10-K 1 d18155_10-k.htm

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 October 2, 2005
Commission file number 1-15983

ARVINMERITOR, INC.

(Exact name of registrant as specified in its charter)

Indiana				38-3354643
(State or other jurisdiction of incorporation or organization)				(I.R.S. Employer Identification No.)

2135 West Maple Road Troy, Michigan				48084-7186
(Address of principal executive offices)				(Zip Code)

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 (including the associated Preferred Share Purchase Rights)				New York Stock Exchange

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None

Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [X] No [ ]

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes [ ] No [X]

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

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

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

The aggregate market value of the registrant’s voting and non-voting common equity held by non-affiliates of the registrant on April 1, 2005 (the last business day of the most recently completed second fiscal quarter) was approximately $1,067.2 million.

70,315,961 shares of the registrant’s Common Stock, par value $1 per share, were outstanding on October 31, 2005.

DOCUMENTS INCORPORATED BY REFERENCE

Certain information contained in the Proxy Statement for the Annual Meeting of Shareowners of the registrant to be held on January 31, 2006 is incorporated by reference into Part III.

PART I

Item 1. Business.

ArvinMeritor, Inc. (the “company” or “ArvinMeritor”), headquartered in Troy, Michigan, is a 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.

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

The company’s fiscal quarters end on the Sundays nearest December 31, March 31 and June 30, and its fiscal year ends on the Sunday nearest September 30. Fiscal year 2005 ended on October 2, 2005 and fiscal year 2004 ended on October 3, 2004. All year and quarter references relate to our fiscal year and fiscal quarters unless otherwise stated. For ease of presentation, September 30 is utilized consistently throughout this report to represent the fiscal year end.

Whenever an item of this Annual Report on Form 10-K refers to information in the Proxy Statement for the Annual Meeting of Shareowners of ArvinMeritor to be held on January 31, 2006 (the “2006 Proxy Statement”), or under specific captions in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations or Item 8. Financial Statements and Supplementary Data, the information is incorporated in that item by reference.

ArvinMeritor serves a broad range of original equipment manufacturer (“OEM”) customers worldwide, including truck OEMs, light vehicle OEMs, trailer producers and specialty vehicle manufacturers, and certain aftermarkets. Our total sales from continuing operations in fiscal year 2005 were $8.9 billion. Our ten largest customers accounted for approximately 74% of fiscal year 2005 sales from continuing operations. We operated over 120 manufacturing facilities in 25 countries around the world in fiscal year 2005, including facilities operated by discontinued operations and joint ventures in which we have interests. Sales from continuing operations outside North America accounted for approximately 49% of total sales from continuing operations in fiscal year 2005. Our continuing operations also participated in 10 significant non-consolidated joint ventures that generated revenues of approximately $1.5 billion in fiscal year 2005.

In fiscal year 2005, we served customers worldwide through the following businesses:

Continuing Operations:

•

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

•

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

Discontinued Operations:

•

Light Vehicle Aftermarket (“LVA”) supplies exhaust, ride control, motion control and filter products and other automotive parts to the passenger car, light truck and sport utility aftermarket.

In October 2004, we announced our intention to divest our LVA business and our coil coating operations, and we transferred these businesses to discontinued operations for accounting purposes. We sold the coil coating operations in November 2004. We continue to pursue divestiture of LVA’s operations. See “Strategic Initiatives” below.

Note 23 of the Notes to Consolidated Financial Statements under Item 8. Financial Statements and Supplementary Data contains financial information by segment for continuing operations for each of the three years ended September 30, 2005, including information on sales and assets by geographic area for each segment. The heading “Products” below includes information on LVS and CVS sales by product for each of the three fiscal years ended September 30, 2005.

References in this Annual Report on Form 10-K to our being a leading supplier or the world’s leading supplier, and other similar statements as to our relative market position are based principally on calculations we have made. These calculations are based on information we have collected, including company and industry sales data obtained from internal and available external sources, as well as our estimates. In addition to such quantitative data, our statements are based on other competitive factors such as our technological capabilities, our research and development efforts and innovations and the quality of our products and services, in each case relative to that of our competitors in the markets we address.

Certain Risk Factors

The following industry and market factors could have an adverse effect (which could be material) on our business, results of operations or financial condition in the future:

•

Cyclicality — We operate in an industry that is cyclical and that has periodically experienced significant year-to-year fluctuations in demand for vehicles. Production and sales of the vehicles for which we supply products generally depend on economic conditions and a variety of other factors, including customer spending and preferences, labor relations and regulatory requirements. Industry cycles are outside our control and cannot be predicted with certainty. See “Seasonality; Cyclicality” below.

•

Dependence on Large Customers — We are dependent on large OEM customers that have substantial bargaining power with respect to price and other commercial terms. There can be no assurance that we will not lose all or a portion of sales to our large volume customers, or that we will be able to offset continued reduction of prices to these customers with reductions in our costs. In addition, the level of our sales to these customers is dependent on their production and sales volumes. To the extent that the financial condition, including bankruptcy, or market share of any of our largest customers deteriorates or their sales otherwise decline, our financial position and results of operations could be adversely affected. See “Customers; Sales and Marketing” below.

•

Competition — We operate in a highly competitive industry. Some of our competitors are larger and have greater financial resources or have established relationships with significant customers. In addition, some OEMs manufacture products of the types we supply, which can displace our sales. See “Competition” below.

•

Raw Materials — A disruption in supply or a significant increase in price of raw materials could impact our production and increase our costs. In addition, we are dependent on the ability of our suppliers to meet performance and quality specifications and delivery schedules in order to meet our commitments to our customers. See “Raw Materials and Supplies” below.

•

International Operations — We have a significant amount of facilities and operations outside the United States, including investments and joint ventures in developing countries. International operations are subject to a number of risks, including, among others, risks with respect to currency exchange rate fluctuations, local economic and political conditions, difficulties in repatriating funds, and restrictive legal or regulatory requirements. See “International Operations” below.

•

Litigation, Regulatory and Product Liability Exposure — Our business is subject to risks related to the outcome of litigation with respect to, among other things, environmental and asbestos-related liability. In addition, we are required to comply with federal, state, local and foreign laws and regulations governing the protection of the environment and occupational health and safety. There is also an inherent risk of exposure to warranty and product liability claims, as well as product recalls, in the automotive industry if our products fail to perform to specifications and are alleged to cause property damage, injury or death. See “Environmental Matters” and Item 3. Legal Proceedings below.

•

Liquidity — Our ability to access the capital markets, and our cost of capital, is dependent in part on our credit ratings. In the third quarter of fiscal year 2005, Standard & Poor’s lowered our credit rating to BB from BB+, and Moody’s Investors Service lowered our credit rating to Ba2 from Ba1. Further declines in our ratings could limit our access to capital markets and further increase our borrowing costs. See Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Contractual Obligations below.

•

Strategic Initiatives — As part of our business strategy, we continue to review our existing businesses to determine whether any of them should be modified, restructured, sold or otherwise discontinued, and we

regularly consider various strategic and business opportunities to grow our business. We cannot predict with certainty whether any future strategic transactions will be beneficial to the company. In addition, any future acquisitions could involve risks with respect to successful integration of operations, increases in debt to finance the acquisition, and achieving projected savings from synergies. See “Strategic Initiatives” below.

•

Pension and Retiree Medical Benefits — The automotive industry, like other industries, continues to be impacted by the rising cost of pension and other post-retirement benefits. To partially address this impact, we amended certain retiree medical plans in fiscal year 2004, to phase out current benefits by no later than fiscal year 2023, and to eliminate benefits for Medicaid-eligible retirees beginning in January 2006. (See Item 3. Legal Proceedings for information on class action lawsuits filed in response to these amendments.) We also discontinued participation in our defined benefit pension plan for non-union U.S. employees hired after September 30, 2005 and replaced it with additional defined contributions to the company savings plan.

The effect of these and other factors on our financial performance in 2005 is discussed in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations below.

Business Strategies

We are a global supplier of a broad range of integrated systems, modules and components for use in commercial, specialty and light vehicles worldwide and we have developed market positions as a leader in most of our served markets. We are working to enhance our leadership positions and capitalize on our existing customer, product and geographic strengths, and to increase sales, earnings and profitability. To achieve these goals, we are working to: (a) rationalize our operations by eliminating excess capacity, (b) refocus our business by evaluating our product portfolio to identify our core competencies, and (c) regenerate and grow the businesses that offer attractive returns.

Several significant factors and trends in the automotive industry present opportunities and challenges to industry suppliers and influence our business strategies. These factors and trends include the cyclicality of the industry; consolidation and globalization of OEMs and their suppliers; increased outsourcing by OEMs; increased demand for modules and systems by OEMs; pricing pressures from OEMs that could negatively impact suppliers’ earnings even when sales volumes are increasing; the rising cost of raw materials, primarily steel and energy; and an increasing emphasis on engineering and technology. Our specific business strategies, described below, are influenced by these industry factors and trends and are focused on leveraging our resources to create a competitive cost structure.

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

•

Products. We manufacture and sell a wide range of products in various segments of the automotive market. For fiscal year 2005, our annual sales from continuing operations include $4.85 billion for LVS and $4.05 billion for CVS.

•

Customers. A diverse customer base helps to mitigate market fluctuations. We have a large customer base comprised of most major vehicle producers.

•

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

Focus on Organic Growth While Reviewing Strategic Opportunities. Our goal is to grow businesses that offer attractive returns and are core to our operations. We have identified the areas of our core business that we believe have the most potential for leveraging into other products and markets, and we are focusing our resources on these areas. We also seek to take advantage of opportunities for operating synergies and cross selling of products between our light vehicle and commercial vehicle businesses. For example, CVS continues to adapt products and technologies, originally developed by the LVS emissions technologies business unit, in the development of emissions control products for its commercial vehicle customers. See “Products — Commercial Vehicle Systems — Undercarriage and

Drivetrain Systems — Emissions Systems” below. In addition, we are exploring opportunities to apply our CVS drivetrain expertise in the development of undercarriage component systems for our LVS customers.

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

Grow Content Per Vehicle Through Technologically Advanced Systems and Modules. Increased outsourcing by OEMs has resulted in higher overall per vehicle sales by independent suppliers and presents an opportunity for supplier sales growth at a faster rate than the overall automotive industry growth trend. OEMs are also demanding modules and integrated systems that require little assembly by the OEM customer.

