont for any indemnity paid on those claims. The coverage is provided by
several insurance carriers based on the insurance agreements in place. Based on
its assessment of the history and nature of filed claims to date, and of
Maremont's insurance carriers,

16

management believes that existing insurance coverage is adequate to cover
substantially all costs relating to pending and future asbestos-related claims.

At September 30, 2002, Maremont had established reserves of $66 million
relating to these potential asbestos-related liabilities and corresponding
asbestos-related recoveries of $59 million. The amounts recorded for the
asbestos-related reserves and recoveries from insurance companies are based upon
assumptions and estimates derived from currently known facts. All such estimates
of liabilities for asbestos-related claims are subject to considerable
uncertainty because such liabilities are influenced by variables that are
difficult to predict. If the assumptions with respect to the nature of pending
claims, the cost to resolve claims and the amount of available insurance prove
to be incorrect, the actual amount of Maremont's liability for asbestos-related
claims, and the effect on ArvinMeritor, could differ materially from current
estimates. Maremont does not have sufficient information to make a reasonable
estimate of its potential liability for asbestos-related claims that may be
asserted against it in the future, and has not accrued reserves for these
unknown claims.

See Item 1. Business, "Environmental Matters" for information relating to
environmental proceedings.

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

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

There were no matters submitted to a vote of security holders during the
fourth quarter of fiscal year 2002.

ITEM 4A. EXECUTIVE OFFICERS OF THE COMPANY.

The name, age, positions and offices held with ArvinMeritor and principal
occupations and employment during the past five years of each of our executive
officers as of November 30, 2002, are as follows:

LARRY D. YOST, 64 -- Chairman of the Board and Chief Executive Officer
since July 2000. Chairman of the Board and Chief Executive Officer of Meritor
from May 1997 to July 2000; Acting President, Light Vehicle Systems of Meritor
from January 1998 to March 1999.

VERNON G. BAKER, II, 49 -- Senior Vice President and General Counsel since
July 2000. Secretary of ArvinMeritor from July 2000 to November 2001; Senior
Vice President, General Counsel and Secretary of Meritor from August 1999 to
July 2000; Vice President and General Counsel, Corporate Research and Technology
of Hoechst Celanese Corporation, a subsidiary of Hoechst AG (pharmaceuticals and
industrial chemicals), from 1989 to July 1999.

DIANE S. BULLOCK, 45 -- Vice President and Controller since August 2001.
Vice President, Corporate Development of ArvinMeritor from July 2000 to December
2000; Vice President and Controller of Meritor from September 1998 to July 2000;
Assistant Controller of Meritor from January 1998 to September 1998;
Controller -- Body Systems N.A. of ITT Automotive, Inc. (automotive component
supplier) from 1995 to 1997.

LINDA M. CUMMINS, 55 -- Senior Vice President, Communications since July
2000. Senior Vice President, Communications of Meritor from April 2000 to July
2000; Vice President, Communications of Meritor from August 1999 to April 2000;
Vice President of Advanced Marketing and Worldwide Communications of United
Technologies Automotive (automotive component supplier) from August 1997 to
August 1999.

WILLIAM K. DANIEL, 37 -- Senior Vice President and President, Light Vehicle
Aftermarket since July 2000. President of Arvin Replacement Products business
group from December 1999 to July 2000; Managing
17

Director of Arvin Replacement Products in Europe from January 1998 to November
1999; Managing Director of Gabriel Europe from May 1996 to December 1997.

JUAN L. DE LA RIVA, 58 -- Senior Vice President, Corporate Development &
Strategy, Engineering and Procurement since October 2001. Senior Vice President,
Corporate Development and Strategy of ArvinMeritor from July 2000 to October
2001; Senior Vice President, Business Development of Meritor from February 2000
to July 2000; Senior Vice President, Business Development and Communications of
Meritor from February 1999 to February 2000; Vice President, Business
Development and Communications of Meritor from September 1998 to February 1999;
Managing Director -- Wheels, Light Vehicle Systems of Meritor from September
1997 to September 1998.

