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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended July 2, 2017
Commission File No. 1-15983

MERITOR, INC.

(Exact name of registrant as specified in its charter)
 
Indiana
38-3354643
 
 
(State or other jurisdiction of incorporation or
(I.R.S. Employer Identification
 
 
organization)
No.)
 
 
 
 
 
2135 West Maple Road, Troy, Michigan
48084-7186
 
 
(Address of principal executive offices)
(Zip Code)
 
(248) 435-1000

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
 
Yes
X
No
 
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Registration S-T during the preceding twelve months (or for such shorter period that the registrant was required to submit and post such files).
 
Yes
X
No
 
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
X
 
Accelerated filer
 
Non-accelerated filer
 
(Do not check if a smaller reporting company)
Smaller reporting company
 
Emerging growth company
 
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
 
Yes
 
No
X
 
88,565,934 shares of Common Stock, $1.00 par value, of Meritor, Inc. were outstanding on July 31, 2017.


INDEX
 
 
 
Page
No.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

2

MERITOR, INC.

PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(in millions, except per share amounts)
 
Three Months Ended June 30,
 
Nine Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
 
(Unaudited)
Sales
$
920

 
$
841

 
$
2,425

 
$
2,471

Cost of sales
(778
)
 
(714
)
 
(2,073
)
 
(2,119
)
GROSS MARGIN
142

 
127

 
352

 
352

Selling, general and administrative
(73
)
 
(59
)
 
(192
)
 
(175
)
Restructuring costs
—

 
(6
)
 
(4
)
 
(9
)
Other operating expense, net
—

 
—

 
(5
)
 
(3
)
OPERATING INCOME
69

 
62

 
151

 
165

Other income (expense), net
1

 
—

 
1

 
(1
)
Equity in earnings of affiliates
14

 
9

 
32

 
26

Interest expense, net
(21
)
 
(20
)
 
(63
)
 
(63
)
INCOME BEFORE INCOME TAXES
63

 
51

 
121

 
127

Provision for income taxes
(11
)
 
(8
)
 
(30
)
 
(22
)
INCOME FROM CONTINUING OPERATIONS
52

 
43

 
91

 
105

LOSS FROM DISCONTINUED OPERATIONS, net of tax
(1
)
 
(1
)
 
(1
)
 
(4
)
NET INCOME
51

 
42

 
90

 
101

Less: Net income attributable to noncontrolling interests
(3
)
 
(1
)
 
(5
)
 
(2
)
NET INCOME ATTRIBUTABLE TO MERITOR, INC.
$
48

 
$
41

 
$
85

 
$
99

NET INCOME ATTRIBUTABLE TO MERITOR, INC.
 
 
 
 
 
 
 
Net income from continuing operations
$
49

 
$
42

 
$
86

 
$
103

Loss from discontinued operations
(1
)
 
(1
)
 
(1
)
 
(4
)
Net income
$
48

 
$
41

 
$
85

 
$
99

BASIC EARNINGS (LOSS) PER SHARE
 
 
 
 
 
 
 
Continuing operations
$
0.55

 
$
0.47

 
$
0.98

 
$
1.13

Discontinued operations
(0.01
)
 
(0.01
)
 
(0.01
)
 
(0.04
)
       Basic earnings per share
$
0.54

 
$
0.46

 
$
0.97

 
$
1.09

DILUTED EARNINGS (LOSS) PER SHARE
 
 
 
 
 
 
 
Continuing operations
$
0.52

 
$
0.46

 
$
0.94

 
$
1.10

Discontinued operations
(0.01
)
 
(0.01
)
 
(0.01
)
 
(0.04
)
       Diluted earnings per share
$
0.51

 
$
0.45

 
$
0.93

 
$
1.06

 
 
 
 
 
 
 
 
Basic average common shares outstanding
88.4

 
89.8

 
87.9

 
91.2

Diluted average common shares outstanding
93.3

 
92.0

 
91.4

 
93.1


See notes to condensed consolidated financial statements.


3

MERITOR, INC.

CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS)
(in millions)


 
Three Months Ended June 30,
 
Nine Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
 
(Unaudited)
Net income
$
51

 
$
42

 
$
90

 
$
101

Other comprehensive income (loss):
 
 
 
 
 
 
 
Foreign currency translation adjustments:
 
 
 
 
 
 
 
     Attributable to Meritor, Inc.
17

 
(10
)
 
8

 
(6
)
     Attributable to noncontrolling interest
—

 
—

 
(1
)
 
—

Pension and other postretirement benefit related adjustments
11

 
7

 
33

 
25

Unrealized gain (loss) on investments and foreign exchange contracts
(2
)
 
3

 
—

 
5

Other comprehensive income, net of tax
26

 
—

 
40

 
24

Total comprehensive income
77

 
42

 
130

 
125

Less: Comprehensive income attributable to noncontrolling interest
(3
)
 
(1
)
 
(4
)
 
(2
)
Comprehensive income attributable to Meritor, Inc.
$
74

 
$
41

 
$
126

 
$
123


See notes to condensed consolidated financial statements.


4

MERITOR, INC.

CONDENSED CONSOLIDATED BALANCE SHEET
(in millions)

 
June 30,
2017
 
September 30,
2016
 
(Unaudited)
 
 
ASSETS
 
 
 
CURRENT ASSETS:
 
 
 
Cash and cash equivalents (1)
$
231

 
$
160

Receivables, trade and other, net (1)
500

 
396

Inventories (1)
360

 
316

Other current assets
37

 
33

TOTAL CURRENT ASSETS
1,128

 
905

NET PROPERTY (1)
430

 
439

GOODWILL (1)
391

 
390

OTHER ASSETS
763

 
760

TOTAL ASSETS
$
2,712

 
$
2,494

LIABILITIES, MEZZANINE EQUITY AND EQUITY (DEFICIT)
 
 
 
CURRENT LIABILITIES:
 
 
 
Short-term debt
$
132

 
$
14

       Accounts and notes payable (1)
602

 
475

Other current liabilities
277

 
268

TOTAL CURRENT LIABILITIES
1,011

 
757

LONG-TERM DEBT
858

 
982

RETIREMENT BENEFITS
667

 
703

OTHER LIABILITIES
220

 
238

TOTAL LIABILITIES
2,756

 
2,680

COMMITMENTS AND CONTINGENCIES (See Note 20)

 

MEZZANINE EQUITY:
 
 
 
Convertible debt with cash settlement
12

 
—

EQUITY (DEFICIT):
 
 
 
Common stock (June 30, 2017 and September 30, 2016, 101.4 and 99.6 shares issued and 88.6 and 86.8 shares outstanding, respectively)
101

 
99

Additional paid-in capital
875

 
876

Accumulated deficit
(156
)
 
(241
)
Treasury stock, at cost (at both June 30, 2017 and September 30, 2016, 12.8 shares)
(136
)
 
(136
)
Accumulated other comprehensive loss
(768
)
 
(809
)
Total deficit attributable to Meritor, Inc.
(84
)
 
(211
)
Noncontrolling interests (1)
28

 
25

TOTAL DEFICIT
(56
)
 
(186
)
TOTAL LIABILITIES, MEZZANINE EQUITY AND DEFICIT
$
2,712

 
$
2,494

(1) As of June 30, 2017, Assets and Liabilities held for sale were: (i) $1 million Cash and cash equivalents; (ii) $11 million Receivables, trade and other, net; (iii) $2 million Inventories; (iv) $3 million Net property; (v) $1 million Goodwill; (vi) $10 million Accounts and notes payable; and (vii) $2 million Noncontrolling interests. As of September 30, 2016, Assets and Liabilities held for sale were: (i) $1 million Cash and cash equivalents; (ii) $8 million Receivables, trade and other, net; (iii) $1 million Inventories; (iv) $5 million Net property; (v) $5 million Accounts and notes payable; and (vi) $3 million Noncontrolling interests.
See notes to condensed consolidated financial statements.

5

MERITOR, INC.

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(in millions)

 
Nine Months Ended June 30,
 
2017
 
2016
 
(Unaudited)
OPERATING ACTIVITIES
 
 
 
CASH PROVIDED BY OPERATING ACTIVITIES (See Note 10)
$
136

 
$
144

INVESTING ACTIVITIES
 
 
 
Capital expenditures
(52
)
 
(66
)
Other investing activities
—

 
3

Net investing cash flows provided by discontinued operations
2

 
4

CASH USED FOR INVESTING ACTIVITIES
(50
)
 
(59
)
FINANCING ACTIVITIES
 
 
 
Repayment of notes
—

 
(55
)
Debt issuance costs
(4
)
 
—

Other financing activities
(12
)
 
(15
)
Net change in debt
(16
)
 
(70
)
Repurchase of common stock
—

 
(81
)
CASH USED FOR FINANCING ACTIVITIES
(16
)
 
(151
)
EFFECT OF CHANGES IN FOREIGN CURRENCY EXCHANGE
RATES ON CASH AND CASH EQUIVALENTS
1

 
2

CHANGE IN CASH AND CASH EQUIVALENTS
71

 
(64
)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
160

 
193

CASH AND CASH EQUIVALENTS AT END OF PERIOD
$
231

 
$
129


See notes to condensed consolidated financial statements.



6

MERITOR, INC.

CONDENSED CONSOLIDATED STATEMENT OF EQUITY (DEFICIT)
(In millions)
(Unaudited)


 
Common
Stock
 
Additional
Paid-in
Capital
 
Accumulated
Deficit
 
Treasury Stock
 
Accumulated
Other
Comprehensive
Loss
 
Total Deficit
Attributable to
Meritor, Inc.
 
Noncontrolling
Interests
 
Total
Beginning balance at September 30, 2016
$
99

 
$
876

 
$
(241
)
 
$
(136
)
 
$
(809
)
 
$
(211
)
 
$
25

 
$
(186
)
Comprehensive income
—

 
—

 
85

 
—

 
41

 
126

 
4

 
130

Equity based compensation expense
—

 
12

 
—

 
—

 
—

 
12

 
—

 
12

Vesting of equity based awards
2

 
(2
)
 
—

 
—

 
—

 
—

 
—

 
—

Stock option exercises
—

 
2

 
—

 
—

 
—

 
2

 
—

 
2

Convertible debt with cash settlement
—

 
(12
)
 
—

 
—

 
—

 
(12
)
 
—

 
(12
)
Noncontrolling interest dividend
—

 
—

 
—

 
—

 
—

 
—

 
(1
)
 
(1
)
Other equity adjustments
—

 
(1
)
 
—

 
—

 
—

 
(1
)
 
—

 
(1
)
Ending Balance at June 30, 2017
$
101

 
$
875

 
$
(156
)

$
(136
)
 
$
(768
)
 
$
(84
)
 
$
28

 
$
(56
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance at September 30, 2015
$
99

 
$
865

 
$
(814
)
 
$
(55
)
 
$
(766
)
 
$
(671
)
 
$
25

 
$
(646
)
Comprehensive income
—

 
—

 
99

 
—

 
24

 
123

 
2

 
125

Equity based compensation expense
—

 
8

 
—

 
—

 
—

 
8

 
—

 
8

Repurchase of common stock
—

 
—

 
—

 
(81
)
 
—

 
(81
)
 
—

 
(81
)
Noncontrolling interest dividends
—

 
—

 
—

 
—

 
—

 
—

 
(2
)
 
(2
)
Ending Balance at June 30, 2016
$
99

 
$
873

 
$
(715
)

$
(136
)
 
$
(742
)
 
$
(621
)
 
$
25

 
$
(596
)

See notes to condensed consolidated financial statements.

7
Index
MERITOR, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)



1. Basis of Presentation
Meritor, Inc. (the “company” or “Meritor”), headquartered in Troy, Michigan, is a premier global supplier of a broad range of integrated systems, modules and components to original equipment manufacturers (“OEMs”) and the aftermarket for the commercial vehicle, transportation and industrial sectors. The company serves commercial truck, trailer, military, bus and coach, construction and other industrial OEMs and certain aftermarkets. The condensed consolidated financial statements are those of the company and its consolidated subsidiaries.
Certain businesses are reported in discontinued operations in the condensed consolidated statement of operations, condensed consolidated statement of cash flows and related notes for all periods presented. Additional information regarding discontinued operations is discussed in Note 4.
In the opinion of the company, the unaudited condensed consolidated financial statements contain all adjustments, consisting solely of adjustments of a normal, recurring nature, necessary to present fairly the financial position, results of operations and cash flows for the periods presented. These statements should be read in conjunction with the company’s audited consolidated financial statements and notes thereto included in the company's Annual Report on Form 10-K for the fiscal year ended September 30, 2016, as amended. The condensed consolidated balance sheet data as of September 30, 2016 was derived from audited financial statements but does not include all annual disclosures required by accounting principles generally accepted in the United States of America. The results of operations for the three and nine months ended June 30, 2017 are not necessarily indicative of the results for the full year.
The company’s fiscal year ends on the Sunday nearest September 30, and its fiscal quarters generally end on the Sundays nearest December 31, March 31 and June 30. The third quarter of fiscal years 2017 and 2016 ended on July 2, 2017 and July 3, 2016, respectively. All year and quarter references relate to the company’s fiscal year and fiscal quarters, unless otherwise stated. For ease of presentation, September 30 and June 30 are used consistently throughout this report to represent the fiscal year end and third fiscal quarter end, respectively.
2. Earnings per Share
Basic earnings (loss) per share is calculated using the weighted average number of shares outstanding during each period. The diluted earnings (loss) per share calculation includes the impact of dilutive common stock options, restricted shares, restricted share units, performance share unit awards and convertible securities, if applicable.
A reconciliation of basic average common shares outstanding to diluted average common shares outstanding is as follows (in millions):
 
Three Months Ended June 30,
 
Nine Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
Basic average common shares outstanding
88.4

 
89.8

 
87.9

 
91.2

Impact of restricted shares, restricted share units and performance share units
1.8

 
2.2

 
1.4

 
1.9

Impact of convertible notes
3.1

 
—

 
2.1

 
—

Diluted average common shares outstanding
93.3


92.0


91.4


93.1

In November 2016, the Board of Directors approved a grant of performance share units to all executives eligible to participate in the long-term incentive plan. Each performance share unit represents the right to receive one share of common stock or its cash equivalent upon achievement of certain performance and time vesting criteria. The fair value of each performance share unit was $12.77, which was the company’s share price on the grant date of December 1, 2016. The Board of Directors also approved a grant of 0.5 million restricted share units to these executives. The restricted share units vest at the earlier of three years from the date of grant or upon termination of employment with the company under certain circumstances. The fair value of each restricted share unit was $12.77, which was the company's share price on the grant date of December 1, 2016.
The actual number of performance share units that will vest depends upon the company’s performance relative to the established M2019 goals for the three-year performance period of October 1, 2016 to September 30, 2019, measured at the end of the performance period. The number of performance share units will depend on meeting the established M2019 goals at the following

8
Index
MERITOR, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


weights: 50% associated with achieving an Adjusted diluted earnings per share from continuing operations target, 25% associated with achieving revenue growth above market and 25% associated with achieving a Net debt to Adjusted EBITDA target. The number of performance share units that vest will be between 0% and 200% of the grant date amount of 0.6 million performance share units.
In November 2015, the Board of Directors approved a grant of performance share units to all executives eligible to participate in the long-term incentive plan. Each performance share unit represents the right to receive one share of common stock or its cash equivalent upon achievement of certain performance and time vesting criteria. The fair value of each performance share unit was $10.51, which was the company’s share price on the grant date of December 1, 2015. The Board of Directors also approved a grant of 0.5 million restricted share units to these executives. The restricted share units vest at the earlier of three years from the date of grant or upon termination of employment with the company under certain circumstances. The fair value of each restricted share unit was $10.51, which was the company's share price on the grant date of December 1, 2015.
The actual number of performance share units that will vest depends upon the company’s performance relative to the established performance metrics for the three-year performance period of October 1, 2015 to September 30, 2018, measured at the end of the performance period. The number of performance share units that vest will depend on Adjusted EBITDA margin and Adjusted diluted earnings per share from continuing operations at the following weights: 50% associated with achieving an Adjusted EBITDA margin target and 50% associated with achieving an Adjusted diluted earnings per share from continuing operations target. The number of performance share units that vest will be between 0% and 200% of the grant date amount of 0.7 million performance share units.
In November 2014, the Board of Directors approved a grant of performance share units to all executives eligible to participate in the long-term incentive plan. Each performance share unit represents the right to receive one share of common stock or its cash equivalent upon achievement of certain performance and time vesting criteria. The fair value of each performance share unit was $13.74, which was the company’s share price on the grant date of December 1, 2014. The Board of Directors also approved a grant of 0.4 million restricted share units to these executives. The restricted share units vest at the earlier of three years from the date of grant or upon termination of employment with the company under certain circumstances. The fair value of each restricted share unit was $13.74, which was the company’s share price on the grant date of December 1, 2014.
The actual number of performance share units that will vest depends upon the company’s performance relative to the established performance metrics for the three-year performance period of October 1, 2014 to September 30, 2017, measured at the end of the performance period. The number of performance share units that vest will depend on Adjusted EBITDA margin and Adjusted diluted earnings per share from continuing operations at the following weights: 75% associated with achieving an Adjusted EBITDA margin target and 25% associated with achieving an Adjusted diluted earnings per share from continuing operations target. The number of performance share units that vest will be between 0% and 200% of the grant date amount of 0.6 million performance share units.
In November 2013, the Board of Directors approved a grant of performance share units to all executives eligible to participate in the long-term incentive plan. Each performance share unit represented the right to receive one share of common stock or its cash equivalent upon achievement of certain performance and time vesting criteria. The fair value of each performance share unit was $7.97, which was the company’s share price on the grant date of December 1, 2013.
The actual number of performance share units that vested on December 1, 2016 depended upon the company’s performance relative to the established M2016 goals for the three-year performance period of October 1, 2013 to September 30, 2016, which was measured after the end of the performance period. The company's performance resulted in the vesting of the performance share units at 112% of the grant date amounts. There were 0.1 million and 0.4 million shares related to these performance share units included in the diluted earnings per share calculation for the three and nine months ended June 30, 2017, respectively, as certain payout thresholds were achieved relative to the established M2016 goals. There were 1.9 million and 1.4 million shares related to these performance share units included in the diluted earnings per share calculation for the three and nine months ended June 30, 2016, respectively, as certain payout thresholds were achieved relative to the established M2016 goals.
For the three months ended June 30, 2017, the dilutive impact of previously issued restricted shares, restricted share units and performance share units was 1.8 million shares, compared to 2.2 million shares for the same period in the prior fiscal year. For the nine months ended June 30, 2017, the dilutive impact of previously issued restricted shares, restricted share units and performance share units was 1.4 million shares, compared to 1.9 million shares for the same period in the prior fiscal year. For the three and nine months ended June 30, 2017, compensation cost related to restricted shares, restricted share units and performance

9
Index
MERITOR, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


share units was $5 million and $12 million, respectively. For the three and nine months ended June 30, 2016, compensation cost related to restricted shares, restricted share units and performance share units was $2 million and $8 million, respectively.
For each of the three and nine months ended June 30, 2016, options to purchase 0.3 million shares of common stock, were excluded in the computation of diluted earnings per share because their exercise price exceeded the average market price for the periods and thus their inclusion would be anti-dilutive.
For the three and nine months ended June 30, 2017, 3.1 million and 2.1 million shares, respectively, were included in the computation of diluted earnings per share, as the company's average stock price during these periods exceeded the conversion price for the 7.875 percent convertible notes due 2026. For the three and nine months ended June 30, 2016, the company’s 7.875 percent convertible notes due 2026 were excluded from the computation of diluted earnings per share, as the company’s average stock price during these periods was less than the conversion price for the notes.
3. New Accounting Standards
Accounting standards to be implemented
In May 2017, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2017-09, Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting. ASU 2017-09 amends the scope of modification accounting for share-based payment arrangements and provides guidance on when an entity would be required to apply modification accounting. This standard is effective for all entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. Early adoption is permitted, including adoption in any interim period. The amendments in this update should be applied prospectively. The company is currently evaluating the potential impact of this new guidance on its consolidated financial statements.

In March 2017, the FASB issued ASU 2017-08, Receivables—Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities. ASU 2017-08 affects entities who own investments in callable debt securities and aligns the amortization period of premiums on callable debt securities to expectations incorporated in market pricing on the underlying securities. This standard is effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted, including adoption in an interim period. The amendments in this update should be applied on a modified retrospective basis through a cumulative-effective adjustment directly to retained earnings at the beginning of the adoption period. The company does not expect a material impact on its consolidated financial statements from adoption of this guidance.

In March 2017, the FASB issued ASU 2017-07, Compensation—Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. The new guidance requires entities to only include the service cost component of net periodic pension cost and net periodic postretirement benefit cost in operating expenses (together with other employee compensation costs). The other components of net benefit cost, including amortization of prior service cost/credit, are to be included in a separate line item(s) outside of any sub-total of operating income. ASU 2017-07 also provides guidance that only the service cost component of net benefit cost is eligible for capitalization. This standard is effective for public business entities for interim and annual periods beginning after December 15, 2017. The revisions in this amendment are to be applied retrospectively for the presentation of the service cost component and the other components of net periodic pension cost and net periodic postretirement benefit cost in the income statement and prospectively for the capitalization of the service cost component of net periodic pension cost and net periodic postretirement benefit in assets. The company is currently evaluating the potential impact of this new guidance on its consolidated financial statements.

In February 2017, the FASB issued ASU 2017-05, Other Income—Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets. ASU 2017-05 provides guidance which defines an “in substance nonfinancial asset”; unifies guidance related to partial sales of nonfinancial assets; eliminates rules specifically addressing sales of real estate; removes exceptions to the financial asset derecognition model; and clarifies the accounting for contributions of nonfinancial assets to joint ventures. The effective date and the transition requirements for the amendments in ASU 2017-05 are the same as the effective date and transition requirements in Topic 606, described below. The company is currently evaluating the potential impact of this new guidance on its consolidated financial statements.

In January 2017, the FASB issued ASU 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. The new guidance eliminates the need to determine the fair value of individual assets and liabilities of a

10
Index
MERITOR, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


reporting unit to measure a goodwill impairment. A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value. The revised guidance will be applied prospectively, and is effective for calendar year-end SEC filers in 2020. Early adoption is permitted for any impairment tests performed after January 1, 2017. The new guidance is not expected to have a material impact on the company's consolidated financial statements.

In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business. The ASU provides clarification on the definition of a business and adds guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. To be considered a business under the new guidance, it must include an input and a substantive process that together significantly contribute to the ability to create output. The amendment removes the evaluation of whether a market participant could replace missing elements. The amendments in this update are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years, and will be applied prospectively. The potential impact of this new guidance will be assessed for future acquisitions or dispositions, but it is not expected to have a material impact on the company's consolidated financial statements.

In October 2016, the FASB issued ASU 2016-17, Consolidation (Topic 810): Interests held through Related Parties that are under Common Control, which alters how a decision maker needs to consider indirect interests in a variable interest entity (VIE) held through an entity under common control. Under the ASU, if a decision maker is required to evaluate whether it is the primary beneficiary of a VIE, it will need to consider only its proportionate indirect interest in the VIE held through a common control party. The amendments in this update are effective for public business entities for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. The company is currently evaluating the potential impact of this new guidance on its consolidated financial statements but does not expect a material impact upon adoption.

In October 2016, the FASB issued ASU 2016-16, Accounting for Income Taxes: Intra-Entity Asset Transfers of Assets Other than Inventory. The ASU was issued to remove the prohibition in FASB ASC 740 against the immediate recognition of the current and deferred income tax effects of intra-entity transfers of assets other than inventory. The amendments in this update are effective for public business entities in fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted; however, the guidance can only be adopted in the first interim period of a fiscal year. The company is currently evaluating the potential impact of this new guidance on its consolidated financial statements.

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (a consensus of the Emerging Issues Task Force). The ASU was issued to reduce differences in practice with respect to how specific transactions are classified in the statement of cash flows. The update provides guidance on the following eight types of transactions: debt prepayment or debt extinguishment costs, settlement of zero-coupon debt instruments, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims, proceeds from the settlement of corporate-owned life insurance policies, including bank-owned life insurance policies, distributions received from equity method investments, beneficial interests in securitization transactions and separately identifiable cash flows and application of the predominance principle. The amendments in this update are effective for public business entities in fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted, provided that all of the amendments are adopted in the same period. The guidance requires application using a retrospective transition method. The company is currently evaluating the potential impact of this new guidance on its consolidated financial statements.
  
In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The ASU introduces an approach based on expected losses to estimate credit losses on certain types of financial instruments, including accounts receivable. The ASU also modifies the impairment model for available-for-sale (AFS) debt securities and provides for a simplified accounting model for purchased financial assets with credit deterioration since their origination. The amendments in this update are required to be adopted by public business entities in fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The company is currently evaluating the potential impact of this new guidance on its accounting policies and its consolidated financial statements.