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

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

Enhance Core Products to Address Safety and Environmental Issues. Another industry trend is the increasing amount of equipment required for changes in environmental and safety-related regulatory provisions. OEMs select suppliers based not only on the cost and quality of products, but also on their ability to meet these demands. We use our technological expertise to anticipate trends and to develop products that address safety and environmental concerns.

To address safety, our LVS group designs its aperture systems with stronger materials, creates designs that enhance the vehicle’s crashworthiness and develops undercarriage systems that offer improved ride and vehicle control dynamics. Our CVS group is focusing on the integration of braking and stability products and suspension products, as well as the development of electronic control capabilities. CVS, through its Meritor WABCO joint venture, is also developing braking systems technology to improve braking performance and reduce stopping distances for commercial motor vehicles.

With respect to emissions regulations, LVS is an industry leader in emissions technologies that improve fuel economy and reduce air pollutants, while CVS is leveraging our expertise in light vehicle emissions technologies to bring products to the commercial vehicle market. Looking forward, we will continue to seek to develop products that will permit us to assist customers in meeting new and more stringent emissions requirements that will be phased in over the next several years in our North America, European and Asia/Pacific markets.

We believe these more stringent emissions regulations will result in continued growth in Europe, and potential growth in North America, of diesel engines. Diesel engines today have the advantage of improved fuel economy, better performance and improving emissions levels. Through a German subsidiary, LVS began production in 2004 under contracts to provide diesel emissions systems to light vehicle OEMs in Europe. Approximately 49% of all new vehicles in Europe are sold with diesel engine powertrains.

Strengthen our Presence in Emerging Global Markets. Geographic expansion to meet the global sourcing needs of customers and to address new markets is an important element of our growth strategy. ArvinMeritor currently

has joint ventures and wholly-owned subsidiaries in China and India and participates in programs to support customers as they establish and expand operations in those markets. We also have wholly-owned operations and regional joint ventures in South America, a market with potential for significant growth.

Drive a Continuous Improvement Culture Focused on Return on Capital. The ArvinMeritor Performance System (AMPS) is a continuous improvement initiative that guides our philosophy for achieving operational excellence, eliminating waste, improving quality and earning customer loyalty. Throughout the company, continuous improvement teams work to achieve significant cost savings, increase productivity and efficiency and streamline operations. They focus on eliminating non-value-added tasks, reducing lead and cycle times and improving customer service.

A continuous improvement culture is important to our business operations and to maintaining and improving our earnings. Process improvement initiatives are required to achieve our goals with respect to return on invested capital (defined as net income plus minority interest plus tax effected interest, divided by total debt plus equity plus minority interest liability) (“ROIC”). We believe that ROIC is a key performance measure, and that our focus on ROIC will help us achieve higher margins, strong cash flow and debt reduction.

Products

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

The following chart sets forth operating segment sales as a percentage of total sales for continuing operations by product for each of the three fiscal years ended September 30, 2005. A narrative description of the principal products of the two operating segments that comprise our continuing operations, as well as the principal products of our discontinued operations (LVA), follows the chart.

	Fiscal Year Ended September 30,
	2005			2004			2003
LVS:
Emissions Technologies (1)		29	%		33	%		35	%
Aperture Systems		15	%		18	%		18	%
Undercarriage Systems		10	%		9	%		11	%
Total LVS		54	%		60	%		64	%

CVS:
Undercarriage and Drivetrain Systems		40	%		34	%		29	%
Specialty Products (2)		6	%		6	%		7	%
Total CVS		46	%		40	%		36	%
Total		100	%		100	%		100	%

(1)

Prior to January 2003, we owned a minority interest in Zeuna Stärker & Co. KG (“Zeuna Stärker”), a German emissions systems company. At that time, we acquired the remaining interest in Zeuna Stärker, and its sales are included in LVS Emissions Technologies for fiscal years 2005 and 2004 and for the last three quarters of fiscal year 2003.

(2)

In December 2002, we sold our off-highway planetary axle business. Sales from these products are included in CVS Specialty Products for the first quarter of fiscal year 2003.

Light Vehicle Systems

Emissions Technologies

We are a leading global supplier of a complete line of exhaust systems and exhaust system components, including mufflers, exhaust pipes, catalytic converters, diesel particulate filters and exhaust manifolds. We sell these products

to OEMs primarily as original equipment, while also supporting manufacturers’ needs for replacement parts and dealers’ needs for service parts. We participate in this business both directly and through joint ventures and affiliates. These alliances include our 50% interest in Arvin Sango Inc., an exhaust joint venture based in North America.

See “Business Strategies — Enhance Core Products to Address Safety and Environmental Issues” above for information on the importance of diesel technology to LVS strategies for future growth.

Aperture Systems

Roof Systems. ArvinMeritor is one of the world’s leading independent suppliers of sunroofs and roof systems products for use in passenger cars, light trucks and sport utility vehicles, including our Golde® brand sunroofs. We make complete roofs, some of which incorporate sunroofs, that provide OEMs with cost savings by reducing assembly time and parts. Our roof system manufacturing facilities are located in North America and Europe.

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

We also supply manual and power activated latch systems to light vehicle manufacturers. Our access control products include modular and integrated door latches, actuators, trunk and hood latches and fuel flap locking devices, with a leadership market position in Europe. We manufacture access control systems at assembly facilities in North and South America, Europe and the Asia/Pacific region.

Undercarriage Systems

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

Suspension Modules. Using our expertise in ride control and vehicle dynamics, we offer final assembly of upper and complete corner modules as well as front and rear cross vehicle modules. This capability gives us the ability to incorporate components that we manufacture into these modules, thus enhancing value content.

Ride Control Systems. We provide ride control products, including shock absorbers, struts, ministruts and corner modules.

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

Commercial Vehicle Systems

Undercarriage and Drivetrain Systems

Truck Axles. We are one of the world’s leading independent suppliers of axles for medium- and heavy-duty commercial vehicles, with axle manufacturing facilities located in North America, South America, Europe and the Asia/Pacific region. Our extensive truck axle product line includes a wide range of drive and non-drive front steer axles and single and tandem rear drive axles, which can include driver-controlled differential lock for extra traction, aluminum carriers to reduce weight and pressurized filtered lubrication systems for longer life. Our front steer and rear drive axles can be equipped with our cam, wedge or disc brakes, automatic slack adjusters and anti-lock braking systems.

Drivelines and Other Products. We also supply universal joints and driveline components, including our Permalube^TM universal joint and Permalube^TM driveline, which are low maintenance, permanently lubricated designs used in the high mileage on-highway market.

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

Through our 50%-owned joint venture with Randon Participacoes, we develop, manufacture and sell truck suspensions, trailer axles and suspensions and related wheel-end products in the South American market.

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

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

Federal regulations require that new heavy- and medium-duty vehicles sold in the United States be equipped with anti-lock braking systems (“ABS”). Our 50%-owned joint venture with WABCO Automotive Products (“WABCO”), a wholly-owned subsidiary of American Standard Inc., is the leading supplier of ABS and a supplier of other electronic and pneumatic control systems for North American heavy-duty commercial vehicles. The joint venture also supplies hydraulic ABS to the North American medium-duty truck market and produces stability control systems for tractors and trailers, which are designed to help maintain vehicle stability and aid in reducing tractor-trailer rollovers.

Transmissions. In the second quarter of fiscal year 2004, we dissolved our 50%-owned joint venture with ZF Friedrichshafen AG (“ZF”), which produced transmission components and systems for heavy vehicle OEMs and the aftermarket in the United States, Canada and Mexico. The joint venture was replaced by a marketing arrangement that allows us to provide the redesigned FreedomLine^TM, a fully automated mechanical truck transmission without a clutch pedal, to our customers. This transmission product line enables us to supply a complete drivetrain system to heavy-duty commercial vehicle manufacturers in North America.

Emissions Systems. CVS has adapted products and applications from the LVS emissions technologies business unit and introduced new technologies to develop a portfolio of technologically advanced emissions control products and applications to address increasingly stringent regulatory standards for diesel particulate matter and nitrogen oxide (NOx) emissions in commercial vehicles. To date, we have nine contracts related to these products and applications, which include:

•

Diesel Oxidation Catalysts — capable of removing up to 90% of hydrocarbon and carbon monoxide emissions and 30% of particulate matter. This technology is available currently.

•

Thermal Regenerator — on demand, active regeneration technology that offers a safe and effective way to remove diesel particulate matter, using diesel fuel as a heat source, without the use of a catalytic coating or precious metals. This technology is expected to be released for OEM use in 2006, in preparation for the EPA’s 2007 particulate matter emission standards.

•

Catalyzed Diesel Particulate Filter — a filter that traps the diesel particulate matter from the exhaust and prevents it from reaching the atmosphere. It is expected to be available in 2007 to meet the new 2007 U.S. regulations.

•

Selective Catalytic Reduction (SCR) System — a compact, low-weight option to effectively reduce NOx emissions to the levels required to meet 2006 and 2008 European standards. The system also achieves reduction of diesel particulate matter and allows the engine to operate in ways that could maximize fuel economy.

•

Plasmatron (Plasma Fuel Reformer) — a system that creates a hydrogen-rich gas from any hydrocarbon fuel source, which enables more efficient control of NOx from diesel engine exhaust, through effective regeneration of “NOx adsorbers” or “lean NOx traps.” This technology could be less sensitive to sulfur

contamination and could use less fuel than conventional regeneration and consume minimal power. This technology, which is expected to be available for production in 2010, also has potential for future applications in gasoline combustion engines.

Specialty Products

Off-Highway Vehicle Products. In fiscal year 2005, we supplied brakes in North America, South America, Europe and the Asia/Pacific region, and heavy-duty axles and drivelines in the Asia/Pacific region, for use in numerous off-highway vehicle applications, including construction, material handling, agriculture, mining and forestry. These products are designed to tolerate high tonnages and operate under extreme conditions. We sold the off-highway brakes business in the first quarter of fiscal year 2006 (see “Strategic Initiatives” below).

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

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

Light Vehicle Aftermarket

The principal LVA products include mufflers; exhaust and tail pipes; catalytic converters; shock absorbers; struts; gas lift supports and vacuum actuators; and automotive oil, air, and fuel filters. These products are sold under the brand names Arvin® (mufflers); Gabriel® (shock absorbers); and Purolator® (filters). LVA also markets products under private label to customers such as CARQUEST, NAPA and AC Delco (ride control) and Motorcraft, Quaker State, Shell and Mobil (filters).

