UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
|
| |
☒ | Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the Quarterly Period Ended June 30,December 29, 2019
|
| |
☐ | Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the transition period from to
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 organization) | | (I.R.S. Employer Identification 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)
Securities registered pursuant to Section 12(b) of the Securities Exchange Act of 1934:
|
| | |
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Common Stock, $1 Par Value | MTOR | New York Stock Exchange |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Registration S-T during the preceding twelve12 months (or for such shorter period that the registrant was required to submit such files). Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a 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 | ☒ | | 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). 82,579,93073,910,025 shares of Common Stock, $1.00 par value, of Meritor, Inc. were outstanding on July 30, 2019.January 29, 2020.
INDEX
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, | Three Months Ended December 31, |
| 2019 | | 2018 | | 2019 | | 2018 | 2019 | | 2018 |
| (Unaudited) | (Unaudited) |
Sales | $ | 1,166 |
| | $ | 1,129 |
| | $ | 3,360 |
| | $ | 3,098 |
| $ | 901 |
| | $ | 1,038 |
|
Cost of sales | (987 | ) | | (959 | ) | | (2,866 | ) | | (2,625 | ) | (774 | ) | | (897 | ) |
GROSS MARGIN | 179 |
| | 170 |
| | 494 |
| | 473 |
| 127 |
| | 141 |
|
Selling, general and administrative | (73 | ) | | (76 | ) | | (180 | ) | | (218 | ) | (70 | ) | | (34 | ) |
Restructuring | 1 |
| | (3 | ) | | 2 |
| | (6 | ) | |
Other operating expense, net | (3 | ) | | — |
| | (3 | ) | | (12 | ) | (5 | ) | | — |
|
OPERATING INCOME | 104 |
| | 91 |
| | 313 |
| | 237 |
| 52 |
| | 107 |
|
Other income, net | 10 |
| | 9 |
| | 30 |
| | 24 |
| 10 |
| | 11 |
|
Equity in earnings of affiliates | 9 |
| | 9 |
| | 24 |
| | 20 |
| 6 |
| | 9 |
|
Interest expense, net | (14 | ) | | (14 | ) | | (43 | ) | | (54 | ) | (14 | ) | | (14 | ) |
INCOME BEFORE INCOME TAXES | 109 |
| | 95 |
| | 324 |
| | 227 |
| 54 |
| | 113 |
|
Provision for income taxes | (21 | ) | | (26 | ) | | (69 | ) | | (131 | ) | (13 | ) | | (21 | ) |
INCOME FROM CONTINUING OPERATIONS | 88 |
| | 69 |
| | 255 |
| | 96 |
| 41 |
| | 92 |
|
INCOME (LOSS) FROM DISCONTINUED OPERATIONS, net of tax | 1 |
| | (2 | ) | | — |
| | (3 | ) | |
INCOME FROM DISCONTINUED OPERATIONS, net of tax | | — |
| | — |
|
NET INCOME | 89 |
| | 67 |
| | 255 |
| | 93 |
| 41 |
| | 92 |
|
Less: Net income attributable to noncontrolling interests | (3 | ) | | (3 | ) | | (7 | ) | | (8 | ) | (2 | ) | | (2 | ) |
NET INCOME ATTRIBUTABLE TO MERITOR, INC. | $ | 86 |
| | $ | 64 |
| | $ | 248 |
| | $ | 85 |
| $ | 39 |
| | $ | 90 |
|
NET INCOME (LOSS) ATTRIBUTABLE TO MERITOR, INC. | | | | | | | | |
NET INCOME ATTRIBUTABLE TO MERITOR, INC. | | | | |
Net income from continuing operations | $ | 85 |
| | $ | 66 |
| | $ | 248 |
| | $ | 88 |
| $ | 39 |
| | $ | 90 |
|
Income (Loss) from discontinued operations | 1 |
| | (2 | ) | | — |
| | (3 | ) | |
Income from discontinued operations | | — |
| | — |
|
Net income | $ | 86 |
| | $ | 64 |
| | $ | 248 |
| | $ | 85 |
| $ | 39 |
| | $ | 90 |
|
BASIC EARNINGS (LOSS) PER SHARE | | | | | | | | |
BASIC EARNINGS PER SHARE | | | | |
Continuing operations | $ | 1.02 |
| | $ | 0.76 |
| | $ | 2.96 |
| | $ | 1.00 |
| $ | 0.50 |
| | $ | 1.06 |
|
Discontinued operations | 0.01 |
| | (0.02 | ) | | — |
| | (0.03 | ) | — |
| | — |
|
Basic earnings per share | $ | 1.03 |
| | $ | 0.74 |
| | $ | 2.96 |
| | $ | 0.97 |
| $ | 0.50 |
| | $ | 1.06 |
|
DILUTED EARNINGS (LOSS) PER SHARE | | | | | | | | |
DILUTED EARNINGS PER SHARE | | | | |
Continuing operations | $ | 0.99 |
| | $ | 0.73 |
| | $ | 2.86 |
| | $ | 0.96 |
| $ | 0.48 |
| | $ | 1.03 |
|
Discontinued operations | 0.01 |
| | (0.02 | ) | | — |
| | (0.03 | ) | — |
| | — |
|
Diluted earnings per share | $ | 1.00 |
| | $ | 0.71 |
| | $ | 2.86 |
| | $ | 0.93 |
| $ | 0.48 |
| | $ | 1.03 |
|
| | | | | | | | | | |
Basic average common shares outstanding | 83.0 |
| | 87.2 |
| | 83.7 |
| | 88.1 |
| 78.2 |
| | 84.8 |
|
Diluted average common shares outstanding | 85.6 |
| | 89.8 |
| | 86.6 |
| | 91.2 |
| 80.7 |
| | 87.5 |
|
See Notes to Condensed Consolidated Financial Statements. Prior periods have been recast, see Note 20.
CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(in millions)
| | | Three Months Ended June 30, | | Nine Months Ended June 30, | Three Months Ended December 31, |
| 2019 | | 2018 | | 2019 | | 2018 | 2019 | | 2018 |
| (Unaudited) | (Unaudited) |
Net income | $ | 89 |
| | $ | 67 |
| | $ | 255 |
| | $ | 93 |
| $ | 41 |
| | $ | 92 |
|
Other comprehensive income (loss): | | | | | | | | | | |
Foreign currency translation adjustments: | | | | | | | | | | |
Attributable to Meritor, Inc. | (6 | ) | | (52 | ) | | (3 | ) | | (46 | ) | 21 |
| | (4 | ) |
Attributable to noncontrolling interest | (1 | ) | | (2 | ) | | — |
| | (1 | ) | — |
| | 1 |
|
Pension and other postretirement benefit related adjustments | 1 |
| | 3 |
| | 2 |
| | 9 |
| 3 |
| | — |
|
Unrealized gain (loss) on cash flow hedges | (2 | ) | | 1 |
| | (2 | ) | | 4 |
| |
Other comprehensive loss, net of tax | (8 | ) | | (50 | ) | | (3 | ) | | (34 | ) | |
Unrealized gain on cash flow hedges | | 2 |
| | 1 |
|
Other comprehensive income (loss), net of tax | | 26 |
| | (2 | ) |
Total comprehensive income | 81 |
| | 17 |
| | 252 |
| | 59 |
| 67 |
| | 90 |
|
Less: Comprehensive income attributable to noncontrolling interest | (2 | ) | | (1 | ) | | (7 | ) | | (7 | ) | (2 | ) | | (3 | ) |
Comprehensive income attributable to Meritor, Inc. | $ | 79 |
| | $ | 16 |
| | $ | 245 |
| | $ | 52 |
| $ | 65 |
| | $ | 87 |
|
See Notes to Condensed Consolidated Financial Statements.
CONDENSED CONSOLIDATED BALANCE SHEET
(in millions)
| | | June 30, 2019 | | September 30, 2018 | December 31, 2019 | | September 30, 2019 |
| (Unaudited) | (Unaudited) |
ASSETS | | | | | | |
CURRENT ASSETS: | | | | | | |
Cash and cash equivalents | $ | 111 |
| | $ | 115 |
| $ | 108 |
| | $ | 108 |
|
Receivables, trade and other, net | 625 |
| | 588 |
| 478 |
| | 551 |
|
Inventories | 491 |
| | 477 |
| 556 |
| | 526 |
|
Other current assets | 32 |
| | 46 |
| 37 |
| | 31 |
|
TOTAL CURRENT ASSETS | 1,259 |
| | 1,226 |
| 1,179 |
| | 1,216 |
|
NET PROPERTY | 481 |
| | 483 |
| 517 |
| | 515 |
|
GOODWILL | 421 |
| | 421 |
| 486 |
| | 478 |
|
OTHER ASSETS | 567 |
| | 596 |
| 714 |
| | 606 |
|
TOTAL ASSETS | $ | 2,728 |
| | $ | 2,726 |
| $ | 2,896 |
| | $ | 2,815 |
|
LIABILITIES, MEZZANINE EQUITY AND EQUITY | | | | |
LIABILITIES AND EQUITY | | | | |
CURRENT LIABILITIES: | | | | | | |
Short-term debt | $ | 24 |
| | $ | 94 |
| $ | 178 |
| | $ | 41 |
|
Accounts and notes payable | 691 |
| | 700 |
| 540 |
| | 610 |
|
Other current liabilities | 296 |
| | 290 |
| 264 |
| | 285 |
|
TOTAL CURRENT LIABILITIES | 1,011 |
| | 1,084 |
| 982 |
| | 936 |
|
LONG-TERM DEBT | 734 |
| | 730 |
| 901 |
| | 902 |
|
RETIREMENT BENEFITS | 238 |
| | 262 |
| 330 |
| | 336 |
|
OTHER LIABILITIES | 234 |
| | 332 |
| 299 |
| | 226 |
|
TOTAL LIABILITIES | 2,217 |
| | 2,408 |
| 2,512 |
| | 2,400 |
|
COMMITMENTS AND CONTINGENCIES (See Note 21) |
| |
| |
MEZZANINE EQUITY: | | | | |
Convertible debt with cash settlement | 1 |
| | 1 |
| |
COMMITMENTS AND CONTINGENCIES (See Note 20) | |
| |
|
| | | | |
EQUITY: | | | | | | |
Common stock (June 30, 2019 and September 30, 2018, 103.9 and 102.2 shares issued and 82.6 and 84.9 shares outstanding, respectively) | 104 |
| | 102 |
| |
Common stock (December 31, 2019 and September 30, 2019, 105.3 and 104.1 shares issued and 77.8 and 81.4 shares outstanding, respectively) | | 105 |
| | 104 |
|
Additional paid-in capital | 798 |
| | 787 |
| 804 |
| | 803 |
|
Retained earnings | 448 |
| | 200 |
| 530 |
| | 491 |
|
Treasury stock, at cost (June 30, 2019 and September 30, 2018, 21.4 and 17.3 shares, respectively) | (307 | ) | | (236 | ) | |
Treasury stock, at cost (December 31, 2019 and September 30, 2019, 27.6 and 22.7 shares, respectively) | | (432 | ) | | (332 | ) |
Accumulated other comprehensive loss | (569 | ) | | (566 | ) | (655 | ) | | (681 | ) |
Total equity attributable to Meritor, Inc. | 474 |
| | 287 |
| 352 |
| | 385 |
|
Noncontrolling interests | 36 |
| | 30 |
| 32 |
| | 30 |
|
TOTAL EQUITY | 510 |
| | 317 |
| 384 |
| | 415 |
|
TOTAL LIABILITIES, MEZZANINE EQUITY AND EQUITY | $ | 2,728 |
| | $ | 2,726 |
| |
TOTAL LIABILITIES AND EQUITY | | $ | 2,896 |
| | $ | 2,815 |
|
See Notes to Condensed Consolidated Financial Statements.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(in millions)
| | | Nine Months Ended June 30, | Three Months Ended December 31, |
| 2019 | | 2018 | 2019 | | 2018 |
| (Unaudited) | (Unaudited) |
OPERATING ACTIVITIES | | | | | | |
CASH PROVIDED BY OPERATING ACTIVITIES (See Note 11) | $ | 194 |
| | $ | 191 |
| |
Net income | | $ | 41 |
| | $ | 92 |
|
Less: Income from discontinued operations, net of tax | | — |
| | — |
|
Income from continuing operations | | 41 |
| | 92 |
|
Adjustments to income from continuing operations to arrive at cash provided by (used for) operating activities: | | | | |
Depreciation and amortization | | 24 |
| | 22 |
|
Deferred income tax expense | | 3 |
| | 3 |
|
Restructuring costs | | 5 |
| | — |
|
Equity in earnings of affiliates | | (6 | ) | | (9 | ) |
Pension and retiree medical income | | (10 | ) | | (9 | ) |
Asbestos related liability remeasurement | | — |
| | (31 | ) |
Other adjustments to income from continuing operations | | 3 |
| | 5 |
|
Dividends received from equity method investments | | — |
| | 1 |
|
Pension and retiree medical contributions | | (3 | ) | | (3 | ) |
Restructuring payments | | (7 | ) | | (1 | ) |
Changes in off-balance sheet accounts receivable securitization and factoring programs | | 7 |
| | 38 |
|
Changes in receivables, inventories and accounts payable | | (31 | ) | | (52 | ) |
Changes in other current assets and liabilities | | (28 | ) | | (40 | ) |
Changes in other assets and liabilities | | (16 | ) | | (4 | ) |
Operating cash flows provided by (used for) continuing operations | | (18 | ) | | 12 |
|
Operating cash flows used for discontinued operations | | (1 | ) | | (1 | ) |
CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES | | $ | (19 | ) | | $ | 11 |
|
INVESTING ACTIVITIES | | | | | | |
Capital expenditures | (63 | ) | | (52 | ) | (16 | ) | | (23 | ) |
Proceeds from sale of equity method investment | — |
| | 250 |
| |
Cash paid for acquisition of AA Gear & Manufacturing, Inc. | — |
| | (36 | ) | |
Cash paid for investment in Transportation Power, Inc. | (6 | ) | | (6 | ) | — |
| | (3 | ) |
Proceeds from sale of a business | — |
| | 4 |
| |
Proceeds from sale of assets | — |
| | 2 |
| |
Proceeds from settlement of cross-currency swaps | 17 |
| | — |
| |
CASH PROVIDED BY (USED FOR) INVESTING ACTIVITIES | (52 | ) | | 162 |
| |
Other investing activities | | — |
| | (1 | ) |
CASH USED FOR INVESTING ACTIVITIES | | (16 | ) | | (27 | ) |
FINANCING ACTIVITIES | | | | | | |
Borrowings and securitization | (46 | ) | | (89 | ) | |
Redemption of notes | (24 | ) | | (181 | ) | |
Deferred issuance costs | (4 | ) | | — |
| |
Securitization | | 72 |
| | 33 |
|
Borrowings against revolving line of credit | | 65 |
| | 45 |
|
Term loan payments | | (3 | ) | | — |
|
Other financing activities | (2 | ) | | (3 | ) | — |
| | (1 | ) |
Net change in debt | (76 | ) | | (273 | ) | 134 |
| | 77 |
|
Repurchase of common stock | (71 | ) | | (63 | ) | (100 | ) | | (50 | ) |
CASH USED FOR FINANCING ACTIVITIES | (147 | ) | | (336 | ) | |
CASH PROVIDED BY FINANCING ACTIVITIES | | 34 |
| | 27 |
|
EFFECT OF CHANGES IN FOREIGN CURRENCY EXCHANGE RATES ON CASH AND CASH EQUIVALENTS | 1 |
| | (5 | ) | 1 |
| | 1 |
|
CHANGE IN CASH AND CASH EQUIVALENTS | (4 | ) | | 12 |
| — |
| | 12 |
|
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD | 115 |
| | 88 |
| 108 |
| | 115 |
|
CASH AND CASH EQUIVALENTS AT END OF PERIOD | $ | 111 |
| | $ | 100 |
| $ | 108 |
| | $ | 127 |
|
See Notes to Condensed Consolidated Financial Statements.
CONDENSED CONSOLIDATED STATEMENT OF EQUITY
(in millions)
(Unaudited)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended June 30, 2019 |
| Common Stock | | Additional Paid-in Capital | | Retained Earnings | | Treasury Stock | | Accumulated Other Comprehensive Loss | | Total Equity Attributable to Meritor, Inc. | | Noncontrolling Interests | | Total |
Beginning Balance at March 31, 2019 | $ | 104 |
| | $ | 793 |
| | $ | 362 |
| | $ | (286 | ) | | $ | (562 | ) | | $ | 411 |
| | $ | 34 |
| | $ | 445 |
|
Comprehensive income | — |
| | — |
| | 86 |
| | — |
| | (7 | ) | | 79 |
| | 2 |
| | 81 |
|
Equity based compensation expense | — |
| | 5 |
| | — |
| | — |
| | — |
| | 5 |
| | — |
| | 5 |
|
Repurchase of common stock | — |
| | — |
| | — |
| | (21 | ) | | — |
| | (21 | ) | | — |
| | (21 | ) |
Ending Balance at June 30, 2019 | $ | 104 |
| | $ | 798 |
| | $ | 448 |
| | $ | (307 | ) | | $ | (569 | ) | | $ | 474 |
| | $ | 36 |
| | $ | 510 |
|
| | | | | | | | | | | | | | | |
| Three months ended June 30, 2018 |
| Common Stock | | Additional Paid-in Capital | | Retained Earnings | | Treasury Stock | | Accumulated Other Comprehensive Loss | | Total Equity Attributable to Meritor, Inc. | | Noncontrolling Interests | | Total |
Beginning Balance at March 31, 2018 | $ | 102 |
| | $ | 775 |
| | $ | 104 |
| | $ | (169 | ) | | $ | (530 | ) | | $ | 282 |
| | $ | 30 |
| | $ | 312 |
|
Comprehensive income (loss) | — |
| | — |
| | 64 |
| | — |
| �� | (48 | ) | | 16 |
| | 1 |
| | 17 |
|
Equity based compensation expense | — |
| | 4 |
| | — |
| | — |
| | — |
| | 4 |
| | — |
| | 4 |
|
Repurchase of common stock | — |
| | — |
| | — |
| | (30 | ) | | — |
| | (30 | ) | | — |
| | (30 | ) |
Ending Balance at June 30, 2018 | $ | 102 |
| | $ | 779 |
| | $ | 168 |
| | $ | (199 | ) | | $ | (578 | ) | | $ | 272 |
| | $ | 31 |
| | $ | 303 |
|
| | | Nine months ended June 30, 2019 | Three months ended December 31, 2019 |
| Common Stock | | Additional Paid-in Capital | | Retained Earnings | | Treasury Stock | | Accumulated Other Comprehensive Loss | | Total Equity Attributable to Meritor, Inc. | | Noncontrolling Interests | | Total | Common Stock | | Additional Paid-in Capital | | Retained Earnings | | Treasury Stock | | Accumulated Other Comprehensive Loss | | Total Equity Attributable to Meritor, Inc. | | Noncontrolling Interests | | Total |
Beginning Balance at September 30, 2018 | $ | 102 |
| | $ | 787 |
| | $ | 200 |
| | $ | (236 | ) | | $ | (566 | ) | | $ | 287 |
| | $ | 30 |
| | $ | 317 |
| |
Beginning Balance at September 30, 2019 | | $ | 104 |
| | $ | 803 |
| | $ | 491 |
| | $ | (332 | ) | | $ | (681 | ) | | $ | 385 |
| | $ | 30 |
| | $ | 415 |
|
Comprehensive income | — |
| | — |
| | 248 |
| | — |
| | (3 | ) | | 245 |
| | 7 |
| | 252 |
| — |
| | — |
| | 39 |
| | — |
| | 26 |
| | 65 |
| | 2 |
| | 67 |
|
Equity based compensation expense | — |
| | 13 |
| | — |
| | — |
| | — |
| | 13 |
| | — |
| | 13 |
| — |
| | 3 |
| | — |
| | — |
| | — |
| | 3 |
| | — |
| | 3 |
|
Vesting of equity based awards | 2 |
| | (2 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| 1 |
| | (1 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Repurchase of common stock | — |
| | — |
| | — |
| | (71 | ) | | — |
| | (71 | ) | | — |
| | (71 | ) | — |
| | — |
| | — |
| | (100 | ) | | — |
| | (100 | ) | | — |
| | (100 | ) |
Noncontrolling interest dividend | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (1 | ) | | (1 | ) | |
Ending Balance at June 30, 2019 | $ | 104 |
| | $ | 798 |
| | $ | 448 |
|
| $ | (307 | ) | | $ | (569 | ) | | $ | 474 |
| | $ | 36 |
| | $ | 510 |
| |
Other equity adjustments | | — |
| | (1 | ) | | — |
| | — |
| | — |
| | (1 | ) | | — |
| | (1 | ) |
Ending Balance at December 31, 2019 | | $ | 105 |
| | $ | 804 |
| | $ | 530 |
| | $ | (432 | ) | | $ | (655 | ) | | $ | 352 |
| | $ | 32 |
| | $ | 384 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Nine months ended June 30, 2018 | Three months ended December 31, 2018 |
| Common Stock | | Additional Paid-in Capital | | Retained Earnings | | Treasury Stock | | Accumulated Other Comprehensive Loss | | Total Equity Attributable to Meritor, Inc. | | Noncontrolling Interests | | Total | Common Stock | | Additional Paid-in Capital | | Retained Earnings | | Treasury Stock | | Accumulated Other Comprehensive Loss | | Total Equity Attributable to Meritor, Inc. | | Noncontrolling Interests | | Total |
Beginning Balance at October 1, 2017 | $ | 101 |
| | $ | 765 |
| | $ | 83 |
| | $ | (136 | ) | | $ | (545 | ) | | $ | 268 |
| | $ | 27 |
| | $ | 295 |
| |
Beginning Balance at September 30, 2018 | | $ | 102 |
| | $ | 787 |
| | $ | 200 |
| | $ | (236 | ) | | $ | (566 | ) | | $ | 287 |
| | $ | 30 |
| | $ | 317 |
|
Comprehensive income (loss) | — |
| | — |
| | 85 |
| | — |
| | (33 | ) | | 52 |
| | 7 |
| | 59 |
| — |
| | — |
| | 90 |
| | — |
| | (3 | ) | | 87 |
| | 3 |
| | 90 |
|
Equity based compensation expense | — |
| | 14 |
| | — |
| | — |
| | — |
| | 14 |
| | — |
| | 14 |
| — |
| | 5 |
| | — |
| | — |
| | — |
| | 5 |
| | — |
| | 5 |
|
Vesting of equity based awards | 1 |
| | (1 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| 2 |
| | (2 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Repurchase of common stock | — |
| | — |
| | — |
| | (63 | ) | | — |
| | (63 | ) | | — |
| | (63 | ) | — |
| | — |
| | — |
| | (50 | ) | | — |
| | (50 | ) | | — |
| | (50 | ) |
Noncontrolling interest dividends | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (1 | ) | | (1 | ) | |
Other equity adjustments | — |
| | 1 |
| | — |
| | — |
| | — |
| | 1 |
| | (2 | ) | | (1 | ) | |
Ending Balance at June 30, 2018 | $ | 102 |
| | $ | 779 |
| | $ | 168 |
|
| $ | (199 | ) | | $ | (578 | ) | | $ | 272 |
| | $ | 31 |
| | $ | 303 |
| |
Ending Balance at December 31, 2018 | | $ | 104 |
| | $ | 790 |
| | $ | 290 |
| | $ | (286 | ) | | $ | (569 | ) | | $ | 329 |
| | $ | 33 |
| | $ | 362 |
|
See Notes to Condensed Consolidated Financial Statements.
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 5.
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, 2018.2019. The Condensed Consolidated Balance Sheet data as of September 30, 20182019 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,December 31, 2019 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 thirdfirst quarter of fiscal years 2020 and 2019 ended on December 29, 2019 and December 30, 2018, respectively. Fiscal year 2019 ended on June 30, 2019 and July 1, 2018, respectively.September 29, 2019. 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 30December 31 are used consistently throughout this report to represent the fiscal year end and thirdfirst 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, | Three Months Ended December 31, |
| 2019 | | 2018 | | 2019 | | 2018 | 2019 | | 2018 |
Basic average common shares outstanding | 83.0 |
| | 87.2 |
| | 83.7 |
| | 88.1 |
| 78.2 |
| | 84.8 |
|
Impact of restricted shares, restricted share units and performance share units | 1.7 |
| | 1.7 |
| | 2.1 |
| | 2.1 |
| 1.6 |
| | 2.1 |
|
Impact of convertible notes | 0.9 |
| | 0.9 |
| | 0.8 |
| | 1.0 |
| 0.9 |
| | 0.6 |
|
Diluted average common shares outstanding | 85.6 |
|
| 89.8 |
|
| 86.6 |
|
| 91.2 |
| 80.7 |
|
| 87.5 |
|
3. Equity Based Compensation
In November 2018,2019, 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 one1 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 $16.50,$25.25, which was the company’s share price on the grant date of December 1, 2018.2019. The Board of Directors also approved a grant of 0.40.3 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 $16.50,$25.25, which was the company's share price on the grant date of December 1, 2018.2019.