In May 2016, the FASB issued ASU 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients. The ASU clarifies the assessment of the likelihood that revenue will be collected from a contract, the guidance for presenting sales taxes and similar taxes, and the timing for measuring customer payments that are not in cash. The ASU also establishes a practical expedient for contract modifications at the transition. The amendments in this update affect the guidance in ASU 2014-09, which is not effective yet. The effective date and the transition requirements for the amendments in ASU 2016-12 are the same as the effective date and transition requirements in ASU 2014-09 as described below. Therefore, the

11
Index
MERITOR, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


company plans to implement this standard in the first quarter of the fiscal year beginning October 1, 2018 in connection with its planned implementation of ASU 2014-09 and is currently evaluating the potential impact of this new guidance on its accounting policies and its consolidated financial statements.

In May 2016, the FASB issued ASU 2016-11, Revenue Recognition (Topic 605) and Derivatives and Hedging (Topic 815): Rescission of SEC Guidance Because of Accounting Standards Updates 2014-09 and 2014-16 Pursuant to Staff Announcements at the March 3, 2016 EITF Meeting (SEC Update). The ASU was issued to remove from the Codification certain SEC staff guidance that the SEC staff stated would be rescinded: Revenue and Expense Recognition for Freight Services in Process; Accounting for Shipping and Handling Fees and Costs; and Accounting for Consideration Given by a Vendor to a Customer (including a Reseller of the Vendor’s Products). The amendments in this update affect the guidance in ASU 2014-09, which is not effective yet. The effective date and the transition requirements for the amendments in ASU 2016-11 are the same as the effective date and transition requirements in ASU 2014-09 as described below. Therefore, the company plans to implement this standard in the first quarter of the fiscal year beginning October 1, 2018 in connection with its planned implementation of ASU 2014-09 and is currently evaluating the potential impact of this new guidance on its consolidated financial statements.

In April, 2016, the FASB issued ASU 2016-10, Revenue from Contracts with Customers (Topic 606), Identifying Performance Obligations and Licensing. The ASU provides guidance regarding the identification of performance and licensing obligations. The amendments in this update affect the guidance in ASU 2014-09, which is not effective yet. The effective date and the transition requirements for the amendments in ASU 2016-10 are the same as the effective date and transition requirements in ASU 2014-09 as described below. Therefore, the company plans to implement this standard in the first quarter of the fiscal year beginning October 1, 2018 in connection with its planned implementation of ASU 2014-09 and is currently evaluating the potential impact of this new guidance on its consolidated financial statements.

In March 2016, the FASB issued ASU 2016-09, Compensation - Stock Compensation (Topic 718), Improvements to Employee Share-Based Payment Accounting. The ASU intends to simplify how share-based payments are accounted for, including accounting for income taxes, forfeitures and statutory tax withholding requirements, as well as classification in the statement of cash flows. The standard is required to be adopted by public business entities in fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. Early adoption is permitted. The company is assessing the potential impact of this new guidance on its consolidated financial statements.

In March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers (Topic 606), Principal versus Agent Considerations (Reporting Revenue Gross versus Net) to clarify certain aspects of the principal-versus-agent guidance in its new revenue recognition standard. The amendments in this update affect the guidance in ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which is not yet effective. The effective date and transition requirements for the amendments in ASU 2016-08 are the same as the effective date and transition requirements of ASU 2014-09. Therefore, the company plans to implement this standard in the first quarter of the fiscal year beginning October 1, 2018 in connection with its planned implementation of ASU 2014-09. The company is currently evaluating the potential impact of this new guidance on its consolidated financial statements.

In March 2016, the FASB issued ASU 2016-07, Investments-Equity Method and Joint Ventures (Topic 323), Simplifying the Transition to the Equity Method of Accounting. The ASU will eliminate the requirement to apply the equity method of accounting retrospectively when a reporting entity obtains significant influence over a previously held investment. The standard is required to be adopted by public business entities in fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. Early adoption is permitted. The company does not expect a material impact on its consolidated financial statements from adoption of this guidance.

In March 2016, the FASB issued ASU 2016-06, Derivatives and Hedging (Topic 815), Contingent Put and Call Options in Debt Instruments. The ASU clarifies that an exercise contingency itself does not need to be evaluated to determine whether it is in an embedded derivative, just the underlying option. The standard is required to be adopted by public business entities in fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. Early adoption is permitted. The company does not expect a material impact on its consolidated financial statements from adoption of this guidance.

In March 2016, the FASB issued ASU 2016-05, Derivatives and Hedging (Topic 815), Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships. The update clarifies that a change in a counterparty to a derivative instrument designated as a hedging instrument would not require the entity to dedesignate the hedging relationship and discontinue the application of hedge accounting. The standard is required to be adopted by public business entities in fiscal years beginning after

12
Index
MERITOR, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


December 15, 2016, including interim years within those fiscal periods. Early adoption is permitted. The company does not expect a material impact on its consolidated financial statements from adoption of this guidance.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The update will require lessees to recognize a right-of-use asset and lease liability for substantially all leases. The standard is required to be adopted by public business entities in fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. The company plans to implement this standard in the first quarter of the fiscal year beginning October 1, 2019 and is currently assessing the potential impact of this new guidance on its on its accounting policies and its consolidated financial statements.

In January 2016, the FASB issued ASU 2016-01, Financial Instruments - Overall (Subtopic 825-10), Recognition and Measurement of Financial Assets and Financial Liabilities, which requires equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income. The guidance is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted. The company does not expect a material impact on its consolidated financial statements from adoption of this guidance.

In July 2015, the FASB issued ASU 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory, which requires entities that measure inventory using first-in, first-out (FIFO) or average cost to measure inventory at the lower of cost and net realizable value. The standard is required to be adopted by public business entities in fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. The company does not expect a material impact on its consolidated financial statements from adoption of this guidance.

In August 2014, the FASB issued ASU 2014-15, Presentation of Financial Statements - Going Concern (Subtopic 205-40), which provides guidance about management's responsibility in evaluating whether there is substantial doubt relating to an entity’s ability to continue as a going concern and to provide related footnote disclosures as applicable. ASU 2014-15 is effective for the annual period ending after December 15, 2016 and for annual periods and interim periods thereafter. Early adoption is permitted. The company does not expect a material impact on its consolidated financial statements from adoption of this guidance.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which requires companies to recognize revenue when a customer obtains control rather than when companies have transferred substantially all risks and rewards of a good or service and requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts. ASU 2014-09 was originally effective for fiscal periods beginning after December 15, 2016, including interim periods within those fiscal periods. In August 2015, the FASB issued ASU 2015-14 which deferred the effective date of ASU 2014-09 by one year making it effective for fiscal periods beginning after December 15, 2017, including interim periods within those fiscal periods, while also providing for early adoption but not before the original effective date. The company plans to implement this standard in the first quarter of the fiscal year beginning October 1, 2018 and is currently evaluating the potential impact of this new guidance on its on its accounting policies and its consolidated financial statements.
Accounting standards implemented during fiscal year 2017
In January 2017, the FASB issued ASU 2017-03 which amended Accounting Changes and Error Corrections (Topic 250) to state that registrants should consider additional qualitative disclosures if the impact of an issued but not yet adopted ASU is unknown or cannot be reasonably estimated and to include a description of the effect of the accounting policies that the registrant expects to apply, if determined. Transition guidance included in certain issued but not yet adopted ASUs was also updated to reflect this amendment.

In June 2014, the FASB issued ASU 2014-12, Compensation - Stock Compensation (Topic 718), Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could be Achieved After the Requisite Service Period. This guidance requires that an award with a performance target that affects vesting and that could be achieved after the requisite service period, such as when an employee retires, but may still vest if and when the performance target is achieved, be treated as an award with performance conditions that affect vesting and the company apply existing guidance under ASC Topic 718, Compensation - Stock Compensation. The guidance is effective for fiscal periods beginning after December 15, 2015, including interim periods within those fiscal periods and may be applied either prospectively or retrospectively. The company adopted this standard prospectively in the first quarter of fiscal year 2017. This guidance did not have a material impact on its consolidated financial statements.

13
Index
MERITOR, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


4. Discontinued Operations
Results of discontinued operations are summarized as follows (in millions):
 
Three Months Ended June 30,
 
Nine Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
Sales
$
—

 
$
—

 
$
—

 
$
—

 
 
 
 
 
 
 
 
Loss before income taxes
$
(1
)
 
$
(1
)
 
$
(1
)
 
$
(5
)
Benefit from income taxes
—

 
—

 
—

 
1

Loss from discontinued operations attributable to Meritor, Inc.
$
(1
)

$
(1
)
 
$
(1
)
 
$
(4
)
Loss from discontinued operations attributable to the company for the three and nine months ended June 30, 2017 and June 30, 2016 was primarily related to changes in estimates related to legal costs incurred in connection with a previously divested business.
Total discontinued operations assets as of both June 30, 2017 and September 30, 2016 were $1 million and total discontinued operations liabilities as of June 30, 2017 and September 30, 2016 were $6 million.
5. Assets and Liabilities Held for Sale
During the first quarter of fiscal year 2017, management approved a plan to sell a business within the Commercial Truck & Industrial reporting segment. The company expects to sell the business within one year from management's approval of the plan. The business and its associated assets and liabilities met the criteria for presentation as held for sale as of June 30, 2017.
Assets and liabilities held for sale are measured at the lower of the carrying value or fair value less costs to sell. Upon meeting the held for sale criteria, the company determined the carrying value of the business exceeded the fair value less costs to sell. As a result, an impairment charge of $3 million was recorded within other operating expense, net in the company’s condensed consolidated statement of operations during the first quarter of fiscal year 2017.
Assets and liabilities held for sale, when measured in subsequent periods, are permitted to be written-up for increases in the fair value, less cost to sell, not in excess of the cumulative loss previously recognized. During the third quarter of fiscal year 2017, the fair value less costs to sell of the business increased relative to the carrying value. As a result, a $1 million adjustment, which reduced the previously recognized loss, was recorded in the company's condensed consolidated statement of operations within other operating expense, net.
During the third quarter of fiscal year 2017, an additional $2 million of assets met the criteria for presentation as assets held for sale within the Aftermarket & Trailer segment related to the Aftermarket restructuring actions (see Note 7).
6. Goodwill
In accordance with FASB Accounting Standards Codification (ASC) Topic 350-20, “Intangibles - Goodwill and Other”, goodwill is reviewed for impairment annually during the fourth quarter of the fiscal year or more frequently if certain indicators arise. If business conditions or other factors cause the operating results and cash flows of a reporting unit to decline, the company may be required to record impairment charges for goodwill at that time.
The company tests goodwill for impairment at a level of reporting referred to as a reporting unit, which is an operating segment or one level below an operating segment (referred to as a component). A component of an operating segment is a reporting unit if the component constitutes a business for which discrete financial information is available and segment management regularly reviews the operating results of that component. When two or more components of an operating segment have similar economic characteristics, the components are aggregated and deemed a single reporting unit. An operating segment is deemed to be a reporting unit if all of its components are similar, if none of its components are a reporting unit, or if the segment comprises only a single component.

14
Index
MERITOR, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


A summary of the changes in the carrying value of goodwill by the company’s two reportable segments are presented below (in millions):
 
Commercial Truck & Industrial
 
Aftermarket
& Trailer
 
Total
Goodwill
$
245

 
$
160

 
$
405

Accumulated impairment losses
(15
)
 
—

 
(15
)
Beginning balance at September 30, 2016
230

 
160

 
390

Foreign currency translation
—

 
1

 
1

Balance at June 30, 2017
$
230

 
$
161

 
$
391

7. Restructuring Costs
Restructuring reserves, primarily related to unpaid employee termination benefits, were $8 million at June 30, 2017 and $16 million at September 30, 2016. The changes in restructuring reserves for the nine months ended June 30, 2017 and 2016 are as follows (in millions):
 
Employee
Termination
Benefits
 
Plant
Shutdown
& Other
 
Total
Beginning balance at September 30, 2016
$
15

 
$
1

 
$
16

Activity during the period:
 
 
 
 

Charges to continuing operations
4

 
—

 
4

Cash payments – continuing operations
(10
)
 
(1
)
 
(11
)
Other
(1
)
 
—

 
(1
)
Total restructuring reserves at June 30, 2017
8

 
—

 
8

Less: non-current restructuring reserves
(1
)
 
—

 
(1
)
Restructuring reserves – current, at June 30, 2017
$
7

 
$
—

 
$
7

 
 
 
 
 
 
Balance at September 30, 2015
$
10

 
$
—

 
$
10

Activity during the period:
 
 
 
 
 
Charges to continuing operations
8

 
1

 
9

Cash payments – continuing operations
(8
)
 
—

 
(8
)
Total restructuring reserves at June 30, 2016
10

 
1

 
11

Less: non-current restructuring reserves
(2
)
 
—

 
(2
)
Restructuring reserves – current, at June 30, 2016
$
8

 
$
1

 
$
9


Ongoing Aftermarket Actions: During the third quarter of fiscal year 2016, the company approved various restructuring plans in the North American and European Aftermarket businesses. The company recorded $5 million of restructuring costs during the third quarter of fiscal year 2016. The company recorded $4 million of restructuring costs during the second quarter of fiscal year 2017. Restructuring actions associated with these plans are expected to be completed by the end of fiscal year 2017.  
    
Other Fiscal 2016 Actions: During the first half of fiscal year 2016, the company recorded restructuring costs of $3 million primarily associated with a labor reduction program in China in the Commercial Truck & Industrial segment and a labor reduction program in the Aftermarket & Trailer segment. Restructuring actions with these plans were substantially complete as of September 30, 2016.

15
Index
MERITOR, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


8. Income Taxes
For each interim reporting period, the company makes an estimate of the effective tax rate expected to be applicable for the full fiscal year pursuant to FASB ASC Topic 740-270, “Accounting for Income Taxes in Interim Periods.” The rate so determined is used in providing for income taxes on a year-to-date basis. Jurisdictions with a projected loss for the year or an actual year-to-date loss where no tax benefit can be recognized are excluded from the estimated annual effective tax rate. The impact of including these jurisdictions on the quarterly effective rate calculation could result in a higher or lower effective tax rate during a particular quarter, based upon the mix and timing of actual earnings versus annual projections.

Income tax expense (benefit) is allocated among continuing operations, discontinued operations and other comprehensive income (“OCI”). Such allocation is applied by tax jurisdiction, and in periods in which there is a pre-tax loss from continuing operations and pre-tax income in another category, such as discontinued operations or OCI, income tax expense is allocated to the other sources of income, with a related benefit recorded in continuing operations.

In prior years, the company established valuation allowances against its U.S. net deferred tax assets and the net deferred tax assets of its 100-percent-owned subsidiaries in France, the United Kingdom, Brazil and certain other countries. In evaluating its ability to recover these net deferred tax assets, the company utilizes a consistent approach which considers its historical operating results, including an assessment of the degree to which any gains or losses are driven by items that are unusual in nature, and tax planning strategies. In addition, the company reviews changes in near-term market conditions and other factors that impact future operating results. Continued improvement in the company’s operating results could lead to reversal of some or all of these valuation allowances in the future.

During the fourth quarter of fiscal year 2016, as a result of sustained profitability in the U.S. evidenced by a strong earnings history, future forecasted earnings and additional positive evidence, the company determined it was more likely than not that it would be able to realize deferred tax assets in the U.S. Accordingly, the company reversed a portion of the valuation allowance in the U.S. Also in the fourth quarter of fiscal year 2016, due to a three-year cumulative loss and future economic uncertainty, the company established a tax valuation allowance in Brazil because the company determined it was not more likely than not that it would realize its deferred tax assets in Brazil.

The company continues to maintain valuation allowances in France, the United Kingdom, Brazil and certain other jurisdictions, as the company believes the negative evidence that it will be able to recover these net deferred tax assets continues to outweigh the positive evidence.

For the three months ended June 30, 2017, the company had approximately $3 million of net pre-tax income compared to $19 million of net pre-tax income in the same period in fiscal year 2016 in tax jurisdictions in which tax expense (benefit) is not recorded.

For the nine months ended June 30, 2017, the company had an insignificant net pre-tax loss compared to $47 million of net pre-tax income in the same period in fiscal year 2016 in tax jurisdictions in which tax expense (benefit) is not recorded.
9. Accounts Receivable Factoring and Securitization
Off-balance sheet arrangements 
Swedish Factoring Facility: The company has an arrangement to sell trade receivables due from AB Volvo through one of its European subsidiaries. Under this arrangement with Nordea Bank, which expires in March 2020, the company can sell up to, at any point in time, €155 million ($177 million) of eligible trade receivables. The amount of eligible receivables sold may exceed Nordea Bank's commitment at Nordea Bank's discretion. The receivables under this program are sold at face value and are excluded from the condensed consolidated balance sheet. The company had utilized €162 million ($186 million) and €121 million ($135 million) of this accounts receivable factoring facility as of June 30, 2017 and September 30, 2016, respectively.
The facility is backed by a 364-day liquidity commitment from Nordea Bank which extends through April 23, 2018. The commitment is subject to standard terms and conditions for this type of arrangement.

16
Index
MERITOR, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


U.S. Factoring Facility: The company has an arrangement to sell trade receivables due from AB Volvo and its U.S. subsidiaries through one of its U.S. subsidiaries. Under this arrangement with Nordea Bank, which expires in February 2019, the company can sell up to, at any point in time, €80 million ($91 million) of eligible trade receivables. The amount of eligible receivables sold may exceed Nordea Bank’s commitment at Nordea Bank’s discretion. The receivables under this program are sold at face value and are excluded from the condensed consolidated balance sheet. The company had utilized €38 million ($43 million) and €39 million ($44 million) of this accounts receivable factoring facility as of June 30, 2017 and September 30, 2016, respectively.
United Kingdom Factoring Facility: The company has an arrangement to sell trade receivables due from AB Volvo and its European subsidiaries through one of its United Kingdom subsidiaries. Under this arrangement with Nordea Bank, which expires in February 2018, the company can sell up to, at any point in time, €25 million ($29 million) of eligible trade receivables. The receivables under this program are sold at face value and are excluded from the condensed consolidated balance sheet. The company had utilized €4 million ($5 million) and €6 million ($6 million) of this accounts receivable factoring facility as of June 30, 2017 and September 30, 2016, respectively. The agreement is subject to standard terms and conditions for these types of arrangements, including a sole discretion clause whereby the bank retains the right to not purchase receivables, which has not been invoked since the inception of the program.
Italy Factoring Facility: The company has an arrangement to sell trade receivables due from AB Volvo and its European subsidiaries through one of its Italian subsidiaries. On June 13, 2017, Meritor extended this Italy factoring facility with Nordea Bank until June 18, 2022, with all other terms of the agreement remaining unchanged. Under this arrangement, the company can sell up to, at any point in time, €30 million ($34 million) of eligible trade receivables. The receivables under this program are sold at face value and are excluded from the condensed consolidated balance sheet. The company had utilized €29 million ($33 million) and €22 million ($24 million) of this accounts receivable factoring facility as of June 30, 2017 and September 30, 2016, respectively. The agreement is subject to standard terms and conditions for these types of arrangements, including a sole discretion clause whereby the bank retains the right to not purchase receivables, which has not been invoked since the inception of the program.
In addition to the above facilities, a number of the company’s subsidiaries, primarily in Europe, factor eligible accounts receivable with financial institutions. Certain receivables are factored without recourse to the company and are excluded from accounts receivable in the condensed consolidated balance sheet. The amount of factored receivables excluded from accounts receivable under these arrangements was $21 million and $10 million at June 30, 2017 and September 30, 2016, respectively.
Total costs associated with all of the off-balance sheet arrangements described above were $2 million in the three months ended June 30, 2017 and 2016, and $4 million and $6 million in the nine months ended June 30, 2017 and 2016, respectively, and are included in selling, general and administrative expenses in the condensed consolidated statements of operations.
On-balance sheet arrangements
The company has a $100 million U.S. accounts receivables securitization facility, which expires December 2019. The maximum permitted priority debt-to-EBITDA ratio as of the last day of each fiscal quarter under the facility is 2.25 to 1.00. This program is provided by PNC Bank, National Association, as Administrator and Purchaser, and the other Purchasers and Purchaser Agents from time to time (participating lenders), which are party to the agreement. Under this program, the company has the ability to sell an undivided percentage ownership interest in substantially all of its trade receivables (excluding the receivables due from AB Volvo and subsidiaries eligible for sale under the U.S. accounts receivable factoring facility) of certain U.S. subsidiaries to ArvinMeritor Receivables Corporation (“ARC”), a wholly-owned, special purpose subsidiary. ARC funds these purchases with borrowings from participating lenders under a loan agreement. This program also includes a letter of credit facility pursuant to which ARC may request the issuance of letters of credit issued for the company’s U.S. subsidiaries (originators) or their designees, which when issued will constitute a utilization of the facility for the amount of letters of credit issued. Amounts outstanding under this agreement are collateralized by eligible receivables purchased by ARC and are reported as short-term debt in the condensed consolidated balance sheet. At June 30, 2017 and September 30, 2016, no amounts, including letters of credit, were outstanding under this program. This securitization program contains a cross default to the revolving credit facility. At certain times during any given month, the company may sell eligible accounts receivable under this program to fund intra-month working capital needs. In such months, the company would then typically utilize the cash received from customers throughout the month to repay the borrowings under the program. Accordingly, during any given month, the company may borrow under this program amounts exceeding the amounts shown as outstanding at fiscal quarter ends.

17
Index
MERITOR, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


10. Operating Cash Flows
The reconciliation of net income to cash flows provided by operating activities is as follows (in millions):
 
Nine Months Ended June 30,
 
2017
 
2016
OPERATING ACTIVITIES
 
 
 
Net income
$
90

 
$
101

Less: Loss from discontinued operations, net of tax
(1
)
 
(4
)
Income from continuing operations
91

 
105

Adjustments to income from continuing operations to arrive at cash provided by operating activities:
 
 
 
Depreciation and amortization
55

 
48

Deferred income tax expense
19

 
2

Restructuring costs
4

 
9

Asset impairment charges
2

 
—

Gain on sale of property
—

 
(2
)
Equity in earnings of affiliates
(32
)
 
(26
)
Pension and retiree medical expense
11

 
15

Other adjustments to income from continuing operations
12

 
5

Dividends received from equity method investments
25

 
29

Pension and retiree medical contributions
(28
)
 
(32
)
Restructuring payments
(11
)
 
(8
)
Changes in off-balance sheet accounts receivable factoring
62

 
(30
)
Changes in assets and liabilities, excluding effects of acquisitions, divestitures, foreign currency adjustments and discontinued operations
(73
)
 
31

Operating cash flows provided by continuing operations
137

 
146

Operating cash flows used for discontinued operations
(1
)
 
(2
)
CASH PROVIDED BY OPERATING ACTIVITIES
$
136

 
$
144

11. Inventories
Inventories are stated at the lower of cost (using FIFO or average methods) or market (determined on the basis of estimated realizable values) and are summarized as follows (in millions):
 
June 30,
2017
 
September 30,
2016
Finished goods
$
142

 
$
125

Work in process
33

 
26

Raw materials, parts and supplies
185

 
165

Total
$
360

 
$
316


18
Index
MERITOR, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


12. Other Current Assets
     Other current assets are summarized as follows (in millions):
 
June 30,
2017
 
September 30,
2016
Asbestos-related recoveries (see Note 20)
$
10

 
$
10

Prepaid and other
27

 
23

Other current assets
$
37

 
$
33

13. Net Property
     Net property is summarized as follows (in millions):
 
June 30,
2017
 
September 30,
2016
Property at cost:
 
 
 
Land and land improvements
$
29

 
$
30

Buildings
234

 
231

Machinery and equipment
867

 
839

Company-owned tooling
122

 
113

Construction in progress
38

 
56

Total
1,290

 
1,269

Less: accumulated depreciation
(860
)
 
(830
)
Net property
$
430

 
$
439

14. Other Assets
     Other assets are summarized as follows (in millions):
 
June 30,
2017
 
September 30,
2016
Investments in non-consolidated joint ventures
$
108

 
$
100

Asbestos-related recoveries (see Note 20)
44

 
49

Unamortized revolver debt issuance costs
8

 
7

Capitalized software costs, net
28

 
29

Non-current deferred income tax assets, net
395

 
413

Assets for uncertain tax positions
37

 
35

Prepaid pension costs
138

 
123

Other
5

 
4

Other assets
$
763

 
$
760

In accordance with FASB ASC Topic 350-40, costs relating to internally developed or purchased software in the preliminary project stage and the post-implementation stage are expensed as incurred. Costs in the application development stage that meet the criteria for capitalization are capitalized and amortized using the straight-line basis over the estimated economic useful life of the software.
The company holds a variable interest in a joint venture accounted for under the equity method of accounting. The joint venture manufactures components for commercial vehicle applications primarily on behalf of the company. The variable interest relates to a supply arrangement between the company and the joint venture whereby the company supplies certain components to the joint venture on a cost-plus basis. The company is not the primary beneficiary of the joint venture, as the joint venture partner has shared or absolute control over key manufacturing operations, labor relationships, financing activities and certain other functions of the joint venture. Therefore, the company does not consolidate the joint venture. At June 30, 2017 and September 30, 2016, the company’s investment in the joint venture was $48 million and $45 million, respectively.