THOMAS A. GOSNELL, 52 -- Senior Vice President and President, Commercial
Vehicle Systems since November 2000. Senior Vice President and President, Heavy
Vehicle Systems Aftermarket Products of ArvinMeritor from July 2000 to November
2000; Senior Vice President and President, Worldwide Aftermarket of Meritor from
September 1999 to July 2000; Vice President and General Manager, Aftermarket, of
Meritor from February 1998 to September 1999; General Manager, Worldwide
Aftermarket Services, Heavy Vehicle Systems, of Meritor from September 1997 to
February 1998.

PERRY L. LIPE, 56 -- Senior Vice President and Chief Information Officer
since July 2000. Vice President, Information Technology of Arvin from September
1998 to July 2000; Vice President, Information Technology of Fisher Controls
International, Inc. (valves, regulators and instrumentation) from September 1992
to August 1998.

TERRENCE E. O'ROURKE, 55 -- President and Chief Operating Officer since
June 2002. Senior Vice President and President, Light Vehicle Systems of
ArvinMeritor from July 2000 to May 2002; Senior Vice President and President,
Light Vehicle Systems of Meritor from March 1999 to July 2000; Group Vice
President and President -- Ford Division of Lear Corporation (automotive
component supplier) from January 1996 to January 1999.

DEBRA L. SHUMAR, 46 -- Senior Vice President, Continuous Improvement and
Quality since July 2002. Vice President, Quality of ArvinMeritor from July 2000
to July 2002; Vice President, Quality of Meritor from 1999 to July 2000;
Director, Quality, Light Vehicle Systems of Meritor from 1998 to 1999; Director,
Quality, Structural Systems of ITT Automotive (automotive component supplier)
from 1994 to 1998.

S. CARL SODERSTROM, JR., 49 -- Senior Vice President and Chief Financial
Officer since July 2001. Senior Vice President, Engineering, Quality and
Procurement of ArvinMeritor from July 2000 to July 2001; Senior Vice President,
Engineering, Quality and Procurement of Meritor from February 1998 to July 2000;
Vice President, Engineering and Quality, Heavy Vehicle Systems of Meritor from
September 1997 to February 1998.

CRAIG M. STINSON, 41 -- Senior Vice President and President, Light Vehicle
Systems, since June 2002. Senior Vice President and President, Exhaust Systems,
of ArvinMeritor from September 2000 to May 2002; Executive Vice President,
Exhaust Systems of ArvinMeritor from July 2000 to September 2000; Executive Vice
President, Exhaust Systems of Arvin from January 2000 to July 2000; Vice
President -- General Motors Business Group, Exhaust Systems of Arvin from June
1998 to January 2000; Vice President -- DaimlerChrysler Business Group, Exhaust
Systems of Arvin from February 1995 to June 1998.

FRANK A. VOLTOLINA, 42 -- Vice President and Treasurer since October 2000.
Vice President and Treasurer of Mallinckrodt Inc. (medical products) from
October 1997 to October 2000; Staff Vice President -- Director of Corporate Tax
of Mallinckrodt from October 1995 to October 1997.

ERNEST T. WHITUS, 47 -- Senior Vice President, Human Resources, since April
2001. Vice President, Human Resources-Commercial Vehicle Systems of ArvinMeritor
from July 2000 to April 2001; Vice President, Human Resources-Heavy Vehicle
Systems of Meritor from October 1998 to July 2000; Director, Human
Resources-Heavy Vehicle Systems of Meritor from September 1997 to October 1998.

18

BONNIE WILKINSON, 52 -- Vice President and Secretary since November 2001.
Assistant General Counsel of ArvinMeritor from July 2000 to November 2001;
Assistant General Counsel of Meritor from September 1997 to July 2000.

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

PART II

ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

ArvinMeritor's common stock, par value $1 per share ("Common Stock"), is
listed on the New York Stock Exchange and trades under the symbol "ARM." On
November 30, 2002, there were 34,091 shareowners of record of ArvinMeritor's
Common Stock.