Customers; Sales and Marketing

ArvinMeritor’s operating segments have numerous customers worldwide and have developed long-standing business relationships with many of these customers. Our ten largest customers accounted for approximately 74% of our total sales from continuing operations in fiscal year 2005.

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

Consistent with industry practice, LVS and CVS make most of their sales to OEMs through open purchase orders, which do not require the purchase of a minimum number of products. The customer typically may cancel these purchase orders on reasonable notice. LVS and CVS also sell products to certain customers under long-term arrangements that require us to provide annual cost reductions (through price reductions or other cost benefits for the OEMs). If we are unable to generate sufficient cost savings in the future to offset such price reductions, our gross margins will be adversely affected (see Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations below).

Both LVS and CVS are dependent upon large OEM customers with substantial bargaining power with respect to price and other commercial terms. Although we believe that our businesses generally enjoy good relations with our OEM customers, loss of all or a substantial portion of sales to any of our large volume customers for whatever reason (including, but not limited to, loss of market share by these customers, loss of contracts, reduced or delayed customer requirements, plant shutdowns, strikes or other work stoppages affecting production by such customers), or continued reduction of prices to these customers, could have a significant adverse effect on our financial results. During fiscal year 2005, DaimlerChrysler AG (which owns Chrysler, Mercedes-Benz AG and Freightliner Corporation), a significant customer of LVS and CVS, accounted for approximately 21% of our total sales from continuing operations. In addition, sales to General Motors Corporation accounted for approximately 10% and sales to Volkswagen accounted for approximately 10% of our total sales from continuing operations. No other customer accounted for 10% or more of our total sales from continuing operations in fiscal year 2005. These sales include pass-through components that are acquired and incorporated into our systems or modules at the customer’s request.

In fiscal year 2005, we were adversely impacted by the weakening financial strength of certain of our customers, which resulted in several customers’ filing for protection under bankruptcy and administration laws. See Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Overview and — Results of Operations.

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.

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

Competition

Each of ArvinMeritor’s businesses operates in a highly competitive environment. LVS and CVS compete worldwide with a number of North American and international providers of components and systems, some of which belong to, or are associated with, some of our customers. Some of these competitors are larger and some are smaller than the company in terms of resources and market shares. The principal competitive factors are price, quality, service, product performance, design and engineering capabilities, new product innovation and timely delivery. LVS has numerous competitors across its various product lines worldwide, including Tenneco, Faurecia, Eberspaecher and Benteler (emissions technologies); Webasto, Inalfa and Aisin (roof systems); Brose, Intier, Kiekert AG, Valeo, Aisin and Grupo Antolin (door and access control systems); Tenneco Automotive, ZF, Thyssen-Krupp, Benteler and TRW (suspension modules); Thyssen-Krupp, NHK Spring, Rassini, Mubea and Sogefi (suspension systems); Kayaba Industries, Inc. (“Kayaba”), Tenneco Automotive and Sachs (ride control systems); and Hayes-Lemmerz, Topy, Accuride and CMW (wheel products). The major competitors of CVS are Dana Corporation (“Dana”) (truck axles and drivelines); Knorr/Bremse, Haldex and Dana (braking systems); Hendrickson and Neway (suspension systems); Hendrickson and Dana (trailer products); and Eaton Corporation (transmissions). In addition, certain OEMs manufacture for their own use products of the types we supply, and any future increase in this activity could displace LVS and CVS sales.

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

Raw Materials and Supplies

Prices of raw materials, primarily steel, for our business segments’ manufacturing needs negatively impacted our operating income in fiscal year 2005. In addition, we concentrate our purchases of certain raw materials and parts over a limited number of suppliers, some of which are located in developing countries, and we are dependent upon the ability of our suppliers to meet performance and quality specifications and delivery schedules. The loss of a significant supplier or the inability of a supplier to meet performance and quality specifications or delivery schedules could have an adverse effect on us.

Beginning in the second half of fiscal year 2002, we, along with the automotive industry globally, experienced rising steel prices and spot shortages of certain steel products. Although availability of steel has improved and we have had some success in recovering a portion of higher steel prices from our customers, increased steel costs, net of recoveries, negatively impacted our financial results in fiscal year 2005. See Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Results of Operations for further information on the effect of these factors on our financial results. While we believe that steel prices are beginning to moderate,

we cannot predict the availability or price of steel in fiscal year 2006 and beyond. We are taking actions to mitigate the effects of steel prices, including alternative sourcing of materials or components, consolidating and selling scrap from our facilities, re-engineering our products to be less dependent on steel, and negotiating with customers to recover some of the increased costs. However, if supplies are inadequate for our needs, or if prices remain at current levels or increase and we are unable to either pass these prices to our customer base or otherwise mitigate the costs, our sales and operating income could continue to be adversely affected.

Some companies in the automotive industry experienced weakening financial strength in fiscal year 2005 that resulted for some in filing for protection under bankruptcy laws. If the weakened financial condition of a significant supplier, or any related labor issues or work stoppages, were to cause a significant disruption in the supply of parts to our facilities, it could have an adverse effect on us. See Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Overview.

Strategic Initiatives

As part of our strategy to rationalize and refocus our business, we regularly review the prospects of our existing businesses to determine whether any of them should be modified, restructured, sold or otherwise discontinued. As part of our strategy to regenerate our profitable businesses, we regularly consider various strategic and business opportunities, including licensing agreements, marketing arrangements and acquisitions.

We believe that the industry in which we operate could experience significant further 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.

We completed the following strategic initiatives since the beginning of fiscal year 2005 (see Notes 3 and 5 of the Notes to Consolidated Financial Statements under Item 8. Financial Statements and Supplementary Data below):

•

In the first quarter of fiscal year 2005, we sold Roll Coater, Inc., a wholly-owned subsidiary that constituted our coil coating operations. The transaction, which was part of our strategy to divest non-core businesses, was structured as a stock sale and included five facilities.

•

In the first quarter of fiscal year 2005, we sold our LVS automotive stamping and components manufacturing facility in Columbus, Indiana.

•

In the first quarter of fiscal year 2006, we sold certain assets of our CVS off-highway brakes business.

In October 2004, we announced our intention to divest the LVA business segment. We believe the divestiture will enable the company to focus more resources on our core competencies and thereby better support our OEM customers. We expect to complete the divestiture of LVA in fiscal year 2006. LVA is reported in our financial statements as discontinued operations. See Note 3 of the Notes to Consolidated Financial Statements under Item 8. Financial Statements and Supplementary Data below.

In fiscal year 2005, we announced restructuring plans with respect to continuing operations to eliminate approximately 700–800 salaried positions and 1,550 hourly positions and to consolidate, downsize, close or sell 11 global facilities, primarily in the LVS segment. These actions are intended to align capacity with industry conditions, utilize assets more efficiently, improve operations and lower costs. Estimated total costs of $135 million include employee severance and other exit costs, as well as asset impairments. We recorded restructuring costs of $101 million related to these actions in fiscal year 2005 and expect the remainder of the costs to be recorded by December 2006. In fiscal year 2005 we also recorded restructuring charges of (i) $16 million in the LVS segment for severance and other employee termination costs (20 salaried and 355 hourly employees) and other costs related to the closure of a Sheffield, England stabilizer bar facility, consolidation of two facilities in Brazil and a reduction in workforce in our operations in Spain, and (ii) $4 million in the CVS segment, relating to severance and other termination benefits (20 employees) as a result of integration of two consolidated joint ventures with AB Volvo. See Note 4 of the Notes to Consolidated Financial Statements under Item 8. Financial Statements and Supplementary Data below.

No assurance can be given as to whether or when any additional strategic initiatives will be consummated in the future. We will continue to consider acquisitions as a means of growing the company or adding needed

technologies, but cannot predict whether our participation or lack of participation in industry consolidation will ultimately be beneficial to us. If an agreement with respect to any additional acquisitions were to be reached, we may be able to finance such acquisitions by using the cash proceeds of divestitures or by issuing additional debt or equity securities. The additional debt from any such acquisitions, if consummated, could increase our debt to capitalization ratio. In addition, the ultimate benefit of any acquisition would depend on our ability to successfully integrate the acquired entity or assets into our existing business and to achieve any projected synergies.

Joint Ventures

As the automotive industry has become more globalized, joint ventures and other cooperative arrangements have become an important element of our business strategies. As of September 30, 2005, our continuing operations participated in 26 joint ventures with interests in the United States, Brazil, Canada, China, the Czech Republic, France, Germany, India, Italy, Korea, Mexico, Turkey and the United Kingdom. At that date, our discontinued operations participated in two joint ventures with interests in India, Venezuela and Colombia.

In accordance with accounting principles generally accepted in the United States, our consolidated financial statements include the operating results of those majority-owned joint ventures in which we have control. Significant consolidated joint ventures include our 57%-owned North American joint venture with Mitsubishi Steel Manufacturing Co. (suspension products for passenger cars, light trucks and sport utility vehicles). Significant unconsolidated joint ventures include our 50%-owned North American joint venture with WABCO (ABS systems for heavy-duty commercial vehicles) and our 50% interest in Arvin Sango Inc. (emissions technologies) in the United States (see Note 12 of the Notes to Consolidated Financial Statements under Item 8. Financial Statements and Supplementary Data below).

Since the beginning of fiscal year 2005, we completed the following significant initiatives with respect to our joint ventures:

•

In the first quarter of fiscal year 2005, we entered into two 51%-owned joint ventures with AB Volvo to produce commercial vehicle drive axles. The joint ventures will manufacture axles at a facility in France and supply them to AB Volvo under the terms of a new supply agreement. We have an option to purchase the remaining interest in one of the joint ventures beginning in 2008.

•

In the third quarter of fiscal year 2005, we formed a 60%-owned joint venture with First Auto Works Sihuan Axle Brake Group in China. The joint venture expects to establish a new facility in the Changchun area to manufacture brakes for the domestic market and for export.

•

In the fourth quarter of fiscal year 2005, we formed a 50%-owned joint venture with DongWon Precision Industrial Co. Ltd. to supply diesel particulate filters to OEMs in Korea.

Research and Development

We have significant research, development, engineering and product design capabilities. We spent $175 million in fiscal year 2005, $156 million in fiscal year 2004 and $160 million in fiscal year 2003 on company-sponsored research, development and engineering. At September 30, 2005, we employed approximately 1,630 professional engineers and scientists.

Patents and Trademarks

We own or license many United States and foreign patents and patent applications in our manufacturing operations and other activities. While in the aggregate these patents and licenses are considered important to the operation of our businesses, management does not consider them of such importance that the loss or termination of any one of them would materially affect a business segment or ArvinMeritor as a whole.