19
Index
MERITOR, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


15. Other Current Liabilities
     Other current liabilities are summarized as follows (in millions):
 
June 30,
2017
 
September 30,
2016
Compensation and benefits
$
121

 
$
115

Income taxes
4

 
8

Taxes other than income taxes
24

 
21

Accrued interest
15

 
14

Product warranties
18

 
18

Environmental reserves (see Note 20)
5

 
7

Restructuring (see Note 7)
7

 
14

Asbestos-related liabilities (see Note 20)
18

 
18

Indemnity obligations (see Note 20)
2

 
2

Other
63

 
51

Other current liabilities
$
277

 
$
268

The company records estimated product warranty costs at the time of shipment of products to customers. Warranty reserves are primarily based on factors that include past claims experience, sales history, product manufacturing and engineering changes and industry developments. Liabilities for product recall campaigns are recorded at the time the company’s obligation is probable and can be reasonably estimated. Policy repair actions to maintain customer relationships are recorded as other liabilities at the time an obligation is probable and can be reasonably estimated. Product warranties, including recall campaigns, not expected to be paid within one year are recorded as a non-current liability.
A summary of the changes in product warranties is as follows (in millions):
 
Nine Months Ended June 30,
 
2017
 
2016
Total product warranties – beginning of period
$
44

 
$
48

Accruals for product warranties
8

 
11

Payments
(10
)
 
(13
)
Change in estimates and other
1

 
(1
)
Total product warranties – end of period
43

 
45

Less: Non-current product warranties
(25
)
 
(27
)
Product warranties – current
$
18

 
$
18

16. Other Liabilities
Other liabilities are summarized as follows (in millions):
 
June 30,
2017
 
September 30,
2016
Asbestos-related liabilities (see Note 20)
$
122

 
$
136

Restructuring (see Note 7)
1

 
2

Non-current deferred income tax liabilities
13

 
12

Liabilities for uncertain tax positions
15

 
16

Product warranties (see Note 15)
25

 
26

Environmental (see Note 20)
6

 
6

Indemnity obligations (see Note 20)
11

 
11

Other
27

 
29

Other liabilities
$
220

 
$
238


20
Index
MERITOR, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


17. Long-Term Debt
     Long-Term Debt, net of discounts where applicable, is summarized as follows (in millions):
 
June 30,
2017
 
September 30,
2016
4.0 percent convertible notes due 2027(1)(3)
$
142

 
$
142

7.875 percent convertible notes due 2026(1)(4)
131

 
129

6.75 percent notes due 2021(2)(5)
271

 
271

6.25 percent notes due 2024(2)(6)
443

 
442

Capital lease obligation
13

 
16

Export financing arrangements and other
—

 
10

Unamortized discount on convertible notes (7)
(10
)
 
(14
)
Subtotal
990

 
996

Less: current maturities
(132
)
 
(14
)
Long-term debt
$
858

 
$
982

(1) The 4.0 percent convertible notes due 2027 and 7.875 percent convertible notes due 2026 contain a put and call feature, which allows for earlier redemption beginning in 2019 and 2020, respectively.
(2) The 6.75 percent notes and 6.25 percent notes contain a call option, which allows for early redemption.
(3) The 4.0 percent convertible notes due 2027 are presented net of $1 million unamortized issuance costs as of June 30, 2017 and September 30, 2016.
(4) The 7.875 percent convertible notes due 2026 are presented net of $2 million unamortized issuance costs as of June 30, 2017 and September 30, 2016, and $7 million and $9 million original issuance discount as of June 30, 2017 and September 30, 2016, respectively.
(5) The 6.75 percent notes due 2021 are presented net of $4 million unamortized issuance costs as of June 30, 2017 and September 30, 2016.
(6) The 6.25 percent notes due 2024 are presented net of $7 million and $8 million unamortized issuance costs as of June 30, 2017 and September 30, 2016, respectively.
(7) The carrying amount of the equity component related to convertible debt.

Convertible Notes Due 2026
The 7.875 percent convertible notes due 2026 (the “2026 Notes”) were classified as current as of June 30, 2017 and noncurrent as of September 30, 2016 as the holders of the company's 2026 Notes are entitled to convert all or a portion of their 2026 Notes at any time beginning July 1, 2017 and prior to the close of business on September 29, 2017 at a rate of 83.3333 shares of common stock per $1,000 principal amount at maturity of the 2026 Notes (representing a conversion price of approximately $12.00 per share). The 2026 Notes are convertible as the closing price of shares of the company's common stock for at least 20 trading days during the 30 consecutive trading-day period ending on June 30, 2017 was greater than 120% of the $12.00 conversion price associated with the 2026 Notes.
The 2026 Notes surrendered for conversion, if any, would be settled in cash up to the principal amount at maturity of the 2026 Notes and cash, stock or a combination of cash and stock, at the company’s election, for the remainder of the conversion value of the 2026 Notes in excess of the principal amount at maturity and cash in lieu of any fractional shares, subject to and in accordance with the provisions of the indenture that governs the 2026 Notes.
As a result of the 2026 Notes becoming currently convertible for cash up to the principal amount of $140 million at the holder's option, $12 million of permanent equity was reclassified as mezzanine equity.
Revolving Credit Facility
On March 31, 2017, the company amended and restated its revolving credit facility. Pursuant to the revolving credit agreement as amended, the company has a $525 million revolving credit facility that matures in March 2022. Additionally, $4 million was capitalized as deferred issuance costs and will be amortized over the term of the agreement. The availability under this facility is dependent upon various factors, including performance against certain financial covenants as highlighted below.

21
Index
MERITOR, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


The availability under the revolving credit facility is subject to certain financial covenants based on (i) the ratio of the company’s priority debt (consisting principally of amounts outstanding under the revolving credit facility, U.S. accounts receivable securitization and factoring programs, and third-party non-working capital foreign debt) to EBITDA and (ii) the amount of annual capital expenditures. The company is required to maintain a total priority debt-to-EBITDA ratio, as defined in the agreement, of 2.25 to 1.00 or less as of the last day of each fiscal quarter throughout the term of the agreement.
The availability under the revolving credit facility is also subject to a collateral test, pursuant to which borrowings on the revolving credit facility cannot exceed 1.0x the collateral test value. The collateral test is performed on a quarterly basis. At June 30, 2017, the revolving credit facility was collateralized by approximately $774 million of the company's assets, primarily consisting of eligible domestic U.S. accounts receivable, inventory, plant, property and equipment, intellectual property and the company's investment in all or a portion of certain of its wholly-owned subsidiaries.
Borrowings under the revolving credit facility are subject to interest based on quoted LIBOR rates plus a margin and a commitment fee on undrawn amounts, both of which are based upon the company’s current corporate credit rating. At June 30, 2017, the margin over LIBOR rate was 300 basis points and the commitment fee was 45 basis points. Overnight revolving credit loans are at the prime rate plus a margin of 200 basis points.
Certain of the company’s subsidiaries, as defined in the revolving credit agreement, irrevocably and unconditionally guarantee amounts outstanding under the revolving credit facility. Similar subsidiary guarantees are provided for the benefit of the holders of the publicly held notes outstanding under the company’s indentures (see Note 23).
No borrowings were outstanding under the revolving credit facility at June 30, 2017 and September 30, 2016. The amended and extended revolving credit facility includes $100 million of availability for the issuance of letters of credit. At June 30, 2017 and September 30, 2016, there were no letters of credit outstanding under the revolving credit facility.

Debt Securities
In December 2014, the company filed a shelf registration statement with the Securities and Exchange Commission, registering an unlimited amount of debt and/or equity securities that the company may offer in one or more offerings on terms to be determined at the time of sale. The December 2014 shelf registration statement superseded and replaced the shelf registration statement filed in February 2012, as amended.

Repurchase of Debt Securities
On March 1, 2016, substantially all of the $55 million principal amount of 4.625 percent convertible notes were repurchased at 100 percent of their face value. On April 15, 2016, the remaining 4.625 percent convertible notes were redeemed at 100 percent of their face value. As of September 30, 2016, none of the 4.625 percent convertible notes were outstanding.
The repurchases were made under the company's equity and equity linked repurchase authorizations (see Note 21). The repurchase program under these authorizations was complete as of September 30, 2016.

Capital Leases
On March 20, 2012, the company entered into an arrangement to finance equipment acquisitions for various U.S. locations. Under this arrangement, the company can request financing from Wells Fargo Equipment Finance (“Wells Fargo”) for progress payments for equipment under construction, not to exceed $10 million at any time. The financing rate is equal to the 30-day LIBOR plus 475 basis points per annum. Under this arrangement, the company can also enter into lease arrangements with Wells Fargo for completed equipment. The lease term is 60 months and the lease interest rate is equal to the 5-year Swap Rate published by the Federal Reserve Board plus 564 basis points. The company had $3 million and $7 million outstanding under this capital lease arrangement as of June 30, 2017 and September 30, 2016, respectively. In addition, the company had another $10 million and $9 million outstanding through other capital lease arrangements at June 30, 2017 and September 30, 2016, respectively.

22
Index
MERITOR, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)



Letter of Credit Facilities
On February 21, 2014, the company entered into an arrangement to amend and restate the letter of credit facility with Citicorp USA, Inc., as administrative agent and issuing bank, and the other lenders party thereto. Under the terms of this amended credit agreement, which expires in March 2019, the company has the right to obtain the issuance, renewal, extension and increase of letters of credit up to an aggregate availability of $25 million. This facility contains covenants and events of default generally similar to those existing in the company’s public debt indentures. There were $18 million and $23 million of letters of credit outstanding under this facility at June 30, 2017 and September 30, 2016, respectively. The company had another $5 million of letters of credit outstanding through other letter of credit facilities at June 30, 2017 and September 30, 2016.

Export Financing Arrangements
The company entered into a number of export financing arrangements through its Brazilian subsidiary during fiscal year 2014.  The export financing arrangements were issued under an incentive program of the Brazilian government to fund working capital for Brazilian companies in exportation programs. The arrangements bore interest at 5.5 percent and had maturity dates in 2017. These financing arrangements were paid off at maturity, as of March 31, 2017. There was $9 million outstanding under these arrangements at September 30, 2016.

Other
One of the company's consolidated joint ventures in China participates in a bills of exchange program to settle its obligations with its trade suppliers. These programs are common in China and generally require the participation of local banks. Under these programs, the company's joint venture issues notes payable through the participating banks to its trade suppliers. If the issued notes payable remain unpaid on their respective due dates, this could constitute an event of default under the company’s revolving credit facility if the defaulted amount exceeds $35 million per bank. As of June 30, 2017 and September 30, 2016, the company had $16 million and $10 million, respectively, outstanding under this program at more than one bank.
18. Financial Instruments
Fair values of financial instruments are summarized as follows (in millions):
 
June 30, 2017
 
September 30, 2016
 
Carrying
Value
 
Fair
Value
 
Carrying
Value
 
Fair
Value
Cash and cash equivalents
$
231

 
$
231

 
$
160

 
$
160

Short-term debt
132

 
245

 
14

 
14

Long-term debt
858

 
912

 
982

 
1,051

Foreign exchange forward contracts (other assets)
—

 
—

 
1

 
1

Foreign exchange forward contracts (other liabilities)
—

 
—

 
2

 
2

Short-term foreign currency option contracts (other assets)
1

 
1

 
—

 
—

Long-term foreign currency option contracts (other assets)
1

 
1

 
2

 
2


The following table reflects the offsetting of derivative assets and liabilities (in millions):
 
June 30, 2017
 
September 30, 2016
 
Gross
Amounts Recognized
 
Gross Amounts
Offset
 
Net Amounts
Reported
 
Gross
Amounts Recognized
 
Gross Amounts
Offset
 
Net Amounts
Reported
Derivative Asset
 
 
 
 
 
 
 
 
 
 
 
Foreign exchange forward contract
1

 
(1
)
 
—

 
1

 
—

 
1

Derivative Liabilities
 
 
 
 
 
 
 
 
 
 
 
Foreign exchange forward contract
1

 
(1
)
 
—

 
2

 
—

 
2


23
Index
MERITOR, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


Fair Value
The current FASB guidance provides a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical instruments (Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels of the fair value hierarchy are described below:
•
Level 1 inputs use quoted prices in active markets for identical instruments.
 
•
Level 2 inputs use other inputs that are observable, either directly or indirectly. These Level 2 inputs include quoted prices for similar instruments in active markets and other inputs such as interest rates and yield curves that are observable at commonly quoted intervals.

•
Level 3 inputs are unobservable inputs, including inputs that are available in situations where there is little, if any, market activity for the related instrument.
In instances where inputs used to measure fair value fall into different levels in the above fair value hierarchy, fair value measurements in their entirety are categorized based on the lowest priority level input that is significant to the valuation. The company's assessment of the significance of particular inputs to these fair value measurements requires judgment and considers factors specific to each asset or liability.
Fair value of financial instruments by the valuation hierarchy at June 30, 2017 is as follows (in millions):
 
Level 1
 
Level 2
 
Level 3
Cash and cash equivalents
$
231

 
$
—

 
$
—

Short-term debt
—

 
241

 
4

Long-term debt
—

 
903

 
9

Foreign exchange forward contracts (asset)
—

 
—

 
—

Foreign exchange forward contracts (liability)
—

 
—

 
—

Short-term foreign currency option contracts (asset)
—

 
—

 
1

Long-term foreign currency option contracts (asset)
—

 
—

 
1

Fair value of financial instruments by the valuation hierarchy at September 30, 2016 is as follows (in millions):
 
Level 1
 
Level 2
 
Level 3
Cash and cash equivalents
$
160

 
$
—

 
$
—

Short-term debt
—

 
—

 
14

Long-term debt
—

 
1,040

 
11

Foreign exchange forward contracts (asset)
—

 
1

 
—

Foreign exchange forward contracts (liability)
—

 
2

 
—

Short-term foreign currency option contracts (asset)
—

 
—

 
—

Long-term foreign currency option contracts (asset)
—

 
—

 
2

The tables below provide a reconciliation of changes in fair value of the Level 3 financial assets and liabilities measured at fair value in the condensed consolidated balance sheet for the three and nine months ended June 30, 2017 and 2016, respectively. No transfers of assets between any of the Levels occurred during these periods.

24
Index
MERITOR, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


Three months ended June 30, 2017 (in millions)
 
Short-term foreign currency option contracts (asset)
 
Long-term foreign currency option contracts (asset)
 
Total
Fair Value as of March 31, 2017
 
$
3

 
$
2

 
$
5

Total unrealized gains (losses):
 
 
 
 
 


Included in other income
 
—

 
—

 
—

Included in cost of sales
 
(1
)
 
—

 
(1
)
Total realized gains (losses):
 
 
 
 
 


Included in other income
 
—

 
—

 
—

Included in cost of sales
 
—

 
—

 
—

Purchases, issuances, sales and settlements:
 
 
 
 
 


Purchases
 
—

 
1

 
1

Settlements
 
(2
)
 
(1
)
 
(3
)
Transfer in and / or out of Level 3 (1)
 
—

 
—

 
—

Reclass between short-term and long-term
 
1

 
(1
)
 
—

Fair Value as of June 30, 2017
 
$
1

 
$
1

 
$
2

Three months ended June 30, 2016 (in millions)
 
Short-term foreign currency option contracts (asset)
 
Long-term foreign currency option contracts (asset)
 
Total
Fair Value as of March 31, 2016
 
$
—

 
$
—

 
$
—

Total unrealized gains (losses):
 
 
 
 
 
 
Included in other income
 
—

 
—

 
—

Included in cost of sales
 
—

 
—

 
—

Total realized gains (losses):
 
 
 
 
 
 
Included in other income
 
—

 
—

 
—

Included in cost of sales
 
—

 
—

 
—

Purchases, issuances, sales and settlements:
 
 
 
 
 
 
Purchases
 
—

 
—

 
—

Settlements
 
—

 
—

 
—

Transfer in and / or out of Level 3 (1)
 
—

 
—

 
—

Reclass between short-term and long-term
 
—

 
—

 
—

Fair Value as of June 30, 2016
 
$
—

 
$
—

 
$
—



25
Index
MERITOR, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


Nine months ended June 30, 2017 (in millions)
 
Short-term foreign currency option contracts (asset)
 
Long-term foreign currency option contracts (asset)
 
Total
Fair Value as of September 30, 2016
 
$
—

 
$
2

 
$
2

Total unrealized gains (losses):
 
 
 
 
 
 
Included in other income
 
—

 
—

 
—

Included in cost of sales
 
—

 
2

 
2

Total realized gains (losses):
 
 
 
 
 
 
Included in other income
 
—

 
—

 
—

Included in cost of sales
 
—

 
—

 
—

Purchases, issuances, sales and settlements:
 
 
 
 
 


Purchases
 
—

 
1

 
1

Settlements
 
(2
)
 
(1
)
 
(3
)
Transfer in and / or out of Level 3 (1)
 
—

 
—

 
—

Reclass between short-term and long-term
 
3

 
(3
)
 
—

Fair Value as of June 30, 2017
 
$
1

 
$
1

 
$
2

Nine months ended June 30, 2016 (in millions)
 
Short-term foreign currency option contracts (asset)
 
Long-term foreign currency option contracts (asset)
 
Total
Fair Value as of September 30, 2015
 
$
1

 
$
1

 
$
2

Total unrealized gains (losses):
 
 
 
 
 
 
Included in other income
 
(2
)
 
—

 
(2
)
Included in cost of sales
 
—

 
(1
)
 
(1
)
Total realized gains (losses):
 
 
 
 
 
 
Included in other income
 
—

 
—

 
—

Included in cost of sales
 
—

 
—

 
—

Purchases, issuances, sales and settlements:
 
 
 
 
 
 
Purchases
 
1

 
—

 
1

Settlements
 
—

 
—

 
—

Transfer in and / or out of Level 3 (1)
 
—

 
—

 
—

Reclass between short-term and long-term
 
—

 
—

 
—

Fair Value as of June 30, 2016
 
$
—

 
$
—

 
$
—

(1) Transfers as of the last day of the reporting period.
Cash and cash equivalents — All highly liquid investments purchased with an original maturity of three months or less are considered to be cash equivalents. The carrying value approximates fair value because of the short maturity of these instruments. The company did not have any cash equivalents as of June 30, 2017 or September 30, 2016.
     Short- and long-term debt — Fair values are based on transaction prices at public exchange for publicly traded debt. For debt instruments that are not publicly traded, fair values are based on interest rates that would be currently available to the company for issuance of similar types of debt instruments with similar terms and remaining maturities.
Foreign exchange forward contracts — The company uses foreign exchange forward purchase and sale contracts with terms of one year or less to hedge its exposure to changes in foreign currency exchange rates. As of June 30, 2017 and September 30, 2016, the notional amount of the company's foreign exchange forward contracts outstanding was $125 million and $190 million, respectively. The fair value of foreign exchange forward contracts is based on a model which incorporates observable inputs including quoted spot rates, forward exchange rates and discounted future expected cash flows utilizing market interest rates with similar quality and maturity characteristics. For derivative instruments that are designated and qualify as a cash flow hedge, the

26
Index
MERITOR, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


effective portion of changes in the fair value of the contracts is recorded in Accumulated Other Comprehensive Loss in the statement of shareholders’ equity and is recognized in operating income when the underlying forecasted transaction impacts earnings.
Foreign currency option contracts — The company uses option contracts to mitigate foreign currency exposure on expected future Indian rupee denominated purchases. In the fourth quarter of fiscal year 2016, the company entered into a new series of foreign currency option contracts with effective dates from the start of the first quarter of fiscal year 2017 through the end of fiscal year 2018. In the third quarter of fiscal year 2017, the company monetized certain foreign currency options maturing in fiscal year 2018 and entered into a new series of foreign currency option contracts with effective dates from the start of the first quarter of fiscal year 2018 through the end of fiscal year 2019. As of June 30, 2017 and September 30, 2016, the notional amount of the company's Indian rupee foreign exchange contracts outstanding was $141 million and $174 million, respectively. The fair value of the foreign currency option contracts is based on a third-party proprietary model, which incorporates inputs at varying unobservable weights of quoted spot rates, market volatility, forward rates and time utilizing market instruments with similar quality and maturity characteristics. The company did not elect hedge accounting for these derivatives. Changes in fair value associated with these contracts are recorded in cost of sales in the consolidated statement of operations.
Also, in fiscal year 2015, the company entered into a series of foreign currency contracts with total notional amounts of $30 million and $27 million to mitigate the risk of volatility in the translation of Swedish krona and euro earnings to U.S. dollars, respectively. During the first quarter of fiscal year 2016, the company entered into additional foreign currency contracts with total notional amounts of $19 million and $21 million to mitigate the risk of volatility in the translation of Swedish krona and euro earnings to U.S. dollars, respectively. During the third quarter of fiscal year 2017, the company entered into additional foreign currency contracts with a total notional amount of $35 million to mitigate the risk of volatility in the translation of euro earnings to U.S. dollars. These foreign currency option contracts did not qualify for a hedge accounting election. As of June 30, 2017 and September 30, 2016, there were no Swedish krona foreign currency option contracts outstanding. As of June 30, 2017, the notional amount of the company's euro foreign currency option contracts outstanding was $20 million. Changes in fair value associated with these contracts were recorded in other income, net, in the consolidated statement of operations.

27
Index
MERITOR, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


19. Retirement Benefit Liabilities
Retirement benefit liabilities consisted of the following (in millions):
 
June 30,
2017
 
September 30,
2016
Retiree medical liability
$
432

 
$
447

Pension liability
261

 
283

Other
13

 
13

Subtotal
706

 
743

Less: current portion (included in compensation and benefits, Note 15)
(39
)
 
(40
)
Retirement benefits
$
667

 
$
703

The components of net periodic pension and retiree medical expense included in continuing operations for the three months ended June 30 are as follows (in millions):
 
2017
 
2016
 
Pension
 
Retiree Medical
 
Pension
 
Retiree Medical
Interest cost
$
13

 
$
4

 
$
16

 
$
4

Assumed return on plan assets
(24
)
 
—

 
(24
)
 
—

Amortization of prior service costs
—

 
(1
)
 
—

 
—

Recognized actuarial loss
8

 
4

 
6

 
3

Total expense (income)
$
(3
)
 
$
7

 
$
(2
)
 
$
7


The components of net periodic pension and retiree medical expense included in continuing operations for the nine months ended June 30 are as follows (in millions):
 
2017
 
2016
 
Pension
 
Retiree Medical
 
Pension
 
Retiree Medical
Interest cost
$
39

 
$
11

 
$
49

 
$
13

Assumed return on plan assets
(71
)
 
—

 
(74
)
 
—

Amortization of prior service costs
—

 
(2
)
 
—

 
—

Recognized actuarial loss
23

 
11

 
18

 
9

Total expense (income)
$
(9
)
 
$
20

 
$
(7
)
 
$
22

20. Contingencies
Environmental
    Federal, state and local requirements relating to the discharge of substances into the environment, the disposal of hazardous wastes and other activities affecting the environment have, and will continue to have, an impact on the operations of the company. The process of estimating environmental liabilities is complex and dependent upon evolving physical and scientific data at the sites, uncertainties as to remedies and technologies to be used and the outcome of discussions with regulatory agencies. The company records liabilities for environmental issues in the accounting period in which they are considered to be probable and the cost can be reasonably estimated. At environmental sites in which more than one potentially responsible party has been identified, the company records a liability for its allocable share of costs related to its involvement with the site, as well as an allocable share of costs related to insolvent parties or unidentified shares. At environmental sites in which Meritor is the only potentially responsible

party, the company records a liability for the total probable and estimable costs of remediation before consideration of recovery from insurers or other third parties.

