-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, KVob4vwVZLQR3YXdw3s0djcuF05Wus070I2MQPDR7/TQzWjNe4uV1ZU4QybFXLTH 0xyJLHgZxyDvS+kvMhk2DA== 0000950123-00-011696.txt : 20001222 0000950123-00-011696.hdr.sgml : 20001222 ACCESSION NUMBER: 0000950123-00-011696 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 16 CONFORMED PERIOD OF REPORT: 20000930 FILED AS OF DATE: 20001221 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ARVINMERITOR INC CENTRAL INDEX KEY: 0001113256 STANDARD INDUSTRIAL CLASSIFICATION: MOTOR VEHICLE PARTS & ACCESSORIES [3714] IRS NUMBER: 383354643 STATE OF INCORPORATION: IN FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-15983 FILM NUMBER: 793027 BUSINESS ADDRESS: STREET 1: 2135 W MAPLE ROAD CITY: TROY STATE: MI ZIP: 48084 BUSINESS PHONE: 2484351000 FORMER COMPANY: FORMER CONFORMED NAME: MU SUB INC DATE OF NAME CHANGE: 20000501 10-K405 1 y43624e10-k405.txt ARVINMERITOR, INC. 1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ 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 30, 2000 COMMISSION FILE NUMBER 1-15983 ------------------------ 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 ------------------------ SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED ------------------- ----------------------------------------- Common Stock, $1 Par Value New York Stock Exchange (including the associated Preferred Share Purchase Rights)
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE ------------------------ 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 November 30, 2000 was approximately $871.2 million. 66,930,340 shares of the registrant's Common Stock, par value $1 per share, were outstanding on November 30, 2000. DOCUMENTS INCORPORATED BY REFERENCE (1) Certain information contained in the Annual Report to Shareowners of the registrant for the fiscal year ended September 30, 2000 is incorporated by reference into Part I, Part II and Part IV. (2) Certain information contained in the Proxy Statement for the Annual Meeting of Shareowners of the registrant to be held on February 14, 2001 is incorporated by reference into Part III. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 PART I ITEM 1. BUSINESS. GENERAL 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 services to the transportation, appliance, construction and furniture industries. ArvinMeritor was incorporated in Indiana in March 2000 in connection with the merger (the "Merger") of Meritor Automotive, Inc. ("Meritor") and Arvin Industries, Inc. ("Arvin"). The Merger was effected in two steps: (1) Meritor, a Delaware corporation, reincorporated in Indiana by merging into ArvinMeritor, its wholly-owned subsidiary, and (2) immediately thereafter, Arvin merged into ArvinMeritor. The Merger was effective on July 7, 2000. Prior to the Merger, Meritor was a Delaware corporation formed in connection with the September 30, 1997 distribution by Rockwell International Corporation, Meritor's former parent company ("Rockwell"), to Rockwell shareowners on a pro rata basis of all of the issued and outstanding shares of Meritor's common stock. Prior to this distribution, Rockwell transferred substantially all of its operations, assets and liabilities related to the automotive businesses then owned and operated by Rockwell (including liabilities relating to former operations) to Meritor and its subsidiaries. As used herein, the terms "Company" and "ArvinMeritor" include subsidiaries and predecessors unless the context indicates otherwise. Whenever an item of this Annual Report on Form 10-K refers to information under specific captions of the 2000 Annual Report to Shareowners of the Company (the "2000 Annual Report") or to information in the Proxy Statement for the Annual Meeting of Shareowners of the Company to be held on February 14, 2001 (the "2001 Proxy Statement"), the information is incorporated in that item by reference. References in this Annual Report on Form 10-K to the Company's being a leading supplier or the world's leading supplier, and other similar statements as to the Company's relative market position, are based principally on calculations made by the Company based on information collected by the Company, including Company and industry sales data obtained from internal and available external sources, as well as Company estimates. In addition to such quantitative data, the Company's statements are based on other competitive factors such as the Company's technological capabilities, its research and development efforts and innovations and the quality of its products and services, in each case relative to that of its competitors in its addressed markets. 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 the related aftermarkets. Its ten largest customers accounted for 62% of total fiscal 2000 sales. The Company operated over 150 manufacturing facilities in 26 countries around the world in fiscal 2000. Sales outside the United States accounted for approximately 50% of total sales in fiscal 2000. The Company serves its customers worldwide through three operating segments: Light Vehicle Systems ("LVS"), Commercial Vehicle Systems ("CVS") and Light Vehicle Aftermarket ("LVA"). The three operating segments supply the following products and markets: - LVS supplies roof, door, access control, suspension, exhaust, ride control and motion control systems and wheel products for passenger cars, light trucks and sport utility vehicles to original equipment manufacturers. - CVS supplies drivetrain systems and components, including axles, brakes and drivelines, for medium-and heavy-duty trucks, trailers and off-highway equipment and specialty vehicles. - LVA supplies mufflers, exhaust and tail pipes, catalytic converters, shock absorbers, struts, clamps, hangers, automotive oil, air and fuel filters and accessories to the passenger car, light truck and sport utility aftermarket. 1 3 Business units that are not focused on automotive products are classified as "Other." The Company's Coil Coating operation, which provides coil coating applications for the transportation, appliance, construction and furniture industries, is the primary component in this classification. Note 22 of the Notes to Consolidated Financial Statements in the 2000 Annual Report contains financial information by segment for the three years ended September 30, 2000, including information on sales and assets by geographic area for each segment. The heading "Products" below includes information on LVS, CVS and LVA sales by product for each of the three fiscal years ended September 30, 2000. 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 or incorporated by reference in this Annual Report on Form 10-K for periods prior to July 7, 2000 reflects only the results of Meritor and its consolidated subsidiaries. The information for the period after July 7, 2000 represents the results of the Company and its consolidated subsidiaries. This information may not be indicative of the future results of operations, financial position or cash flows of the Company. INDUSTRY DEVELOPMENTS AND OUTLOOK The industry in which the Company operates is cyclical in nature and has been characterized historically by periodic fluctuations in demand for vehicles for which the Company supplies products. Recent declines in several of the Company's principal markets, including commercial vehicle markets in North America and the light vehicle aftermarket, together with the impact of plant shutdowns by some North American OEM customers and currency fluctuations, had a negative effect on the Company's financial results in fiscal year 2000. See Chief Financial Officer's Review -- Management's Discussion and Analysis -- Overview and Outlook and -- Results of Operations in the 2000 Annual Report. For fiscal year 2001, the Company's most recent outlook show a 40% decline in North American production in the heavy-duty commercial truck and trailer markets and declines in light vehicle production of 10% in North America and 2% in Europe. Conditions in foreign exchange markets, notably weakness of the euro relative to the U.S. dollar, will also impact the Company in 2001. The Company is seeking to mitigate the effects of these negative factors not only by expanding its revenue base, but also by reducing costs and improving operational efficiencies. In that connection, the Company has focused significant effort on achieving projected Merger synergies, and has undertaken restructuring actions in the third quarter of fiscal year 2000 and the first quarter of fiscal year 2001 to improve efficiency and achieve cost reductions. See "Strategic Initiatives" below and Notes 6 and 24 of the Notes to Consolidated Financial Statements in the 2000 Annual Report. INDUSTRY TRENDS The automotive industry is experiencing several significant trends that present opportunities and challenges to industry suppliers. These trends, which influence the Company's business strategies, include the globalization of OEMs and their suppliers, increased outsourcing by OEMs, increased demand for modules and systems by OEMs, with an increasing emphasis on engineering and technology, the consolidation of suppliers worldwide, and the growth of e-commerce. As OEMs expand geographically to access new markets, they are able to achieve significant cost savings and enhanced product quality and consistency by sourcing from the most capable full-service global suppliers. OEMs and suppliers also have the opportunity to take advantage of economies of scale through global sourcing of components and systems and by designing platforms that can be used in different geographic markets but still be adapted to local preferences. OEMs are responding to global competitive pressures to improve quality and reduce manufacturing costs and related capital investments by outsourcing products that historically have been engineered and manufactured internally. Outsourcing enables OEMs to focus on their core design, assembly and marketing capabilities. In markets addressed by LVS, this increased outsourcing trend has extended not only to 2 4 components, but to entire modules and systems, requiring suppliers to provide a higher level of engineering, design, and electromechanical and systems integration expertise in order to remain competitive. Increased outsourcing by light vehicle OEMs has produced higher overall per vehicle sales by independent suppliers. Such increased outsourcing can result in supplier sales growth independent of the overall automotive industry growth trend. OEMs also are reducing their total number of suppliers and are more frequently entering into supply arrangements with the most capable global suppliers. Increasingly, the criteria for selection include quality, cost and responsiveness, as well as certain full-service capabilities, including an increasing emphasis on design and engineering. This trend and the globalization trend described above have contributed to the consolidation of automotive suppliers into larger, more efficient and more capable companies. The Internet is taking a more significant role in the automotive industry supply chain, as industry participants recognize the potential benefits of e-commerce. These benefits include the potential to shorten processing time for orders, reduce inventory and increase inventory turns, and reduce costs more quickly than prices. Along with these benefits, e-commerce also presents challenges. In particular, pressure to reduce prices results in the corresponding need to reduce costs in order to maintain profit margins. BUSINESS STRATEGIES ArvinMeritor has developed leadership market positions as it has grown into a global supplier of a broad range of components and systems for use in commercial, specialty and light vehicles worldwide. ArvinMeritor seeks to maintain these market positions in the face of the industry downturns described above. In the longer term, the Company continues to work to enhance its leadership positions and capitalize on its existing customer, product and geographic strengths, as well as the industry trends described above, and to increase its sales, earnings and profitability. To achieve these goals, ArvinMeritor employs the following business strategies: Continuously Improve Core Business Processes. The Company is continuously seeking to improve its core business processes, through investment in information technology and capital equipment, rationalization of production among facilities, deintegration of non-core processes, establishment of flexible assembly sites and simplification and increased commonality of products. The goals of these actions are to reduce product costs, improve product quality and lower required asset investment levels, which should result in reduced product development times and more flexibility to meet customer needs. The Merger provided an opportunity to advance this process by combining or selecting between the best practices of both constituent companies. Capitalize on Customer Outsourcing Activities. A significant growth strategy of the Company is to provide lower cost and higher quality products to customers that are increasing their outsourcing activities. Management believes truck and trailer OEMs in Europe will increasingly outsource in order to achieve cost and efficiency advantages. The Company works closely with current and prospective customers worldwide to identify and implement mutually beneficial outsourcing opportunities. An example of this strategy is the Company's December 1998 acquisition of Volvo Truck Corporation's heavy truck axle manufacturing operations in Lindesberg, Sweden. With this acquisition, the Company entered into a related supply contract and became the primary supplier of heavy-duty axles for Volvo's heavy truck operations. The Company has sought and will continue to seek to utilize its broad product lines and its design, engineering and manufacturing expertise by expanding its sales of higher value modules and systems. The Company will seek to utilize its leadership positions in the supply of electromechanical systems to light vehicle OEMs and its ability to provide drivetrain systems to truck and specialty vehicle OEMs to capitalize on this anticipated customer demand. Leverage Geographic Strengths. Geographic expansion to meet the global sourcing needs of customers and to address new markets will continue to be an important element of the Company's growth strategy. Management believes opportunities exist to increase further the Company's presence in the North American light vehicle OEM market, where its pro forma combined sales of light vehicle products increased from approximately $1.94 billion in fiscal 1999 to approximately $2.15 billion in fiscal 2000. The Merger has 3 5 enhanced the Company's LVS product offerings and improved the Company's ability to take advantage of these opportunities. The Company also believes there are opportunities to increase sales to heavy-duty and medium-duty commercial vehicle OEMs in Europe, building on established customer relationships with their North American affiliates and the Company's existing manufacturing presence in Europe. Emerging markets such as the Asia/Pacific region and South America also present growth opportunities as demand for commercial, specialty and light vehicles increases in these areas. In evaluating opportunities in these emerging markets, the Company will continue to assess the economic situation in these regions and its potential effect on the Company's businesses and served markets. Introduce New Systems and Technologies. ArvinMeritor plans to continue investing in new technologies and product development. ArvinMeritor also plans to continue working closely with its customers to develop and implement design, engineering, manufacturing and quality improvements. The Company will draw upon the engineering resources of its Technical Centers in Troy, Michigan and Columbus, Indiana, and its engineering centers of expertise in the United States, Brazil, Canada, France, Germany and the United Kingdom. See "Research and Development." Management believes that the strategy of continuing to introduce new and improved systems and technologies will be an important factor in the Company's efforts to achieve its growth objectives. LVS is implementing this strategy by developing and strengthening its market position in two areas: aperture systems, including door, access control and roof systems, and undercarriage components and systems, including suspensions, ride and motion control products, wheels, exhaust systems, corner modules and other components. See "Products -- Light Vehicle Systems" below. Expand Aftermarket Business. ArvinMeritor believes that the aftermarket offers significant growth opportunities, through the Company's relationships with OEM customers as well as acquisitions made by retailers. The Company also expects growth opportunities from developing markets outside North America and Europe. The Company is pursuing a strategy of expansion of its aftermarket business by utilizing its distribution centers in Kentucky, North Carolina, Ohio, Oklahoma, Tennessee, Utah and Ontario, and by leveraging its existing aftermarket channels with new products, both those manufactured by the Company and those manufactured by others and sold by the Company under distribution agreements. The Merger furthered this strategy by combining Arvin's strength in the light vehicle aftermarket with Meritor's strength in the commercial vehicle aftermarket, thus providing opportunities for operating synergies and cross-selling of products. CVS' aftermarket capabilities were also enhanced with the December 1998 acquisition of Euclid Industries, a leading North American supplier and manufacturer of aftermarket replacement parts for a wide range of medium- and heavy-duty vehicles. Selectively Pursue Strategic Opportunities. The Company regularly evaluates various strategic and business development opportunities, including licensing agreements, marketing arrangements, joint ventures, acquisitions and dispositions. The Company intends to continue to selectively pursue alliances and acquisitions that would allow it to gain access to new customers and technologies, penetrate new geographic markets and enter new product markets. The Company also intends to continue to review the prospects of its existing businesses to determine whether any of them should be modified, restructured, sold or otherwise discontinued. See "Strategic Initiatives" and "Joint Ventures" below for information on the Company's initiatives in these areas. Participation in E-Commerce Initiatives. The Company has a number of web-enabled initiatives in place or under development, including an online customer catalog and ordering system for certain businesses to shorten delivery time. In addition, the Company was the first supplier to participate in Covisint, a web-based supply exchange sponsored by global OEMs. The Company serves on Covisint's customer advisory council and participates in on-line auctions for global procurement. 4 6 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, the Company provides its products to OEMs, dealers, distributors, fleets and other end-users in the related aftermarkets. The Merger has enhanced the Company's product lines and provided opportunities for increased sales through cross-marketing products and services to customers of the two constituent companies. The following chart depicts operating segment sales by product for each of the three fiscal years ended September 30, 2000. Product sales by Arvin and its subsidiaries are included only for periods after the date of the Merger. A narrative description of the principal products of the Company's three operating segments and other operations follows the chart. SALES BY PRODUCT
FISCAL YEAR ENDED SEPTEMBER 30, -------------------- 2000 1999 1998 ---- ---- ---- LVS: Door Systems........................................... 11% 13% 13% Roof Systems........................................... 6 7 10 Access Control Systems................................. 3 4 5 Exhaust Systems*....................................... 7 -- -- Suspension Systems..................................... 5 5 5 Wheel Products......................................... 3 3 4 Ride and Motion Control Systems*....................... 2 -- -- Seat Adjusting Systems**............................... 2 3 2 --- --- --- Total LVS......................................... 39% 35% 39% --- --- --- CVS: Original Equipment: Truck and Trailer Axles and Brakes..................... 37% 39% 34% Off-Highway, Specialty and Government Products......... 9 12 14 Transmissions, Clutches, Drivelines and Other***....... 1 5 5 Aftermarket............................................... 9 9 8 --- --- --- Total CVS......................................... 56% 65% 61% --- --- --- LVA*: Exhaust System Products................................ 2% --% --% Ride Control Products.................................. 1 -- -- Filtration Products.................................... 1 -- -- --- --- --- Total LVA......................................... 4 -- -- --- --- --- Other*...................................................... 1 -- -- --- --- --- Total............................................. 100% 100% 100% === === ===
- --------------- * Sales relating to ride and motion control systems, exhaust systems, LVA products and Other are included only for periods after the date of the Merger, July 7, 2000. ** The Company sold its seat adjusting systems business in November 1999. *** In August 1999, the Company transferred its transmission and clutch business to a new joint venture 50% owned by the Company. 5 7 Light Vehicle Systems A key strategy of LVS is to develop its market position in aperture systems (including door, roof and access control systems and gas springs) and undercarriage components and systems (including suspension systems, exhaust systems, ride and motion control products and wheels). The Merger provided an enhanced platform for expansion of this business and improved the Company's ability to supply suspension systems and corner modules to light vehicle OEMs. The following products comprise the Company's LVS portfolio. Door Systems. The Company is a leading supplier of manual and power window regulators and a leading supplier of integrated door modules and systems. In fiscal year 2000, the Company manufactured window regulators at plants in North America, Europe and the Asia/Pacific region for light vehicle and heavy-duty commercial vehicle OEMs. The Company's wide range of power and manual door system products utilizes numerous technologies and offers the Company's own electric motors, which are designed for individual applications and to maximize operating efficiency and reduce noise levels. Roof Systems. ArvinMeritor is one of the world's leading independent suppliers of sunroofs and roof systems products, including its Golde(R) brand sunroofs, for use in passenger cars, light trucks and sport utility vehicles. The Company makes one-piece, modular roof systems, some of which incorporate sunroofs, that provide OEMs with cost savings by reducing assembly time and parts. The Company has roof system manufacturing facilities in North America, Europe and the Asia/Pacific region. Access Control Systems. ArvinMeritor supplies manual and power activated latch systems to light vehicle and heavy-duty commercial vehicle manufacturers, with leadership market positions in Europe and a market presence in North America and the Asia/Pacific region. The Company's access control products include modular and integrated door latches, actuators, trunk and hood latches and fuel flap locking devices. The Company has access control systems manufacturing facilities in North America, Europe and the Asia/ Pacific region. Exhaust Systems. ArvinMeritor is a leading global supplier of a complete line of exhaust system components, including mufflers, exhaust pipes, catalytic converters, and exhaust manifolds. The Company sells these products to OEMs, either as original equipment or as replacement parts in connection with manufacturers' recall or warranty programs or as dealer service parts. ArvinMeritor participates in this business both directly and through joint ventures and affiliates. These alliances include the Company's 50% interest in Arvin Sango Inc., an exhaust joint venture, and its 49% interest in Zeuna Starker GmbH & Co., an exhaust systems supplier headquartered in Germany. Suspension Systems. Through its 57%-owned joint venture with Mitsubishi Steel Manufacturing Co., the Company is one of the leading independent suppliers of products used in suspension systems for passenger cars, light trucks and sport utility vehicles in North America. The Company's suspension system products, which are manufactured at three facilities in the United States and Canada, include coil springs, stabilizer bars and torsion bars. This business has experienced significant sales growth over the past five years as light vehicle OEMs have increased their outsourcing of suspension system products and the light vehicle market has grown. In February 2000 the joint venture acquired Tempered Spring Co., a supplier of automotive suspension components based in England. The acquisition added new products and processes to the Company's portfolio and expanded its presence in the European suspensions market. Wheel Products. ArvinMeritor is a leading supplier of steel wheel products to the light vehicle OEM market, principally in North and South America. The Company has wheel manufacturing facilities in Brazil and Mexico. Ride and Motion Control Systems. The Company provides ride control products, including shock absorbers, struts, ministruts and corner modules. Through its two majority-owned joint ventures with Kayaba Industries, Inc., the Company manufactures ride control products and is a leading supplier in the European OEM market. The Company is a worldwide leader in the manufacture and supply of climate control and counterbalancing systems for the automotive industry. Its products include gas lift supports and vacuum actuators. 6 8 Seat Adjusting Systems. Before November 1999, the Company supplied manual and power seat adjusting systems for passenger cars, light trucks and sport utility vehicles, principally in North America. The Company sold its seat adjusting systems business at that time. See "Strategic Initiatives" below. The Company continues to supply electric motors for seat adjusting systems at facilities in the United States and France. Commercial Vehicle Systems Truck and Trailer Products Truck Axles. ArvinMeritor is one of the world's leading independent suppliers of axles for heavy-duty commercial vehicles. The Company's axle manufacturing facilities located in the United States, Brazil, England, Sweden and Italy produce axles for medium- and heavy-duty commercial vehicles. The Company's 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. The Company's front steer and rear drive axles can be equipped with the Company's cam, wedge or air disc brakes, automatic slack adjusters and anti-lock braking systems. Brakes. The Company is a leading independent supplier of air brakes to medium- and heavy-duty commercial vehicle manufacturers in North America and Europe. Through manufacturing facilities located in the United States, Canada, the United Kingdom and Italy, the Company manufactures a broad range of foundation air brakes as well as automatic slack adjusters for brake systems. The Company's 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-duty and medium-duty vehicles sold in the United States be equipped with anti-lock braking systems ("ABS"). Through its 50%-owned joint venture with WABCO Automotive Products ("WABCO"), a wholly-owned subsidiary of American Standard, Inc., the Company is the leading supplier of ABS and a supplier of other electronic and pneumatic control systems for North American heavy-duty commercial vehicles. Through the joint venture the Company also supplies hydraulic ABS to the North American medium-duty truck market. Trailer Products. ArvinMeritor believes it is the world's leading manufacturer of heavy-duty trailer axles, with leadership positions in North America and in Europe. The Company's trailer axles are available in over forty models in capacities from 20,000 to 30,000 pounds for virtually all heavy trailer applications and are available with the Company's broad range of brake products, including ABS. In addition, the Company supplies trailer air suspension products for which it has strong market positions in Europe and a market presence in North America. Transmissions and Clutches. Through its 50%-owned joint venture with ZF Friedrichshafen AG ("ZF"), the Company produces technologically-advanced medium- and heavy-duty transmission components and systems for heavy vehicle original equipment manufacturers and the aftermarket for the United States, Canada and Mexico. This transmission product line enables the Company to supply a complete drivetrain system to heavy-duty commercial vehicle manufacturers in North America. The joint venture's range of transmission models includes the Engine Synchro Shift(TM) transmission for heavy-duty trucks that is designed to reduce gear shifting effort for drivers and reduce wear on clutches and other drivetrain components in a cost efficient manner by synchronizing engine speed to road speed shifts without use of the clutch. (See Item 3. Legal Proceedings for information with respect to a patent infringement lawsuit filed against the Company by Eaton Corporation and an adverse judgment in the case.) The joint venture, through its 60% interest in Meritor Clutch Co., also supplies clutches, including diaphragm-spring clutches. 7 9 Drivelines and Other Products. ArvinMeritor also supplies universal joints and driveline components, including its Permalube(TM) universal joint, a permanently lubricated universal joint used in the high mileage on-highway market. Off-Highway, Specialty and Government Products Off-Highway Vehicle Products. The Company supplies 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. Specialty Vehicle Products. The Company supplies axles, brakes and transfer cases for use in buses, coaches and recreational, fire and other specialty vehicles in North America and Europe, and is the leading supplier of bus and coach axles and brakes in North America. Government Products. The Company supplies axles, brakes, 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. Light Vehicle Aftermarket The principal LVA products include mufflers; exhaust and tail pipes; catalytic converters; shock absorbers; struts; clamps; hangers; automotive oil, air, and fuel filters; and accessories. These products are sold under the brand names Maremont(R), TIMAX(R), ANSA(R) and ROSI(R) (mufflers), Gabriel(R) (shock absorbers) and Purolator(R) (filters). The Company also markets products under private label to customers such as Pep Boys, Midas, Sears, AutoZone, Kwik-Fit, Partco, CarQuest and Meineke. Other "Other" includes business units that are not focused on automotive products, and consists primarily of the Company's Coil Coating operation. Coil coated steel and aluminum substrates are used in a variety of construction applications, such as garage and entry doors, interior and exterior building panels, heating and air conditioning and roofs. In addition, coated substrates are used in consumer goods manufacturing for the appliance, lighting fixture and office products markets. CUSTOMERS; SALES AND MARKETING The Company's operating segments have numerous customers worldwide and have developed long-standing business relationships with many of these customers. Original Equipment. Both LVS and CVS market and sell their products principally to OEMs. In North America, CVS also markets its 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 without penalty. LVS and CVS also sell products to certain customers under long-term arrangements that require the Company to provide annual cost reductions (through price reductions or other cost benefits for the OEMs). If the Company were unable to generate sufficient cost savings in the future to offset such price reductions, the Company's gross margins could be adversely affected. Both LVS and CVS are dependent upon large OEM customers with substantial bargaining power, including with respect to price and other commercial terms. Although the Company believes that it generally enjoys good relations with its OEM customers, loss of all or a substantial portion of sales to any of its large volume customers for whatever reason (including, but not limited to, loss of contracts, reduced or delayed 8 10 customer requirements, plant shutdowns, strikes or other work stoppages affecting production by such customers) could have a significant adverse effect on the Company's financial results. During fiscal 2000, DaimlerChrysler AG (which owns Chrysler, Mercedes-Benz AG and Freightliner Corporation) accounted for approximately $617 million of sales for CVS, $369 million of sales for LVS and $7 million of sales for LVA, or 18% of the total sales of the Company. 