The high and low sale prices per share of ArvinMeritor Common Stock for
each quarter of fiscal years 2002 and 2001 were as follows:

Quarterly cash dividends in the following amounts per share were declared
and paid in each quarter of the last two fiscal years.

On July 1, 2002, we issued 750 shares of Common Stock to two non-employee
directors of ArvinMeritor, in lieu of cash payment of the quarterly retainer fee
for board service. These shares were issued pursuant to the terms of our
Directors Stock Plan and the issuance was exempt from registration under the
Securities Act of 1933, as amended, as a transaction not involving a public
offering under Section 4(2).

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

ITEM 6. SELECTED FINANCIAL DATA.

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

19

ARVINMERITOR, INC.

SELECTED FINANCIAL DATA

- ---------------
(1) Fiscal year 2002 net income and basic and diluted earnings per share include
a restructuring charge of $15 million ($10 million after-tax, or $0.15 per
share) and a gain on sale of the exhaust accessories manufacturing
operations of $6 million ($4 million after-tax, or $0.06 per share). Net
income and basic and diluted earnings per share for fiscal year 2001
includes restructuring costs of $67 million ($45 million after-tax, or $0.68
per share), an employee separation charge of $12 million ($8 million
after-tax, or $0.12 per share), and an environmental charge of $5 million
($3 million after-tax, or $0.05 per share). Net income and basic and diluted
earnings per share for fiscal year 2000 includes a one-time gain of $83
million ($51 million after-tax, or $0.96 per share) for the sale of the seat
adjusting systems business, restructuring costs of $26 million ($16 million
after-tax, or $0.30 per share), and other one-time charges of $4 million ($3
million after-tax, or $0.06 per share). Net income and basic and diluted
earnings per share for fiscal year 1999 includes restructuring costs of $28
million ($17 million after-tax, or $0.33 per share) and a one-time gain of
$24 million ($18 million after-tax, or $0.34 per share) recorded to reflect
the formation of a transmission and clutch joint venture with ZF
Friedrichshafen AG. Net income and basic and diluted earnings per share for
fiscal year 1998 includes a one-time charge of $31 million ($19 million
after-tax, or $0.36 per share) relating to the settlement of interest rate
agreements.

20

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.

OVERVIEW AND OUTLOOK

We operate in a cyclical industry that has been characterized historically
by periodic fluctuations in demand for light, commercial and specialty vehicles,
and related aftermarkets. Light vehicle production volumes peaked in North
America in fiscal 2000 at 17.5 million units and in Western Europe (including
Czech Republic) in fiscal 2001 at 16.9 million units. Vehicle build rates for
heavy-duty trucks in North America were 294,000 units in fiscal 2000 and fell
nearly 50 percent in fiscal 2001. Lower demand in most of our principal markets
in fiscal 2002 and 2001 had a negative effect on our financial results.

The following sets forth vehicle production in our principal markets for
the last three fiscal years:

- ---------------
Source: Automotive industry publications and management estimates.

Our fiscal 2003 outlook for light vehicle production is 16.0 million
vehicles in North America and 16.5 million vehicles in Western Europe. We expect
that North American heavy-duty (also referred to as Class 8) truck production
will decline about five percent in fiscal 2003 to 161,000 units. Despite
continued soft markets, we plan to grow our sales as a result of new business
awards and greater market penetration.

Over the past two years, we have focused on reducing our break-even levels
and driving a continuous improvement culture throughout the organization. We
will continue to identify aggressive cost-reduction actions in order to improve
our financial results in fiscal 2003.

Our industry is rapidly transforming to keep pace with the continued OEM
trends toward outsourcing, increased OEM demand for modules and systems and an
increasing emphasis on engineering and technology. The increased competitive
pressures and complexity of the industry are presenting suppliers with
challenges, as well as growth opportunities.

We believe that ArvinMeritor has all the ingredients and qualities in place
to be a leading Tier One supplier. Our broad customer, product and geographic
base, coupled with our technological capabilities, position us to be one of the
industry's strongest competitors and to take further advantage of industry
trends.