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, 20182019 to September 30, 2021,2022, measured at the end of the performance period. The number of performance share units that vest will depend on adjusted EBITDA margin, new business wins, free cash flow conversion and adjusted diluted earnings per share from continuing operations which are all weighted at the following weights: 50% associated with achieving an adjusted EBITDA
MERITOR, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
margin target and 50% associated with achieving an adjusted diluted earnings per share from continuing operations target.25%. The number of performance share units that vest will be between 0% and 200% of the grant date amount of 0.50.4 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 vested depended 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, which was measured at the end of the performance period.MERITOR, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the three and nine months ended June 30,December 31, 2019 the dilutive impact of previously issued restricted shares, restricted share units and performance share units was 1.7 million and 2.1 million shares, respectively. For the three and nine months ended June 30,December 31, 2018, the dilutive impact of previously issued restricted shares, restricted share units and performance share units was 1.71.6 million and 2.1 million shares, respectively. For the three and nine months ended June 30,December 31, 2019 compensation cost related to restricted shares, restricted share units and performance share units was $5 million and $13 million, respectively. For the three and nine months ended June 30,December 31, 2018, compensation cost related to restricted shares, restricted share units and performance share units was $4$3 million and $14$5 million, respectively.
For the three and nine months ended June 30,December 31, 2019 0.9 million and 0.8 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,December 31, 2018, 0.9 million and 1.00.6 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.
3.4. New Accounting Standards
Accounting standards implemented during fiscal year 20192020
In May 2014,On October 1, 2019, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2014-09, Revenue from Contracts with Customers, followed by various related amendments (ASU 2016-08,company implemented ASU 2016-10, ASU 2016-11, ASU 2016-12, ASU 2016-20, ASU 2017-05, ASU 2017-06, ASU 2017-13, and ASU 2017-14) collectively referred to as "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.2016-02, Leases (Topic 842). The company elected the practical expedient package which allowed the company to not reassess whether existing contracts contain a lease and to not reassess classification of existing leases. The company also adopted Topic 606ASU 2018-11 Leases (Topic 842) Targeted Improvements, electing to not separate lease and non-lease components in the first quarter of the fiscal year beginning October 1, 2018.contracts that contain both and electing to not restate comparative periods when adopting ASU 2016-02. As a result, the company has changed its accounting policyrecognized a right-of-use asset and lease liability as a lessee for revenue recognition as detailed below.
The company applied Topic 606 using the modified retrospective approach (i.e., by recognizing the cumulative effect of initially applying Topic 606 as an adjustment to the opening balance of equity at October 1, 2018). Therefore, the comparative information has not been adjusted and continues to be reported under Topic 605. There was no adjustment to the opening balance of equity at October 1, 2018 as there was no significant impact to previously recorded revenue or expense. The guidance has been applied tosubstantially all existing contracts at the date of initial application. The adoption of Topic 606 had an immaterial impact on our Condensed Consolidated Balance Sheet, Condensed Consolidated Statement of Operations,operating leases and Condensed Consolidated Statement of Cash Flows but did require enhanced disclosures to meet thehas included new disclosure requirements; those enhanced disclosures are included inand expanded disclosures. (See Note 4.
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 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. The revisions in this amendment
MERITOR, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 adopted this standard in the first quarter of fiscal year 2019. Amounts previously reflected in Operating Income were reclassified to Other income (expense) in accordance with the provisions of ASU 2017-07. Refer to Note 20 for amounts that were reclassified.
In July 2018, the FASB issued ASU 2018-09, Codification Improvements. The amendments in this ASU result from the FASB’s standing project to address suggestions on the Accounting Standards Codification ("ASC") and to make other incremental improvements to GAAP. The amendments include changes to clarify the ASC or correct unintended application of guidance that is not expected to have a significant effect on current accounting practice or create a significant administrative cost to most entities.
Some of the amendments in this ASU were effective upon issuance. Others have transition guidance with effective dates for annual periods beginning after December 15, 2018, for public business entities, or are conforming amendments that have been made to recently issued guidance that is not yet effective that may require application of the transition and effective date guidance in the original ASU.
The company adopted certain amendments in this ASU in the first quarter of fiscal year 2019. Those certain amendments had effective dates for annual periods beginning after December 15, 2017, for public business entities. The amendments that were adopted in the first quarter of fiscal year 2019 did not have a material impact on the company's Condensed Consolidated Financial Statements. The company plans to implement the remaining amendments beginning October 1, 2019 and is currently evaluating the potential impact on its Condensed Consolidated Financial Statements.
The company also adopted the following ASUs during fiscal year 2019, none of which had a material impact on the Condensed Consolidated Financial Statements or financial statement disclosures:
|
| | |
ASU | | Effective Date |
2016-01 | Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities | October 1, 2018 |
2016-15 | Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (a consensus of the Emerging Issues Task Force) | October 1, 2018 |
2016-16 | Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory | October 1, 2018 |
2016-18 | Statement of Cash Flows (Topic 230): Restricted Cash (a consensus of the FASB Emerging Issues Task Force) | October 1, 2018 |
2017-01 | Business Combinations (Topic 805): Clarifying the Definition of a Business | October 1, 2018 |
2017-09 | Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting | October 1, 2018 |
2017-10 | Service Concession Arrangements (Topic 853): Determining the Customer of the Operation Services (a consensus of the FASB Emerging Issues Task Force) | October 1, 2018 |
2018-03 | Technical Corrections and Improvements to Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities | October 1, 2018 |
2018-04 | Investments—Debt Securities (Topic 320) and Regulated Operations (Topic 980): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 117 and SEC Release No. 33-9273 (SEC Update) | October 1, 2018 |
2018-08 | Not-For-Profit Entities (Topic 958): Clarifying the Scope and the Accounting Guidance for Contributions Received and Contributions Made | October 1, 2018 |
6)Accounting standards to be implemented
The following represent the standards that may result in a significant change in practice and/or have a significant financial impact on the company.
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.
MERITOR, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 guidance on its accounting policies and its Condensed Consolidated Financial Statements. The company plans to implement this standard using the additional and optional transition method as provided by ASU 2018-11. Please see discussion of ASU 2018-11 below.
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 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 guidance on its accounting policies and its Condensed Consolidated Financial Statements.
In February 2018, the FASB issued ASU 2018-02, Income Statement—Reporting Comprehensive Income (Topic 220). The guidance in ASU 2018-02 allows an entity to elect to reclassify the stranded tax effects related to the Tax Cuts and Jobs Act of 2017 ("U.S. tax reform") from accumulated other comprehensive income into retained earnings. ASU 2018-02 is effective for fiscal years beginning after December 15, 2018, with early adoption permitted. The company is currently evaluating the potential impact of this new guidance on its Condensed Consolidated Financial Statements.
In July 2018, the FASB issued ASU 2018-10, Codification Improvements to Topic 842. The amendments in this ASU affect narrow aspects of the guidance issued in ASU 2016-02, Leases (Topic 842), which is not yet effective. The effective date and transition requirements for this ASU are the same as those for ASU 2016-02 as described above. Therefore, the company plans to implement this standard in the first quarter of the fiscal year beginning October 1, 2019 in connection with its planned implementation of ASU 2016-02 and is currently assessing the potential impact of this new guidance on its accounting policies and its Condensed Consolidated Financial Statements.
In July 2018, the FASB issued ASU 2018-11, Leases (Topic 842): Targeted Improvements. The amendments in this ASU affect the guidance issued in ASU 2016-02, Leases (Topic 842), which is not yet effective. The amendments provide entities with an additional (and optional) transition method to adopt the new leases standard. Under this new transition method, an entity initially applies the new leases standard at the adoption date and recognizes a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. The amendments also provide lessors with a practical expedient to not separate nonlease components from the associated lease component and, instead, to account for those components as a single component in certain circumstances. The effective date for this ASU are the same as those for ASU 2016-02 as described above. Therefore, the company plans to implement this standard in the first quarter of the fiscal year beginning October 1, 2019 in connection with its planned implementation of ASU 2016-02 and is currently assessing the potential impact of this new guidance on its accounting policies and its Condensed Consolidated Financial Statements.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement. The amendments in this ASU add, modify, and eliminate certain disclosure requirements on fair value measurements in Topic 820. The amendments in this update are effective for all entities for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Certain amendments should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. Others should be applied retrospectively. Early adoption is permitted. An entity is permitted to early adopt any removed or modified disclosures upon issuance of this ASU and delay adoption of the additional disclosures until their effective date. The company is currently evaluating the potential impact of this new guidance on its Condensed Consolidated Financial Statements.
In April 2019, the FASB issued ASU 2019-04, Codification Improvements to Topic 326, Financial Instruments—Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments. The amendments in this ASU affect a variety of Topics in the Codification (ASU 2016-01, Financial Instruments - Overall (Subtopic 825-10), Recognition and Measurement of Financial Assets and Financial Liabilities; ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments; and ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities).
For the amendments in this ASU that are applicable to ASU 2016-01, which Meritor has adopted, the effective date is the first quarter of fiscal year 2021 with early adoption permitted. For the amendments in this ASU that are applicable to ASU 2016-13, which Meritor has not yet adopted, the effective date is the first quarter of fiscal year 2021. For the amendments in this ASU that
MERITOR, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
are applicable to ASU 2017-12, which Meritor has adopted, the effective date is the first quarter of fiscal year 2020 with early adoption permitted. The company has not yet adopted any of these amendments and is currently evaluating the potential impact of this new guidance on its Condensed Consolidated Financial Statements.
4.5. Revenue
Revenue is measured based on the consideration to which the company expects to be entitled, and is presented net of any estimates of customer sales allowances, incentives, rebates, and returns. The company recognizes revenue when it satisfies a performance obligation by transferring control over a product or service to a customer.
Taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction, that are collected by the company from a customer, are excluded from revenue.
Shipping and handling costs associated with outbound freight after control of a product has transferred to a customer are accounted for as a fulfillment cost, as opposed to a distinct performance obligation, and are included in cost of sales.
Nature of goods and services
The following is a description of principal activities - separated by reportable segments - from which the company generates its revenue.
The Commercial Truck segment supplies drivetrain systems and components, including axles, drivelines and braking and suspension systems, primarily for medium- and heavy-duty trucks 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.
The Aftermarket, Industrial and 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. In addition, this segment supplies drivetrain systems and certain components, including axles, drivelines, brakes and suspension systems for military, construction, bus and coach, fire and emergency and other applications in North America and Europe. It also supplies a variety of undercarriage products and systems for trailer applications in North America.
Although the company may enter into long-term supply arrangements with its major customers, the prices and volumes are not fixed over the term of the arrangements and a contract does not exist under the scope of Topic 606 until prices and volumes are known. As such, individual customer releases or purchase orders represent the contract with the customer.
The company accounts for individual products and services separately if they are distinct (i.e., if a product or service is separately identifiable from other items and if a customer can benefit from it on its own or with other resources that are readily available to the customer). The company has identified certain performance obligations related to brake pad fitting and axle dressing where it is acting as an agent and, therefore, recognizes revenue on a net basis for satisfaction of those performance obligations.
The company recognizes revenue for the sale of goods at the point in time when the customer takes control of the goods. As such, revenue is recognized upon shipment of product and transfer of ownership to the customer. The amount of revenue recognized is based on the purchase order price and adjusted for variable consideration (i.e., customer sales allowances, incentives, rebates, and returns). Provisions for customer sales allowances, incentives, rebates, and returns are recorded as a reduction of sales at the time of revenue recognition based primarily on historical experience. The company’s payment terms with customers are customary and vary by customer and geography but typically range from 30 to 90 days.
The company provides warranties on some of its products. The company records estimated product warranty costs at the time of shipment of products to customers (see Note 16 and Note 17).
MERITOR, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Disaggregation of revenue
In the following tables, revenue is disaggregated for each of our operating segments by primary geographical market for the three and nine months ended June 30, 2019.December 31, 2019 and 2018.
MERITOR, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
| | | | Three Months Ended June 30, 2019 | | Three Months Ended December 31, 2019 |
Primary Geographical Market | | Commercial Truck | | Aftermarket, Industrial and Trailer | | Total | | Commercial Truck | | Aftermarket, Industrial and Trailer | | Total |
U.S. | | $ | 419 |
| | $ | 278 |
| | $ | 697 |
| | $ | 292 |
| | $ | 243 |
| | $ | 535 |
|
Canada | | — |
| | 18 |
| | 18 |
| | — |
| | 14 |
| | 14 |
|
Mexico | | 54 |
| | 12 |
| | 66 |
| | 34 |
| | 9 |
| | 43 |
|
Total North America | | 473 |
| | 308 |
| | 781 |
| | 326 |
| | 266 |
| | 592 |
|
Sweden | | 75 |
| | — |
| | 75 |
| | 62 |
| | — |
| | 62 |
|
Italy | | 62 |
| | 4 |
| | 66 |
| | 45 |
| | 4 |
| | 49 |
|
United Kingdom | | 40 |
| | 3 |
| | 43 |
| | 33 |
| | 2 |
| | 35 |
|
Other Europe | | 3 |
| | 16 |
| | 19 |
| | 1 |
| | 37 |
| | 38 |
|
Total Europe | | 180 |
| | 23 |
| | 203 |
| | 141 |
| | 43 |
| | 184 |
|
Brazil | | 67 |
| | — |
| | 67 |
| | 53 |
| | 1 |
| | 54 |
|
China | | 44 |
| | — |
| | 44 |
| | 34 |
| | — |
| | 34 |
|
India | | 53 |
| | — |
| | 53 |
| | 22 |
| | 1 |
| | 23 |
|
Other Asia-Pacific | | 18 |
| | — |
| | 18 |
| | 14 |
| | — |
| | 14 |
|
Total sales | | $ | 835 |
| | $ | 331 |
| | $ | 1,166 |
| | $ | 590 |
| | $ | 311 |
| | $ | 901 |
|
|
| | | | | | | | | | | | |
| | Nine Months Ended June 30, 2019 |
Primary Geographical Market | | Commercial Truck | | Aftermarket, Industrial and Trailer | | Total |
U.S. | | $ | 1,182 |
| | $ | 781 |
| | $ | 1,963 |
|
Canada | | — |
| | 53 |
| | 53 |
|
Mexico | | 151 |
| | 35 |
| | 186 |
|
Total North America | | 1,333 |
| | 869 |
| | 2,202 |
|
Sweden | | 223 |
| | — |
| | 223 |
|
Italy | | 178 |
| | 13 |
| | 191 |
|
United Kingdom | | 126 |
| | 8 |
| | 134 |
|
Other Europe | | 9 |
| | 54 |
| | 63 |
|
Total Europe | | 536 |
| | 75 |
| | 611 |
|
Brazil | | 180 |
| | — |
| | 180 |
|
China | | 129 |
| | — |
| | 129 |
|
India | | 172 |
| | — |
| | 172 |
|
Other Asia-Pacific | | 66 |
| | — |
| | 66 |
|
Total sales | | $ | 2,416 |
| | $ | 944 |
| | $ | 3,360 |
|
|
| | | | | | | | | | | | |
| | Three Months Ended December 31, 2018(1) |
Primary Geographical Market | | Commercial Truck | | Aftermarket, Industrial and Trailer | | Total |
U.S. | | $ | 350 |
| | $ | 240 |
| | $ | 590 |
|
Canada | | — |
| | 18 |
| | 18 |
|
Mexico | | 47 |
| | 10 |
| | 57 |
|
Total North America | | 397 |
| | 268 |
| | 665 |
|
Sweden | | 74 |
| | — |
| | 74 |
|
Italy | | 57 |
| | 4 |
| | 61 |
|
United Kingdom | | 41 |
| | 3 |
| | 44 |
|
Other Europe | | 3 |
| | 19 |
| | 22 |
|
Total Europe | | 175 |
| | 26 |
| | 201 |
|
Brazil | | 50 |
| | — |
| | 50 |
|
China | | 41 |
| | — |
| | 41 |
|
India | | 57 |
| | — |
| | 57 |
|
Other Asia-Pacific | | 24 |
| | — |
| | 24 |
|
Total sales | | $ | 744 |
| | $ | 294 |
| | $ | 1,038 |
|
(1) Amounts for the three months ended December 31, 2018 have been recast to reflect reportable segment changes.
Contract balances
As of June 30,December 31, 2019 and September 30, 2018,2019, Trade receivables, net, which are included in Receivables, trade and other, net, on the Condensed Consolidated Balance Sheet, were $611$451 million and $566$517 million, respectively.
For the ninethree months ended June 30,December 31, 2019 and December 31, 2018, the company had no material bad-debt expense and there were no material contract
MERITOR, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
assets, contract liabilities or deferred contract costs recorded on the Condensed Consolidated Balance Sheet as of June 30, 2019.
Contract costs
The company applies the practical expedient provided in Topic 606December 31, 2019 and recognizes the incremental costs of obtaining contracts as an expense when incurred if the amortization period of the assets that the company otherwise would have recognized is one year or less. The costs which are not capitalized are included in cost of sales.December 31, 2018.
5. Discontinued Operations
ResultsMERITOR, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
6. Leases
The company’s lease portfolio is comprised of discontinued operationsleases of real estate, including manufacturing and office facilities, and leases of personal property, including machinery and equipment and IT equipment. Operating leases with an initial term of 12 months or less are summarizednot recorded on the Condensed Consolidated Balance Sheet and related lease expense is recognized on a straight-line basis over the lease term. Short-term lease costs and variable lease costs were insignificant in the three months ended December 31, 2019.
For all asset classes, the company has elected to adopt the practical expedient under ASC 842 to not separate lease and non-lease components in contracts that contain both. These lease agreements are accounted for as follows (in millions):a single lease component for all classes of underlying assets. The company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants.
As the discount rate implicit in the lease is typically unknown, the discount rate used to determine the lease liability for the majority of our leases is the collateralized incremental borrowing rate in the applicable geographic area for a similar term and amount as the lease agreement.
Components of lease expense
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Nine Months Ended June 30, |
| 2019 | | 2018 | | 2019 | | 2018 |
Sales | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
| | | | | | | |
Income (loss) before income taxes | $ | 1 |
| | $ | (2 | ) | | $ | — |
| | $ | (4 | ) |
Benefit from income taxes | — |
| | — |
| | — |
| | 1 |
|
Income (loss) from discontinued operations attributable to Meritor, Inc. | $ | 1 |
|
| $ | (2 | ) | | $ | — |
| | $ | (3 | ) |
|
| | | |
| Three Months Ended December 31, 2019 |
Finance lease costs | $ | 1 |
|
Operating lease costs | 5 |
|
Total lease costs | $ | 6 |
|
Loss from discontinued operations attributable toThe following table provides a summary of the company for the threelocation and nine months ended June 30, 2018 was primarilyamounts related to environmental remediationfinance leases recognized in the Condensed Consolidated Balance Sheet.
|
| | | | | |
| Classification | | December 31, 2019 |
Finance lease right-of-use assets | Net Property | | $ | 7 |
|
Finance lease liabilities | Short-term debt | | 2 |
|
Finance lease liabilities | Long-term debt | | 5 |
|
The following table provides a summary of the location and changes in estimatesamounts related to legal costs incurredoperating leases recognized in connection with a previously divested business.the Condensed Consolidated Balance Sheet.
|
| | | | | |
| Classification | | December 31, 2019 |
Operating lease right-of-use assets | Other assets | | $ | 78 |
|
Operating lease liabilities | Other current liabilities | | 14 |
|
Operating lease liabilities | Other liabilities | | 64 |
|
The following tables summarize additional information related to our lease agreements.
MERITOR, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Supplemental cash flow information related to leases
|
| | | |
| Three Months Ended December 31, 2019 |
Cash paid for amounts included in the measurement of lease liabilities: | |
Operating cash flows from operating leases | $ | 5 |
|
Operating cash flows from finance leases | — |
|
Financing cash flows from finance leases | 1 |
|
Right-of-use assets obtained in exchange for lease obligations: |
|
Operating leases | 4 |
|
Finance leases | 2 |
|
Supplemental balance sheet information related to leases
|
| | |
| December 31, 2019 |
Weighted-average remaining lease term (years): | |
Operating leases | 8.7 |
|
Finance leases | 2.7 |
|
Weighted-average discount rate: | |
Operating leases | 4.5 | % |
Finance leases | 9.1 | % |
Maturities
|
| | | | | | | |
| Operating Leases | | Finance Leases |
2020 (excluding the three months ended December 31, 2019) | $ | 13 |
| | $ | 2 |
|
2021 | 16 |
| | 3 |
|
2022 | 13 |
| | 2 |
|
2023 | 11 |
| | 1 |
|
2024 | 8 |
| | — |
|
Thereafter | 35 |
| | — |
|
Total lease payments | 96 |
| | 8 |
|
Less: Impact of discounting future lease payments | (18 | ) | | (1 | ) |
Present value of lease liabilities | $ | 78 |
| | $ | 7 |
|
Disclosures related to periods prior to adoption of ASU 2016-02
Cash obligations under future minimum rental commitments under operating leases as of September 30, 2019 are shown in the table below.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2020 | | 2021 | | 2022 | | 2023 | | 2024 | | Thereafter | | Total |
Lease commitments | $ | 18 |
| | $ | 15 |
| | $ | 14 |
| | $ | 13 |
| | $ | 13 |
| | $ | 25 |
| | $ | 98 |
|
6.7. Goodwill
In accordance with 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
MERITOR, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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.
Acquisition of AA Gear & Manufacturing, Inc. Business
On April 30, 2018, the company acquired substantially all of the assets of AA Gear & Manufacturing, Inc. and its subsidiaries ("AAG") for a cash purchase price of approximately $35 million. The AAG acquisition was accounted for as a business combination. The company recorded goodwill in the amount of $12 million for the excess of consideration paid over the fair value of the individual assets acquired and liabilities assumed. This recorded goodwill consists largely of the synergies and economies of scale expected from combining the operations of the company and AAG. All of the goodwill was assigned to the Aftermarket, Industrial and Trailer reportable segment. All goodwill recognized is expected to be deductible for income tax purposes over the next 15 years.
Realignment of Reporting Units
As discussed in Note 23, the company realigned its operations in the second quarter of fiscal year 2019, resulting in a change to its reportable segments. The company’s reporting units did not change as a result of the change in reportable segments. The Commercial Truck segment contains one reporting unit. The Aftermarket, Industrial and Trailer segment contains four reporting units.
MERITOR, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
A summary of the changes in the carrying value of goodwill by the company’s two2 reportable segments are presented below (in millions):
| | | Commercial Truck | | Aftermarket, Industrial and Trailer | | Total | Commercial Truck | | Aftermarket, Industrial and Trailer | | Total |
Goodwill (1) | $ | 266 |
| | $ | 170 |
| | $ | 436 |
| $ | 261 |
| | $ | 232 |
| | $ | 493 |
|
Accumulated impairment losses (1) | — |
| | (15 | ) | | (15 | ) | — |
| | (15 | ) | | (15 | ) |
Beginning Balance at September 30, 2018 (1) | 266 |
| | 155 |
| | 421 |
| |
AAG measurement period adjustment (see Note 9) | — |
| | 3 |
| | 3 |
| |
Beginning Balance at September 30, 2019 | | 261 |
| | 217 |
| | 478 |
|
AxleTech measurement period adjustment (see Note 10) | | — |
| | 2 |
| | 2 |
|
Foreign currency translation | (3 | ) | | — |
| | (3 | ) | 4 |
| | 2 |
| | 6 |
|
Ending Balance at June 30, 2019 | $ | 263 |
| | $ | 158 |
| | $ | 421 |
| |
Ending Balance at December 31, 2019 | | $ | 265 |
| | $ | 221 |
| | $ | 486 |
|
(1) Amounts have been recast to reflect reportable segment changes (see Note 23).
7.8. Restructuring Costs
Restructuring reserves, primarily related to unpaid employee termination benefits, were $1$5 million at June 30,December 31, 2019 and $4$8 million at September 30, 2018.2019. Restructuring costs are recorded within Other operating expense, net within the Condensed Consolidated Statement of Operations. The changes in restructuring reserves for the ninethree months ended June 30,December 31, 2019 and 2018 are as follows (in millions):
| | | Employee Termination Benefits | | Plant Shutdown & Other | | Total | Total |
Beginning Balance at September 30, 2018 | $ | 4 |
| | $ | — |
| | $ | 4 |
| |
Beginning Balance at September 30, 2019 | | $ | 8 |
|
Activity during the period: | | | | |
| |
Charges to continuing operations | (2 | ) | | — |
| | (2 | ) | 5 |
|
Cash payments – continuing operations | (2 | ) | | — |
| | (2 | ) | (7 | ) |
Other | 1 |
| | — |
| | 1 |
| (1 | ) |
Total restructuring reserves at June 30, 2019 | 1 |
| | — |
| | 1 |
| |
Total restructuring reserves at December 31, 2019 | | 5 |
|
Less: non-current restructuring reserves | — |
| | — |
| | — |
| — |
|
Restructuring reserves – current, at June 30, 2019 | $ | 1 |
| | $ | — |
| | $ | 1 |
| |
Restructuring reserves – current, at December 31, 2019 | | $ | 5 |
|
| | | | | | |
Balance at September 30, 2017 | $ | 5 |
| | $ | 1 |
| | $ | 6 |
| |
Balance at September 30, 2018 | | $ | 4 |
|
Activity during the period: | | | | | | |
Charges to continuing operations | 6 |
| | — |
| | 6 |
| — |
|
Cash payments – continuing operations | (6 | ) | | (1 | ) | | (7 | ) | (1 | ) |
Total restructuring reserves at June 30, 2018 | 5 |
| | — |
| | 5 |
| |
Total restructuring reserves at December 31, 2018 | | 3 |
|
Less: non-current restructuring reserves | (1 | ) | | — |
| | (1 | ) | (1 | ) |
Restructuring reserves – current, at June 30, 2018 | $ | 4 |
| | $ | — |
| | $ | 4 |
| |
Restructuring reserves – current, at December 31, 2018 | | $ | 2 |
|
8.