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 four to six years. Aftermarkets. CVS also provides its truck and trailer products and off-highway and specialty products to OEMs, dealers and distributors in the aftermarket. LVA sells its 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. The Company's Coil Coating customers include steel companies, service centers and end manufacturers engaged in the transportation, appliance, construction and furniture industries. COMPETITION Each of the Company's businesses operates in a highly competitive environment. LVS and CVS compete worldwide with a number of United States and international vehicle manufacturers and independent suppliers. 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. In North America, the major competitors of CVS are Eaton Corporation and Dana Corporation. In addition, certain OEMs manufacture for their own use products of the types supplied by the Company, and any future increase in this activity could displace sales by the Company. LVA competes with both OEMs and independent suppliers in North America and Europe and serves the market through its own sales force as well as a network of manufacturers' representatives. Competitive factors include customer loyalty, competitive pricing, customized service, quality, timely delivery, product development and manufacturing process efficiency. The Company's Coil Coating operation competes with other coil coaters and with internal paint systems. RAW MATERIALS AND SUPPLIES The Company believes it has adequate sources for the supply of raw materials and components for its business segments' manufacturing needs with suppliers located around the world. The Company does, however, concentrate its purchases of certain raw materials and parts over a limited number of suppliers, some of which are located in developing countries, and is dependent upon the ability of its suppliers to meet performance and quality specifications and delivery schedules. Although the Company historically has not experienced any significant difficulties in obtaining an adequate supply of raw materials and components necessary for its manufacturing operations, 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 the Company. 9 11 STRATEGIC INITIATIVES ArvinMeritor regularly considers various strategic and business opportunities, including licensing agreements, marketing arrangements and acquisitions, and reviews the prospects of its existing businesses to determine whether any of them should be modified, restructured, sold or otherwise discontinued. The industry in which the Company operates 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, the Company's primary strategic initiative in fiscal year 2000 was the Merger. Arvin and Meritor determined to enter into the Merger in order to enhance the financial strength and diversity of operations and product lines of both companies and better position themselves to take advantage of global opportunities. In addition, the Company believes that efficiencies and cost savings resulting from the Merger should enable it to improve upon and increase its strategic options and lower its average cost of capital. Annual pre-tax synergies are estimated to be approximately $50 million in fiscal year 2001, increasing to approximately $100 million in fiscal year 2003. In addition, on November 30, 1999, the Company sold its LVS seat adjusting systems business for approximately $135 million cash. The Company had determined that retention of this business was not consistent with the LVS strategy of developing its market position in aperture systems and undercarriage components and systems. On November 8, 2000, the Company announced restructuring actions to realign operations at selected facilities throughout the world, with a cost of approximately $90 million. The Company expects these restructuring activities to reduce operating costs by approximately $25 million in fiscal year 2001 and $50 million in fiscal year 2002 and thereafter. The Company also recorded a restructuring charge of $26 million in the third quarter of fiscal 2000 relating to workforce reductions and other facility-related costs for the rationalization of operations. See Notes 6 and 24 of the Notes to Consolidated Financial Statements in the 2000 Annual Report. No assurance can be given as to whether or when any additional strategic initiatives will be consummated in the future. The Company will continue to consider acquisitions as a means of further expansion, but cannot predict whether its participation or lack of participation in industry consolidation will ultimately be beneficial to the Company. If an agreement with respect to any additional acquisitions were to be reached, the Company could finance such acquisitions by issuance of additional debt or equity securities. The additional debt from any such acquisitions, if consummated, could increase the Company's debt to capitalization ratio. In addition, the ultimate benefit of any acquisition would depend on the ability of the Company to successfully integrate the acquired entity or assets into its 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 the business strategies of the Company. At September 30, 2000, the Company had interests in joint ventures with operations in the United States, Argentina, Belgium, Brazil, Canada, China, Colombia, the Czech Republic, Germany, Hungary, India, Italy, Japan, Mexico, Peru, the Philippines, South Africa, Spain, Turkey, Venezuela and the United Kingdom. In accordance with accounting principles generally accepted in the United States, the consolidated financial statements of the Company include the operating results of those majority-owned joint ventures in which the Company has control. Consolidated joint ventures include the Company's 57%-owned joint venture with Mitsubishi Steel Manufacturing Co. (suspension products for passenger cars, light trucks and sport utility vehicles); and its 50.1% and 75% interests in two joint ventures with Kayaba Industries Inc. (ride control products). Unconsolidated joint ventures of the Company include its 50%-owned joint venture with WABCO 10 12 (ABS systems for heavy-duty commercial vehicles); its 50%-owned joint venture with ZF (transmissions and clutches); its 50% interests in Arvin Sango Inc. and Arvin Exhaust GmbH (exhaust systems); and its 49% interest in Zeuna Starker GmbH & Co. (exhaust systems). In February 2000, the Company acquired an additional 20% interest in an exhaust joint venture in Shanghai, China, bringing its total ownership to 55%. RESEARCH AND DEVELOPMENT The Company has significant research, development, engineering and product design capabilities. The Company spent approximately $115 million, $117 million and $111 million in fiscal 2000, 1999 and 1998, respectively, on research, development and engineering. At September 30, 2000, the Company employed approximately 1,700 professional engineers and scientists. Pursuant to a transitional services agreement entered into with Rockwell, Rockwell's Science Center provided assistance to the Company in the development of various technological and product advancements through September 30, 2000. This arrangement has now expired. PATENTS AND TRADEMARKS Numerous United States and foreign patents and patent applications are owned or licensed by the Company in its manufacturing operations and other activities. While in the aggregate these patents and licenses are considered important to the operation of the Company's 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 the Company as a whole. (See Item 3. Legal Proceedings for information with respect to a patent infringement lawsuit filed against the Company by Eaton Corporation and an adverse judgment in the case.) The Company's name, its registered trademarks Arvin(TM) and Meritor(TM) and its symbol are important to its business. Other significant trademarks owned by the Company include Golde(R)(sunroofs) and Fumagalli(TM) (wheels) with respect to LVS; Gabriel(R) (shock absorbers and struts), Purolator(R)(filters) and Maremont(R) (exhaust products) with respect to LVA; and ROR(R) (trailer axles) with respect to CVS. Under the terms of an agreement entered into by Meritor and Rockwell in 1997, the Company may continue to apply the "Rockwell" brand name to its products until September 30, 2007. EMPLOYEES At September 30, 2000, the Company had approximately 36,000 full-time employees. At that date, approximately 7,400 Company employees in the United States and Canada were covered by collective bargaining agreements. The Company believes its 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 had, and will continue to have, an impact on the manufacturing operations of the Company. Thus far, compliance with environmental requirements and resolution of environmental claims have been accomplished without material effect on the Company's liquidity and capital resources, competitive position or financial statements. The Company has been designated as a potentially responsible party at ten Superfund sites, excluding sites as to which the Company's records disclose no involvement or as to which the Company's potential liability has been finally determined. Management estimates the total reasonably possible costs the Company could incur for the remediation of Superfund sites at September 30, 2000 to be approximately $20 million, of which probable costs of $13 million had been accrued. 11 13 Various other lawsuits, claims and proceedings have been asserted against the Company alleging violations of federal, state and local environmental protection requirements, or seeking remediation of alleged environmental impairments, principally at previously disposed-of properties. For these matters, management has estimated the total reasonably possible costs the Company could incur at September 30, 2000 to be approximately $50 million. ArvinMeritor expects that any amounts that may be required to be paid in excess of recorded reserves of $25 million will not have a material adverse effect on the Company's financial condition. Based on its assessment and after consulting with Vernon G. Baker, II, Esq., General Counsel of the Company, management believes that the Company's expenditures for environmental capital investment and remediation necessary to comply with present regulations governing environmental protection and other expenditures for the resolution of environmental claims will not have a material adverse effect on the Company's liquidity and capital resources, competitive position or financial statements. Management cannot assess the possible effect of compliance with future requirements. INTERNATIONAL OPERATIONS Approximately 52% of ArvinMeritor's total assets as of September 30, 2000, 50% of fiscal 2000 sales, and 46% of pro forma combined fiscal 2000 sales were outside the United States. Note 22 of the Notes to Consolidated Financial Statements in the 2000 Annual Report includes financial information by geographic area for the three fiscal years ended September 30, 2000. Management believes that international operations have significantly benefited the financial performance of the Company. However, the Company's 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, 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, and tax laws. There can be no assurance that these risks will not have a material adverse impact on the Company's ability to increase or maintain its foreign sales or on its financial condition or results of operations. During fiscal 2000, the Company's sales and operating income were negatively impacted by approximately $130 million and $20 million, respectively, due to exchange rate changes. (See Chief Financial Officer's Review -- Management's Discussion and Analysis -- Results of Operations in the 2000 Annual Report.) The impact that the euro and other currencies will have on the Company's sales and operating income is difficult to predict in the upcoming year. The Company enters into foreign currency forward exchange contracts to minimize the risk of unanticipated gains and losses from currency rate fluctuations on foreign currency commitments entered into in the ordinary course of business. It is the policy of the Company not to enter into derivative financial instruments for speculative purposes and therefore the Company holds no derivative instruments for trading purposes. The Company has not experienced any material adverse effect on its consolidated financial position, results of operations or cash flow related to these foreign currency forward exchange contracts. (See Chief Financial Officer's Review -- Management's Discussion and Analysis -- Quantitative and Qualitative Disclosures about Market Risk in the 2000 Annual Report.) On January 1, 1999, the euro became the common currency of eleven countries of the European Union. During a three-year transition period, the present national currencies of these eleven countries will become sub-units of the euro at fixed exchange rates. The European Union's current plans call for the transition period to be completed by July 1, 2002, at which time the euro will become the sole legal tender in those participating countries. The Company is engaged in business in some of the countries that participate in the European Monetary Union, and sales for fiscal 2000 in these countries were approximately 17% of the Company's total sales. In 12 14 addition, the Company enters into foreign currency forward exchange contracts with respect to several of the existing currencies that have been subsumed into the euro and has borrowings in participating currencies primarily under its bank revolving credit arrangements. The Company has analyzed the potential effects of the euro conversion on competitive conditions, information technology and other systems, currency risks, financial instruments and contracts, and has examined the tax and accounting consequences of euro conversion, and believes that the conversion will not have a material adverse effect on its business, operations and financial condition. The Company is making the necessary adjustments to accommodate the conversion, including modifications to its information technology systems and programs, pricing schedules and financial instruments. The Company expects that all necessary actions will be completed in a timely manner, and that the costs associated with the conversion to the euro will not be material. SEASONALITY; CYCLICALITY LVS and CVS may experience seasonal variations in the demand for their products to the extent automotive vehicle production fluctuates. Historically, for both segments, such demand has been somewhat lower in the Company's first and fourth fiscal quarters (the fourth and third calendar quarters, respectively) 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 the Company supplies products, resulting in corresponding fluctuations in demand for products of the Company. Cycles in the major automotive industry markets of North America and Europe are not necessarily concurrent or related. The cyclical nature of the automotive industry is outside the control of the Company and cannot be predicted with certainty. The Company has sought and will continue to seek to expand its operations globally to mitigate the effect of periodic fluctuations in demand of the automotive industry in one or more particular countries. The following table sets forth vehicle production in principal markets served by LVS and CVS for the last five fiscal years:
FISCAL YEAR ENDED SEPTEMBER 30, ------------------------------------ 1996 1997 1998 1999 2000 ---- ---- ---- ---- ---- Light Vehicles (in millions): North America......................................... 15.1 15.2 15.4 16.9 17.5 South America......................................... 1.8 2.1 2.0 1.5 2.0 Europe................................................ 14.5 15.2 17.7 18.2 19.3 Asia/Pacific (calendar year data)..................... 16.6 17.1 15.4 15.6 17.5 Commercial Vehicles (in thousands): North America, Heavy-Duty Trucks...................... 203 201 245 292 269 North America, Medium-Duty Trucks..................... 125 138 141 175 165 North America, Trailers............................... 266 252 327 366 367 Europe, Trailers...................................... 91 81 130 124 119
- --------------- Source: Automotive industry publications and management estimates Recent declines in several of the Company's principal markets, including commercial vehicle markets in North America and the light vehicle aftermarket, together with plant shutdowns by North American OEM customers, had a negative effect on the Company's financial results in fiscal year 2000. See Chief Financial Officer's Review -- Management's Discussion and Analysis -- Overview and Outlook and -- Results of Operations in the 2000 Annual Report for information on recent downturns in certain markets and their effects on the Company's sales and earnings. The Company's most recent outlook for fiscal year 2001 shows a 40% decline in North American production in the heavy-duty commercial truck and trailer markets. For light vehicle production, the Company currently expects a 10% decline in North America and a 2% decline in Europe during fiscal year 2001. 13 15 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; 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; as well as other risks and uncertainties, including those detailed herein and from time to time in other filings of the Company with the Securities and Exchange Commission. See also "Customers; Sales and Marketing," "Competition," "Raw Materials and Supplies," "Strategic Initiatives," "International Operations" and "Seasonality; Cyclicality" in this Annual Report on Form 10-K, and Chief Financial Officer's Review -- Management's Discussion and Analysis in the 2000 Annual Report. 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. ITEM 2. PROPERTIES. At September 30, 2000, the Company's operating segments operated the following facilities in the United States, Europe, South America, Canada, Mexico, Australia, South Africa and the Far East:
MANUFACTURING ENGINEERING FACILITIES, SALES OFFICES, WAREHOUSES FACILITIES AND SERVICE CENTERS ------------- ------------------------------------------------- LVS................................ 87 49 CVS................................ 37 44 LVA................................ 23 29 Other.............................. 4 2
These facilities had an aggregate floor space of approximately 32.5 million square feet, substantially all of which is in use. The Company owned approximately 74% and leased approximately 26% of this floor space. There are no major encumbrances (other than financing arrangements which in the aggregate are not material) on any of the Company's plants or equipment. In the opinion of management, the Company's 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, 2000 is as follows:
OWNED LEASED FACILITIES FACILITIES --------------------------------- --------------------------------- LOCATION LVS CVS LVA OTHER LVS CVS LVA OTHER TOTAL -------- ------ ------ ------ ------ ------ ------ ------ ------ ------ (IN THOUSANDS OF SQUARE FEET) United States........ 3,986 4,698 2,043 642 533 999 900 479 14,280 Canada............... 446 413 -- -- 104 120 107 -- 1,190 Europe............... 3,462 2,934 1,076 -- 1,738 139 868 -- 10,217 Asia/Pacific......... 341 677 -- -- 181 1,255 597 -- 3,051 Latin America........ 958 2,092 -- -- 89 142 188 -- 3,469 Africa............... 304 -- -- -- -- 11 1 -- 316 Total...... 9,497 10,814 3,119 642 2,645 2,666 2,661 479 32,523
14 16 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 the Company's Engine Synchro Shift(TM) transmission for heavy-duty trucks, and seeking damages and injunctive relief. Meritor was joined as a defendant on June 11, 1998, and trial in this matter began on June 23, 1998. On July 1, 1998, the 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 product sales. At September 30, 2000, said damages totalled approximately $3.75 million. A judgment was entered on July 17, 1998. Because the jury found the infringement to be willful, the judge in the case has discretion to increase the damages to an amount up to three times the amount of the award. Eaton's request for a permanent injunction is pending. A separate phase of the trial with respect to Meritor's allegations of inequitable conduct by Eaton in obtaining its patent was held from April 19-21, 1999. The judge is expected to rule on this phase of the proceedings at the same time as he rules on Eaton's request for a permanent injunction and the damage issue. The Company is considering further actions, including post-trial motions and an appeal to the United States Court of Appeals for the Federal Circuit. Based on advice of M. Lee Murrah, Esq., Assistant General Counsel of the Company, management believes the Company's truck transmissions do not infringe Eaton's patent. The Company intends to continue to defend this suit vigorously. Various other lawsuits, claims and proceedings have been or may be instituted or asserted against the Company or its subsidiaries relating to the conduct of the Company's business, including those pertaining to product liability, intellectual property, environmental, safety and health, and employment matters. Included in these matters are claims for alleged asbestos-related personal injuries, which arose from products manufactured prior to 1977 by a subsidiary acquired by Arvin in 1986. During fiscal years 1995 through 2000, the Company and its predecessors paid asbestos-related claims of approximately $35 million, substantially all of which was reimbursed by insurance. Management believes that existing insurance coverage will reimburse substantially all of the potential liabilities and expenses related to pending cases. The outcome of litigation cannot be predicted with certainty and some lawsuits, claims or proceedings may be disposed of unfavorably to the Company. However, based on its evaluation of matters which are pending or asserted and after consulting with Vernon G. Baker, II, Esq., General Counsel of the Company, management believes the disposition of such matters will not have a material adverse effect on the Company's financial statements. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. See the information reported under Item 4. Submission of Matters to a Vote of Security Holders in the Company's Quarterly Report on Form 10-Q for the Quarterly Period ended June 30, 2000, with respect to a special meeting of shareowners of Meritor held July 6, 2000. There were no other matters submitted to a vote of security holders during the fourth quarter of fiscal 2000. ITEM 4A. EXECUTIVE OFFICERS OF THE COMPANY. The name, age, positions and offices held with the Company and principal occupations and employment during the past five years of each of the executive officers of the Company as of December 15, 2000 are as follows: LARRY D. YOST, 62 -- Chairman of the Board and Chief Executive Officer. 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; Senior Vice President, President, Automotive and Acting President, Heavy Vehicle Systems of Rockwell (electronic controls and communications) from March 1997 to September 1997; President, Heavy Vehicle Systems of Rockwell from November 1994 to March 1997. V. WILLIAM HUNT, 56 -- Vice Chairman and President. Chairman of the Board, President and Chief Executive Officer of Arvin from April 1999 to July 2000; President and Chief Executive Officer of Arvin from 15 17 May 1998 to April 1999; President and Chief Operating Officer of Arvin from 1996 to May 1998; Executive Vice President of Arvin from 1990 to 1996. VERNON G. BAKER, II, 47 -- Senior Vice President, General Counsel and Secretary. 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. GARY L. COLLINS, 54 -- Senior Vice President, Human Resources. Senior Vice President, Human Resources of Meritor from August 1997 to July 2000; Vice President -- Human Resources and Government Relations, Automotive of Rockwell from September 1991 to September 1997. LINDA M. CUMMINS, 52 -- Senior Vice President, Communications. 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; Vice President of Communications and External Affairs of United Technologies Automotive from June 1996 to August 1997; Director of Broadcast News/Global News Department of Ford Motor Company (automotive) from 1993 to 1996. WILLIAM K. DANIEL, 35 -- Senior Vice President and President, Light Vehicle Aftermarket. President of Arvin Replacement Products business group from December 1999 to July 2000; Managing Director of Arvin Replacement Products in Europe from January 1998 to November 1999; Managing Director of Gabriel Europe from May 1996 to December 1997; Vice President, Sales, of Arvin Replacement Products from 1995 to 1996. JUAN L. DE LA RIVA, 56 -- Senior Vice President, Corporate Development and Strategy. 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; Managing Director -- Wheels, Light Vehicle Systems of Rockwell, from 1994 to September 1997. THOMAS A. GOSNELL, 50 -- Senior Vice President and President, Commercial Vehicle Systems. Senior Vice President and President, Heavy Vehicle Systems Aftermarket Products of the Company 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; General Manager, Worldwide Aftermarket Services, Heavy Vehicle Systems, of Rockwell from November 1996 to September 1997; General Manager - North America, Aftermarket Services, Heavy Vehicle Systems, of Rockwell from June 1991 to November 1996. PERRY L. LIPE, 54 -- Senior Vice President and Chief Information Officer. 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. WILLIAM M. LOWE, 47 -- Vice President and Controller. Vice President, Financial Operations and Chief Accounting Officer of Arvin from June 1998 to July 2000; Corporate Controller and Chief Accounting Officer of Arvin from 1994 to June 1998. THOMAS A. MADDEN, 47 -- Senior Vice President and Chief Financial Officer. Senior Vice President and Chief Financial Officer of Meritor from May 1997 to July 2000; Vice President and Senior Vice President -- Finance, Automotive of Rockwell from March 1997 to September 1997; Vice President, Corporate Development of Rockwell from September 1996 to March 1997; Vice President -- Finance & Administration, Light Vehicle Systems of Rockwell from May 1996 to September 1996; Vice President -- Finance & Administration, Automotive of Rockwell from October 1994 to May 1996. 16 18 TERRENCE E. O'ROURKE, 53 -- Senior Vice President and President, Light Vehicle Systems. 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; President -- Chrysler Division of Lear Corporation from October 1994 to January 1996. A. R. SALES, 52 -- Senior Vice President and President, Roll Coater. Vice President and Treasurer of the Company from July 2000 to October 2000; Executive Vice President and Chief Financial Officer of Arvin -- Roll Coater, Inc. from January 1999 to July 2000; Vice President and Treasurer of Arvin from April 1997 to December 1998; Treasurer of Arvin from September 1990 to April 1997. S. CARL SODERSTROM, 47 -- Senior Vice President, Engineering, Quality and Procurement. 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; Vice President, Engineering and Quality, Heavy Vehicle Systems of Rockwell from October 1995 to September 1997; Director of Development -- Operator Interface and Logic Division of Allen-Bradley Company, LLC (automation), a subsidiary of Rockwell, from 1993 to October 1995. DIANE M. STELFOX, 43 -- Vice President, Corporate Development. 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. CRAIG M. STINSON, 39 -- Senior Vice President and President, Exhaust Systems. Executive Vice President, Exhaust Systems of the Company 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; and Vice President -- DaimlerChrysler Business Group, Exhaust Systems, of Arvin from February 1995 to June 1998. FRANK A. VOLTOLINA, 40 -- Vice President and Treasurer. 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; Assistant Controller-Director of Corporate Tax of Mallinckrodt from January 1993 to September 1995. 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 the Company was selected pursuant to any arrangement or understanding between him or her and any person other than the Company. All executive officers are elected annually. PART II ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. The Company's Common Stock, par value $1 per share, is listed on the New York Stock Exchange and trades under the symbol "ARM." On December 8, 2000, there were 44,798 shareowners of record of the Company's Common Stock. In connection with the Merger, each outstanding share of Meritor common stock was exchanged for 0.75 shares of the Company's Common Stock. The high and low sale prices per share of Meritor's common stock for each quarter in fiscal year 1999 and the first three quarters of fiscal year 2000, restated to reflect the 17 19 exchange rate in the Merger, and the high and low sale prices per share of the Company's Common Stock for the fourth quarter of fiscal year 2000, were as follows:
2000 1999 ------------------ ------------------ QUARTER ENDED HIGH LOW HIGH LOW ------------- ------ ------ ------ ------ December 31....................... $28.58 $20.00 $29.50 $18.83 March 31.......................... 26.50 18.17 28.92 18.92 June 30........................... 22.33 14.67 35.33 20.92 September 30...................... 18.63 13.75 34.67 26.17
A quarterly cash dividend, in the amount of 22 cents per share of Company Common Stock, was declared and paid in the fourth quarter of fiscal 2000. Quarterly cash dividends, each in the amount of 10.5 cents per share of Meritor common stock (14 cents per share, after adjustment to reflect the exchange rate in the Merger), were declared and paid in each quarter of fiscal 1999 and the first three quarters of fiscal 2000. On July 10, 2000, the Company issued 750 shares of Common Stock to each of Steven C. Beering, Joseph P. Flannery, Robert E. Fowler, Jr., William D. George, Jr., Ivan W. Gorr, Richard W. Hanselman, Don J. Kacek, James E. Perrella and Martin D. Walker, newly-elected non-employee directors of the Company. All of these shares were issued pursuant to the terms of the Company's Directors Stock Plan and, in each case, 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). In July 2000 the Company's board of directors authorized the purchase of up to $100 million of the Company's Common Stock. Under the repurchase program, the Company expects to purchase shares periodically in the open market or through privately negotiated transactions. Through September 30, 2000, the Company had acquired approximately 3.1 million shares under this program at an aggregate cost of $53 million, or an average of $16.98 per share. ITEM 6. SELECTED FINANCIAL DATA. See the information in the table captioned Selected Financial Data in the 2000 Annual Report. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION. See the discussion and analysis under the caption Chief Financial Officer's Review -- Management's Discussion and Analysis in the 2000 Annual Report. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. See Chief Financial Officer's Review -- Management's Discussion and Analysis -- Quantitative and Qualitative Disclosures About Market Risk in the 2000 Annual Report. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. See Statement of Consolidated Income, Consolidated Balance Sheet, Statement of Consolidated Cash Flows, Statement of Consolidated Shareowners' Equity, Notes to Consolidated Financial Statements, and Independent Auditors' Report in the 2000 Annual Report. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. 18 20 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY. See the information under the captions Election of Directors and Information as to Nominees for Directors and Continuing Directors in the 2001 Proxy Statement. No nominee for director was selected pursuant to any arrangement or understanding between the nominee and any person other than the Company pursuant to which such person is or was to be selected as a director or nominee. There are no family relationships, as defined in Item 401 of Regulation S-K, between any of the directors or nominees for directors and any other director, executive officer or person nominated to become a director or executive officer. See also the information with respect to executive officers of the Company under Item 4a of Part I. ITEM 11. EXECUTIVE COMPENSATION. See the information under the captions Compensation of Directors, Executive Compensation, Employment Agreement with V. William Hunt, Offer Letters to Other Executive Officers and Retirement Benefits in the 2001 Proxy Statement. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. See the information under the captions Voting Securities and Ownership by Management of Equity Securities in the 2001 Proxy Statement. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. None. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. (a) Financial Statements, Financial Statement Schedules and Exhibits. (1) Financial Statements (all financial statements listed below are those of the Company and its consolidated subsidiaries and are incorporated by reference in Item 8 from the 2000 Annual Report): Statement of Consolidated Income, years ended September 30, 2000, 1999 and 1998. Consolidated Balance Sheet, September 30, 2000 and 1999. Statement of Consolidated Cash Flows, years ended September 30, 2000, 1999 and 1998. Statement of Consolidated Shareowners' Equity, years ended September 30, 2000, 1999 and 1998. Notes to Consolidated Financial Statements. Independent Auditors' Report. (2) Financial Statement Schedule for the years ended September 30, 2000, 1999, and 1998.