21

RESULTS OF OPERATIONS

The following sets forth the sales, operating income and net income of the
company for the years ended September 30, 2002, 2001 and 2000, as well as pro
forma amounts for fiscal 2000.

- ---------------
(1) Pro forma financial information is presented as if the merger had occurred
at the beginning of fiscal 2000 and reflects (a) the amortization of
goodwill from the merger and the elimination of historical Arvin goodwill
amortization expense; (b) the adjustment to interest expense for borrowings
to fund the Arvin cash consideration and other financing costs; (c) the
income tax effects of (a) and (b) above; and (d) the adjustment of shares
outstanding representing the exchange of one share of Meritor common stock
for 0.75 share of ArvinMeritor common stock and one share of Arvin common
stock for one share of ArvinMeritor common stock, based on the average
shares outstanding for each year. See Note 4 of the Notes to Consolidated
Financial Statements for more information on the ArvinMeritor merger.

22

TOTAL COMPANY

2002 COMPARED TO 2001

Sales for fiscal 2002 were $6,882 million, up $77 million, or one percent,
over last year. The sales increase was primarily attributable to higher
production volumes for North American heavy-duty trucks and the favorable impact
of a stronger euro.

To improve comparability of operating income on a year-over-year basis, the
following information is presented (in millions):

Operating income for fiscal 2002 was $343 million, up $148 million from
fiscal 2001. Fiscal 2002 operating margin improved to 5.0 percent, up from 2.9
percent last year. The company has been able to improve its operating margin
through savings generated by cost-reduction initiatives and restructuring
programs. In the first quarter of fiscal 2002, the company recorded a
restructuring charge of $15 million for severance and other employee costs
related to a net reduction of approximately 450 employees. The company also
recorded restructuring costs of $67 million in fiscal 2001. This charge included
severance and other employee costs of approximately $48 million related to a net
reduction of approximately 1,350 employees, with the balance primarily
associated with facility-related costs from the rationalization of operations.
For more information concerning the status of the company's restructuring
programs, see Note 5 of the Notes to Consolidated Financial Statements.

Fiscal 2002 results include a gain on sale of the company's exhaust
accessories manufacturing business of $6 million. Other charges in fiscal 2001
include $12 million related to an employee separation agreement and $5 million
related to environmental liability costs. In fiscal 2002 the company adopted
Statement of Financial Accounting Standards No. 142 (SFAS 142), "Goodwill and
Other Intangible Assets", which eliminated goodwill amortization expense of $24
million. Excluding restructuring costs, gain on sale of business and other
charges, as well as adjusting for goodwill amortization in fiscal 2001, segment
operating income was $352 million in fiscal 2002, up $49 million from $303
million in fiscal 2001.

Equity in losses of affiliates was $3 million in fiscal 2002, as compared
to equity in earnings of affiliates of $4 million a year ago. The decline was
primarily related to the company's commercial vehicle affiliates. Interest
expense, net and other for fiscal 2002 was $105 million, down $31 million, or 23
percent, from fiscal 2001, principally as a result of lower average debt levels
and the favorable interest rate environment. The effective income tax rate in
fiscal 2002 was 32 percent, down from 33.5 percent in fiscal 2001 (31 percent,
after excluding goodwill amortization).

23

Income before cumulative effect of accounting change was $149 million in
fiscal 2002, compared to $35 million in fiscal 2001. As required by SFAS 142,
the company reviewed the fair values of each of its reporting units, using
discounted cash flows and market multiples. As a result of this review, the
company recorded an impairment loss on goodwill as a cumulative effect of
accounting change for its coil coating operations (classified as "Other" for
segment reporting) of $42 million ($42 million after-tax, or $0.63 per diluted
share) in the first quarter of fiscal 2002. Increased competition, consolidation
in the coil coating applications industry and the struggling U.S. steel market
caused a decrease in the fair value of this business.