28
Index
MERITOR, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


     The company has been designated as a potentially responsible party at nine Superfund sites, excluding sites as to which the company’s records disclose no involvement or as to which the company’s liability has been finally determined. Management estimates the total reasonably possible costs the company could incur for the remediation of Superfund sites at June 30, 2017 to be approximately $8 million, of which $2 million is probable and recorded as a liability. Included in reasonably possible amounts are estimates for certain remediation actions that may be required if current actions are deemed inadequate by the regulators.
     In addition to the Superfund sites, various other lawsuits, claims and proceedings have been asserted against the company, alleging violations of federal, state and local environmental protection requirements, or seeking remediation of alleged environmental impairments, principally at previously disposed-of properties. For these matters, management has estimated the total reasonably possible costs the company could incur at June 30, 2017 to be approximately $27 million, of which $9 million is probable and recorded as a liability.
     Included in the company’s environmental liabilities are costs for on-going operation, maintenance and monitoring at environmental sites in which remediation has been put into place. This liability is discounted using discount rates in the range of 1.0 to 3.0 percent and is approximately $7 million at June 30, 2017. The undiscounted estimate of these costs is approximately $8 million.
     The following are the components of the Superfund and non-Superfund environmental reserves (in millions):
 
Superfund Sites
 
Non-Superfund Sites
 
Total
Beginning balance at September 30, 2016
$
2

 
$
11

 
$
13

Payments and other
—

 
(4
)
 
(4
)
Accruals
—

 
2

 
2

Balance at June 30, 2017
$
2

 
$
9

 
$
11

Environmental reserves are included in Other Current Liabilities (see Note 15) and Other Liabilities (see Note 16) in the condensed consolidated balance sheet.
     The actual amount of costs or damages for which the company may be held responsible could materially exceed the foregoing estimates because of uncertainties, including the financial condition of other potentially responsible parties, the success of the remediation, discovery of new contamination and other factors that make it difficult to predict actual costs accurately. However, based on management’s assessment, after consulting with outside advisors that specialize in environmental matters, and subject to the difficulties inherent in estimating these future costs, the company believes that its expenditures for 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 effect on the company’s 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 remedies could significantly change the company’s estimates. Management cannot assess the possible effect of compliance with future requirements.
In April 2016, the company was served with several complaints filed against the company and other defendants in the United States District Court for the Northern District of Mississippi. The complaints were amended in July 2016.  These complaints allege damages, including diminution of property value, concealment/fraud and emotional distress resulting from alleged environmental pollution in and around a neighborhood in Grenada, Mississippi. Rockwell owned and operated a facility near the neighborhood from 1965 to 1985. The company filed answers to the complaints in July 2016. In May 2017, the company was served with a complaint filed against the company and other defendants by the Mississippi Attorney General in the Chancery Court of Grenada County, Mississippi.  The complaint alleges that operations at the above-referenced Grenada facility caused contamination of off-site groundwater and surface waters. Subsequently, the company removed this action to the United States District Court for the Northern District of Mississippi.The company intends to defend itself vigorously against these claims. The company believes at this time that liabilities associated with this case, while possible, are not probable and estimable, and therefore has not recorded any accrual for them as of June 30, 2017. Further, a reasonably possible range of loss cannot be estimated at this time.

29
Index
MERITOR, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


Asbestos
     Maremont Corporation (“Maremont”), a subsidiary of Meritor, manufactured friction products containing asbestos from 1953 through 1977, when it sold its friction product business. Arvin Industries, Inc., a predecessor of the company, 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 4,200 and 5,800 pending asbestos-related claims at June 30, 2017 and September 30, 2016, respectively. Although Maremont has been named in these cases, in the cases where actual injury has been alleged, very few claimants have established that a Maremont product caused their injuries. Plaintiffs’ lawyers often sue dozens or even hundreds of defendants in individual lawsuits, 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, the total number of claims filed is not necessarily the most meaningful factor in determining Maremont's asbestos-related liability.
     Maremont’s asbestos-related reserves and corresponding asbestos-related recoveries are summarized as follows (in millions):
 
June 30,
2017
 
September 30,
2016
Pending and future claims
$
70

 
$
70

Billed but unpaid claims
3

 
2

Asbestos-related liabilities
$
73

 
$
72

Asbestos-related insurance recoveries
$
27

 
$
32

A portion of the asbestos-related recoveries and reserves are included in Other Current Assets and Liabilities, with the majority of the amounts recorded in Other Assets and Liabilities (see Note 12, Note 14, Note 15 and Note 16).
        Pending and Future Claims: Maremont engaged Bates White LLC (“Bates White”), a consulting firm with extensive experience estimating costs associated with asbestos litigation, to assist with determining the estimated cost of resolving pending and future asbestos-related claims that have been, and could reasonably be expected to be, filed against Maremont. Although it is not possible to estimate the full range of costs because of various uncertainties, Bates White advised Maremont that it would be possible to determine an estimate of a reasonable forecast of the cost of the probable settlement and defense costs of resolving pending and future asbestos-related claims, based on historical data and certain assumptions with respect to events that may occur in the future.
     As of September 30, 2016, Bates White provided a reasonable and probable estimate that consisted of a range of equally likely possibilities of Maremont’s obligation for asbestos personal injury claims over the next ten years of $70 million to $83 million. After consultation with Bates White, management recognized a liability of $70 million as of each of June 30, 2017 and September 30, 2016 for pending and future claims over the next ten years. 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. Maremont has recognized incremental insurance receivables associated with recoveries expected for asbestos-related liabilities as the estimate of asbestos-related liabilities for pending and future claims changes.
     Assumptions: The following assumptions were made by Maremont after consultation with Bates White and are included in their study:
•
Pending and future claims were estimated for a ten-year period ending in fiscal year 2026;
•
Maremont believes that the litigation environment could change significantly beyond ten years and that the reliability of estimates of future probable expenditures in connection with asbestos-related personal injury claims will decline for each year further in the future. As a result, estimating a probable liability beyond ten years is difficult and uncertain;
•
On a per claim basis, defense and processing costs for pending and future claims will be at the level consistent with Maremont’s prior experience;
•
Potential payments made to claimants from other sources, including other defendants and 524(g) trusts favorably impact Maremont’s estimated liability in the future; and
•
The ultimate indemnity cost of resolving nonmalignant claims with plaintiffs’ law firms in jurisdictions without an established history with Maremont cannot be reasonably estimated.

30
Index
MERITOR, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


Recoveries: Maremont has historically had insurance that reimburses a substantial portion of the costs incurred defending against asbestos-related claims. The insurance receivable related to asbestos-related liabilities was $27 million and $32 million as of June 30, 2017 and September 30, 2016, respectively. The receivable is for coverage provided by one insurance carrier based on a coverage-in-place agreement. Maremont currently expects to exhaust the remaining limits provided by this coverage sometime in the next ten years. The difference between the estimated liability and insurance receivable is primarily related to exhaustion of settled insurance coverage within the forecasted period.
Maremont maintained insurance coverage with other insurance carriers that management believes also covers indemnity and defense costs. During fiscal year 2013, Maremont re-initiated lawsuits against these carriers, seeking a declaration of its rights to coverage for asbestos claims and to facilitate an orderly and timely collection of insurance proceeds. During the first quarter of fiscal year 2016, the dispute related to these insurance policies was settled. As a part of this settlement, on December 12, 2015, Maremont received $17 million in cash, of which $5 million was recognized as a reduction in asbestos expense and $12 million was recorded as a liability to the insurance carrier as it is required to be returned to the carrier if additional asbestos liability is not incurred. During the fourth quarter of fiscal year 2016, Maremont recognized an additional $9 million of the cash settlement proceeds as a reduction in asbestos expense. During the first quarter of fiscal year 2017, the company recognized the remaining $3 million of the cash settlement proceeds as a reduction in asbestos expense. The settlement also provides additional recovery for Maremont if certain future defense and indemnity spending thresholds are met.
     The amounts recorded for the asbestos-related reserves and recoveries from insurance companies are based upon assumptions and estimates derived from currently known facts. All such estimates of liabilities and recoveries for asbestos-related claims are subject to considerable uncertainty because such liabilities and recoveries are influenced by variables that are difficult to predict. The future litigation environment for Maremont could change significantly from its past experience, due, for example, to changes in the mix of claims filed against Maremont in terms of plaintiffs’ law firms, jurisdictions and diseases; 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 estimation period, the nature of pending and future claims, the cost to resolve claims and the amount of available insurance prove to be incorrect, the actual amount of liability for Maremont’s asbestos-related claims, and the effect on the company, could differ materially from current estimates and, therefore, could have a material impact on the company’s financial condition and results of operations.
     Rockwell International (“Rockwell”) — ArvinMeritor, Inc. (“AM”), a subsidiary of Meritor, 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 at the time of the spin-off of the automotive business from Rockwell in 1997. Rockwell had approximately 1,600 and 3,200 pending active asbestos claims in lawsuits that name AM, together with many other companies, as defendants at June 30, 2017 and September 30, 2016, respectively.
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 likely never identify any of Rockwell’s products. Historically, AM has been dismissed from the vast majority of similar claims filed in the past with no payment to claimants. For those claimants who do show that they worked with Rockwell’s products, management nevertheless believes it has meritorious defenses, in substantial part due to the integrity of the products involved and the lack of any impairing medical condition on the part of many claimants.
     The Rockwell legacy asbestos-related reserves and corresponding asbestos-related recoveries are summarized as follows (in millions):
 
June 30,
2017
 
September 30,
2016
Pending and future claims
$
60

 
$
60

Billed but unpaid claims
4

 
1

Asbestos-related liabilities
$
64

 
$
61

Asbestos-related insurance recoveries
$
27

 
$
27

Pending and Future Claims: The company engaged Bates White to assist with determining whether it would be possible to estimate the cost of resolving pending and future Rockwell legacy asbestos-related claims that have been, and could reasonably be expected to be, filed against the company. As of September 30, 2016, Bates White provided a reasonable and probable estimate that consisted of a range of equally likely possibilities of Rockwell’s obligation for asbestos personal injury claims over the next

31
Index
MERITOR, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


ten years of $60 million to $75 million. After consultation with Bates White, management recognized a liability for the pending and future claims over the next ten years of $60 million as of each of June 30, 2017 and September 30, 2016. 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 Rockwell.
  Assumptions: The following assumptions were made by the company after consultation with Bates White and are included in their study:
•
Pending and future claims were estimated for a ten-year period ending in fiscal year 2026;
•
The company believes that the litigation environment could change significantly beyond ten years and that the reliability of estimates of future probable expenditures in connection with asbestos-related personal injury claims will decline for each year further in the future. As a result, estimating a probable liability beyond ten years is difficult and uncertain;
•
On a per claim basis, defense and processing costs for pending and future claims will be at the level consistent with the company’s prior experience;
•
Potential payments made to claimants from other sources, including other defendants and 524(g) trusts favorably impact the company’s estimated liability in the future; and
•
The ultimate indemnity cost of resolving nonmalignant claims with plaintiff’s law firms in jurisdictions without an established history with Rockwell cannot be reasonably estimated.
Recoveries: Rockwell has insurance coverage that management believes covers indemnity and defense costs, over and above self-insurance retentions, for a significant portion of these claims. In 2004, the company initiated litigation against certain of these carriers to enforce the insurance policies. During the third quarter of fiscal year 2016, the company reached a settlement, relating to certain proofs of claim filed by the company under certain insurance policies, with an insolvent insurer for $5.5 million (the "allowed claim"). On June 17, 2016, the company entered into an assignment of claim (the "Assignment”) with Macquarie Bank to assign the allowed claim the company had against the insolvent insurer. The Assignment was approved by the liquidator, which resulted in the company receiving $3 million in the third quarter of fiscal year 2016. During the fourth quarter of fiscal year 2016, the company executed settlement agreements with two of these carriers, thereby resolving the litigation against those particular carriers. Pursuant to the terms of one of those settlement agreements, in the fourth quarter of fiscal year 2016 the company received $32 million in cash from an insurer, of which $10 million was recognized as a reduction in asbestos expense, and $22 million was recorded as a liability to the insurance carrier as it is required to be returned to the carrier if additional asbestos liability is not ultimately incurred. During the first nine months of fiscal year 2017, Rockwell recognized an additional $12 million of the cash settlement proceeds as a reduction in asbestos expense. Pursuant to the terms of a second settlement agreement, in the fourth quarter of fiscal year 2016 the company recorded a $12 million receivable to reflect expected reimbursement of future defense and indemnity payments under a coverage-in-place arrangement with that insurer. In addition to the coverage provided from the settlement agreements executed during the fourth quarter of fiscal year 2016, the company continues to maintain a receivable of $6 million related to a previously executed coverage-in-place arrangement with other insurers. The insurance receivable for Rockwell's asbestos-related liabilities totaled $27 million as of each of June 30, 2017 and September 30, 2016. Included in these amounts are insurance receivables of $9 million as of each of June 30, 2017 and September 30, 2016, which are associated with policies in dispute and have been fully reserved.
The amounts recorded for the asbestos-related reserves and recoveries from insurance companies are based upon assumptions and estimates derived from currently known facts. All such estimates of liabilities and recoveries for asbestos-related claims are subject to considerable uncertainty because such liabilities and recoveries are influenced by variables that are difficult to predict. The future litigation environment for Rockwell could change significantly from its past experience, due, for example, to changes in the mix of claims filed against Rockwell in terms of plaintiffs’ law firms, jurisdictions and diseases; legislative or regulatory developments; Rockwell’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 estimation period, the nature of pending claims, the cost to resolve claims and the amount of available insurance prove to be incorrect, the actual amount of liability for Rockwell asbestos-related claims, and the effect on the company, could differ materially from current estimates and, therefore, could have a material impact on the company’s financial condition and results of operations.
Indemnifications
The company has provided indemnifications in conjunction with certain transactions, primarily divestitures. These indemnities address a variety of matters, which may include environmental, tax, asbestos and employment-related matters, and the periods of indemnification vary in duration.

32
Index
MERITOR, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


In December 2005, the company guaranteed a third party’s obligation to reimburse another party for payment of health and prescription drug benefits to a group of retired employees. The retirees were former employees of a wholly-owned subsidiary of the company prior to it being acquired by the company. The wholly-owned subsidiary, which was part of the company’s light vehicle aftermarket business, was sold by the company in fiscal year 2006. Prior to May 2009, except as set forth hereinafter, the third party met its obligations to reimburse the other party. In May 2009, the third party filed for bankruptcy protection under Chapter 11 of the U.S. Bankruptcy Code, requiring the company to recognize its obligations under the guarantee. The company recorded a $28 million liability in fiscal year 2009 for this matter. At each of June 30, 2017 and September 30, 2016, the remaining estimated liability for this matter was approximately $11 million.
   In connection with the sale of its interest in MSSC in October 2009, the company provided certain indemnities to the buyer for its share of potential obligations related to pension funding shortfall, environmental and other contingencies, and valuation of certain accounts receivable and inventories. At June 30, 2017 and September 30, 2016, the company's remaining exposure was approximately $1 million, which is included in other liabilities in the condensed consolidated balance sheet.
The company is not aware of any other claims or other information that would give rise to material payments under such indemnifications.
Other
The company identified certain sales transactions for which value-added tax was potentially required to be remitted to certain tax jurisdictions for tax years 2009 through 2016. At June 30, 2017 and September 30, 2016, the company’s estimate of the probable liability was $11 million and $10 million, respectively.

On June 24, 2014, the company filed a complaint in the Circuit Court for Oakland County Michigan against a supplier alleging that certain bearings supplied by the supplier for TL Trailer Axles were faulty, and as a result, the company suffered product liability damages and expenses with respect to vehicle recalls. On May 13, 2016, the company entered into a settlement agreement with the supplier pursuant to which the company received approximately $6 million in the third quarter of fiscal year 2016. The settlement does not relieve the company of its current liability for past or future claims related to TL Axles. The company has the right to seek future indemnification from the supplier with respect to any currently unasserted claims.

On July 5, 2017, the company's subsidiary Meritor Heavy Vehicle Systems, LLC fully and finally resolved all claims with respect to its various legal proceedings with Sistemas Automotrices de Mexico, S.A. de C.V. (“Sisamex”), its Mexican joint venture with Quimmco, S.A. de C.V. ("Quimmco"), that were originally filed in 2014 in the District Court for the Northern District of Illinois regarding Sisamex’s rights to manufacture certain products and the components thereof for sale in Mexico.  The parties entered into a confidential settlement agreement and release pursuant to which the parties agreed to dismiss, with prejudice, all of the legal proceedings between them and Meritor agreed to pay Quimmco a settlement of $10 million, consistent with the reserve recorded as of June 30, 2017.

In addition, various lawsuits, claims and proceedings, other than those specifically disclosed in the condensed consolidated financial statements, have been or may be instituted or asserted against the company, relating to the conduct of the company’s business, including those pertaining to product liability, warranty or recall claims, intellectual property, safety and health, contract and employment matters. Although the outcome of other litigation cannot be predicted with certainty, and some lawsuits, claims or proceedings may be disposed of unfavorably to the company, management believes the disposition of matters that are pending will not have a material effect on the company’s business, financial condition, results of operations or cash flows. 

33
Index
MERITOR, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


21. Shareholders' Equity
Common Stock and Debt Repurchase Authorizations
  On July 21, 2016, the Board of Directors authorized the repurchase of up to $100 million of the company’s common stock and up to $150 million aggregate principal amount of any of the company’s debt securities (including convertible debt securities), in each case from time to time through open market purchases, privately negotiated transactions or otherwise, until September 30, 2019, subject to compliance with legal and regulatory requirements and the company's debt covenants. As of June 30, 2017, an insignificant amount of repurchases had been made under these authorizations.
Accumulated Other Comprehensive Loss (“AOCL”)
The components of AOCL and the changes in AOCL by components, net of tax, for three months ended June 30, 2017 and 2016 are as follows (in millions):
 
Foreign Currency Translation
 
Employee Benefit Related Adjustments
 
Unrealized Loss, net of tax
 
Total
Balance at March 31, 2017
$
(75
)
 
$
(718
)
 
$
(1
)
 
$
(794
)
Other comprehensive income (loss) before reclassification
17

 
—

 
(2
)
 
15

Amounts reclassified from accumulated other comprehensive loss
—

 
11

 
—

 
11

Net current-period other comprehensive income (loss)
$
17

 
$
11

 
$
(2
)
 
$
26

Balance at June 30, 2017
$
(58
)
 
$
(707
)
 
$
(3
)
 
$
(768
)
 
Details about Accumulated Other Comprehensive Income Components
 
Amount Reclassified from Accumulated Other Comprehensive Income
 
Affected Line Item in the Consolidated Statement of Operations
 
Employee Benefit Related Adjustment
 
 
 
 
 
Prior service costs
 
$
(1
)
 
(a) 
 
Actuarial losses
 
$
12

 
(a) 
 
 
 
11

 
Total before tax
 
 
 
(3
)
 
Tax benefit
 
Total reclassifications for the period
 
$
8

 
Net of tax
 
(a)  These accumulated other comprehensive income components are included in the computation of net periodic pension and retiree medical expense (see Note 19 for additional details), which is recorded in cost of sales and selling, general and administrative expenses.
 
 
Foreign Currency Translation
 
Employee Benefit Related Adjustments
 
Unrealized Loss, net of tax
 
Total
Balance at March 31, 2016
$
(50
)
 
$
(687
)
 
$
(5
)
 
$
(742
)
Other comprehensive income (loss) before reclassification
(10
)
 
(2
)
 
3

 
(9
)
Amounts reclassified from accumulated other comprehensive loss - net of tax
—

 
9

 
—

 
9

Net current-period other comprehensive income (loss)
$
(10
)
 
$
7

 
$
3

 
$
—

Balance at June 30, 2016
$
(60
)
 
$
(680
)
 
$
(2
)
 
$
(742
)

34
Index
MERITOR, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


 
Details about Accumulated Other Comprehensive Income Components
 
Amount Reclassified from Accumulated Other Comprehensive Income
 
Affected Line Item in the Consolidated Statement of Operations
 
Employee Benefit Related Adjustment
 
 
 
 
 
Actuarial losses
 
$
9

 
(b) 
 
 
 
9

 
Total before tax
 
 
 
—

 
Tax expense
 
Total reclassifications for the period
 
$
9

 
Net of tax
 
 
 
 
 
 
 
 
 
 
 
 
 
(b)  These accumulated other comprehensive income components are included in the computation of net periodic pension and retiree medical expense (see Note 19 for additional details).
 
The components of AOCL and the changes in AOCL by components, net of tax, for nine months ended June 30, 2017 and 2016 are as follows (in millions):
 
Foreign Currency Translation
 
Employee Benefit Related Adjustments
 
Unrealized Loss, net of tax
 
Total
Balance at September 30, 2016
$
(66
)
 
$
(740
)
 
$
(3
)
 
$
(809
)
Other comprehensive income (loss) before reclassification
8

 
1

 
—

 
9

Amounts reclassified from accumulated other comprehensive loss
—

 
32

 
—

 
32

Net current-period other comprehensive income (loss)
$
8

 
$
33

 
$
—

 
$
41

Balance at June 30, 2017
$
(58
)
 
$
(707
)
 
$
(3
)
 
$
(768
)
 
Details about Accumulated Other Comprehensive Income Components
 
Amount Reclassified from Accumulated Other Comprehensive Income
 
Affected Line Item in the Consolidated Statement of Operations
 
Employee Benefit Related Adjustment
 
 
 
 
 
Prior service costs
 
$
(2
)
 
(a) 
 
Actuarial losses
 
34

 
(a) 
 
 
 
32

 
Total before tax
 
 
 
(10
)
 
Tax benefit
 
Total reclassifications for the period
 
$
22

 
Net of tax
 
(a)  These accumulated other comprehensive income components are included in the computation of net periodic pension and retiree medical expense (see Note 19 for additional details), which is recorded in cost of sales and selling, general and administrative expenses.
 
 
Foreign Currency Translation
 
Employee Benefit Related Adjustments
 
Unrealized Loss, net of tax
 
Total
Balance at September 30, 2015
$
(54
)
 
$
(705
)
 
$
(7
)
 
$
(766
)
Other comprehensive income (loss) before reclassification
(6
)
 
(2
)
 
5

 
(3
)
Amounts reclassified from accumulated other comprehensive loss - net of tax
—

 
27

 
—

 
27

Net current-period other comprehensive income (loss)
$
(6
)
 
$
25

 
$
5

 
$
24

Balance at June 30, 2016
$
(60
)
 
$
(680
)
 
$
(2
)
 
$
(742
)

35
Index
MERITOR, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


 
Details about Accumulated Other Comprehensive Income Components
 
Amount Reclassified from Accumulated Other Comprehensive Income
 
Affected Line Item in the Consolidated Statement of Operations
 
Employee Benefit Related Adjustment
 
 
 
 
 
Actuarial losses
 
$
27

 
(b) 
 
 
 
27

 
Total before tax
 
 
 
—

 
Tax expense
 
Total reclassifications for the period
 
$
27

 
Net of tax
 
 
 
 
 
 
 
 
 
 
 
 
 
(b)  These accumulated other comprehensive income components are included in the computation of net periodic pension and retiree medical expense (see Note 19 for additional details).
 

22. Business Segment Information
The company defines its operating segments as components of its business where separate financial information is available and is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. The company’s Chief Operating Decision Maker (“CODM”) is the Chief Executive Officer.
      The company has two reportable segments at June 30, 2017, as follows:
•
The Commercial Truck & Industrial segment supplies drivetrain systems and components, including axles, drivelines and braking and suspension systems, primarily for medium- and heavy-duty trucks, military, construction, bus and coach, fire and emergency and other applications in North America, South America, Europe and Asia Pacific. This segment also includes the company's aftermarket businesses in Asia Pacific and South America; and
•
The Aftermarket & Trailer segment supplies axles, brakes, drivelines, suspension parts and other replacement parts to commercial vehicle and industrial aftermarket customers, primarily in North America and Europe. This segment also supplies a wide variety of undercarriage products and systems for trailer applications in North America.

     Segment adjusted EBITDA is defined as income (loss) from continuing operations before interest expense, income taxes, depreciation and amortization, non-controlling interests in consolidated joint ventures, loss on sale of receivables, restructuring expense, asset impairment charges and other special items as determined by management. Segment adjusted EBITDA excludes unallocated legacy and corporate income (expense), net. The company uses Segment adjusted EBITDA as the primary basis for the CODM to evaluate the performance of each of its reportable segments.
     The accounting policies of the segments are the same as those applied in the condensed consolidated financial statements, except for the use of Segment adjusted EBITDA. The company may allocate certain common costs, primarily corporate functions, between the segments differently than the company would for stand alone financial information prepared in accordance with GAAP. These allocated costs include expenses for shared services such as information technology, finance, communications, legal and human resources. The company does not allocate interest expense and certain legacy and other corporate costs not directly associated with the segment.