PAGE ---- Independent Auditors' Report................................ S-1 Schedule II -- Valuation and Qualifying Accounts............ S-2
Schedules not filed with this Annual Report on Form 10-K are omitted because of the absence of conditions under which they are required or because the information called for is shown in the financial statements or related notes. 19 21 (3) Exhibits 3-a Restated Articles of Incorporation of the Company, filed as Exhibit 4.01 to the Company's Registration Statement on Form S-4, as amended (Registration No. 333-36448)("Form S-4") is incorporated herein by reference. 3-b By-laws of the Company, filed as Exhibit 4.02 to the Form S-4, is incorporated herein by reference. 4-a Rights Agreement, dated as of July 3, 2000, between the Company and EquiServe Trust Company, N.A., as rights agent, filed as Exhibit 4.03 to the Form S-4, is incorporated herein by reference. 4-b Indenture, dated as of April 1, 1998, between the Company and The Chase Manhattan Bank, as trustee, filed as Exhibit 4 to Meritor's Registration Statement on Form S-3 (Registration No. 333-49777), is incorporated by reference. 4-b-1 First Supplemental Indenture, dated as of July 7, 2000, to the Indenture, dated as of April 1, 1998, between the Company and The Chase Manhattan Bank, as trustee. 4-c Indenture dated as of July 3, 1990, as supplemented by a First Supplemental Indenture dated as of March 31, 1994, between the Company and Harris Trust and Savings Bank, as trustee, filed as Exhibit 4-4 to Arvin's Registration Statement on Form S-3 (Registration No. 33-53087), is incorporated by reference. 4-c-1 Second Supplemental Indenture, dated as of July 7, 2000, to the Indenture dated as of July 3, 1990, between the Company and Harris Trust and Savings Bank, as trustee. 4-d Indenture dated as of January 28, 1997 between the Company and Wilmington Trust Company, as trustee, filed as Exhibit 4.4 to Arvin's Registration Statement on Form S-3 (Registration No. 333-18521), is incorporated by reference. 4-d-1 First Supplemental Indenture dated as of January 28, 1997, to Indenture dated as of January 28, 1997, between the Company and Wilmington Trust Company, as trustee, filed as Exhibit 4.5 to Arvin's Current Report on Form 8-K dated February 10, 1997 (File No. 1-302), is incorporated by reference. 4-d-2 Second Supplemental Indenture dated as of July 7, 2000, to Indenture dated as of January 28, 1997, between the Company and Wilmington Trust Company. 10-a Agreement and Plan of Reorganization dated as of April 6, 2000, between Meritor, Arvin and Mu Sub, Inc., filed as Exhibit 2.1 to Meritor's Current Report on Form 8-K dated April 14, 2000 (File No. 1-13093), is incorporated by reference. 10-b-1 Five-Year Revolving Credit Agreement dated as of June 28, 2000 among the Company, the foreign subsidiary borrowers and lenders from time to time party to the agreement, Bank One, NA, as Administrative Agent, The Chase Manhattan Bank as Syndication Agent, and Citicorp USA, Inc. and Bank of America, NA, as Documentation Agents, filed as Exhibit 10-a to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2000 (File No. 1-15983), is incorporated by reference. 10-b-2 364-Day Credit Agreement dated as of June 28, 2000 among the Company, the lenders from time to time party to the agreement, Bank One, NA, as Administrative Agent, The Chase Manhattan Bank as Syndication Agent, and Citicorp USA, Inc. and Bank of America, NA, as Documentation Agents, filed as Exhibit 10-b to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2000 (File No. 1-15983), is incorporated by reference. *10-c-1 The Company's 1997 Long-Term Incentives Plan, filed as Exhibit 10-a-1 to Meritor's Annual Report on Form 10-K for the fiscal year ended September 30, 1997 (File No. 1-13093) ("1997 Form 10-K"), is incorporated by reference. *10-c-2 Form of Restricted Stock Agreement under the Company's 1997 Long-Term Incentives Plan, filed as Exhibit 10-a-2 to the 1997 Form 10-K, is incorporated by reference.
20 22 *10-c-3 Form of Option Agreement under the Company's 1997 Long-Term Incentives Plan, filed as Exhibit 10(a) to Meritor's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1998 (File No. 1-13093), is incorporated by reference. *10-d-1 The Company's Directors Stock Plan, filed as Exhibit 10-b-1 to the 1997 Form 10-K, is incorporated by reference. *10-d-2 Form of Restricted Stock Agreement under the Company's Directors Stock Plan, filed as Exhibit 10-b-2 to the 1997 Form 10-K, is incorporated by reference. *10-d-3 Form of Option Agreement under the Company's Directors Stock Plan, filed as Exhibit 10(b) to Meritor's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1998 (File No. 1-13093), is incorporated by reference. *10-e The Company's Incentive Compensation Plan, filed as Exhibit 10-c-1 to the 1997 Form 10-K, is incorporated by reference. *10-f Copy of resolution of the Board of Directors of the Company, adopted on July 6, 2000, providing for its Deferred Compensation Policy for Non-Employee Directors. *10-g The Company's Deferred Compensation Plan, filed as Exhibit 10-e-1 to Meritor's Annual Report on Form 10-K for the fiscal year ended September 30, 1998 (File No. 1-13093), is incorporated by reference. *10-h Arvin's 1998 Stock Benefit Plan, filed as Exhibit 10(A) to Arvin's Annual Report on Form 10-K for the fiscal year ended January 3, 1999 (File No. 1-302), is incorporated by reference. *10-i Arvin's 1988 Stock Benefit Plan, as amended, filed as Exhibit 10 to Arvin's Quarterly Report on Form 10-Q for the quarter ended July 3, 1988, and as Exhibit 10(E) to Arvin's Quarterly Report on Form 10-Q for the quarter ended July 4, 1993 (File No. 1-302), is incorporated by reference. *10-j Employment Agreement, dated as of April 6, 2000, among the Company, Arvin and V. William Hunt, filed as Exhibit 10.01 to the Form S-4, is incorporated by reference. *10-k-1 Employment offer letter between the Company and Larry D. Yost. *10-k-2 Employment offer letter between the Company and Prakash R. Mulchandani. *10-k-3 Employment offer letter between the Company and Terrence E. O'Rourke. *10-k-4 Employment offer letter between the Company and Thomas A. Madden. *10-l Form of Arvin Change of Control Agreement, filed as Exhibit 10(I) to Arvin's Annual Report on Form 10-K for the fiscal year ended December 28, 1997 (File No. 1-302), is incorporated by reference. 10-m Distribution Agreement dated as of September 30, 1997 by and between Rockwell and Meritor, filed as Exhibit 2.1 to Meritor's Current Report on Form 8-K dated October 10, 1997 (File No. 1-13093), is incorporated by reference. 10-n Employee Matters Agreement dated as of September 30, 1997 by and between Rockwell and Meritor, filed as Exhibit 2.2 to Meritor's Current Report on Form 8-K dated October 10, 1997 (File No. 1-13093), is incorporated by reference. 10-o Tax Allocation Agreement dated as of September 30, 1997 by and between Rockwell and Meritor, filed as Exhibit 2.3 to Meritor's Current Report on Form 8-K dated October 10, 1997 (File No. 1-13093), is incorporated by reference. 13 Portions of the 2000 Annual Report to Shareowners. 21 List of Subsidiaries of the Company. 23-a Consent of M. Lee Murrah, Esq., Assistant General Counsel of the Company. 23-b Consent of Vernon G. Baker, II, Esq., Senior Vice President, General Counsel and Secretary of the Company. 23-c Independent auditors' consent.
21 23 24 Power of Attorney authorizing certain persons to sign this Annual Report on Form 10-K on behalf of certain directors and officers of the Company. 27 Financial Data Schedule.
- --------------- * Management contract or compensatory plan or arrangement. (b) Reports on Form 8-K. The Company filed a Current Report on Form 8-K, dated July 10, 2000, reporting under Item 2, Acquisition or Disposition of Assets, the consummation of the Merger on July 7, 2000; reporting under Item 5, Other Matters, that the Company is successor issuer to Meritor under Rule 12g-3 under the Securities Exchange Act of 1934; and filing under Item 7, Financial Statements, Pro Forma Financial Information and Exhibits, certain financial statements and exhibits. 22 24 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. ARVINMERITOR, INC. By: /s/ VERNON G. BAKER, II ------------------------------------ Vernon G. Baker, II Senior Vice President, General Counsel and Secretary Date: December 21, 2000 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on the 21st day of December, 2000 by the following persons on behalf of the registrant and in the capacities indicated. Larry D. Yost* Chairman of the Board and Chief Executive Officer (principal executive officer) and Director V. William Hunt* Vice Chairman and President and Director Joseph B. Anderson, Jr., Steven C. Beering, Directors Rhonda L. Brooks, John J. Creedon, Joseph P. Flannery, Robert E. Fowler, Jr., William D. George, Jr., Richard W. Hanselman, Charles H. Harff, Victoria B. Jackson, Don J. Kacek, James E. Marley and Harold A. Poling* Thomas A. Madden* Senior Vice President and Chief Financial Officer (principal financial officer) William M. Lowe* Vice President and Controller (principal accounting officer) *By: /s/ VERNON G. BAKER, II ------------------------------------------------ Vernon G. Baker, II, Attorney-in-fact** **By authority of powers of attorney filed herewith
23 25 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Shareowners of ArvinMeritor, Inc. Troy, Michigan We have audited the consolidated financial statements of ArvinMeritor, Inc. and subsidiaries (formerly Meritor Automotive, Inc. and subsidiaries -- See Note 1) as of September 30, 2000 and 1999, and for each of the three years in the period ended September 30, 2000, and have issued our report thereon dated November 7, 2000; such financial statements and report are included in your 2000 Annual Report to Shareowners and are incorporated herein by reference. Our audits also included the financial statement schedule of ArvinMeritor, Inc. and subsidiaries, listed in Item 14(a)(2). This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, such financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. DELOITTE & TOUCHE Detroit, Michigan November 7, 2000 S-1 26 SCHEDULE II ARVINMERITOR, INC. VALUATION AND QUALIFYING ACCOUNTS FOR THE YEAR ENDED SEPTEMBER 30, 2000, 1999, AND 1998
BALANCE AT CHARGED TO BALANCE AT BEGINNING OF COSTS AND OTHER END OF DESCRIPTION YEAR(A) EXPENSES DEDUCTIONS OTHER YEAR(A) - ----------- ------------ ---------- ---------- ----- ---------- Year ended September 30, 2000: Allowance for doubtful accounts..... $10.4 $2.8 $2.4(b) $10.9(d) $21.7 Year ended September 30, 1999: Allowance for doubtful accounts..... $13.8 $1.2 $3.9(b) $(0.7)(c) $10.4 Year ended September 30, 1998: Allowance for doubtful accounts..... $11.6 $3.2 $1.0(b) $ -- $13.8
- --------------- (a) Includes allowances for trade and other long-term receivables. (b) Uncollectible accounts written off. (c) Includes increase in allowance of $1.8 million due to acquisition of businesses, less reversal of reserve of $2.5 million due to change in estimate of collectibility of note receivable. (d) Includes increase in allowance of $11.9 million due to Merger. S-2 EX-4.B.1 2 y43624ex4-b_1.txt FIRST SUPPLEMENTAL INDENTURE 1 Exhibit 4-b-1 FIRST SUPPLEMENTAL INDENTURE FIRST SUPPLEMENTAL INDENTURE, dated as of July 7, 2000, to the Indenture, dated as of April 1, 1998, between Meritor Automotive, Inc., a Delaware corporation ("Meritor") having its principal office at 2135 West Maple Road, Troy, Michigan 48084-7186, and The Chase Manhattan Bank, a New York banking corporation, as trustee (the "Trustee"), having its principal corporate trust office at 450 West 33rd Street, 15th Floor, New York, New York 10001-2697, Attention: Capital Markets Fiduciary Services (the "Indenture"). All capitalized terms not defined herein are used herein as defined in the Indenture. WHEREAS, Meritor, Arvin Industries, Inc. ("Arvin"), and ArvinMeritor, Inc. ("ArvinMeritor") have entered into an Agreement and Plan of Reorganization, dated April 6, 2000, under which Meritor and Arvin will each merge into ArvinMeritor, an Indiana corporation (the "Merger"); and WHEREAS, Section 8.01 of the Indenture provides that Meritor may merge into any other corporation that is organized and existing under the laws of any State if certain other conditions are satisfied; and WHEREAS, on February 24, 1999, Meritor issued $500,000,000 aggregate principal amount of its 6.80% Notes due February 15, 2009 (the "Notes") under the Indenture, and the Notes are outstanding on the date hereof; and WHEREAS, in connection with the Merger, ArvinMeritor will assume Meritor's obligations under the Indenture, including its obligations with respect to the Notes; NOW, THEREFORE, THIS SUPPLEMENTAL INDENTURE WITNESSETH: 1. Effective upon consummation of the Merger, ArvinMeritor hereby expressly assumes the due and punctual payment of the principal of (and premium, if any) and interest, if any, on all the Securities and coupons, if any, appertaining thereto and the performance of every covenant of the Indenture on the part of Meritor to be performed or observed. 2. Pursuant to Section 8.02 of the Indenture, upon consummation of the Merger, ArvinMeritor shall succeed to, and be substituted for, and may exercise every right and power of, the Company under the Indenture with the same effect as if ArvinMeritor had been named as the Company in the Indenture, and thereafter Meritor shall be relieved of all obligations and covenants under the Indenture, the Securities and any coupons. 2 -2- IN WITNESS WHEREOF, the parties hereto have caused this Supplemental Indenture to be duly executed, and their respective corporate seals to be hereunder affixed and attested, all as of the day and year first above written. [CORPORATE SEAL] MERITOR AUTOMOTIVE, INC. By: /s/ Vernon G. Baker, II ------------------------------ Title: Senior Vice President, General Counsel and Secretary Attest: /s/ Bonnie Wilkinson - --------------------- Title: Assistant Secretary [CORPORATE SEAL] ARVINMERITOR, INC. By: /s/ Thomas A. Madden ---------------------- Title: Senior Vice President and Chief Financial Officer Attest: /s/ Vernon G. Baker, II - ----------------------- Title: Secretary [CORPORATE SEAL] THE CHASE MANHATTAN BANK, as Trustee By: /s/ Robert S. Peschler ---------------------- Title: Assistant Vice President Attest: /s/ Diane Darconte - ------------------ Authorized Officer
EX-4.C.1 3 y43624ex4-c_1.txt SECOND SUPPLEMENTAL INDENTURE 1 Exhibit 4-c-1 SECOND SUPPLEMENTAL INDENTURE Second Supplemental Indenture, dated as of July 7, 2000 ("Second Supplemental Indenture"), between ARVINMERITOR, INC., an Indiana corporation (hereinafter called the "Company"), having its principal executive office at 2135 West Maple Road, Troy, Michigan 48084-7186, and Harris Trust and Savings Bank, a banking organization organized under the laws of Illinois, having its Corporate Trust Office at 2 North LaSalle Street, Suite 1020, Chicago, Illinois 60602 ("Harris"), or any successor to Harris, as trustee (hereinafter called the "Trustee"). RECITALS OF THE COMPANY On April 6, 2000, Arvin Industries, Inc., an Indiana corporation ("Arvin"), Meritor Automotive, Inc., a Delaware corporation ("Meritor"), and the Company executed an agreement and plan of reorganization (the "Merger Agreement") under which Meritor is being merged with and into the Company, to be immediately followed by the merger of Arvin with and into the Company, with the Company as the surviving corporation (the "Merger"). Arvin and the Trustee are parties to that certain indenture dated as of July 3, 1990, as supplemented by that First Supplemental Indenture dated as of March 31, 1994 (together, the "Indenture"). In accordance with Section 801 of the Indenture, immediately following the Merger, the Company is not in default in the performance or observance of any of the terms, covenants and conditions of the Indenture to be kept or performed by the Company; the Company is a corporation organized under the laws of the State of Indiana; and the Company shall, by virtue of this Second Supplemental Indenture, expressly assume the due and punctual payment of the principal of and premium, if any, and interest on all of the Securities, according to their tenor, and the due and punctual performance and observance of all of the covenants and conditions of the Indenture to be performed or observed by the Company. Section 901(1) of the Indenture authorizes the Company and the Trustee (without the consent of any Holders of Securities issued under the Indenture) to enter into a supplemental indenture for the purpose of evidencing the succession of another Person to the Company, and the assumption by any such successor of the covenants of the Company in the Indenture and in the Securities contained. The Company now proposes to enter into this Second Supplemental Indenture for the purpose of evidencing the succession of the Company to Arvin and the assumption by the Company of the covenants of Arvin in the Indenture and in the Securities contained. NOW, THEREFORE, THIS SUPPLEMENTAL INDENTURE WITNESSETH: For and in consideration of the premises and for the equal and proportionate benefit of all Holders of Securities heretofore or hereafter authenticated and delivered under the Indenture, it is mutually covenanted and agreed as follows: 1. The Company expressly assumes the due and punctual payment of the principal of and premium, if any, and interest on all of the Securities, according to their tenor, and the due and punctual performance and observance of all of the covenants and conditions of the Indenture to be performed or observed by the Company. 2. This Second Supplemental Indenture shall become operative and effective upon the merger of Arvin with and into the Company, as contemplated by the Merger Agreement. 3. Pursuant to Section 904 of the Indenture, (i) the Indenture is modified in accordance with the provisions of this Supplemental Indenture, (ii) this Second Supplemental Indenture forms a part of the Indenture for all purposes, and (iii) 2 every Holder of Securities heretofore or hereafter authenticated and delivered under the Indenture and of any coupons appertaining thereto is bound by this Second Supplemental Indenture. 4. References to the Indenture, including all such references in Securities of any series heretofore or hereafter authenticated and delivered under the Indenture, need not contain any reference to this Second Supplemental Indenture, but all references to the Indenture dated as of July 3, 1990, between Arvin and Harris, or to the Indenture dated as of July 3, 1990, between Arvin and Harris, as amended by the First Supplemental Indenture dated as of March 31, 1994, between Arvin and Harris, shall be deemed to refer to the Indenture as modified in accordance with this Second Supplemental Indenture. 5. All capitalized terms used in this Second Supplemental Indenture and not defined herein shall have the respective meanings set forth in the Indenture. The recitals contained in this Second Supplemental Indenture shall be taken as the statements of the Company, and the Trustee assumes no responsibility for their correctness. This instrument may be executed in any number of counterparts, each of which so executed shall be deemed to be an original, but all such counterparts shall together constitute but one and the same instrument. 6. This Second Supplemental Indenture may be executed in one or more separate counterparts, each of which shall be an original, but all of which together shall constitute one instrument. -2- 3 IN WITNESS WHEREOF, the parties hereto have caused this Second Supplemental Indenture to be duly executed, and their respective corporate seals to be hereunto affixed, all as of the day and year first above written. ARVINMERITOR, INC. By: /s/ Thomas A. Madden -------------------- [SEAL] Name: Thomas A. Madden Its: Senior Vice President, Chief Financial Officer and Treasurer ATTEST: By: /s/ Vernon G. Baker, II ----------------------- Secretary HARRIS TRUST AND SAVINGS BANK, not in its individual capacity but solely as trustee By: /s/ J. Bartolini ---------------- [SEAL] Name: J. Bartolini Its: Authorized Officer ATTEST: By: /s/ C. H. Long -------------- Assistant Secretary
-3- EX-4.D.2 4 y43624ex4-d_2.txt SECOND SUPPLEMENTAL INDENTURE 1 Exhibit 4-d-2 SECOND SUPPLEMENTAL INDENTURE Second Supplemental Indenture, dated as of July 7, 2000 ("Second Supplemental Indenture"), between ARVINMERITOR, INC., an Indiana corporation (hereinafter called the "Company"), having its principal executive office at 2135 West Maple Road, Troy, Michigan 48084-7186, and Wilmington Trust Company, a Delaware banking corporation, not in its individual capacity but solely as trustee (the "Trustee"), under the Indenture dated as of January 28, 1997 between Arvin Industries, Inc., an Indiana corporation ("Arvin") and the Trustee, as trustee, as supplemented by the First Supplemental Indenture, dated as of January 28, 1997, between Arvin and the Trustee, as trustee (together, the "Indenture"). W I T N E S S E T H: WHEREAS, Arvin executed and delivered the Indenture to the Trustee to provide for the issuance of Arvin's unsecured junior subordinated debt securities to be issued from time to time in one or more series as might be determined by Arvin under the Indenture, in an unlimited aggregate principal amount which may be authenticated and delivered as provided in the Indenture; WHEREAS, pursuant to the terms of the Indenture, Arvin provided for the establishment of a new series of its Debt Securities to be known as its 9.50% Junior Subordinated Deferrable Interest Debentures due 2027 (the "Debentures"), the form and substance of such Debentures and the terms, provisions and conditions thereof were set forth as provided in the Indenture; WHEREAS, Arvin Capital I, a Delaware statutory business trust (the "Trust"), holds all $103,100,000 aggregate principal amount of the Debentures outstanding; WHEREAS, on April 6, 2000, Arvin, Meritor Automotive, Inc., a Delaware corporation ("Meritor"), and the Company executed an agreement and plan of reorganization (the "Merger Agreement") under which Meritor is being merged with and into the Company, to be immediately followed by the merger of Arvin with and into the Company, with the Company as the surviving corporation; WHEREAS, immediately following the merger of Arvin with and into the Company, no Event of Default and no event which, after notice or lapse of time, or both, would become an Event of Default has occurred and is continuing; WHEREAS, Section 9.1(b) of the Indenture authorizes the Company and the Trustee (without the consent of any Holders of Debt Securities issued under the Indenture) to enter into a supplemental indenture for the purpose of evidencing the succession of another corporation to Arvin, and the assumption by such successor of the covenants and obligations of Arvin in the Indenture; and WHEREAS, the Company has requested that the Trustee execute and deliver this Second Supplemental Indenture, and all requirements necessary to make this Second Supplemental Indenture a valid instrument in accordance with its terms have been met, and the execution and delivery of this Second Supplemental Indenture has been duly authorized in all respects. 2 NOW THEREFORE, the Company covenants and agrees with the Trustee as follows: 1. The Company hereby expressly assumes the due and punctual payment of the principal of (premium, if any) and interest on all of the Debt Securities of all series in accordance with the terms of each series, according to their tenor and the due and punctual performance and observance of all the covenants and conditions of the Indenture with respect to each series or established with respect to such series pursuant to Section 2.1 of the Indenture to be kept or performed by the Company. 2. This Second Supplemental Indenture shall become operative and effective upon the merger of Arvin with and into the Company, as contemplated by the Merger Agreement. 3. Pursuant to Section 9.3 of the Indenture, (i) the Indenture is modified in accordance with the provisions of this Second Supplemental Indenture, (ii) this Second Supplemental Indenture forms a part of the Indenture for all purposes, and (iii) every holder of Debt Securities heretofore or hereafter authenticated and delivered under the Indenture and of any coupons appertaining thereto is bound by this Second Supplemental Indenture. 4. References to the Indenture, including all such references in Debt Securities of any series heretofore or hereafter authenticated and delivered under the Indenture, need not contain any reference to this Second Supplemental Indenture, but all references to the Indenture dated as of January 28, 1997 between Arvin and the Trustee, as supplemented by the First Supplemental Indenture, dated as of January 28, 1997, between Arvin and the Trustee, shall be deemed to refer to the Indenture as modified in accordance with this Second Supplemental Indenture. References in the Indenture to the Company (as defined in the Indenture) shall be deemed to be references to the Company (as defined herein). 5. All capitalized terms used in this Second Supplemental Indenture and not defined herein shall have the respective meanings set forth in the Indenture. The recitals contained in this Second Supplemental Indenture shall be taken as the statements of the Company, and the Trustee assumes no responsibility for their correctness. 6. This Second Supplemental Indenture shall be deemed to be a contract made under the laws of the State of New York, and for all purposes shall be construed in accordance with the laws of said State. 7. The Indenture, as supplemented by this Second Supplemental Indenture, is in all respects ratified and confirmed, and this Second Supplemental Indenture shall be deemed part of the Indenture in the manner and to the extent herein and therein provided. 