Net income for fiscal 2002 was $107 million, or $1.59 per diluted share, as
compared to fiscal 2001 net income of $35 million, or $0.53 per diluted share.
Net income in fiscal 2002 included restructuring costs ($10 million after-tax or
$0.15 per diluted share), a gain on sale of business ($4 million after-tax or
$0.06 per diluted share) and the cumulative effect of the goodwill accounting
change ($42 million after-tax or $0.63 per diluted share). Excluding the impact
of these items, diluted earnings per share was $2.31. Net income in fiscal 2001
included goodwill amortization expense ($20 million after-tax or $0.30 per
diluted share), restructuring costs ($45 million after-tax or $0.68 per diluted
share) and certain other charges ($11 million after-tax or $0.17 per diluted
share). Excluding the impact of these items, diluted earnings per share was
$1.68.

2001 COMPARED TO 2000

Sales for fiscal 2001 were $6,805 million, up $1,652 million, or 32
percent, over fiscal 2000 sales. Fiscal 2001 results include incremental sales
of $2,439 million, attributable to the merger with Arvin, for the first three
quarters of the year. Fiscal 2000 results include Arvin results for the fourth
quarter only. The increase in sales related to the merger was significantly
offset by a decline in the company's Commercial Vehicle Systems (CVS) segment
sales of $673 million. CVS sales were lower in fiscal 2001 due to the steep
decline in CVS heavy-duty truck and trailer markets in North America.

Fiscal 2001 operating income was $195 million, down $234 million from
fiscal 2000 operating income of $429 million. Operating margin was 2.9 percent
in fiscal 2001 compared to 8.3 percent in fiscal 2000. The decline in operating
income was driven by the impact of the significant decrease in CVS sales. The
merger with Arvin added operating income of $100 million on the incremental
sales of $2,439 million.

2001 COMPARED TO PRO FORMA 2000

Sales for fiscal 2001 were $6,805 million, down $917 million, or 12
percent, from pro forma fiscal 2000 sales. The decline in sales was driven by
the company's CVS segment, which experienced a steep decline in the heavy-duty
truck and trailer markets in North America. Also contributing to the decline
were lower volumes in the North American light vehicle market and a softening of
demand in the aftermarket.

Fiscal 2001 operating income as reported was $195 million, down $379
million from pro forma fiscal 2000. Operating margin was 2.9 percent in fiscal
2001, as compared to 7.4 percent in pro forma fiscal 2000. As previously
discussed, included in operating income in fiscal 2001, were restructuring costs
of $67 million and other charges of $17 million. In pro forma fiscal 2000, the
company also recorded $30 million in restructuring costs. This included
approximately $19 million related to a net reduction of approximately 500
employees, $4 million associated with a voluntary early retirement plan in the
U.S. and the balance primarily associated with facility-related costs from the
rationalization of operations. In addition, pro forma fiscal 2000 results
included $6 million of other credits and a one-time gain on the sale of business
of $83 million related to the company's sale of its Light Vehicle Systems (LVS)
seat adjusting systems business.

Excluding restructuring costs, gain on sale of business and other charges,
operating income for fiscal 2001 was $279 million, down $236 million from $515
million in pro forma fiscal 2000. Operating margin before the effect of these
items was 4.1 percent in fiscal 2001, as compared to 6.7 percent in pro forma
fiscal 2000. The substantial decrease in operating income was principally due to
lower CVS sales, resulting from weakness in CVS markets, particularly in North
America. Additionally, operating income from the Other segment (business units
not focused on automotive products) decreased $19 million.

24

Equity in earnings of affiliates was $4 million in fiscal 2001, as compared
to $40 million in pro forma fiscal 2000. The decline was primarily due to lower
earnings from commercial vehicle affiliates. Interest expense, net and other for
fiscal 2001 was $136 million, down $6 million, or four percent, from pro forma
fiscal 2000 reflecting lower debt levels and interest rates.

