ARVINMERITOR INC - 10-Q Quarterly Report

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

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.

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

69,312,186 shares of Common Stock, $1.00 par value, of ArvinMeritor, Inc. were outstanding on January 31, 2004.


PART I.	FINANCIAL INFORMATION:

	Item 1.	Financial Statements:	Page No.

		Statement of Consolidated Income — Three Months Ended December 31, 2003 and 2002	2

		Consolidated Balance Sheet — December 31, 2003 and September 30, 2003	3

		Condensed Statement of Consolidated Cash Flows — Three Months Ended December 31, 2003 and 2002	4

		Notes to Consolidated Financial Statements	5

	Item 2.	Management’s Discussion and Analysis of Results of Operations and Financial Condition	23

	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	29

	Item 4.	Controls and Procedures	30

PART II.	OTHER INFORMATION:

	Item 2.	Changes in Securities and Use of Proceeds	30

	Item 5.	Other Information	30

	Item 6.	Exhibits and Reports on Form 8-K	31

Signatures			33


		Three Months Ended
		December 31,

		2003			2002

		(Unaudited)
Sales		$	2,180		$	1,709
Cost of sales			(1,998	)		(1,535	)

GROSS MARGIN			182			174
	Selling, general and administrative		(116	)		(101	)
	Restructuring costs		(1	)		—
	Costs for withdrawn tender offer		(16	)		—

OPERATING INCOME			49			73
	Equity in earnings of affiliates		2			1
	Gain on sale of marketable securities		7			—
	Interest expense, net and other		(26	)		(25	)

INCOME BEFORE INCOME TAXES			32			49
	Provision for income taxes		(11	)		(16	)
	Minority interests		(2	)		(1	)

NET INCOME		$	19		$	32

BASIC EARNINGS PER SHARE		$	0.28		$	0.48

DILUTED EARNINGS PER SHARE		$	0.28		$	0.47

Basic average common shares outstanding			67.0			66.9

Diluted average common shares outstanding			68.3			67.4

Cash dividends per common share		$	0.10		$	0.10


					December 31,			September 30,
					2003			2003

ASSETS					(Unaudited)
CURRENT ASSETS:
	Cash and cash equivalents				$	137		$	103
	Receivables (less allowance for doubtful accounts:
			December 31, 2003, $23 and September 30, 2003, $24)			1,386			1,327
	Inventories					581			543
	Other current assets					267			266

		TOTAL CURRENT ASSETS				2,371			2,239

NET PROPERTY						1,337			1,332
GOODWILL						985			951
OTHER ASSETS						734			731

		TOTAL ASSETS			$	5,427		$	5,253

				LIABILITIES AND SHAREOWNERS’ EQUITY
CURRENT LIABILITIES:
	Short-term debt				$	12		$	20
	Accounts payable					1,299			1,311
	Compensation and benefits					240			238
	Income taxes					26			31
	Other current liabilities					289			278

		TOTAL CURRENT LIABILITIES				1,866			1,878

LONG-TERM DEBT						1,572			1,541
RETIREMENT BENEFITS						709			683
OTHER LIABILITIES						183			188
MINORITY INTERESTS						73			64
SHAREOWNERS’ EQUITY:
	Common stock (December 31 and September 30, 2003, 71.0 shares issued and 68.5 outstanding)					71			71
	Additional paid-in capital					562			561
	Retained earnings					651			639
	Treasury stock (December 31 and September 30, 2003, 2.5 shares)					(38	)		(37	)
	Unearned compensation					(9	)		(12	)
	Accumulated other comprehensive loss					(213	)		(323	)

		TOTAL SHAREOWNERS’ EQUITY				1,024			899

		TOTAL LIABILITIES AND SHAREOWNERS’ EQUITY			$	5,427		$	5,253


					Three Months Ended
					December 31,

					2003			2002

					(Unaudited)
OPERATING ACTIVITIES
Net income					$	19		$	32
	Adjustments to net income to arrive at cash provided by operating activities:
			Depreciation and amortization			56			50
			Gain on sale of marketable securities			(7	)		—
			Restructuring costs, net of expenditures			(3	)		(3	)
			Pension and retiree medical expense			33			24
			Pension and retiree medical contributions			(23	)		(22	)
			Changes in receivable securitization			(14	)		(5	)
			Changes in assets and liabilities, excluding effects of acquisitions, divestitures and foreign currency adjustments			(48	)		(99	)

CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES						13			(23	)

INVESTING ACTIVITIES
		Capital expenditures				(32	)		(26	)
		Proceeds from disposition of property and businesses				16			13
		Proceeds from sale of securities				18			—
		Other investing activities				—			(2	)