36
Index
MERITOR, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


     Segment information is summarized as follows (in millions):
 
Commercial Truck
& Industrial
 
Aftermarket
& Trailer
 
Eliminations
 
Total
Three Months Ended June 30, 2017
 
 
 
 
 
 
 
External Sales
$
704

 
$
216

 
$
—

 
$
920

Intersegment Sales
24

 
12

 
(36
)
 
—

Total Sales
$
728

 
$
228

 
$
(36
)
 
$
920

Three Months Ended June 30, 2016
 
 
 
 
 
 
 
External Sales
$
623

 
$
218

 
$
—

 
$
841

Intersegment Sales
17

 
9

 
(26
)
 
—

Total Sales
$
640

 
$
227

 
$
(26
)
 
$
841

 
 
 
 
 
 
 
 
 
Commercial Truck
& Industrial
 
Aftermarket
& Trailer
 
Eliminations
 
Total
Nine Months Ended June 30, 2017
 
 
 
 
 
 
 
External Sales
$
1,826

 
$
599

 
$
—

 
$
2,425

Intersegment Sales
61

 
28

 
(89
)
 
—

Total Sales
$
1,887

 
$
627

 
$
(89
)
 
$
2,425

Nine Months Ended June 30, 2016
 
 
 
 
 
 
 
External Sales
$
1,846

 
$
625

 
$
—

 
$
2,471

Intersegment Sales
58

 
23

 
(81
)
 
—

Total Sales
$
1,904

 
$
648

 
$
(81
)
 
$
2,471



37
Index
MERITOR, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


 
Three Months Ended June 30,
 
Nine Months Ended June 30,
 
2017

2016
 
2017
 
2016
Segment adjusted EBITDA:
 
 
 
 
 
 
 
Commercial Truck & Industrial
$
75

 
$
61

 
$
171

 
$
169

Aftermarket & Trailer
26

 
38

 
78

 
86

Segment adjusted EBITDA
101


99

 
249

 
255

Unallocated legacy and corporate income (expense), net (1)
2

 
(3
)
 
—

 
(2
)
Interest expense, net
(21
)
 
(20
)
 
(63
)
 
(63
)
Provision for income taxes
(11
)
 
(8
)
 
(30
)
 
(22
)
Depreciation and amortization
(18
)
 
(17
)
 
(55
)
 
(48
)
Noncontrolling interests
(3
)
 
(1
)
 
(5
)
 
(2
)
Loss on sale of receivables
(2
)
 
(2
)
 
(4
)
 
(6
)
Asset impairment charges
1

 
—

 
(2
)
 
—

Restructuring costs
—

 
(6
)
 
(4
)
 
(9
)
Income from continuing operations attributable to Meritor, Inc.
$
49


$
42

 
$
86

 
$
103

(1)
Unallocated legacy and corporate income (expense), net represents items that are not directly related to the company's business segments. These items primarily include asbestos-related charges and settlements, pension and retiree medical costs associated with sold businesses, and other legacy costs for environmental and product liability.
 
June 30,
2017
 
September 30,
2016
Segment Assets:
 
 
 
Commercial Truck & Industrial
$
1,618

 
$
1,433

Aftermarket & Trailer
466

 
436

Total segment assets
2,084

 
1,869

Corporate (1)
916

 
845

Less: Accounts receivable sold under off-balance sheet factoring programs(2) 
(288
)
 
(220
)
Total assets
$
2,712

 
$
2,494

(1) 
Corporate assets consist primarily of cash, deferred income taxes and prepaid pension costs.
(2) 
At June 30, 2017 and September 30, 2016, segment assets include $288 million and $220 million, respectively, of accounts receivable sold under off-balance sheet accounts receivable factoring programs (see Note 9). These sold receivables are included in segment assets as the CODM reviews segment assets inclusive of these balances.
23. Supplemental Guarantor Condensed Consolidating Financial Statements
Rule 3-10 of Regulation S-X requires that separate financial information for issuers and guarantors of registered securities be filed in certain circumstances. Certain of the company's 100-percent-owned subsidiaries, as defined in the credit agreement (the “Guarantors”), irrevocably and unconditionally guarantee amounts outstanding under the senior secured revolving credit facility on a joint and several basis. Similar subsidiary guarantees were provided for the benefit of the holders of the notes outstanding under the company's indentures (see Note 17).
In lieu of providing separate audited financial statements for the Parent and Guarantors, the company has included the accompanying condensed consolidating financial statements as permitted by Regulation S-X Rules 3-10. These condensed consolidating financial statements are presented on the equity method. Under this method, the investments in subsidiaries are recorded at cost and adjusted for the Parent's share of the subsidiary's cumulative results of operations, capital contributions and distribution and other equity changes. The Guarantors are combined in the condensed consolidating financial statements.

38
Index                        
MERITOR, INC.
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
(In millions)
(Unaudited)





 
Three Months Ended June 30, 2017
 
Parent
 
Guarantors
 
Non-
Guarantors
 
Elims
 
Consolidated
Sales
 
 
 
 
 
 
 
 
 
External
$
—

 
$
528

 
$
392

 
$
—

 
$
920

Subsidiaries
—

 
33

 
77

 
(110
)
 
—

Total sales
—

 
561

 
469

 
(110
)
 
920

Cost of sales
(13
)
 
(480
)
 
(395
)
 
110

 
(778
)
GROSS MARGIN
(13
)
 
81

 
74

 
—

 
142

Selling, general and administrative
(34
)
 
(14
)
 
(25
)
 
—

 
(73
)
Restructuring costs
—

 
1

 
(1
)
 
—

 
—

Other operating income (expense), net
(1
)
 
—

 
1

 
—

 
—

OPERATING INCOME (LOSS)
(48
)
 
68

 
49

 
—

 
69

Other income (expense), net
12

 
(7
)
 
(4
)
 
—

 
1

Equity in earnings of affiliates
—

 
12

 
2

 
—

 
14

Interest income (expense), net
(32
)
 
8

 
3

 
—

 
(21
)
INCOME (LOSS) BEFORE INCOME TAXES
(68
)
 
81

 
50

 
—

 
63

Benefit (provision) for income taxes
19

 
(21
)
 
(9
)
 
—

 
(11
)
Equity income from continuing operations of subsidiaries
98

 
34

 
—

 
(132
)
 
—

INCOME FROM CONTINUING OPERATIONS
49

 
94

 
41

 
(132
)
 
52

LOSS FROM DISCONTINUED OPERATIONS, net of tax
(1
)
 
—

 
—

 
—

 
(1
)
NET INCOME
48

 
94

 
41

 
(132
)
 
51

Less: Net income attributable to noncontrolling interests
—

 
—

 
(3
)
 
—

 
(3
)
NET INCOME ATTRIBUTABLE TO MERITOR, INC.
$
48

 
$
94

 
$
38

 
$
(132
)
 
$
48





39

MERITOR, INC.
CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME (LOSS)
(In millions)
(Unaudited)


 
Three Months Ended June 30, 2017
 
Parent
 
Guarantors
 
Non-
Guarantors
 
Elims
 
Consolidated
Net income
$
48

 
$
94

 
$
41

 
$
(132
)
 
$
51

Other comprehensive income, net of tax
26

 
—

 
18

 
(18
)
 
26

Total comprehensive income
74

 
94

 
59

 
(150
)
 
77

Less: Comprehensive loss (income) attributable to
noncontrolling interests
1

 
—

 
(4
)
 
—

 
(3
)
 Comprehensive income attributable to Meritor, Inc.
$
75

 
$
94

 
$
55

 
$
(150
)
 
$
74




40
Index                        
MERITOR, INC.
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
(In millions)
(Unaudited)





 
Three Months Ended June 30, 2016
 
Parent
 
Guarantors
 
Non-
Guarantors
 
Elims
 
Consolidated
Sales
 
 
 
 
 
 
 
 
 
External
$
—

 
$
410

 
$
431

 
$
—

 
$
841

Subsidiaries
—

 
30

 
14

 
(44
)
 
—

Total sales
—

 
440

 
445

 
(44
)
 
841

Cost of sales
(14
)
 
(361
)
 
(383
)
 
44

 
(714
)
GROSS MARGIN
(14
)
 
79

 
62

 
—

 
127

Selling, general and administrative
(23
)
 
(20
)
 
(16
)
 
—

 
(59
)
Restructuring costs
—

 
(3
)
 
(3
)
 
—

 
(6
)
Other operating income, net
—

 
—

 
—

 
—

 
—

OPERATING INCOME (LOSS)
(37
)
 
56

 
43

 
—

 
62

Other income (expense), net
8

 
(48
)
 
40

 
—

 
—

Equity in earnings of affiliates
—

 
8

 
1

 
—

 
9

Interest income (expense), net
(29
)
 
8

 
1

 
—

 
(20
)
INCOME (LOSS) BEFORE INCOME TAXES
(58
)
 
24

 
85

 
—

 
51

Provision for income taxes
(1
)
 
—

 
(7
)
 
—

 
(8
)
Equity income from continuing operations of subsidiaries
101

 
74

 
—

 
(175
)
 
—

INCOME FROM CONTINUING OPERATIONS
42

 
98

 
78

 
(175
)
 
43

LOSS FROM DISCONTINUED OPERATIONS, net of tax
(1
)
 
—

 
—

 
—

 
(1
)
NET INCOME
41

 
98

 
78

 
(175
)
 
42

Less: Net income attributable to noncontrolling interests
—

 
—

 
(1
)
 
—

 
(1
)
NET INCOME ATTRIBUTABLE TO MERITOR, INC.
$
41

 
$
98

 
$
77

 
$
(175
)
 
$
41



41

MERITOR, INC.
CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME (LOSS)
(In millions)
(Unaudited)


 
Three Months Ended June 30, 2016
 
Parent
 
Guarantors
 
Non-
Guarantors
 
Elims
 
Consolidated
Net income
$
41

 
$
98

 
$
78

 
$
(175
)
 
$
42

Other comprehensive income (loss)
—

 
44

 
(50
)
 
6

 
—

Total comprehensive income
41

 
142

 
28

 
(169
)
 
42

Less: Comprehensive income attributable to noncontrolling interests
—

 
—

 
(1
)
 
—

 
(1
)
 Comprehensive income attributable to Meritor, Inc.
$
41

 
$
142

 
$
27

 
$
(169
)
 
$
41



42
Index                        
MERITOR, INC.
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
(In millions)
(Unaudited)





 
Nine Months Ended June 30, 2017
 
Parent
 
Guarantors
 
Non-
Guarantors
 
Elims
 
Consolidated
Sales
 
 
 
 
 
 
 
 
 
External
$
—

 
$
1,244

 
$
1,181

 
$
—

 
$
2,425

Subsidiaries
—

 
89

 
103

 
(192
)
 
—

Total sales
—

 
1,333

 
1,284

 
(192
)
 
2,425

Cost of sales
(42
)
 
(1,122
)
 
(1,101
)
 
192

 
(2,073
)
GROSS MARGIN
(42
)
 
211

 
183

 
—

 
352

Selling, general and administrative
(77
)
 
(67
)
 
(48
)
 
—

 
(192
)
Restructuring costs
2

 
(1
)
 
(5
)
 
—

 
(4
)
Other operating expense, net
(3
)
 
—

 
(2
)
 
—

 
(5
)
OPERATING INCOME (LOSS)
(120
)
 
143

 
128

 
—

 
151

Other income (expense), net
36

 
(12
)
 
(23
)
 
—

 
1

Equity in earnings of affiliates
—

 
27

 
5

 
—

 
32

Interest income (expense), net
(99
)
 
27

 
9

 
—

 
(63
)
INCOME (LOSS) BEFORE INCOME TAXES
(183
)
 
185

 
119

 
—

 
121

Benefit (provision) for income taxes
54

 
(56
)
 
(28
)
 
—

 
(30
)
Equity income from continuing operations of subsidiaries
215

 
75

 
—

 
(290
)
 
—

INCOME FROM CONTINUING OPERATIONS
86

 
204

 
91

 
(290
)
 
91

LOSS FROM DISCONTINUED OPERATIONS, net of tax
(1
)
 
—

 
—

 
—

 
(1
)
NET INCOME
85

 
204

 
91

 
(290
)
 
90

Less: Net income attributable to noncontrolling interests
—

 
—

 
(5
)
 
—

 
(5
)
NET INCOME ATTRIBUTABLE TO MERITOR, INC.
$
85

 
$
204

 
$
86

 
$
(290
)
 
$
85



43

MERITOR, INC.
CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME (LOSS)
(In millions)
(Unaudited)


 
Nine Months Ended June 30, 2017
 
Parent
 
Guarantors
 
Non-
Guarantors
 
Elims
 
Consolidated
Net income
$
85

 
$
204

 
$
91

 
$
(290
)
 
$
90

Other comprehensive income, net of tax
40

 
2

 
12

 
(14
)
 
40

Total comprehensive income
125

 
206

 
103

 
(304
)
 
130

Less: Comprehensive loss (income) attributable to
noncontrolling interests
1

 
—

 
(5
)
 
—

 
(4
)
 Comprehensive income attributable to Meritor, Inc.
$
126

 
$
206

 
$
98

 
$
(304
)
 
$
126



44
Index                        
MERITOR, INC.
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
(In millions)
(Unaudited)





 
Nine Months Ended June 30, 2016
 
Parent
 
Guarantors
 
Non-
Guarantors
 
Elims
 
Consolidated
Sales
 
 
 
 
 
 
 
 
 
External
$
—

 
$
1,247

 
$
1,224

 
$
—

 
$
2,471

Subsidiaries
—

 
85

 
46

 
(131
)
 
—

Total sales
—

 
1,332

 
1,270

 
(131
)
 
2,471

Cost of sales
(40
)
 
(1,107
)
 
(1,103
)
 
131

 
(2,119
)
GROSS MARGIN
(40
)
 
225

 
167

 
—

 
352

Selling, general and administrative
(62
)
 
(62
)
 
(51
)
 
—

 
(175
)
Restructuring costs
—

 
(4
)
 
(5
)
 
—

 
(9
)
Other operating expense, net
(3
)
 
—

 
—

 
—

 
(3
)
OPERATING INCOME (LOSS)
(105
)
 
159

 
111

 
—

 
165

Other income (expense), net
42

 
(57
)
 
14

 
—

 
(1
)
Equity in earnings of affiliates
—

 
24

 
2

 
—

 
26

Interest income (expense), net
(88
)
 
23

 
2

 
—

 
(63
)
INCOME (LOSS) BEFORE INCOME TAXES
(151
)
 
149

 
129

 
—

 
127

Provision for income taxes
(1
)
 
—

 
(21
)
 
—

 
(22
)
Equity income from continuing operations of subsidiaries
255

 
95

 
—

 
(350
)
 
—

INCOME FROM CONTINUING OPERATIONS
103

 
244

 
108

 
(350
)
 
105

LOSS FROM DISCONTINUED OPERATIONS, net of tax
(4
)
 
(5
)
 
(4
)
 
9

 
(4
)
NET INCOME
99

 
239

 
104

 
(341
)
 
101

Less: Net income attributable to noncontrolling interests
—

 
—

 
(2
)
 
—

 
(2
)
NET INCOME ATTRIBUTABLE TO MERITOR, INC.
$
99

 
$
239

 
$
102

 
$
(341
)
 
$
99



45

MERITOR, INC.
CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME (LOSS)
(In millions)
(Unaudited)


 
Nine Months Ended June 30, 2016
 
Parent
 
Guarantors
 
Non-
Guarantors
 
Elims
 
Consolidated
Net income
$
99

 
$
239

 
$
104

 
$
(341
)
 
$
101

Other comprehensive income (loss), net of tax
24

 
56

 
(52
)
 
(4
)
 
24

Total comprehensive income
123

 
295

 
52

 
(345
)
 
125

Less: Comprehensive income attributable to
noncontrolling interests
—

 
—

 
(2
)
 
—

 
(2
)
 Comprehensive income attributable to Meritor, Inc.
$
123

 
$
295

 
$
50

 
$
(345
)
 
$
123



46
Index
MERITOR, INC.
CONDENSED CONSOLIDATING BALANCE SHEET
(In millions)
(Unaudited)


 
June 30, 2017
 
Parent
 
Guarantors
 
Non-
Guarantors
 
Elims
 
Consolidated
CURRENT ASSETS:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents (1)
$
150

 
$
4

 
$
77

 
$
—

 
$
231

Receivables trade and other, net (1)
1

 
43

 
456

 
—

 
500

Inventories (1)
—

 
165

 
195

 
—

 
360

Other current assets
5

 
14

 
18

 
—

 
37

TOTAL CURRENT ASSETS
156

 
226

 
746

 
—

 
1,128

NET PROPERTY (1)
21

 
201

 
208

 
—

 
430

GOODWILL (1)
—

 
219

 
172

 
—

 
391

OTHER ASSETS
437

 
129

 
197

 
—

 
763

INVESTMENTS IN SUBSIDIARIES
2,866

 
769

 
—

 
(3,635
)
 
—

TOTAL ASSETS
$
3,480

 
$
1,544

 
$
1,323

 
$
(3,635
)
 
$
2,712

CURRENT LIABILITIES:
 
 
 
 
 
 
 
 
 
Short-term debt
$
128

 
$
3

 
$
1

 
$
—

 
$
132

Accounts and notes payable (1)
51

 
230

 
321

 
—

 
602

Other current liabilities
103

 
70

 
104

 
—

 
277

TOTAL CURRENT LIABILITIES
282

 
303

 
426

 
—

 
1,011

LONG-TERM DEBT
850

 
1

 
7

 
—

 
858

RETIREMENT BENEFITS
645

 
—

 
22

 
—

 
667

INTERCOMPANY PAYABLE (RECEIVABLE)
1,744

 
(1,966
)
 
222

 
—

 
—

OTHER LIABILITIES
31

 
146

 
43

 
—

 
220

MEZZANINE EQUITY
12

 
—

 
—

 
—

 
12

EQUITY (DEFICIT) ATTRIBUTABLE TO
       MERITOR, INC.
(84
)
 
3,060

 
575

 
(3,635
)
 
(84
)
NONCONTROLLING INTERESTS (1)
—

 
—

 
28

 
—

 
28

TOTAL LIABILITIES, MEZZANINE EQUITY AND DEFICIT
$
3,480

 
$
1,544

 
$
1,323

 
$
(3,635
)
 
$
2,712


(1) As of June 30, 2017, Assets and Liabilities held for sale were: (i) $1 million Cash and cash equivalents; (ii) $11 million Receivables, trade and other, net; (iii) $2 million Inventories; (iv) $3 million Net property; (v) $1 million Goodwill; (vi) $10 million Accounts and notes payable; and (vii) $2 million Noncontrolling interests. These assets and liabilities held for sale are included in the Non-Guarantors column.


47
Index
MERITOR, INC.
CONDENSED CONSOLIDATING BALANCE SHEET
(In millions)
(Unaudited)


 
September 30, 2016
 
Parent
 
Guarantors
 
Non-
Guarantors
 
Elims
 
Consolidated
CURRENT ASSETS:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents (1)
$
90

 
$
4

 
$
66

 
$
—

 
$
160

Receivables trade and other, net (1)
1

 
39

 
356

 
—

 
396

Inventories (1)
—

 
143

 
173

 
—

 
316

Other current assets
5

 
12

 
16

 
—

 
33

TOTAL CURRENT ASSETS
96

 
198

 
611

 
—

 
905

NET PROPERTY (1)
22

 
198

 
219

 
—

 
439

GOODWILL
—

 
219

 
171

 
—

 
390

OTHER ASSETS
447

 
132

 
181

 
—

 
760

INVESTMENTS IN SUBSIDIARIES
2,575

 
679

 
—

 
(3,254
)
 
—

TOTAL ASSETS
$
3,140

 
$
1,426

 
$
1,182

 
$
(3,254
)
 
$
2,494

CURRENT LIABILITIES:
 
 
 
 
 
 
 
 
 
Short-term debt
$
1

 
$
4

 
$
9

 
$
—

 
$
14

Accounts and notes payable (1)
42

 
172

 
261

 
—

 
475

Other current liabilities
90

 
74

 
104

 
—

 
268

TOTAL CURRENT LIABILITIES
133

 
250

 
374

 
—

 
757

LONG-TERM DEBT
971

 
3

 
8

 
—

 
982

RETIREMENT BENEFITS
680

 
—

 
23

 
—

 
703

INTERCOMPANY PAYABLE (RECEIVABLE)
1,534

 
(1,768
)
 
234

 
—

 
—

OTHER LIABILITIES
34

 
162

 
42

 
—

 
238

EQUITY (DEFICIT) ATTRIBUTABLE TO
       MERITOR, INC.
(212
)
 
2,779

 
476

 
(3,254
)
 
(211
)
NONCONTROLLING INTERESTS (1)
—

 
—

 
25

 
—

 
25

TOTAL LIABILITIES AND EQUITY (DEFICIT)
$
3,140

 
$
1,426

 
$
1,182

 
$
(3,254
)
 
$
2,494


(1) As of September 30, 2016, Assets and Liabilities held for sale were: (i) $1 million Cash and cash equivalents; (ii) $8 million Receivables, trade and other, net; (iii) $1 million Inventories; (iv) $5 million Net property; (v) $5 million Accounts and notes payable; and (vi) $3 million Noncontrolling interests. These assets and liabilities held for sale are included in the Non-Guarantors column.


48
Index
MERITOR, INC.
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
(In millions)
(Unaudited)


 
Nine Months Ended June 30, 2017
 
Parent
 
Guarantors
 
Non-
Guarantors
 
Elims
 
Consolidated
CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES
$
(24
)
 
$
28

 
$
132

 
$
—

 
$
136

INVESTING ACTIVITIES
 
 
 
 
 
 
 
 
 
Capital expenditures
(8
)
 
(27
)
 
(17
)
 
—

 
(52
)
Net investing cash flows provided by discontinued operations
—

 
2

 
—

 
—

 
2

CASH USED FOR INVESTING ACTIVITIES
(8
)
 
(25
)
 
(17
)
 
—

 
(50
)
FINANCING ACTIVITIES
 
 
 
 
 
 
 
 
 
Debt issuance costs
(4
)
 
—

 
—

 
—

 
(4
)
Intercompany advances
96

 
—

 
(96
)
 
—

 
—

Other financing activities
—

 
(3
)
 
(9
)
 
—

 
(12
)
CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES
92

 
(3
)
 
(105
)
 
—

 
(16
)
EFFECT OF CHANGES IN FOREIGN CURRENCY
       EXCHANGE RATES ON CASH AND CASH
       EQUIVALENTS
—

 
—

 
1

 
—

 
1

CHANGE IN CASH AND CASH EQUIVALENTS
60

 
—

 
11

 
—

 
71

CASH AND CASH EQUIVALENTS AT BEGINNING
       OF PERIOD
90

 
4

 
66

 
—

 
160

CASH AND CASH EQUIVALENTS AT END OF
       PERIOD
$
150

 
$
4

 
$
77

 
$
—

 
$
231


49
Index
MERITOR, INC.
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
(In millions)
(Unaudited)


 
Nine Months Ended June 30, 2016
 
Parent
 
Guarantors
 
Non-
Guarantors
 
Elims
 
Consolidated
CASH PROVIDED BY (USED FOR)
       OPERATING ACTIVITIES
$
124

 
$
25

 
$
(5
)
 
$
—

 
$
144

INVESTING ACTIVITIES
 
 
 
 
 
 
 
 
 
Capital expenditures
(16
)
 
(29
)
 
(21
)
 
—

 
(66
)
Other investing activities
—

 
4

 
(1
)
 
—

 
3

Net investing cash flows provided by discontinued operations
—

 
1

 
3

 
—

 
4

CASH USED FOR INVESTING ACTIVITIES
(16
)
 
(24
)
 
(19
)
 
—

 
(59
)
FINANCING ACTIVITIES
 
 
 
 
 
 
 
 
 
Repayment of notes
(55
)
 
—

 
—

 
—

 
(55
)
Repurchase of common stock
(81
)
 
—

 
—

 
—

 
(81
)
Intercompany advances
(10
)
 
—

 
10

 
—

 
—

Other financing activities
—

 
(4
)
 
(11
)
 
—

 
(15
)
CASH USED FOR FINANCING ACTIVITIES
(146
)
 
(4
)
 
(1
)
 
—

 
(151
)
EFFECT OF CHANGES IN FOREIGN CURRENCY
       EXCHANGE RATES ON CASH AND CASH
       EQUIVALENTS
—

 
—

 
2

 
—

 
2

CHANGE IN CASH AND CASH EQUIVALENTS
(38
)
 
(3
)
 
(23
)
 
—

 
(64
)
CASH AND CASH EQUIVALENTS AT BEGINNING
       OF PERIOD
73

 
6

 
114

 
—

 
193

CASH AND CASH EQUIVALENTS AT END OF
       PERIOD
$
35

 
$
3

 
$
91

 
$
—

 
$
129


Basis of Presentation

Certain information and footnote disclosures normally included in financial statements prepared in conformity with generally accepted accounting principles have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. As of June 30, 2017 and September 30, 2016, Parent-only obligations included $672 million and $708 million of pension and retiree medical benefits, respectively (see Note 19). All debt is debt of the Parent other than $12 million and $24 million at June 30, 2017 and September 30, 2016, respectively (see Note 17), and is primarily related to capital lease obligations and lines of credit. There were $1 million and $18 million of cash dividends paid to the Parent by subsidiaries and investments accounted for by the equity method for the nine months ended June 30, 2017 and June 30, 2016, respectively.