Net income for fiscal 2001 was $35 million, or $0.53 per diluted share, as
compared to pro forma fiscal 2000 net income of $287 million, or $4.02 per
diluted share. Net income in fiscal 2001 included restructuring costs ($45
million after-tax or $0.68 per diluted share) and certain one-time charges ($11
million after-tax or $0.17 per diluted share). Excluding the impact of these
items, diluted earnings per share was $1.38. Net income in pro forma fiscal 2000
included restructuring costs ($19 million after-tax or $0.27 per diluted share),
other credits ($3 million after tax or $0.04 per diluted share) and gain on sale
of business ($51 million after tax or $0.69 per diluted share). Excluding the
impact of these items, diluted earnings per share on a pro forma basis was
$3.56.

BUSINESS SEGMENTS

LIGHT VEHICLE SYSTEMS -- To improve comparability on a year-over-year
basis, the following information is presented (in millions):

2002 COMPARED TO 2001

LVS sales increased to $3,632 million in fiscal 2002, up $44 million from
$3,588 million a year ago. Acquisition activity added approximately $80 million
to sales in fiscal 2002 and included additional investments in two previously
unconsolidated joint ventures in Germany and China. LVS also sold its seat
motors business in August 2001 and divested its investment in a majority-owned
joint venture in North America effective September 30, 2001. These businesses
contributed sales of approximately $120 million in fiscal 2001. In addition,
sales were up in fiscal 2002 principally due to new business awards.

LVS operating income was $196 million in fiscal 2002, down $17 million, or
eight percent, from fiscal 2001. Operating margin declined to 5.4 percent from
5.9 percent in fiscal 2001 (6.1 percent, after excluding goodwill amortization).
Pricing pressure from the vehicle manufacturers continued to negatively impact
operating margin. Also contributing to the operating margin decline were higher
engineering costs, start-up costs associated with a new Detroit manufacturing
facility and increases in steel costs. Restructuring costs related to the LVS
segment totaled $7 million and $27 million in fiscal 2002 and 2001,
respectively. LVS continues to identify and implement cost-reduction initiatives
to mitigate the pricing pressures from the vehicle manufacturers.

2001 COMPARED TO PRO FORMA 2000

On a reported basis, sales in fiscal 2001 were up $1,557 million and
operating income was up $64 million. Incremental sales and operating income of
$1,633 million and $74 million, respectively, related to the merger with Arvin.

25

LVS sales were $3,588 million in fiscal 2001, a decrease of $80 million,
compared to pro forma fiscal 2000. Unfavorable foreign currency translation and
divestiture activity lowered sales in fiscal 2001 by approximately $130 million
and $30 million, respectively. Excluding these items, sales were up two percent,
despite lower vehicle build rates in North America. This increase was
principally related to higher sales in air and emission systems.

LVS operating income was $213 million in fiscal 2001, down $19 million from
pro forma 2000 operating income of $232 million. Operating margin was 5.9
percent in fiscal 2001, compared to 6.3 percent in pro forma fiscal 2000.
Pricing pressure from the vehicle manufacturers contributed to the operating
margin decline. Furthermore, the higher sales of air and emission systems
included sales of catalytic converters, which typically carry low operating
margins. In fiscal 2001 and pro forma 2000, LVS implemented restructuring and
other programs aimed at lowering fixed costs. Restructuring costs related to
these programs were $27 million and $14 million in fiscal 2001 and pro forma
2000, respectively.

COMMERCIAL VEHICLE SYSTEMS -- To improve comparability on a year-over-year
basis, the following information is presented (in millions):

2002 COMPARED TO 2001

CVS sales were $2,249 million, up $50 million, or two percent, compared to
fiscal 2001. Vehicle build rates in CVS markets were mixed in fiscal 2002. A
13-percent increase in North American Class 8 truck volumes drove higher
drivetrain and braking systems sales of approximately $70 million. However,
declines in worldwide trailer markets contributed to lower suspension systems
and trailer product sales of approximately $35 million.

CVS operating income was $94 million, an increase of $62 million from
fiscal 2001. Operating margin improved to 4.2 percent, up from 1.5 percent in
fiscal 2001 (2.0 percent, after excluding goodwill amortization). Restructuring
charges attributable to the CVS segment were $6 million and $40 million,
respectively, in fiscal 2002 and 2001. The cost savings resulting from these
restructuring programs and other cost-reduction actions have allowed CVS to
lower its fixed cost structure and contributed to the operating margin
improvement.