8. This Second Supplemental Indenture may be executed in one or more separate counterparts, each of which shall be an original, but all of which together shall constitute one instrument. -2- 3 9. The recitals herein contained are made by the Company and not by the Trustee, and the Trustee assumes no responsibility for the correctness thereof. The Trustee makes no representation as to the validity or sufficiency of this Second Supplemental Indenture. IN WITNESS WHEREOF, the parties hereto have caused this Second Supplemental Indenture to be duly executed on the date or dates indicated in the acknowledgments and as of the day and year first above written. ARVINMERITOR, INC. By: /s/ Vernon G. Baker, II ---------------------------------- Name: Vernon G. Baker, II Its: Senior Vice President, General Counsel And Secretary WILMINGTON TRUST COMPANY, not in its individual capacity but solely as Trustee By: /s/ C. Paglia ----------------------------------- Name: Charlotte Paglia Its: Financial Services Officer -3- 4 STATE OF MICHIGAN ) ) SS: COUNTY OF OAKLAND ) On the 5th day of July, 2000, before me personally came Vernon G. Baker, II, to me known, who, being by me duly sworn, did depose and say that he is the Senior Vice President, General Counsel and Secretary of ARVINMERITOR, INC., one of the corporations described in and which executed the above instrument, and that he signed his name thereto by authority of the Board of Directors of said corporation. IN WITNESS WHEREOF, I have hereunto set my hand and affixed my seal of office this 5th day of July, 2000. /s/ Laura J. Thomas ------------------------------- Notary Public Laura J. Thomas Notary Public, Macomb County, MI Acting in Oakland County, MI My Commission Expires Jan. 24, 2002 STATE OF DELAWARE ) ) SS: COUNTY OF NEWCASTLE ) On the 5th day of July, 2000, before me personally came Charlotte Paglia to me known, who, being by me duly sworn, did depose and say he is Financial Services Officer of WILMINGTON TRUST COMPANY, one of the corporations described in and which executed the above instrument, and that he signed his name thereto by authority of the Board of Directors of said corporation. IN WITNESS WHEREOF, I have hereunto set my hand and affixed my seal of office this 5th day of July, 2000. /s/ Christine L. Migliocco ------------------------------------- Notary Public Christine L. Migliocco Notary Public My Commission Expires Jan. 13, 2004 -4- EX-10.F 5 y43624ex10-f.txt COPY OF RESOLUTION OF THE BOARD OF DIRECTORS 1 Exhibit 10-f ARVINMERITOR, INC. EXCERPT FROM RESOLUTIONS ADOPTED BY THE BOARD OF DIRECTORS ON JULY 6, 2000 - - DEFERRAL ARRANGEMENTS FOR ANNUAL RETAINER FEE RESOLVED, that any Director of this Corporation may elect to defer all or any part of the retainer fees paid in cash which such Director will be entitled to receive from this Corporation for Board, Committee or other service beginning January 1 of the following year by delivering to the Secretary of this Corporation a written notice, specifying the percentage of such future fees paid in cash to be deferred and the time when, or period during which, such deferred fees shall be paid to him or her or, in the event of his or her death, to his or her estate or beneficiary; that any such election shall continue in effect for successive periods of one calendar year each so long as the Director continues as a member of the Board of Directors unless and until such Director shall elect to terminate such deferral with respect to future fees by delivering a written notice to that effect to the Secretary of this Corporation, with such termination to be effective as to fees paid on or after the January 1 next following the date of receipt by the Secretary of this Corporation of such Director's written notice of termination of deferral; that there shall be credited to the total amount deferred by each Director at the end of each calendar quarter an additional amount equal to the amount then deferred and owing multiplied by one-fourth of the annual rate for quarterly compounding that is 120% of the "applicable Federal long-term rate" determined by the Secretary of the Treasury pursuant to Section 1274(d) of the Internal Revenue Code, as amended, or any successor provision, for the last month in such calendar quarter, such additional amount to be paid at the same time and in the same proportion as the payments of the fees so deferred; that the Board of Directors may terminate any such deferral at any time and may change the period of payment of any deferred amounts or cause any deferred amounts to be paid in a lump sum regardless of a Director's instructions with respect thereto; that no deferred fees or additional amounts credited thereon may be assigned or otherwise transferred; and that deferral pursuant to this resolution shall be available in addition to or as an alternative to the election available pursuant to Section 9 of the Directors Plan; provided, however, that the total of the portions of a Director's retainer fees paid in cash deferred under that Section and under this resolution shall in no event exceed the total amount of such fees to which such Director may be entitled for any calendar year; provided, further, that any deferral election validly made by a director of Meritor for the year 2000 under the Meritor deferral arrangement for annual retainer fees and any deferral election made pursuant to this resolution within one month after the Effective Time by any other person who becomes a Director of this Corporation effective as of the Effective Time with respect to the retainer fees for the year 2000 shall be deemed to be an election made pursuant to this resolution with respect to deferrals of annual retainer fees for this Corporation; and further * * * * EX-10.K.1 6 y43624ex10-k_1.txt EMPLOYMENT OFFER LETTER 1 Exhibit 10-k-1 ArvinMeritor, Inc. ARVINMERITOR, INC. 2135 West Maple Road Troy, MI 48084-7186 Telephone 248.435.3901 Facsimile 248.435.1487 July 5, 2000 Larry D. Yost Troy, Michigan Dear Larry: We are pleased to extend to you our offer of employment for the position of Chairman and Chief Executive Officer of ArvinMeritor, Inc., effective as of the consummation of the merger between Arvin Industries and Meritor Automotive, Inc. on July 7, 2000. Subject to the approval of the ArvinMeritor Board of Directors, you will become an elected officer of ArvinMeritor, effective July 7, 2000. In this position, you will report to the Board of Directors of ArvinMeritor, Inc., and be based in Troy, Michigan. You will continue to receive your current monthly base salary. As in the past, your salary will be reviewed in November of each year for possible adjustment based on performance. Please note that this offer is subject to formal approval by the ArvinMeritor Compensation Committee of the Board of Directors. Discussions have been held with members of the Meritor Compensation Committee, and we are confident that the ArvinMeritor Compensation Committee will approve our offer. Annual Incentive Plans As a prior Meritor employee, you will continue to participate in the Meritor FY2000 ICP through September 30, 2000 with actual performance based on continuing operations assessed against targeted goals, excluding the impact of the merger with Arvin. You will be eligible to participate in the ArvinMeritor annual incentive plan beginning in FY2001. We fully anticipate the ArvinMeritor plan will mirror Meritor's current plan. Long-Term Incentives Your outstanding stock options and/or restricted shares will be converted, based upon the agreed upon conversion ratio, into ArvinMeritor options and/or restricted shares. You will continue to participate in Meritor's FY1998-2000, FY1999-2001 and FY2000-2002 LTIP Cash Performance Plan cycles that are underway at your current target cash award level. In addition you will be eligible to participate in ArvinMeritor's Long-Term Incentives Plan (LTIP) beginning with the FY2001 annual stock option grant and LTIP Performance Plan award. Note: You will receive additional information about ArvinMeritor's annual incentive and long term incentive plans during the first quarter of FY2001, which are expected to be the same as the current Meritor plan. Special Merger Award You will receive a special "merger award" as a lump-sum cash payment, upon consummation of the merger in the amount of $700,000. You will be expected to invest (net of all associated taxes) up to 50% of this lump-sum payment in ArvinMeritor stock on or before October 31, 2000. This is necessary only to the extent needed to fully achieve ArvinMeritor's executive stock ownership guidelines. Since the ArvinMeritor stock ownership guidelines mirror Meritor's guidelines, your obligation under the stock ownership guidelines do not change. July 5, 2000 Page Two 2 Benefits You will be eligible, based upon your position/compensation level, for all the regular ArvinMeritor health, welfare, retirement and other employee benefit programs. We are currently in the process of developing a plan to consolidate the Arvin and Meritor benefit programs and defining the ArvinMeritor benefit package which will be substantially comparable in the aggregate to the Arvin and Meritor benefit plans. The ArvinMeritor integration plans provide for the creation of a single ArvinMeritor benefits structure to be effective January 1, 2001. Through December 31, 2000, your employee benefits will remain in effect as they were before the merger. You will continue to participate in various benefit plans formerly sponsored by Meritor. The only change that you will experience is that, if you participate in the Savings Plan, your matching contributions will now be received in ArvinMeritor stock and any employee contributions that you direct to an employer stock fund will now be received in ArvinMeritor stock. In addition, your existing balances in the Meritor stock funds will be converted to ArvinMeritor stock. As an officer of ArvinMeritor, the following additional benefits will continue: - - Club Membership - - Company Car - - Financial Counseling - - Annual Executive Physical Examination - - Personal Excess Liability Coverage Severance Benefits Larry, we are convinced you will be a valued employee of ArvinMeritor, however, in the event your employment with ArvinMeritor is terminated, you will be eligible for certain severance benefits as follows: [X] By ArvinMeritor Without Cause - Accrued obligations; - Monthly severance pay for a period of 12 to 36 months, taking into consideration years of service and other factors as may be determined by the Compensation Committee; - Pro-rata annual incentive bonus participation for the time actually worked in the fiscal year of termination; - Benefit continuation for the period base salary is continued; - Immediate vesting of all outstanding stock options; - Payment of all vested benefits under the retirement and savings plans; - Outplacement services; - Extend time to exercise options to three years (if terminated on or before July 7, 2003), but not beyond the expiration date specified in the grant; - Pro-rata participation in the cash portion of any long-term incentive cycles that began more than one year prior to date of termination; and - No mitigation. [X] By ArvinMeritor for Cause (Cause defined as continued and willful failure to perform duties; gross misconduct which is materially and demonstrably injurious to ArvinMeritor; or conviction of or pleading guilty or no contest to a (a) felony or (b) other crime which materially and adversely affects ArvinMeritor) - Accrued obligations and vested plan benefits under the retirement and savings plans; - Forfeit all unvested long-term incentive awards, both stock options and cash portions of any long term incentive cycles; and - Forfeit eligibility to receive an annual incentive award 3 July 5, 2000 Page Three [X] By the Executive for Any Reason (other than death or disability) - Accrued obligations and vested plan benefits under the retirement and savings plans. [X] Death - Accrued obligations; - Pro-rata annual incentive bonus participation for the time actually worked in the year of death; - Immediate vesting of all outstanding stock options; - Pro-rata cash portion of any long-term incentive cycles that began more than one year prior to the date of death; - Medical benefit continuation for your spouse and other dependents for six months and at the end of this six month period your spouse and dependents may be eligible for coverage under COBRA (for an additional period not to exceed 30 months) or under a company-sponsored retiree medical program if applicable; - Payment of all vested benefits under the retirement and savings plans; and - Options may be exercised in accordance with the provisions of the grant. [X] Disability (Disability initially defined as the inability to perform the duties of your current job as a result of disease or injury. Based on your years of service, your first six months of disability will result in either full salary continuation for the entire six-month period or a combination of salary continuation and reduced payments for said six-month period. If you are unable to perform your job duties, following the aforementioned six-month period, you will be placed on long-term disability and receive benefits under the provisions of that program. Following a one-year period on long-term disability, eligibility for continued coverage will be based on your inability to perform any job for which you are qualified by education, training or experience.) - Accrued obligations; - Pro-rata annual incentive bonus participation for the time actually worked or on salary continuance during disability; - Pro-rata cash portion of any long-term incentive cycles that began more than one year prior to the end of salary continuance; - Continuation of the vesting and option exercising rules for equity incentive awards; - Medical and life insurance benefits will be provided on the same terms as if you were employed; - In accordance with the retirement plan provisions you will continue to earn vesting service but not credited service for the purpose of determining your plan benefit; - In accordance with the savings plan provisions you will continue to earn vesting service; and - Following the end of your salary continuation period, dental benefits can be continued on a full contributory basis. Reimbursement of Legal Fees You will be reimbursed any legal fees incurred in connection with enforcing this agreement. You have previously agreed to and signed Meritor's "Mutual Agreement to Arbitrate Claims" and the Meritor "Standards of Business Conduct and Conflict of Interest Certificate". Even though these are Meritor documents, it is expected they will be applicable with ArvinMeritor after the merger. In the event you leave employment of ArvinMeritor for any reason you agree that for a period of 18 months following your departure, you will not solicit for employment any ArvinMeritor employee. You also agree that you will not disclose, nor will you use any ArvinMeritor proprietary information. 4 July 5, 2000 Page Four Larry, we feel you will make a significant contribution to the ArvinMeritor organization and we also believe the Company will furnish you a rewarding opportunity. On behalf of the Board, I welcome you to ArvinMeritor! Sincerely, /s/ Harold A. Poling Harold A. Poling Chairman, Compensation and Management Development Committee Board of Directors ArvinMeritor, Inc. ACCEPTED: /s/ Larry D. Yost 7/ /00 ----------------- ------- Larry D. Yost Date cc: D. R. Beall C. H. Harff EX-10.K.2 7 y43624ex10-k_2.txt EMPLOYMENT OFFER LETTER 1 Exhibit 10-k-2 ArvinMeritor, Inc. LARRY D. YOST ARVINMERITOR, INC. 2135 West Maple Road Chairman and CEO Troy, MI 48084-7186 Telephone 248.435.3901 Facsimile 248.435.1487 July 5, 2000 Prakash R. Mulchandani Troy, Michigan Dear Prakash: We are pleased to extend to you our offer of employment for the position of Executive Vice President and President, Heavy Vehicle Systems, effective as of the consummation of the merger between Arvin Industries and Meritor Automotive, Inc. on July 7, 2000. Subject to the approval of the ArvinMeritor Board of Directors, you will become an elected officer of ArvinMeritor, effective July 7, 2000. In this position, you will report to Bill Hunt, Vice Chairman and President, and the Office of the Chairman, and be based in Troy, Michigan. You will continue to receive your current monthly base salary. As in the past, your salary will be reviewed in November of each year for possible adjustment based on performance. Please note that this offer is subject to formal approval by the ArvinMeritor Compensation Committee of the Board of Directors. Discussions have been held with members of the Meritor Compensation Committee, and we are confident that the ArvinMeritor Compensation Committee will approve our offer. Annual Incentive Plans As a prior Meritor employee, you will continue to participate in the Meritor FY2000 ICP through September 30, 2000 with actual performance based on continuing operations assessed against targeted goals, excluding the impact of the merger with Arvin. You will be eligible to participate in the ArvinMeritor annual incentive plan beginning in FY2001. We fully anticipate the ArvinMeritor plan will mirror Meritor's current plan. Long-Term Incentives Your outstanding stock options and/or restricted shares will be converted, based upon the agreed upon conversion ratio, into ArvinMeritor options and/or restricted shares. You will continue to participate in Meritor's FY1998-2000, FY1999-2001 and FY2000-2002 LTIP Cash Performance Plan cycles that are underway at your current target cash award level. In addition you will be eligible to participate in ArvinMeritor's Long-Term Incentives Plan (LTIP) beginning with the FY2001 annual stock option grant and LTIP Performance Plan award. Note: You will receive additional information about ArvinMeritor's annual incentive and long term incentive plans during the first quarter of FY2001, which are expected to be the same as the current Meritor plan. 2 July 5, 2000 Page Two Benefits You will be eligible, based upon your position/compensation level, for all the regular ArvinMeritor health, welfare, retirement and other employee benefit programs. We are currently in the process of developing a plan to consolidate the Arvin and Meritor benefit programs and defining the ArvinMeritor benefit package which will be substantially comparable in the aggregate to the Arvin and Meritor benefit plans. The ArvinMeritor integration plans provide for the creation of a single ArvinMeritor benefits structure to be effective January 1, 2001. Through December 31, 2000, your employee benefits will remain in effect as they were before the merger. You will continue to participate in various benefit plans formerly sponsored by Meritor at the location through which you were paid. Former Arvin locations will continue to provide the Arvin benefit plans and former Meritor locations will continue to provide the Meritor benefit plans. The only change that you will experience is that, if you participate in the Savings Plan, your matching contributions will now be received in ArvinMeritor stock and any employee contributions that you direct to an employer stock fund will now be received in ArvinMeritor stock. In addition, your existing balances in the Meritor stock funds will be converted to ArvinMeritor stock. As an officer of ArvinMeritor, the following additional benefits will continue: - - Club Membership - - Company Car - - Financial Counseling - - Executive Physical Examination - - Personal Excess Liability Coverage Severance Benefits Prakash, we are convinced you will be a valued employee of ArvinMeritor, however, in the event your employment with ArvinMeritor is terminated, you will be eligible for certain severance benefits as follows: [X] By ArvinMeritor Without Cause - Accrued obligations; - Monthly severance pay for a period of 12 to 36 months, taking into consideration years of service and other factors as may be determined by the Compensation Committee; - Pro-rata annual incentive bonus participation for the time actually worked in the fiscal year of termination; - Benefit continuation for the period base salary is continued; - Immediate vesting of all outstanding stock options; - Payment of all vested benefits under the retirement and savings plans; - Outplacement services; - Extend time to exercise options to three years (if terminated on or before July 7, 2003), but not beyond the expiration date specified in the grant; - Pro-rata participation in the cash portion of any long-term incentive cycles that began more than one year prior to date of termination; and - No mitigation. [X] By ArvinMeritor for Cause (Cause defined as continued and willful failure to perform duties; gross misconduct which is materially and demonstrably injurious to ArvinMeritor; or conviction of or pleading guilty or no contest to a (a) felony or (b) other crime which materially and adversely affects ArvinMeritor) - Accrued obligations and vested plan benefits under the retirement and savings plans; - Forfeit all unvested long-term incentive awards, both stock options and cash portions of any long term incentive cycles; and - Forfeit eligibility to receive an annual incentive award July 5, 2000 Page Three 3 [X] By the Executive for Any Reason (other than death or disability) - Accrued obligations and vested plan benefits under the retirement and savings plans. [X] Death - Accrued obligations; - Pro-rata annual incentive bonus participation for the time actually worked in the year of death; - Immediate vesting of all outstanding stock options; - Pro-rata cash portion of any long-term incentive cycles that began more than one year prior to the date of death; - Medical benefit continuation for your spouse and other dependents for six months and at the end of this six month period your spouse and dependents may be eligible for coverage under COBRA (for an additional period not to exceed 30 months) or under a company-sponsored retiree medical program if applicable; - Payment of all vested benefits under the retirement and savings plans; and - Options may be exercised in accordance with the provisions of the grant. [X] Disability (Disability initially defined as the inability to perform the duties of your current job as a result of disease or injury. Based on your years of service, your first six months of disability will result in either full salary continuation for the entire six-month period or a combination of salary continuation and reduced payments for said six-month period. If you are unable to perform your job duties, following the aforementioned six-month period, you will be placed on long-term disability and receive benefits under the provisions of that program. Following a one-year period on long-term disability, eligibility for continued coverage will be based on your inability to perform any job for which you are qualified by education, training or experience.) - Accrued obligations; - Pro-rata annual incentive bonus participation for the time actually worked or on salary continuance during disability; - Pro-rata cash portion of any long-term incentive cycles that began more than one year prior to the end of salary continuance; - Continuation of the vesting and option exercising rules for equity incentive awards; - Medical and life insurance benefits will be provided on the same terms as if you were employed; - In accordance with the retirement plan provisions you will continue to earn vesting service but not credited service for the purpose of determining your plan benefit; - In accordance with the savings plan provisions you will continue to earn vesting service; and - Following the end of your salary continuation period, dental benefits can be continued on a full contributory basis. Reimbursement of Legal Fees You will be reimbursed any legal fees incurred in connection with enforcing this agreement. You have previously agreed to and signed Meritor's "Mutual Agreement to Arbitrate Claims" and the Meritor "Standards of Business Conduct and Conflict of Interest Certificate". Even though these are Meritor documents, it is expected they will be applicable with ArvinMeritor after the merger. In the event you leave employment of ArvinMeritor for any reason you agree that for a period of 18 months following your departure, you will not solicit for employment any ArvinMeritor employee. You also agree that you will not disclose, nor will you use any ArvinMeritor proprietary information. 4 July 5, 2000 Page Four Prakash, we feel you will make a significant contribution to the ArvinMeritor organization and we also believe the Company will furnish you a rewarding opportunity. On behalf of the Board, I welcome you to ArvinMeritor! If you have any questions about your employment terms, please contact Gary Collins, Senior Vice President, Human Resources, at 248-435-1060. Sincerely, /s/ Larry Yost /s/ Bill Hunt Larry D. Yost V. William Hunt Chairman and Chief Executive Officer Vice Chairman and President ArvinMeritor, Inc. ArvinMeritor, Inc. ACCEPTED: /s/Prakash R. Mulchandani 8/7/00 ------------------------- ------ Prakash R. Mulchandani Date cc: G. Collins R. Mack EX-10.K.3 8 y43624ex10-k_3.txt EMPLOYMENT OFFER LETTER 1 Exhibit 10-k-3 ArvinMeritor, Inc. LARRY D. YOST ARVINMERITOR, INC. 2135 West Maple Road Chairman and CEO Troy, MI 48084-7186 Telephone 248.435.3901 Facsimile 248.435.1487 July 5, 2000 Terrence E. O'Rourke Troy, Michigan Dear Terry: We are pleased to extend to you our offer of employment for the position of Senior Vice President and President, Light Vehicle Systems, effective as of the consummation of the merger between Arvin Industries and Meritor Automotive, Inc. on July 7, 2000. Subject to the approval of the ArvinMeritor Board of Directors, you will become an elected officer of ArvinMeritor, effective July 7, 2000. In this position, you will report to Bill Hunt, Vice Chairman and President, and the Office of the Chairman, and be based in Troy, Michigan. You will continue to receive your current monthly base salary. As in the past, your salary will be reviewed in November of each year for possible adjustment based on performance. Please note that this offer is subject to formal approval by the ArvinMeritor Compensation Committee of the Board of Directors. Discussions have been held with members of the Meritor Compensation Committee, and we are confident that the ArvinMeritor Compensation Committee will approve our offer. Annual Incentive Plans As a prior Meritor employee, you will continue to participate in the Meritor FY2000 ICP through September 30, 2000 with actual performance based on continuing operations assessed against targeted goals, excluding the impact of the merger with Arvin. You will be eligible to participate in the ArvinMeritor annual incentive plan beginning in FY2001. We fully anticipate the ArvinMeritor plan will mirror Meritor's current plan. Long-Term Incentives Your outstanding stock options and/or restricted shares will be converted, based upon the agreed upon conversion ratio, into ArvinMeritor options and/or restricted shares. You will continue to participate in Meritor's FY1999-2001 and FY2000-2002 LTIP Cash Performance Plan cycles that are underway at your current target cash award level. In addition you will be eligible to participate in ArvinMeritor's Long-Term Incentives Plan (LTIP) beginning with the FY2001 annual stock option grant and LTIP Performance Plan award. Note: You will receive additional information about ArvinMeritor's annual incentive and long term incentive plans during the first quarter of FY2001, which are expected to be the same as the current Meritor plan. Special Merger Award You will receive a special "merger award" as a lump-sum cash payment, upon consummation of the merger in the amount of $300,000. You will be expected to invest (net of all associated taxes) up to 50% of this lump-sum payment in ArvinMeritor stock on or before October 31, 2000. This is necessary only to the extent needed to fully achieve ArvinMeritor's executive stock ownership guidelines. Since the ArvinMeritor stock ownership guidelines mirror Meritor's guidelines, your obligation under the stock ownership guidelines do not change. 2 July 5, 2000 Page Two Benefits You will be eligible, based upon your position/compensation level, for all the regular ArvinMeritor health, welfare, retirement and other employee benefit programs. We are currently in the process of developing a plan to consolidate the Arvin and Meritor benefit programs and defining the ArvinMeritor benefit package which will be substantially comparable in the aggregate to the Arvin and Meritor benefit plans. The ArvinMeritor integration plans provide for the creation of a single ArvinMeritor benefits structure to be effective January 1, 2001. Through December 31, 2000, your employee benefits will remain in effect as they were before the merger. You will continue to participate in various benefit plans formerly sponsored by Meritor at the location through which you were paid. Former Arvin locations will continue to provide the Arvin benefit plans and former Meritor locations will continue to provide the Meritor benefit plans. The only change that you will experience is that, if you participate in the Savings Plan, your matching contributions will now be received in ArvinMeritor stock and any employee contributions that you direct to an employer stock fund will now be received in ArvinMeritor stock. In addition, your existing balances in the Meritor stock funds will be converted to ArvinMeritor stock. As an officer of ArvinMeritor, the following additional benefits will continue: - - Club Membership - - Company Car - - Financial Counseling - - Executive Physical Examination - - Personal Excess Liability Coverage Severance Benefits Terry, we are convinced you will be a valued employee of ArvinMeritor, however, in the event your employment with ArvinMeritor is terminated, you will be eligible for certain severance benefits as follows: [X] By ArvinMeritor Without Cause - Accrued obligations; - Monthly severance pay for a period of 12 to 36 months, taking into consideration years of service and other factors as may be determined by the Compensation Committee; - Pro-rata annual incentive bonus participation for the time actually worked in the fiscal year of termination; - Benefit continuation for the period base salary is continued; - Immediate vesting of all outstanding stock options; - Payment of all vested benefits under the retirement and savings plans; - Outplacement services; - Extend time to exercise options to three years (if terminated on or before July 7, 2003), but not beyond the expiration date specified in the grant; - Pro-rata participation in the cash portion of any long-term incentive cycles that began more than one year prior to date of termination; and - No mitigation. [X] By ArvinMeritor for Cause (Cause defined as continued and willful failure to perform duties; gross misconduct which is materially and demonstrably injurious to ArvinMeritor; or conviction of or pleading guilty or no contest to a (a) felony or (b) other crime which materially and adversely affects ArvinMeritor) - Accrued obligations and vested plan benefits under the retirement and savings plans; - Forfeit all unvested long-term incentive awards, both stock options and cash portions of any long term incentive cycles; and - Forfeit eligibility to receive an annual incentive award 3 July 5, 2000 Page Three [X] By the Executive for Any Reason (other than death or disability) - Accrued obligations and vested plan benefits under the retirement and savings plans. [X] Death - Accrued obligations; - Pro-rata annual incentive bonus participation for the time actually worked in the year of death; - Immediate vesting of all outstanding stock options; - Pro-rata cash portion of any long-term incentive cycles that began more than one year prior to the date of death; - Medical benefit continuation for your spouse and other dependents for six months and at the end of this six month period your spouse and dependents may be eligible for coverage under COBRA (for an additional period not to exceed 30 months) or under a company-sponsored retiree medical program if applicable; - Payment of all vested benefits under the retirement and savings plans; and - Options may be exercised in accordance with the provisions of the grant. [X] Disability (Disability initially defined as the inability to perform the duties of your current job as a result of disease or injury. Based on your years of service, your first six months of disability will result in either full salary continuation for the entire six-month period or a combination of salary continuation and reduced payments for said six-month period. If you are unable to perform your job duties, following the aforementioned six-month period, you will be placed on long-term disability and receive benefits under the provisions of that program. Following a one-year period on long-term disability, eligibility for continued coverage will be based on your inability to perform any job for which you are qualified by education, training or experience.) - Accrued obligations; - Pro-rata annual incentive bonus participation for the time actually worked or on salary continuance during disability; - Pro-rata cash portion of any long-term incentive cycles that began more than one year prior to the end of salary continuance; - Continuation of the vesting and option exercising rules for equity incentive awards; - Medical and life insurance benefits will be provided on the same terms as if you were employed; - In accordance with the retirement plan provisions you will continue to earn vesting service but not credited service for the purpose of determining your plan benefit; - In accordance with the savings plan provisions you will continue to earn vesting service; and - Following the end of your salary continuation period, dental benefits can be continued on a full contributory basis. Reimbursement of Legal Fees You will be reimbursed any legal fees incurred in connection with enforcing this agreement. You have previously agreed to and signed Meritor's "Mutual Agreement to Arbitrate Claims" and the Meritor "Standards of Business Conduct and Conflict of Interest Certificate". Even though these are Meritor documents, it is expected they will be applicable with ArvinMeritor after the merger. In the event you leave employment of ArvinMeritor for any reason you agree that for a period of 18 months following your departure, you will not solicit for employment any ArvinMeritor employee. You also agree that you will not disclose, nor will you use any ArvinMeritor proprietary information. 4 July 5, 2000 Page Four Terry, we feel you will make a significant contribution to the ArvinMeritor organization and we also believe the Company will furnish you a rewarding opportunity. On behalf of the Board, I welcome you to ArvinMeritor! If you have any questions about your employment terms, please contact Gary Collins, Senior Vice President, Human Resources, at 248-435-1060. Sincerely, /s/ Larry Yost /s/ Bill Hunt Larry D. Yost V. William Hunt Chairman and Chief Executive Officer Vice Chairman and President ArvinMeritor, Inc. ArvinMeritor, Inc. ACCEPTED: /s/Terrence E. O'Rourke 7/14/00 ----------------------- ------- Terrence E. O'Rourke Date cc: G. Collins R. Mack EX-10.K.4 9 y43624ex10-k_4.txt EMPLOYMENT OFFER LETTER 1 Exhibit 10-k-4 ArvinMeritor, Inc. LARRY D. YOST ARVINMERITOR, INC. 2135 West Maple Road Chairman and CEO Troy, MI 48084-7186 Telephone 248.435.3901 Facsimile 248.435.1487