MERITOR, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
9. 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
MERITOR, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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.
On December 22, 2017, the U.S. government enacted the U.S. tax reform. The U.S. tax reform made broad and complex changes to the U.S. tax code that affected the company's fiscal year ended September 30, 2018, including, but not limited to, reducing the U.S. federal corporate tax rate and requiring a one-time transition tax on certain unrepatriated earnings of foreign subsidiaries. The U.S. tax reform reduced the federal corporate tax rate to 21 percent effective January 1, 2018.
The SEC staff issued Staff Accounting Bulletin ("SAB") 118, which provides guidance on accounting for the tax effects of the U.S. tax reform. SAB 118 provides a measurement period that should not extend beyond one year from the U.S. tax reform enactment date for companies to complete the accounting under ASC 740. In accordance with SAB 118, a company must reflect the income tax effects of those aspects of the U.S. tax reform for which the accounting under ASC 740 is complete. To the extent that a company’s accounting for certain income tax effects of the U.S. tax reform is incomplete but the company is able to determine a reasonable estimate, it must record a provisional estimate in the financial statements. If a company cannot determine a provisional estimate to be included in the financial statements, it should continue to apply ASC 740 on the basis of the provisions of the tax laws that were in effect immediately before the enactment of the U.S. tax reform.
Specifically, the company included discrete tax expense in its first quarter financial statements for fiscal year 2018 related to provisional amounts under SAB 118 for the impact of the revaluation of U.S. deferred tax assets and liabilities due to the federal income tax rate reduction from 35 percent to 21 percent. Additionally, the company estimated its liability and included provisional amounts for the one-time transition tax as a discrete tax expense. The company will elect to offset the liability associated with this transition tax by utilizing foreign tax credit carryovers. The revaluation of the deferred tax assets and the transition tax resulted in a non-cash charge of $77 million in the first quarter of fiscal year 2018. In the first quarter of fiscal year 2019, a $7 million income tax net benefit was recorded which consists of an income tax benefit of $11 million for refinement of the transition tax and $4 million income tax expense for refinement of other adjustments. In the third quarter of fiscal year 2019, a $2 million income tax benefit was recored to these other adjustments.
Tax expense related to the transition tax and rate change on net deferred tax assets and liabilities as of December 31, 2018 is now considered complete under SAB 118. Additionally, as of December 31, 2018, the company has accounted for the tax impacts related to the Global Intangible Low Tax Income ("GILTI"), Base Erosion Anti Abuse Tax ("BEAT") and Foreign Derived Intangible Income ("FDII") regimes as well as all other provisions of the U.S. tax reform that are effective in fiscal year 2019. The company has elected to treat GILTI as a period cost and, therefore, has not recognized deferred taxes for basis differences that may reverse as GILTI tax in future periods.
In evaluating the ability to recover its 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. In fiscal year 2018, after sustained profitability and improved market conditions, the valuation allowance in Brazil was reversed. As of June 30,December 31, 2019, the company continues to maintain the valuation allowances in France, Germany, the U.K., 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. If, in the future, the company generates taxable income on a sustained basis, its conclusion regarding the need for valuation allowances in these jurisdictions could change.
For the three months ended June 30,December 31, 2019, the company had approximately $4$3 million of net pre-tax income compared to $7$6 million of net pre-tax income in the same period in fiscal year 2018 in tax jurisdictions in which tax expense (benefit) is not recorded.
For the nine months ended June 30, 2019 the company had approximately $12 million of net pre-tax income compared to $20 million of net pre-tax income in the same period in fiscal year 2018 in tax jurisdictions in which tax expense (benefit) is not recorded.
9.10. Acquisition and Divestiture
Acquisition of AxleTech Business
On July 26, 2019, the company acquired 100 percent of the voting equity interest of the AxleTech group companies for approximately $175$179 million in cash, subject to certain purchase price adjustments. The company funded the acquisition with the
MERITOR, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
term loan under the revolving credit agreement (see Note 18)17). The additionacquisition of AxleTech enhances Meritor’s growth platform with the addition of a complementary product portfolio that includes a full line of independent suspensions, axles, braking solutions and drivetrain components across the off-highway, defense, specialty and aftermarket markets. AxleTech will operateoperates within Meritor’s Aftermarket, Industrial and Trailer segment. The amounts of revenue and earnings, fair value of identifiable net assets and related goodwill of AxleTech are unavailable and will be disclosed in the company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2019.
Additionally, on July 29, 2019, the company approved a restructuring plan related to the integration of its acquisition of AxleTech. This restructuring plan is intended to realize certain targeted synergies following the acquisition, primarily from the elimination of cost overlap. With this restructuring plan, the Company expects to incur $11 million of total costs in the Aftermarket, Industrial and Trailer segment with approximately $7 million related to employee severance charges and approximately $4 million related to lease termination costs. Restructuring associated with severance actions are expected to be substantially completed by fiscal year 2020. The lease term expires in fiscal year 2023.
Acquisition of AAG Business
On April 30, 2018, the company acquired substantially all of the assets of AAG for a cash purchase price of approximately $35 million. AAG provides low-to-medium volume batch manufacturing for complex gear and shaft applications, as well as quick-turnaround prototyping solutions and emergency plant support. The AAG acquisition was accounted for as a business combination.
As of June 30, 2019, the company finalized all measurement period adjustments related to the AAG acquisition. Since completion of initial estimates in the fourth quarter of fiscal year 2018,2019, the company recorded $2 million in measurement period adjustments to decrease the provisional fair value of receivables acquired in the AxleTech transaction, resulting in a $4 million decrease to finite lived intangible assets, a $1corresponding $2 million increase to accounts receivable and a $3 million increase toin goodwill. The adjustments wereThis adjustment was made to reflect additional available informationinformation. The measurement period remains open to finalize the value of tangible and updated valuation results.intangible assets. The company is reviewing and may record other additional measurement period adjustments in fiscal year 2020. All goodwill resulting from the AAG acquisition of AxleTech was assigned to the Aftermarket, Industrial and Trailer reportable segment (see Note 6)7).
Divestiture of Meritor Huayang Vehicle Braking Company Ltd.
On February 7, 2018, Meritor completed the sale of its equity interest in Meritor Huayang Vehicle Braking Company Ltd. All assets and liabilities of the business were transferred at closing.
MERITOR, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
10.11. Accounts Receivable Factoring and Securitization
The company has a U.S. accounts receivable securitization facility with PNC Bank and participates in various accounts receivable factoring programs, primarily with Nordea Bank for trade receivables from AB Volvo, as follows:
| | | | Current Expiration | | Total Facility Size as of 6/30/19 | | Utilized as of 6/30/19 | | Utilized as of 9/30/18 | | Current Expiration | | Total Facility Size as of 12/31/19 | | Utilized as of 12/31/19 | | Utilized as of 9/30/19 |
| | EUR | | USD | | EUR | | USD | | EUR | | USD | | EUR | | USD | | EUR | | USD | | EUR | | USD |
On-balance sheet arrangement | | | | | | | | | | | | | | | | | | | | | | | | |
Committed U.S. accounts receivable securitization (1) | | December 2021 | | N/A |
| | $ | 110 |
| | N/A |
| | $ | 3 |
| | N/A |
| | $ | 57 |
| | December 2022 | | N/A |
| | $ | 115 |
| | N/A |
| | $ | 84 |
| | N/A |
| | $ | 13 |
|
Total on-balance sheet arrangement: (1) | | N/A |
| | $ | 110 |
| | N/A |
| | $ | 3 |
| | N/A |
| | $ | 57 |
| | N/A |
| | $ | 115 |
| | N/A |
| | $ | 84 |
| | N/A |
| | $ | 13 |
|
Off-balance sheet arrangements | | | | | | | | | | | | | | | | | | | | | | | | |
Committed Swedish factoring facility (2)(3) | | March 2020 | | € | 155 |
| | $ | 176 |
| | € | 140 |
| | $ | 160 |
| | € | 136 |
| | $ | 158 |
| | March 2020 (5) | | € | 155 |
| | $ | 169 |
| | € | 128 |
| | $ | 140 |
| | € | 109 |
| | $ | 119 |
|
Committed U.S. factoring facility (2) | | February 2023 | | N/A |
| | 75 |
| | N/A |
| | 70 |
| | 45 |
| | 53 |
| | February 2023 | | N/A |
| | 75 |
| | N/A |
| | 55 |
| | N/A |
| | 58 |
|
Uncommitted U.K. factoring facility | | February 2022 | | 25 |
| | 28 |
| | 10 |
| | 11 |
| | 8 |
| | 9 |
| | February 2022 | | 25 |
| | 27 |
| | 3 |
| | 4 |
| | 6 |
| | 6 |
|
Uncommitted Italy factoring facility | | June 2022 | | 30 |
| | 34 |
| | 30 |
| | 34 |
| | 24 |
| | 28 |
| | June 2022 | | 30 |
| | 33 |
| | 21 |
| | 23 |
| | 21 |
| | 23 |
|
Other uncommitted factoring facilities (4) | | None | | N/A |
| | N/A |
| | 18 |
| | 19 |
| | 11 |
| | 12 |
| | None | | N/A |
| | N/A |
| | 17 |
| | 18 |
| | 18 |
| | 20 |
|
Total off-balance sheet arrangements | | € | 210 |
| | $ | 313 |
| | € | 198 |
| | $ | 294 |
| | € | 224 |
| | $ | 260 |
| | € | 210 |
| | $ | 304 |
| | € | 169 |
| | $ | 240 |
| | € | 154 |
| | $ | 226 |
|
(1) Availability subject to adequate eligible accounts receivable available for sale. The utilized amount includes $3 million and $11$4 million of letters of credit as of June 30,December 31, 2019 and September 30, 2018, respectively.2019.
(2) Actual amounts may exceed the bank's commitment at the bank's discretion.
(3) The facility is backed by a 364-day liquidity commitment from Nordea Bank which extends through January 10,June 22, 2020.
(4) There is no explicit facility size under the agreement, but the counterparty approves the purchase of receivable tranches at its discretion.
On-balance sheet(5) The company is working to extend this arrangement
U.S. Securitization Facility: The company's U.S. accounts receivables securitization facility with PNC Bank is subject to a maximum permitted priority debt-to-EBITDA ratio as of the last day of each fiscal quarter under the facility of 2.25 to 1.00. Under this program, the company has the ability to sell an undivided percentage ownership interest in substantially all of before 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. This securitization program contains a cross default to the company's 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.current maturity date.
Off-balance sheet arrangements
Total costs associated with all of the off-balance sheet arrangements described above were $2 million and $1 million for the three months ended June 30,December 31, 2019 and 2018, respectively. Total costs associated with all of the off-balance sheet arrangements described above were $5 million and $3 million in the nine months ended June 30, 2019 and 2018, respectively, and are included in selling, general and administrative expenses in the Condensed Consolidated StatementsStatement of Operations.
MERITOR, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
11. 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, |
| 2019 | | 2018 |
OPERATING ACTIVITIES | | | |
Net income | $ | 255 |
| | $ | 93 |
|
Less: Loss from discontinued operations, net of tax | — |
| | (3 | ) |
Income from continuing operations | 255 |
| | 96 |
|
Adjustments to income from continuing operations to arrive at cash provided by operating activities: | | | |
Depreciation and amortization | 64 |
| | 64 |
|
Deferred income tax expense | 27 |
| | 92 |
|
Loss on debt extinguishment | — |
| | 8 |
|
Restructuring costs | (2 | ) | | 6 |
|
Asset impairment charges | 1 |
| | 2 |
|
Equity in earnings of affiliates | (24 | ) | | (20 | ) |
Pension and retiree medical income | (28 | ) | | (23 | ) |
Asbestos related liability remeasurement | (31 | ) | | — |
|
Other adjustments to income from continuing operations | 13 |
| | 13 |
|
Dividends received from equity method investments | 14 |
| | 9 |
|
Pension and retiree medical contributions | (12 | ) | | (17 | ) |
Restructuring payments | (2 | ) | | (7 | ) |
Changes in off-balance sheet accounts receivable securitization and factoring programs | 41 |
| | 65 |
|
Changes in receivables, inventories and accounts payable | (96 | ) | | (136 | ) |
Changes in other current assets and liabilities | (21 | ) | | 26 |
|
Changes in other assets and liabilities | (3 | ) | | 12 |
|
Operating cash flows provided by continuing operations | 196 |
| | 190 |
|
Operating cash flows provided by (used for) discontinued operations | (2 | ) | | 1 |
|
CASH PROVIDED BY OPERATING ACTIVITIES | $ | 194 |
| | $ | 191 |
|
12. 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, 2019 | | September 30, 2018 | December 31, 2019 | | September 30, 2019 |
Finished goods | $ | 154 |
| | $ | 170 |
| $ | 159 |
| | $ | 153 |
|
Work in process | 42 |
| | 41 |
| 44 |
| | 39 |
|
Raw materials, parts and supplies | 295 |
| | 266 |
| 353 |
| | 334 |
|
Total | $ | 491 |
| | $ | 477 |
| $ | 556 |
| | $ | 526 |
|
13. Net Property
MERITOR, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
13. Other Current Assets
Other current assets are summarized as follows (in millions):
|
| | | | | | | |
| June 30, 2019 | | September 30, 2018 |
Asbestos-related recoveries (see Note 21) | $ | 8 |
| | $ | 16 |
|
Prepaid and other | 24 |
| | 30 |
|
Other current assets | $ | 32 |
| | $ | 46 |
|
14. Net Property
Net property is summarized as follows (in millions):
| | | June 30, 2019 | | September 30, 2018 | December 31, 2019 | | September 30, 2019 |
Property at cost: | | | | | | |
Land and land improvements | $ | 30 |
| | $ | 29 |
| $ | 31 |
| | $ | 31 |
|
Buildings | 228 |
| | 228 |
| 228 |
| | 224 |
|
Machinery and equipment | 928 |
| | 914 |
| 962 |
| | 935 |
|
Company-owned tooling | 136 |
| | 130 |
| 142 |
| | 136 |
|
Construction in progress | 66 |
| | 81 |
| 67 |
| | 74 |
|
Total | 1,388 |
| | 1,382 |
| 1,430 |
| | 1,400 |
|
Less: accumulated depreciation | (907 | ) | | (899 | ) | (913 | ) | | (885 | ) |
Net property | $ | 481 |
| | $ | 483 |
| $ | 517 |
| | $ | 515 |
|
15.14. Other Assets
Other assets are summarized as follows (in millions):
| | | June 30, 2019 | | September 30, 2018 | December 31, 2019 | | September 30, 2019 |
Investments in non-consolidated joint ventures | $ | 113 |
| | $ | 102 |
| $ | 115 |
| | $ | 110 |
|
Asbestos-related recoveries (see Note 21) | 57 |
| | 76 |
| |
Unamortized revolver debt issuance costs | 8 |
| | 7 |
| |
Capitalized software costs, net | 20 |
| | 26 |
| |
Deferred income tax assets, net | 113 |
| | 140 |
| 139 |
| | 122 |
|
Assets for uncertain tax positions | 52 |
| | 53 |
| |
Prepaid pension costs | 166 |
| | 152 |
| 163 |
| | 149 |
|
Intangible assets (1) | 13 |
| | 18 |
| |
Other | 25 |
| | 22 |
| 297 |
| | 225 |
|
Other assets | $ | 567 |
| | $ | 596 |
| $ | 714 |
| | $ | 606 |
|
MERITOR, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
| |
(1)
| Primarily relates to customer relationships. As of June 30, 2019, the gross carrying value was $18 million and the accumulated amortization was $5 million. As of September 30, 2018, the gross carrying value was $22 million and the accumulated amortization was $4 million. The weighted average amortization periods for customer relationships is approximately 19 years. |
The company holds a variable interest in a joint venture that is a variable interest entity ("VIE") 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. As of June 30, 2019 and September 30, 2018, the company’s investment in the joint venture was $68 million and $63 million, respectively.
TransPower
Meritor completed a $3 million investment in Transportation Power, Inc. ("TransPower") in each of the first and third quarters of fiscal year 2019. Investments of $3 million in TransPower were also made in each of the first and third quarters of fiscal year 2018. The company holds a variable interest in TransPower, a VIE. TransPower develops electrical drive solutions and supplies integrated drive systems, full electric truck solutions and energy-storage subsystems to major manufacturers of trucks, school buses, refuse vehicles and terminal tractors. The company is not the primary beneficiary of TransPower, as other owners have control over the significant activities of TransPower, including the development of intellectual property and manufacturing. Therefore, the company does not consolidate TransPower. As of June 30, 2019 and September 30, 2018, the company’s investment in TransPower was $12 million and $6 million, respectively, representing the company’s maximum exposure to loss.
16.15. Other Current Liabilities
Other current liabilities are summarized as follows (in millions):
|
| | | | | | | |
| June 30, 2019 | | September 30, 2018 |
Compensation and benefits | $ | 108 |
| | $ | 122 |
|
Income taxes | 12 |
| | 27 |
|
Taxes other than income taxes | 17 |
| | 25 |
|
Accrued interest | 14 |
| | 11 |
|
Product warranties | 18 |
| | 19 |
|
Environmental reserves (see Note 21) | 8 |
| | 8 |
|
Restructuring (see Note 7) | 1 |
| | 3 |
|
Asbestos-related liabilities (see Note 21) | 9 |
| | 18 |
|
Indemnity obligations | 1 |
| | 1 |
|
Accrued payable to Maremont (see Note 21) | 48 |
| | — |
|
Other | 60 |
| | 56 |
|
Other current liabilities | $ | 296 |
| | $ | 290 |
|
|
| | | | | | | |
| December 31, 2019 | | September 30, 2019 |
Compensation and benefits | $ | 87 |
| | $ | 125 |
|
Product warranties | 17 |
| | 18 |
|
Other | 160 |
| | 142 |
|
Other current liabilities | $ | 264 |
| | $ | 285 |
|
Compensation and benefits includes the current portion of pension and retiree medical liability, accrued incentive compensation, salary and wages and accrued vacation, holiday and sick leave pay.
MERITOR, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
A summary of the changes in product warranties is as follows (in millions):
| | | Nine Months Ended June 30, | Three Months Ended December 31, |
| 2019 | | 2018 | 2019 | | 2018 |
Total product warranties – beginning of period | $ | 54 |
| | $ | 45 |
| $ | 50 |
| | $ | 54 |
|
Accruals for product warranties | 21 |
| | 14 |
| 3 |
| | 7 |
|
Payments | (18 | ) | | (12 | ) | (7 | ) | | (5 | ) |
Change in estimates and other | (5 | ) | | 4 |
| — |
| | (1 | ) |
Total product warranties – end of period | 52 |
| | 51 |
| 46 |
| | 55 |
|
Less: Non-current product warranties | (34 | ) | | (33 | ) | (29 | ) | | (36 | ) |
Product warranties – current | $ | 18 |
| | $ | 18 |
| $ | 17 |
| | $ | 19 |
|
17.
MERITOR, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
16. Other Liabilities
Other liabilities are summarized as follows (in millions):
|
| | | | | | | |
| June 30, 2019 | | September 30, 2018 |
Asbestos-related liabilities (see Note 21) | $ | 91 |
| | $ | 193 |
|
Restructuring (see Note 7) | — |
| | 1 |
|
Non-current deferred income tax liabilities | 16 |
| | 16 |
|
Liabilities for uncertain tax positions | 48 |
| | 48 |
|
Product warranties (see Note 16) | 34 |
| | 35 |
|
Environmental (see Note 21) | 7 |
| | 9 |
|
Indemnity obligations | 8 |
| | 9 |
|
Other | 30 |
| | 21 |
|
Other liabilities | $ | 234 |
| | $ | 332 |
|
|
| | | | | | | |
| December 31, 2019 | | September 30, 2019 |
Asbestos-related liabilities (see Note 20) | $ | 81 |
| | $ | 82 |
|
Product warranties (see Note 15) | 29 |
| | 32 |
|
Other | 189 |
| | 112 |
|
Other liabilities | $ | 299 |
| | $ | 226 |
|
18.17. Long-Term Debt
Long-Term debt, net of discounts where applicable, is summarized as follows (in millions):
|
| | | | | | | |
| December 31, 2019 | | September 30, 2019 |
3.25 percent convertible notes due 2037 | $ | 319 |
| | $ | 319 |
|
7.875 percent convertible notes due 2026 | 23 |
| | 23 |
|
Term loan due 2024 | 172 |
| | 175 |
|
6.25 percent notes due 2024 | 445 |
| | 444 |
|
Financing lease obligation | 7 |
| | 7 |
|
Borrowings and securitization | 145 |
| | 9 |
|
Unamortized discount on convertible notes | (32 | ) | | (34 | ) |
Subtotal | 1,079 |
| | 943 |
|
Less: current maturities | (178 | ) | | (41 | ) |
Long-term debt | $ | 901 |
| | $ | 902 |
|
|
| | | | | | | |
| June 30, 2019 | | September 30, 2018 |
3.25 percent convertible notes due 2037(1)(3) | $ | 319 |
| | $ | 318 |
|
4.0 percent convertible notes due 2027(1)(4) | — |
| | 24 |
|
7.875 percent convertible notes due 2026(1)(5) | 22 |
| | 22 |
|
6.25 percent notes due 2024(2)(6) | 444 |
| | 444 |
|
Capital lease obligation | 7 |
| | 7 |
|
Borrowings and securitization | — |
| | 46 |
|
Unamortized discount on convertible notes(7) | (34 | ) | | (37 | ) |
Subtotal | 758 |
| | 824 |
|
Less: current maturities | (24 | ) | | (94 | ) |
Long-term debt | $ | 734 |
| | $ | 730 |
|
(1)
The 3.25 percent, 4.0 percent and 7.875 percent convertible notes contain a put and call feature, which allows for earlier redemption beginning in 2025, 2019 and 2020, respectively.
(2) The 6.25 percent notes contain a call option, which allows for early redemption by Meritor.
(3) The 3.25 percent convertible notes are presented net of $6 million and $7 million unamortized issuance costs as of June 30, 2019 and September 30, 2018, respectively.
(4) The 4.0 percent convertible notes were presented net of unamortized issuance costs of an insignificant amount as of September 30, 2018.
MERITOR, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(5) The 7.875 percent convertible notes are presented net of unamortized issuance costs of an insignificant amount as of June 30, 2019 and September 30, 2018, and $1 million original issuance discount as of June 30, 2019 and September 30, 2018.
(6) The 6.25 percent notes are presented net of $6 million unamortized issuance costs as of June 30, 2019 and September 30, 2018.
(7) The carrying amount of the equity component related to convertible debt.
Repurchase of Debt Securities
On February 15, 2019, the company redeemed $19 million aggregate principal amount outstanding of the company's 4.0 percent senior convertible notes due 2027 ("the 4.0 Percent Convertible Notes") at a price of 100 percent of the accreted principal amount, plus accrued and unpaid interest. On June 7, 2019, the company redeemed the remaining $5 million aggregate principal amount outstanding of the 4.0 Percent Convertible Notes at a price equal to 100 percent of the accreted principal amount, plus accrued and unpaid interest. The 4.0 Percent Convertible Notes were classified as current as of September 30, 2018 as the securities were redeemable at the option of the holder on February 15, 2019, at a repurchase price in cash equal to 100 percent of the accreted principal amount of the securities to be repurchased, plus accrued and unpaid interest.
Current Classification of 7.875 Percent Convertible Notes
The 7.875 percent senior convertible notes due 2026 ("the 7.875(the "7.875 Percent Convertible Notes") were classified as current as of June 30,December 31, 2019 as the holders are entitled to convert all or a portion of their 7.875 Percent Convertible Notes at any time beginning JulyJanuary 1, 20192020 and prior to the close of business on September 30, 2019March 31, 2020 at a rate of 83.3333 shares of common stock per $1,000 principal amount at maturity of the 7.875 Percent Convertible Notes (representing a conversion price of approximately $12.00 per share). The 7.875 Percent Convertible 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 28,December 31, 2019 was greater than 120 percent of the $12.00 conversion price associated with the 7.875 Percent Convertible Notes.
The 7.875 Percent Convertible Notes were also classified as current as of September 30, 2018 as the holders were entitled to convert all or a portion of their 7.875 Percent Convertible Notes at any time beginning October 1, 2018 and prior to the close of business on December 31, 2018 at a rate of 83.3333 shares of common stock per $1,000 principal amount at maturity of the 7.875 Percent Convertible Notes (representing a conversion price of approximately $12.00 per share). The 7.875 Percent Convertible Notes were 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 September 28, 2018 was greater than 120 percent of the $12.00 conversion price associated with the 7.875 Percent Convertible Notes.2019.
The 7.875 Percent Convertible Notes surrendered for conversion, if any, would be settled in cash up to the principal amount at maturity of the 7.875 Percent Convertible 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 7.875 Percent Convertible 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 7.875 Percent Convertible Notes.
As a result of the 7.875 Percent Convertible Notes becoming currently convertible for cash up to the principal amount of $23 million at the holder's option, $1 million of permanent equity was reclassified as mezzanine equity as of June 30, 2019 and September 30, 2018.
Revolving Credit Facility
On June 7, 2019, the company amended and restated its revolving credit facility. Pursuant to the revolving credit agreement as amended, the company has a $625 million revolving credit facility and a $175 million term loan facility, intendedwhich was utilized for the company's acquisition of AxleTech, that mature in June 2024 (with a springing maturity in November 2023 if the outstanding amount of the 6.25 percent notes due 2024 is greater than $75 million at that time). The availability under the revolving credit facility is dependent upon various factors, including performance against certain financial covenants as highlighted below.