Our registered trademarks ArvinMeritor®, Arvin® and Meritor® are important to our business. Other significant trademarks owned by us include Purolator® (filters) with respect to LVA; Fumagalli^TM (wheels), Zeuna Stärker® (emissions systems) and Golde® (sunroofs) with respect to LVS; and ROR^TM (trailer axles) with respect to CVS. In connection with the 1997 spin-off of Meritor’s common stock to the shareowners of Rockwell International

Corporation (now Rockwell Automation, Inc., and referred to in this Annual Report on Form 10-K as “Rockwell”) and the transfer of Rockwell’s automotive businesses to Meritor, Meritor entered into an agreement that allows us to continue to apply the “Rockwell” brand name to our products until September 30, 2007.

Employees

At September 30, 2005, we had approximately 29,000 full-time employees. At that date, approximately 4,300 employees in the United States and Canada were covered by collective bargaining agreements and most of our facilities outside of the United States and Canada were unionized. We believe our relationship with unionized employees is satisfactory. No significant work stoppages have occurred in the past five years.

Environmental Matters

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

We have been designated as a potentially responsible party at seven Superfund sites, excluding sites as to which our records disclose no involvement or as to which our potential liability has been finally determined. Management estimates the total reasonably possible costs we could incur for the remediation of Superfund sites as of September 30, 2005, to be approximately $28 million, of which $11 million is recorded as a liability. During fiscal year 2005, we recorded environmental remediation costs of $6 million resulting from a revised estimate to remediate a former Rockwell facility that was sold in 1990.

In addition to Superfund sites, various other lawsuits, claims and proceedings have been asserted against us, alleging violations of federal, state and local environmental protection requirements or seeking remediation of alleged environmental impairments, principally at previously disposed-of properties. For these matters, management has estimated the total reasonably possible costs we could incur as of September 30, 2005, to be approximately $52 million, of which $13 million is recorded as a liability.

See Note 22 of the Notes to Consolidated Financial Statements under Item 8. Financial Statements and Supplementary Data below for information on the changes in environmental accruals during fiscal year 2005.

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

International Operations

Approximately 49% of our total assets related to continuing operations as of September 30, 2005 and 49% of fiscal year 2005 sales from continuing operations were outside North America. See Note 23 of the Notes to Consolidated Financial Statements under Item 8. Financial Statements and Supplementary Data below for financial information by geographic area for the three fiscal years ended September 30, 2005.

Our international operations are subject to a number of risks inherent in operating abroad, including, but not limited to:

•

risks with respect to currency exchange rate fluctuations;

•

local economic and political conditions;

•

disruptions of capital and trading markets;

•

possible terrorist attacks or acts of aggression that could affect vehicle production or the availability of raw materials or supplies;

•

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

•

changes in legal or regulatory requirements;

•

import or export licensing requirements;

•

limitations on the repatriation of funds;

•

difficulty in obtaining distribution and support;

•

nationalization;

•

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

•

tax laws; and

•

labor disruptions.

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

Our operations are exposed to global market risks, including the effect of changes in foreign currency exchange rates. We have implemented a foreign currency cash flow hedging program to help reduce the company’s exposure to changes in exchange rates. We use foreign currency forward contracts to manage the company’s exposures arising from foreign currency exchange risk. Gains and losses on the underlying foreign currency exposures are partially offset with gains and losses on the foreign currency forward contracts. The contracts generally mature within 12 months. It is our policy not to enter into derivative financial instruments for speculative purposes and, therefore, we hold no derivative instruments for trading purposes. See Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Quantitative and Qualitative Disclosures About Market Risk and Note 16 of the Notes to Consolidated Financial Statements under Item 8. Financial Statements and Supplementary Data below.

Seasonality; Cyclicality

LVS and CVS may experience seasonal variations in the demand for products to the extent automotive vehicle production fluctuates. Historically, for both segments, demand has been somewhat lower in the quarters ended September 30 and December 31, when OEM plants may close during model changeovers and vacation and holiday periods. LVA also experiences seasonal variations in the demand for products. Historically, demand has been somewhat lower in the quarters ended December 31 and March 31, when activity relating to the servicing of vehicles is less frequent.

In addition, the industry in which LVS and CVS operate has been characterized historically by periodic fluctuations in overall demand for trucks, passenger cars and other vehicles for which we supply products, resulting in corresponding fluctuations in demand for our products. The cyclical nature of the automotive industry is outside our control and cannot be predicted with certainty. Cycles in the major automotive industry markets of North America and Europe are not necessarily concurrent or related. We have sought and will continue to seek to expand our operations globally to mitigate the effect of periodic fluctuations in demand of the automotive industry in one or more particular countries.

Demand for CVS products can also be affected by pre-buy before the effective date of new regulatory requirements, such as changes in emissions standards. We believe that stronger heavy-duty truck demand in North America in fiscal year 2002 was partially due to the pre-buy before new U.S. emission standards went into effect on October 1, 2002. Implementation of new, more stringent, emissions standards is scheduled for 2007 and 2010 in the U.S. and 2008 in Europe, and we believe that heavy-duty truck demand in these markets could increase prior to the effective dates of the new regulations.

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

	Year Ended September 30,
	2005		2004		2003		2002		2001
Light Vehicles (in millions):
North America		15.6		15.9		16.0		16.3		15.6
South America		2.7		2.3		2.0		1.9		2.2
Western Europe (including Czech Republic)		16.4		16.9		16.7		16.5		16.9
Asia/Pacific		22.5		20.9		18.9		17.3		16.9
Commercial Vehicles (in thousands):
North America, Heavy-Duty Trucks		324		235		164		169		150
North America, Medium-Duty Trucks		208		172		141		133		144
United States and Canada, Trailers		327		284		213		145		208
Western Europe, Heavy- and Medium-Duty Trucks		421		376		364		363		386
Western Europe, Trailers		115		109		98		101		110

Source: Automotive industry publications and management estimates.

We anticipate the North American heavy-duty truck market to decrease approximately 6% in fiscal year 2006, with production at an estimated 305,000 units. In Western Europe, we expect production of heavy- and medium-duty trucks to remain at approximately 421,000 units. Our most recent outlook shows North American and Western European light vehicle production to be 15.6 million and 16.4 million vehicles, respectively, during fiscal year 2006. See Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Overview and — Results of Operations below for information on the effects of recent market cycles on our sales and earnings.

Available Information

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

Cautionary Statement

This Annual Report on Form 10-K contains statements relating to future results of the company (including certain projections and business trends) that are “forward-looking statements” as defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements are typically identified by words or phrases such as “believe,” “expect,” “anticipate,” “estimate,” “should,” “are likely to be,” “will” and similar expressions. Actual results may differ materially from those projected as a result of certain risks and uncertainties, including but not limited to global economic and market conditions; the demand for commercial, specialty and light vehicles for which the company supplies products; risks inherent in operating abroad (including foreign currency exchange rates and potential disruption of production and supply due to terrorist attacks or acts of aggression); availability and cost of raw materials, including steel; 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 suppliers and customers, including potential disruptions in supply of parts to our facilities or demand for our products due to work stoppages; the financial condition of the company’s suppliers and customers, including potential bankruptcies; successful integration of acquired or merged businesses; the ability to achieve the expected annual savings and synergies from past and future business combinations; success and timing of potential

divestitures; potential impairment of long-lived assets, including goodwill; competitive product and pricing pressures; the amount of the company’s debt; the ability of the company to access capital markets; credit ratings of the company’s debt; the outcome of existing and any future legal proceedings, including any litigation with respect to environmental or asbestos-related matters; as well as other risks and uncertainties, including but not limited to those detailed herein and from time to time in other filings of the company with the SEC. See also the following portions of this Annual Report on Form 10-K: Item 1. Business, “Certain Risk Factors”; “Customers; Sales and Marketing”; “Competition”; “Raw Materials and Supplies”; “Strategic Initiatives”; “Environmental Matters”; “International Operations”; and “Seasonality; Cyclicality”; Item 3. Legal Proceedings; and Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. These forward-looking statements are made only as of the date hereof, and the company undertakes no obligation to update or revise the forward-looking statements, whether as a result of new information, future events or otherwise, except as otherwise required by law.

Item 2. Properties.

At September 30, 2005, our operating segments and discontinued operations (LVA) and joint ventures had the following facilities in the United States, Europe, South America, Canada, Mexico, Australia, South Africa and the Asia/Pacific region:


LVS	73	16
CVS	34	30
LVA	13	7
Other	1	4
	121	57

These facilities had an aggregate floor space of approximately 27.4 million square feet, substantially all of which is in use. We owned approximately 74% and leased approximately 26% of this floor space. There are no major encumbrances (other than financing arrangements that in the aggregate are not material) on any of our plants or equipment. In the opinion of management, our properties have been well maintained, are in sound operating condition and contain all equipment and facilities necessary to operate at present levels. A summary of floor space of these facilities at September 30, 2005, is as follows:

	Owned Facilities								Leased Facilities
Location	LVS		CVS		LVA		Other		LVS		CVS		LVA		Other		Total
	(in thousands of square feet)
United States		3,456		3,869		1,866		595		951		1,128		601		44		12,510
Canada		454		413		—		—		88		173		34		—		1,162
Europe		2,633		3,223		1,167		—		2,198		196		497		—		9,914
Asia/Pacific		287		471		—		—		249		780		100		—		1,887
Latin America		692		834		108		—		62		—		—		—		1,696
Africa		237		—		—		—		—		11		—		—		248
Total		7,759		8,810		3,141		595		3,548		2,288		1,232		44		27,417

Item 3. Legal Proceedings

1. Maremont Corporation (“Maremont”), a subsidiary of ArvinMeritor, manufactured friction products containing asbestos from 1953 through 1977, when it sold its friction product business. Arvin acquired Maremont in 1986. Maremont and many other companies are defendants in suits brought by individuals claiming personal injuries as a result of exposure to asbestos-containing products. Maremont had approximately 61,700 and 74,000 pending asbestos-related claims at September 30, 2005 and 2004, respectively. The decrease in pending claims since September 30, 2004 is primarily due to the settlement of 8,500 claims in one jurisdiction.