July 5, 2000 Thomas A. Madden Troy, Michigan Dear Tom: We are pleased to extend to you our offer of employment for the position of Senior Vice President and Chief Financial Officer effective as of the consummation of the merger between Arvin Industries and Meritor Automotive, Inc. on July 7, 2000. Subject to the approval of the ArvinMeritor Board of Directors, you will become an elected officer of ArvinMeritor, effective July 7, 2000. In this position, you will report to Larry Yost, Chairman and Chief Executive Officer, and the Office of the Chairman, and be based in Troy, Michigan. You will continue to receive your current monthly base salary. As in the past, your salary will be reviewed in November of each year for possible adjustment based on performance. Please note that this offer is subject to formal approval by the ArvinMeritor Compensation Committee of the Board of Directors. Discussions have been held with members of the Meritor Compensation Committee, and we are confident that the ArvinMeritor Compensation Committee will approve our offer. Annual Incentive Plans As a prior Meritor employee, you will continue to participate in the Meritor FY2000 ICP through September 30, 2000 with actual performance based on continuing operations assessed against targeted goals, excluding the impact of the merger with Arvin. You will be eligible to participate in the ArvinMeritor annual incentive plan beginning in FY2001. We fully anticipate the ArvinMeritor plan will mirror Meritor's current plan. Long-Term Incentives Your outstanding stock options and/or restricted shares will be converted, based upon the agreed upon conversion ratio, into ArvinMeritor options and/or restricted shares. You will continue to participate in Meritor's FY1998-2000, FY1999-2001 and FY2000-2002 LTIP Cash Performance Plan cycles that are underway at your current target cash award level. In addition you will be eligible to participate in ArvinMeritor's Long-Term Incentives Plan (LTIP) beginning with the FY2001 annual stock option grant and LTIP Performance Plan award. Note: You will receive additional information about ArvinMeritor's annual incentive and long term incentive plans during the first quarter of FY2001, which are expected to be the same as the current Meritor plan. Special Merger Award You will receive a special "merger award" as a lump-sum cash payment, upon consummation of the merger in the amount of $310,000. You will be expected to invest (net of all associated taxes) up to 50% of this lump-sum payment in ArvinMeritor stock on or before October 31, 2000. This is necessary only to the extent needed to fully achieve ArvinMeritor's executive stock ownership guidelines. Since the ArvinMeritor stock ownership guidelines mirror Meritor's guidelines, your obligation under the stock ownership guidelines do not change. 2 July 5, 2000 Page Two Benefits You will be eligible, based upon your position/compensation level, for all the regular ArvinMeritor health, welfare, retirement and other employee benefit programs. We are currently in the process of developing a plan to consolidate the Arvin and Meritor benefit programs and defining the ArvinMeritor benefit package which will be substantially comparable in the aggregate to the Arvin and Meritor benefit plans. The ArvinMeritor integration plans provide for the creation of a single ArvinMeritor benefits structure to be effective January 1, 2001. Through December 31, 2000, your employee benefits will remain in effect as they were before the merger. You will continue to participate in various benefit plans formerly sponsored by Meritor at the location through which you were paid. Former Arvin locations will continue to provide the Arvin benefit plans and former Meritor locations will continue to provide the Meritor benefit plans. The only change that you will experience is that, if you participate in the Savings Plan, your matching contributions will now be received in ArvinMeritor stock and any employee contributions that you direct to an employer stock fund will now be received in ArvinMeritor stock. In addition, your existing balances in the Meritor stock funds will be converted to ArvinMeritor stock. As an officer of ArvinMeritor, the following additional benefits will continue: - - Club Membership - - Company Car - - Financial Counseling - - Executive Physical Examination - - Personal Excess Liability Coverage Severance Benefits Tom, we are convinced you will be a valued employee of ArvinMeritor, however, in the event your employment with ArvinMeritor is terminated, you will be eligible for certain severance benefits as follows: - - By ArvinMeritor Without Cause - Accrued obligations; - Monthly severance pay for a period of 12 to 36 months, taking into consideration years of service and other factors as may be determined by the Compensation Committee; - Pro-rata annual incentive bonus participation for the time actually worked in the fiscal year of termination; - Benefit continuation for the period base salary is continued; - Immediate vesting of all outstanding stock options; - Payment of all vested benefits under the retirement and savings plans; - Outplacement services; - Extend time to exercise options to three years (if terminated on or before July 7, 2003), but not beyond the expiration date specified in the grant; - Pro-rata participation in the cash portion of any long-term incentive cycles that began more than one year prior to date of termination; and - No mitigation. - - By ArvinMeritor for Cause (Cause defined as continued and willful failure to perform duties; gross misconduct which is materially and demonstrably injurious to ArvinMeritor; or conviction of or pleading guilty or no contest to a (a) felony or (b) other crime which materially and adversely affects ArvinMeritor) - Accrued obligations and vested plan benefits under the retirement and savings plans; - Forfeit all unvested long-term incentive awards, both stock options and cash portions of any long term incentive cycles; and - Forfeit eligibility to receive an annual incentive award 3 July 5, 2000 Page Three - - By the Executive for Any Reason (other than death or disability) - Accrued obligations and vested plan benefits under the retirement and savings plans. - - Death - Accrued obligations; - Pro-rata annual incentive bonus participation for the time actually worked in the year of death; - Immediate vesting of all outstanding stock options; - Pro-rata cash portion of any long-term incentive cycles that began more than one year prior to the date of death; - Medical benefit continuation for your spouse and other dependents for six months and at the end of this six month period your spouse and dependents may be eligible for coverage under COBRA (for an additional period not to exceed 30 months) or under a company-sponsored retiree medical program if applicable; - Payment of all vested benefits under the retirement and savings plans; and - Options may be exercised in accordance with the provisions of the grant. - - Disability (Disability initially defined as the inability to perform the duties of your current job as a result of disease or injury. Based on your years of service, your first six months of disability will result in either full salary continuation for the entire six-month period or a combination of salary continuation and reduced payments for said six-month period. If you are unable to perform your job duties, following the aforementioned six-month period, you will be placed on long-term disability and receive benefits under the provisions of that program. Following a one-year period on long-term disability, eligibility for continued coverage will be based on your inability to perform any job for which you are qualified by education, training or experience.) - Accrued obligations; - Pro-rata annual incentive bonus participation for the time actually worked or on salary continuance during disability; - Pro-rata cash portion of any long-term incentive cycles that began more than one year prior to the end of salary continuance; - Continuation of the vesting and option exercising rules for equity incentive awards; - Medical and life insurance benefits will be provided on the same terms as if you were employed; - In accordance with the retirement plan provisions you will continue to earn vesting service but not credited service for the purpose of determining your plan benefit; - In accordance with the savings plan provisions you will continue to earn vesting service; and - Following the end of your salary continuation period, dental benefits can be continued on a full contributory basis. Reimbursement of Legal Fees You will be reimbursed any legal fees incurred in connection with enforcing this agreement. You have previously agreed to and signed Meritor's "Mutual Agreement to Arbitrate Claims" and the Meritor "Standards of Business Conduct and Conflict of Interest Certificate". Even though these are Meritor documents, it is expected they will be applicable with ArvinMeritor after the merger. In the event you leave employment of ArvinMeritor for any reason you agree that for a period of 18 months following your departure, you will not solicit for employment any ArvinMeritor employee. You also agree that you will not disclose, nor will you use any ArvinMeritor proprietary information. 4 July 5, 2000 Page Four Tom, we feel you will make a significant contribution to the ArvinMeritor organization and we also believe the Company will furnish you a rewarding opportunity. On behalf of the Board, I welcome you to ArvinMeritor! If you have any questions about your employment terms, please contact Gary Collins, Senior Vice President, Human Resources, at 248-435-1060. Sincerely, /s/ Larry Yost /s/ Bill Hunt Larry D. Yost V. William Hunt Chairman and Chief Executive Officer Vice Chairman and President ArvinMeritor, Inc. ArvinMeritor, Inc. ACCEPTED: /s/ Thomas A. Madden 7/7/0 --------------------- ----- Thomas A. Madden Date cc: G. Collins R. Mack EX-13 10 y43624ex13.txt PORTIONS OF THE 2000 ANNUAL REPORT 1 Exhibit 13 CHIEF FINANCIAL OFFICER'S REVIEW MANAGEMENT'S DISCUSSION AND ANALYSIS OVERVIEW AND OUTLOOK The merger of Meritor and Arvin helps to position ArvinMeritor as a leader within the automotive supply industry (see Notes 1 and 3 of Notes to Consolidated Financial Statements). Our industry is rapidly transforming to keep pace with the globalization and consolidation of the original equipment manufacturers (OEMs), as well as the continued trends towards outsourcing by the OEMs and integrated systems. The increased competitive pressures and complexity of the industry presents suppliers with many challenges and growth opportunities. We believe that the merger of Arvin and Meritor provides enhanced financial strength, flexibility and product mix, as well as stronger customer and market positions, that enables the company to take further advantage of these industry trends. The company is making excellent progress in the merger integration process. To date, we have identified projected cost-reduction synergies for 2001 of $50 million pre-tax, or $40 million after-tax. This includes a $10-million annual recurring reduction in income taxes, which is expected to contribute to the reduction of the fiscal 2001 effective tax rate to 35.5 percent. We are on schedule to increase these cost synergies to $100 million pre-tax in 2003. With our newly merged company, we are even more confident in our ability to meet, over a multi-year period, our stated long-term financial goals to deliver annual average sales growth of 10 percent and earnings per share growth of 15 to 18 percent, while maintaining a strong emphasis on cash and investment grade ratios. Page 1 2 Our long-term goals have been established with the recognition that the industry in which the company operates has been characterized historically by periodic fluctuations in overall demand for light, commercial and specialty vehicles, and related aftermarkets, resulting in corresponding fluctuations in demand for products of the company. Accordingly, the company will measure its performance against these long-term financial goals over a multi-year period. The outlook for our major served markets around the world is somewhat mixed. There are signs of a modest weakening in North American and Western European light vehicle production during fiscal 2001. Within the heavy-duty commercial truck and trailer markets, we expect North American production will continue to decline 30 percent or more in fiscal 2001, while European production is expected to be down modestly. The light vehicle replacement market should remain weak over the same period. Additionally, it is difficult to predict the impact the euro and other currencies will have on sales and operating income in the upcoming year. While we remain cautious regarding the current market outlook, we will continue to drive strong financial performance through aggressive ongoing cost-reduction efforts, restructuring actions and synergy realization programs. In addition to the progress being made by our merger integration teams, we are taking actions to align our operations with the existing and anticipated declines in some of the company's major markets. On November 8, 2000, the company announced restructuring actions to realign operations at selected facilities around the world, with a total cost of approximately $90 million (see Note 24 of Notes to Consolidated Financial Page 2 3 Statements). The company expects these restructuring activities to reduce operating costs by about $25 million in fiscal 2001, growing to $50 million in fiscal 2002 and thereafter. We also continually evaluate other value-enhancing initiatives, such as stock repurchase programs. During the last month of fiscal 1999 and the first two quarters of fiscal 2000, Meritor purchased 5.1 million shares at an aggregate cost of approximately $125 million, or an average of $24.51 per share. In July 2000, ArvinMeritor announced a program to repurchase up to $100 million of the company's common stock, of which 3.1 million shares had been purchased at an aggregate cost of approximately $53 million, or an average of $16.98 per share through September 30, 2000. FINANCIAL CONDITION OPERATING CASH FLOW - Our cash flow from operations was $228 million in fiscal 2000, which was used to partially fund capital expenditures, dividend payments, merger-related expenses and the repurchase of treasury stock. Cash flow from operations was $262 million and $280 million in fiscal 1999 and 1998, respectively. The decline in cash provided by operating activities in fiscal 2000 from fiscal 1999 is primarily the result of working capital levels not being reduced commensurate with the decline in sales during the fourth quarter of fiscal 2000. In addition, increased pension funding and retiree medical payments contributed to the reduction from 1999 levels. INVESTING CASH FLOW - Our operating cash flow has allowed the company to fund capital expenditures of $225 million in fiscal 2000, $170 million in fiscal 1999 and $139 million in fiscal 1998. The company continues to invest in the property, plant and equipment needed for future business requirements. Capital expenditures in fiscal 2000 included equipment to support new product introductions, capacity expansion and new Page 3 4 production processes and costs to continue to implement new information systems. The company is currently evaluating additional aggressive cost and spending reduction strategies, including reductions in capital spending, and expects capital expenditures in fiscal 2001 to be between $225 million and $300 million. The capital spending increase in 2000 and the potential increase for 2001 are primarily related to the inclusion of Arvin capital expenditures for a quarter in fiscal 2000 and for a full year in fiscal 2001. In fiscal 2000, cash used for investing activities included the capital expenditures described above, cash payments of $49 million relating to the merger between Arvin and Meritor and cash used for acquisitions of businesses and investments of $74 million. This cash used was partially offset by $148 million of proceeds from dispositions of assets, property and businesses, primarily relating to the sale of the seat adjusting systems business. In fiscal 1999, cash used for investing activities included capital expenditures of $170 million and cash used for three acquisitions of $573 million, offset somewhat by $51 million of proceeds from the formation of the transmission and clutch joint venture with ZF Friedrichshafen AG (ZF). In fiscal 1998, cash used for investing activities and capital expenditures was $147 million. These cash outflows were partially offset by $17 million of proceeds received from the sale of assets. FINANCING CASH FLOW - Net cash provided by financing activities was $38 million in fiscal 2000. During July 2000, the company entered into two unsecured credit facilities for a total of $1.5 billion. These new credit facilities became effective on the date of the merger, replacing existing credit agreements of Arvin and Meritor. In addition, during September 2000, the company instituted a commercial paper program with authorized Page 4 5 borrowings of up to $1 billion. The net increase in debt in fiscal 2000 was $245 million. The company made payments of $172 million for the repurchase of its stock and $35 million for cash dividends. In November 2000, the board of directors declared a $0.22 per share quarterly dividend payable in December 2000. Net cash provided by financing activities was $441 million in fiscal 1999. This amount includes a $507-million increase in debt, primarily related to the February 1999 public offering of $500 million of debt securities. The proceeds were used to repay existing indebtedness, including short-term credit facilities entered into to facilitate three acquisitions. In addition, the company made payments of $6 million for the repurchase of its stock, $29 million for cash dividends and $31 million for the settlement of interest rate agreements entered into in 1998 (see Note 14 of Notes to Consolidated Financial Statements). Net cash used for financing activities was $216 million in 1998. This amount reflects net payments of $129 million to reduce debt. In addition, the company made net payments of $58 million relating to certain Canadian tax obligations and payments of $29 million for cash dividends. OTHER INFORMATION - The company's long-term debt to capitalization ratio was 64 percent at September 30, 2000, down from 68 percent at September 30, 1999. Pre-tax interest coverage was 5.0x for fiscal 2000, down from 6.3x for fiscal 1999. Excluding special items, pre-tax interest coverage was 4.4x for fiscal 2000, down from 6.4x for fiscal 1999. On a pro forma basis, excluding special items, pre-tax interest coverage was 3.9x and 4.9x for fiscal 2000 and 1999, respectively. Standard & Poors and Moody's have assigned Page 5 6 "BBB/Baa2" credit ratings, respectively, to the company's long-term debt and "A2/P2" credit ratings, respectively, to the company's commercial paper program. The company has retirement medical and defined benefit pension plans that cover most of its U.S. and certain non-U.S. employees (see Notes 17 and 18 of Notes to Consolidated Financial Statements). Retirement medical plan payments aggregated $49 million in fiscal 2000, $41 million in fiscal 1999 and $36 million in fiscal 1998, and are expected to approximate $45 million in fiscal 2001. The company made pension plan contributions of $40 million in fiscal 2000, $30 million in fiscal 1999 and $28 million in fiscal 1998. Management expects to fund at least the minimum pension plan contributions required by government regulations for the various plans and anticipates that pension plan funding will be between $20 million and $40 million in fiscal 2001. The company regularly considers various strategic and business opportunities, including acquisitions. Although no assurance can be given as to whether or when any acquisitions will be consummated, if an agreement were to be reached, the company could finance such acquisitions by issuance of additional debt or equity securities. The additional debt from any acquisitions, if consummated, could increase the company's debt to capitalization ratio. Based upon the company's projected cash flow from operations and existing bank credit facilities, management believes that sufficient liquidity is available to meet anticipated operating, capital and dividend requirements over the next 12 months. RESULTS OF OPERATIONS The merger of Arvin and Meritor was accounted for as a purchase with Meritor designated as the acquiror. Accordingly, the historic financial information for periods Page 6 7 prior to July 7, 2000, reflects only the results of Meritor and its consolidated subsidiaries. The information for the period after July 7, 2000, represents the results of ArvinMeritor and its consolidated subsidiaries. All prior periods' share and per share data have been restated to conform with the exchange of Meritor shares to ArvinMeritor shares on a one Meritor share for 0.75 ArvinMeritor shares basis, in connection with the merger (see Note 3 of Notes to Consolidated Financial Statements). All earnings per share amounts are on a diluted basis. All references to pro forma amounts assume that the merger occurred at the beginning of each period presented, and does not give pro forma effect to any acquisitions or divestitures made by Arvin or Meritor. The following sets forth the sales, operating income and net income of the company for the years ended September 30, 2000, 1999 and 1998, as well as pro forma amounts for each year (dollars in millions, except per share amounts): ARVINMERITOR, INC. (IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
As Reported Pro Forma (unaudited) (1) ----------------------------------- ----------------------------------- Year Ended September 30, 2000 1999 1998 2000 1999 1998 ------- ------- ------- ------- ------- ------- Sales Light Vehicle Systems $ 2,031 $ 1,575 $ 1,475 $ 3,668 $ 3,474 $ 3,041 Commercial Vehicle Systems 2,872 2,875 2,361 2,926 2,941 2,425 Light Vehicle Aftermarket 209 -- -- 950 906 686 Other 41 -- -- 178 170 116 ------- ------- ------- ------- ------- ------- TOTAL SALES $ 5,153 $ 4,450 $ 3,836 $ 7,722 $ 7,491 $ 6,268 ======= ======= ======= ======= ======= ======= Operating income Light Vehicle Systems $ 149 $ 129 $ 86 $ 232 $ 198 $ 155 Commercial Vehicle Systems 221 232 212 231 244 224 Light Vehicle Aftermarket 6 -- -- 43 72 62 Other -- -- -- 9 17 3 ------- ------- ------- ------- ------- ------- SEGMENT OPERATING INCOME 376 361 298 515 531 444 Gain on sale of business and other 89 24 -- 89 31 -- Restructuring costs and other (26) (28) -- (30) (35) (7) Merger costs (10) -- -- -- -- -- ------- ------- ------- ------- ------- ------- TOTAL OPERATING INCOME 429 357 298 574 527 437 Other income -- 2 -- -- 2 (2) Equity in earnings of affiliates 29 35 28 40 45 32 Non-operating one-time items -- -- (31) (3) (1) (25) Interest expense, net (89) (61) (39) (142) (117) (80) Provision for income taxes (141) (129) (102) (177) (169) (135) Minority interest (10) (10) (7) (5) (7) (9) ------- ------- ------- ------- ------- ------- NET INCOME $ 218 $ 194 $ 147 $ 287 $ 280 $ 218 ======= ======= ======= ======= ======= ======= DILUTED EARNINGS PER SHARE $ 4.12 $ 3.75 $ 2.84 $ 4.02 $ 3.67 $ 2.87 ------- ------- ------- ------- ------- ------- DILUTED EARNINGS PER SHARE BEFORE SPECIAL ITEMS (2) $ 3.52 $ 3.73 $ 3.20 $ 3.56 $ 3.66 $ 3.11 ------- ------- ------- ------- ------- -------