MERITOR, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The availability under the revolving credit facility is subject to certain financial covenants based on the ratio of the company’s priority debt (consisting principally of amounts outstanding under the revolving credit facility, the U.S. accounts receivable securitization and factoring programs, and third-party non-working capital foreign debt) to EBITDA. The company is required to maintain a total priority debt-to-EBITDA ratio, as defined in the revolving credit agreement, of 2.25 to 1.00 or less as of the last day of each fiscal quarter throughout the term of the agreement.
MERITOR, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 either the company’s current corporate credit rating or its total leverage ratio, as defined in the revolving credit agreement. At June 30,December 31, 2019, the margin over LIBOR rate was 200 basis points and the commitment fee was 30 basis points. Overnight revolving credit loans are at the prime rate plus a margin of 100 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 24)23).
At JuneDecember 31, 2019, there were $65 million in borrowings outstanding under the revolving credit facility. At September 30, 2019, and September 30, 2018, there were no0 borrowings outstanding under the revolving credit facility. The amended and extended revolving credit facility includes $100 million of availability for the issuance of letters of credit. At June 30,December 31, 2019 and September 30, 2018,2019, there were no0 letters of credit outstanding under the revolving credit facility.
Capital Leases
The company had $7 million of outstanding capital lease arrangements at both June 30, 2019 and September 30, 2018.
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 expired in March 2019, the company had the right to obtain the issuance, renewal, extension and increase of letters of credit up to an aggregate availability of $25 million. This facility contained covenants and events of default generally similar to those existing in the company’s public debt indentures. There were $1 million of letters of credit outstanding under this facility at September 30, 2018. On March 20, 2019, the company allowed this facility to expire. The letters of credit previously provided under this facility were replaced with letters of credit issued under the company’s U.S. accounts receivables securitization facility with PNC Bank. The company had another $12 million and $19 million of letters of credit outstanding through other letter of credit facilities as of June 30, 2019 and September 30, 2018, respectively.
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,December 31, 2019 and September 30, 2018,2019, the company had $25$18 million and $22$30 million, respectively, outstanding under this program at more than one bank.
19.18. Financial Instruments
Fair values of financial instruments are summarized as follows (in millions):
| | | June 30, 2019 | | September 30, 2018 | December 31, 2019 | | September 30, 2019 |
| Carrying Value | | Fair Value | | Carrying Value | | Fair Value | Carrying Value | | Fair Value | | Carrying Value | | Fair Value |
Cash and cash equivalents | $ | 111 |
| | $ | 111 |
| | $ | 115 |
| | $ | 115 |
| $ | 108 |
| | $ | 108 |
| | $ | 108 |
| | $ | 108 |
|
Short-term debt | 24 |
| | 51 |
| | 94 |
| | 116 |
| 178 |
| | 208 |
| | 41 |
| | 60 |
|
Long-term debt | 734 |
| | 806 |
| | 730 |
| | 776 |
| 901 |
| | 987 |
| | 902 |
| | 953 |
|
Foreign exchange forward contracts (other assets) | 1 |
| | 1 |
| | 2 |
| | 2 |
| 2 |
| | 2 |
| | — |
| | — |
|
Foreign exchange forward contracts (other liabilities) | 1 |
| | 1 |
| | — |
| | — |
| |
Foreign currency option contracts (other assets) | — |
| | — |
| | — |
| | — |
| 1 |
| | 1 |
| | — |
| | — |
|
Cross-currency swaps (other assets) | — |
| | — |
| | 6 |
| | 6 |
| 6 |
| | 6 |
| | 10 |
| | 10 |
|
Cross-currency swaps (other liabilities) | 5 |
| | 5 |
| | — |
| | — |
| 5 |
| | 5 |
| | 5 |
| | 5 |
|
MERITOR, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following table reflects the offsetting of derivative assets and liabilities (in millions):
| | | June 30, 2019 | | September 30, 2018 | December 31, 2019 | | September 30, 2019 |
| Gross Amounts Recognized | | Gross Amounts Offset | | Net Amounts Reported | | Gross Amounts Recognized | | Gross Amounts Offset | | Net Amounts Reported | Gross Amounts Recognized | | Gross Amounts Offset | | Net Amounts Reported | | Gross Amounts Recognized | | Gross Amounts Offset | | Net Amounts Reported |
Derivative Assets | | | | | | | | | | | | | | | | | | | | | | |
Foreign exchange forward contracts | 1 |
| | — |
| | 1 |
| | 2 |
| | — |
| | 2 |
| 2 |
| | — |
| | 2 |
| | — |
| | — |
| | — |
|
Cross-currency swaps | — |
| | — |
| | — |
| | 6 |
| | — |
| | 6 |
| 6 |
| | — |
| | 6 |
| | 10 |
| | — |
| | 10 |
|
Foreign currency option contracts | | 1 |
| | — |
| | 1 |
| | — |
| | — |
| | — |
|
Derivative Liabilities | | | | | | | | | | | | | | | | | | | | | | |
Foreign exchange forward contracts | 1 |
| | — |
| | 1 |
| | — |
| | — |
| | — |
| |
Cross-currency swaps | 5 |
| | — |
| | 5 |
| | — |
| | — |
| | — |
| 5 |
| | — |
| | 5 |
| | 5 |
| | — |
| | 5 |
|
Fair Value
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,December 31, 2019 is as follows (in millions):
| | | Level 1 | | Level 2 | | Level 3 | Level 1 | | Level 2 | | Level 3 |
Cash and cash equivalents | $ | 111 |
| | $ | — |
| | $ | — |
| $ | 108 |
| | $ | — |
| | $ | — |
|
Short-term debt | — |
| | 49 |
| | 2 |
| — |
| | 132 |
| | 76 |
|
Long-term debt | — |
| | 801 |
| | 5 |
| — |
| | 818 |
| | 169 |
|
Foreign exchange forward contracts (other assets) | — |
| | 1 |
| | — |
| — |
| | 2 |
| | — |
|
Foreign exchange forward contracts (other liabilities) | — |
| | — |
| | 1 |
| — |
| | — |
| | — |
|
Foreign currency option contracts (other assets) | — |
| | — |
| | — |
| — |
| | 1 |
| | — |
|
Cross-currency Swap (other assets) | — |
| | — |
| | — |
| |
Cross-currency swaps (other assets) | | — |
| | 6 |
| | — |
|
Cross-currency swaps (other liabilities) | — |
| | 5 |
| | — |
| — |
| | 5 |
| | — |
|
MERITOR, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Fair value of financial instruments by the valuation hierarchy at September 30, 20182019 is as follows (in millions):
| | | Level 1 | | Level 2 | | Level 3 | Level 1 | | Level 2 | | Level 3 |
Cash and cash equivalents | $ | 115 |
| | $ | — |
| | $ | — |
| $ | 108 |
| | $ | — |
| | $ | — |
|
Short-term debt | — |
| | 114 |
| | 2 |
| — |
| | 49 |
| | 11 |
|
Long-term debt | — |
| | 771 |
| | 5 |
| — |
| | 782 |
| | 171 |
|
Foreign exchange forward contracts (other assets) | — |
| | 2 |
| | — |
| |
Foreign exchange forward contracts (other liabilities) | — |
| | — |
| | — |
| — |
| | — |
| | — |
|
Foreign currency option contracts (other assets) | — |
| | — |
| | — |
| — |
| | — |
| | — |
|
Cross-currency swap (other assets) | — |
| | 6 |
| | — |
| |
Cross-currency swaps (other assets) | | — |
| | 10 |
| | — |
|
Cross-currency swaps (other liabilities) | | — |
| | 5 |
| | — |
|
No transfers of assets between any of the Levels occurred during the three and nine months ended June 30,December 31, 2019 and 2018.
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, 2019 or September 30, 2018.
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 18 months or less to hedge its exposure to changes in foreign currency exchange rates. As of June 30,December 31, 2019 and September 30, 2018,2019, the notional amount of the company's foreign exchange contracts outstanding under its foreign currency cash flow hedging program was $118$85 million and $154$110 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 cash flow hedges, changes in the fair value of the contracts is recorded in Accumulated Other Comprehensive LossIncome (Loss) in the statement of shareholders’ equity and is recognized in operating income when the underlying forecasted transaction impacts earnings.
Foreign exchange swap contracts - The company uses foreign exchange swap purchase and sale contracts with terms of 18 months or less to hedge its exposure related to changes in foreign currency exchange rates on short term intercompany loans. As of December 31, 2019, the notional amount of the company’s foreign exchange swap contracts was $72 million. As of September 30, 2019, there were 0 foreign exchange swap contracts outstanding. 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 Condensed Consolidated Statement of Operations.
Foreign currency option contracts — The company uses option contracts to mitigate foreign exchange exposure on expected future Indian Rupee-denominatedforeign currency-denominated purchases. As of June 30,December 31, 2019 and September 30, 2018,2019, the notional amount of the company's Indian rupee foreign exchange contracts outstanding was $114$105 million and $180$139 million, respectively. 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 Condensed Consolidated Statement of Operations.
The company uses option contracts to mitigate the risk of volatility in the translation of euroforeign currency earnings to U.S. dollars. As of JuneDecember 31, 2019 and September 30, 2019, the notional amount of the company's euro option contracts outstanding was $12 million. As of September 30, 2018, there were no euro option contracts outstanding.$64 million and $28 million, respectively. These option contracts did not qualify for a hedge accounting election. Changes in fair value associated with these contracts are recorded in the Condensed Consolidated Statement of Operations in other income, net.
The company uses option contracts to mitigate the risk of volatility in the translation of Swedish krona to U.S. dollars. As of June 30, 2019, the notional amount of the company's Swedish krona option contracts outstanding was $18 million. As of September 30, 2018, there were no Swedish krona option contracts outstanding. These option contracts did not qualify for a hedge accounting election. Changes in fair value associated with these contracts are recorded in the Condensed Consolidated Statement of Operations in other income, net.
The company uses option contracts to mitigate foreign exchange exposure on expected future South Korean won-denominated purchases. As of June 30, 2019 and September 30, 2018, the notional amount of the company's South Korean won option contracts outstanding was $48 million and $41 million, respectively. 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 Condensed Consolidated Statement of Operations.
The company uses foreign currency option contracts to mitigate foreign currency exposure on expected future Brazilian real-denominated purchases. As of June 30, 2019, there were no Brazilian real option contracts outstanding. As of September 30, 2018, the notional amount of the company's Brazilian real option contracts outstanding was $16 million. The company did not elect
MERITOR, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
hedge accounting for these derivatives. Changes in fair value associated with these contracts are recorded in cost of sales in the Condensed Consolidated Statement of Operations.
The fair value of foreign currency option contracts is based on third-party proprietary models, which incorporate inputs at varying unobservable weights of quoted spot rates, market volatility, forward rates and time utilizing market instruments with similar quality and maturity characteristics.
Cross-currency swap contracts — The company uses cross-currency swap contracts to hedge a portion of its net investment in a foreign subsidiary against volatility in foreign exchange rates. These derivative instruments are designated and qualify as hedges of net investments in foreign operations using the spot method to assess effectiveness. Changes in fair values of the instruments are recognized in foreign currency translation adjustments, a component of other comprehensive income (loss) in the
MERITOR, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Condensed Consolidated Statement of Comprehensive Income (Loss), to offset the changes in the values of the net investments being hedged.
In the third quarter of fiscal year 2018,2019, the company entered into multiple cross-currency swaps with a combined notional amount of $225 million with maturities in May 2021. These swaps hedged a portion of the net investment in a certain European subsidiary against volatility in the euro/U.S. dollar foreign exchange rate.
In the third quarter of fiscal year 2019, the company unwound these cross-currency swaps and received proceeds of $19 million, $2 million of which related to net accrued interest receivable. The company also entered into multiple new cross-currency swaps with a combined notional amount of $225 million, with maturities in October 2022. As of both June 30,December 31, 2019 and September 30, 2018,2019, the notional amount of the company's cross-currency swap contracts outstanding was $225 million. These swaps hedge a portion of the net investment in a certain European subsidiary against volatility in the euro/U.S. dollar foreign exchange rate.
The fair value of cross-currency swap 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.
MERITOR, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
20.19. Retirement Benefit Liabilities
Retirement benefit liabilities consisted of the following (in millions):
| | | June 30, 2019 | | September 30, 2018 | December 31, 2019 | | September 30, 2019 |
Retiree medical liability | $ | 79 |
| | $ | 86 |
| $ | 66 |
| | $ | 67 |
|
Pension liability | 163 |
| | 182 |
| 263 |
| | 271 |
|
Other | 15 |
| | 13 |
| 18 |
| | 14 |
|
Subtotal | 257 |
| | 281 |
| 347 |
| | 352 |
|
Less: current portion (included in compensation and benefits, Note 16) | (19 | ) | | (19 | ) | |
Less: current portion (included in compensation and benefits, Note 15) | | (17 | ) | | (16 | ) |
Retirement benefits | $ | 238 |
| | $ | 262 |
| $ | 330 |
| | $ | 336 |
|
The components of net periodic pension and retiree medical income included in continuing operations for the three months ended June 30December 31 are as follows (in millions):
| | | 2019 | | 2018 | 2019 | | 2018 |
| Pension | | Retiree Medical | | Pension | | Retiree Medical | Pension | | Retiree Medical | | Pension | | Retiree Medical |
Interest cost | $ | 13 |
| | $ | 1 |
| | $ | 14 |
| | $ | 1 |
| $ | (11 | ) | | $ | — |
| | $ | (13 | ) | | $ | (1 | ) |
Assumed return on plan assets | (24 | ) | | — |
| | (25 | ) | | — |
| 24 |
| | — |
| | 24 |
| | — |
|
Amortization of prior service costs | — |
| | (9 | ) | | — |
| | (9 | ) | |
Amortization of prior service benefit | | — |
| | 9 |
| | — |
| | 9 |
|
Recognized actuarial loss | 6 |
| | 4 |
| | 7 |
| | 5 |
| (8 | ) | | (4 | ) | | (6 | ) | | (4 | ) |
Total income | $ | (5 | ) | | $ | (4 | ) | | $ | (4 | ) | | $ | (3 | ) | $ | 5 |
| | $ | 5 |
| | $ | 5 |
| | $ | 4 |
|
The components of net periodic pension and retiree medical income included in continuing operations for the nine months ended June 30 are as follows (in millions):
|
| | | | | | | | | | | | | | | |
| 2019 | | 2018 |
| Pension | | Retiree Medical | | Pension | | Retiree Medical |
Interest cost | $ | 40 |
| | $ | 2 |
| | $ | 41 |
| | $ | 2 |
|
Assumed return on plan assets | (73 | ) | | — |
| | (74 | ) | | — |
|
Amortization of prior service costs | — |
| | (26 | ) | | — |
| | (26 | ) |
Recognized actuarial loss | 17 |
| | 12 |
| | 21 |
| | 13 |
|
Total income | $ | (16 | ) | | $ | (12 | ) | | $ | (12 | ) | | $ | (11 | ) |
For the three months ended June 30,December 31, 2019 and 2018, the non-service cost components of the net periodic pension and Other Post-Employment Benefits ("OPEB") income were $9$10 million and $7$9 million, respectively, and are presented in other income. For the nine months ended June 30, 2019 and 2018, the non-service cost components of the net periodic pension and OPEBOther income, were $28 million and $23 million, respectively, and are presented in other income. We used the practical expedient for retrospective presentation of the 2018 other expense components in this disclosure. Refer to Note 3 for additional details on the adoption of ASU 2017-07.net.
MERITOR, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
21.20. 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.
MERITOR, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The company has been designated as a potentially responsible party at ten10 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. Superfund is a United States federal government program designed to fund the cleanup of sites contaminated with hazardous substances and pollutants. Management estimates the total reasonably possible costs the company could incur for the remediation of the ten10 Superfund sites at June 30,December 31, 2019 to be approximately $23 million, of which $11 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,December 31, 2019 to be approximately $13 million, of which $4 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 2.251.50 to 3.002.25 percent and is approximately $13$15 million at June 30,December 31, 2019. The undiscounted estimate of these costs is approximately $14$16 million.
The following are the components of the Superfund and non-Superfund environmental reserves (in millions):
| | | Superfund Sites | | Non-Superfund Sites | | Total | Superfund Sites | | Non-Superfund Sites | | Total |
Beginning Balance at September 30, 2018 | $ | 12 |
| | $ | 5 |
| | $ | 17 |
| |
Beginning Balance at September 30, 2019 | | $ | 11 |
| | $ | 4 |
| | $ | 15 |
|
Payments and other | (3 | ) | | (2 | ) | | (5 | ) | (1 | ) | | — |
| | (1 | ) |
Accruals | 2 |
| | 1 |
| | 3 |
| 1 |
| | — |
| | 1 |
|
Ending Balance at June 30, 2019 | $ | 11 |
| | $ | 4 |
| | $ | 15 |
| |
Ending Balance at December 31, 2019 | | $ | 11 |
| | $ | 4 |
| | $ | 15 |
|
Environmental reserves are included in Other Current Liabilities (see Note 16)15) and Other Liabilities (see Note 17)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.
MERITOR, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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. However, plaintiffs’ motion to remand the case to the Chancery Court was granted in March 2018. In April, May and July 2018, the company was served with additional property damage, personal injury and wrongful death lawsuits naming the company and others as defendants, which were brought by current and former residents of the same neighborhood. The company entered into settlement negotiations with plaintiffs and recorded an accrual in the second quarter of fiscal year 2019.
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 1,700 pending asbestos-related claims at September 30, 2018. 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 Bankruptcy Filing: In the first quarter of fiscal year 2019, Maremont and its three wholly-owned subsidiaries, Maremont Exhaust Products, Inc., AVM, Inc., and Former Ride Control Operating Company, Inc., began to solicit votes from asbestos claimants in favor of a Joint Pre-Packaged Plan of Reorganization (the "Plan"). On January 18, 2019, the Plan was approved by voting asbestos claimants and, on January 22, 2019, Maremont and its subsidiaries voluntarily filed cases under Chapter 11 of the U.S. Bankruptcy Code in the U.S. Bankruptcy Court for the District of Delaware (the "Bankruptcy Court") seeking to implement the Plan through the Chapter 11 cases. Among other things, the Plan was intended to permanently resolve all current and future asbestos claims related to Maremont's historical asbestos-related activities through the creation of a trust pursuant to Section 524(g) of the U.S. Bankruptcy Code (the "524(g) Trust"). Meritor determined that the net amount of $51 million Maremont would be required to contribute to the 524(g) Trust according to the Plan represented Meritor's best estimate of Maremont's net asbestos liability. As a result, Meritor recognized $31 million of income related to remeasuring the Maremont net asbestos liability based on the terms of the Plan.
In the second quarterAs of fiscalJanuary 22, 2019, Maremont and its subsidiaries were deconsolidated from the Condensed Consolidated Balance Sheet of the company as of January 22, 2019 and the results of Maremont’sMaremont's operations were eliminated from the company’s consolidated resultsCondensed Consolidated Statement of operations beginning on that dateOperations as Maremont became subject to the control of a court. Deconsolidation had an insignificant impact on the Condensed Consolidated Statement of Operations. On a prospective basis, the company accounts for its investment in Maremont under the cost method. The fair value of this investment was zero at the date of deconsolidation. The company recorded $48 million in Other Current Liabilities, which represented Meritor’s best estimate of the contribution of cash and repayment of a loan to Maremont following Plan confirmation.
The Plan was confirmed by the U.S. Bankruptcy Court for the District of Delaware on May 17, 2019 and approved by the United States District Court for the District of Delaware on June 27, 2019. On July 9, 2019, the company contributed cash and repaid a loan to Maremont and Maremont funded the 524(g) Trust with such cash and its other assets, including its existing insurance policies. As a result, all current and future asbestos claims related to the Maremont’s historical asbestos-related activities have been channeled to the 524(g) Trust, which will process and satisfy all such claims going forward pursuant to its resolution and payment procedures.
Pending and Future Claims as of September 2018: Previously, Maremont engaged a third-party advisor with extensive experience in assessing asbestos-related liabilities to conduct a study to estimate its potential undiscounted liability for pending and future asbestos-related claims. Management continuously monitored the underlying claims data and experience, for the purpose of assessing the appropriateness of the assumptions used to estimate the liability.
MERITOR, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
As of September 30, 2018, the estimated range of equally likely possibilities of Maremont’s obligation for asbestos-related claims over the next 41 years was $107 million to $195 million. Based on the information contained in the actuarial study, and all other available information considered, Maremont concluded that no amount within the range of potential liability was more likely than any other and, therefore, recorded a liability at the low end of the range. Maremont recognized a liability for pending and future claims over the next 41 years of $107 million as of September 30, 2018.
Recoveries as of September 2018: Maremont had historically had insurance that reimburses a meaningful portion of the costs incurred defending against asbestos-related claims. The expected insurance receivable related to future asbestos-related liabilities was $24 million as of September 30, 2018.
Rockwell International Corporation ("Rockwell") — ArvinMeritor, Inc. ("AM"), a predecessor 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. There were approximately 1,400 pending active asbestos claims in lawsuits that name AM, together with many other companies, as defendants at June 30,December 31, 2019 and September 30, 2018.2019.
A significant portion of the claims do not identify any Rockwell products or specify which of the claimants, if any, were exposed to asbestos attributable to Rockwell products, and past experience has shown that the vast majority of the claimants will likely never identify any of Rockwell 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 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.
Pending and Future Claims: The company engaged a third-party advisor with extensive experience in assessing asbestos-related liabilities to conduct a study to estimate its potential undiscounted liability for pending and future asbestos-related claims as of September 30, 2018.2019. Management continuously monitors the underlying claims data and experience for the purpose of assessing the appropriateness of the assumptions used to estimate the liability.
As of September 30, 2018,2019, the estimated probable range of equally likely possibilities of the company’s obligation for asbestos-related claims over the next 4140 years is $103$91 million to $186$181 million. Based on the information contained in the actuarial study, and all other available information considered, management concluded that no amount within the range of potential liability was more likely than any other and, therefore, recorded a liability at the low end of the range. The company recognized a liability for pending and future claims over the next 4140 years of $100$90 million as of June 30,December 31, 2019 and $103$91 million as of September 30, 2018.2019.
Recoveries: AM has insurance coverage that management believes covers indemnity and defense costs, over and above self-insurance retentions, for a significant portion of these claims. The insurance receivables for Rockwell asbestos-related liabilities totaled $65$60 million and $68$61 million as of June 30,December 31, 2019 and September 30, 2018,2019, respectively.
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
MERITOR, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 firm, jurisdiction and disease; legislative or regulatory developments; the company’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.
IndemnificationsIndemnification
The company has provided indemnities 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.
The company is not aware of any claims or other information that would give rise to material payments under such indemnification obligations.
MERITOR, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Other
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.
22.21. Shareholders' Equity
There were no0 dividends declared or paid in the first second or third quarter of fiscal years 20192020 and 2018.2019. The payment of cash dividends and the amount of any dividend are subject to review and change at the discretion of the company's Board of Directors.
Common Stock and Debt Repurchase Authorizations
On July 26,November 7, 2019, the Board of Directors authorized the repurchase of up to $250$325 million of the company’scompany's common stock, which was an increase from the prior $250 million authorization approved on July 26, 2019. Repurchases can be made from time to time through open market purchases, privately negotiated transactions or otherwise, subject to compliance with legal and regulatory requirements and the company’s debt covenants. This authorization supersedesDuring fiscal year 2019, the company repurchased 1.3 million shares of common stock for $25 million (including commission costs) pursuant to this common stock repurchase authorization. During the first quarter of fiscal year 2020, the company repurchased 4.9 million shares of common stock for $100 million (including commission costs) pursuant to this authorization. As of December 31, 2019, the amount remaining authorityavailable for repurchases under the prior November 2018 equitythis common stock repurchase authorization described below.was $200 million.
On November 2, 2018, the Board of Directors authorized the repurchase of up to $200 million of the company's common stock and up to $100 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, subject to compliance with legal and regulatory requirements and the company's debt covenants. These repurchase authorizations superseded theThe remaining authority under the prior July 2016 repurchase authorizations described below. In the first quarter of fiscal year 2019, the company repurchased 3.0 million shares of common stock for $50 million (including commission costs) pursuant to the common stock repurchase authorization. In the third quarter of fiscal year 2019, the company repurchased 1.0 million shares of common stock for $21 million (including commission costs) pursuant to the common stock repurchase authorization. In the second quarter of fiscal year 2019, the company redeemed $19 million aggregate principal amount outstanding of the 4.0 Percent Convertible Notes pursuant to the debt repurchase authorization. In the third quarter of fiscal year 2019, the company redeemed the remaining $5 million aggregate principal amount of the outstanding 4.0 Percent Convertible Notes pursuant to the debt repurchase authorization. As of June 30, 2019, the amounts remaining available for repurchases were $130 million under this common stock repurchase authorization was superseded by the July 2019 authorization described above. As of December 31, 2019 and $76 millionSeptember 30, 2019, the amount remaining available for repurchase under this debt repurchase authorization.
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. The repurchase program under the $100 million equity repurchase authorization was complete as of September 30, 2018. The amount remaining available for repurchases under the debt repurchase authorization was $50 million as of September 30, 2018.$76 million.