CASH PROVIDED BY (USED FOR) INVESTING ACTIVITIES						2			(15	)

FINANCING ACTIVITIES
				Net increase in revolving credit facilities		28			53
				(Payments) borrowings on lines of credit and other		(7	)		1

		Net proceeds from debt				21			54
		Cash dividends				(7	)		(7	)

CASH PROVIDED BY FINANCING ACTIVITIES						14			47

EFFECT OF CHANGES IN FOREIGN CURRENCY EXCHANGE RATES ON CASH						5			7

CHANGE IN CASH AND CASH EQUIVALENTS						34			16
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD						103			56

CASH AND CASH EQUIVALENTS AT END OF PERIOD					$	137		$	72

ArvinMeritor, Inc. (the company or ArvinMeritor) 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. The consolidated financial statements are those of the company and its consolidated subsidiaries.

In the opinion of the company, the unaudited financial statements contain all adjustments, consisting solely of adjustments of a normal, recurring nature, necessary to present fairly the financial position, results of operations and cash flows for the periods presented. These statements should be read in conjunction with the company’s financial statements included in the Annual Report on Form 10-K for the fiscal year ended September 30, 2003. The results of operations for the three months ended December 31, 2003, are not necessarily indicative of the results for the full year.

The company’s fiscal year ends on the Sunday nearest September 30. The company’s fiscal quarters end on the Sundays nearest December 31, March 31 and June 30. The first quarter of fiscal 2003 and 2002 ended on December 28, 2003, and December 29, 2002, respectively. All year and quarter references relate to the company’s fiscal year and fiscal quarters unless otherwise stated.

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

Basic earnings per share are based upon the weighted average number of shares outstanding during each period. Diluted earnings per share assumes the exercise of common stock options and the impact of restricted stock when dilutive.

A reconciliation of basic average common shares outstanding to diluted average common shares outstanding at December 31 is as follows (in millions):

On December 8, 2003, President Bush signed the Medicare Prescription Drug, Improvement and Modernization Act (the Act) into law. This law introduces a prescription drug benefit under Medicare as well as a federal subsidy to sponsors of retiree health care benefit plans that provide a benefit that is at least actuarially equivalent to the benefit established by the law. In January 2004, the Financial Accounting Standards Board (FASB) issued FASB Staff Position (FSP) No. FAS 106-1, “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003.” The FSP permits companies that are a sponsor of a postretirement heath care plan that provides a prescription drug benefit to either include the effects of the Act in its financial statements or defer accounting for the Act until the FASB issues guidance on how to account for the federal subsidy. The company has elected to defer accounting for the effects of the Act until specific guidance is issued by the FASB.

In December 2003, the FASB issued Statement of Financial Accounting Standards No. 132 (revised 2003), “Employers’ Disclosures about Pensions and Other Postretirement Benefits, an amendment of FASB Statements No. 87, 88, and 106.” This Statement revises employers’ disclosures about pension and other postretirement benefit plans. It does not change the measurement or recognition of those plans required by FASB Statements No. 87, No. 88 and No. 106. It requires additional disclosures to those in the original FASB Statement No. 132 about the assets, obligations, cash flows, and net periodic benefit cost of defined benefit pension plans and other defined benefit postretirement plans. Certain of these disclosures are required for financial statements with interim periods ending after December 15, 2003. The company has elected to adopt this statement in the first quarter of fiscal 2004 and has included the additional disclosure requirements in Note 16.

On July 9, 2003, the company commenced a tender offer to acquire all of the outstanding shares of Dana Corporation (Dana) for $15.00 per share in cash. On July 22, 2003, Dana’s Board of Directors recommended that its shareowners reject the company’s initial cash tender offer. On November 17, 2003, the company increased its tender offer to $18.00 per share in cash and indicated it would withdraw its offer on December 2, 2003 unless the Dana Board of Directors agreed to begin negotiating a definitive merger agreement. On November 24, 2003, following Dana’s announcement that its Board of Directors recommended that its shareowners reject the company’s increased offer, the company announced that it had withdrawn its $18.00 per share all cash tender offer. As a result of the company’s decision to withdraw its tender offer, the company recorded a net charge of $9 million ($6 million after-tax, or $0.09 per diluted share) in the first quarter of fiscal 2004. The pre-tax charge includes $16 million in direct incremental acquisition costs and a gain on the sale of Dana stock owned by the company of $7 million.

In the second quarter of fiscal 2003, the company purchased the remaining 51-percent interest in Zeuna Stärker GmbH & Co. KG (Zeuna Stärker). The December 31, 2003 consolidated balance sheet includes $111 million of goodwill associated with the purchase price allocation. Incremental sales from Zeuna Stärker were $203 million in the first quarter of fiscal year 2004.