Although Maremont has been named in these cases, very few cases allege actual injury and, in the cases where actual injury has been alleged, very few claimants have established that a Maremont product caused their injuries. Plaintiffs’ lawyers often sue dozens or even hundreds of defendants in individual lawsuits on behalf of hundreds or thousands of claimants, seeking damages against all named defendants irrespective of the disease or injury and irrespective of any causal connection with a particular product. For these reasons, Maremont does not consider the number of claims filed or the damages alleged to be a meaningful factor in determining its asbestos-related liability.

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

Pending and Future Claims: At the end of fiscal year 2004 and through the third quarter of fiscal year 2005, Maremont established reserves for pending asbestos-related claims that reflected internal estimates of its defense and indemnity costs. These estimates were based on the history and nature of filed claims to date and Maremont’s experience with historical indemnity and litigation costs, using data from actual CCR settlements, experience in resolving claims since dissolution of the CCR, and Maremont’s assessment of the nature of pending claims. Maremont did not accrue reserves for its potential liability for asbestos-related claims that may be asserted against it in the future because it did not have sufficient information to make a reasonable estimate of these unknown claims.

In the fourth quarter of fiscal year 2005, Maremont engaged Bates White LLC (“Bates White”), a consulting firm with extensive experience estimating costs associated with asbestos litigation, to assist with determining whether it would be possible to estimate the cost of resolving pending and future asbestos-related claims that have been, and could reasonably be expected to be, filed against Maremont, as well as the cost of Maremont’s share of committed but unpaid settlements entered into by the CCR. Although it is not possible to estimate the full range of costs because of various uncertainties, Bates White advised Maremont that it would be able to determine an estimate of a reasonable forecast of the cost of resolving pending and future asbestos-related claims based on historical data and certain assumptions with respect to events that occur in the future.

The resulting study by Bates White provided an estimate of the reasonably possible range of Maremont’s obligation for asbestos personal injury claims over the next three to four years of $36 million to $55 million. After consultation with Bates White, Maremont determined the most likely and probable liability for pending and future claims over the next four years is $50 million. The ultimate cost of resolving pending and future claims is estimated based on the history of claims and expenses for plaintiffs represented by law firms in jurisdictions with an established history with Maremont (see Note 22 of the Notes to Consolidated Financial Statements under Item 8. Financial Statements and Supplementary Data for a description of the assumptions included in the Bates White study). The significant reduction in the liability since September 30, 2004 is a result of both an overall reduction in pending claims and the results of the study by Bates White, which estimates a value for pending and future claims that are expected to be settled. Maremont had previously estimated a settlement value on all pending claims.

Shortfall: Maremont is also subject to claims for payment of a portion of claims against several former members of the CCR that have filed for bankruptcy protection, and have failed, or may fail, to pay certain financial obligations with respect to settlements that were reached on their behalf by the CCR. These defaulted member shares are referred to as “shortfall.” In an effort to resolve the affected settlements, Maremont has entered into negotiations with plaintiffs’ attorneys, and an estimate of Maremont’s obligations for the shortfall is included in the total asbestos-related reserves. In addition, Maremont and its insurers are engaged in legal proceedings to determine whether existing insurance coverage should reimburse any potential liability related to this issue.

Recoveries: Maremont has insurance that reimburses a substantial portion of the costs incurred defending against asbestos-related claims. The coverage also reimburses Maremont for any indemnity paid on those claims. The coverage is provided by several insurance carriers based on insurance agreements in place. The recorded asbestos-related insurance receivable incorporates historical information with respect to buy-outs and settlements of coverage and excludes any policies in dispute.

At September 30, 2005, Maremont had established reserves of $54 million relating to these potential asbestos-related liabilities and corresponding asbestos-related recoveries of $35 million. The difference between the estimated liability and insurance receivable is related to proceeds received from settled insurance policies and liabilities for shortfall and other. Certain insurance policies have been settled in cash prior to the ultimate settlement of related asbestos liabilities. Amounts received from insurance settlements generally reduce recorded insurance receivables. Receivables for policies in dispute are not recorded. In fiscal year 2005, the company received $12 million associated with the settlement of certain insurance policies. (See Note 22 of the Notes to Consolidated Financial Statements under Item 8. Financial Statements and Supplementary Data.)

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

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

Rockwell maintained insurance coverage that we believe covers indemnity and defense costs, over and above self-insurance retentions, for most of these claims. We have initiated claims against these carriers to enforce the insurance policies. Although the status of one carrier as a financially viable entity is in question, we expect to recover the majority of defense and indemnity costs we have incurred to date, over and above self-insured retentions, and a substantial portion of the costs for defending asbestos claims going forward. The uncertainties of asbestos claim litigation and resolution of the litigation with our insurance companies make it difficult to predict accurately the ultimate resolution of asbestos claims. That uncertainty is increased by the possibility of adverse rulings or new legislation affecting asbestos claim litigation or the settlement process. Subject to these uncertainties and based on our experience defending these asbestos claims, we do not believe these lawsuits will have a material adverse effect on our financial condition.

ArvinMeritor has not established reserves for pending claims or for corresponding recoveries for Rockwell-legacy asbestos-related claims, and defense and indemnity costs related to these claims are expensed as incurred. Reserves have not been established because management cannot reasonably estimate the ultimate liabilities for these costs, primarily because we do not have a sufficient history of claims settlement and defense costs from which to develop reliable assumptions.

Rockwell was not a member of the CCR and handled its asbestos-related claims using its own litigation counsel. As a result, we do not have any additional potential liabilities for committed CCR settlements or shortfall (as described above) in connection with the Rockwell-legacy cases.

3. Three separate class action lawsuits were filed in the United States District Court for the Eastern District of Michigan in 2003 and 2004 against the company and Rockwell as a result of modifications made by the company to its retiree medical benefits. (See Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation — Overview and — Critical Accounting Policies — Retiree Medical and Note 19 of the Notes to Consolidated Financial Statements under Item 8. Financial Statements and Supplementary Data for information with respect to changes made to the company’s retiree medical benefits and the related accounting and financial impacts.) The lawsuits allege that the changes breach the terms of various collective bargaining agreements entered into with the United Auto Workers and the United Steel Workers at former facilities that have either been closed or sold and are located in Wisconsin, Pennsylvania, Indiana, Ohio, Kentucky, Illinois and Michigan. The complaints also allege a companion claim under the Employee Retirement Income Security Act of 1974 (ERISA) essentially restating the alleged collective bargaining breach claims and seeking to bring them under ERISA. Plaintiffs seek an injunction requiring the defendants to provide lifetime retiree health care benefits under the applicable collective bargaining agreements, plus costs and attorneys’ fees, as well as punitive and unspecified damages for mental distress and anguish. The company believes that it has meritorious defenses to these actions and plans to defend these suits vigorously.

4. See Item 1. Business, “Environmental Matters” for information relating to environmental proceedings.

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

Item 4. Submission of Matters to a Vote of Security Holders.

There were no matters submitted to a vote of security holders during the fourth quarter of fiscal year 2005.

Item 4A. Executive Officers of the Registrant

The name, age, positions and offices held with ArvinMeritor and principal occupations and employment during the past five years of each of our executive officers as of October 31, 2005, are as follows:

Charles G. McClure, Jr., 52 — Chairman of the Board, Chief Executive Officer and President since August 2004. Chief Executive Officer of Federal-Mogul Corporation (automotive supplier) from July 2003 to July 2004; President and Chief Operating Officer of Federal-Mogul Corporation from January 2001 to July 2003; President and Chief Executive Officer of Detroit Diesel Corporation (automotive supplier) from 1997 to December 2000.

Vernon G. Baker, II, 52 — Senior Vice President and General Counsel since July 2000. Secretary from July 2000 to November 2001.

Brian P. Casey, 50 — Vice President and Treasurer since July 2003. Vice President, Global Systems of Lear Corporation (automotive supplier) from September 2002 to July 2003; Assistant Treasurer of Lear Corporation from June 2000 to September 2002.

Linda M. Cummins, 58 — Senior Vice President, Communications since July 2000.

William K. Daniel, 40 — Senior Vice President and President, Light Vehicle Aftermarket since July 2000.

Juan L. De La Riva, 61 — Senior Vice President and President, Light Vehicle Systems since August 2003. Senior Vice President, Corporate Development & Strategy, Engineering and Procurement from October 2001 to August 2003; Senior Vice President, Corporate Development and Strategy from July 2000 to October 2001.

James D. Donlon, III, 59 — Senior Vice President and Chief Financial Officer since April 2005. Senior Vice President and Chief Financial Officer of Kmart Corporation (retailer) from January 2004 to March 2005; Senior Vice President and Controller of the Chrysler Division of DaimlerChrysler Corporation (automotive) from 1998 to 2003.

Thomas A. Gosnell, 55 — Senior Vice President and President, Commercial Vehicle Systems since November 2000. Senior Vice President and President, Heavy Vehicle Systems Aftermarket Products from July 2000 to November 2000.

Perry L. Lipe, 59 — Senior Vice President and Chief Information Officer since July 2000.

Rakesh Sachdev, 49 — Senior Vice President, Corporate Strategy, since April 2005. Vice President and Controller from August 2003 to March 2005; Vice President and General Manager, Worldwide Braking Systems from December 2000 to July 2003; Vice President and General Manager, Worldwide Trailer Products from July 2000 to December 2000.

Ernest T. Whitus, 50 — Senior Vice President, Human Resources, since April 2001. Vice President, Human Resources-Commercial Vehicle Systems from July 2000 to April 2001.

Bonnie Wilkinson, 55 — Vice President and Secretary since November 2001. Assistant General Counsel from July 2000 to November 2001.

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

PART II

Item 5. Market for the Registrant’s Common Equity and Related Stockholder Matters.

ArvinMeritor’s common stock, par value $1 per share (“Common Stock”), is listed on the New York Stock Exchange (“NYSE”) and trades under the symbol “ARM.” On October 31, 2005, there were 29,047 shareowners of record of ArvinMeritor’s Common Stock.

The high and low sale prices per share of ArvinMeritor Common Stock for each quarter of fiscal years 2005 and 2004 were as follows:

	Fiscal Year 2005				Fiscal Year 2004
Quarter Ended	High		Low		High		Low
December 31	$	22.83	$	16.25	$	23.97	$	16.45
March 31		22.62		15.15		26.24		18.48
June 30		19.92		11.74		22.10		17.58
September 30		20.22		15.70		20.32		18.03

Quarterly cash dividends in the amount of $0.10 per share were declared and paid in each quarter of the last two fiscal years.