MERITOR, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Accumulated Other Comprehensive Loss ("AOCL")
The components of AOCL and the changes in AOCL by components, net of tax, for the three months ended June 30,December 31, 2019 and 2018 are as follows (in millions):
| | | Foreign Currency Translation | | Employee Benefit Related Adjustments | | Unrealized Income (Loss) on cash flow hedges | | Total | Foreign Currency Translation | | Employee Benefit Related Adjustments | | Unrealized Income (Loss) on cash flow hedges | | Total |
Balance at March 31, 2019 | $ | (87 | ) | | $ | (475 | ) | | $ | — |
| | $ | (562 | ) | |
Balance at September 30, 2019 | | $ | (107 | ) | | $ | (572 | ) | | $ | (2 | ) | | $ | (681 | ) |
Other comprehensive income before reclassification | (6 | ) | | — |
| | — |
| | (6 | ) | 21 |
| | — |
| | — |
| | 21 |
|
Amounts reclassified from accumulated other comprehensive loss | — |
| | 1 |
| | (2 | ) | | (1 | ) | — |
| | 3 |
| | 2 |
| | 5 |
|
Net current-period other comprehensive income | $ | (6 | ) | | $ | 1 |
| | $ | (2 | ) | | $ | (7 | ) | 21 |
| | 3 |
| | 2 |
| | 26 |
|
Balance at June 30, 2019 | $ | (93 | ) | | $ | (474 | ) | | $ | (2 | ) | | $ | (569 | ) | |
Balance at December 31, 2019 | | $ | (86 | ) | | $ | (569 | ) | | $ | — |
| | $ | (655 | ) |
|
| | | | | | | |
| 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 | | $ | (9 | ) | | (a) |
| Actuarial losses | | 10 |
| | (a) |
| | | 1 |
| | Total before tax |
| | | — |
| | Tax benefit |
| Total reclassifications for the period | | $ | 1 |
| | 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 20 for additional details), which is recorded in other operating income (expense). |
|
|
| | | | | | | |
| 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 benefit | | $ | (9 | ) | | (a) |
| Actuarial losses | | 12 |
| | (a) |
| | | 3 |
| | Total before tax |
| | | — |
| | Tax benefit |
| Total reclassifications for the period | | $ | 3 |
| | 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 other income (expense), net. |
|
| | | Foreign Currency Translation | | Employee Benefit Related Adjustments | | Unrealized Income (Loss) on cash flow hedges | | Total | Foreign Currency Translation | | Employee Benefit Related Adjustments | | Unrealized Income (Loss) on cash flow hedges | | Total |
Balance at March 31, 2018 | $ | (35 | ) | | $ | (494 | ) | | $ | (1 | ) | | $ | (530 | ) | |
Balance at September 30, 2018 | | $ | (90 | ) | | $ | (476 | ) | | $ | — |
| | $ | (566 | ) |
Other comprehensive income before reclassification | (52 | ) | | — |
| | 1 |
| | (51 | ) | (4 | ) | | (1 | ) | | — |
| | (5 | ) |
Amounts reclassified from accumulated other comprehensive loss | — |
| | 3 |
| | — |
| | 3 |
| — |
| | 1 |
| | 1 |
| | 2 |
|
Net current-period other comprehensive income | $ | (52 | ) | | $ | 3 |
| | $ | 1 |
| | $ | (48 | ) | $ | (4 | ) | | $ | — |
| | $ | 1 |
| | $ | (3 | ) |
Balance at June 30, 2018 | $ | (87 | ) | | $ | (491 | ) | | $ | — |
| | $ | (578 | ) | |
Balance at December 31, 2018 | | $ | (94 | ) | | $ | (476 | ) | | $ | 1 |
| | $ | (569 | ) |
|
| | | | | | | |
| 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 benefit | | $ | (9 | ) | | (b) |
| Actuarial losses | | $ | 10 |
| | (b) |
| | | 1 |
| | Total before tax |
| | | — |
| | Tax benefit |
| Total reclassifications for the period | | $ | 1 |
| | 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), which is recorded in other income (expense), net. |
|
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 | | | | |
| Prior service costs | | $ | (9 | ) | | (b) |
| Actuarial losses | | $ | 12 |
| | (b) |
| | | 3 |
| | Total before tax |
| | | — |
| | Tax benefit |
| Total reclassifications for the period | | $ | 3 |
| | 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 20 for additional details), which is recorded in other operating income (expense). |
|
The components of AOCL and the changes in AOCL by components, net of tax, for the nine months ended June 30, 2019 and 2018 are as follows (in millions):
|
| | | | | | | | | | | | | | | |
| Foreign Currency Translation | | Employee Benefit Related Adjustments | | Unrealized Income (Loss) on cash flow hedges | | Total |
Balance at September 30, 2018 | $ | (90 | ) | | $ | (476 | ) | | $ | — |
| | $ | (566 | ) |
Other comprehensive income before reclassification | (3 | ) | | (1 | ) | | — |
| | (4 | ) |
Amounts reclassified from accumulated other comprehensive loss | — |
| | 3 |
| | (2 | ) | | 1 |
|
Net current-period other comprehensive income | $ | (3 | ) | | $ | 2 |
| | $ | (2 | ) | | $ | (3 | ) |
Balance at June 30, 2019 | $ | (93 | ) | | $ | (474 | ) | | $ | (2 | ) | | $ | (569 | ) |
|
| | | | | | | |
| 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 | | $ | (26 | ) | | (a) |
| Actuarial losses | | 29 |
| | (a) |
| | | 3 |
| | Total before tax |
| | | — |
| | Tax benefit |
| Total reclassifications for the period | | $ | 3 |
| | 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 20 for additional details), which is recorded in other operating income (expense). |
|
MERITOR, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
|
| | | | | | | | | | | | | | | |
| Foreign Currency Translation | | Employee Benefit Related Adjustments | | Unrealized Income (Loss) on cash flow hedges | | Total |
Balance at September 30, 2017 | $ | (41 | ) | | $ | (500 | ) | | $ | (4 | ) | | $ | (545 | ) |
Other comprehensive income before reclassification | (46 | ) | | 1 |
| | 4 |
| | (41 | ) |
Amounts reclassified from accumulated other comprehensive loss | — |
| | 8 |
| | — |
| | 8 |
|
Net current-period other comprehensive income | $ | (46 | ) | | $ | 9 |
| | $ | 4 |
| | $ | (33 | ) |
Balance at June 30, 2018 | $ | (87 | ) | | $ | (491 | ) | | $ | — |
| | $ | (578 | ) |
|
| | | | | | | |
| 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 | | $ | (26 | ) | | (a) |
| Actuarial losses | | 34 |
| | (a) |
| | | 8 |
| | Total before tax |
| | | (1 | ) | | Tax benefit |
| Total reclassifications for the period | | $ | 7 |
| | 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 20 for additional details), which is recorded in other operating income (expense). |
|
23.22. 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.
In the second quarter of fiscal year 2019, the company realigned its operations resulting in a change to its operating and reportable segments. As of the second quarter of fiscal year 2019, the reportable segments are (1) Commercial Truck and (2) Aftermarket, Industrial and Trailer. Prior year reportable segment financial results have been recast for these changes.
The company has two2 reportable segments at June 30,December 31, 2019, as follows:
| |
• | The Commercial Truck segment supplies drivetrain systems and components, including axles, drivelines and braking and suspension systems, primarily for medium- and heavy-duty trucks 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. |
| |
• | The Aftermarket, Industrial and 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. In addition, this segment supplies drivetrain systems and certain components, including axles, drivelines, brakes and suspension systems for military, construction, bus and coach, fire and emergency and other applications in North America and Europe. It also supplies a 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,
MERITOR, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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.
Segment information is summarized as follows (in millions):
| |
| Commercial Truck | | Aftermarket, Industrial and Trailer | | Eliminations | | Total | Commercial Truck | | Aftermarket, Industrial and Trailer | | Eliminations | | Total |
Three Months Ended June 30, 2019 | | | | | | | | |
Three Months Ended December 31, 2019 | | | | | | | | |
External Sales | $ | 835 |
| | $ | 331 |
| | $ | — |
| | $ | 1,166 |
| $ | 590 |
| | $ | 311 |
| | $ | — |
| | $ | 901 |
|
Intersegment Sales | 34 |
| | 9 |
| | (43 | ) | | — |
| 32 |
| | 6 |
| | (38 | ) | | — |
|
Total Sales | $ | 869 |
| | $ | 340 |
| | $ | (43 | ) | | $ | 1,166 |
| $ | 622 |
| | $ | 317 |
| | $ | (38 | ) | | $ | 901 |
|
Three Months Ended June 30, 2018 (1) | | | | | | | | |
Three Months Ended December 31, 2018 (1) | | | | | | | | |
External Sales | $ | 819 |
| | $ | 310 |
| | $ | — |
| | $ | 1,129 |
| $ | 744 |
| | $ | 294 |
| | $ | — |
| | $ | 1,038 |
|
Intersegment Sales | 35 |
| | 9 |
| | (44 | ) | | — |
| 35 |
| | 9 |
| | (44 | ) | | — |
|
Total Sales | $ | 854 |
| | $ | 319 |
| | $ | (44 | ) | | $ | 1,129 |
| $ | 779 |
| | $ | 303 |
| | $ | (44 | ) | | $ | 1,038 |
|
| | | | | | | | |
| Commercial Truck | | Aftermarket, Industrial and Trailer | | Eliminations | | Total | |
Nine Months Ended June 30, 2019 | | | | | | | | |
External Sales | $ | 2,416 |
| | $ | 944 |
| |
| | $ | 3,360 |
| |
Intersegment Sales | 108 |
| | 28 |
| | (136 | ) | | — |
| |
Total Sales | $ | 2,524 |
| | $ | 972 |
| | $ | (136 | ) | | $ | 3,360 |
| |
Nine Months Ended June 30, 2018 (1) | | | | | | | | |
External Sales | $ | 2,254 |
| | $ | 844 |
| | $ | — |
| | $ | 3,098 |
| |
Intersegment Sales | 102 |
| | 25 |
| | (127 | ) | | — |
| |
Total Sales | $ | 2,356 |
| | $ | 869 |
| | $ | (127 | ) | | $ | 3,098 |
| |
(1) Amounts for the three and nine months ended June 30,December 31, 2018 have been recast to reflect reportable segment changes.
MERITOR, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
| | | Three Months Ended June 30, | | Nine Months Ended June 30, | Three Months Ended December 31, |
| 2019 | | 2018 (3) | | 2019 | | 2018 (3) | 2019 | | 2018 (3) |
Segment adjusted EBITDA: | | | | | | | | | | |
Commercial Truck | $ | 93 |
| | $ | 100 |
| | $ | 258 |
| | $ | 263 |
| $ | 56 |
| | $ | 77 |
|
Aftermarket, Industrial and Trailer | 54 |
| | 38 |
| | 146 |
| | 108 |
| 40 |
| | 40 |
|
Segment adjusted EBITDA | 147 |
|
| 138 |
| | 404 |
| | 371 |
| 96 |
|
| 117 |
|
Unallocated legacy and corporate expense, net (1) | (1 | ) | | (3 | ) | | — |
| | (15 | ) | 2 |
| | 2 |
|
Interest expense, net | (14 | ) | | (14 | ) | | (43 | ) | | (54 | ) | (14 | ) | | (14 | ) |
Provision for income taxes | (21 | ) | | (26 | ) | | (69 | ) | | (131 | ) | (13 | ) | | (21 | ) |
Depreciation and amortization | (21 | ) | | (22 | ) | | (64 | ) | | (64 | ) | (24 | ) | | (22 | ) |
Noncontrolling interests | (3 | ) | | (3 | ) | | (7 | ) | | (8 | ) | (2 | ) | | (2 | ) |
Loss on sale of receivables | (2 | ) | | (1 | ) | | (5 | ) | | (3 | ) | (1 | ) | | (1 | ) |
Asset impairment charges | (1 | ) | | — |
| | (1 | ) | | (2 | ) | |
Restructuring | 1 |
| | (3 | ) | | 2 |
| | (6 | ) | (5 | ) | | — |
|
Asbestos related liability remeasurement (2) | — |
| | — |
| | 31 |
| | — |
| — |
| | 31 |
|
Income from continuing operations attributable to Meritor, Inc. | $ | 85 |
|
| $ | 66 |
| | $ | 248 |
| | $ | 88 |
| $ | 39 |
|
| $ | 90 |
|
| |
(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. |
| |
(2) | The ninethree months ended June 30, 2019December 31, 2018 includes $31 million related to the remeasurement of the Maremont asbestos liability based on the Maremont prepackaged plan of reorganization. |
| |
(3) | Amounts for the three and nine months ended June 30,December 31, 2018 have been recast to reflect reportable segment changes. |
| | | June 30, 2019 | | September 30, 2018 (3) | December 31, 2019 | | September 30, 2019 |
Segment Assets: | | | | | | |
Commercial Truck | $ | 1,846 |
| | $ | 1,764 |
| $ | 1,700 |
| | $ | 1,659 |
|
Aftermarket, Industrial and Trailer | 609 |
| | 589 |
| 839 |
| | 815 |
|
Total segment assets | 2,455 |
| | 2,353 |
| 2,539 |
| | 2,474 |
|
Corporate (1) | 567 |
| | 633 |
| 597 |
| | 567 |
|
Less: Accounts receivable sold under off-balance sheet factoring programs (2) | (294 | ) | | (260 | ) | (240 | ) | | (226 | ) |
Total assets | $ | 2,728 |
| | $ | 2,726 |
| $ | 2,896 |
| | $ | 2,815 |
|
| |
(1) | Corporate assets consist primarily of cash, deferred income taxes and prepaid pension costs. |
| |
(2) | At June 30,December 31, 2019 and September 30, 2018,2019, segment assets include $294$240 million and $260$226 million, respectively, of accounts receivable sold under off-balance sheet accounts receivable factoring programs (see Note 10)11). These sold receivables are included in segment assets as the CODM reviews segment assets inclusive of these balances. |
| |
(3)
| Amounts as of September 30, 2018 have been recast to reflect reportable segment changes, including the reallocation of goodwill. |
MERITOR, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
24.23. 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 18)17).
In lieu of providing separate audited financial statements for Meritor, Inc. (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.
MERITOR, INC.
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
(In millions)
(Unaudited)
| | | Three Months Ended June 30, 2019 | Three Months Ended December 31, 2019 |
| Parent | | Guarantors | | Non- Guarantors | | Elims | | Consolidated | Parent | | Guarantors | | Non- Guarantors | | Elims | | Consolidated |
Sales | | | | | | | | | | | | | | | | | | |
External | $ | — |
| | $ | 696 |
| | $ | 470 |
| | $ | — |
| | $ | 1,166 |
| $ | — |
| | $ | 535 |
| | $ | 366 |
| | $ | — |
| | $ | 901 |
|
Subsidiaries | — |
| | 24 |
| | 46 |
| | (70 | ) | | — |
| — |
| | 23 |
| | 35 |
| | (58 | ) | | — |
|
Total sales | — |
| | 720 |
| | 516 |
| | (70 | ) | | 1,166 |
| — |
| | 558 |
| | 401 |
| | (58 | ) | | 901 |
|
Cost of sales | (17 | ) | | (599 | ) | | (441 | ) | | 70 |
| | (987 | ) | (16 | ) | | (469 | ) | | (347 | ) | | 58 |
| | (774 | ) |
GROSS MARGIN | (17 | ) | | 121 |
| | 75 |
| | — |
| | 179 |
| (16 | ) | | 89 |
| | 54 |
| | — |
| | 127 |
|
Selling, general and administrative | (30 | ) | | (28 | ) | | (15 | ) | | — |
| | (73 | ) | (24 | ) | | (29 | ) | | (17 | ) | | — |
| | (70 | ) |
Restructuring | — |
| | 1 |
| | — |
| | — |
| | 1 |
| |
Other operating expense, net | (3 | ) | | — |
| | — |
| | — |
| | (3 | ) | — |
| | — |
| | (5 | ) | | — |
| | (5 | ) |
OPERATING INCOME (LOSS) | (50 | ) | | 94 |
| | 60 |
| | — |
| | 104 |
| (40 | ) | | 60 |
| | 32 |
| | — |
| | 52 |
|
Other income (expense), net | 14 |
| | (2 | ) | | (2 | ) | | — |
| | 10 |
| |
Other income, net | | — |
| | 7 |
| | 3 |
| | — |
| | 10 |
|
Equity in earnings of affiliates | — |
| | 6 |
| | 3 |
| | — |
| | 9 |
| — |
| | 4 |
| | 2 |
| | — |
| | 6 |
|
Interest income (expense), net | (32 | ) | | 11 |
| | 7 |
| | — |
| | (14 | ) | (31 | ) | | 11 |
| | 6 |
| | — |
| | (14 | ) |
INCOME (LOSS) BEFORE INCOME TAXES | (68 | ) | | 109 |
| | 68 |
| | — |
| | 109 |
| (71 | ) | | 82 |
| | 43 |
| | — |
| | 54 |
|
Benefit (provision) for income taxes | 19 |
| | (18 | ) | | (22 | ) | | — |
| | (21 | ) | 12 |
| | (15 | ) | | (10 | ) | | — |
| | (13 | ) |
Equity income from continuing operations of subsidiaries | 134 |
| | 37 |
| | — |
| | (171 | ) | | — |
| 98 |
| | 28 |
| | — |
| | (126 | ) | | — |
|
INCOME FROM CONTINUING OPERATIONS | 85 |
| | 128 |
| | 46 |
| | (171 | ) | | 88 |
| 39 |
| | 95 |
| | 33 |
| | (126 | ) | | 41 |
|
INCOME (LOSS) FROM DISCONTINUED OPERATIONS, net of tax | 1 |
| | — |
| | — |
| | — |
| | 1 |
| |
INCOME FROM DISCONTINUED OPERATIONS, net of tax | | — |
| | — |
| | — |
| | — |
| | — |
|
NET INCOME | 86 |
| | 128 |
| | 46 |
| | (171 | ) | | 89 |
| 39 |
| | 95 |
| | 33 |
| | (126 | ) | | 41 |
|
Less: Net income attributable to noncontrolling interests | — |
| | — |
| | (3 | ) | | — |
| | (3 | ) | — |
| | — |
| | (2 | ) | | — |
| | (2 | ) |
NET INCOME ATTRIBUTABLE TO MERITOR, INC. | $ | 86 |
| | $ | 128 |
| | $ | 43 |
| | $ | (171 | ) | | $ | 86 |
| $ | 39 |
| | $ | 95 |
| | $ | 31 |
| | $ | (126 | ) | | $ | 39 |
|
MERITOR, INC.
CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME (LOSS)
(In millions)
(Unaudited)
| | | Three Months Ended June 30, 2019 | Three Months Ended December 31, 2019 |
| Parent | | Guarantors | | Non- Guarantors | | Elims | | Consolidated | Parent | | Guarantors | | Non- Guarantors | | Elims | | Consolidated |
Net income | $ | 86 |
| | $ | 128 |
| | $ | 46 |
| | $ | (171 | ) | | $ | 89 |
| $ | 39 |
| | $ | 95 |
| | $ | 33 |
| | $ | (126 | ) | | $ | 41 |
|
Other comprehensive loss, net of tax | (7 | ) | | (2 | ) | | (3 | ) | | 4 |
| | (8 | ) | |
Other comprehensive income, net of tax | | 26 |
| | 30 |
| | 32 |
| | (62 | ) | | 26 |
|
Total comprehensive income | 79 |
| | 126 |
| | 43 |
| | (167 | ) | | 81 |
| 65 |
| | 125 |
| | 65 |
| | (188 | ) | | 67 |
|
Less: Comprehensive income attributable to noncontrolling interests | — |
| | — |
| | (2 | ) | | — |
| | (2 | ) | — |
| | — |
| | (2 | ) | | — |
| | (2 | ) |
Comprehensive income attributable to Meritor, Inc. | $ | 79 |
| | $ | 126 |
| | $ | 41 |
| | $ | (167 | ) | | $ | 79 |
| $ | 65 |
| | $ | 125 |
| | $ | 63 |
| | $ | (188 | ) | | $ | 65 |
|
MERITOR, INC.
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
(In millions)
(Unaudited)
| | | Three Months Ended June 30, 2018 (1) | Three Months Ended December 31, 2018 |
| Parent | | Guarantors | | Non- Guarantors | | Elims | | Consolidated | Parent | | Guarantors | | Non- Guarantors | | Elims | | Consolidated |
Sales | | | | | | | | | | | | | | | | | | |
External | $ | — |
| | $ | 629 |
| | $ | 500 |
| | $ | — |
| | $ | 1,129 |
| $ | — |
| | $ | 589 |
| | $ | 449 |
| | $ | — |
| | $ | 1,038 |
|
Subsidiaries | — |
| | 40 |
| | 61 |
| | (101 | ) | | — |
| — |
| | 32 |
| | 57 |
| | (89 | ) | | — |
|
Total sales | — |
| | 669 |
| | 561 |
| | (101 | ) | | 1,129 |
| — |
| | 621 |
| | 506 |
| | (89 | ) | | 1,038 |
|
Cost of sales | (20 | ) | | (559 | ) | | (481 | ) | | 101 |
| | (959 | ) | (15 | ) | | (534 | ) | | (437 | ) | | 89 |
| | (897 | ) |
GROSS MARGIN | (20 | ) | | 110 |
| | 80 |
| | — |
| | 170 |
| (15 | ) | | 87 |
| | 69 |
| | — |
| | 141 |
|
Selling, general and administrative | (30 | ) | | (27 | ) | | (19 | ) | | — |
| | (76 | ) | (25 | ) | | (27 | ) | | 18 |
| | — |
| | (34 | ) |
Restructuring | (2 | ) | | (1 | ) | | — |
| | — |
| | (3 | ) | |
OPERATING INCOME (LOSS) | (52 | ) | | 82 |
| | 61 |
| | — |
| | 91 |
| (40 | ) | | 60 |
| | 87 |
| | — |
| | 107 |
|
Other income (expense), net | 28 |
| | (15 | ) | | (4 | ) | | — |
| | 9 |
| |
Other income, net | | — |
| | 5 |
| | 6 |
| | — |
| | 11 |
|
Equity in earnings of affiliates | — |
| | 6 |
| | 3 |
| | — |
| | 9 |
| — |
| | 7 |
| | 2 |
| | — |
| | 9 |
|
Interest income (expense), net | (26 | ) | | 6 |
| | 6 |
| | — |
| | (14 | ) | (32 | ) | | 12 |
| | 6 |
| | — |
| | (14 | ) |
INCOME (LOSS) BEFORE INCOME TAXES | (50 | ) | | 79 |
| | 66 |
| | — |
| | 95 |
| (72 | ) | | 84 |
| | 101 |
| | — |
| | 113 |
|
Benefit (provision) for income taxes | 7 |
| | (13 | ) | | (20 | ) | | — |
| | (26 | ) | 11 |
| | (12 | ) | | (20 | ) | | — |
| | (21 | ) |
Equity income from continuing operations of subsidiaries | 109 |
| | 39 |
| | — |
| | (148 | ) | | — |
| 151 |
| | 40 |
| | — |
| | (191 | ) | | — |
|
INCOME FROM CONTINUING OPERATIONS | 66 |
| | 105 |
| | 46 |
| | (148 | ) | | 69 |
| 90 |
| | 112 |
| | 81 |
| | (191 | ) | | 92 |
|
LOSS FROM DISCONTINUED OPERATIONS, net of tax | (2 | ) | | (2 | ) | | (2 | ) | | 4 |
| | (2 | ) | |
INCOME FROM DISCONTINUED OPERATIONS, net of tax | | — |
| | — |
| | — |
| | — |
| | — |
|
NET INCOME | 64 |
| | 103 |
| | 44 |
| | (144 | ) | | 67 |
| 90 |
| | 112 |
| | 81 |
| | (191 | ) | | 92 |
|
Less: Net income attributable to noncontrolling interests | — |
| | — |
| | (3 | ) | | — |
| | (3 | ) | — |
| | — |
| | (2 | ) | | — |
| | (2 | ) |
NET INCOME ATTRIBUTABLE TO MERITOR, INC. | $ | 64 |
| | $ | 103 |
| | $ | 41 |
| | $ | (144 | ) | | $ | 64 |
| $ | 90 |
| | $ | 112 |
| | $ | 79 |
| | $ | (191 | ) | | $ | 90 |
|
(1) Prior period has been recast, see Note 20.
MERITOR, INC.
CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME (LOSS)
(In millions)
(Unaudited)
|
| | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, 2018 |
| Parent | | Guarantors | | Non- Guarantors | | Elims | | Consolidated |
Net income | $ | 64 |
| | $ | 103 |
| | $ | 44 |
| | $ | (144 | ) | | $ | 67 |
|
Other comprehensive loss, net of tax | (48 | ) | | (57 | ) | | (8 | ) | | 63 |
| | (50 | ) |
Total comprehensive income | 16 |
| | 46 |
| | 36 |
| | (81 | ) | | 17 |
|
Less: Comprehensive income attributable to noncontrolling interests | — |
| | — |
| | (1 | ) | | — |
| | (1 | ) |
Comprehensive income attributable to Meritor, Inc. | $ | 16 |
| | $ | 46 |
| | $ | 35 |
| | $ | (81 | ) | | $ | 16 |
|
MERITOR, INC.