50

MERITOR, INC.

Item 2. Management’s Discussion and Analysis of Financial Conditions and Results of Operations
OVERVIEW
Meritor, Inc. (the “company”, “our”, “we” or “Meritor”), headquartered in Troy, Michigan, is a premier global supplier of a broad range of integrated systems, modules and components to original equipment manufacturers (“OEMs”) and the aftermarket for the commercial vehicle, transportation and industrial sectors. The company serves commercial truck, trailer, military, bus and coach, construction, and other industrial OEMs and certain aftermarkets. Meritor common stock is traded on the New York Stock Exchange under the ticker symbol MTOR.
3rd Quarter Fiscal Year 2017 Results
Our sales for the third quarter of fiscal year 2017 were $920 million, an increase compared to $841 million in the same period in the prior fiscal year. The increase in sales was primarily driven by increased production in North America, Europe and China and new business wins.
Net income attributable to Meritor for the third quarter of fiscal year 2017 was $48 million compared to $41 million in the same period in the prior fiscal year. Higher net income year over year was driven primarily by increased revenue and continued material performance.
Adjusted EBITDA (see Non-GAAP Financial Measures below) for the third quarter of fiscal year 2017 was $103 million compared to $96 million in the same period in the prior fiscal year. Our Adjusted EBITDA margin (see Non-GAAP Financial Measures below) in the third quarter of fiscal year 2017 was 11.2 percent compared to 11.4 percent in the same period a year ago. Adjusted EBITDA increased year over year as higher revenue and continued material performance more than offset higher variable compensation accruals. Also in the prior year, we recognized approximately $6 million related to a favorable supplier litigation settlement (see Note 20 of the Notes to the Condensed Consolidated Financial Statements in Part I of this Quarterly Report).
Net income from continuing operations attributable to the company for the third quarter of fiscal year 2017 was $49 million compared to $42 million in the same period in the prior fiscal year. Adjusted income from continuing operations attributable to the company (see Non-GAAP Financial Measures below) for the third quarter of fiscal year 2017 was $60 million compared to $52 million in the same period in the prior fiscal year.
Cash provided by operating activities was $106 million in the third quarter of fiscal year 2017 compared to cash flows provided by operating activities of $105 million in the third quarter of fiscal year 2016.
Trends and Uncertainties
     Industry Production Volumes
     The following table reflects estimated on-highway commercial truck production volumes for selected original equipment (OE) markets for the three and nine months ended June 30, 2017 and 2016 based on available sources and management’s estimates.
 
Three Months Ended June 30,
 
Percent
Nine Months Ended June 30,
 
Percent
 
2017
 
2016
 
Change
2017
 
2016
 
Change
Estimated Commercial Truck production (in thousands):
 
 
 
 
 
North America, Heavy-Duty Trucks
66

 
63

 
5
 %
164

 
199

 
(18
)%
North America, Medium-Duty Trucks
67

 
63

 
6
 %
184

 
187

 
(2
)%
North America, Trailers
73

 
74

 
(1
)%
205

 
219

 
(6
)%
Western Europe, Heavy- and Medium-Duty Trucks
117

 
114

 
3
 %
352

 
335

 
5
 %
South America, Heavy- and Medium-Duty Trucks
20

 
16

 
25
 %
50

 
46

 
9
 %
India, Heavy- and Medium-Duty Trucks
67

 
87

 
(23
)%
240

 
257

 
(7
)%
     
North America:
In the third quarter of fiscal year 2017, Class 8 production volumes in North America increased significantly from the second quarter of fiscal year 2017. We expect similar production levels to continue through the end of fiscal year 2017.

Western Europe:
Continuing through the end of fiscal year 2017, we expect production volumes to increase slightly compared to the levels experienced in fiscal year 2016.


51

MERITOR, INC.

South America:
Continuing through the end of fiscal year 2017, we expect production volumes in South America to increase slightly compared to the levels experienced in fiscal year 2016.

China:
Continuing through the end of fiscal year 2017, we expect production volumes in China to increase from the levels experienced in fiscal year 2016 due to improvements in the construction market.

India:
Continuing through the end of fiscal year 2017, we expect production volumes in India to remain strong, but decrease slightly from the levels experienced in fiscal year 2016.

Industry-Wide Issues
Our business continues to address a number of other challenging industry-wide issues including the following:
•
Uncertainty around the global market outlook;
•
Volatility in price and availability of steel, components and other commodities;
•
Disruptions in the financial markets and their impact on the availability and cost of credit;
•
Volatile energy and transportation costs;
•
Impact of currency exchange rate volatility;
•
Consolidation and globalization of OEMs and their suppliers; and
•
Significant pension and retiree medical health care costs.
Other
Other significant factors that could affect our results and liquidity include:
•
Significant contract awards or losses of existing contracts or failure to negotiate acceptable terms in contract renewals;
•
Ability to successfully launch a significant number of new products, including potential product quality issues, and obtain new business;
•
Ability to manage possible adverse effects on our European operations, or financing arrangements related thereto, following the United Kingdom's decision to exit the European Union, or in the event one or more other countries exit the European monetary union;
•
Ability to further implement planned productivity, cost reduction, and other margin improvement initiatives;
•
Ability to successfully execute strategic initiatives;
•
Ability to work with our customers to manage rapidly changing production volumes;
•
Ability to recover, and timing of recovery of, steel price and other cost increases from our customers;
•
Any unplanned extended shutdowns or production interruptions by us, our customers or our suppliers;
•
A significant deterioration or slowdown in economic activity in the key markets in which we operate;
•
Competitively driven price reductions to our customers;
•
Potential price increases from our suppliers;
•
Additional restructuring actions and the timing and recognition of restructuring charges, including any actions associated with the prolonged softness in markets in which we operate;
•
Higher-than-planned warranty expenses, including the outcome of known or potential recall campaigns;
•
Uncertainties of asbestos claim and other litigation, including the outcome of litigation with insurance companies regarding scope of asbestos coverage, and the long-term solvency of our insurance carriers; and

52

MERITOR, INC.

•
Restrictive government actions (such as restrictions on transfer of funds and trade protection measures, including import and export duties, quotas and customs duties and tariffs).

NON-GAAP FINANCIAL MEASURES
In addition to the results reported in accordance with accounting principles generally accepted in the United States (“GAAP”), we have provided information regarding non-GAAP financial measures. These non-GAAP financial measures include Adjusted income (loss) from continuing operations attributable to the company, Adjusted diluted earnings (loss) per share from continuing operations, Adjusted EBITDA, Adjusted EBITDA margin, Segment adjusted EBITDA, Segment adjusted EBITDA margin, Free cash flow and Net debt.
     Adjusted income (loss) from continuing operations attributable to the company and Adjusted diluted earnings (loss) per share from continuing operations are defined as reported income (loss) from continuing operations and reported diluted earnings (loss) per share from continuing operations before restructuring expenses, asset impairment charges, non-cash tax expense related to the use of deferred tax assets in jurisdictions with net operating loss carry forwards, and other special items as determined by management. Adjusted EBITDA is defined as income (loss) from continuing operations before interest, income taxes, depreciation and amortization, non-controlling interests in consolidated joint ventures, loss on sale of receivables, restructuring expenses, asset impairment charges and other special items as determined by management. Adjusted EBITDA margin is defined as Adjusted EBITDA divided by consolidated sales from continuing operations. Segment adjusted EBITDA is defined as income (loss) from continuing operations before interest expense, income taxes, depreciation and amortization, noncontrolling interests in consolidated joint ventures, loss on sale of receivables, restructuring expense, asset impairment charges and other special items as determined by management. Segment adjusted EBITDA excludes unallocated legacy and corporate expense (income), net. Segment adjusted EBITDA margin is defined as Segment adjusted EBITDA divided by consolidated sales from continuing operations, either in the aggregate or by segment as applicable. Free cash flow is defined as cash flows provided by (used for) operating activities less capital expenditures. Net debt is defined as total debt less cash and cash equivalents.
     Management believes these non-GAAP financial measures are useful to both management and investors in their analysis of the company's financial position and results of operations. In particular, Adjusted EBITDA, Adjusted EBITDA margin, Segment adjusted EBITDA, Segment adjusted EBITDA margin, Adjusted income (loss) from continuing operations attributable to the company and Adjusted diluted earnings (loss) per share from continuing operations are meaningful measures of performance to investors as they are commonly utilized to analyze financial performance in our industry, perform analytical comparisons, benchmark performance between periods and measure our performance against externally communicated targets.
Free cash flow is used by investors and management to analyze our ability to service and repay debt and return value directly to shareholders. Net debt over Adjusted EBITDA is a specific financial measure in our current M2019 plan used to measure the company’s leverage in order to assist management in its assessment of appropriate allocation of capital.
Management uses the aforementioned non-GAAP financial measures for planning and forecasting purposes, and Segment adjusted EBITDA is also used as the primary basis for the CODM to evaluate the performance of each of our reportable segments.
Our Board of Directors uses Adjusted EBITDA margin, Free cash flow, Adjusted diluted earnings (loss) per share from continuing operations and Net debt over Adjusted EBITDA as key metrics to determine management’s performance under our performance-based compensation plans.
     Adjusted income (loss) from continuing operations attributable to the company, Adjusted diluted earnings (loss) per share from continuing operations, Adjusted EBITDA, Adjusted EBITDA margin, Segment adjusted EBITDA and Segment adjusted EBITDA margin should not be considered a substitute for the reported results prepared in accordance with GAAP and should not be considered as an alternative to net income as an indicator of our financial performance. Free cash flow should not be considered a substitute for cash provided by (used for) operating activities, or other cash flow statement data prepared in accordance with GAAP, or as a measure of financial position or liquidity. In addition, this non-GAAP cash flow measure does not reflect cash used to repay debt or cash received from the divestitures of businesses or sales of other assets and thus does not reflect funds available for investment or other discretionary uses. Net debt should not be considered a substitute for total debt as reported on the balance sheet. These non-GAAP financial measures, as determined and presented by the company, may not be comparable to related or similarly titled measures reported by other companies. Set forth below are reconciliations of these non-GAAP financial measures to the most directly comparable financial measures calculated in accordance with GAAP.

53

MERITOR, INC.

Adjusted income from continuing operations attributable to the company and Adjusted diluted earnings per share from continuing operations are reconciled to Income from continuing operations attributable to the company and Diluted earnings per share from continuing operations below (in millions, except per share amounts).
 
Three Months Ended June 30,
 
Nine Months Ended June 30,
 
2017

2016
 
2017
 
2016
Income from continuing operations attributable to the company
$
49

 
$
42

 
$
86

 
$
103

Restructuring costs
—

 
6

 
4

 
9

Asset impairment charges, net of noncontrolling interests
—

 
—

 
2

 
—

Non-cash tax expense (1)
11

 
5

 
22

 
10

Income tax benefits
—

 
(1
)
 
—

 
(1
)
Adjusted income from continuing operations attributable to the company
$
60

 
$
52

 
$
114

 
$
121

 
 
 
 
 
 
 
 
Diluted earnings per share from continuing operations
$
0.52

 
$
0.46

 
$
0.94

 
$
1.10

Impact of adjustments on diluted earnings per share
0.12

 
0.11

 
0.31

 
0.20

Adjusted diluted earnings per share from continuing operations
$
0.64

 
$
0.57

 
$
1.25

 
$
1.30

(1) Represents tax expense related to the use of deferred tax assets in jurisdictions with net operating loss carry forwards.

Free cash flow is reconciled to cash provided by operating activities below (in millions).
 
Three Months Ended June 30,
 
Nine Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
Cash provided by operating activities
$
106

 
$
105

 
$
136

 
$
144

Capital expenditures
(12
)
 
(19
)
 
(52
)
 
(66
)
Free cash flow
$
94

 
$
86

 
$
84

 
$
78


















54

MERITOR, INC.


Adjusted EBITDA and Segment adjusted EBITDA are reconciled to net income attributable to Meritor, Inc. below (dollars in millions).
 
Three Months Ended June 30,
 
Nine Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
Net income attributable to Meritor, Inc.
$
48

 
$
41

 
$
85

 
$
99

Loss from discontinued operations, net of tax, attributable to Meritor, Inc.
1

 
1

 
1

 
4

Income from continuing operations, net of tax, attributable to Meritor, Inc.
$
49

 
$
42

 
$
86

 
$
103

 

 

 

 

Interest expense, net
21

 
20

 
63

 
63

Provision for income taxes
11

 
8

 
30

 
22

Depreciation and amortization
18

 
17

 
55

 
48

Noncontrolling interests
3

 
1

 
5

 
2

Loss on sale of receivables
2

 
2

 
4

 
6

Asset impairment charges
(1
)
 
—

 
2

 
—

Restructuring costs
—

 
6

 
4

 
9

Adjusted EBITDA
$
103

 
$
96

 
$
249

 
$
253

 
 
 
 
 
 
 
 
Adjusted EBITDA margin (1)
11.2
%
 
11.4
%
 
10.3
%
 
10.2
%
 
 
 
 
 
 
 
 
Unallocated legacy and corporate expense (income), net (2)
(2
)
 
3

 
—

 
2

Segment adjusted EBITDA
$
101

 
$
99

 
$
249

 
$
255

 
 
 
 
 
 
 
 
Commercial Truck & Industrial
 
 
 
 
 
 
 
Segment adjusted EBITDA
$
75

 
$
61

 
$
171

 
$
169

Segment adjusted EBITDA margin (3)
10.3
%
 
9.5
%
 
9.1
%
 
8.9
%
 
 
 
 
 
 
 
 
Aftermarket & Trailer
 
 
 
 
 
 
 
Segment adjusted EBITDA
$
26

 
$
38

 
$
78

 
$
86

Segment adjusted EBITDA margin (3)
11.4
%
 
16.7
%
 
12.4
%
 
13.3
%
(1) Adjusted EBITDA margin equals Adjusted EBITDA divided by consolidated sales from continuing operations.
(2) Unallocated legacy and corporate expense (income), net represents items that are not directly related to the company's business segments. These items primarily include asbestos-related charges and settlements, pension and retiree medical costs associated with sold businesses, and other legacy costs for environmental and product liability.
(3) Segment adjusted EBITDA margin equals Segment adjusted EBITDA divided by consolidated sales from continuing operations, either in the aggregate or by segment as applicable.

55

MERITOR, INC.


Net debt is reconciled to total debt and Adjusted EBITDA is reconciled to net income attributable to Meritor, Inc. below (dollars in millions).
 
June 30,
2017
 
September 30,
2016
Short-term debt
$
132

 
$
14

Long-term debt
858

 
982

Total debt
990

 
996

Less: Cash and cash equivalents
(231
)
 
(160
)
Net debt
$
759

 
$
836


 
Twelve Months Ended (1)
 
Twelve Months Ended
 
June 30, 2017
 
September 30, 2016
Net income attributable to Meritor, inc.
$
559

 
$
573

Loss from discontinued operations, net of tax, attributable to Meritor, Inc.
1

 
4

Income from continuing operations, net of tax, attributable to Meritor, inc.
$
560

 
$
577

 
 
 
 
Interest expense, net
84

 
84

Benefit for income taxes
(416
)
 
(424
)
Depreciation and amortization
74

 
67

Noncontrolling interests
5

 
2

Loss on sale of receivables
3

 
5

Asset impairment charges
2

 
—

Restructuring costs
11

 
16

Adjusted EBITDA
$
323

 
$
327

 
 
 
 
Net debt over Adjusted EBITDA
2.3

 
2.6

(1) Trailing-twelve-month period ended June 30, 2017 is used to measure the company's leverage in order to assist management in its assessment of appropriate allocation of capital as part of our current M2019 plan and is also used to assess management's performance under one of our performance-based compensation plans.

56

MERITOR, INC.

Results of Operations

Three Months Ended June 30, 2017 Compared to Three Months Ended June 30, 2016
   Sales
The following table reflects total company and business segment sales for the three months ended June 30, 2017 and 2016 (dollars in millions). The reconciliation is intended to reflect the trend in business segment sales and to illustrate the impact that changes in foreign currency exchange rates, volumes and other factors had on sales. Business segment sales include intersegment sales.
 
Three Months Ended June 30,
 
 
 
 
 
Dollar Change Due To
 
2017
 
2016
 
Dollar
Change
 
%
Change
 
Currency
 
Volume/ Other
Sales:
 
 
 
 
 
 
 
 
 
 
 
Commercial Truck & Industrial
 
 
 
 
 
 
 
 
 
 
 
            North America
$
384

 
$
335

 
$
49

 
15
 %
 
$
—

 
$
49

            Europe
175

 
160

 
15

 
9
 %
 
(5
)
 
20

            South America
46

 
38

 
8

 
21
 %
 
4

 
4

     China
38

 
24

 
14

 
58
 %
 
(2
)
 
16

     India
44

 
43

 
1

 
2
 %
 
2

 
(1
)
     Other
17

 
23

 
(6
)
 
(26
)%
 
1

 
(7
)
          Total External Sales
$
704

 
$
623

 
$
81

 
13
 %
 
$
—

 
$
81

            Intersegment Sales
24

 
17

 
7

 
41
 %
 
(1
)
 
8

          Total Sales
$
728

 
$
640

 
$
88

 
14
 %
 
$
(1
)
 
$
89

 
 
 
 
 
 
 
 
 
 
 
 
Aftermarket & Trailer
 
 
 
 
 
 
 
 
 
 
 
            North America
$
185

 
$
188

 
$
(3
)
 
(2
)%
 
$
(1
)
 
$
(2
)
            Europe
31

 
30

 
1

 
3
 %
 
(1
)
 
2

          Total External Sales
$
216

 
$
218

 
$
(2
)
 
(1
)%
 
$
(2
)
 
$
—

            Intersegment Sales
12

 
9

 
3

 
33
 %
 
—

 
3

          Total Sales
$
228

 
$
227

 
$
1

 
—
 %
 
$
(2
)
 
$
3

 
 
 
 
 
 
 
 
 
 
 
 
Total External Sales
$
920


$
841

 
$
79

 
9
 %
 
$
(2
)
 
$
81

Commercial Truck & Industrial sales were $728 million in the third quarter of fiscal year 2017, up 14 percent compared to the third quarter of fiscal year 2016. The increase in sales was primarily driven by higher Class 8 truck production in North America, increased production in Europe and China and new business wins.
Aftermarket & Trailer sales were $228 million in the third quarter of fiscal year 2017, up slightly from the same period a year ago.
Cost of Sales and Gross Profit
     Cost of sales primarily represents materials, labor and overhead production costs associated with the company’s products and production facilities. Cost of sales for the three months ended June 30, 2017 was $778 million compared to $714 million in the same period in the prior fiscal year, representing an increase of 9 percent, primarily driven by increased volumes. Total cost of sales was 84.6 and 84.9 percent of sales for the three-month periods ended June 30, 2017 and 2016, respectively.
     The following table summarizes significant factors contributing to the changes in costs of sales during the third quarter of fiscal year 2017 compared to the same quarter in the prior year (in millions):

57

MERITOR, INC.

 
Cost of Sales
Three Months Ended June 30, 2016
$
714

Volume, mix and other, net
70

Foreign exchange
(6
)
Three Months Ended June 30, 2017
$
778

     Changes in the components of cost of sales year over year are summarized as follows (in millions):
 
Change in Cost of Sales
Higher material costs
$
45

Higher labor and overhead costs
20

Other, net
(1
)
Total change in costs of sales
$
64

Material costs represent the majority of our cost of sales and include raw materials, composed primarily of steel and purchased components. Material costs for the three months ended June 30, 2017 increased $45 million compared to the same period in the prior fiscal year primarily due to higher volumes and higher steel prices, partially offset by material performance programs.
Labor and overhead costs increased $20 million compared to the same period in the prior fiscal year primarily due to higher volumes.
Gross margin was $142 million and $127 million for the three-month periods ended June 30, 2017 and 2016, respectively. Gross margin, as a percentage of sales, was 15.4 and 15.1 percent for the three-month periods ended June 30, 2017 and 2016, respectively. Gross margin as a percentage of sales increased due to the impacts of higher sales and continued material performance.
Other Income Statement Items
     Selling, general and administrative expenses (“SG&A”) for the three months ended June 30, 2017 and 2016 are summarized as follows (dollars in millions):
 
Three Months Ended
 
 
 
 
 
June 30, 2017
 
June 30, 2016
 
Increase (Decrease)
SG&A
Amount
 
% of sales
 
Amount
 
% of sales
 
Amount
 
% of sales
Loss on sale of receivables
$
(2
)
 
(0.2
)%
 
$
(2
)
 
(0.2
)%
 
$
—

 
0.0 pts
Short and long-term variable
     compensation
(18
)
 
(2.0
)%
 
(9
)
 
(1.1
)%
 
9

 
0.9 pts
Asbestos-related expense, net of asbestos-related insurance recoveries
(2
)
 
(0.2
)%
 
(4
)
 
(0.5
)%
 
(2
)
 
(0.3) pts
Supplier litigation settlement
—

 
—
 %
 
6

 
0.7
 %
 
6

 
0.7 pts
All other SG&A
(51
)
 
(5.5
)%
 
(50
)
 
(5.9
)%
 
1

 
(0.4) pts
Total SG&A
$
(73
)
 
(7.9
)%
 
$
(59
)
 
(7.0
)%
 
$
14

 
0.9 pts
In the prior year, we recognized approximately $6 million related to a favorable supplier litigation settlement (see Note 20 of the Notes to the Condensed Consolidated Financial Statements in Part I of this Quarterly Report). The increase in SG&A was also attributable to higher variable compensation recognized in the current year, which is based on year-to-date and expected full-year company performance. We recognized $4 million and $3 million related to previous cash settlements with insurance companies for recoveries of defense and indemnity costs associated with asbestos liabilities in the third quarter of fiscal years 2017 and 2016, respectively, which are included in Asbestos-related expense, net of asbestos-related insurance recoveries (see Note 20 of the Notes to the Condensed Consolidated Financial Statements in Part I of this Quarterly Report).
All other SG&A, which represents normal selling, general and administrative expense, remained relatively flat year-over-year as a percentage of sales.

58

MERITOR, INC.

Restructuring costs decreased by $6 million from $6 million in the third quarter of fiscal year 2016 to an insignificant amount in the same period in fiscal year 2017. During the three months ended June 30, 2016, these costs primarily related to employee severance costs stemming from Aftermarket restructuring programs in North America and Europe.
Operating income increased by $7 million from $62 million in the third quarter of fiscal year 2016 to $69 million in the same period in fiscal year 2017. Key items affecting operating income are discussed above.
Equity in earnings of affiliates increased by $5 million from $9 million in the third quarter of fiscal year 2016 to $14 million in the same period in fiscal year 2017. The increase was primarily attributable to higher production in our affiliates' respective markets.
Interest expense, net increased by $1 million from $20 million in the third quarter of fiscal year 2016 to $21 million in the same period in fiscal year 2017.
Provision for income taxes was $11 million in the third quarter of fiscal year 2017 compared to $8 million in the same period in the prior fiscal year. In the third quarter of fiscal year 2017, our effective tax rate was 17 percent compared to 16 percent in the prior year. The increase in tax expense was primarily driven by stronger earnings.
Income from continuing operations (before noncontrolling interests) increased by $9 million from $43 million in the third quarter of fiscal year 2016 to $52 million in the same period in fiscal year 2017. The reasons for the increase are discussed above.
Loss from discontinued operations, net of tax was $1 million in the third quarter of fiscal years 2017 and 2016.
Net income attributable to Meritor, Inc. increased by $7 million from $41 million in the third quarter of fiscal year 2016 to $48 million in the same period in fiscal year 2017. The various factors affecting net income are discussed above.

Segment adjusted EBITDA and Segment adjusted EBITDA margins
Segment adjusted EBITDA is defined as income (loss) from continuing operations before interest expense, income taxes, depreciation and amortization, noncontrolling interests in consolidated joint ventures, loss on sale of receivables, restructuring expense, asset impairment charges and other special items as determined by management. Segment adjusted EBITDA excludes unallocated legacy and corporate expense (income), net. We use Segment adjusted EBITDA as the primary basis for the CODM to evaluate the performance of each of our reportable segments. Segment adjusted EBITDA margin is defined as Segment adjusted EBITDA divided by consolidated sales from continuing operations, either in the aggregate or by segment as applicable. Segment adjusted EBITDA and Segment adjusted EBITDA margin are non-GAAP measures (see Non-GAAP Financial Measures above).
     The following table reflects Segment adjusted EBITDA and Segment adjusted EBITDA margins for the three months ended June 30, 2017 and 2016 (in millions).
 