On January 7, 2005, the company issued 130,573 shares of Common Stock to two former executive officers in settlement of deferred share awards made to them in prior years under the company’s Incentive Compensation Plan. The issuance of these securities was exempt from registration under the Securities Act of 1933, as a transaction not involving a public offering under Section 4(2).

On February 26, 2005, the company issued 4,873 shares of Common Stock to a retiring non-employee director in settlement of restricted share units that were awarded to him in 2004 as an annual grant and in lieu of cash payment of quarterly retainer and meeting fees for board service under the 2004 Directors Stock Plan. On July 31, 2005, the company issued 6,900 shares of Common Stock to another retiring non-employee director of the company in settlement of restricted share units that had been awarded to him in 2004 and 2005 as annual grants under the 2004 Directors Stock Plan. In addition, effective October 1, 2005, the company issued 912 shares of Common Stock to a non-employee director of the company, pursuant to the terms of the 2004 Directors Stock Plan, in lieu of cash payment of quarterly retainer and meeting fees for board service. In each case, the issuance of these securities was exempt from registration under the Securities Act of 1933, as a transaction not involving a public offering under Section 4(2).

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

Item 6. Selected Financial Data.

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

	Year Ended September 30,
SUMMARY OF OPERATIONS	2005			2004			2003			2002			2001
Sales
Light Vehicle Systems	$	4,849		$	4,818		$	4,301		$	3,541		$	3,503
Commercial Vehicle Systems		4,054			3,215			2,422			2,249			2,199
Total	$	8,903		$	8,033		$	6,723		$	5,790		$	5,702

Income from Continuing Operations (1)	$	33		$	127		$	100		$	96		$	5
Income (Loss) from Discontinued Operations (2)		(21	)		(169	)		37			53			30
Income (Loss) Before Cumulative Effect of Accounting Change		12			(42	)		137			149			35
Cumulative Effect of Accounting Change, Net of Tax		—			—			(4	)		(42	)		—
Net Income (Loss)	$	12		$	(42	)	$	133		$	107		$	35

BASIC EARNINGS (LOSS) PER SHARE
Continuing Operations (1)	$	0.48		$	1.89		$	1.50		$	1.44		$	0.08
Discontinued Operations (2)		(0.31	)		(2.51	)		0.55			0.80			0.45
Cumulative Effect of Accounting Change		—			—			(0.06	)		(0.63	)		—
Basic earnings (loss) per share	$	0.17		$	(0.62	)	$	1.99		$	1.61		$	0.53

DILUTED EARNINGS (LOSS) PER SHARE
Continuing Operations (1)	$	0.47		$	1.85		$	1.48		$	1.43		$	0.08
Discontinued Operations (2)		(0.30	)		(2.46	)		0.54			0.79			0.45
Cumulative Effect of Accounting Change		—			—			(0.06	)		(0.63	)		—
Diluted earnings (loss) per share	$	0.17		$	(0.61	)	$	1.96		$	1.59		$	0.53
Cash dividends per share	$	0.40		$	0.40		$	0.40		$	0.40		$	0.76

FINANCIAL POSITION AT SEPTEMBER 30
Total assets	$	5,870		$	5,639		$	5,448		$	4,717		$	4,408
Short-term debt		131			3			18			15			93
Long-term debt		1,451			1,487			1,541			1,473			1,370

(1)

Fiscal year 2005 income from continuing operations and related diluted earnings per share include restructuring charges of $117 million ($72 million after-tax, or $1.03 per share), charges associated with certain customer bankruptcies of $14 million ($9 million after-tax, or $0.13 per share), environmental charges of $7 million ($4 million after-tax, or $0.06 per share), and a gain on divestitures of $4 million ($3 million after-tax, or $0.04 per share). Fiscal year 2004 income from continuing operations and related diluted earnings per share include restructuring charges of $15 million ($11 million after-tax, or $0.16 per share), environmental remediation charges of $11 million ($8 million after-tax, or $0.12 per share), a withdrawn tender offer net charge of $9 million ($6 million after-tax, or $0.09 per share), and a gain on sale of a ride control joint venture of $20 million. Fiscal year 2003 income from continuing operations and related diluted earnings per share include restructuring charges of $20 million ($14 million after-tax, or $0.21 per share) and a gain on divestitures of $15 million ($11 million after-tax, or $0.15 per share). Fiscal year 2002 income from continuing operations and diluted earnings per share includes restructuring charges of $11 million ($8 million after-tax, or $0.13 per share). Fiscal year 2001 income from continuing operations and diluted earnings per share include restructuring charges of $67 million ($45 million after-tax, or $0.68 per share), an employee separation charge

of $12 million ($8 million after-tax, or $0.12 per share), and an environmental charge of $5 million ($3 million after-tax, or $0.05 per share).

(2)

Fiscal year 2005 includes a non-cash impairment charge of $43 million ($28 million after-tax) to record certain North American LVA businesses at fair value. Fiscal year 2004 includes a non-cash goodwill impairment charge of $190 million ($2.77 per diluted share) in our LVA business.

Item 7. Management’s Discussion and Analysis of Financial Conditions and Results of Operations.

Overview

ArvinMeritor is a global supplier of a broad range of integrated systems, modules and components to the motor vehicle industry. The company serves light vehicle, commercial truck, trailer and specialty original equipment manufacturers and certain aftermarkets. Headquartered in Troy, Michigan, the company employs approximately 29,000 people at more than 120 manufacturing facilities in 25 countries. ArvinMeritor common stock is traded on the New York Stock Exchange under the ticker symbol ARM.

Our business continues to address a number of challenging industry-wide issues including:

•

Excess capacity;

•

High commodity prices, particularly steel and energy, including high oil prices;

•

Weakened financial strength of some original equipment manufacturers (OEM) and suppliers;

•

Changing production volumes at our OEM customers and changes in product mix in North America;

•

OEM pricing pressures; and

•

Currency exchange rate volatility.

In response to these issues, we continue to rationalize, restructure and refocus our businesses. During fiscal year 2005, we announced certain restructuring plans, including the elimination of salaried positions and the consolidation, downsizing, closure or sale of 11 underperforming facilities. These actions, which are primarily targeted at our Light Vehicle Systems (LVS) business segment, are intended to align capacity with industry conditions, utilize assets more efficiently, improve operations and lower costs. We expect the total estimated cost of these actions to be approximately $135 million, of which approximately $110 million will be cash costs. These estimated costs are comprised of the following:

•

Employee severance costs related to the reduction of approximately 400 to 500 salaried employees across the entire company;

•

Employee severance and facility shutdown costs associated with the closure, sale or consolidation of a number of LVS facilities, and the reduction of approximately 250 salaried and 1,350 hourly employees associated with these facilities. These headcount reductions are in addition to the 400 to 500 salaried employees noted above;

•

Employee severance and facility shutdown costs associated with the closure or consolidation of several Commercial Vehicle Systems (CVS) facilities, and the reduction of approximately 50 salaried and 200 hourly employees associated with these facilities. These headcount reductions are in addition to the 400 to 500 salaried employees noted above; and

•

Impairment of long-lived assets, primarily machinery and equipment associated with the closure or consolidation of these facilities.

We recorded restructuring costs of $101 million related to these actions during fiscal year 2005. These costs included $71 million of employee termination benefits, $26 million of asset impairment charges and $4 million of other costs associated with the closure of facilities. In accordance with accounting principles generally accepted in the United States, we expect the remainder of the restructuring costs to be recorded in the next 12 months.

In addition to these actions, in the first quarter of fiscal year 2005, we announced the closure of a Sheffield, England, stabilizer bar facility owned by our 57-percent owned consolidated joint venture, Meritor Suspensions Systems Company (MSSC). Total restructuring costs recorded in fiscal year 2005 related to this action were $9 million and primarily related to severance and asset impairments.

Despite the significant challenges that the entire automotive industry continues to face, our CVS business segment reported record sales. This was primarily due to higher production volumes at many of our CVS customers. When compared to the prior year, North American heavy-duty (commonly referred to as Class 8 trucks) increased approximately 38 percent, while Western European heavy and medium duty truck production volumes increased approximately 12 percent. Additionally, in the first quarter of fiscal year 2005, CVS formed two consolidated joint ventures in France with AB Volvo to manufacture and distribute axles. These joint ventures increased sales $226 million.

A summary of our results for fiscal year 2005 is as follows:

•

Sales were $8.9 billion, up 11 percent from fiscal year 2004. The increase in sales is primarily attributable to CVS.

•

Operating margins were 1.5 percent, down from 3.2 percent a year ago. Fiscal year 2005 operating income includes $117 million of restructuring costs, of which $101 million is associated with our fiscal year 2005 programs announced in May.

•

Diluted earnings per share from continuing operations were $0.47, compared to $1.85 per share in fiscal year 2004.

•

Diluted loss per share from discontinued operations was $0.30, compared to diluted loss per share of $2.46 in fiscal year 2004. Fiscal year 2005 included an impairment charge of $0.40 per diluted share and fiscal year 2004 included a goodwill impairment charge of $2.77 per diluted share.

•

Net income was $12 million or $0.17 per diluted share, compared to net loss of $42 million, or $0.61 per diluted share, last year.

During fiscal year 2005, the industries in which we operate continued to experience substantial increases in the cost of steel, a significant raw material we use to make our products. In fiscal year 2005, we experienced steel price increases, net of customer recoveries, of approximately $90 million compared to fiscal year 2004.

In addition to higher steel costs, intense competition, coupled with global excess capacity most notably in the light vehicle industry, has created pressure from our customers to reduce our selling prices. We continuously work to address these competitive challenges and offset price decreases by reducing costs, improving productivity and restructuring operations. Excluding higher net steel costs, the company’s cost reduction and productivity programs offset the impact of lower selling prices to our customers.

Also impacting our industry is the rising cost of pension and other post-retirement benefits. To partially address this issue, the company amended certain retiree medical plans in fiscal year 2004. These plan amendments will phase out the benefit currently provided by the company by fiscal year 2023. We expect these plan changes to reduce retiree medical expenses and benefit payments in the coming years. Including the impact of these amendments, retiree medical expenses in fiscal year 2005 were $32 million, down from $57 million in fiscal year 2004, and future annual benefit payments are expected to be reduced by $26 million by fiscal 2010. However, we expect pension expense to increase approximately $25 million in fiscal year 2006 as a result of the reduction in the discount rate used to measure the projected benefit obligation to 5.30 percent from 6.25 percent.