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
(In millions)
(Unaudited)
|
| | | | | | | | | | | | | | | | | | | |
| Nine Months Ended June 30, 2019 |
| Parent | | Guarantors | | Non- Guarantors | | Elims | | Consolidated |
Sales | | | | | | | | | |
External | $ | — |
| | $ | 1,962 |
| | $ | 1,398 |
| | $ | — |
| | $ | 3,360 |
|
Subsidiaries | — |
| | 84 |
| | 154 |
| | (238 | ) | | — |
|
Total sales | — |
| | 2,046 |
| | 1,552 |
| | (238 | ) | | 3,360 |
|
Cost of sales | (48 | ) | | (1,723 | ) | | (1,333 | ) | | 238 |
| | (2,866 | ) |
GROSS MARGIN | (48 | ) | | 323 |
| | 219 |
| | — |
| | 494 |
|
Selling, general and administrative | (83 | ) | | (85 | ) | | (12 | ) | | — |
| | (180 | ) |
Restructuring | — |
| | 1 |
| | 1 |
| | — |
| | 2 |
|
Other operating expense, net | (3 | ) | | — |
| | — |
| | — |
| | (3 | ) |
OPERATING INCOME (LOSS) | (134 | ) | | 239 |
| | 208 |
| | — |
| | 313 |
|
Other income (expense), net | 64 |
| | (11 | ) | | (23 | ) | | — |
| | 30 |
|
Equity in earnings of affiliates | — |
| | 16 |
| | 8 |
| | — |
| | 24 |
|
Interest income (expense), net | (97 | ) | | 35 |
| | 19 |
| | — |
| | (43 | ) |
INCOME (LOSS) BEFORE INCOME TAXES | (167 | ) | | 279 |
| | 212 |
| | — |
| | 324 |
|
Benefit (provision) for income taxes | 50 |
| | (52 | ) | | (67 | ) | | — |
| | (69 | ) |
Equity income from continuing operations of subsidiaries | 365 |
| | 86 |
| | — |
| | (451 | ) | | — |
|
INCOME FROM CONTINUING OPERATIONS | 248 |
| | 313 |
| | 145 |
| | (451 | ) | | 255 |
|
LOSS FROM DISCONTINUED OPERATIONS, net of tax | — |
| | — |
| | — |
| | — |
| | — |
|
NET INCOME | 248 |
| | 313 |
| | 145 |
| | (451 | ) | | 255 |
|
Less: Net income attributable to noncontrolling interests | — |
| | — |
| | (7 | ) | | — |
| | (7 | ) |
NET INCOME ATTRIBUTABLE TO MERITOR, INC. | $ | 248 |
| | $ | 313 |
| | $ | 138 |
| | $ | (451 | ) | | $ | 248 |
|
MERITOR, INC.
CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME (LOSS)
(In millions)
(Unaudited)
|
| | | | | | | | | | | | | | | | | | | |
| Nine Months Ended June 30, 2019 |
| Parent | | Guarantors | | Non- Guarantors | | Elims | | Consolidated |
Net income | $ | 248 |
| | $ | 313 |
| | $ | 145 |
| | $ | (451 | ) | | $ | 255 |
|
Other comprehensive loss, net of tax | (3 | ) | | (9 | ) | | (11 | ) | | 20 |
| | (3 | ) |
Total comprehensive income | 245 |
| | 304 |
| | 134 |
| | (431 | ) | | 252 |
|
Less: Comprehensive income attributable to noncontrolling interests | — |
| | — |
| | (7 | ) | | — |
| | (7 | ) |
Comprehensive income attributable to Meritor, Inc. | $ | 245 |
| | $ | 304 |
| | $ | 127 |
| | $ | (431 | ) | | $ | 245 |
|
MERITOR, INC.
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
(In millions)
(Unaudited)
|
| | | | | | | | | | | | | | | | | | | |
| Nine Months Ended June 30, 2018 (1) |
| Parent | | Guarantors | | Non- Guarantors | | Elims | | Consolidated |
Sales | | | | | | | | | |
External | $ | — |
| | $ | 1,663 |
| | $ | 1,435 |
| | $ | — |
| | $ | 3,098 |
|
Subsidiaries | — |
| | 107 |
| | 159 |
| | (266 | ) | | — |
|
Total sales | — |
| | 1,770 |
| | 1,594 |
| | (266 | ) | | 3,098 |
|
Cost of sales | (57 | ) | | (1,477 | ) | | (1,357 | ) | | 266 |
| | (2,625 | ) |
GROSS MARGIN | (57 | ) | | 293 |
| | 237 |
| | — |
| | 473 |
|
Selling, general and administrative | (90 | ) | | (74 | ) | | (54 | ) | | — |
| | (218 | ) |
Restructuring | (2 | ) | | (2 | ) | | (2 | ) | | — |
| | (6 | ) |
Other operating expense, net | (10 | ) | | (1 | ) | | (1 | ) | | — |
| | (12 | ) |
OPERATING INCOME (LOSS) | (159 | ) | | 216 |
| | 180 |
| | — |
| | 237 |
|
Other income (expense), net | 70 |
| | (10 | ) | | (36 | ) | | — |
| | 24 |
|
Equity in earnings of affiliates | — |
| | 14 |
| | 6 |
| | — |
| | 20 |
|
Interest income (expense), net | (91 | ) | | 21 |
| | 16 |
| | — |
| | (54 | ) |
INCOME (LOSS) BEFORE INCOME TAXES | (180 | ) | | 241 |
| | 166 |
| | — |
| | 227 |
|
Provision for income taxes | (8 | ) | | (75 | ) | | (48 | ) | | — |
| | (131 | ) |
Equity income from continuing operations of subsidiaries | 276 |
| | 100 |
| | — |
| | (376 | ) | | — |
|
INCOME FROM CONTINUING OPERATIONS | 88 |
| | 266 |
| | 118 |
| | (376 | ) | | 96 |
|
LOSS FROM DISCONTINUED OPERATIONS, net of tax | (3 | ) | | (2 | ) | | (2 | ) | | 4 |
| | (3 | ) |
NET INCOME | 85 |
| | 264 |
| | 116 |
| | (372 | ) | | 93 |
|
Less: Net income attributable to noncontrolling interests | — |
| | — |
| | (8 | ) | | — |
| | (8 | ) |
NET INCOME ATTRIBUTABLE TO MERITOR, INC. | $ | 85 |
| | $ | 264 |
| | $ | 108 |
| | $ | (372 | ) | | $ | 85 |
|
(1) Prior period has been recast, see Note 20.
MERITOR, INC.
CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME (LOSS)
(In millions)
(Unaudited)
|
| | | | | | | | | | | | | | | | | | | |
| Nine Months Ended June 30, 2018 |
| Parent | | Guarantors | | Non- Guarantors | | Elims | | Consolidated |
Net income | $ | 85 |
| | $ | 264 |
| | $ | 116 |
| | $ | (372 | ) | | $ | 93 |
|
Other comprehensive income (loss), net of tax | (33 | ) | | (45 | ) | | 6 |
| | 38 |
| | (34 | ) |
Total comprehensive income | 52 |
| | 219 |
| | 122 |
| | (334 | ) | | 59 |
|
Less: Comprehensive income attributable to noncontrolling interests | — |
| | — |
| | (7 | ) | | — |
| | (7 | ) |
Comprehensive income attributable to Meritor, Inc. | $ | 52 |
| | $ | 219 |
| | $ | 115 |
| | $ | (334 | ) | | $ | 52 |
|
MERITOR, INC.
CONDENSED CONSOLIDATING BALANCE SHEET
(In millions)
(Unaudited)
|
| | | | | | | | | | | | | | | | | | | |
| June 30, 2019 |
| Parent | | Guarantors | | Non- Guarantors | | Elims | | Consolidated |
CURRENT ASSETS: | | | | | | | | | |
Cash and cash equivalents | $ | 27 |
| | $ | 5 |
| | $ | 79 |
| | $ | — |
| | $ | 111 |
|
Receivables trade and other, net | 3 |
| | 81 |
| | 541 |
| | — |
| | 625 |
|
Inventories | — |
| | 260 |
| | 231 |
| | — |
| | 491 |
|
Other current assets | 4 |
| | 11 |
| | 17 |
| | — |
| | 32 |
|
TOTAL CURRENT ASSETS | 34 |
| | 357 |
| | 868 |
| | — |
| | 1,259 |
|
NET PROPERTY | 21 |
| | 240 |
| | 220 |
| | — |
| | 481 |
|
GOODWILL | — |
| | 254 |
| | 167 |
| | — |
| | 421 |
|
OTHER ASSETS | 147 |
| | 189 |
| | 231 |
| | — |
| | 567 |
|
INVESTMENTS IN SUBSIDIARIES | 4,188 |
| | 960 |
| | — |
| | (5,148 | ) | | — |
|
TOTAL ASSETS | $ | 4,390 |
| | $ | 2,000 |
| | $ | 1,486 |
| | $ | (5,148 | ) | | $ | 2,728 |
|
CURRENT LIABILITIES: | | | | | | | | | |
Short-term debt | $ | 23 |
| | $ | — |
| | $ | 1 |
| | $ | — |
| | $ | 24 |
|
Accounts and notes payable | 54 |
| | 292 |
| | 345 |
| | — |
| | 691 |
|
Other current liabilities | 144 |
| | 65 |
| | 87 |
| | — |
| | 296 |
|
TOTAL CURRENT LIABILITIES | 221 |
| | 357 |
| | 433 |
| | — |
| | 1,011 |
|
LONG-TERM DEBT | 730 |
| | — |
| | 4 |
| | — |
| | 734 |
|
RETIREMENT BENEFITS | 218 |
| | — |
| | 20 |
| | — |
| | 238 |
|
INTERCOMPANY PAYABLE (RECEIVABLE) | 2,691 |
| | (2,856 | ) | | 165 |
| | — |
| | — |
|
OTHER LIABILITIES | 55 |
| | 118 |
| | 61 |
| | — |
| | 234 |
|
MEZZANINE EQUITY | 1 |
| | — |
| | — |
| | — |
| | 1 |
|
EQUITY ATTRIBUTABLE TO MERITOR, INC. | 474 |
| | 4,381 |
| | 767 |
| | (5,148 | ) | | 474 |
|
NONCONTROLLING INTERESTS | — |
| | — |
| | 36 |
| | — |
| | 36 |
|
TOTAL LIABILITIES, MEZZANINE EQUITY AND EQUITY | $ | 4,390 |
| | $ | 2,000 |
| | $ | 1,486 |
| | $ | (5,148 | ) | | $ | 2,728 |
|
|
| | | | | | | | | | | | | | | | | | | |
| Three Months Ended December 31, 2018 |
| Parent | | Guarantors | | Non- Guarantors | | Elims | | Consolidated |
Net income | $ | 90 |
| | $ | 112 |
| | $ | 81 |
| | $ | (191 | ) | | $ | 92 |
|
Other comprehensive loss, net of tax | (3 | ) | | (8 | ) | | (9 | ) | | 18 |
| | (2 | ) |
Total comprehensive income | 87 |
| | 104 |
| | 72 |
| | (173 | ) | | 90 |
|
Less: Comprehensive income attributable to noncontrolling interests | — |
| | — |
| | (3 | ) | | — |
| | (3 | ) |
Comprehensive income attributable to Meritor, Inc. | $ | 87 |
| | $ | 104 |
| | $ | 69 |
| | $ | (173 | ) | | $ | 87 |
|
MERITOR, INC.
CONDENSED CONSOLIDATING BALANCE SHEET
(In millions)
(Unaudited)
| | | September 30, 2018 | December 31, 2019 |
| Parent | | Guarantors | | Non- Guarantors | | Elims | | Consolidated | Parent | | Guarantors | | Non- Guarantors | | Elims | | Consolidated |
CURRENT ASSETS: | | | | | | | | | | | | | | | | | | |
Cash and cash equivalents | $ | 24 |
| | $ | 6 |
| | $ | 85 |
| | $ | — |
| | $ | 115 |
| $ | 13 |
| | $ | 5 |
| | $ | 90 |
| | $ | — |
| | $ | 108 |
|
Receivables trade and other, net | 2 |
| | 62 |
| | 524 |
| | — |
| | 588 |
| 3 |
| | 82 |
| | 393 |
| | — |
| | 478 |
|
Inventories | — |
| | 242 |
| | 235 |
| | — |
| | 477 |
| — |
| | 308 |
| | 248 |
| | — |
| | 556 |
|
Other current assets | 6 |
| | 12 |
| | 28 |
| | — |
| | 46 |
| 7 |
| | 10 |
| | 20 |
| | — |
| | 37 |
|
TOTAL CURRENT ASSETS | 32 |
| | 322 |
| | 872 |
| | — |
| | 1,226 |
| 23 |
| | 405 |
| | 751 |
| | — |
| | 1,179 |
|
NET PROPERTY | 24 |
| | 241 |
| | 218 |
| | — |
| | 483 |
| 22 |
| | 257 |
| | 238 |
| | — |
| | 517 |
|
GOODWILL | — |
| | 250 |
| | 171 |
| | — |
| | 421 |
| — |
| | 337 |
| | 149 |
| | — |
| | 486 |
|
OTHER ASSETS | 179 |
| | 182 |
| | 235 |
| | — |
| | 596 |
| 182 |
| | 252 |
| | 280 |
| | — |
| | 714 |
|
INVESTMENTS IN SUBSIDIARIES | 3,583 |
| | 855 |
| | — |
| | (4,438 | ) | | — |
| 4,575 |
| | 958 |
| | — |
| | (5,533 | ) | | — |
|
TOTAL ASSETS | $ | 3,818 |
| | $ | 1,850 |
| | $ | 1,496 |
| | $ | (4,438 | ) | | $ | 2,726 |
| $ | 4,802 |
| | $ | 2,209 |
| | $ | 1,418 |
| | $ | (5,533 | ) | | $ | 2,896 |
|
CURRENT LIABILITIES: | | | | | | | | | | | | | | | | | | |
Short-term debt | $ | 47 |
| | $ | — |
| | $ | 47 |
| | $ | — |
| | $ | 94 |
| $ | 97 |
| | $ | — |
| | $ | 81 |
| | $ | — |
| | $ | 178 |
|
Accounts and notes payable | 64 |
| | 297 |
| | 339 |
| | — |
| | 700 |
| 19 |
| | 251 |
| | 270 |
| | — |
| | 540 |
|
Other current liabilities | 77 |
| | 71 |
| | 142 |
| | — |
| | 290 |
| 74 |
| | 88 |
| | 102 |
| | — |
| | 264 |
|
TOTAL CURRENT LIABILITIES | 188 |
| | 368 |
| | 528 |
| | — |
| | 1,084 |
| 190 |
| | 339 |
| | 453 |
| | — |
| | 982 |
|
LONG-TERM DEBT | 726 |
| | — |
| | 4 |
| | — |
| | 730 |
| 897 |
| | — |
| | 4 |
| | — |
| | 901 |
|
RETIREMENT BENEFITS | 241 |
| | — |
| | 21 |
| | — |
| | 262 |
| 305 |
| | 1 |
| | 24 |
| | — |
| | 330 |
|
INTERCOMPANY PAYABLE (RECEIVABLE) | 2,325 |
| | (2,640 | ) | | 315 |
| | — |
| | — |
| 2,997 |
| | (3,012 | ) | | 15 |
| | — |
| | — |
|
OTHER LIABILITIES | 50 |
| | 124 |
| | 158 |
| | — |
| | 332 |
| 61 |
| | 124 |
| | 114 |
| | — |
| | 299 |
|
MEZZANINE EQUITY | 1 |
| | — |
| | — |
| | — |
| | 1 |
| |
EQUITY ATTRIBUTABLE TO MERITOR, INC. | 287 |
| | 3,998 |
| | 440 |
| | (4,438 | ) | | 287 |
| 352 |
| | 4,757 |
| | 776 |
| | (5,533 | ) | | 352 |
|
NONCONTROLLING INTERESTS | — |
| | — |
| | 30 |
| | — |
| | 30 |
| — |
| | — |
| | 32 |
| | — |
| | 32 |
|
TOTAL LIABILITIES, MEZZANINE EQUITY AND EQUITY | $ | 3,818 |
| | $ | 1,850 |
| | $ | 1,496 |
| | $ | (4,438 | ) | | $ | 2,726 |
| |
TOTAL LIABILITIES AND EQUITY | | $ | 4,802 |
| | $ | 2,209 |
| | $ | 1,418 |
| | $ | (5,533 | ) | | $ | 2,896 |
|
MERITOR, INC.
CONDENSED CONSOLIDATING BALANCE SHEET
(In millions)
(Unaudited)
|
| | | | | | | | | | | | | | | | | | | |
| September 30, 2019 |
| Parent | | Guarantors | | Non- Guarantors | | Elims | | Consolidated |
CURRENT ASSETS: | | | | | | | | | |
Cash and cash equivalents | $ | 4 |
| | $ | 4 |
| | $ | 100 |
| | $ | — |
| | $ | 108 |
|
Receivables trade and other, net | 3 |
| | 92 |
| | 456 |
| | — |
| | 551 |
|
Inventories | — |
| | 292 |
| | 234 |
| | — |
| | 526 |
|
Other current assets | 6 |
| | 10 |
| | 15 |
| | — |
| | 31 |
|
TOTAL CURRENT ASSETS | 13 |
| | 398 |
| | 805 |
| | — |
| | 1,216 |
|
NET PROPERTY | 21 |
| | 260 |
| | 234 |
| | — |
| | 515 |
|
GOODWILL | — |
| | 337 |
| | 141 |
| | — |
| | 478 |
|
OTHER ASSETS | 170 |
| | 225 |
| | 211 |
| | — |
| | 606 |
|
INVESTMENTS IN SUBSIDIARIES | 4,432 |
| | 899 |
| | — |
| | (5,331 | ) | | — |
|
TOTAL ASSETS | $ | 4,636 |
| | $ | 2,119 |
| | $ | 1,391 |
| | $ | (5,331 | ) | | $ | 2,815 |
|
CURRENT LIABILITIES: | | | | | | | | | |
Short-term debt | $ | 32 |
| | $ | — |
| | $ | 9 |
| | $ | — |
| | $ | 41 |
|
Accounts and notes payable | 53 |
| | 283 |
| | 274 |
| | — |
| | 610 |
|
Other current liabilities | 77 |
| | 109 |
| | 99 |
| | — |
| | 285 |
|
TOTAL CURRENT LIABILITIES | 162 |
| | 392 |
| | 382 |
| | — |
| | 936 |
|
LONG-TERM DEBT | 898 |
| | — |
| | 4 |
| | — |
| | 902 |
|
RETIREMENT BENEFITS | 312 |
| | 1 |
| | 23 |
| | — |
| | 336 |
|
INTERCOMPANY PAYABLE (RECEIVABLE) | 2,833 |
| | (3,005 | ) | | 172 |
| | — |
| | — |
|
OTHER LIABILITIES | 46 |
| | 112 |
| | 68 |
| | — |
| | 226 |
|
EQUITY ATTRIBUTABLE TO MERITOR, INC. | 385 |
| | 4,619 |
| | 712 |
| | (5,331 | ) | | 385 |
|
NONCONTROLLING INTERESTS | — |
| | — |
| | 30 |
| | — |
| | 30 |
|
TOTAL LIABILITIES AND EQUITY | $ | 4,636 |
| | $ | 2,119 |
| | $ | 1,391 |
| | $ | (5,331 | ) | | $ | 2,815 |
|
MERITOR, INC.
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
(In millions)
(Unaudited)
| | | Nine Months Ended June 30, 2019 | Three Months Ended December 31, 2019 |
| Parent | | Guarantors | | Non- Guarantors | | Elims | | Consolidated | Parent | | Guarantors | | Non- Guarantors | | Elims | | Consolidated |
CASH PROVIDED BY OPERATING ACTIVITIES | $ | 8 |
| | $ | 32 |
| | $ | 154 |
| | $ | — |
| | $ | 194 |
| |
CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES | | $ | 65 |
| | $ | 9 |
| | $ | (93 | ) | | $ | — |
| | $ | (19 | ) |
INVESTING ACTIVITIES | | | | | | | | | | | | | | | | | | |
Capital expenditures | (2 | ) | | (32 | ) | | (29 | ) | | — |
| | (63 | ) | — |
| | (8 | ) | | (8 | ) | | — |
| | (16 | ) |
Cash paid for investment in Transportation Power, Inc. | (6 | ) | | — |
| | — |
| | — |
| | (6 | ) | |
Proceeds from settlement of cross-currency swaps | 17 |
| | — |
| | — |
| | — |
| | 17 |
| |
CASH PROVIDED BY (USED FOR) INVESTING ACTIVITIES | 9 |
| | (32 | ) | | (29 | ) | | — |
| | (52 | ) | |
CASH USED FOR INVESTING ACTIVITIES | | — |
| | (8 | ) | | (8 | ) | | — |
| | (16 | ) |
FINANCING ACTIVITIES | | | | | | | | | | | | | | | | | | |
Borrowings and securitization | — |
| | — |
| | (46 | ) | | — |
| | (46 | ) | |
Redemption of notes | (24 | ) | | — |
| | — |
| | — |
| | (24 | ) | |
Deferred issuance costs | (4 | ) | | — |
| | — |
| | — |
| | (4 | ) | |
Securitization | | — |
| | — |
| | 72 |
| | — |
| | 72 |
|
Borrowings against revolving line of credit | | 65 |
| | — |
| | — |
| | — |
| | 65 |
|
Term loan payments | | (3 | ) | | — |
| | — |
| | — |
| | (3 | ) |
Repurchase of common stock | (71 | ) | | — |
| | — |
| | — |
| | (71 | ) | (100 | ) | | — |
| | — |
| | — |
| | (100 | ) |
Intercompany advances | 86 |
| | — |
| | (86 | ) | | — |
| | — |
| (18 | ) | | — |
| | 18 |
| | — |
| | — |
|
Other financing activities | (1 | ) | | (1 | ) | | — |
| | — |
| | (2 | ) | |
CASH USED FOR FINANCING ACTIVITIES | (14 | ) | | (1 | ) | | (132 | ) | | — |
| | (147 | ) | |
CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES | | (56 | ) | | — |
| | 90 |
| | — |
| | 34 |
|
EFFECT OF CHANGES IN FOREIGN CURRENCY EXCHANGE RATES ON CASH AND CASH EQUIVALENTS | — |
| | — |
| | 1 |
| | — |
| | 1 |
| — |
| | — |
| | 1 |
| | — |
| | 1 |
|
CHANGE IN CASH AND CASH EQUIVALENTS | 3 |
| | (1 | ) | | (6 | ) | | — |
| | (4 | ) | 9 |
| | 1 |
| | (10 | ) | | — |
| | — |
|
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD | 24 |
| | 6 |
| | 85 |
| | — |
| | 115 |
| 4 |
| | 4 |
| | 100 |
| | — |
| | 108 |
|
CASH AND CASH EQUIVALENTS AT END OF PERIOD | $ | 27 |
| | $ | 5 |
| | $ | 79 |
| | $ | — |
| | $ | 111 |
| $ | 13 |
| | $ | 5 |
| | $ | 90 |
| | $ | — |
| | $ | 108 |
|
MERITOR, INC.
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
(In millions)
(Unaudited)
| | | Nine Months Ended June 30, 2018 | Three Months Ended December 31, 2018 |
| Parent | | Guarantors | | Non- Guarantors | | Elims | | Consolidated | Parent | | Guarantors | | Non- Guarantors | | Elims | | Consolidated |
CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES | $ | (26 | ) | | $ | 31 |
| | $ | 186 |
| | $ | — |
| | $ | 191 |
| $ | (9 | ) | | $ | 15 |
| | $ | 5 |
| | $ | — |
| | $ | 11 |
|
INVESTING ACTIVITIES | | | | | | | | | | | | | | | | | | |
Capital expenditures | (3 | ) | | (25 | ) | | (24 | ) | | — |
| | (52 | ) | (1 | ) | | (12 | ) | | (10 | ) | | — |
| | (23 | ) |
Proceeds from sale of a business | 4 |
| | — |
| | — |
| | — |
| | 4 |
| |
Proceeds from prior year sale of equity method investment | 250 |
| | — |
| | — |
| | — |
| | 250 |
| |
Cash paid for investment in Transportation Power, Inc. | (6 | ) | | — |
| | — |
| | — |
| | (6 | ) | (3 | ) | | — |
| | — |
| | — |
| | (3 | ) |
Cash paid for acquisition of AA Gear & Manufacturing, Inc. | (36 | ) | | — |
| | — |
| | — |
| | (36 | ) | |
Proceeds from sale of assets | — |
| | — |
| | 2 |
| | — |
| | 2 |
| |
CASH PROVIDED BY (USED FOR) INVESTING ACTIVITIES | 209 |
| | (25 | ) | | (22 | ) | | — |
| | 162 |
| |
Other investing activities | | — |
| | — |
| | (1 | ) | | — |
| | (1 | ) |
CASH USED FOR INVESTING ACTIVITIES | | (4 | ) | | (12 | ) | | (11 | ) | | — |
| | (27 | ) |
FINANCING ACTIVITIES | | | | | | | | | | | | | | | | | | |
Borrowings and securitization | — |
| | — |
| | (89 | ) | | — |
| | (89 | ) | |
Redemption of notes | (181 | ) | | — |
| | — |
| | — |
| | (181 | ) | |
Securitization | | — |
| | — |
| | 33 |
| | — |
| | 33 |
|
Borrowings against revolving line of credit | | 45 |
| | — |
| | — |
| | — |
| | 45 |
|
Repurchase of common stock | (63 | ) | | — |
| | — |
| | — |
| | (63 | ) | (50 | ) | | — |
| | — |
| | — |
| | (50 | ) |
Intercompany advances | 67 |
| | — |
| | (67 | ) | | — |
| | — |
| 18 |
| | — |
| | (18 | ) | | — |
| | — |
|
Other financing activities | (1 | ) | | (2 | ) | | — |
| | — |
| | (3 | ) | — |
| | (1 | ) | | — |
| | — |
| | (1 | ) |
CASH USED FOR FINANCING ACTIVITIES | (178 | ) | | (2 | ) | | (156 | ) | | — |
| | (336 | ) | |
CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES | | 13 |
| | (1 | ) | | 15 |
| | — |
| | 27 |
|
EFFECT OF CHANGES IN FOREIGN CURRENCY EXCHANGE RATES ON CASH AND CASH EQUIVALENTS | — |
| | — |
| | (5 | ) | | — |
| | (5 | ) | — |
| | — |
| | 1 |
| | — |
| | 1 |
|
CHANGE IN CASH AND CASH EQUIVALENTS | 5 |
| | 4 |
| | 3 |
| | — |
| | 12 |
| — |
| | 2 |
| | 10 |
| | — |
| | 12 |
|
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD | 10 |
| | 3 |
| | 75 |
| | — |
| | 88 |
| 24 |
| | 6 |
| | 85 |
| | — |
| | 115 |
|
CASH AND CASH EQUIVALENTS AT END OF PERIOD | $ | 15 |
| | $ | 7 |
| | $ | 78 |
| | $ | — |
| | $ | 100 |
| $ | 24 |
| | $ | 8 |
| | $ | 95 |
| | $ | — |
| | $ | 127 |
|
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,December 31, 2019 and September 30, 2018,2019, Parent-only obligations included $224$305 million and $248$315 million of pension and retiree medical benefits, respectively (see Note 20)19). All debt is debt of the Parent other than $5$85 million and $51$13 million at June 30,December 31, 2019 and September 30, 2018,2019, respectively (see Note 18)17), and is primarily related to U.S. accounts receivable securitization and capitalfinancing lease obligations. There were $29 million of0 cash dividends paid to the Parent by subsidiaries and investments accounted for by the equity method for the ninethree months ended June 30,December 31, 2019 and June 30,December 31, 2018, respectively.