(1) Pro forma financial information presented as if the Merger had occurred at the beginning of each fiscal year and reflects (a) the amortization of goodwill from 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 shares 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. (2) Special items in fiscal 2000 include gain on the sale of the seat adjusting systems business and other assets of $89 million ($54 million after-tax, or $1.01 per share), restructuring costs of $26 million ($16 million after-tax, or $0.30 per share), and merger expenses of $10 million ($6 million after-tax, or $0.11 per share) Special items in fiscal 1999 include gain on formation of ZF Meritor joint venture of $24 million ($18 million after-tax, or $0.34 per share) and restructuring costs of $28 million ($17 million after-tax, or $0.33 per share). Special items in fiscal 1998 include interest rate settlement costs of $31 million ($19 million after-tax, or $0.36 per share). Pro forma amounts in fiscal 2000 exclude merger costs of $70 million ($58 million after-tax, or $0.81 per share). In addition to the special items discussed above, pro forma special items in fiscal 2000 include restructuring and other charges of $4 million ($3 million after-tax, or $0.04 per share), and $3 million ($2 million after-tax, or $0.03 per share) non-operating one-time items. Pro forma amounts in fiscal 1999 also include a gain on sale of affiliate of $7 million (5 million after-tax, or $0.07 per share), restructuring and other charges of $7 million ($4 million after-tax, or $0.05 per share) and non-operating one time items of $1 million ($1 million after-tax, or $0.01 per share). Pro forma amounts in fiscal 1998 also include restructuring and other costs of $7 million ($5 million after-tax, or $0.07 per share) and a gain in non-operating one-time items of $6 million ($6 million after-tax, or $0.08 per share). The following charts demonstrate the strength, diversity and balance of our served markets, product mix and geographic presence for the fiscal year ended September 30, 2000 as a percent of sales on a pro forma basis. [BAR CHARTS] 2000 COMPARED TO 1999 SALES - Sales for fiscal 2000 were $5.2 billion, up $703 million, or 16 percent, over last year's sales of $4.5 billion. Included in fiscal 2000 sales are $714 million of sales attributable to the merger with Arvin and a decrease of about $130 million due to currency exchange. Excluding the impact of currency and the merger with Arvin, fiscal 2000 sales would have been up 3 percent from fiscal 1999. The sale of the company's Page 7 8 seat adjusting systems business in November 1999 resulted in a decrease of $98 million in sales year-over-year. Additionally, the company's transmission and clutch business contributed sales of $166 million in fiscal 1999. The results of this business are now reported as equity income, due to the formation of the Meritor ZF joint venture in fiscal 1999. Pro forma sales, as if Arvin and Meritor had operated as a merged company in all periods, were $7.7 billion in fiscal 2000, an increase of 3 percent over pro forma 1999 sales. LIGHT VEHICLE SYSTEMS (LVS) SALES - LVS sales grew 29 percent, to $2.0 billion, from $1.6 billion a year ago. Fiscal 2000 sales include $447 million of sales from Arvin businesses, offset somewhat by $84 million of negative currency exchange. Adjusting to exclude the sales attributable to the merger with Arvin, LVS sales would have been 1 percent higher than fiscal 1999 sales. Market penetration gains, principally in the door, suspension, wheel and seat motor lines, combined with strong industry volumes drove this growth, which was offset by the sale of the LVS seat adjusting systems business in early fiscal 2000 and the negative impact of currency. On a pro forma basis, LVS sales for fiscal 2000 were $3.7 billion, up $194 million or 6 percent from $3.5 billion in 1999. Additional market penetration gains in the exhaust business drove this further growth. LVS sales in North America grew 48 percent (11 percent on a pro forma basis). Sales in South America and Asia/Pacific grew 7 percent and 5 percent, respectively (up 4 percent and 6 percent on a pro forma basis, respectively). Sales in Europe were up 15 percent (down 2 percent on a pro forma basis). COMMERCIAL VEHICLE SYSTEMS (CVS) SALES - CVS reported $2.9 billion in sales of components and systems for original equipment and the aftermarket in fiscal 2000, Page 8 9 including $17 million attributable to the merger with Arvin, which was down slightly from fiscal 1999 sales. CVS sales in North America were $2.0 billion, down $148 million or 7 percent from $2.2 billion in fiscal 1999. The decline in North American heavy truck markets of approximately 7 percent drove this decline. European sales were up $103 million or 18 percent, and South American sales were up $18 million, or 27 percent, while sales in the rest of the world were up $24 million. On a pro forma basis, CVS sales would have been $2.9 billion in fiscal 2000, down $15 million, or 1 percent, from pro forma 1999 sales. LIGHT VEHICLE AFTERMARKET (LVA) SALES - LVA sales were $209 million in fiscal 2000 with no sales in fiscal 1999, because this business is attributable to Arvin and is accordingly included in the consolidated results only from July 7, 2000, and forward. On a pro forma basis, LVA sales in fiscal 2000 were $950 million, an increase of 5 percent, or $44 million from pro forma 1999 levels. The increase in pro forma sales is attributable primarily to the inclusion of a full year of results of the Purolator business, which was acquired by Arvin in March 1999. Purolator generated $318 million of pro forma sales in fiscal 2000, as compared to $203 million in pro forma sales in fiscal 1999. These increases were partially offset by price reductions and product mix issues, the negative impact of currency translation and a softening of markets in both North America and Europe in the latter part of the fiscal year. OPERATING INCOME - Fiscal 2000 operating income was $429 million, up $72 million from fiscal 1999. In fiscal 2000, the company completed the sale of its LVS seat adjusting systems business for approximately $135 million in cash, resulting in a one-time gain of $83 million ($51 million after-tax, or $0.96 per share). The seat adjusting Page 9 10 systems business had fiscal 1999 sales of approximately $130 million. Also during fiscal 2000, the company recorded a restructuring charge of $26 million ($16 million after-tax, or $0.30 per share) relating to workforce reductions and other facility-related costs for the rationalization of operations and merger expenses of $10 million ($6 million after-tax, or $0.11 per share). Fiscal 1999 operating income was $357 million, and includes a restructuring charge 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) in connection with the formation of a transmission and clutch joint venture with ZF Friedrichshafen AG. Excluding the restructuring charges, merger costs and one-time gains from sales of businesses and assets, operating income would have been $376 million in fiscal 2000, up $15 million from $361 million in fiscal 1999. This increase is attributable to the results of Arvin, included in the company's results since July 7, 2000. Operating margins were 8.3 percent in fiscal 2000 (7.3 percent, excluding the special items), versus 8.0 percent in fiscal 1999 (8.1 percent, excluding the special items). On a pro forma basis, excluding special items, operating income would have been $515 million in fiscal 2000, down 3 percent from $531 million in fiscal 1999. Pro forma operating margins before special items declined from 7.1 percent in fiscal 1999 to 6.7 percent in fiscal 2000. LVS OPERATING INCOME - LVS operating income was $149 million in fiscal 2000, with operating margins of 7.3 percent. Operating income was up $20 million, or 16 percent, from 1999, although operating margins decreased 90 basis points. Results from the merger with Arvin contributed $7 million of operating income in fiscal 2000. Operating income increased due to the volume contribution from higher sales and favorable product mix. On a pro forma basis, operating income for fiscal 2000 increased Page 10 11 $34 million, or 17 percent, to $232 million. Pro forma operating margins increased from 5.7 percent in fiscal 1999 to 6.3 percent in fiscal 2000. CVS OPERATING INCOME - CVS operating income was $221 million in fiscal 2000, a decrease of 5 percent from 1999. Operating margins declined by 40 basis points to 7.7 percent in fiscal 2000. The decline in margins was driven by higher costs due to unfavorable economics, the negative impact of currency exchange and higher warranty expenses. On a pro forma basis, operating income for fiscal 2000 was $231 million, also down 5 percent from pro forma fiscal 1999. Pro forma operating margins of 7.9 percent also declined by 40 basis points. LVA OPERATING INCOME - LVA operating income was $6 million in fiscal 2000, with operating margins of 2.9 percent. This business was acquired as part of the merger with Arvin and is, accordingly, included in the consolidated results from July 7, 2000, and forward. On a pro forma basis, operating income and margins for fiscal 2000 were $43 million and 4.5 percent, respectively, down from fiscal 1999 pro forma operating income of $72 million and related margins of 7.9 percent. The decline in LVA pro forma operating income relates primarily to reduced pricing and product mix issues, and was partially offset by increased volume. The decline in operating income also reflects the soft market conditions experienced in late fiscal 2000 and consolidation of the distribution channel base. EQUITY IN EARNINGS OF AFFILIATES - Equity in earnings of affiliates was down $6 million in fiscal 2000, to $29 million, primarily as a result of the lower North American truck volumes. Page 11 12 INTEREST EXPENSE, NET - Interest expense, net for fiscal 2000 was $89 million, up $28 million from fiscal 1999 interest expense of $61 million. The increase is primarily attributable to higher debt levels associated with acquisitions and the share repurchase programs. On a pro forma basis, fiscal 2000 interest expense, net increased $25 million, to $142 million, primarily as a result of the share repurchase programs and acquisitions made during fiscal 1999. NET INCOME - Net income for fiscal 2000 was $218 million, or $4.12 per share, an increase of 12 percent and 10 percent, respectively, as compared with fiscal 1999 net income of $194 million, or $3.75 per share. Net income before special items was $186 million, or $3.52 in fiscal 2000, compared with 1999 net income before special items of $193 million, or $3.73 per share. Special items include the restructuring charges, gains and merger expenses discussed earlier. On a pro forma basis, excluding special items, fiscal 2000 net income was down $25 million, or 9 percent, to $254 million, with earnings per share of $3.56, compared to 1999 earnings per share of $3.66. 1999 COMPARED TO 1998 SALES - Sales for fiscal 1999 were $4.5 billion, up $614 million, or 16 percent, over fiscal 1998 sales of $3.8 billion. LVS SALES - LVS sales grew $100 million, or 7 percent, to $1.6 billion for fiscal year 1999. Market penetration gains, principally in the door, suspension and seat adjusting systems product lines, combined with strong North American vehicle volumes drove the higher sales. This growth was partially offset by weakness in European roof systems sales and the negative impact of currency exchange and lower vehicle volumes in South America. LVS fiscal 1999 sales in North America increased $127 million, or 22 Page 12 13 percent, and sales in Asia/Pacific were up $21 million, or 38 percent. Sales in Europe and South America were down $37 million and $11 million, respectively. CVS SALES - CVS reported $2.9 billion in fiscal 1999 sales, an increase of $514 million, or 22 percent, over 1998. Excluding acquisitions, CVS sales increased $119 million, or 5 percent. Record production volumes in the North American heavy truck market drove North American sales of truck axles, brakes and transmissions to $1.3 billion, an increase of $245 million, or 22 percent. North American sales of other CVS products were $657 million, down $65 million from 1998, primarily as a result of lower government program sales. European sales, excluding acquisitions, were down $21 million, or 6 percent, and South American sales fell $47 million, or 41 percent, while CVS sales in the rest of the world were up $7 million. OPERATING INCOME - Fiscal 1999 operating income was up $59 million over fiscal 1998. Excluding the restructuring charge and gain on sale discussed earlier, fiscal 1999 operating income of $361 million was up 21 percent over the prior year's operating income of $298 million. Operating margins, before the special items, improved to 8.1 percent in fiscal 1999, from 7.8 percent in fiscal 1998. This improvement reflects the company's continued focus on process improvement and cost reductions, offset somewhat by premium costs associated with meeting the record levels of demand in the North American truck markets. The company's process improvement and cost-reduction programs relate to (1) purchasing, which includes outsourcing non-core manufacturing and using lower cost global sourcing of materials and supply base management; and (2) manufacturing, which Page 13 14 includes shifting production to lower cost facilities, consolidating common processes, improving material flow and investing in capital and systems. LVS OPERATING INCOME - LVS operating margins improved dramatically in fiscal 1999 to 8.2 percent, from 5.8 percent in 1998. Substantial savings were realized in fiscal 1999 from material and other cost-reduction programs. The operating margin improvement also reflects the volume contribution from the higher sales. CVS OPERATING INCOME - CVS operating income for fiscal 1999 was $232 million, an increase of 9 percent over fiscal 1998. Operating margins declined to 8.1 percent in fiscal 1999 from 9.0 percent in 1998. This margin decline was driven primarily by an increase in premium freight costs and the use of higher-cost alternate component suppliers to meet the record demand in the North American heavy truck market. Fiscal 1999 operating margins were also adversely impacted by the decline of higher-margin government program sales. EQUITY IN EARNINGS OF AFFILIATES - Equity in earnings of affiliates increased $7 million in fiscal 1999, to $35 million, primarily as a result of higher sales of anti-lock brakes and related systems by the company's WABCO affiliate. NET INCOME - Net income for the year was $194 million, or $3.75 per share, an increase of 32 percent as compared with 1998 net income of $147 million, or $2.84 per share. Net income before special items was $193 million in fiscal 1999, or $3.73 per share, compared with 1998 net income before special items of $166 million, or $3.20 per share, an improvement of 17 percent in earnings per share. Special items include the one-time gain related to the formation of the ZF Meritor joint venture and a restructuring Page 14 15 charge recorded in fiscal 1999 and the one-time charge in fiscal 1998 for the settlement of interest rate agreements. 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 the manufacturing operations of the company. To date, compliance with environmental requirements and resolution of environmental claims has been accomplished without material effect on the company's liquidity and capital resources, competitive position, or financial statements. The company has been designated as a potentially responsible party at 10 Superfund sites, excluding sites as to which the company's records disclose no involvement or as to which the company's potential liability has been finally determined. Management estimates the total, reasonably possible costs the company could incur for the remediation of Superfund sites at September 30, 2000, to be approximately $20 million, of which probable costs of $13 million have been accrued. Various other lawsuits, claims and proceedings have been asserted against the company, alleging violations of federal, state and local environmental protection requirements, or seeking remediation of alleged environmental impairments, principally at previously disposed-of properties. For these matters, ArvinMeritor expects that any amounts that may be required to be paid in excess of recorded reserves of $25 million will not have a material adverse effect on the company's financial condition. Based on its assessment, management believes that the company's expenditures for environmental capital investment and remediation necessary to comply with present Page 15 16 regulations governing environmental protection and other expenditures for the resolution of environmental claims will not have a material adverse effect on the company's liquidity and capital resources, competitive position or financial statements. Management cannot assess the possible effect of compliance with future requirements. AFFILIATES The company has 16 joint ventures, which are accounted for under the equity method of accounting. These strategic alliances provide for sales, product design, development and manufacturing in certain product and geographic areas. Aggregate sales of these affiliates were $924 million, $488 million and $443 million in fiscal 2000, 1999 and 1998, respectively. The increase in fiscal 2000 is due to the inclusion of approximately $290 million in sales from Arvin's affiliates and $146 million attributable to sales of the ZF Meritor joint venture created in late fiscal 1999. The company's equity in earnings of affiliates was $29 million in fiscal 2000, compared to $35 million in fiscal 1999 and $28 million in fiscal 1998. Cash dividends to ArvinMeritor from these joint ventures were $32 million, $28 million and $27 million in fiscal 2000, 1999 and 1998, respectively. The decrease in fiscal 2000 earnings of affiliates from fiscal 1999 is primarily a result of the lower North American truck volumes, which resulted in lower sales and lower earnings of certain affiliates. The increase in equity income in fiscal 1999 from fiscal 1998 relates primarily to the company's 50 percent-owned joint venture with WABCO, a leading supplier of anti-lock braking systems for North American heavy-duty commercial vehicles. This growth was attributed to the growing use of anti-lock braking systems across North America. INCOME TAXES Page 16 17 The company's effective income tax rate in fiscal 2000 was 38.2 percent, compared to 38.8 percent in fiscal 1999 and 40.0 percent in fiscal 1998. The tax rate decline in fiscal 2000 from the 1999 level was primarily due to the company's legal entity realignment, which resulted in lower state income taxes. Income taxes on the one-time gain related to the formation of the ZF Meritor joint venture in fiscal 1999 were recorded at an effective tax rate of 25 percent, due to a book-tax basis difference on assets transferred into the joint venture, which reduced the company's overall effective tax rate for fiscal 1999 by 1.2 percentage points, as compared to 1998's effective tax rate. INTERNATIONAL OPERATIONS Approximately 44 percent of the company's total assets as of September 30, 2000, and 37 percent of fiscal 2000 sales were outside North America. Management believes that international operations have significantly benefited the financial performance of the company. However, the company's international operations are subject to a number of risks inherent in operating abroad. There can be no assurance that these risks will not have a material adverse impact on the company's ability to increase or maintain its foreign sales or on its financial condition or results of operations. During fiscal 2000, the company's sales and operating income were both negatively impacted by approximately $130 million and $20 million, respectively, due to exchange rate changes. The impact the euro and other currencies will have on the company's sales and operating income is difficult to predict in the upcoming year. On January 1, 1999, the euro became the common currency of eleven countries of the European Union. During a three-year transition period, the present national currencies of these eleven countries will become sub-units of the euro at fixed exchange Page 17 18 rates. The European Union's current plans call for the transition period to be completed by July 1, 2002, at which time the euro will become the sole legal tender in those participating countries. The company is engaged in business in some of the countries that participate in the European Monetary Union, and sales for fiscal 2000 in these countries were approximately 17 percent of the company's total sales. In addition, the company enters into foreign currency forward exchange contracts with respect to several of the existing currencies that have been subsumed into the euro and has borrowings in participating currencies primarily under its revolving Credit Facility. The company has analyzed the potential effects of the euro conversion on competitive conditions, information technology and other systems, currency risks, financial instruments and contracts, and has examined the tax and accounting consequences of euro conversion, and believes that the conversion will not have a material adverse effect on its business, operations and financial condition. The company is making the necessary adjustments to accommodate the conversion, including modifications to its information technology systems and programs, pricing schedules and financial instruments. The company expects that all necessary actions will be completed in a timely manner, and that the costs associated with the conversion to the euro will not be material. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Page 18 19 The company is exposed to foreign currency exchange rate risk inherent in its purchases, sales, assets and liabilities denominated in currencies other than the U.S. dollar and interest rate risk associated with the company's debt. The company enters into foreign currency forward exchange contracts to minimize the risk of unanticipated gains and losses from currency rate fluctuations on foreign currency commitments entered into in the ordinary course of business (see Note 14 of Notes to Consolidated Financial Statements). It is the policy of the company not to enter into derivative financial instruments for speculative purposes and therefore the company holds no derivative instruments for trading purposes. The company has performed a sensitivity analysis assuming a hypothetical 10- percent adverse movement in foreign currency exchange rates and interest rates applied to the underlying exposures described above. As of September 30, 2000, the analysis indicated that such market movements would not have a material effect on the company's consolidated financial position, results of operations or cash flows. Actual gains or losses in the future may differ significantly from that analysis, however, based on changes in the timing and amount of interest rate and foreign currency exchange rate movements and the company's actual exposures. NEW ACCOUNTING PRONOUNCEMENTS There were no new accounting pronouncements adopted by the company in fiscal 2000 that had a material impact on the company's financial condition or results of operations. On October 1, 2000, the company adopted Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Page 19 20 Activities." The adoption of this standard did not have a material impact on the company (see Note 2 of Notes to Consolidated Financial Statements). CAUTIONARY STATEMENT This Management's Discussion and Analysis, as well as other sections of this annual report, 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; 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; the failure to achieve the expected annual savings and synergies from past and future business combinations; competitive product and pricing pressures; the amount of the company's debt, as well as other risks and uncertainties, such as those described under Overview and Outlook, Environmental Matters, International Operations, and Quantitative and Qualitative Disclosures About Market Risk and those detailed herein and from time to time in the filings of the company with the Securities and Exchange Commission. These forward-looking statements are made only as of the date hereof, and the company undertakes no obligation to update or Page 20 21 revise the forward-looking statements, whether as a result of new information, future events or otherwise. Page 21 22 Independent Auditors' Report To the Board of Directors and Shareowners of ArvinMeritor, Inc.: We have audited the accompanying consolidated balance sheets of ArvinMeritor, Inc. and subsidiaries (formerly Meritor Automotive, Inc. and subsidiaries - see Note 1) as of September 30, 2000 and 1999, and the related consolidated statements of income, shareowners' equity and cash flows for each of the three years in the period ended September 30, 2000. These financial statements are the responsibility of the company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of ArvinMeritor, Inc. and subsidiaries at September 30, 2000 and 1999, and the results of their operations and their cash flows for each of the three years in the period ended September 30, 2000 in conformity with accounting principles generally accepted in the United States of America. DELOITTE & TOUCHE LLP Detroit, Michigan November 7, 2000 23
ARVINMERITOR, INC. STATEMENT OF CONSOLIDATED INCOME (IN MILLIONS, EXCEPT PER SHARE AMOUNTS) - ------------------------------------------------------------------------------------------------------------------------------------ Year Ended September 30, ----------------------------------------------- 2000 1999 1998 -------- -------- -------- Sales $ 5,153 $ 4,450 $ 3,836 Cost of sales 4,410 3,798 3,287 ------- -------- ------- GROSS MARGIN 743 652 549 Selling, general and administrative (348) (280) (248) Amortization expense (19) (11) (3) Restructuring costs (26) (28) - Merger expenses (10) - - Gain on sale of business and other 89 24 - ------- ------- ------- OPERATING INCOME 429 357 298 Other income - 2 - Equity in earnings of affiliates 29 35 28 Interest rate settlement cost - - (31) Interest expense,net (89) (61) (39) ------- ------- ------- INCOME BEFORE INCOME TAXES 369 333 256 Provision for income taxes (141) (129) (102) Minority interests (10) (10) (7) ------- ------- ------- NET INCOME $ 218 $ 194 $ 147 ====== ======= ======= Basic and Diluted Earnings per Share $ 4.12 $ 3.75 $ 2.84 ====== ======= ======= Average Common Shares Outstanding - Basic and Diluted 52.9 51.8 51.8 ======= ======= =======
See Notes to Consolidated Financial Statements ArvinMeritor, Inc. - -------------------------------------------------------------------------------- CONSOLIDATED BALANCE SHEET (IN MILLIONS) - --------------------------------------------------------------------------------
September 30, ------------------------------- ASSETS 2000 1999 - ------ ---- ----
1 24 CURRENT ASSETS Cash and cash equivalents $ 116 $ 68 Receivables (less allowance for doubtful accounts: 2000 $22; 1999, $10) 1,278 742 Inventories 583 392 Other current assets 212 130 ------- ------- Total current assets 2,189 1,332 ------- ------- NET PROPERTY 1,348 766 NET GOODWILL (less accumulated amortization: 2000, $48; 1999, $35) 756 454 OTHER ASSETS 427 244 ------- ------- TOTAL ASSETS $ 4,720 $ 2,796 ======= ======= LIABILITIES AND SHAREOWNERS' EQUITY CURRENT LIABILITIES Short-term debt $ 183 $ 44 Accounts payable 1,058 712 Accrued compensation and benefits 203 144 Accrued income taxes 27 28 Other current liabilities 254 196 ------- ------- Total current liabilities 1,725 1,124 ------- ------- LONG-TERM DEBT 1,537 802 ACCRUED RETIREMENT BENEFITS 382 371 OTHER LIABILITIES 113 116 MINORITY INTERESTS 96 35 COMPANY-OBLIGATED MANDATORILY REDEEMABLE PREFERRED CAPITAL SECURITIES 74 - SHAREOWNERS' EQUITY Common stock (2000, 71.0 shares issued and 67.9 outstanding; 1999, 69.1 shares issued and 68.8 outstanding) 71 69 Additional paid-in capital 546 158 Retained earnings 466 283 Treasury stock (2000, 3.1 shares; 1999, 0.3 shares) (53) (6) Accumulated other comprehensive loss (237) (156) ------- ------- Total shareowners' equity 793 348 ------- ------- TOTAL LIABILITIES AND SHAREOWNERS' EQUITY $ 4,720 $ 2,796 ======= =======
See Notes to Consolidated Financial Statements. - -------------------------------------------------------------------------------- 2 25 ARVINMERITOR, INC. STATEMENT OF CONSOLIDATED CASH FLOWS (IN MILLIONS) - -------------------------------------------------------------------------------
Year Ended September 30, -------------------------------------- 2000 1999 1998 ------ ------ ------ OPERATING ACTIVITIES Net income $ 218 $ 194 $ 147 Adjustments to net income to arrive at cash provided by operating activities: Depreciation 143 120 99 Amortization 19 11 3 Gain on sale of business and other (89) (24) - Restructuring, net of expenditures 19 23 - Deferred income taxes 32 17 (10) Pension and retiree medical expense 58 52 50 Pension and retiree medical contributions (89) (71) (64) Changes in assets and liabilities, excluding effects of acquisitions, divestitures and foreign currency adjustments: Receivables 15 (95) (88) Inventories (10) - (34) Accounts payable (28) 45 129 Change in other working capital (66) (18) 64 Other assets and liabilities 6 8 (16) ----- ----- ------ CASH PROVIDED BY OPERATING ACTIVITIES 228 262 280 ----- ----- ----- INVESTING ACTIVITIES Capital expenditures (225) (170) (139) Acquisitions of businesses and investments, net of cash acquired (74) (573) (8) Payment of certain merger related assumed liabilities (49) - - Proceeds from disposition of assets, property and businesses 148 51 17 ----- ------ ----- CASH USED FOR INVESTING ACTIVITIES (200) (692) (130) ----- ----- ----- FINANCING ACTIVITIES Net increase (decrease) in revolving and other debt 245 9 (129) Proceeds from issuance of notes - 498 - ----- ---- ---- Net increase (decrease) in debt 245 507 (129) Cash dividends (35) (29) (29) Purchases of treasury stock (172) (6) - Payment of interest rate settlement cost - (31) - Distribution tax obligation, net - - (58) ----- ----- ----- CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES 38 441 (216) ----- ----- ----- EFFECT OF EXCHANGE RATE CHANGES ON CASH (18) (8) (2) INCREASE (DECREASE) IN CASH 48 3 (68) CASH AT BEGINNING OF YEAR 68 65 133 ----- ---- ----- CASH AT END OF YEAR $ 116 $ 68 $ 65 ====== ===== =====
See Notes to Consolidated Financial Statements. - ------------------------------------------------------------------------------- 3 26 ARVINMERITOR, INC. STATEMENT OF CONSOLIDATED SHAREOWNERS' EQUITY (IN MILLIONS, EXCEPT PER SHARE AMOUNTS) - --------------------------------------------------------------------------------
Year Ended September 30, -------------------------------------- 2000 1999 1998 ------ ------ ------ COMMON STOCK Beginning balance $ 69 $ 69 $ 69 ArvinMeritor merger: Shares issued to Arvin shareowners 24 - - Conversion of outstanding Meritor shares (15) - - Cancellation of Meritor treasury stock (7) - - ------ ------ ------ Ending balance 71 69 69 ------ ------ ------ ADDITIONAL PAID-IN CAPITAL Beginning balance 158 156 154 ArvinMeritor merger: Shares issued to Arvin shareowners and Arvin stock options converted 492 - - Conversion of outstanding Meritor shares 15 - - Cancellation of Meritor treasury stock (119) - - Other - 2 2 ------ ------ ------ Ending balance 546 158 156 ------ ------ ------ RETAINED EARNINGS Beginning balance 283 118 - Net income 218 194 147 Cash dividends (per share: 2000, $0.64; 1999 and 1998, $0.56) (35) (29) (29) ------ ------ ------ Ending balance 466 283 118 ------ ------ ------ TREASURY STOCK Beginning balance (6) - - Cancellation of treasury stock in connection with merger 125 - - Purchase of treasury stock (172) (6) - ------ ------ ------ Ending balance (53) (6) - ------ ------ ------ ACCUMULATED OTHER COMPREHENSIVE LOSS Beginning balance (156) (77) (72) Foreign currency translation adjustments (81) (79) (5) ------ ------ ------ Ending balance (237) (156) (77) ------ ------ ------ TOTAL SHAREOWNERS' EQUITY $ 793 $ 348 $ 266 ====== ====== ====== COMPREHENSIVE INCOME Net income $ 218 $ 194 $ 147 Foreign currency translation adjustments (81) (79) (5) ------ ------ ------ TOTAL COMPREHENSIVE INCOME $ 137 $ 115 $ 142 ====== ====== ======