We previously announced our intention to divest our Light Vehicle Aftermarket (LVA) business segment. We believe divesting this business will enable us to concentrate better on our core competencies while strengthening our balance sheet. For financial accounting and reporting purposes, LVA is reported as discontinued operations for all periods presented. Due to evolving industry dynamics, the timing to complete the divestiture of LVA has extended into fiscal year 2006. In the fourth quarter of fiscal year 2005, management concluded that it is more likely that LVA’s North American businesses will be sold individually rather than as a whole. Although we do not believe this change in strategy materially impacts the aggregate expected value to be realized on the sale of the entire LVA business, it did require us, for accounting purposes, to evaluate fair value on an individual business basis rather

than LVA North America as a whole. This resulted in a non-cash impairment charge of $43 million ($28 million after-tax, or $0.40 per diluted share) to record certain LVA businesses at fair value. Our previous strategy was to sell the LVA North American business as a whole. Accordingly, the company’s previous analysis of impairment was on the total North American business. This analysis indicated that the aggregate fair value of the North American LVA business, when taken as a whole, exceeded its carrying value.

In addition to the planned divestiture of LVA, we have completed other divestitures as part of our plan to rationalize operations and focus on core businesses. These divestitures include:

•

Certain assets of our CVS off-highway brake business in October 2005;

•

Our LVS Columbus, Indiana automotive stamping and components manufacturing business in December 2004;

•

Our coil coating business in November 2004;

•

Our commercial vehicle systems trailer beam fabrication facility in the third quarter of fiscal year 2004;

•

Our 75-percent shareholdings in AP Amortiguadores, S.A. (APA) in the second quarter of fiscal year 2004;

•

Net assets related to the manufacturing and distribution of CVS off-highway planetary axles in fiscal year 2003; and

•

Our LVS exhaust tube manufacturing facility in fiscal year 2003;

Cash used for operating activities before the impact of the accounts receivable securitization and factoring programs for fiscal year 2005 was $13 million, compared to $406 million of cash provided by operating activities before the impact of the accounts receivable securitization and factoring programs last fiscal year. The decrease in cash flow was largely driven by lower income and higher uses of cash for working capital, including higher cash restructuring costs. This was partially offset by lower pension and retiree medical contributions. In addition, fiscal year 2004 operating cash flow was favorably impacted by ArvinMeritor’s accounting calendar, which included 53 weeks compared to 52 weeks in fiscal year 2005.

Market Outlook

Historically, the company has experienced periodic fluctuations in demand for light, commercial and specialty vehicles and certain aftermarkets, most notably in our commercial vehicle markets in North America. Vehicle production in our principal markets for the last five fiscal years is shown below:

	Year Ended September 30,
	2005		2004		2003		2002		2001
Light Vehicles (in millions):
North America		15.6		15.9		16.0		16.3		15.6
South America		2.7		2.3		2.0		1.9		2.2
Western Europe (including Czech Republic)		16.4		16.9		16.7		16.5		16.9
Asia/Pacific		22.5		20.9		18.9		17.3		16.9
Commercial Vehicles (in thousands):
North America, Heavy-Duty Trucks		324		235		164		169		150
North America, Medium-Duty Trucks		208		172		141		133		144
United States and Canada, Trailers		327		284		213		145		208
Western Europe, Heavy- and Medium-Duty Trucks		421		376		364		363		386
Western Europe, Trailers		115		109		98		101		110

Source: Automotive industry publications and management estimates.

Our fiscal year 2006 outlook for light vehicle production is 15.6 million vehicles in North America and 16.4 million vehicles in Western Europe. We expect that North American heavy-duty truck production will decrease about 6 percent in fiscal year 2006 to an estimated 305,000 units. In Western Europe, we expect production of heavy- and medium- duty trucks to increase slightly to an estimated 421,000 units.

Company Outlook

We are beginning to see a moderating of steel price increases; however, we believe the price of steel will continue to challenge our industry in fiscal year 2006. We have taken actions to help mitigate this issue including finding new global steel sources, identifying alternative materials, finding ways to re-engineer our products to be less dependent on steel, consolidating and selling scrap from many of our facilities and negotiating with our customers to recover some of the increased costs. We continue to further consolidate and restructure our LVS businesses to address competitive challenges in the automotive supplier industry. In addition to the restructuring actions noted above, we continue to rationalize and refocus our core businesses, additional restructuring actions may be required.

Significant factors that could affect the company’s results in fiscal year 2006 include:

•

Our ability to recover steel, plastics and energy price increases from our customers;

•

Additional restructuring actions and the timing and recognition of restructuring charges;

•

Higher than planned price reductions to our customers;

•

The financial strength of our suppliers and customers, including potential bankruptcies;

•

Our ability to implement planned productivity and cost reduction initiatives;

•

The impact of any acquisitions or divestitures;

•

Production disruptions at customer and supplier facilities;

•

Significant gains or losses of existing business from our customers;

•

The impact of currency fluctuations on sales and operating income.

Non-GAAP Measures

In addition to the results reported in accordance with accounting principles generally accepted in the United States (GAAP), we have provided information regarding “cash flow from operations before accounts receivable securitization and factoring programs”, a non-GAAP financial measure. This non-GAAP measure is defined as net cash provided by operating activities before the net change in accounts receivable securitized and factored. The company believes it is appropriate to exclude the net change in securitized and factored accounts receivable since the sale of receivables may be viewed as a substitute for borrowing activity.

We believe that this non-GAAP financial measure is useful to both management and investors in the analysis of our financial position. This non-GAAP measure should not be considered a substitute for cash provided by operating activities or other cash flow statement data prepared in accordance with GAAP or as a measure of liquidity. In addition, cash provided by operations before receivable securitization and factoring programs does not reflect funds available for investment or other discretionary uses. See “Cash Flows” below for a reconciliation of cash flows from operating activities to cash flow from operations before accounts receivable securitization and factoring programs.

Results of Operations

The following is a summary of our financial results for the last three fiscal years:

	September 30,
	2005			2004			2003
	(in millions, except per share amounts)
Sales:
Light Vehicle Systems	$	4,849		$	4,818		$	4,301
Commercial Vehicle Systems		4,054			3,215			2,422
SALES	$	8,903		$	8,033		$	6,723
Operating Income (Loss):
Light Vehicle Systems	$	(53	)	$	123		$	135
Commercial Vehicle Systems		193			164			111
SEGMENT OPERATING INCOME		140			287			246
Environmental remediation costs		(7	)		(11	)		—
Costs for withdrawn tender offer		—			(16	)		—
Unallocated corporate costs		(3	)		—			—
OPERATING INCOME		130			260			246
Equity in earnings of affiliates		28			19			8
Gain on sale of marketable securities		—			7			—
Interest expense, net and other		(127	)		(107	)		(104	)
INCOME BEFORE INCOME TAXES		31			179			150
Benefit (provision) for income taxes		5			(44	)		(45	)
Minority interests		(3	)		(8	)		(5	)
INCOME FROM CONTINUING OPERATIONS		33			127			100
INCOME (LOSS) FROM DISCONTINUED OPERATIONS		(21	)		(169	)		37
INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE		12			(42	)		137
Cumulative effect of accounting change, net of tax		—			—			(4	)
NET INCOME (LOSS)	$	12		$	(42	)	$	133

DILUTED EARNINGS (LOSS) PER SHARE
Continuing operations	$	0.47		$	1.85		$	1.48
Discontinued operations		(0.30	)		(2.46	)		0.54
Cumulative effect of accounting change		—			—			(0.06	)
Diluted earnings (loss) per share	$	0.17		$	(0.61	)	$	1.96

DILUTED AVERAGE COMMON SHARES OUTSTANDING		69.9			68.6			67.9

2005 Compared to 2004

Sales

The following table reflects geographical business segment sales for fiscal years 2005 and 2004. The reconciliation is intended to reflect the trend in business segment sales and to illustrate the impact changes in foreign currency exchange rates and acquisitions and divestitures had on sales (in millions).

											Dollar Change Due to
	2005		2004		Dollar Change			% Change			Currency		Acquisitions/ Divestitures			Volume/ Other
LVS:
North America	$	2,071	$	2,010	$	61			3	%	$	17	$	(70	)	$	114
Europe		2,262		2,337		(75	)		(3	)%		153		(99	)		(129	)
Asia and Other		516		471		45			10	%		35		(33	)		43
		4,849		4,818		31			1	%		205		(202	)		28
CVS:
North America		2,475		2,014		461			23	%		4		9			448
Europe		1,106		827		279			34	%		54		226			(1	)
Asia and Other		473		374		99			26	%		31		—			68
		4,054		3,215		839			26	%		89		235			515
SALES	$	8,903	$	8,033	$	870			11	%	$	294	$	33		$	543

Continuing Operations

Sales for fiscal year 2005 were $8,903 million, up $870 million, or 11 percent, from fiscal year 2004. The increase in sales was attributable to stronger commercial vehicle truck and trailer volumes in our CVS business segment; new business awards, principally associated with suspension modules in our LVS business; and foreign currency translation, primarily due to the stronger euro in relation to the U.S. dollar. These increases were partially offset by lower volumes in certain of our European LVS businesses. Acquisitions, primarily our two new consolidated joint ventures with AB Volvo, added sales of $235 million; divestitures of certain LVS businesses in fiscal years 2005 and 2004 reduced sales in fiscal year 2005 by $202 million.

Business Segments

Light Vehicle Systems (LVS) sales increased to $4,849 million in fiscal year 2005, up $31 million, or one percent, from $4,818 million in fiscal year 2004. The effect of foreign currency translation, primarily as a result of the stronger euro when compared to the US dollar, increased sales by $205 million. Divestitures, primarily the sale of APA in fiscal year 2004, and the sale of an automotive stamping and components manufacturing operation in the first quarter of fiscal year 2005, reduced sales by $202 million. Excluding the impact of foreign currency translation and divestitures, sales were up slightly. Higher pass-through sales of approximately $300 million, principally associated with our new suspension module business, were partially offset by lower OE demand particularly in certain of our European businesses. Pass-through sales increased to approximately $1,300 million in fiscal year 2005 from approximately $1,000 million in fiscal year 2004. Pass-through sales are products sold to our customers where we acquire the material and assemble it into the final product. These pass-through sales carry minimal margins as we have little engineering or manufacturing responsibility.

Commercial Vehicle Systems (CVS) sales were $4,054 million, up $839 million, or 26 percent, from fiscal year 2004. The increase in sales was primarily attributable to stronger commercial vehicle truck and trailer volumes. Compared to fiscal year 2004, production volumes in North America for commercial vehicle heavy-duty trucks (Class 8) increased approximately 38 percent, medium duty trucks increased 21 percent and trailer volumes increased 15 percent. South American truck volumes increased 17 percent. Acquisitions, primarily the formation of two joint ventures with AB Volvo in the first quarter of fiscal 2005, added sales of $235 million.