MERITOR, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
24. Subsequent Event
TransPower
As of December 31, 2019, the fair value of the company’s investment in Transportation Power Inc. ("TransPower") was $12 million. On January 16, 2020, Meritor acquired 100 percent of the voting equity interest of TransPower for an additional $16 million.
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.
3rd1st Quarter Fiscal Year 20192020 Results
Our sales for the thirdfirst quarter of fiscal year 20192020 were $1,166$901 million, an increasea decrease compared to $1,129$1,038 million in the same period in the prior fiscal year. The increasedecrease in sales was driven by higher trucklower global production primarily in North America,volumes, partially offset by sales from our AxleTech business, which we acquired in the strengtheningfourth quarter of the U.S. dollar against most currencies.fiscal year 2019.
Net income attributable to Meritor for the thirdfirst quarter of fiscal year 20192020 was $86$39 million compared to $64$90 million in the same period in the prior fiscal year. Higher netIn the prior year, we recognized $31 million of income related to remeasuring the Maremont asbestos liability, which did not repeat. Lower revenue year over year was primarilyand higher restructuring costs, related to programs announced in September 2019, also contributed to lower net income from continuing operations attributable to conversion on increased revenue and lower income tax expense.Meritor.
Adjusted EBITDA (see Non-GAAP Financial Measures below) for the thirdfirst quarter of fiscal year 20192020 was $146$98 million compared to $135$119 million in the same period in the prior fiscal year. Our adjusted EBITDA margin (see Non-GAAP Financial Measures below) in the thirdfirst quarter of fiscal year 20192020 was 12.510.9 percent compared to 12.011.5 percent in the same period in the prior fiscal year. The increasedecrease in adjusted EBITDA and adjusted EBITDA margin year over year was driven primarily by conversion on higherlower revenue, and the impact of Aftermarket pricing actions implemented earlier this year, partially offset by higherlower material and and labor and burden costs. Adjusted EBITDA margin was also impacted by our AxleTech business, as the expected benefit from executed synergies continue to ramp up to full run rate.
Net income from continuing operations attributable to the company for the thirdfirst quarter of fiscal year 20192020 was $85$39 million compared to $66$90 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 thirdfirst quarter of fiscal year 20192020 was $10352 million compared to $80$69 million in the same period in the prior fiscal year.
Cash used for operating activities was $19 million in the first quarter of fiscal year 2020 compared to cash provided by operating activities of $11 million in the first quarter of fiscal year 2019. The decrease in cash provided by operating activities was $143 milliondriven primarily by lower earnings in the thirdfirst quarter of fiscal year 2019 compared to $119 million in2020.
Equity Repurchase Authorization
In the thirdfirst quarter of fiscal year 2018. Higher earnings helped drive cash flow performance in the third quarter of fiscal year 2019.
Equity Repurchase Authorization
On July 26, 2019, our Board of Directors authorized the repurchase of up to $250 million of our common stock from time to time through open market purchases, privately negotiated transactions or otherwise, subject to compliance with legal and regulatory requirements and our debt covenants. This authorization supersedes the remaining authority under the prior November 2018 equity repurchase authorization described below.
In the third quarter of fiscal year 2019,2020, we repurchased 1.04.9 million shares of our common stock for $21$100 million (including commission costs) pursuant to the November 20182019 equity repurchase authorization described in the Liquidity section below. The amount remaining available for repurchases under that repurchase authorization was $130$200 million as of June 30,December 31, 2019.
Acquisition of AxleTech Business
On July 26, 2019, we acquired 100 percent of AxleTech's shares for approximately $175 million in cash, subject to certain purchase price adjustments. The addition of AxleTech enhances our growth platform with the addition of a complementary product portfolio that includes a full line of independent suspensions, axles, braking solutions and drivetrain components across the off-highway, defense, specialty and aftermarket markets.
Trends and Uncertainties
Industry Production Volumes
The following table reflects estimated on-highway commercial truck production volumes for selected original equipment markets for the three and nine months ended June 30,December 31, 2019 and 2018 based on available sources and management’s estimates.
| | | Three Months Ended June 30, | | Percent | | Nine Months Ended June 30, | | Percent | Three Months Ended December 31, | | Percent |
| 2019 | | 2018 | | Change | | 2019 | | 2018 | | Change | 2019 | | 2018 | | Change |
Estimated Commercial Truck production (in thousands): | Estimated Commercial Truck production (in thousands): | | | | | | | | | | | |
North America, Heavy-Duty Trucks | 93 |
| | 78 |
| | 19 | % | | 266 |
| | 218 |
| | 22 | % | 67 |
| | 84 |
| | (20 | )% |
North America, Medium-Duty Trucks | 77 |
| | 72 |
| | 7 | % | | 212 |
| | 194 |
| | 9 | % | 59 |
| | 65 |
| | (9 | )% |
North America, Trailers | 86 |
| | 81 |
| | 6 | % | | 250 |
| | 227 |
| | 10 | % | 80 |
| | 87 |
| | (8 | )% |
Western Europe, Heavy- and Medium-Duty Trucks | 125 |
| | 124 |
| | 1 | % | | 392 |
| | 367 |
| | 7 | % | 111 |
| | 129 |
| | (14 | )% |
South America, Heavy- and Medium-Duty Trucks | 31 |
| | 25 |
| | 24 | % | | 85 |
| | 74 |
| | 15 | % | 30 |
| | 27 |
| | 11 | % |
India, Heavy- and Medium-Duty Trucks | 110 |
| | 113 |
| | (3 | )% | | 343 |
| | 342 |
| | — | % | 71 |
| | 114 |
| | (38 | )% |
North America:
During the fourth quarter of fiscal year 2019, we expect production volumes to remain relatively consistent with the levels
experienced in the first nine months of fiscal year 2019.
Western Europe:
During the fourth quarter of fiscal year 2019, we expect production volumes in Western Europe to decrease slightly from the
levels experienced in the first nine months of fiscal year 2019, due to the normal impact of the European summer holidays.
South America:
During the fourth quarter of fiscal year 2019, we expect production volumes to remain relatively consistent with the levels
experienced in the first nine months of fiscal year 2019.
China:
During the fourth quarter of fiscal year 2019,2020, we expect production volumes to decrease from the levels experienced in thefiscal year 2019 by approximately 25 percent.
first nine months of
Western Europe:
During fiscal year 2020, we expect production volumes in Western Europe to decrease from the levels experienced in
fiscal year 2019.
India:South America:
During the fourth quarter of fiscal year 2019,2020, we expect production volumes to increase slightly from the levels experienced in fiscal year 2019.
China:
During fiscal year 2020, we expect production volumes to decrease from the levels experienced in thefiscal year 2019.
first nine months of
India:
During fiscal year 2020, we expect production volumes to significantly decrease from the levels experienced in fiscal year 2019.
Industry-Wide Issues and Other Significant Issues
Our business continues to address a number of challenging industry-wide issues, including the following:
Uncertainty around the global market outlook;
Volatility in price and availability of steel, components, transportation costs and other commodities;commodities, including energy;
Potential for 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; and
Consolidation and globalization of OEMs and their suppliers.
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 execute and implement strategic initiatives, including the ability to launch a significant number of new products, including potential product quality issues, and obtain new business;
Ability to manage possible adverse effects on European markets or 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 and implement strategic initiatives;
Ability to work with our customers to manage rapidly changing production volumes;
Ability to recover, and timingvolumes, including in the event of recovery of, steel price and other cost increases from our customers;
Any unplanned extended shutdowns or production interruptions byaffecting 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;
Potentialcustomers or potential price increases from our suppliers;
Additional restructuring actions and the timing and recognition of restructuring charges, including any actions associated with 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, environmental and other legal proceedings, the long-term solvency of our insurance carriers and the potential for higher-than-anticipated costs resulting from environmental liabilities, including those related to site remediation;
Significant pension costs; and
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 and free cash flow and net debt.flow.
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 or tax credits, 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 debtFree cash flow over adjusted EBITDAincome from continuing operations is a specific financial measure inof our current M2019M2022 plan used to measure the company’s leverage in ordercompany's ability to assist management in its assessment of appropriate allocation of capital.convert earnings to free cash flow.
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 Chief Operating Decision Maker ("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 debtfree cash flow over adjusted EBITDAincome from continuing operations 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.
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, |
| 2019 | | 2018 | | 2019 | | 2018 |
Income from continuing operations attributable to the company | $ | 85 |
| | $ | 66 |
| | $ | 248 |
| | $ | 88 |
|
Loss on debt extinguishment | — |
| | — |
| | — |
| | 8 |
|
Restructuring | (1 | ) | | 3 |
| | (2 | ) | | 6 |
|
Asset impairment charges, net of noncontrolling interests | 1 |
| | — |
| | 1 |
| | 2 |
|
Non-cash tax expense (1) | 20 |
| | 12 |
| | 47 |
| | 26 |
|
U.S. tax reform impacts (2) | (2 | ) | | 1 |
| | (9 | ) | | 77 |
|
Asbestos related liability remeasurement (3) | — |
| | — |
| | (31 | ) | | — |
|
Income tax expense (benefits) (4) | — |
| | (2 | ) | | 6 |
| | (4 | ) |
Adjusted income from continuing operations attributable to the company | $ | 103 |
| | $ | 80 |
| | $ | 260 |
| | $ | 203 |
|
| | | | | | | |
Diluted earnings per share from continuing operations | $ | 0.99 |
| | $ | 0.73 |
| | $ | 2.86 |
| | $ | 0.96 |
|
Impact of adjustments on diluted earnings per share | 0.21 |
| | 0.16 |
| | 0.14 |
| | 1.27 |
|
Adjusted diluted earnings per share from continuing operations | $ | 1.20 |
| | $ | 0.89 |
| | $ | 3.00 |
| | $ | 2.23 |
|
|
| | | | | | | |
| Three Months Ended December 31, |
| 2019 | | 2018 |
Income from continuing operations attributable to the company | $ | 39 |
| | $ | 90 |
|
Restructuring | 5 |
| | — |
|
Non-cash tax expense (1) | 9 |
| | 11 |
|
U.S. tax reform impacts (2) | — |
| | (7 | ) |
Asbestos related liability remeasurement (3) | — |
| | (31 | ) |
Income tax expense (benefits) (4) | (1 | ) | | 6 |
|
Adjusted income from continuing operations attributable to the company | $ | 52 |
| | $ | 69 |
|
| | | |
Diluted earnings per share from continuing operations | $ | 0.48 |
| | $ | 1.03 |
|
Impact of adjustments on diluted earnings per share | 0.16 |
| | (0.24 | ) |
Adjusted diluted earnings per share from continuing operations | $ | 0.64 |
| | $ | 0.79 |
|
(1) Represents tax expense related to the use of deferred tax assets in jurisdictions with net operating loss carry forwards or tax credits.
(2) The ninethree months ended June 30, 2019December 31, 2018 includes $12$11 million of non-cash tax benefit related to the one time deemed repatriation of accumulated foreign earnings and $3$4 million of non-cash tax expense related to other adjustments. The nine months ended June 30, 2018 includes $43 million of non-cash tax expense related to the revaluation of our deferred tax assets and liabilities as a result of the U.S. tax reform and $34 million of non-cash tax expense related to the one time deemed repatriation of accumulated foreign earnings.
(3) The ninethree months ended June 30, 2019December 31, 2018 includes $31 million related to the remeasurement of the Maremont net asbestos liability based on the Maremont prepackaged plan of reorganization.
(4) The ninethree months ended June 30,December 31, 2019 includes $1 million of income tax benefits related to restructuring. The three months ended December 31, 2018 includes $6 million of income tax expense related to the remeasurement of the Maremont net asbestos liability based on the Maremont prepackaged plan of reorganization.
Free cash flow is reconciled to cash provided by (used for) operating activities below (in millions).
| | | Three Months Ended June 30, | | Nine Months Ended June 30, | Three Months Ended December 31, |
| 2019 | | 2018 | | 2019 | | 2018 | 2019 | | 2018 |
Cash provided by operating activities | $ | 143 |
| | $ | 119 |
| | $ | 194 |
| | $ | 191 |
| |
Cash provided by (used for) operating activities | | $ | (19 | ) | | $ | 11 |
|
Capital expenditures | (19 | ) | | (17 | ) | | (63 | ) | | (52 | ) | (16 | ) | | (23 | ) |
Free cash flow | $ | 124 |
| | $ | 102 |
| | $ | 131 |
| | $ | 139 |
| $ | (35 | ) | | $ | (12 | ) |
| | | | |
Free cash flow conversion(1) | | (67 | )% | | (17 | )% |
(1) Represents free cash flow divided by adjusted income from continuing operations
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, | Three Months Ended December 31, |
| 2019 | | 2018 | | 2019 | | 2018 | 2019 | | 2018 |
Net income attributable to Meritor, Inc. | $ | 86 |
| | $ | 64 |
| | $ | 248 |
| | $ | 85 |
| $ | 39 |
| | $ | 90 |
|
Loss (income) from discontinued operations, net of tax, attributable to Meritor, Inc. | (1 | ) | | 2 |
| | — |
| | 3 |
| |
Income from discontinued operations, net of tax, attributable to Meritor, Inc. | | — |
| | — |
|
Income from continuing operations, net of tax, attributable to Meritor, Inc. | $ | 85 |
| | $ | 66 |
| | $ | 248 |
| | $ | 88 |
| $ | 39 |
| | $ | 90 |
|
|
| |
| |
| |
|
| |
|
Interest expense, net | 14 |
| | 14 |
| | 43 |
| | 54 |
| 14 |
| | 14 |
|
Provision for income taxes | 21 |
| | 26 |
| | 69 |
| | 131 |
| 13 |
| | 21 |
|
Depreciation and amortization | 21 |
| | 22 |
| | 64 |
| | 64 |
| 24 |
| | 22 |
|
Noncontrolling interests | 3 |
| | 3 |
| | 7 |
| | 8 |
| 2 |
| | 2 |
|
Loss on sale of receivables | 2 |
| | 1 |
| | 5 |
| | 3 |
| 1 |
| | 1 |
|
Asset impairment charges | 1 |
| | — |
| | 1 |
| | 2 |
| |
Asbestos related liability remeasurement | — |
| | — |
| | (31 | ) | | — |
| — |
| | (31 | ) |
Restructuring | (1 | ) | | 3 |
| | (2 | ) | | 6 |
| 5 |
| | — |
|
Adjusted EBITDA | $ | 146 |
| | $ | 135 |
| | $ | 404 |
| | $ | 356 |
| $ | 98 |
| | $ | 119 |
|
| | | | | | | | | | |
Adjusted EBITDA margin (1) | 12.5 | % | | 12.0 | % | | 12.0 | % | | 11.5 | % | 10.9 | % | | 11.5 | % |
| | | | | | | | | | |
Unallocated legacy and corporate expense, net (2) | 1 |
| | 3 |
| | — |
| | 15 |
| |
Unallocated legacy and corporate expense (income), net (2) | | (2 | ) | | (2 | ) |
Segment adjusted EBITDA | $ | 147 |
| | $ | 138 |
| | $ | 404 |
| | $ | 371 |
| $ | 96 |
| | $ | 117 |
|
| | | | | | | | | | |
Commercial Truck (3) | | | | | | | | | | |
Segment adjusted EBITDA | $ | 93 |
| | $ | 100 |
| | $ | 258 |
| | $ | 263 |
| $ | 56 |
| | $ | 77 |
|
Segment adjusted EBITDA margin (4) | 10.7 | % | | 11.7 | % | | 10.2 | % | | 11.2 | % | 9.0 | % | | 9.9 | % |
| | | | | | | | | | |
Aftermarket, Industrial and Trailer (3) | | | | | | | | | | |
Segment adjusted EBITDA | $ | 54 |
| | $ | 38 |
| | $ | 146 |
| | $ | 108 |
| $ | 40 |
| | $ | 40 |
|
Segment adjusted EBITDA margin (4) | 15.9 | % | | 11.9 | % | | 15.0 | % | | 12.4 | % | 12.6 | % | | 13.2 | % |
(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) Amounts for the three and nine months ended June 30,December 31, 2018 have been recast to reflect reportable segment changes.
(4) Segment adjusted EBITDA margin equals segment adjusted EBITDA divided by consolidated sales from continuing operations, either in the aggregate or by segment as applicable
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, 2019 | | September 30, 2018 |
Short-term debt | $ | 24 |
| | $ | 94 |
|
Long-term debt | 734 |
| | 730 |
|
Total debt | 758 |
| | 824 |
|
Less: Cash and cash equivalents | (111 | ) | | (115 | ) |
Net debt | $ | 647 |
| | $ | 709 |
|
|
| | | | | | | |
| Twelve Months Ended(1) | | Twelve Months Ended |
| June 30, 2019 | | September 30, 2018 |
Net income attributable to Meritor, Inc. | $ | 280 |
| | $ | 117 |
|
Loss from discontinued operations, net of tax, attributable to Meritor, Inc. | — |
| | 3 |
|
Income from continuing operations, net of tax, attributable to Meritor, Inc. | $ | 280 |
| | $ | 120 |
|
| | | |
Interest expense, net | 56 |
| | 67 |
|
Provision for income taxes | 87 |
| | 149 |
|
Depreciation and amortization | 84 |
| | 84 |
|
Noncontrolling interests | 8 |
| | 9 |
|
Loss on sale of receivables | 7 |
| | 5 |
|
Asset impairment charges | 2 |
| | 3 |
|
Asbestos related liability remeasurement | (31 | ) | | — |
|
Asbestos related items | 25 |
| | 25 |
|
Pension settlement loss | 6 |
| | 6 |
|
Restructuring costs | (2 | ) | | 6 |
|
Adjusted EBITDA | $ | 522 |
| | $ | 474 |
|
| | | |
Net debt over adjusted EBITDA | 1.2 |
| | 1.5 |
|
(1) Trailing-twelve-month period ended June 30, 2019 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.applicable.
Results of Operations
Three Months Ended June 30,December 31, 2019 Compared to Three Months Ended June 30,December 31, 2018
Sales
The following table reflects total company and business segment sales for the three months ended June 30,December 31, 2019 and 2018 (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 | Three Months Ended December 31, | | | | | | Dollar Change Due To |
| 2019 | | 2018 (1) | | Dollar Change | | % Change | | Currency | | Volume/ Other | 2019 | | 2018 (1) | | Dollar Change | | % Change | | Currency | | Volume/ Other |
Sales: | | | | | | | | | | | | | | | | | | | | | | |
Commercial Truck | | | | | | | | | | | | | | | | | | | | | | |
North America | $ | 473 |
| | $ | 431 |
| | $ | 42 |
| | 10 | % | | $ | — |
| | $ | 42 |
| $ | 326 |
| | $ | 397 |
| | $ | (71 | ) | | (18 | )% | | $ | — |
| | $ | (71 | ) |
Europe | 180 |
| | 196 |
| | (16 | ) | | (8 | )% | | (11 | ) | | (5 | ) | 141 |
| | 175 |
| | (34 | ) | | (19 | )% | | (3 | ) | | (31 | ) |
South America | 67 |
| | 55 |
| | 12 |
| | 22 | % | | (7 | ) | | 19 |
| 53 |
| | 50 |
| | 3 |
| | 6 | % | | (4 | ) | | 7 |
|
China | 44 |
| | 53 |
| | (9 | ) | | (17 | )% | | (3 | ) | | (6 | ) | 34 |
| | 41 |
| | (7 | ) | | (17 | )% | | (1 | ) | | (6 | ) |
India | 53 |
| | 58 |
| | (5 | ) | | (9 | )% | | (1 | ) | | (4 | ) | 22 |
| | 57 |
| | (35 | ) | | (61 | )% | | — |
| | (35 | ) |
Other | 18 |
| | 26 |
| | (8 | ) | | (31 | )% | | (1 | ) | | (7 | ) | 14 |
| | 24 |
| | (10 | ) | | (42 | )% | | (1 | ) | | (9 | ) |
Total External Sales | $ | 835 |
| | $ | 819 |
| | $ | 16 |
| | 2 | % | | $ | (23 | ) | | $ | 39 |
| $ | 590 |
| | $ | 744 |
| | $ | (154 | ) | | (21 | )% | | $ | (9 | ) | | $ | (145 | ) |
Intersegment Sales | 34 |
| | 35 |
| | (1 | ) | | (3 | )% | | (3 | ) | | 2 |
| 32 |
| | 35 |
| | (3 | ) | | (9 | )% | | (1 | ) | | (2 | ) |
Total Sales | $ | 869 |
| | $ | 854 |
| | $ | 15 |
| | 2 | % | | $ | (26 | ) | | $ | 41 |
| $ | 622 |
| | $ | 779 |
| | $ | (157 | ) | | (20 | )% | | $ | (10 | ) | | $ | (147 | ) |
| | | | | | | | | | | | | | | | | | | | | | |
Aftermarket, Industrial and Trailer | | | | | | | | | | | | | | | | | | | | | | |
North America | $ | 308 |
| | $ | 279 |
| | $ | 29 |
| | 10 | % | | $ | (1 | ) | | $ | 30 |
| $ | 266 |
| | $ | 268 |
| | $ | (2 | ) | | (1 | )% | | $ | — |
| | $ | (2 | ) |
Europe | 23 |
| | 31 |
| | (8 | ) | | (26 | )% | | (1 | ) | | (7 | ) | 43 |
| | 26 |
| | 17 |
| | 65 | % | | (1 | ) | | 18 |
|
Other | | 2 |
| | — |
| | 2 |
| | N/A |
| | — |
| | 2 |
|
Total External Sales | $ | 331 |
| | $ | 310 |
| | $ | 21 |
| | 7 | % | | $ | (2 | ) | | $ | 23 |
| $ | 311 |
| | $ | 294 |
| | $ | 17 |
| | 6 | % | | $ | (1 | ) | | $ | 18 |
|
Intersegment Sales | 9 |
| | 9 |
| | — |
| | — | % | | (2 | ) | | 2 |
| 6 |
| | 9 |
| | (3 | ) | | (33 | )% | | (1 | ) | | (2 | ) |
Total Sales | $ | 340 |
| | $ | 319 |
| | $ | 21 |
| | 7 | % | | $ | (4 | ) | | $ | 25 |
| $ | 317 |
| | $ | 303 |
| | $ | 14 |
| | 5 | % | | $ | (2 | ) | | $ | 16 |
|
| | | | | | | | | | | | | | | | | | | | | | |
Total External Sales | $ | 1,166 |
|
| $ | 1,129 |
| | $ | 37 |
| | 3 | % | | $ | (25 | ) | | $ | 62 |
| $ | 901 |
|
| $ | 1,038 |
| | $ | (137 | ) | | (13 | )% | | $ | (10 | ) | | $ | (127 | ) |
(1) Amounts for the three months ended June 30,December 31, 2018 have been recast to reflect reportable segment changes.
Commercial Truck sales were $869$622 million in the thirdfirst quarter of fiscal year 2019, up 22020, down 20 percent compared to the thirdfirst quarter of fiscal year 2018.2019. The increasedecrease in sales was driven primarily by increased production in North America, partially offset bydecreased market volumes for most regions across the strengthening of the U.S. dollar against most currencies.segment.