See Notes to Consolidated Financial Statements. - -------------------------------------------------------------------------------- 4 27 ARVINMERITOR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------------------------------------------- 1. BASIS OF PRESENTATION 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. On July 7, 2000, Meritor Automotive, Inc. (Meritor) and Arvin Industries, Inc. (Arvin) merged into ArvinMeritor. The merger was accounted for utilizing the purchase method of accounting. The financial information for the periods prior to July 7, 2000, reflect the results of Meritor and its consolidated subsidiaries prior to the merger. The information for the period after July 7, 2000, represents the results of ArvinMeritor and its consolidated subsidiaries. All prior periods' share and per share data have been restated to conform with the exchange of Meritor shares to ArvinMeritor shares on a one to 0.75 basis in connection with the merger with Arvin (see Note 3). Certain prior year amounts have been reclassified to conform with current year presentation. 2. ACCOUNTING POLICIES Use of Estimates The financial statements of ArvinMeritor have been prepared in accordance with accounting principles generally accepted in the U.S. that require management to make estimates and assumptions that affect the amounts reported in the financial statements. Actual results could differ from those estimates. Consolidations and Joint Ventures The consolidated financial statements include the accounts of the company and those majority-owned subsidiaries in which the company has control. All significant intercompany accounts and transactions are eliminated in consolidation. The accounts and results of operations of controlled subsidiaries where ownership is greater than 50 percent, but less than 100 percent, are included in the consolidated results and are offset by a related minority interest expense and liability recorded for the minority interest ownership. Investments in affiliates that are not majority-owned and controlled are reported using the equity method of accounting for investments. Foreign Currency Local currencies are considered the functional currencies outside the U.S., except for subsidiaries located in countries with highly inflationary economies. For operations reporting in local currencies, assets and liabilities are translated at year-end exchange rates with cumulative currency translation adjustments included as a component of Accumulated Other Comprehensive Loss. Income and expense items are translated at average rates of exchange during the year. 5 28 Cash Equivalents The company considers all highly liquid investments purchased with a maturity of three months or less to be cash equivalents. Inventories Inventories are stated at the lower of cost (using LIFO, FIFO or average methods) or market (determined on the basis of estimated realizable values). Tooling Costs incurred by the company for certain engineering and tooling projects, principally for light vehicle products, for which customer reimbursement is contractually guaranteed are classified as Other Current Assets in the accompanying Consolidated Balance Sheet. Provisions for losses are provided at the time management anticipates costs to exceed anticipated customer reimbursement. Company-owned tooling is classified as property and depreciated over its expected life or the life of the related vehicle platform, whichever is shorter. Property and Depreciation Property is stated at cost. Depreciation of property is based on estimated useful lives, generally using the straight-line method. Significant renewals and betterments are capitalized, and replaced units are written off. Maintenance and repairs, as well as renewals of minor amounts, are charged to expense. Intangible Assets Goodwill represents the excess of the cost of purchased businesses over the fair value of their net assets at the date of acquisition and is amortized using the straight-line method for periods not to exceed 40 years. All intangibles, including patents, trademarks and licenses, are reviewed periodically to determine whether the carrying amount of the asset is impaired. Adjustments to the carrying value are made if the review indicates this amount will not be recoverable. Capitalized Software Costs relating to internally developed or purchased software are capitalized and amortized utilizing the straight-line basis over periods not to exceed seven years. These amounts are included in Other Assets in the accompanying Consolidated Balance Sheet. Impairment of Long-Lived Assets Management periodically reviews the realizability of long-lived assets, based on an evaluation of remaining useful lives, cash flows and profitability projections. Revenue Recognition Revenues are recognized upon shipment of products to customers. 6 29 Earnings per Share Basic earnings per share are based upon the weighted average number of shares outstanding during each year. Diluted earnings per share assumes the exercise of common stock options when dilutive. Environmental Matters The company records accruals for environmental issues in the accounting period in which its responsibility is established and the cost can be reasonably estimated. At environmental sites in which more than one potentially responsible party has been identified, the company records a liability for its allocable share of costs related to its involvement with the site, as well as an allocable share of costs related to insolvent parties or unidentified shares. At environmental sites in which ArvinMeritor is the only responsible party, the company records a liability for the total estimated costs of remediation before consideration of recovery from insurers or other third parties. If recovery from a third party is determined to be probable, the company records a receivable for the estimated recovery. Stock-Based Compensation The company accounts for its stock-based compensation using the intrinsic value approach under Accounting Principles Board Opinion (APB) No. 25, "Accounting for Stock Issued to Employees," and has adopted the disclosure-only provisions of Statement of Financial Accounting Standards No. 123 (SFAS 123), "Accounting for Stock-Based Compensation" (see Note 16). New Accounting Standards In June 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 133 (SFAS 133), "Accounting for Derivative Instruments and Hedging Activities," as amended, effective for all fiscal quarters of fiscal years beginning after June 15, 2000. SFAS 133 requires that all derivatives be recognized as either assets or liabilities in the statement of financial position and be measured at fair value. The primary type of derivative financial instruments the company uses is forward foreign exchange contracts to minimize the foreign currency exposure of various reporting locations related to certain commitments denominated in currencies other than the location's functional currency. The company adopted this standard, as amended, effective October 1, 2000. The adoption of this standard did not have a material impact on the financial position or results of operations of the company. 7 30 3. ARVINMERITOR MERGER On July 7, 2000, Meritor and Arvin merged to form ArvinMeritor. Under the terms of the merger agreement, each share of Meritor common stock was converted into the right to receive 0.75 shares of common stock of ArvinMeritor, and each share of Arvin common stock was converted into the right to receive one share of common stock of ArvinMeritor plus $2.00 in cash. In total, approximately 62.3 million shares of Meritor, 24.3 million shares of Arvin and $48.5 million in cash were exchanged for approximately 70.1 million shares of ArvinMeritor. The merger was accounted for by the purchase method of accounting. Accordingly, the results of operations of Arvin are included with those of the company for the period subsequent to the date of the merger. The total estimated merger consideration of $576 million was allocated first to assets and liabilities based on their fair values as of the merger date, with the residual allocated to goodwill, which is being amortized on a straight-line basis over 40 years. Since the company assumed the stock options outstanding of Arvin, the fair value of these options was included in determining the fair value. The purchase price allocation is preliminary and may be revised up to one year from the date of acquisition due to appraisals of fixed assets, other fair value adjustments and the finalization of any potential plans of restructuring. A summary of the estimated fair market value of assets and liabilities acquired is as follows: Current assets $ 946 Property plant and equipment 610 Goodwill 329 Other assets 246 ----- Total assets 2,131 Current liabilities (988) Long-term liabilities (169) Long-term debt and capital securities (398) ----- Fair market value $ 576 ======
The following unaudited pro forma consolidated results of operations assume that the ArvinMeritor merger occurred as of the beginning of each period and excludes merger expenses (in millions, except per share amounts): 2000 1999 -------- -------- Net sales $ 7,722 $ 7,491 ======= ======= Net income 287 280 ======= ======= Basic earnings per share 4.02 3.68 ======= ======== Diluted earnings per share 4.02 3.67 ======= ========
8 31 Pro forma net income and basic and diluted earnings per share amounts for the fiscal year ended September 30, 2000, exclude a non-recurring charge of $70 million ($58 million after-tax or $0.81 per share) for merger-related expenses. The pro forma adjustments are based upon available information and certain assumptions that management believes are reasonable. The pro forma data is not necessarily indicative of the results of operations of ArvinMeritor that would have been achieved if the merger had in fact occurred on such dates, or the results of operations of ArvinMeritor for any future period. The pro forma data does not give effect to any potential restructuring costs or to any potential cost savings or other synergies that could result from the merger. 4. ACQUISITION OF BUSINESSES During fiscal 1999, the company completed three acquisitions. On December 28, 1998, the company acquired the assets of Euclid Industries and assumed substantially all of Euclid's liabilities. The company completed its acquisition of the heavy truck axle manufacturing operations of Volvo Truck Corporation on December 31, 1998. The purchase price for the Volvo heavy truck axle business was approximately $135 million in cash, of which $34 million is deferred at September 30, 2000. On January 29, 1999, the company acquired the Heavy Vehicle Braking Systems (HVBS) business of LucasVarity plc for approximately $400 million in cash. These acquisitions were accounted for by the purchase method of accounting, and accordingly, the results of operations of the acquired businesses are included with those of the company for the periods subsequent to the dates of acquisition. The assets and liabilities have been recorded at fair value as of the acquisition dates. The excess of the purchase price of these acquisitions over the fair market value of assets acquired of $424 million is included in Net Goodwill in the accompanying Consolidated Balance Sheet and is being amortized on a straight-line basis over 40 years. These acquisitions would have added pro forma sales of $173 million with no impact on net income on a pro forma basis in 1999, assuming the acquisitions occurred at the beginning of 1999. 5. SALE OF BUSINESSES In the first quarter of 2000, the company completed the sale of its LVS seat adjusting systems business for approximately $135 million cash, resulting in a one-time gain of $83 million ($51 million after-tax, or $0.96 per basic and diluted share). The seat adjusting systems business had fiscal 1999 sales of approximately $130 million. In the fourth quarter of 1999, a one-time gain of $24 million ($18 million after-tax, or $0.34 per share) was recorded to reflect the formation of a transmission and clutch joint venture with ZF Friedrichshafen AG (ZF). Under the terms of the joint venture agreement, the company transferred the assets of its transmission and clutch businesses into the joint venture, while ZF contributed technology and made a $51-million cash payment to the company. ArvinMeritor and ZF each own 50 percent of the joint venture. 9 32 6. RESTRUCTURING COSTS The company recorded a restructuring charge of $26 million ($16 million after-tax, or $0.30 per basic and diluted share) in the third quarter of fiscal 2000. The charge included severance and other employee costs of approximately $19 million, related to a net reduction of approximately 500 employees, with the balance primarily associated with facility-related costs from the rationalization of operations. As of September 30, 2000, approximately $6 million had been paid in termination benefits, with a net reduction of approximately 160 employees. As of September 30, 2000, approximately $14 million of the reserve remains in Other Current Liabilities in the accompanying Consolidated Balance Sheet. The company expects the remaining restructuring actions will be substantially completed by the end of the third quarter of fiscal 2001. The company recorded a restructuring charge of $28 million ($17 million after-tax, or $0.33 per basic and diluted share) in fiscal 1999. The original charge included severance and other employee costs of approximately $16 million, related to a net reduction of approximately 350 employees, with the balance primarily associated with facility-related costs from the rationalization of operations. All restructuring actions had been completed as of June 30, 2000, and have resulted in lower-than-expected severance and other employee costs of approximately $2 million and higher facility-related costs of approximately $2 million. As of September 30, 2000, approximately $12 million has been paid in termination benefits for a net reduction of approximately 500 employees, with approximately $2 million remaining in Other Current Liabilities for final termination benefits. The net reduction of employees primarily related to LVS businesses. These charges are included in the caption Restructuring Costs in the accompanying Statement of Consolidated Income. 7. INVENTORIES Inventories are summarized as follows (in millions):
September 30, ----------------- 2000 1999 ------ ------ Finished goods $ 298 $ 181 Work in process 142 117 Raw materials, parts and supplies 195 145 ----- ----- Total 635 443 Less allowance to adjust the carrying value of certain inventories (2000, $125; 1999, $135) to a LIFO basis 52 51 ----- ----- Inventories $ 583 $ 392 ===== =====
10 33 8. OTHER CURRENT ASSETS Other Current Assets are summarized as follows (in millions):
September 30, ------------------- 2000 1999 ------ ----- Current deferred income taxes (see Note 19) $ 122 $ 83 Customer tooling 37 30 Prepaid and other 53 17 ----- ----- Other Current Assets $ 212 $ 130 ===== =====
9. NET PROPERTY Net Property is summarized as follows (in millions):
September 30, --------------------- 2000 1999 ------ ----- Property at cost: Land and land improvements $ 66 $ 33 Buildings 400 308 Machinery and equipment 1,572 1,217 Company-owned tooling 190 194 Construction in progress 221 113 ------- ------ Total 2,449 1,865 Less accumulated depreciation 1,101 1,099 ------- ------ Net Property $ 1,348 $ 766 ======= ======
10. OTHER ASSETS Other Assets are summarized as follows (in millions):
September 30, ---------------------- 2000 1999 ------ ----- Long-term deferred income taxes (see Note 19) $ 9 $ 71 Investments in affiliates 200 50 Prepaid pension costs (see Note 18) 78 66 Net capitalized computer software costs 41 34 Patents, trademarks and licenses 38 8 Other 61 15 ------ ------ Other Assets $ 427 $ 244 ====== ======
11 34 11. OTHER CURRENT LIABILITIES Other Current Liabilities are summarized as follows (in millions):
September 30, --------------------- 2000 1999 ------ ------ Accrued product warranties $ 95 $ 95 Accrued taxes other than income taxes 36 27 Accrued restructuring 16 11 Environmental reserves 11 10 Other 96 53 ------ ------ Other Current Liabilities $ 254 $ 196 ====== ======
12. OTHER LIABILITIES Other Liabilities are summarized as follows (in millions):
September 30, -------------------- 2000 1999 ------ ------- Environmental reserves $ 27 $ 14 Deferred payments 34 44 Other 52 58 ------ ------- Other Liabilities $ 113 $ 116 ====== =======
13. LONG-TERM DEBT Long-Term Debt, net of discount where applicable, is summarized as follows (in millions):
September 30, -------------------- 2000 1999 ------- ------ 6 7/8 percent notes due 2001 $ 75 $ - 7.94 percent notes due 2005 50 - 6 3/4 percent notes due 2008 100 - 7 1/8 percent notes due 2009 150 - 6.8 percent notes due 2009 498 498 Commercial paper 560 - Bank revolving credit facilities 194 239 Lines of credit and other 93 109 ------- ------ Subtotal 1,720 846 Less: current maturities (183) (44) ------- ------ Long-Term Debt $ 1,537 $ 802 ======= ======
12 35 During July 2000, the company entered into two unsecured credit facilities: a 364-day, $750-million credit facility which matures on June 27, 2001, with the option to convert borrowings thereunder to a two-year term loan, and a five-year, $750-million revolving credit facility, which matures on June 27, 2005. The new credit facilities became effective on the date of the merger, canceling existing credit agreements of Arvin and Meritor, and will be used for general corporate purposes of the company. Borrowings are subject to interest based on quoted market rates plus a margin, in addition to a facility fee, both of which are based on the company's credit rating. At September 30, 2000, the margin over the LIBOR rate was 57.5 basis points, which includes the facility fee of 12.5 basis points. At September 30, 2000, the company was in compliance with all covenants and there have been no events of default. During September 2000, the company instituted a commercial paper program with authorized borrowings of up to $1 billion. At September 30, 2000, borrowings under the commercial paper program totaled approximately $560 million, at an average interest rate of 6.8 percent. Commercial paper borrowings are backed by the revolving credit facility, of which $500 million is classified as long-term debt and $60 million is classified as short-term debt. The company has $85 million of unsecured lines of credit with interest rates determined at the time of borrowing. At September 30, 2000, there were no outstanding borrowings under these facilities. These lines of credit expire in September 2001. Included in the Balance Sheet are $74 million of 9.5-percent company-obligated mandatorily redeemable preferred capital securities ("capital securities"), issued by a wholly owned subsidiary trust of ArvinMeritor, due February 1, 2027, and callable in February 2007. The company fully and unconditionally guarantees the subsidiary trust's obligation under the capital securities. Future minimum lease payments on operating leases are $28 million in 2001, $27 million in 2002, $19 million in 2003, $15 million in 2004, $14 million in 2005 and $58 million thereafter. 14. FINANCIAL INSTRUMENTS ArvinMeritor's financial instruments include cash, short- and long-term debt and foreign currency forward exchange contracts. As of September 30, 2000 and 1999, the carrying values of the company's financial instruments approximated their fair values, based on prevailing market prices and rates. It is the policy of the company not to enter into derivative financial instruments for speculative purposes. The company does enter into foreign currency forward exchange contracts to minimize the risk of unanticipated gains and losses from currency rate fluctuations on foreign currency commitments entered into in the ordinary course of business. These foreign currency forward exchange contracts relate to purchase and sales transactions and are generally for terms of less than one year. The foreign currency forward exchange contracts are executed with creditworthy banks and are denominated in currencies of major industrial countries. The notional amount of outstanding foreign currency forward exchange contracts aggregated $222 million and $266 million at September 30, 2000 and 1999, respectively. ArvinMeritor does not anticipate any material adverse effect on its results of operations or financial position relating to these foreign currency forward exchange contracts. 13 36 In anticipation of offering debt securities in October 1998, the company entered into interest rate agreements in April 1998 to secure interest rates. The planned issuance of the debt securities did not occur in fiscal 1998, and the company settled certain interest rate agreements associated with the then-planned offering of debt securities, resulting in a payment in the first quarter of fiscal 1999 of $31 million. The accounting treatment of the settlement payment was a one-time charge of $31 million ($19 million after-tax, or $0.36 per basic and diluted share). 15. CAPITAL STOCK The company is authorized to issue 500 million shares of Common Stock, with a par value of $1 per share, and 30 million shares of Preferred Stock, without par value, of which two million shares are designated as Series A Junior Participating Preferred Stock (Junior Preferred Stock). Under the Company Rights Plan, a Preferred Share Purchase Right (Right) is attached to each share of Common Stock pursuant to which the holder may, in certain takeover-related circumstances, become entitled to purchase from the company 1/100th of a share of Junior Preferred Stock at a price of $100, subject to adjustment. Also, in certain takeover-related circumstances, each Right (other than those held by an acquiring person) will be exercisable for shares of Common Stock or stock of the acquiring person having a market value of twice the exercise price. In certain events, each Right may be exchanged by the company for one share of Common Stock or 1/100th of a share of Junior Preferred Stock. The Rights will expire on July 7, 2010, unless earlier exchanged or redeemed at a redemption price of $0.01 per Right. Until a Right is exercised, the holder, as such, will have no voting, dividend or other rights as a shareowner of the company. The company has reserved approximately 9.5 million shares of Common Stock in connection with its 1997 Long-Term Incentives Plan (the 1997 LTIP), Directors Stock Plan and Incentive Compensation Plan for grants of non-qualified stock options, incentive stock options, stock appreciation rights, restricted stock and stock awards to key employees and the company's directors. At September 30, 2000, there were six million shares available for future grants under these plans. In July 2000, the company's board of directors authorized a program to repurchase up to $100 million of its common stock. Under the program, the company will purchase shares periodically in the open market or through privately negotiated transactions as market conditions warrant and in accordance with Securities and Exchange Commission rules. As of September 30, 2000, 3.1 million shares of ArvinMeritor common stock had been purchased under this program at an aggregate cost of approximately $53 million, or an average of $16.98 per share. In September 1999, Meritor's board of directors authorized the purchase of up to $125 million of Meritor's common stock and in February 2000, the board of directors authorized an additional $75 million for such purpose. Meritor purchased 5,120,400 shares at an aggregate cost of approximately $125 million, or an average of $24.51 per share, under these programs before they were suspended in February 2000 in anticipation of entering into a definitive agreement to merge with Arvin. The treasury stock was cancelled in connection with the merger. 14 37 16. STOCK OPTIONS Stock options granted under the plans described in Note 15 expire ten years from the date of grant and generally have a vesting period of three years. The stock options granted are exercisable at prices equal to the fair market value of Common Stock on the dates the options are granted; accordingly, no compensation expense has been recognized for the stock option plans. All Meritor option quantities and exercise prices have been adjusted for the one Meritor share for 0.75 ArvinMeritor shares exchange ratio as part of the merger (see Note 3). Upon completion of the merger, each outstanding option to purchase one share of Arvin common stock was converted into an option to purchase one share of ArvinMeritor common stock, plus $1.00 per share reduction of the exercise price. The converted options generally expire ten years from the date of the original grant and vested immediately upon the merger being consummated. The Arvin stock options originally granted were exercisable at prices not less than the fair market value of Arvin's common stock on the dates the options were granted. Accordingly, no compensation expense has been recognized for the stock option plans. The Arvin stock options were valued using the Black-Scholes options model and the fair value of the options was included in the purchase price of Arvin, as described in Note 3. All of the converted options are exercisable at prices greater than the fair market value of ArvinMeritor common stock on the date of the conversion. Information relative to stock options is as follows (shares in thousands):
Weighted Average Exercise Shares Price ------ ------- Options outstanding on October 1, 1997 276 $ 31.71 Granted 2,282 29.87 Exercised (3) 30.21 Cancelled (220) 29.91 ------ ------- Options outstanding at September 30, 1998 2,335 30.08 Granted 629 27.37 Exercised (22) 29.83 Cancelled (218) 29.62 ------ ------- Options outstanding at September 30, 1999 2,724 29.49 Granted 729 22.09 Conversion of Arvin options at July 7, 2000 3,118 28.10 Exercised - Cancelled (176) 29.96 ------- ------- Options outstanding at September 30, 2000 6,395 $ 28.04 ======= ======= Exercisable at September 30, 1998: 85 $31.73 Exercisable at September 30, 1999: 621 30.42 Exercisable at September 30, 2000: 4,878 28.77
15 38 Options outstanding at September 30, 2000, are summarized as follows (shares in thousands):
Price range ------------------------------------- $17.01- $23.01- $29.01- $35.01 $23.00 $29.00 $35.00 $41.00 ------------------------------------- Options outstanding 1,914 983 2,459 1,039 Weighted average remaining life (years) 8.3 5.8 6.9 7.9 Weighted average exercise price $20.45 $26.88 $30.17 $38.06 Options exercisable 1,200 626 2,013 1,039 Weighted average price of options exercisable $19.52 $26.49 $30.20 $38.06
If the company accounted for its stock-based compensation plans using the fair value method provided by SFAS 123, the company's 2000, 1999 and 1998 net income and earnings per share would have been reduced to pro forma net income of $212 million, $188 million and $142 million, respectively, and pro forma earnings per share of $4.01, $3.63 and $2.74, respectively. The weighted average fair value of options granted was $8.16, $7.79 and $9.34 per share in 2000, 1999 and 1998, respectively. The fair value of each option was estimated on the date of grant using the Black-Scholes pricing model utilizing the following assumptions:
2000 1999 1998 ------------ ----------- ----------- Volatility 35.0% 31.0% 31.0% Life 5 years 5 years 5 years Dividend yield rate 5.0% 2.0% 2.0% Risk free interest rate 6.1% 4.8% 5.8%
17. RETIREMENT MEDICAL PLANS ArvinMeritor has retirement medical plans that cover the majority of its U.S. and certain non-U.S. employees and provide for medical payments to eligible employees and dependents upon retirement. The components of retirement medical expense are as follows (in millions):
2000 1999 1998 ------ ----- ----- Service cost $ 2 $ 3 $ 2 Interest cost 33 29 28 Amortization of unrecognized amounts (1) 1 (1) ----- ----- ----- Retirement medical expense $ 34 $ 33 $ 29 ====== ===== =====
16 39 The accumulated benefit obligation is summarized as follows (in millions): Accumulated benefit obligation:
2000 1999 ------ ------ Retirees $ 397 $ 384 Employees eligible to retire 22 19 Employees not eligible to retire 46 34 ------ ------ Total accumulated benefit obligation $ 465 $ 437 ======= ======
The following reconciles the change in retiree medical accumulated benefit obligation and the amounts included in the balance sheet (in millions): Change in accumulated benefit obligation:
2000 1999 ------ ------ Accumulated benefit obligation at beginning of year $ 437 $ 454 Service cost 2 3 Interest cost 33 29 Plan amendments (1) - Acquisitions 47 2 Divestitures (2) - Actuarial gains (2) (10) Benefits paid ($36 million in fiscal 1998) (49) (41) ------ ------ Accumulated benefit obligation at end of year 465 437 Items not recognized in the balance sheet: Plan amendments 10 15 Actuarial losses (150) (157) ------- ------ Recorded liability at September 30 $ 325 $ 295 ------ ------