2001 COMPARED TO PRO FORMA 2000

On a reported basis, sales in fiscal 2001 were down $673 million and
operating income was down $189 million. Incremental sales and operating income
of $41 million and $6 million, respectively, related to the merger with Arvin.

CVS sales were $2,199 million in fiscal 2001, down $727 million from pro
forma fiscal 2000. Sales in North America were down approximately $600 million,
principally due to the 49-percent decline in the North American Class 8 truck
market and the 43-percent decline in the trailer market in U.S. and Canada. The
impact of foreign currency translation contributed approximately $80 million to
the sales decline in fiscal 2001.

CVS operating income was $32 million, a decrease of $199 million from pro
forma fiscal 2000. Operating margin declined to 1.5 percent in fiscal 2001, from
7.9 percent in pro forma fiscal 2000. Lower production

26

volumes in North America for heavy- and medium-duty trucks and trailers drove
the margin decline. In response to the significant decline in its markets, CVS
initiated restructuring programs with a total cost of $56 million in fiscal 2001
and pro forma 2000.

LIGHT VEHICLE AFTERMARKET -- To improve comparability on a year-over-year
basis, the following information is presented (in millions):

2002 COMPARED TO 2001

LVA sales were $844 million in fiscal 2002, a two percent decrease from
$859 million in the prior year. LVA continued to experience lower demand in
exhaust and ride control products during fiscal 2002. The quality of original
equipment parts continues to weaken demand for these products.

LVA operating income was $58 million in fiscal 2002, with an operating
margin of 6.9 percent, compared to operating income of $44 million and an
operating margin of 5.1 percent in fiscal 2001 (5.6 percent, after excluding
goodwill amortization). Despite lower sales for aftermarket parts, LVA was able
to increase its operating margin, as the result of improved pricing and
cost-reduction activities.

2001 COMPARED TO PRO FORMA 2000

On a reported basis, sales were up $650 million and operating income was up
$38 million. The increase in sales and operating income was due to the merger
with Arvin. The full year of merger activity in fiscal 2001 added $648 million
to sales and $28 million to operating income.

LVA sales were $859 million in fiscal 2001, a decline of $91 million, or 10
percent, compared to pro forma fiscal 2000. Softening customer demand resulted
in depressed volumes in this segment.

LVA operating income was $44 million in fiscal 2001, up slightly from $43
million in pro forma fiscal 2000. Operating margin was 5.1 percent compared to
pro forma fiscal 2000 operating margin of 4.5 percent. The operating margin
increase is the result of improved pricing, the favorable impact of
cost-reduction actions and lower changeover spending.

AFFILIATES

At September 30, 2002, the company had investments in 12 joint ventures
which were accounted for under the equity method of accounting, as they were not
majority-owned or controlled. These strategic alliances provide for sales,
product design, development and manufacturing in certain product and geographic
areas. Aggregate sales of these affiliates were $1,565 million, $1,641 million
and $924 million in fiscal 2002, 2001 and 2000, respectively.

The company's equity in earnings (losses) of affiliates was $(3) million in
fiscal 2002, $4 million in fiscal 2001, and $29 million in fiscal 2000. Cash
dividends to ArvinMeritor were $19 million, $24 million and $32 million in
fiscal 2002, 2001 and 2000, respectively. The decrease in earnings of affiliates
over the three-year period is primarily a result of lower earnings from
commercial vehicle affiliates.

27

FINANCIAL CONDITION

The company remains committed to strong cash flow generation and investment
grade capital structure. During fiscal 2002, the company strengthened its
capital structure by replacing its bank revolver borrowings with long-term
notes, the earliest of which mature in 2007. In addition, the company replaced
its $750 million one-year bank revolving facility with a new $400 million
three-year bank revolver. The company's primary source of liquidity continues to
be cash generated from operations, supplemented by its accounts receivables
securitization program and, as required, borrowings on the revolving credit
faciliti