Operating Income and Operating Margins

The following table reflects operating income and operating margins for fiscal years 2005 and 2004 (dollars in millions).

	Operating Income												Operating Margins
	2005			2004			$ Change			% Change			2005			2004			Change
LVS	$	(53	)	$	123		$	(176	)		(143	)%		(1.1	)%		2.6	%		(3.7	) pts
CVS		193			164			29			18	%		4.8	%		5.1	%		(0.3	) pts
Total Segment		140			287			(147	)		(51	)%		1.6	%		3.6	%		(2.0	) pts
Environmental remediation costs		(7	)		(11	)		4			36	%
Costs for withdrawn tender offer		—			(16	)		16			100	%
Unallocated corporate costs		(3	)		—			(3	)		—
TOTAL	$	130		$	260		$	(130	)		(50	)%		1.5	%		3.2	%		(1.7	) pts

Operating income for fiscal year 2005 was $130 million, a decrease of $130 million, compared to fiscal year 2004. Operating margin was 1.5 percent, down from 3.2 percent. We recorded restructuring costs of $117 million during fiscal year 2005 as follows (in millions):

	LVS		CVS		Total
New actions (1)
Facility rationalization	$	56	$	19	$	75
Asset impairments		26		—		26
Total new actions		82		19		101
Previous actions		16		—		16
Total restructuring costs	$	98	$	19	$	117

(1)

New actions are programs announced in May 2005

In addition to the new restructuring actions, we recorded additional restructuring charges of $16 million in fiscal year 2005. These costs were primarily for severance and other employee termination costs, related to a reduction of approximately 20 salaried and 355 hourly employees, and asset impairments. These costs relate to the closure of the Sheffield, England, stabilizer bar facility, the consolidation of two facilities in Brazil and a reduction in workforce in our operations in Spain.

We recorded restructuring charges of $15 million in fiscal year 2004. These costs included severance and other employee termination costs of $10 million related to a reduction of approximately 50 salaried employees and 575 hourly employees in our LVS business, and $5 million associated with certain administrative and managerial employee termination costs.

Despite the higher sales levels, operating income in fiscal year 2005 was negatively impacted by the restructuring costs noted above and steel costs, which, net of recoveries, were approximately $90 million higher than in fiscal year 2004. Also impacting operating income in fiscal year 2005 were $14 million of charges associated with certain customer bankruptcies; $7 million of environmental remediation costs, primarily associated with a former Rockwell facility; and a $4 million gain on the sale of an automotive stamping and components manufacturing operation in the first quarter of fiscal year 2005. Retiree medical and pension costs were $16 million lower than fiscal year 2004. This is a result of amending certain retiree medical plans in fiscal year 2004, which reduced retiree medical expense by $22 million compared to fiscal year 2004.

Operating income in fiscal year 2004 includes the costs associated with the withdrawn tender offer for the outstanding shares of Dana Corporation (Dana) of $16 million (before a non-operating gain of $7 million on the sale of Dana stock owned by the company), environmental remediation costs of $11 million (associated with a different Rockwell facility), and a gain on the sale of APA of $20 million.

Selling, general and administrative expenses as a percentage of sales decreased to 4.2 percent in fiscal year 2005 from 4.8 percent in fiscal year 2004 due to reduced headcount resulting from the restructuring actions and our continued efforts to reduce selling, general and administrative spending.

Business Segments

LVS operating loss was $53 million, a decrease of $176 million from operating income of $123 million in fiscal year 2004 and operating margins decreased to a negative 1.1 percent from 2.6 percent. The decrease in operating income is primarily due to the previously mentioned restructuring actions and higher steel costs in fiscal year 2005. LVS continued its restructuring efforts in fiscal year 2005 and recorded $98 million of restructuring charges associated with facility closures and consolidations and workforce reductions compared to $10 million a year ago. These costs include $56 million of employee termination costs and $26 million of asset impairments related to the restructuring actions announced in May 2005. Additionally, LVS recorded $16 million of restructuring costs associated with the closure of its Sheffield, England, stabilizer bar facility, the consolidation of two facilities in Brazil and a reduction in workforce in its operations in Spain. The $16 million relates to employee termination benefits and other costs of $11 million and asset impairments of $5 million. Total headcount reductions associated with all of these actions were approximately 2,250, of which 500 were salaried employees and 1,750 were hourly employees.

LVS continued to experience narrowing margins in fiscal year 2005 due primarily to higher steel costs. LVS incurred higher net steel costs of approximately $40 million in fiscal year 2005. Also impacting operating income in fiscal year 2005, were lower value added sales volumes (non pass-through sales), $11 million of charges associated with certain customer bankruptcies and a $4 million net charge associated with a product warranty matter. LVS operating income improved by $13 million from fiscal year 2004 due to a reduction in foreign exchange loss from 2005 attributable to the impact of hedging foreign exchange transactions in fiscal year 2005 that were not hedged in fiscal year 2004. LVS also recorded a $4 million gain on the sale of an automotive stamping and components manufacturing operation in the first quarter of fiscal year 2005. Operating income in fiscal year 2004 included the $20 million gain on the sale of APA.

CVS operating income was $193 million, an increase of $29 million from fiscal year 2004. Operating margin declined to 4.8 percent, down from 5.1 percent in fiscal year 2004. The increase in operating income was largely attributable to higher sales volumes. The benefits of the higher sales volumes were partially offset by higher net steel costs of $50 million, $19 million of restructuring costs principally associated with the reduction of approximately 225 salaried employees and 200 hourly employees. Also negatively impacting operating income was a $3 million charge associated with the bankruptcy of a European trailer customer. Retiree medical and pension costs were $18 million lower than the previous year, as a result of the amendment to certain retiree medical plans in fiscal year 2004. Fiscal year 2004 operating income included a $4 million charge in the fourth quarter associated with the settlement of a TRW warranty matter.

Other Income Statement Items

Equity in earnings of affiliates was $28 million in fiscal year 2005, compared to $19 million in fiscal year 2004. The increase was primarily related to improved performance and higher earnings of our commercial vehicle affiliates. The increase was also partially driven by the reduction in losses associated with the dissolution of our CVS transmission joint venture with ZF Friedrichshafen in the second quarter of fiscal year 2004. We recorded equity losses of $4 million in fiscal year 2004 related to this joint venture.

Interest expense, net and other was $127 million in fiscal year 2005 compared to $107 million in fiscal year 2004. The increase in interest expense was primarily attributable to higher interest rates on our variable rate debt compared with fiscal year 2004. Also included in interest expense, net and other in fiscal year 2005 was a $4 million loss on debt extinguishment associated with the debt exchange completed in the fourth quarter of fiscal year 2005. The loss on debt extinguishment primarily consisted of the premium paid to note holders to exchange their notes. See “Liquidity and Contractual Obligations” for further details concerning the debt extinguishment.

Benefit for income taxes was $5 million in fiscal year 2005, resulting in an effective rate of negative 16 percent. The effective tax rate was 25 percent in fiscal year 2004. The decline in the tax rate is principally associated with lower income levels relative to our structural tax position.

Minority interest expense was $3 million in fiscal year 2005 compared to $8 million in fiscal year 2004. Minority interests represent our minority partners’ share of income or loss associated with our less than 100-percent owned consolidated joint ventures. The decrease in minority interest expense in fiscal year 2005 is primarily related

to our minority partners’ share of $9 million of restructuring costs associated with the closure of the Sheffield, England, stabilizer bar facility in our MSSC joint venture.

Income from continuing operations for fiscal year 2005 was $33 million, or $0.47 per diluted share, compared to $127 million, or $1.85 per diluted share in fiscal 2004. The decrease was primarily attributable to the $117 million of restructuring costs and higher net steel costs of approximately $90 million, offset partially by the higher CVS sales volumes.

Loss from discontinued operations was $21 million in fiscal 2005 compared to a loss from discontinued operations of $169 million in fiscal 2004. As previously described, in the fourth quarter of fiscal 2005, management concluded that it is more likely that LVA’s North American businesses will be sold individually. As a result, the company evaluated fair value on an individual business basis rather than LVA North America as a whole. This resulted in a non-cash impairment charge of $43 million ($28 million after-tax) to record certain LVA North American businesses at fair value. Also impacting fiscal year 2005, were $6 million of after-tax changeover costs in LVA, associated with a new supply agreement with a significant customer, which were more than offset by lower depreciation expense. In accordance with accounting principles generally accepted in the United States, our LVA business segment discontinued depreciating fixed assets as of September 30, 2004. Depreciation expense in fiscal year 2004 was approximately $14 million after-tax. In an effort to lower fixed costs and improve profitability resulting from weakening demand in the aftermarket business, LVA recorded restructuring costs totaling $2 million and $3 million during fiscal years 2005 and 2004, respectively.

Also impacting loss from discontinued operations in fiscal year 2005 was the loss of approximately $6 million of Roll Coater income as a result of the sale of this business in November 2004. This loss of net income was offset partially by a $2 million gain on the sale of Roll Coater. The effective tax rate for discontinued operations was 7 percent in fiscal year 2005, down from 41 percent in fiscal year 2004. The decrease in the effective tax rate was primarily due to lower income levels.

The fiscal year 2004 results included a non-cash goodwill impairment charge of $190 million ($2.77 per diluted share) in our LVA business. For more information on this impairment charge see Note 3 of the Notes to Consolidated Financial Statements.

2004 Compared to 2003

Sales

The following table reflects geographical business segment sales for fiscal years 2004 and 2003. The reconciliation is intended to reflect the trend in business segment sales and to illustrate the impact changes in foreign currency exchange rates and acquisitions and divestitures had on sales (in millions).

										Dollar Change Due to
	2004		2003		Dollar Change		% Change			Currency		Acquisitions/ Divestitures			Volume/ Other
LVS:
North America	$	2,010	$	1,923	$	87		5	%	$	8	$	(15	)	$	94
Europe		2,337		1,941		396		20	%		246		106			44
Asia and Other		471		437		34		8	%		36		(26	)		24
		4,818		4,301		517		12	%		290		65			162
CVS:
North America		2,014		1,492		522		35	%		—		10			512
Europe		827		652		175		27	%		90		—			85
Asia and Other		374		278		96		35	%