Segment adjusted EBITDA
 
Segment adjusted EBITDA margins
 
Three Months Ended June 30,
 
 
 
Three Months Ended June 30,
 
 
 
2017
 
2016
 
Change
 
2017
 
2016
 
Change
Commercial Truck & Industrial
$
75

 
$
61

 
$
14

 
10.3
%
 
9.5
%
 
0.8 pts
Aftermarket & Trailer
26

 
38

 
(12
)
 
11.4
%
 
16.7
%
 
(5.3) pts
Segment adjusted EBITDA
$
101

 
$
99

 
$
2

 
11.0
%
 
11.8
%
 
(0.8) pts

59

MERITOR, INC.

     Significant items impacting year-over-year Segment adjusted EBITDA include the following (in millions):
 
Commercial
Truck & Industrial
 
Aftermarket
& Trailer
 
TOTAL
Segment adjusted EBITDA– Quarter ended June 30, 2016
$
61

 
$
38

 
$
99

Higher earnings from unconsolidated affiliates
5

 
—

 
5

Short-and long-term variable compensation
(8
)
—

(4
)
 
(12
)
Impact of foreign currency exchange rates
(1
)
 
—

 
(1
)
2016 Supplier litigation settlement
—

 
(6
)
 
(6
)
Allocated asbestos-related expense, net of allocated asbestos-related insurance recoveries
1

 
—

 
1

Volume, mix, pricing and other
17

 
(2
)
 
15

Segment adjusted EBITDA – Quarter ended June 30, 2017
$
75

 
$
26

 
$
101

Commercial Truck & Industrial Segment adjusted EBITDA was $75 million in the third quarter of fiscal year 2017, up $14 million from the same period in the prior fiscal year. Segment adjusted EBITDA margin increased to 10.3 percent compared to 9.5 percent in the same period in the prior fiscal year. The increases in Segment adjusted EBITDA and Segment adjusted EBITDA margin were driven by higher revenue and continued material performance. These increases were partially offset by higher allocated variable compensation accruals based on overall company performance.
     Aftermarket & Trailer Segment adjusted EBITDA was $26 million in the third quarter of fiscal year 2017, down $12 million from the same period in the prior fiscal year. Segment adjusted EBITDA margin decreased to 11.4 percent compared to 16.7 percent in the third quarter of fiscal year 2016. The decreases in Segment adjusted EBITDA and Segment adjusted EBITDA margin were primarily driven by a favorable supplier litigation settlement recognized in the third quarter of fiscal year 2016 (see Note 20 of the Notes to the Condensed Consolidated Financial Statements in Part I of this Quarterly Report), as well as higher allocated variable compensation accruals based on overall company performance and net steel costs in the third quarter of fiscal year 2017.

60

MERITOR, INC.

Nine Months Ended June 30, 2017 Compared to Nine Months Ended June 30, 2016
   Sales
The following table reflects total company and business segment sales for the nine months ended June 30, 2017 and 2016 (dollars in millions). The reconciliation is intended to reflect the trend in business segment sales and to illustrate the impact that changes in foreign currency exchange rates, volumes and other factors had on sales. Business segment sales include intersegment sales.
 
Nine Months Ended June 30,
 
 
 
 
 
Dollar Change Due To
 
2017
 
2016
 
Dollar
Change
 
%
Change
 
Currency
 
Volume/ Other
Sales:
 
 
 
 
 
 
 
 
 
 
 
Commercial Truck & Industrial
 
 
 
 
 
 
 
 
 
 
 
            North America
$
960

 
$
1,057

 
$
(97
)
 
(9
)%
 
$
—

 
$
(97
)
            Europe
464

 
446

 
18

 
4
 %
 
(19
)
 
37

            South America
113

 
94

 
19

 
20
 %
 
15

 
4

     China
90

 
63

 
27

 
43
 %
 
(5
)
 
32

     India
139

 
121

 
18

 
15
 %
 
1

 
17

     Other
60

 
65

 
(5
)
 
(8
)%
 
2

 
(7
)
          Total External Sales
$
1,826

 
$
1,846

 
$
(20
)
 
(1
)%
 
$
(6
)
 
$
(14
)
            Intersegment Sales
61

 
58

 
3

 
5
 %
 
(4
)
 
7

          Total Sales
$
1,887

 
$
1,904

 
$
(17
)
 
(1
)%
 
$
(10
)
 
$
(7
)
 
 
 
 
 
 
 
 
 
 
 
 
Aftermarket & Trailer
 
 
 
 
 
 
 
 
 
 
 
            North America
$
521

 
$
538

 
$
(17
)
 
(3
)%
 
$
(2
)
 
$
(15
)
            Europe
78

 
87

 
(9
)
 
(10
)%
 
(2
)
 
(7
)
          Total External Sales
$
599

 
$
625

 
$
(26
)
 
(4
)%
 
$
(4
)
 
$
(22
)
            Intersegment Sales
28

 
23

 
5

 
22
 %
 
(1
)
 
6

          Total Sales
$
627

 
$
648

 
$
(21
)
 
(3
)%
 
$
(5
)
 
$
(16
)
 
 
 
 
 
 
 
 
 
 
 
 
Total External Sales
$
2,425

 
$
2,471

 
$
(46
)
 
(2
)%
 
$
(10
)
 
$
(36
)
Commercial Truck & Industrial sales were $1,887 million in the first nine months of fiscal year 2017, down 1 percent compared to the first nine months of fiscal year 2016. The decrease in sales was driven primarily by lower Class 8 truck production in North America, partially offset by increased volumes in the rest of the world and new business wins.
Aftermarket & Trailer sales were $627 million in the first nine months of fiscal year 2017, down 3 percent compared to the first nine months of fiscal year 2016. The decrease in sales was primarily due to lower trailer production.
Cost of Sales and Gross Profit
     Cost of sales primarily represents materials, labor and overhead production costs associated with the company’s products and production facilities. Cost of sales for the nine months ended June 30, 2017 was $2,073 million compared to $2,119 million in the same period in the prior fiscal year, representing a decrease of 2 percent. Total cost of sales was 85.5 and 85.8 percent of sales for the nine-month periods ended June 30, 2017 and 2016, respectively.
     The following table summarizes significant factors contributing to the changes in costs of sales during the first nine months of fiscal year 2017 compared to the same period in the prior year (in millions):

61

MERITOR, INC.

 
Cost of Sales
Nine Months Ended June 30, 2016
$
2,119

Volume, mix and other, net
(28
)
Foreign exchange
(18
)
Nine Months Ended June 30, 2017
$
2,073

     Changes in the components of cost of sales year over year are summarized as follows (in millions):
 
Change in Cost of Sales
Lower material costs
$
(48
)
Higher labor and overhead costs
7

Other, net
(5
)
Total change in costs of sales
$
(46
)
Material costs represent the majority of our cost of sales and include raw materials, composed primarily of steel and purchased components. Material costs for the nine months ended June 30, 2017 decreased $48 million compared to the same period in the prior fiscal year primarily due to lower volumes and material performance programs, which were partially offset by higher year-over-year steel prices.
Labor and overhead costs increased $7 million compared to the same period in the prior fiscal year.
Gross margin was $352 million for the nine-month periods ended June 30, 2017 and 2016. Gross margin, as a percentage of sales, was 14.5 and 14.2 percent for the nine-month periods ended June 30, 2017 and 2016, respectively. Gross margin as a percentage of sales increased as continued material performance more than offset the impact of lower sales.
Other Income Statement Items
     Selling, general and administrative expenses for the nine months ended June 30, 2017 and 2016 are summarized as follows (dollars in millions):
 
Nine Months Ended
 
 
 
 
 
June 30, 2017
 
June 30, 2016
 
Increase (Decrease)
SG&A
Amount
 
% of sales
 
Amount
 
% of sales
 
Amount
 
% of sales
Loss on sale of receivables
$
(4
)
 
(0.2
)%
 
$
(6
)
 
(0.2
)%
 
$
(2
)
 
0.0 pts
Short-and long-term variable
     compensation
(35
)
 
(1.4
)%
 
(24
)
 
(1.0
)%
 
11

 
0.4 pts
Asbestos-related expense, net of asbestos-related insurance recoveries
(3
)
 
(0.1
)%
 
(10
)
 
(0.4
)%
 
(7
)
 
(0.3) pts
2016 Supplier litigation settlement
—

 
—
 %
 
6

 
0.2
 %
 
6

 
0.2 pts
Legal settlement charge
(10
)
 
(0.4
)%
 
—

 
—
 %
 
10

 
0.4 pts
All other SG&A
(140
)
 
(5.8
)%
 
(141
)
 
(5.7
)%
 
(1
)
 
0.1 pts
Total SG&A
$
(192
)
 
(7.9
)%
 
$
(175
)
 
(7.1
)%
 
$
17

 
 0.8 pts
We recognized a $10 million charge for a legal settlement related to a dispute with a joint venture in the second quarter of fiscal year 2017 (see Note 20 of the Notes to the Condensed Consolidated Financial Statements in Part I of this Quarterly Report). In the prior year, we recognized approximately $6 million related to a favorable supplier litigation settlement (see Note 20 of the Notes to the Condensed Consolidated Financial Statements in Part I of this Quarterly Report). The increase in SG&A was also attributable to higher variable compensation recognized in the current year, which is based on year-to-date and expected full-year company performance. We recognized $15 million and $8 million related to previous cash settlements with insurance companies for recoveries of defense and indemnity costs associated with asbestos liabilities in the nine months ended June 30, 2017 and 2016, respectively, which are included in Asbestos-related expense, net of asbestos-related insurance recoveries (see Note 20 of the Notes to the Condensed Consolidated Financial Statements in Part I of this Quarterly Report).

62

MERITOR, INC.

All other SG&A, which represents normal selling, general and administrative expense remained relatively flat as a percentage of sales.
Restructuring costs decreased by $5 million from $9 million in the first nine months of fiscal year 2016 to $4 million in the same period in fiscal year 2017. During the nine months ended June 30, 2017, these costs primarily related to employee severance costs recognized by our Aftermarket & Trailer segment. During the nine months ended June 30, 2016, $2 million of restructuring costs were recognized by our Commercial Truck & Industrial segment and $7 million by our Aftermarket & Trailer segment, primarily related to employee severance.
Other operating expense, net increased by $2 million from $3 million in the first nine months of fiscal year 2016 to $5 million in the first nine months of 2017 primarily because of an impairment charge as the result of the carrying value of a business, classified as held for sale, exceeding its fair value less costs to sell in the first nine months of 2017.
Operating income decreased by $14 million from $165 million in the first nine months of fiscal year 2016 to $151 million in the same period in fiscal year 2017. Key items affecting operating income are discussed above.
Equity in earnings of affiliates increased by $6 million from $26 million in the first nine months of fiscal year 2016 to $32 million in the same period in fiscal year 2017. The increase was primarily attributable to higher production in our affiliates' respective markets.
Interest expense, net was $63 million in the first nine months of fiscal years 2017 and 2016.
Provision for income taxes was $30 million in the first nine months of fiscal year 2017 compared to $22 million in the same period in the prior fiscal year. In the first nine months of fiscal year 2017, our effective tax rate was 25 percent compared to 17 percent in the prior year. This increase in tax expense was primarily driven by stronger earnings.
Income from continuing operations (before noncontrolling interests) decreased by $14 million from $105 million in the first nine months of fiscal year 2016 to $91 million in the same period in fiscal year 2017. The reasons for the decrease are discussed above.
Loss from discontinued operations, net of tax was $1 million in the first nine months of fiscal year 2017 and $4 million in the first nine months of fiscal year 2016. In the first nine months of fiscal year 2016, loss from discontinued operations, net of tax, was primarily attributable to changes in estimates related to legal costs incurred in connection with previously divested businesses.
Net income attributable to Meritor, Inc. decreased by $14 million from $99 million in the first nine months of fiscal year 2016 to $85 million in the same period in fiscal year 2017. The various factors affecting net income are discussed above.

Segment adjusted EBITDA and Segment adjusted EBITDA margins
     The following table reflects Segment adjusted EBITDA and Segment adjusted EBITDA margins for the nine months ended June 30, 2017 and 2016 (in millions).
 
Segment adjusted EBITDA
 
Segment adjusted EBITDA margins
 
Nine Months Ended June 30,
 
 
 
Nine Months Ended June 30,
 
 
 
2017
 
2016
 
Change
 
2017
 
2016
 
Change
Commercial Truck & Industrial
$
171

 
$
169

 
$
2

 
9.1
%
 
8.9
%
 
0.2 pts
Aftermarket & Trailer
78

 
86

 
(8
)
 
12.4
%
 
13.3
%
 
(0.9) pts
Segment adjusted EBITDA
$
249

 
$
255

 
$
(6
)
 
10.3
%
 
10.3
%
 
0.0 pts

63

MERITOR, INC.

     Significant items impacting year-over-year Segment adjusted EBITDA include the following (in millions):
 
Commercial
Truck & Industrial
 
Aftermarket
& Trailer
 
TOTAL
Segment adjusted EBITDA– Nine months ended June 30, 2016
$
169

 
$
86

 
$
255

Higher earnings from unconsolidated affiliates
6

 
—

 
6

Short-and long-term variable compensation

(10
)
—

(4
)
 
(14
)
Impact of foreign currency exchange rates
6

 
1

 
7

2016 Supplier litigation settlement
—

 
(6
)
 
(6
)
Allocated asbestos-related expense, net of allocated asbestos-related insurance recoveries
7

 
2

 
9

Legal settlement charge
(10
)
 
—

 
(10
)
Volume, mix, pricing and other
3

 
(1
)
 
2

Segment adjusted EBITDA – Nine months ended June 30, 2017
$
171

 
$
78

 
$
249


Commercial Truck & Industrial Segment adjusted EBITDA was $171 million in the first nine months of fiscal year 2017, up $2 million from the same period in the prior fiscal year. Segment adjusted EBITDA margin was 9.1 percent compared to 8.9 percent in the first nine months of fiscal 2016. The increase in Segment adjusted EBITDA and Segment adjusted EBITDA margin was primarily driven by strong material, labor and burden performance, the impact of foreign exchange rates and higher affiliate earnings, which more than offset the legal settlement charge recognized in the first nine months of fiscal year 2017 (see Note 20 of the Notes to the Condensed Consolidated Financial Statements in Part I of this Quarterly Report) and higher allocated variable compensation accruals based on overall company performance.
     Aftermarket & Trailer Segment adjusted EBITDA was $78 million for the first nine months of fiscal year 2017, down $8 million from the same period in the prior fiscal year. Segment adjusted EBITDA margin was 12.4 percent compared to 13.3 percent in the first nine months of fiscal year 2016. The decrease in Segment adjusted EBITDA and Segment adjusted EBITDA margin was primarily driven by a favorable supplier litigation settlement recognized in the third quarter of fiscal year 2016 (see Note 20 of the Notes to the Condensed Consolidated Financial Statements in Part I of this Quarterly Report) and higher allocated variable compensation accruals based on overall company performance. These unfavorable impacts were partially offset by strong material, labor and burden performance.

64

MERITOR, INC.

Financial Condition
Cash Flows (in millions)
 
Nine Months Ended June 30,
 
2017
 
2016
OPERATING CASH FLOWS
 
 
 
Income from continuing operations
$
91

 
$
105

Depreciation and amortization
55

 
48

Deferred income tax expense
19

 
2

Restructuring costs
4

 
9

Gain from sale of property
—

 
(2
)
Asset impairment charges
2

 
—

Equity in earnings of affiliates
(32
)
 
(26
)
Pension and retiree medical expense
11

 
15

Dividends received from equity method investments
25

 
29

Pension and retiree medical contributions
(28
)
 
(32
)
Restructuring payments
(11
)
 
(8
)
Decrease (increase) in working capital
(75
)
 
20

Changes in off-balance sheet accounts receivable factoring
62

 
(30
)
Other, net
14

 
16

Cash flows provided by continuing operations
137

 
146

Cash flows used for discontinued operations
(1
)
 
(2
)
CASH PROVIDED BY OPERATING ACTIVITIES
$
136

 
$
144

     Cash provided by operating activities in the first nine months of fiscal year 2017 was $136 million compared to $144 million in the same period of fiscal year 2016. The decrease in cash provided is due in part to $17 million received related to an insurance settlement for recoveries for defense and indemnity costs associated with Maremont asbestos liabilities and $6 million received related to a supplier litigation settlement, both of which occurred in the first nine months of fiscal year 2016 and did not recur in the first nine months of fiscal year 2017 (see Note 20 of the Notes to the Condensed Consolidated Financial Statements in Part I of this Quarterly Report).
 
Nine Months Ended June 30,
 
2017
 
2016
INVESTING CASH FLOWS
 
 
 
Capital expenditures
$
(52
)
 
$
(66
)
Other investing activities
—

 
3

Net investing cash flows provided by discontinued operations
2

 
4

CASH USED FOR INVESTING ACTIVITIES
$
(50
)
 
$
(59
)
     Cash used for investing activities was $50 million in the first nine months of fiscal year 2017 compared to $59 million in the same period in fiscal year 2016, primarily due to reduced capital expenditures.

65

MERITOR, INC.

 
Nine Months Ended June 30,
 
2017
 
2016
FINANCING CASH FLOWS
 
 
 
Repayment of notes
$
—

 
$
(55
)
Debt issuance costs
(4
)
 
—

Other financing activities
(12
)
 
(15
)
Net change in debt
(16
)
 
(70
)
Repurchase of common stock
—

 
(81
)
CASH USED FOR FINANCING ACTIVITIES
$
(16
)
 
$
(151
)
     Cash used for financing activities was $16 million in the first nine months of fiscal year 2017 compared to $151 million in the same period of fiscal year 2016. The decrease in cash used for financing activities is primarily related to the repurchase of substantially all of the $55 million of principal amount 4.625 percent convertible notes and the $81 million (including commission costs) cash used to repurchase 8.6 million shares of our common stock in the first nine months of fiscal year 2016.
Liquidity
Our outstanding debt, net of discounts and unamortized debt issuance costs where applicable, is summarized as follows (in millions).
 
June 30,
 
September 30,
 
2017
 
2016
Fixed-rate debt securities
$
714

 
$
713

Fixed-rate convertible notes
273

 
271

Unamortized discount on convertible notes
(10
)
 
(14
)
Other borrowings
13

 
26

Total debt
$
990

 
$
996

Overview – Our principal operating and capital requirements are for working capital needs, capital expenditure requirements, debt service requirements, funding of pension and retiree medical costs, restructuring and product development programs. We expect fiscal year 2017 capital expenditures for our business segments to be approximately $85 million.
     We generally fund our operating and capital needs with cash on hand, cash flows from operations, our various accounts receivable securitization and factoring arrangements and availability under our revolving credit facility. Cash in excess of local operating needs is generally used to reduce amounts outstanding, if any, under our revolving credit facility or U.S. accounts receivable securitization program. Our ability to access additional capital in the long term will depend on availability of capital markets and pricing on commercially reasonable terms as well as our credit profile at the time we are seeking funds. We continuously evaluate our capital structure to ensure the most appropriate and optimal structure and may, from time to time, retire, repurchase, exchange or redeem outstanding indebtedness or common equity, issue new equity or debt securities or enter into new lending arrangements if conditions warrant.
In December 2014, we filed a shelf registration statement with the Securities and Exchange Commission, registering an unlimited amount of debt and/or equity securities that we may offer in one or more offerings on terms to be determined at the time of sale. 
     We believe our current financing arrangements provide us with the financial flexibility required to maintain our operations and fund future growth, including actions required to improve our market share and further diversify our global operations, through the term of our revolving credit facility, which matures in March 2022.

66

MERITOR, INC.

     Sources of liquidity as of June 30, 2017, in addition to cash on hand, are as follows (in millions):
 
Total Facility
Size
 
Utilized as of
6/30/17
 
Readily Available as of
6/30/17
 
Current Expiration
On-balance sheet arrangements:
 
 
 
 
 
 
 
Revolving credit facility (1)
$
525

 
$
—

 
$
525

 
March 2022 (1)
Committed U.S. accounts receivable securitization (2)
100

 
—

 
88

 
December 2019
Total on-balance sheet arrangements
$
625


$
—

 
$
613

 
 
Off-balance sheet arrangements: (2)
 
 
 
 
 
 
 
Committed Swedish factoring facility (3)
$
177

 
$
186

 
$
—

 
March 2020
Committed U.S. factoring facility
91

 
43

 
—

 
February 2019
Uncommitted U.K. factoring facility
29

 
5

 
—

 
February 2018
Uncommitted Italy factoring facility
34

 
33

 
—

 
June 2022
Other uncommitted factoring facilities
23

 
21

 
—

 
None
Letter of credit facility
25

 
18

 
7

 
March 2019
Total off-balance sheet arrangements
379

 
306

 
7

 
 
Total available sources
$
1,004


$
306

 
$
620

 
 
(1)The availability under the revolving credit facility is subject to a collateral test and a priority debt-to-EBITDA ratio covenant.
(2)Availability subject to adequate eligible accounts receivable available for sale.
(3)Actual amounts may exceed the bank's commitment at the bank's discretion.

Cash and Liquidity Needs – Our cash and liquidity needs have been affected by the level, variability and timing of our customers’ worldwide vehicle production and other factors outside of our control. At June 30, 2017, we had $231 million in cash and cash equivalents.
At June 30, 2017, we had approximately $22 million of our cash and cash equivalents held in jurisdictions outside of the U.S. that, if repatriated, could result in withholding taxes. It is our intent to reinvest those cash balances in our foreign operations, and we will continue to meet our liquidity needs in the U.S. through ongoing cash flows from operations in the U.S., external borrowings or both.
Our availability under the revolving credit facility is subject to a collateral test and a priority debt-to-EBITDA ratio covenant, as defined in the credit agreement, which may limit our borrowings under such agreement as of each quarter end. As long as we are in compliance with those covenants as of the quarter end, we have full availability (up to the amount of collateral under the collateral test) under the revolving credit facility every other day during the quarter. Our future liquidity is subject to a number of factors, including access to adequate funding under our revolving credit facility, access to other borrowing arrangements such as factoring or securitization facilities, vehicle production schedules and customer demand. Even taking into account these and other factors, management expects to have sufficient liquidity to fund our operating requirements through the term of our revolving credit facility. At June 30, 2017, we were in compliance with all covenants under our credit agreement.
Common Stock Repurchase Authorization – On July 21, 2016, our Board of Directors authorized the repurchase of up to $100 million of our common stock from time to time through open market purchases, privately negotiated transactions or otherwise, until September 30, 2019, subject to compliance with legal and regulatory requirements and our debt covenants. As of June 30, 2017, an insignificant amount of repurchases had been made under this authorization.