The weighted average discount rates (using a June 30 measurement date) were 8.0 percent in fiscal 2000 and 7.5 percent in fiscal 1999. For measurement purposes, a 6.9-percent and 8.3-percent annual increase in the pre- and post-65 per capita cost of covered health care benefits was assumed for 2000. The rate was assumed to decrease gradually to 5.0 percent for 2011 and remain at that level thereafter. Increasing the health care cost trend rates by one percentage point would increase the accumulated obligation at September 30, 2000, by approximately $40 million and would increase total expense by approximately $4 million. Decreasing the health care cost trend rates by one percentage point would decrease the accumulated obligation at September 30, 2000, by approximately $36 million and would decrease total expense by approximately $3 million. 18. RETIREMENT PENSION PLANS ArvinMeritor sponsors defined benefit pension plans that cover most of its U.S. employees and certain non-U.S. employees. Pension benefits for salaried employees are based on years of credited service and compensation. Pension benefits for hourly employees are based on years of service and specified benefit amounts. The company's funding policy provides that annual contributions to the pension trusts will be at least equal to the minimum amounts required by ERISA in the U.S. and the actuarial recommendations or statutory requirements in other countries. 17 40 Certain of the company's non-U.S. subsidiaries provide limited non-pension benefits to retirees in addition to government-sponsored programs. The cost of these programs is not significant to the company. Most retirees outside the U.S. are covered by government-sponsored and administered programs. Net pension expense consisted of the following (in millions):
2000 1999 1998 ------ ------ ----- Service cost $ 22 $ 21 $ 15 Interest cost 37 22 18 Assumed return on plan assets (40) (25) (15) Amortization of unrecognized amounts 5 1 3 ----- ----- ----- Net pension expense $ 24 $ 19 $ 21 ===== ===== =====
The following reconciles the change in pension projected benefit obligation, the change in plan assets and the amounts included in the balance sheet (in millions): Change in projected benefit obligation:
2000 1999 ------ ------ Projected benefit obligation at beginning of year $ 445 $ 318 Service cost 22 21 Interest cost 37 22 Participant contributions 1 2 Plan amendments (1) 3 Acquisitions 423 81 Divestitures (4) - Actuarial (gains)losses (21) 19 Special termination benefits - 1 Benefits paid (21) (19) Foreign exchange rate changes (29) (3) ----- ----- Projected benefit obligation at end of year 852 445 ----- ----- Change in plan assets: Fair value of plan assets at beginning of year 368 237 Actual return on plan assets 29 10 Employer contributions 40 30 Plan participants' contributions 1 2 Acquisitions 443 109 Divestitures (2) - Benefits paid (21) (19) Foreign exchange rate changes (28) (1) ----- ----- Fair value of plan assets at end of year 830 368 ----- ----- Funded status (22) (77) Items not recognized in the balance sheet: Actuarial losses 26 41 Prior service cost 9 15 Net initial asset (9) (12) ----- ----- Net prepaid (accrued) pension costs $ 4 $ (33) ===== =====
18 41 Amounts recognized in the balance sheet at September 30 consisted of:
2000 1999 ---- ---- Prepaid pension asset $ 78 $ 66 Accrued pension liability (76) (104) Intangible asset 2 5 ----- ----- Net amount recognized $ 4 $ (33) ===== =====
The projected benefit obligation, accumulated benefit obligation, and fair value of plan assets for the pension plans with accumulated benefit obligations in excess of plan assets were $73 million, $61 million and $0 million, respectively, as of September 30, 2000, and $235 million, $177 million and $80 million, respectively, as of September 30, 1999. Assumptions used (June 30 measurement date):
2000 1999 -------- --------- Discount rate 6.3-8.0% 6.0 -7.5% Compensation increase rate 2.8-4.5% 2.5- 4.5% Long-term rate of return on plan assets 9.0-9.5% 9.0%
The company also sponsors certain defined contribution savings plans for eligible employees. Expense related to these plans was $8 million, $6 million and $6 million for fiscal 2000, 1999 and 1998, respectively. 19. INCOME TAXES The components of the Provision for Income Taxes are summarized as follows (in millions):
2000 1999 1998 ---- ---- ---- Current tax expense: U.S. $ 17 $ 38 $ 37 Foreign 91 64 66 State and local 1 10 9 ------ ------ ------ Total current tax expense 109 112 112 ------ ------ ------ Deferred tax expense (benefit): U.S. 30 13 (4) Foreign (3) 3 (3) State and local 5 1 (3) ------ ------ ------ Total deferred tax expense (benefit) 32 17 (10) ------ ------ ------ Provision for income taxes $ 141 129 $ 102 ====== ====== ======
The deferred tax expense represents tax deductions related to previously accrued expenses. The deferred tax benefit represents the tax impact related to certain accrued expenses that have been recorded for financial statement purposes but are not deductible for income tax purposes until paid. 19 42 Net deferred income tax benefits included in Other Current Assets in the accompanying Consolidated Balance Sheet consist of the tax effects of temporary differences related to the following (in millions):
September 30, ----------------------- 2000 1999 ------ ------ Accrued product warranties $ 32 $ 31 Accrued compensation and benefits 36 26 Accrued restructuring 5 3 Inventory costs 29 (7) Receivables 16 5 Other-net 4 25 ------ ------ Current deferred income taxes $ 122 $ 83 ====== ======
Net deferred income tax benefits included in Other Assets in the accompanying Consolidated Balance Sheet consist of the tax effects of temporary differences related to the following (in millions):
September 30, ---------------------- 2000 1999 ------ ----- Accrued retirement medical costs $ 111 $ 100 Property (99) (54) Pensions (16) 8 Loss and credit carryforwards 38 30 Other (10) 4 ------ ------ Subtotal 24 88 Valuation allowance (15) (17) ------ ------ Long-term deferred income taxes $ 9 $ 71 ====== ======
Management believes it is more likely than not that current and long-term deferred tax benefits will reduce future current income tax expense and payments. Significant factors considered by management in its determination of the probability of the realization of the deferred tax benefits included: (a) historical operating results, (b) expectations of future earnings and (c) the extended period of time over which the retirement medical liability will be paid. The valuation allowance represents the amount of tax benefits related to net operating loss and tax credit carryforwards, which management believes are not likely to be realized. The carryforward periods for $20 million of net operating losses and tax credit carryforwards expire between 2001 and 2010. The carryforward period for the remaining net operating losses and tax credits is indefinite. The company's effective tax rate was different from the U.S. statutory rate for the reasons set forth below:
2000 1999 1998 ---- ---- ---- Statutory tax rate 35.0% 35.0% 35.0% State and local income taxes 1.2 2.3 1.6 Foreign income taxes 1.4 1.1 2.7 Recognition of tax loss carryforwards - - (2.0) Sale of business - basis difference - (1.2) - Tax on undistributed foreign earnings 0.7 1.2 1.6 Other (0.1) 0.4 1.1 ------ ------ ------ Effective tax rate 38.2% 38.8% 40.0% ====== ====== ======
20 43 The income tax provisions were calculated based upon the following components of income before income taxes (in millions):
2000 1999 1998 ---- ---- ---- U.S. income $ 139 $ 160 $ 86 Foreign income 230 173 170 ------- ------ ------ Total $ 369 $ 333 $ 256 ======= ====== ======
No provision has been made for U.S., state or additional foreign income taxes related to approximately $208 million of undistributed earnings of foreign subsidiaries that have been or are intended to be permanently reinvested. 20. SUPPLEMENTAL FINANCIAL INFORMATION
2000 1999 1998 ---- ---- ---- (In millions) Statement of income data: Maintenance and repairs expense $ 86 $ 74 $ 72 Research, development and engineering expense 115 117 111 Rental expense 26 23 18 Statement of cash flows data: Interest payments $ 95 $ 61 $ 43 Income tax payments 100 95 116 Distribution tax payment - - 72
21. CONTINGENT LIABILITIES Federal, state and local requirements relating to the discharge of substances into the environment, the disposal of hazardous wastes and other activities affecting the environment have, and will continue to have, an impact on the manufacturing operations of the company. Thus far, compliance with environmental requirements and resolution of environmental claims have been accomplished without material effect on the company's liquidity and capital resources, competitive position or financial statements. The company has been designated as a potentially responsible party at 10 Superfund sites, excluding sites as to which the company's records disclose no involvement or as to which the company's potential liability has been finally determined. Management estimates the total, reasonably possible costs the company could incur for the remediation of Superfund sites at September 30, 2000, to be approximately $20 million, of which $13 million has been accrued. Various other lawsuits, claims and proceedings have been asserted against the company, alleging violations of federal, state and local environmental protection requirements, or seeking remediation of alleged environmental impairments, principally at previously disposed-of properties. For these matters, management has estimated the total, reasonably possible costs the company could incur at September 30, 2000, to be approximately $50 million, of which $25 million has been recorded. Based on its assessment, management believes that the company's expenditures for environmental capital investment and remediation necessary to comply with present regulations governing environmental protection and other expenditures for the resolution of environmental claims will not have a material adverse effect on the company's liquidity and capital resources, competitive position or financial statements. Management cannot assess the possible effect of compliance with future requirements. Various other lawsuits, claims and proceedings have been or may be instituted or asserted against the company, relating to the conduct of its business, including those pertaining to product liability, intellectual property, safety and health, and employment matters. Although the outcome of litigation cannot be predicted with certainty, and some lawsuits, claims or proceedings may be disposed of unfavorably to the company, management believes the disposition of matters that are pending or asserted will not have a material adverse effect on the company's financial statements. 21 44 22. BUSINESS SEGMENT INFORMATION ArvinMeritor currently has three reportable operating segments: LVS, CVS and LVA. LVS is a major supplier of exhaust systems, aperture systems (primarily roof and door systems) and undercarriage systems (primarily suspension, ride and motion control, and wheel products) for passenger cars, light trucks and sport utility vehicles to original equipment manufacturers. CVS is a leading supplier of drivetrain systems and components, including axles, brakes, and drivelines, for medium- and heavy-duty trucks, trailers and off-highway equipment and specialty vehicles. LVA supplies exhaust, ride control, filter products and accessories to the light vehicle aftermarket. Business units that are not focused on automotive products are classified as "Other." The company's Coil Coating division is the primary component of this classification. Revenues are attributed to geographic areas, based on the location of the assets producing the revenues. Segment information is summarized as follows: Sales (in millions):
2000 1999 1998 ---- ---- ---- Light Vehicle Systems $ 2,031 $ 1,575 $ 1,475 Commercial Vehicle Systems 2,872 2,875 2,361 Light Vehicle Aftermarket 209 - - Other 41 - - -------- --------- -------- Total $ 5,153 $ 4,450 $ 3,836 ======== ========= ======== Earnings (in millions): 2000 1999 1998 ---- ----- ---- Operating income: Light Vehicle Systems $ 149 $ 129 $ 86 Commercial Vehicle Systems 221 232 212 Light Vehicle Aftermarket 6 - - Other - - - Restructuring costs (26) (28) Merger expenses (10) - - Gain on sale of business and other 89 24 - -------- --------- -------- Operating income 429 357 298 Other income - 2 - Equity in earnings of affiliates 29 35 28 Interest-rate settlement cost - - (31) Interest expense, net (89) (61) (39) -------- --------- -------- Income before income taxes 369 333 256 Provision for income taxes (141) (129) (102) Minority interests (10) (10) (7) -------- --------- -------- Net income $ 218 $ 194 $ 147 ======== ========= ======== Depreciation and Amortization (in millions): 2000 1999 1998 ---- ---- ---- Light Vehicle Systems $ 55 $ 45 $ 44 Commercial Vehicle Systems 98 86 58 Light Vehicle Aftermarket 7 - - Other 2 - - -------- --------- -------- Total depreciation and amortization $ 162 $ 131 $ 102 ======== ========= ======== Capital Expenditures (in millions): 2000 1999 1998 ---- ----- ---- Light Vehicle Systems $ 106 $ 55 $ 58 Commercial Vehicle Systems 112 115 81 Light Vehicle Aftermarket 5 - - Other 2 - - -------- --------- -------- Total capital expenditures $ 225 $ 170 $ 139 ======== ========= ========
22 45
Segment Assets (in millions): 2000 1999 1998 ---- ---- ---- Light Vehicle Systems $ 1,739 $ 701 $ 741 Commercial Vehicle Systems 1,783 1,814 1,049 Light Vehicle Aftermarket 751 - - Other 107 - - -------- --------- -------- Segment total assets 4,380 2,515 1,790 Corporate (1) 340 281 296 -------- --------- -------- Total assets $ 4,720 $ 2,796 $ 2,086 ======== ========= ========
(1) Consists primarily of cash, taxes and prepaid pension costs. Information on the company's geographic areas is summarized as follows: Sales by Geographic Area (in millions):
2000 1999 1998 ---- ---- ---- U.S. $ 2,576 $ 2,249 $ 1,848 Canada 441 476 414 Mexico 235 145 124 -------- --------- -------- Total North America 3,252 2,870 2,386 France 394 398 411 U.K. 345 271 251 Other Europe 769 584 431 -------- --------- -------- Total Europe 1,508 1,253 1,093 Other 393 327 357 -------- --------- -------- Total sales $ 5,153 $ 4,450 $ 3,836 ======== ========= ======== Assets by Geographic Area (in millions): 2000 1999 1998 ---- ----- ---- U.S. $ 2,251 $ 1,375 $ 937 Canada 220 150 146 Mexico 149 83 82 -------- --------- -------- Total North America 2,620 1,608 1,165 U.K. 602 346 128 France 256 191 202 Other Europe 842 402 309 -------- --------- -------- Total Europe 1,700 939 639 Other 400 249 282 -------- --------- -------- Total assets $4,720 $2,796 $2,086 ======== ========= ========
Sales to one original equipment manufacturer represented 18 percent of the company's sales in fiscal 2000 and 23 percent of the company's sales in fiscal 1999 and 1998. These sales include other customers acquired or merged with this customer. No other customer comprised 10 percent or more of the company's sales in the three years ended September 30, 2000. 23 46 23. QUARTERLY FINANCIAL INFORMATION (UNAUDITED) The following is a condensed summary of the company's unaudited quarterly results of operations for fiscal 2000 and 1999 and stock price data for fiscal 2000. The per share amounts are based on the weighted average shares outstanding for that quarter. All historical per share amounts, including stock prices, prior to the merger date have been adjusted for the one for 0.75 exchange ratio as part of the merger (see Note 3).
2000 Fiscal Quarters -------------------- First Second Third Fourth 2000 ----- ------ ----- ------ ---- (In millions, except share-related data) Sales $ 1,136 $ 1,196 $ 1,141 $ 1,680 $ 5,153 Cost of sales 966 1,000 956 1,488 4,410 Net income 97 57 40 24 218 Net income per share (basic and diluted) 1.94 1.22 0.86 0.35 4.12 Stock Prices High $ 28.58 $ 26.50 $ 22.33 $ 18.63 $ 28.58 Low $ 20.00 $ 18.17 $ 14.67 $ 13.75 $ 13.75
First quarter 2000 net income included a gain on sale of business of $83 million ($51 million after-tax, or $1.02 per share) (see Note 5) and third quarter 2000 net income included a restructuring charge of $26 million ($16 million after-tax, or $0.34 per share) (see Note 6), and a gain on the sale of land of $6 million ($3 million after-tax, or $0.06 per share). Third and fourth quarters include merger expenses of $2 million and $8 million, respectively ($1 million and $5 million after-tax, respectively and $0.02 and $0.07 per share, respectively).
1999 Fiscal Quarters -------------------- First Second Third Fourth 1999 ----- ------ ----- ------ ---- (In millions, except share-related data) Sales $ 944 $ 1,163 $ 1,217 $ 1,126 $ 4,450 Cost of sales 815 988 1,033 962 3,798 Net income 40 50 39 65 194 Net income per share (basic and diluted) 0.77 0.97 0.75 1.25 3.75
Third quarter 1999 net income included a restructuring charge of $28 million ($17 million after-tax, or $0.33 per share) (see Note 6) and fourth quarter 1999 net income included a gain on sale of business of $24 million ($18 million after-tax, or $0.35 per share) (see Note 5). 24.SUBSEQUENT EVENT (UNAUDITED) On November 8, 2000, the company announced restructuring actions to realign operations at selected facilities around the world. These actions are expected to have a total cost of approximately $90 million, with the majority of the cost accounted for as a restructuring charge of $60 million in the first quarter of 2001. Of the remaining cost, $15 million will be accounted for as an adjustment to the fair value of liabilities assumed in conjunction with the ArvinMeritor merger, and $15 million will be accounted for as period costs during 2001, as incurred. The total restructuring cost of $90 million is comprised of employee severance benefits of $50 million related to a net reduction of 1,500 employees, asset rationalization costs of $25 million, and equipment relocation and other costs of $15 million. The costs of these restructuring activities relate approximately 50 percent to CVS, 35 percent to LVS and 15 percent to LVA. 24 47 ARVINMERITOR, INC. SELECTED FINANCIAL DATA (IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
Year Ended September 30, 2000 1999 1998 1997 1996 - ----------------------------------------------------------------------------------------------------------------------------------- SUMMARY OF OPERATIONS Sales Light Vehicle Systems $ 2,031 $ 1,575 $ 1,475 $ 1,352 $ 1,317 Commercial Vehicle Systems 2,872 2,875 2,361 1,957 1,827 Light Vehicle Aftermarket 209 - - - - Other 41 - - - - ------- ------- ------- ------- -------- Total $ 5,153 $ 4,450 $ 3,836 $ 3,309 $ 3,144 ======== ======= ======= ======= ======= Net income 218 (1) 194 (1) 147 (1) 109 114 Basic and diluted earnings per share (2) $ 4.12 (1) $ 3.75 (1) $ 2.84 (1) N/A N/A Cash dividends per share (2) $ 0.64 $ 0.56 $ 0.56 N/A N/A - ----------------------------------------------------------------------------------------------------------------------------------- FINANCIAL POSITION AT SEPTEMBER 30 Total assets 4,720 2796 2,086 2,002 1,830 Short-term debt 183 44 34 21 8 Long-term debt 1,537 802 313 465 24 Capital Securities 74 - - - -
OTHER DATA (1) Net income and basic and diluted earnings per share for fiscal year 2000 includes a one-time gain of $89 million ($54 million after-tax, or $1.01 per share) for the sale of the seat adjusting systems business and other assets, restructuring costs of $26 million ($16 million after-tax, or $0.30 per share), and merger expenses of $10 million ($6 million after-tax, or $0.11 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. (2) As the company began operations as a stand-alone entity on September 30, 1997, per share data for years ending prior to September 30, 1998, are not applicable. EX-21 11 y43624ex21.txt LIST OF SUBSIDIARIES OF THE COMPANY 1 Exhibit 21 ARVINMERITOR, INC. LIST OF SUBSIDIARIES OF THE COMPANY AS OF SEPTEMBER 30, 2000
PERCENTAGE OF VOTING SECURITIES OWNED BY NAME AND JURISDICTION REGISTRANT SUBSIDIARY --------------------- ---------- ---------- Meritor Heavy Vehicle Systems, LLC (Delaware)............. 100% Meritor Light Vehicle Systems, Inc. (Delaware)............ 100% Meritor Holdings, LLC (Delaware).......................... 100% Meritor Finance Cayman Islands, Ltd.(Cayman Islands) 100% Meritor do Brasil Ltda. (Brazil)........... 100%(1) Meritor Holdings Netherlands B.V. (Netherlands)... 100% Meritor Automotive GmbH (Germany)................. 100%(2) Meritor Automotive Canada Inc. (Canada)............ 100% Meritor Automotive Limited (England).............. 100% Meritor France (France).................... 100% Maremont Corporation (Delaware).............................100% AVM, Inc. (South Carolina).......................... 100% Maremont Exhaust Products, Inc. (Delaware).......... 100% Gabriel Ride Control Products, Inc. (Delaware)...... 100% Arvin-Kayaba, LLC (Indiana).................. 50.1% Arvin International Holdings, Inc. (Delaware)...............100% Arvin International U.K. PLC (United Kingdom)......... 100% Arvin Exhaust Limited (United Kingdom)......... 100%
2 Exhibit 21 Arvin Replacement Products Limited (United Kingdom)... 100% Arvin Exhaust S.A. (Spain).................................. 100% A.P. Amortiguadores S.A. (Spain)............................ 75% Arvin Replacement Products S.p.A. (Italy)................... 100% Arvin International Holland B.V. (Netherlands).............. 100% Arvin Exhaust B.V. (Netherlands)..................... 100% Purolator Products Company (Delaware)............................... 100% Purolator Products NA, Inc. (Delaware)...................... 100% Roll Coater, Inc. (Indiana)......................................... 100% Arvin Technologies, Inc. (Michigan)................................. 100% Arvin Canada Holding Limited (Canada)............................... 82% 18%(3) Arvin Ride Control Products, Inc. (Canada).................. 100% Arvin France S.A. (France)........................................... 73.5% 26.5%(4) Arvin Exhaust S.A. (France)................................. 100% Arvin Replacement Products S.A. (France)............................ 100%(5) Arvin Exhaust S.p.A. (Italy)........................................ 100%(6) Arvin Exhaust do Brasil Ltda. (Brazil).............................. 12.5% 87.5%(7)
- -------------- 1 100% of the voting securities of Meritor do Brasil Ltda. is owned by Meritor Participacoes Ltda., a holding company all of the voting securities of which is owned by Meritor Finance Cayman Islands. 2 1% of the voting securities of Meritor Automotive GmbH is owned by Meritor Heavy Vehicle Systems Limited, 75% is owned by Meritor Automotive BV and 24% is owned by Meritor Holdings Netherlands B.V. 3 18% of the voting securities of Arvin Canada Holding Limited is owned by Arvin Finance Company of Canada. 3 Exhibit 21 4 26.5% of the voting securities of Arvin France S.A. is owned by Arvin Ride Control Products, Inc. 5 100% of the voting securities of Arvin Replacement Products S.A. is owned by Financiere Rosi S.A. which is owned 100% by Arvin International Holdings, Inc. 6 99% of the voting securities of Arvin Exhaust S.p.A. is owned by Arvin International Holland B.V. and 1% is owned by Arvin Exhaust B.V. 7 60% of the voting shares of Arvin Exhaust do Brasil Ltda. is owned by Arvin Industriea Comerciao e Participacoes Ltda. and 27.5% is owned by Arvin Automotiva Industria e Comerciao Ltda. Listed above are certain consolidated subsidiaries included in the financial statements of the Company at September 30, 2000. EX-23.A 12 y43624ex23-a.txt CONSENT OF M. LEE MURRAH, ESQ 1 Exhibit 23-a CONSENT OF EXPERT I consent to the reference to me under the heading "Item 3. Legal Proceedings" in the Annual Report on Form 10-K of ArvinMeritor, Inc. ("ArvinMeritor") for the year ended September 30, 2000, and to the incorporation by reference of such reference into the following Registration Statements of ArvinMeritor:
Form Registration No. Purpose ---- --------------- ------- S-8 333-49608 Meritor Automotive, Inc. Savings Plan S-8 333-49610 Meritor Automotive, Inc. 1997 Long-Term Incentives Plan S-8 333-42012 Arvin Industries, Inc. Employee Stock Benefit Plan and 1988 and 1998 Employee Stock Benefit Plans S-8 333-42014 Arvin Industries, Inc. Savings Plan and Employee Savings Plan S-3 333-43110 Arvin Industries, Inc. Employee Savings Plan S-3 333-43112 Arvin Industries, Inc. Employee Stock Benefit Plan S-3 333-43116 Arvin Industries, Inc. 1998 Stock Benefit Plan S-3 333-43118 Arvin Industries, Inc. 1988 Stock Benefit Plan S-3 333-43146 Arvin Industries, Inc. Savings Plan /s/ M. Lee Murrah ----------------- M. Lee Murrah, Assistant General Counsel of ArvinMeritor, Inc.
Date: December 21, 2000 EX-23.B 13 y43624ex23-b.txt CONSENT OF VERNON G. BAKER, II, ESQ. 1 Exhibit 23-b CONSENT OF EXPERT I consent to the references to me under the headings "Item 1. Business - Environmental Matters" and "Item 3. Legal Proceedings" in the Annual Report on Form 10-K of ArvinMeritor, Inc. ("ArvinMeritor") for the year ended September 30, 2000. I also consent to the incorporation by reference of such references into the following Registration Statements of ArvinMeritor:
Form Registration No. Purpose ---- --------------- ------- S-8 333-49608 Meritor Automotive, Inc. Savings Plan S-8 333-49610 Meritor Automotive, Inc. 1997 Long-Term Incentives Plan S-8 333-42012 Arvin Industries, Inc. Employee Stock Benefit Plan and 1988 and 1998 Employee Stock Benefit Plans S-8 333-42014 Arvin Industries, Inc. Savings Plan and Employee Savings Plan S-3 333-43110 Arvin Industries, Inc. Employee Savings Plan S-3 333-43112 Arvin Industries, Inc. Employee Stock Benefit Plan S-3 333-43116 Arvin Industries, Inc. 1998 Stock Benefit Plan S-3 333-43118 Arvin Industries, Inc. 1988 Stock Benefit Plan S-3 333-43146 Arvin Industries, Inc. Savings Plan /s/ Vernon G. Baker, II ----------------------- Vernon G. Baker, II Senior Vice President, General Counsel and Secretary of ArvinMeritor, Inc.
Date: December 21, 2000 EX-23.C 14 y43624ex23-c.txt INDEPENDENT AUDITORS' CONSENT 1 Exhibit 23-c INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference of our reports dated November 7, 2000, appearing in and incorporated by reference in the Annual Report on Form 10-K of ArvinMeritor, Inc. for the year ended September 30, 2000 in the following Registration Statements of ArvinMeritor, Inc.:
Form Registration No. Purpose ---- --------------- ------- S-8 333-49608 Meritor Automotive, Inc. Savings Plan S-8 333-49610 Meritor Automotive, Inc. 1997 Long-Term Incentives Plan S-8 333-42012 Arvin Industries, Inc. Employee Stock Benefit Plan and 1988 and 1998 Employee Stock Benefit Plans S-8 333-42014 Arvin Industries, Inc. Savings Plan and Employee Savings Plan S-3 333-43110 Arvin Industries, Inc. Employee Savings Plan S-3 333-43112 Arvin Industries, Inc. Employee Stock Benefit Plan S-3 333-43116 Arvin Industries, Inc. 1998 Stock Benefit Plan S-3 333-43118 Arvin Industries, Inc. 1988 Stock Benefit Plan S-3 333-43146 Arvin Industries, Inc. Savings Plan
DELOITTE & TOUCHE LLP Detroit, Michigan December 21, 2000 EX-24 15 y43624ex24.txt POWER OF ATTORNEY 1 Exhibit 24 POWER OF ATTORNEY I, the undersigned Director and/or Officer of ArvinMeritor, Inc., an Indiana corporation (the "Company"), hereby constitute VERNON G. BAKER, II, MARK R. SCHAITKIN and BONNIE WILKINSON, and each of them singly, my true and lawful attorneys with full power to them and each of them to sign for me, and in my name and in the capacity or capacities indicated below, the Annual Report on Form 10-K for the fiscal year ended September 30, 2000, and any amendments and supplements thereto, to be filed by the Company with the Securities and Exchange Commission pursuant to the Securities Exchange Act of 1934.
Signature Title Date --------- ----- ---- /s/ Larry D. Yost Chairman of the Board and November 8, 2000 - ---------------------------- Chief Executive Officer Larry D. Yost (principal executive officer) and Director /s/ V. William Hunt Vice Chairman and President November 8, 2000 - ---------------------------- and Director V. William Hunt /s/ Joseph B. Anderson, Jr. Director November 8, 2000 - ---------------------------- Joseph B. Anderson, Jr. Director November 8, 2000 - ---------------------------- Donald R. Beall /s/ Steven C. Beering Director November 8, 2000 - ---------------------------- Steven C. Beering /s/ Rhonda L. Brooks Director November 8, 2000 - ---------------------------- Rhonda L. Brooks /s/ John J. Creedon Director November 8, 2000 - ---------------------------- John J. Creedon /s/ Joseph P. Flannery Director November 8, 2000 - ---------------------------- Joseph P. Flannery /s/ Robert E. Fowler, Jr. Director November 8, 2000 - ---------------------------- Robert E. Fowler, Jr.
2 /s/ William D. George, Jr. Director November 8, 2000 - ---------------------------- William D. George, Jr. Director November 8, 2000 - ---------------------------- Ivan W. Gorr /s/ Richard W. Hanselman Director November 8, 2000 - ---------------------------- Richard W. Hanselman /s/ Charles H. Harff Director November 8, 2000 - ----------------------------- Charles H. Harff /s/ Victoria B. Jackson Director November 8, 2000 - ----------------------------- Victoria B. Jackson /s/ Don J. Kacek Director November 8, 2000 - ----------------------------- Don J. Kacek /s/ James E. Marley Director November 8, 2000 - ----------------------------- James E. Marley Director November 8, 2000 - ----------------------------- James E. Perrella /s/ Harold A. Poling Director November 8, 2000 - ----------------------------- Harold A. Poling Director November 8, 2000 - ----------------------------- Martin D. Walker /s/ Thomas A. Madden Senior Vice President, Finance, November 8, 2000 - ----------------------------- and Chief Financial Officer Thomas A. Madden (principal financial officer) /s/ William M. Lowe Vice President and Controller November 8, 2000 - ----------------------------- (principal accounting officer) William M. Lowe
EX-27 16 y43624ex27.txt FINANCIAL DATA SCHEDULE
5 YEAR SEP-30-2000 OCT-01-1999 SEP-30-2000 116 0 1,278 22 583 2,189 2,449 1,101 4,720 1,725 1,537 74 0 71 722 4,720 5,153 5,182 4,410 4,813 0 0 89 369 141 218 0 0 0 218 4.12 4.12
-----END PRIVACY-ENHANCED MESSAGE-----