During fiscal 2003, the company approved workforce reductions and facility consolidations in its Light Vehicle Systems (LVS) business segment. These measures follow the management realignment of the company’s LVS business and are also intended to address the competitive challenges in the automotive supplier industry. Additionally, the company has approved plans for a work force reduction and facility closure in its Light Vehicle Aftermarket (LVA) business segment. During the three months ended December 31, 2003, the company recorded restructuring costs for employee termination and benefit expenses totaling $1 million related to these programs. At December 31, 2003, $6 million of restructuring reserves relating to employee termination benefit payments remained in the consolidated balance sheet.

The company recorded additional restructuring costs of $1 million in the first quarter of fiscal year 2004 related to severance and other termination benefits associated with the integration of Zeuna Stärker into the Light Vehicle Systems business. The acquisition was accounted for using the purchase method of accounting and these restructuring costs were reflected in the purchase price allocation. At December 31, 2003, $5 million of restructuring reserves related to this integration remained in the consolidated balance sheet.

The changes in the restructuring reserves for the three months ended December 31, 2003 are as follows (in millions):

The company participates in U.S. and European accounts receivable securitization facilities to enhance financial flexibility and lower interest costs. Under the U.S. accounts receivable securitization facility the company sells substantially all of the trade receivables of certain U.S. subsidiaries to ArvinMeritor Receivables Corporation (ARC), a wholly owned, special purpose subsidiary. ARC has entered into an agreement to sell an undivided interest in up to $250 million of eligible receivables to certain bank conduits. Under the European facility, the company can sell up to 50 million euro of trade receivables to a bank. As of December 31, 2003 and September 30, 2003 the company had utilized $180 million and $210 million, respectively, of the U.S. accounts receivable securitization facility and 35 million euro ($43 million) and 24 million euro ($27 million), respectively, of the European accounts receivable securitization facility.

As of December 31, 2003 and September 30, 2003 the banks had a preferential interest in $316 million and $255 million, respectively, of the remainder of the receivables held at ARC to secure the obligation under the U.S. accounts receivable securitization facility. The bank had a preferential interest in 5 million euro ($6 million) and 4 million euro ($5 million) as of December 31, 2003 and September 30, 2003, respectively, of the remainder of the receivables held to secure the obligation under the European accounts receivable securitization facility.

The company has no retained interest in the receivables sold, but does perform collection and administrative functions. The receivables under these programs were sold at fair market value and a discount on the sale was recorded in interest expense, net and other. A discount of $1 million was recorded for the three months ended December 31, 2003 and 2002. The gross amount of proceeds received from the sale of receivables under these programs was $760 million and $350 million for the three months ended December 31, 2003 and 2002, respectively. The U.S. accounts receivable securitization program and the European program mature in September 2004 and March 2005, respectively.

If the company’s credit ratings were reduced to certain levels, or if certain receivables performance-based covenants were not met, it would constitute a termination event, which, at the option of the banks, could result in termination of the facilities. At December 31, 2003, the company was in compliance with all covenants.

In addition to its securitization programs, several of the company’s European subsidiaries factor eligible accounts receivable with financial institutions. The receivables are factored without recourse to the company and are excluded from accounts receivable. The amounts of factored receivables were $70 million and $47 million at December 31, 2003 and September 30, 2003, respectively.

Effective October 1, 2002, the company voluntarily changed its method of accounting for stock options granted under its various stock-based compensation plans and began expensing the fair value of stock options. The company recorded compensation expense associated with the expensing of options of $1 million ($1 million after-tax, or $0.01 per diluted share) for the three months ended December 31, 2003 and 2002 .


		December 31,			September 30,
		2003			2003

Finished goods		$	261		$	252
Work in process			137			136
Raw materials, parts and supplies			228			200

	Total		626			588
Less: allowance to adjust the carrying value of certain inventories to a LIFO basis			(45	)		(45	)

	Inventories	$	581		$	543


For the Quarterly Period Ended		December 28, 2003

Commission file number		1-15983


Indiana		38-3354643

(State or other jurisdiction		(I.R.S. Employer
of incorporation or organization)		Identification No.)

2135 West Maple Road, Troy, Michigan		48084-7186

(Address of principal executive offices)		(Zip Code)


		Employee
		Termination
		Benefits

Balance at September 30, 2003		$	13
Activity during the period:
	Charges to expense		1
	Purchase accounting		1
	Cash payments		(4	)

Balance at December 31, 2003		$	11


Yes		ü		No


Yes		ü		No