Debt Repurchase Authorization – On July 21, 2016, our Board of Directors authorized the repurchase of up to $150 million aggregate principal amount of any of our debt securities (including convertible debt securities) from time to time through open market purchases, privately negotiated transactions or otherwise, until September 30, 2019, subject to compliance with legal and regulatory requirements and our debt covenants. No repurchases had been made under this authorization as of June 30, 2017.
Repurchase of 2026 Notes – On March 1, 2016, substantially all of the $55 million principal amount of 4.625 percent convertible notes due 2026 were repurchased at 100 percent of their face value. On April 15, 2016, the remaining 4.625 percent convertible

67

MERITOR, INC.

notes due 2026 were redeemed at 100 percent of their face value. As of September 30, 2016, none of the 4.625 percent convertible notes due 2026 were outstanding.
Revolving Credit Facility – On March 31, 2017, we amended and restated our revolving credit facility. Pursuant to the revolving credit agreement as amended, we have a $525 million revolving credit facility that matures in March 2022. Additionally, $4 million was capitalized as deferred issuance costs and will be amortized over the term of the agreement. The availability under this facility is dependent upon various factors, including performance against certain financial covenants as highlighted below.
 The availability under the revolving credit facility is subject to certain financial covenants based on (i) the ratio of our priority debt (consisting principally of amounts outstanding under the revolving credit facility, U.S. accounts receivable securitization and factoring programs, and third-party non-working capital foreign debt) to EBITDA and (ii) the amount of annual capital expenditures. We are required to maintain a total priority debt-to-EBITDA ratio, as defined in the agreement, of 2.25 to 1.00 or less as of the last day of each fiscal quarter throughout the term of the agreement. At June 30, 2017, we were in compliance with all covenants under the revolving credit facility with a ratio of approximately 0.19x for the priority debt-to-EBITDA ratio covenant.
     The availability under the revolving credit facility is also subject to a collateral test, pursuant to which borrowings on the revolving credit facility cannot exceed 1.0x the collateral test value. The collateral test is performed on a quarterly basis. At June 30, 2017, the revolving credit facility was collateralized by approximately $774 million of our assets, primarily consisting of eligible domestic U.S. accounts receivable, inventory, plant, property and equipment, intellectual property and our investment in all or a portion of certain of its wholly-owned subsidiaries.
Borrowings under the revolving credit facility are subject to interest based on quoted LIBOR rates plus a margin and a commitment fee on undrawn amounts, both of which are based upon our current corporate credit rating. At June 30, 2017, the margin over LIBOR rate was 300 basis points and the commitment fee was 45 basis points. Overnight revolving credit loans are at the prime rate plus a margin of 200 basis points.
Certain of our subsidiaries, as defined in the revolving credit agreement, irrevocably and unconditionally guarantee amounts outstanding under the revolving credit facility. Similar subsidiary guarantees are provided for the benefit of the holders of the publicly-held notes outstanding under our indentures (see Note 23 of the Notes to the Condensed Consolidated Financial Statements in Part I of this Quarterly Report).
No borrowings were outstanding under the revolving credit facility at June 30, 2017 and September 30, 2016. The amended and extended revolving credit facility includes $100 million of availability for the issuance of letters of credit. At June 30, 2017 and September 30, 2016, there were no letters of credit outstanding under the revolving credit facility.
U.S. Securitization Program – We have a $100 million U.S. accounts receivables securitization facility. On December 5, 2016, the company entered into an amendment which extended the facility expiration date to December 2019. The maximum permitted priority debt-to-EBITDA ratio as of the last day of each fiscal quarter under the facility is 2.25 to 1.00. This program is provided by PNC Bank, National Association, as Administrator and Purchaser, and the other Purchasers and Purchaser Agents from time to time (participating lenders), which are party to the agreement. Under this program, we have the ability to sell an undivided percentage ownership interest in substantially all of our trade receivables (excluding the receivables due from AB Volvo and subsidiaries eligible for sale under the U.S. accounts receivable factoring facility) of certain U.S. subsidiaries to ArvinMeritor Receivables Corporation ("ARC"), a wholly-owned, special purpose subsidiary. ARC funds these purchases with borrowings from participating lenders under a loan agreement. This program also includes a letter of credit facility pursuant to which ARC may request the issuance of letters of credit issued for our U.S. subsidiaries (originators) or their designees, which when issued will constitute a utilization of the facility for the amount of letters of credit issued. Amounts outstanding under this agreement are collateralized by eligible receivables purchased by ARC and are reported as short-term debt in the condensed consolidated balance sheet. At June 30, 2017 and September 30, 2016, no amounts, including letters of credit, were outstanding under this program. This securitization program contains a cross default to our revolving credit facility. At June 30, 2017, we were in compliance with all covenants under our credit agreement (see Note 17 of the Notes to the Condensed Consolidated Financial Statements in Part I of this Quarterly Report). At certain times during any given month, we may sell eligible accounts receivable under this program to fund intra-month working capital needs. In such months, we would then typically utilize the cash received from our customers throughout the month to repay the borrowings under the program. Accordingly, during any given month, we may borrow under this program in amounts exceeding the amounts shown as outstanding at fiscal quarter ends.

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Capital Leases – On March 20, 2012, we entered into an arrangement to finance equipment acquisitions for various U.S. locations. Under this arrangement, we can request financing from Wells Fargo Equipment Finance ("Wells Fargo") for progress payments for equipment under construction, not to exceed $10 million at any time. The financing rate is equal to the 30-day LIBOR plus 475 basis points per annum. Under this arrangement, we can also enter into lease arrangements with Wells Fargo for completed equipment. The lease term is 60 months and the lease interest rate is equal to the 5-year Swap Rate published by the Federal Reserve Board plus 564 basis points. We had $3 million and $7 million outstanding under this capital lease arrangement as of June 30, 2017 and September 30, 2016, respectively. In addition, we had another $10 million and $9 million outstanding through other capital lease arrangements at June 30, 2017 and September 30, 2016, respectively.
Export financing arrangements – Our export financing arrangements were entered into through our Brazilian subsidiary pursuant to an incentive program of the Brazilian government to fund working capital for Brazilian companies in exportation programs. The arrangements bore interest at 5.5 percent and had maturity dates in 2017. These financing arrangements were paid off at maturity, as of March 31, 2017. There was $9 million outstanding under these arrangements at September 30, 2016.
Other – One of our consolidated joint ventures in China participates in a bills of exchange program to settle its obligations with its trade suppliers. These programs are common in China and generally require the participation of local banks. Under these programs, our joint venture issues notes payable through the participating banks to its trade suppliers. If the issued notes payable remain unpaid on their respective due dates, this could constitute an event of default under our revolving credit facility if the defaulted amount exceeds $35 million per bank. As of June 30, 2017 and September 30, 2016, we had $16 million and $10 million, respectively, outstanding under this program at more than one bank.
Credit Ratings – At June 30, 2017, our Standard & Poor’s corporate credit rating, senior secured credit rating, and senior unsecured credit rating were B+, BB and B, respectively. Our Moody’s Investors Service corporate credit rating, senior secured credit rating, and senior unsecured credit rating were B1, Ba1 and B2, respectively. Any lowering of our credit ratings could increase our cost of future borrowings and could reduce our access to capital markets and result in lower trading prices for our securities.
Off-Balance Sheet Arrangements
     Accounts Receivable Factoring Arrangements – We participate in accounts receivable factoring programs with a total amount utilized at June 30, 2017 of $288 million, of which $229 million was attributable to committed factoring facilities involving the sale of AB Volvo accounts receivables. The remaining amount of $59 million was related to factoring by certain of our European subsidiaries under uncommitted factoring facilities with financial institutions. The receivables under all of these programs are sold at face value and are excluded from the consolidated balance sheet. Total facility size, utilized amounts, readily available amounts and expiration dates for each of these programs are shown in the table above under Liquidity.
The Swedish facility is backed by a 364-day liquidity commitment from Nordea Bank which was renewed through April 23, 2018. Commitments under all of our factoring facilities are subject to standard terms and conditions for these types of arrangements (including, in the case of the U.K. and Italy commitments, a sole discretion clause whereby the bank retains the right to not purchase receivables, which has not been invoked since the inception of the respective programs).
     Letter of Credit Facilities – On February 21, 2014, we amended and restated our letter of credit facility with Citicorp USA, Inc., as administrative agent and issuing bank, and the other lenders party thereto. Under the terms of this amended credit agreement, which expires in March 2019, we have the right to obtain the issuance, renewal, extension and increase of letters of credit up to an aggregate availability of $25 million. This facility contains covenants and events of default generally similar to those existing in our public debt indentures. We had $18 million and $23 million of letters of credit outstanding under this facility at June 30, 2017 and September 30, 2016, respectively. In addition, we had another $5 million of letters of credit outstanding through other letter of credit facilities at June 30, 2017 and September 30, 2016.
Contingencies
Contingencies related to environmental, asbestos and other matters are discussed in Note 20 of the Notes to Condensed Consolidated Financial Statements in Part I of this Quarterly Report.
Critical Accounting Policies
Our significant accounting policies are consistent with those described in Note 2 to our consolidated financial statements in Item 8 of our 2016 Form 10-K. Our critical accounting estimates are consistent with those described in Item 7 of our 2016 Form 10-K.

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MERITOR, INC.

New Accounting Pronouncements
New Accounting Pronouncements are discussed in Note 3 of the Notes to Condensed Consolidated Financial Statements in Item 1. Financial Statements.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
We are exposed to certain global market risks, including foreign currency exchange risk and interest rate risk associated with our debt.
As a result of our substantial international operations, we are exposed to foreign currency risks that arise from our normal business operations, including in connection with our transactions that are denominated in foreign currencies. In addition, we translate sales and financial results denominated in foreign currencies into U.S. dollars for purposes of our consolidated financial statements. As a result, appreciation of the U.S. dollar against these foreign currencies generally will have a negative impact on our reported revenues and operating income while depreciation of the U.S. dollar against these foreign currencies will generally have a positive effect on reported revenues and operating income.
We use foreign currency forward contracts to minimize the earnings exposures arising from foreign currency exchange risk on foreign currency purchases and sales. Gains and losses on the underlying foreign currency exposures are partially offset with gains and losses on the foreign currency forward contracts. Under this cash flow hedging program, we designate the foreign currency contracts (the “contracts”) as cash flow hedges of underlying foreign currency forecasted purchases and sales. The effective portion of changes in the fair value of the contracts is recorded in Accumulated Other Comprehensive Loss (“AOCL”) in the statement of shareholder's equity and is recognized in operating income when the underlying forecasted transaction impacts earnings. The contracts generally mature within 12 months.
We use foreign currency option contracts to mitigate foreign currency exposure on expected future Indian rupee-denominated purchases. In the second quarter of fiscal year 2015, we monetized our outstanding foreign currency option contracts and entered into a new series of foreign currency option contracts with effective dates from the start of the third quarter of fiscal year 2015 through the end of fiscal year 2017. In the fourth quarter of fiscal year 2016, we entered into a new series of foreign currency option contracts with effective dates from the start of the first quarter of fiscal year 2017 through the end of fiscal year 2018. In the third quarter of fiscal year 2017, we monetized certain foreign currency options maturing in fiscal year 2018 and entered into a new series of foreign currency option contracts with effective dates from the start of the first quarter of fiscal year 2018 through the end of fiscal year 2019. Changes in fair value associated with these contracts are recorded in cost of sales in the consolidated statements of operations.
In the fourth quarter of fiscal year 2015 and the first quarter of fiscal year 2016, due to the risk of volatility of the Swedish krona and euro as compared to the U.S. dollar, we entered into a series of foreign currency option contracts that do not qualify for hedge accounting but were expected to mitigate foreign currency translation exposure of Swedish krona and euro earnings to U.S. dollars. As of June 30, 2017 and September 30, 2016, there were no Swedish krona foreign currency option contracts outstanding. During the third quarter of fiscal year 2017, we entered into additional foreign currency option contracts to mitigate the risk of volatility in the translation of euro earnings to U.S. dollars. As of June 30, 2017, the notional amount of our euro foreign currency option contracts outstanding was $20 million. Changes in fair value associated with these contracts were recorded in other income, net, in the consolidated statement of operations.
Interest rate risk relates to the gain/increase or loss/decrease we could incur on our debt balances and interest expense associated with changes in interest rates. To manage this risk, we may enter into interest rate swaps from time to time to economically convert portions of our fixed-rate debt into floating rate exposure, ensuring that the sensitivity of the economic value of debt falls within our corporate risk tolerances. It is our policy not to enter into derivative instruments for speculative purposes, and therefore, we hold no derivative instruments for trading purposes.
Included below is a sensitivity analysis to measure the potential gain (loss) in the fair value of financial instruments with exposure to market risk (in millions). The model assumes a 10% hypothetical change (increase or decrease) in exchange rates and instantaneous, parallel shifts of 50 basis points in interest rates.

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MERITOR, INC.


Market Risk
 
Assuming a
10% Increase
in Rates
 
Assuming a
10% Decrease
in Rates
 
Increase (Decrease) in
Foreign Currency Sensitivity:
 
 
 
 
 
Forward contracts in USD (1)
$
5.2

 
$
(5.2
)
 
Fair Value
Forward contracts in Euro (1)
(5.3
)
 
5.3

 
Fair Value
Foreign currency denominated debt (2)
0.8

 
(0.8
)
 
Fair Value
Foreign currency option contracts in USD
4.8

 
0.1

 
Fair Value
Foreign currency option contracts in Euro
4.5

 
(0.8
)
 
Fair Value
 
 
 
 
 
 
 
Assuming a 50
BPS Increase
in Rates
 
Assuming a 50
 BPS Decrease
in Rates
 
Increase (Decrease) in
Interest Rate Sensitivity:
 
 
 
 
 
Debt – fixed rate (3)
$
(31.5
)
 
$
32.6

 
Fair Value
Debt – variable rate
—

 
—

 
Cash flow
Interest rate swaps
—

 
—

 
Fair Value

(1)
Includes only the risk related to the derivative instruments and does not include the risk related to the underlying exposure. The analysis assumes overall derivative instruments and debt levels remain unchanged for each hypothetical scenario.

(2)
At June 30, 2017, the fair value of outstanding foreign currency denominated debt was $8 million. A 10% decrease in quoted currency exchange rates would result in a decrease of $1 million in foreign currency denominated debt. At June 30, 2017, a 10% increase in quoted currency exchange rates would result in an increase of $1 million in foreign currency denominated debt.

(3)
At June 30, 2017, the fair value of outstanding debt was $1,157 million. A 50 basis points decrease in quoted interest rates would result in an increase of $33 million in the fair value of fixed rate debt. A 50 basis points increase in quoted interest rates would result in a decrease of $32 million in the fair value of fixed rate debt.


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MERITOR, INC.

Item 4. Controls and Procedures
Evaluation of Internal Controls over Financial Reporting
As required by Rule 13a-15 under the Securities Exchange Act of 1934 (the “Exchange Act”), management, with the participation of the Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of June 30, 2017. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were not effective as of June 30, 2017 as a result of material weaknesses that exist in our internal control over financial reporting (ICFR) as previously described in our Annual Report on Form 10-K for the year ended September 30, 2016, as amended.
Previously Identified Material Weakness
As of September 30, 2016, our management concluded that our internal control over financial reporting was not effective due to material weaknesses identified with respect to the design and operating effectiveness of our controls over the assessment of uncertain tax positions (UTPs) and our deferred tax asset valuation allowance in accordance with ASC 740, Income Taxes. These material weaknesses allowed errors to occur that were not detected in a timely manner therefore requiring a correction of certain disclosures in the Income Taxes footnote in our consolidated financial statements for fiscal years 2015 and 2014. The material weaknesses had no impact on our financial position, results of operations or cash flows as of and for the years ended September 30, 2015 and 2014.
Management’s Remediation Plan
The principal factors contributing to the material weaknesses were the design and operating effectiveness over the assessment of UTPs and the deferred tax asset valuation allowance. The following plans are being implemented:
Process Level Control Remediation: The company has begun improving the precision of existing controls or implementing new preventive and detective controls associated with the tax accounting of UTPs and deferred tax asset valuation allowance. Such controls include:
•
ensuring completeness and accuracy of the global list of UTPs
•
enhanced communication through formal periodic meetings attended by accounting, tax, finance, business and strategy leaders
•
updates to control design to incorporate detailed steps related to the preparation, detailed review, and overriding review of UTPs and income tax calculations, including inputs and assumptions

Enhanced Tax and Accounting Policies and Procedures: The company intends to review and update its tax policies and procedures. Trainings will be developed to ensure full understanding and compliance with the policies and procedures.
We believe the measures described above will remediate the material weaknesses we have identified and strengthen our overall internal control over financial reporting.  We are currently in the process of completing our remediation efforts and have begun testing the operating effectiveness of the actions discussed above.  The actions that we are taking are subject to ongoing senior management review, as well as audit committee oversight. We will continue to monitor the effectiveness of these and other processes, procedures and controls and will make any further changes that management determines are appropriate.  The identified material weaknesses will not be considered remediated until the controls are in operation for a sufficient period of time for management to conclude that the control environment is operating effectively.

Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting during the three months ended June 30, 2017 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.


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MERITOR, INC.

PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Except as set forth below and under Note 20 of the Notes to the Condensed Consolidated Financial Statements in Part I of this Quarterly Report on Form 10-Q, there have been no material developments in legal proceedings involving the company or its subsidiaries since those reported in the company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2016, as amended.
In fiscal years 2002 and 2004, the company approved amendments to certain retiree medical plans, including health benefits for retirees (and their surviving spouses) who were formerly United Auto Workers (“UAW”) members at ten former Rockwell International (“Rockwell”) plants. Certain of these plan amendments were challenged in lawsuits that were filed in the United States District Court for the Eastern District of Michigan ("District Court") alleging the changes breached the terms of various collective bargaining agreements (“CBAs”) entered into by Rockwell and the UAW for facilities that have either been closed or sold and alleging a companion claim under the Employee Retirement Income Security Act of 1974 (“ERISA”). The two class actions lawsuits that were filed in 2004 (Cole v. ArvinMeritor, et al. and Faust v. ArvinMeritor, et al.) by the UAW and retirees and surviving spouses claimed that the health benefits were vested for life through the negotiated CBAs. These actions were subsequently consolidated. 
 On December 22, 2005, the District Court issued a preliminary injunction enjoining the company from implementing changes to retiree health benefits and ordered the company to reinstate and resume paying the full cost of health benefits for the UAW retirees at the levels existing prior to the changes made in 2002 and 2004. In 2006, the District Court granted a motion by the UAW for summary judgment and granted the UAW’s request to make the terms of the preliminary injunction permanent (the “injunction”). The company accounted for the injunction as a rescission of the 2002 and 2004 plan amendments and began recording the impact of the injunction in March 2006. In addition, the injunction ordered the defendants to reimburse the plaintiffs for out-of-pocket expenses incurred since the date of the earlier benefit modifications. In 2007, the company appealed the District Court’s order to the U.S. Court of Appeals for the Sixth Circuit ("Sixth Circuit"). The Sixth Circuit ruled to affirm the District Court’s ruling and the company moved for an en banc rehearing. This motion was held in abeyance while the parties attempted to settle the case.  In July 2016 the company moved for re-hearing based on a January 2015 U.S. Supreme Court decision on the subject matter and a subsequent Sixth Circuit ruling in a separate case on the same subject matter. The court granted the re-hearing and in April 2017, the Sixth Circuit reversed the District Court’s decision, finding that the retiree medical benefits were not vested for life through the CBAs.
The plaintiffs’ appeal to the Sixth Circuit for a rehearing en banc was denied in June 2017. The plaintiffs subsequently filed a motion to stay the Sixth Circuit's mandate pending appeal to the U.S. Supreme Court. The Sixth Circuit denied that motion on July 10, 2017 and issued the mandate the same day. Through the Sixth Circuit's mandate, the case has been remanded to the District Court to carry out further proceedings as necessary to comply with the mandate. On July 19, 2017 the company filed a motion with the District Court to dissolve the injunction and enter the judgment in favor of the Defendants. A hearing date has been set for August 30, 2017. We also expect the plaintiffs to file a petition for certiorari with the U.S. Supreme Court in the next few months. We cannot predict when the District court may dissolve the injunction or whether or not the U.S. Supreme Court will grant the plaintiffs' petition for certiorari. 
Item 1A. Risk Factors
There have been no material changes in risk factors involving the company or its subsidiaries from those previously disclosed in the company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2016, as amended.

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MERITOR, INC.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Issuer repurchases
The table below sets forth information with respect to purchases made by or on behalf of us of shares of our common stock during the three months ended June 30, 2017:
Period
Total Number of Shares Purchased
Average Price Paid Per Share
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
Maximum Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (1)
April 1- 30, 2017
—

$
—

—

$
—

May 1- 31, 2017
—

$
—

—

$
—

June 1- 30, 2017
7,933

$
15.00

7,933

$
99,881,011

Total
7,933

 
 
7,933

 
 
(1)
On July 21, 2016, the Board of Directors authorized the repurchase of up to $100 million of the company’s common stock and up to $150 million aggregate principal amount of any of the company’s debt securities (including convertible debt securities), in each case from time to time through open market purchases, privately negotiated transactions or otherwise, until September 30, 2019, subject to compliance with legal and regulatory requirements and the company's debt covenants. As part of the equity and equity-linked repurchase authorization, we entered into a 10b5-1 common stock repurchase plan.
     The independent trustee of our 401(k) plans purchases shares in the open market to fund investments by employees in our common stock, one of the investment options available under such plans, and any matching contributions in company stock we provide under certain of such plans. In addition, our stock incentive plans permit payment of an option exercise price by means of cashless exercise through a broker and permit the satisfaction of the minimum statutory tax obligations upon exercise of options and the vesting of restricted stock units through stock withholding. There were no shares withheld in the third quarter of fiscal 2017 to satisfy tax obligations for exercise of options. In addition, our stock incentive plans also permit the satisfaction of tax obligations upon the vesting of restricted stock through stock withholding. There were no shares withheld in the third quarter of fiscal 2017 to satisfy tax obligations upon the vesting of restricted shares. The company does not believe such purchases or transactions described above are issuer repurchases for the purposes of this Item 2 of Part II of this Quarterly Report on Form 10-Q.

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MERITOR, INC.

Item 5. Other Information
Cautionary Statement
This Quarterly Report on Form 10-Q 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 reliance on major OEM customers and possible negative outcomes from contract negotiations with our major customers, including failure to negotiate acceptable terms in contract renewal negotiations and our ability to obtain new customers; the outcome of actual and potential product liability, warranty and recall claims; our ability to successfully manage rapidly changing volumes in the commercial truck markets and work with our customers to manage demand expectations in view of rapid changes in production levels; global economic and market cycles and conditions; availability and sharply rising costs of raw materials, including steel, and our ability to manage or recover such costs; our ability to manage possible adverse effects on our European operations, or financing arrangements related thereto following the United Kingdom's decision to exit the European Union or, in the event one or more other countries exit the European monetary union; risks inherent in operating abroad (including foreign currency exchange rates, restrictive government actions regarding trade, implications of foreign regulations relating to pensions and potential disruption of production and supply due to terrorist attacks or acts of aggression); risks related to our joint ventures; rising costs of pension and other postemployment benefits; the ability to achieve the expected benefits of strategic initiatives and restructuring actions; the demand for commercial and specialty vehicles for which we supply products; whether our liquidity will be affected by declining vehicle productions in the future; OEM program delays; demand for and market acceptance of new and existing products; successful development and launch of new products; labor relations of our company, our 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 our suppliers and customers, including potential bankruptcies; possible adverse effects of any future suspension of normal trade credit terms by our suppliers; potential difficulties competing with companies that have avoided their existing contracts in bankruptcy and reorganization proceedings; potential impairment of long-lived assets, including goodwill; potential adjustment of the value of deferred tax assets; competitive product and pricing pressures; the amount of our debt; our ability to continue to comply with covenants in our financing agreements; our ability to access capital markets; credit ratings of our debt; the outcome of existing and any future legal proceedings, including any litigation with respect to environmental, asbestos-related, or other matters; possible changes in accounting rules; ineffective internal controls; and other substantial costs, 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 our Annual Report on Form 10-K for the year ended September 30, 2016, as amended: Item 1. Business, “Customers; Sales and Marketing”; “Competition”; “Raw Materials and Supplies”; “Employees”; “Environmental Matters”; “International Operations”; and “Seasonality; Cyclicality”; Item 1A. Risk Factors; 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.

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MERITOR, INC.

Item 6. Exhibits
3-a
Amended and Restated Articles of Incorporation of Meritor, filed as Exhibit 3-a to Meritor’s Annual Report on Form 10-K for the fiscal year ended September 27, 2015, is incorporated herein by reference.
3-b
Amended and Restated By-laws of Meritor, filed as Exhibit 3-b to Meritor’s Annual Report on Form 10-K for the fiscal year ended October 2, 2016, is incorporated herein by reference.
10-a**
Extension Letter dated June 8, 2017, from Meritor Heavy Vehicle Systems Cameri S.P.A. to Nordea Bank AB (pbl).
 10-b**
Seventh Amendment to the Receivables Purchase Agreement dated as of June 22, 2017, by and among ArvinMeritor Receivables Corporation, as Seller, Meritor, Inc., as Initial Servicer, and PNC Bank, National Association, as a Related Committed Purchaser, as an LC Participant, as a Purchaser Agent, as LC Bank and as Administrator.
12**
Computation of ratio of earnings to fixed charges
23**
Consent of Bates White LLC
31-a**
Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) under the Exchange Act
31-b**
Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) under the Exchange Act
32-a**
Certification of the Chief Executive Officer pursuant to Rule 13a-14(b) under the Exchange Act and 18 U.S.C. Section 1350
32-b**
Certification of the Chief Financial Officer pursuant to Rule 13a-14(b) under the Exchange Act and 18 U.S.C. Section 1350
101.INS
XBRL INSTANCE DOCUMENT
101.SCH
XBRL TAXONOMY EXTENSION SCHEMA
101.PRE
XBRL TAXONOMY EXTENSION PRESENTATION LINKBASE
101.LAB
XBRL TAXONOMY EXTENSION LABEL LINKBASE
101.CAL 
XBRL TAXONOMY EXTENSION CALCULATION LINKBASE
101.DEF 
XBRL TAXONOMY EXTENSION DEFINITION LINKBASE

** Filed herewith.


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MERITOR, INC.

SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
     
 
MERITOR, INC.
 
 
 
 
 
Date:
August 3, 2017
By:       
/s/
April Miller Boise
 
 
 
 
April Miller Boise
 
 
 
 
Senior Vice President, General Counsel and Corporate Secretary
 
 
 
 
(For the registrant)
 
 
 
 
 
Date:
August 3, 2017
By:
/s/
Paul D. Bialy
 
 
 
 
Paul D. Bialy
 
 
 
 
Vice President, Controller and Principal Accounting Officer
 
 
 
 
 
 
 
 
 
 
Date:
August 3, 2017
By:
/s/
Kevin A. Nowlan
 
 
 
 
Kevin A. Nowlan
 
 
 
 
Senior Vice President and Chief Financial Officer

77