Aftermarket, Industrial and Trailer sales were $340$317 million in the thirdfirst quarter of fiscal year 2020, up 5 percent compared to the first quarter of fiscal year 2019. Higher sales were primarily driven by revenue generated from our AxleTech business we acquired in the fourth quarter of fiscal year 2019, up 7 percent compared topartially offset by decreased volumes across the third quarter of fiscal year 2018. Higher sales were driven by increased industrial volumes and pricing actions within our Aftermarket business.segment.
|
| | | | | | | | | | | | | | |
| Three Months Ended December 31, | | | | |
| 2019 | | 2018 | | Dollar Change | | % Change |
Sales | $ | 901 |
| | $ | 1,038 |
| | $ | (137 | ) | | (13 | )% |
Cost of sales | (774 | ) | | (897 | ) | | 123 |
| | 14 | % |
GROSS MARGIN | 127 |
| | 141 |
| | (14 | ) | | (10 | )% |
Selling, general and administrative | (70 | ) | | (34 | ) | | (36 | ) | | (106 | )% |
Other operating expense, net | (5 | ) | | — |
| | (5 | ) | | N/A |
|
Other income, net | 10 |
| | 11 |
| | (1 | ) | | (9 | )% |
Equity in earnings of affiliates | 6 |
| | 9 |
| | (3 | ) | | (33 | )% |
Interest expense, net | (14 | ) | | (14 | ) | | — |
| | — | % |
INCOME BEFORE INCOME TAXES | 54 |
| | 113 |
| | (59 | ) | | (52 | )% |
Provision for income taxes | (13 | ) | | (21 | ) | | 8 |
| | 38 | % |
NET INCOME | 41 |
| | 92 |
| | (51 | ) | | (55 | )% |
Less: Net income attributable to noncontrolling interests | (2 | ) | | (2 | ) | | — |
| | — | % |
NET INCOME ATTRIBUTABLE TO MERITOR, INC. | $ | 39 |
| | $ | 90 |
| | $ | (51 | ) | | (57 | )% |
Cost of Sales and Gross ProfitMargin
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,December 31, 2019 was $987$774 million compared to $959$897 million in the same period in the prior fiscal year, representing an increasea decrease of 314 percent, primarily driven by increaseddecreased market volumes. Total cost of sales was 84.685.9 and 84.986.4 percent of sales for the three-month periods ended June 30,December 31, 2019 and 2018, respectively.
The following table summarizes significant factors contributing to the changes in costs of sales during the third quarter of fiscal year 2019 compared to the same quarter in the prior year (in millions):
|
| | | |
| Cost of Sales |
Three Months Ended June 30, 2018 (1) | $ | 959 |
|
Volume, mix and other, net | 60 |
|
Foreign exchange | (32 | ) |
Three Months Ended June 30, 2019 | $ | 987 |
|
(1) Amounts for the three months ended June 30, 2018 have been recast for ASU 2017-07, Compensation Retirement Benefits (Topic 715). $7 million was reclassified out of Cost of goods sold and into Non-operating income (expense).
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 | $ | 38 |
|
Lower labor and overhead costs | (8 | ) |
Other, net | (2 | ) |
Total change in costs of sales | $ | 28 |
|
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,December 31, 2019 increased $38decreased $106 million compared to the same period in the prior fiscal year primarily due to higherlower volumes, and higher year-over-year steel prices.prices and layered capacity costs.
Labor and overhead costs decreased by $8$20 million compared to the same period in the prior fiscal year.year primarily due to lower volumes.
Gross margin was $179$127 million and $170$141 million for the three-month periods ended June 30,December 31, 2019 and 2018, respectively. Gross margin as a percentage of sales was 15.414.1 and 15.113.6 percent for the three-month periods ended June 30,December 31, 2019 and 2018, respectively. Gross margin as a percentage of sales increasedremained relatively flat as lower sales more than offset lower material, primarily due to conversion on higher revenue which was partially offset by higher materialsteel, and freight costs.
Other Income Statement Items
Selling, general and administrative expenses ("SG&A") for the three months ended June 30,December 31, 2019 and 2018 are summarized as follows (dollars in millions):were $70 million and $34 million, respectively.
|
| | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | | | |
| June 30, 2019 | | June 30, 2018 | | Increase (Decrease) |
SG&A | Amount | | % of sales | | Amount | | % of sales | | Amount | | % of sales |
Loss on sale of receivables | $ | (2 | ) | | (0.2 | )% | | $ | (1 | ) | | (0.1 | )% | | $ | 1 |
| | 0.1 pts |
Short and long-term variable compensation | (16 | ) | | (1.4 | )% | | (16 | ) | | (1.4 | )% | | — |
| | 0.0 pts |
Asbestos related expense, net of asbestos related insurance recoveries | — |
| | — | % | | (3 | ) | | (0.3 | )% | | (3 | ) | | (0.3) pts |
All other SG&A | (55 | ) | | (4.7 | )% | | (56 | ) | | (4.9 | )% | | (1 | ) | | (0.2) pts |
Total SG&A | $ | (73 | ) | | (6.3 | )% | | $ | (76 | ) | | (6.7 | )% | | $ | (3 | ) | | (0.4) pts |
We recognized $3$31 million related to previous cash settlements with insurance companies for recoveriesremeasuring the Maremont asbestos liability based on the terms of defense and indemnity costs associated with asbestos liabilitiesthe plan of reorganization in the thirdfirst quarter of fiscal year 2018, which is included in Asbestos-related expense, net of asbestos-related insurance recoveries2019 (see Note 2120 of the Notes to the Condensed Consolidated Financial Statements in Part I of this Quarterly Report).
Other operating expense All other SG&A increased by $5 million primarily due to additional costs generated from our AxleTech business, which was $3 millionacquired in the thirdfourth quarter of fiscal year 2019 and insignificant in the third quarter of fiscal year 2018. During the three months ended June 30, 2019, these costs primarily related to environmental remediation.2019.
Operating income increased by $13 million from $91 million in the third quarter of fiscal year 2018 to $104 million in the same period in fiscal year 2019. Key items affecting operating income are discussed above.
Non-operating income increased by $1 million from $9 million in the third quarter of fiscal year 2018 to $10 million in the same period in fiscal year 2019. Amounts for the three months ended June 30, 2018 have been recast for ASU 2017-07, Compensation Retirement Benefits (Topic 715). For the three months ended June 30, 2018, $7 million was reclassified out of Cost of goods sold and into Non-operating income.
Equity in earnings of affiliates was $9 million in the third quarter of fiscal years 2019 and 2018.
Interest expense, net was $14 million in the third quarter of fiscal years 2019 and 2018.
Provision for income taxes was $21 million in the third quarter of fiscal year 2019 compared to $26 million in the same period in the prior fiscal year. Higher pre-tax income during the third quarter of fiscal year 2019 compared to the same quarter in the prior year was offset by a reduction in the current year annualized effective tax rate. Additionally, we recorded a $4 million tax charge related to a tax accrual recorded in the third quarter of fiscal year 2018, that did not repeat.
Income from continuing operations (before noncontrolling interests) was $88 million in the third quarter of fiscal year 2019 compared to $69 million in the third quarter of fiscal year 2018. The reasons for the increase are discussed above.
Net income attributable to Meritor, Inc. was $86 million in the third quarter of fiscal year 2019 compared to $64 million in the third quarter of fiscal year 2018. 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 three months ended June 30,December 31, 2019 and 2018 (dollars in millions).
|
| | | | | | | | | | | | | | | | | | | |
| Segment adjusted EBITDA | | Segment adjusted EBITDA margins |
| Three Months Ended June 30, | | | | Three Months Ended June 30, | | |
| 2019 | | 2018 (1) | | Change | | 2019 | | 2018 (1) | | Change |
Commercial Truck | $ | 93 |
| | $ | 100 |
| | $ | (7 | ) | | 10.7 | % | | 11.7 | % | | (1.0) pts |
Aftermarket, Industrial and Trailer | 54 |
| | 38 |
| | 16 |
| | 15.9 | % | | 11.9 | % | | 4.0 pts |
Segment adjusted EBITDA | $ | 147 |
| | $ | 138 |
| | $ | 9 |
| | 12.6 | % | | 12.2 | % | | 0.4 pts |
|
| | | | | | | | | | | | | | | | | | | | |
| Segment adjusted EBITDA | | Segment adjusted EBITDA margins |
| Three Months Ended December 31, | | | | Three Months Ended December 31, | | |
| 2019 | | 2018 (1) | | Change | | 2019 | | 2018 (1) | | Change |
Commercial Truck | $ | 56 |
| | $ | 77 |
| | $ | (21 | ) | | 9.0 | % | | 9.9 | % | | (0.9 | ) pts |
Aftermarket, Industrial and Trailer | 40 |
| | 40 |
| | — |
| | 12.6 | % | | 13.2 | % | | (0.6 | ) pts |
Segment adjusted EBITDA | $ | 96 |
| | $ | 117 |
| | $ | (21 | ) | | 10.7 | % | | 11.3 | % | | (0.6 | ) pts |
(1) Amounts for the three months ended June 30,December 31, 2018 have been recast to reflect reportable segment changes.
Significant items impacting year-over-year segment adjusted EBITDA include the following (in millions):
|
| | | | | | | | | | | |
| Commercial Truck | | Aftermarket, Industrial and Trailer | | TOTAL |
Segment adjusted EBITDA– Quarter ended June 30, 2018 (1) | $ | 100 |
| | $ | 38 |
| | $ | 138 |
|
Lower pension and retiree medical expense, net | 1 |
| | — |
| | 1 |
|
Impact of foreign currency exchange rates | (5 | ) | | (1 | ) | | (6 | ) |
Volume, mix, pricing and other | (3 | ) | | 17 |
| | 14 |
|
Segment adjusted EBITDA – Quarter ended June 30, 2019 | $ | 93 |
| | $ | 54 |
| | $ | 147 |
|
|
| | | | | | | | | | | |
| Commercial Truck | | Aftermarket, Industrial and Trailer | | TOTAL |
Segment adjusted EBITDA– Quarter ended December 31, 2018 (1) | $ | 77 |
| | $ | 40 |
| | $ | 117 |
|
Lower earnings from unconsolidated affiliates | (3 | ) | | — |
| | (3 | ) |
Impact of foreign currency exchange rates | (3 | ) | | (1 | ) | | (4 | ) |
Volume, mix, pricing and other | (15 | ) | | 1 |
| | (14 | ) |
Segment adjusted EBITDA – Quarter ended December 31, 2019 | $ | 56 |
| | $ | 40 |
| | $ | 96 |
|
(1) Amounts for the three months ended June 30,December 31, 2018 have been recast to reflect reportable segment changes.
Commercial Truck segment adjusted EBITDA was $93$56 million in the thirdfirst quarter of fiscal year 2019,2020, down $7$21 million from the same period in the prior fiscal year. Segment adjusted EBITDA margin decreased from 11.79.9 percent in the thirdfirst quarter of fiscal year 20182019 to 10.79.0 percent in the thirdfirst quarter of fiscal year 2019.2020. The decrease in segment adjusted EBITDA and segment adjusted EBITDA margin were driven primarily by higher material costs,lower volumes, partially offset by the conversion on higher revenue. We continue to incur these layered capacity costs, but they are trending to be less than we have incurred in the past. Segment adjusted EBITDA was also unfavorably impacted by the strengthening of the U.S. dollar against most currencies.lower freight, labor and burden and material costs.
Aftermarket, Industrial and Trailer segment adjusted EBITDA was $54$40 million in the thirdfirst quarter of fiscal years 2020 and 2019. Segment adjusted EBITDA margin decreased from 13.2 percent in the first quarter of fiscal year 2019 up $16 million from the same period in the prior fiscal year. Segment adjusted EBITDA margin increased from 11.9to 12.6 percent in the thirdfirst quarter of fiscal year 2018 to 15.9 percent2020. The decrease in the third quarter of fiscal year 2019. The increase in segment adjusted EBITDA and segment adjusted EBITDA margin was driven primarily by pricing actions withinthe impact from our Aftermarket business.AxleTech business, as the benefit from executed synergies continue to ramp up to full run rate.
Nine Months Ended June 30, 2019Compared to Nine Months Ended June 30, 2018
Sales
The following table reflects total company and business segment sales for the nine months ended June 30, 2019 and 2018 (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 |
| 2019 | | 2018 (1) | | Dollar Change | | % Change | | Currency | | Volume/ Other |
Sales: | | | | | | | | | | | |
Commercial Truck | | | | | | | | | | | |
North America | $ | 1,333 |
| | $ | 1,122 |
| | $ | 211 |
| | 19 | % | | $ | — |
| | $ | 211 |
|
Europe | 536 |
| | 567 |
| | (31 | ) | | (5 | )% | | (35 | ) | | 4 |
|
South America | 180 |
| | 162 |
| | 18 |
| | 11 | % | | (24 | ) | | 42 |
|
China | 129 |
| | 149 |
| | (20 | ) | | (13 | )% | | (8 | ) | | (12 | ) |
India | 172 |
| | 172 |
| | — |
| | — | % | | (13 | ) | | 13 |
|
Other | 66 |
| | 82 |
| | (16 | ) | | (20 | )% | | (3 | ) | | (13 | ) |
Total External Sales | $ | 2,416 |
| | $ | 2,254 |
| | $ | 162 |
| | 7 | % | | $ | (83 | ) | | $ | 245 |
|
Intersegment Sales | 108 |
| | 102 |
| | 6 |
| | 6 | % | | (11 | ) | | 17 |
|
Total Sales | $ | 2,524 |
| | $ | 2,356 |
| | $ | 168 |
| | 7 | % | | $ | (94 | ) | | $ | 262 |
|
| | | | | | | | | | | |
Aftermarket, Industrial and Trailer | | | | | | | | | | | |
North America | $ | 869 |
| | $ | 752 |
| | $ | 117 |
| | 16 | % | | $ | (3 | ) | | $ | 120 |
|
Europe | 75 |
| | 92 |
| | (17 | ) | | (18 | )% | | (4 | ) | | (13 | ) |
Total External Sales | $ | 944 |
| | $ | 844 |
| | $ | 100 |
| | 12 | % | | $ | (7 | ) | | $ | 107 |
|
Intersegment Sales | 28 |
| | 25 |
| | 3 |
| | 12 | % | | (5 | ) | | 8 |
|
Total Sales | $ | 972 |
| | $ | 869 |
| | $ | 103 |
| | 12 | % | | $ | (12 | ) | | $ | 115 |
|
| | | | | | | | | | | |
Total External Sales | $ | 3,360 |
|
| $ | 3,098 |
| | $ | 262 |
| | 8 | % | | $ | (90 | ) | | $ | 352 |
|
(1) Amounts for the nine months ended June 30, 2018 have been recast to reflect reportable segment changes.
Commercial Truck sales were $2,524 million in the first nine months of fiscal year 2019, up 7 percent compared to the first nine months of fiscal year 2018. The increase in sales was driven primarily by higher truck production in North America and increased market share, partially offset by the strengthening of the U.S. dollar against most currencies.
Aftermarket, Industrial and Trailer sales were $972 million in the first nine months of fiscal year 2019, up 12 percent compared to the first nine months of fiscal year 2018. Higher sales were driven by increased volumes across North America and pricing actions within our Aftermarket business.
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, 2019 was $2,866 million compared to $2,625 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 85.3 and 84.7 percent of sales for the nine-month periods ended June 30, 2019 and 2018, respectively.
The following table summarizes significant factors contributing to the changes in costs of sales during the first nine months of fiscal year 2019 compared to the same quarter in the prior year (in millions):
|
| | | |
| Cost of Sales |
Nine Months Ended June 30, 2018 (1) | $ | 2,625 |
|
Volume, mix and other, net | 332 |
|
Foreign exchange | (91 | ) |
Nine Months Ended June 30, 2019 | $ | 2,866 |
|
(1) Amounts for the nine months ended June 30, 2018 have been recast for ASU 2017-07, Compensation Retirement Benefits (Topic 715). $22 million was reclassified out of Cost of goods sold and into Non-operating income (expense).
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 | $ | 229 |
|
Higher labor and overhead costs | 13 |
|
Other, net | (1 | ) |
Total change in costs of sales | $ | 241 |
|
Material costsrepresent 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, 2019 increased $229 million compared to the same period in the prior fiscal year primarily due to higher volumes and higher year-over-year steel prices.
Labor and overhead costsincreased $13 million compared to the same period in the prior fiscal year primarily due to higher volumes.
Gross margin was $494 million and $473 million for the nine-month periods ended June 30, 2019 and 2018, respectively. Gross margin, as a percentage of sales, was 14.7 and 15.3 percent for the nine-month periods ended June 30, 2019 and 2018, respectively. Gross margin as a percentage of sales decreased primarily due to higher freight and other layered capacity costs driven by significant production levels, which more than offset the impact of conversion on higher revenue.
Other Income Statement Items
SG&A for the nine months ended June 30, 2019 and 2018 are summarized as follows (dollars in millions):
|
| | | | | | | | | | | | | | | | | | | |
| Nine Months Ended | | | | |
| June 30, 2019 | | June 30, 2018 (1) | | Increase (Decrease) |
SG&A | Amount | | % of sales | | Amount | | % of sales | | Amount | | % of sales |
Loss on sale of receivables | $ | (5 | ) | | (0.1 | )% | | $ | (3 | ) | | (0.1 | )% | | $ | 2 |
| | 0.0 pts |
Short and long-term variable compensation | (37 | ) | | (1.1 | )% | | (43 | ) | | (1.4 | )% | | (6 | ) | | (0.3) pts |
Asbestos related expense, net of asbestos related insurance recoveries | — |
| | — | % | | (7 | ) | | (0.2 | )% | | (7 | ) | | (0.2) pts |
Q1 Asbestos related liability remeasurement | 31 |
| | 0.9 | % | | — |
| | — | % | | (31 | ) | | (0.9) pts |
All other SG&A | (169 | ) | | (5.1 | )% | | (165 | ) | | (5.3 | )% | | 4 |
| | (0.2) pts |
Total SG&A | $ | (180 | ) | | (5.4 | )% | | $ | (218 | ) | | (7.0 | )% | | $ | (38 | ) | | (1.6) pts |
(1) Amounts for the nine months ended June 30, 2018 have been recast for ASU 2017-07, Compensation Retirement Benefits (Topic 715).
We recognized $31 million related to remeasuring the Maremont asbestos liability based on the Maremont plan of reorganization in the first quarter of fiscal year 2019 (see Note 21 of the Notes to the Condensed Consolidated Financial Statements in Part I of this Quarterly Report). We recognized $7 million related to previous cash settlements with insurance companies for recoveries of defense and indemnity costs associated with asbestos liabilities in the first nine months of fiscal year 2018, which is included in
Asbestos-related expense, net of asbestos-related insurance recoveries (see Note 21 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, increased year over year, primarily due to investments made throughout fiscal year 2019 to support plan growth initiatives.
Other operating expense was $3 million in the first nine months of fiscal year 2019. Other operating expense was $12 million in the first nine months of fiscal year 2018. During the nine months ended June 30, 2019 and June 30, 2018, these costs primarily related to environmental remediation.
Operating income increased by $76 million from $237 million in the first nine months of fiscal year 2018 to $313 million in the same period in fiscal year 2019. Key items affecting operating income are discussed above.
Non-operating income increased by $6 million from $24 million in the first nine months of fiscal year 2018 to $30 million in the same period in fiscal year 2019. The increase was driven primarily by lower pension and retiree medical expense in the current year. Amounts for the nine months ended June 30, 2018 have been recast for ASU 2017-07, Compensation Retirement Benefits (Topic 715). For the nine months ended June 30, 2018, $22 million was reclassified out of Cost of goods sold and $1 million was reclassified out of SG&A and into Non-operating income.
Equity in earnings of affiliates increased by $4 million from $20 million in the first nine months of fiscal year 2018 to $24 million in the same period in fiscal year 2019. The increase was primarily attributable to higher earnings across all our joint ventures.
Interest expense, net decreased by $11 million from $54 million in the first nine months of fiscal year 2018 to $43 million in the same period in fiscal year 2019. The decrease in Interest expense was primarily attributable to the loss on debt extinguishment of $8 million recognized in the first quarter of fiscal year 2018 that did not repeat, as well as the benefits from the cross-currency swaps entered into during the third quarter of fiscal year 2018.
Provision for income taxes was $69 million in the first nine months of fiscal year 2019 compared to $131 million in the same period in the prior fiscal year. The nine months ended June 30, 2018 included $43 million of non-cash tax expense related to the remeasurement of our deferred tax attributes as a result of the U.S. tax reform and $34 million of non-cash tax expense related to the one-time deemed repatriation of accumulated foreign earnings, which had no cash impact due to the use of foreign tax credits. For the nine months ended June 30, 2019, a $12 million non-cash tax benefit was recorded to reduce the liability for the refinement of the one-time deemed repatriation. Also impacting the first nine months of fiscal year 2019 was a $6 million non-cash income tax expense adjustment related to the remeasurement of the Maremont asbestos liability. Also impacting the third quarter of fiscal year 2019 was stronger earnings in certain jurisdictions that do not have a tax valuation allowance compared to the prior year.
Income from continuing operations (before noncontrolling interests) was $255 million in the first nine months of fiscal year 2019 compared to $96 million in the first nine months of fiscal year 2018. The reasons for the increase are discussed above.
Net income attributable to Meritor, Inc. was $248 million in the first nine months of fiscal year 2019 compared to $85 million in the first nine months of fiscal year 2018. 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, 2019 and 2018 (dollars in millions).
|
| | | | | | | | | | | | | | | | | | | |
| Segment adjusted EBITDA | | Segment adjusted EBITDA margins |
| Nine Months Ended June 30, | | | | Nine Months Ended June 30, | | |
| 2019 | | 2018 (1) | | Change | | 2019 | | 2018 (1) | | Change |
Commercial Truck | $ | 258 |
| | $ | 263 |
| | $ | (5 | ) | | 10.2 | % | | 11.2 | % | | (1.0) pts |
Aftermarket, Industrial and Trailer | 146 |
| | 108 |
| | 38 |
| | 15.0 | % | | 12.4 | % | | 2.6 pts |
Segment adjusted EBITDA | $ | 404 |
| | $ | 371 |
| | $ | 33 |
| | 12.0 | % | | 12.0 | % | | 0.0 pts |
(1) Amounts for the nine months ended June 30, 2018 have been recast to reflect reportable segment changes.
Significant items impacting year-over-year segment adjusted EBITDA include the following (in millions):
|
| | | | | | | | | | | |
| Commercial Truck | | Aftermarket, Industrial and Trailer | | TOTAL |
Segment adjusted EBITDA– Nine months ended June 30, 2018 (1) | $ | 263 |
| | $ | 108 |
| | $ | 371 |
|
Higher earnings from unconsolidated affiliates | 4 |
| | — |
| | 4 |
|
Lower pension and retiree medical expense, net | 2 |
| | 1 |
| | 3 |
|
Impact of foreign currency exchange rates | (14 | ) | | (4 | ) | | (18 | ) |
Volume, mix, pricing and other | 3 |
| | 41 |
| | 44 |
|
Segment adjusted EBITDA – Nine months ended June 30, 2019 | $ | 258 |
| | $ | 146 |
| | $ | 404 |
|
(1) Amounts for the nine months ended June 30, 2018 have been recast to reflect reportable segment changes.
Commercial Truck segment adjusted EBITDA was $258 million in the first nine months of fiscal year 2019, down $5 million from the same period in the prior fiscal year. Segment adjusted EBITDA margin decreased from 11.2 percent for the first nine months of fiscal year 2018 to 10.2 percent in the first nine months of fiscal year 2019. The decrease in segment adjusted EBITDA and segment adjusted EBITDA margin was driven primarily by higher net steel, freight and other layered capacity costs, partially offset by conversion on higher revenue and continued material performance. Segment adjusted EBITDA was also unfavorably impacted by the strengthening of the U.S. dollar against most currencies.
Aftermarket, Industrial and Trailer segment adjusted EBITDA was $146 million in the first nine months of fiscal year 2019, up $38 million from the same period in the prior fiscal year. Segment adjusted EBITDA margin increased from 12.4 percent in the first nine months of fiscal year 2018 to 15.0 percent in the first nine months of fiscal year 2019. The increase in segment adjusted EBITDA and segment adjusted EBITDA margin was driven primarily by pricing actions within our Aftermarket business.
Financial Condition
Cash Flows (in millions)
|
| | | | | | | |
| Nine Months Ended June 30, |
| 2019 | | 2018 |
OPERATING CASH FLOWS | | | |
Income from continuing operations | $ | 255 |
| | $ | 96 |
|
Depreciation and amortization | 64 |
| | 64 |
|
Deferred income tax expense | 27 |
| | 92 |
|
Loss on debt extinguishment | — |
| | 8 |
|
Restructuring costs | (2 | ) | | 6 |
|
Asset impairment charges | 1 |
| | 2 |
|
Equity in earnings of affiliates | (24 | ) | | (20 | ) |
Pension and retiree medical income | (28 | ) | | (23 | ) |
Asbestos related liability remeasurement | (31 | ) | | — |
|
Dividends received from equity method investments | 14 |
| | 9 |
|
Pension and retiree medical contributions | (12 | ) | | (17 | ) |
Restructuring payments | (2 | ) | | (7 | ) |
Changes in receivables, inventories and accounts payable | (96 | ) | | (136 | ) |
Changes in off-balance sheet accounts receivable factoring | 41 |
| | 65 |
|
Changes in other current assets and liabilities | (21 | ) | | 26 |
|
Changes in other assets and liabilities | (3 | ) | | 12 |
|
Other, net | 13 |
| | 13 |
|
Cash flows provided by continuing operations | 196 |
| | 190 |
|
Cash flows provided by (used for) discontinued operations | (2 | ) | | 1 |
|
CASH PROVIDED BY OPERATING ACTIVITIES | $ | 194 |
| | $ | 191 |
|
|
| | | | | | | |
| Three Months Ended December 31, |
| 2019 | | 2018 |
OPERATING CASH FLOWS | | | |
Income from continuing operations | $ | 41 |
| | $ | 92 |
|
Depreciation and amortization | 24 |
| | 22 |
|
Deferred income tax expense | 3 |
| | 3 |
|
Restructuring costs | 5 |
| | — |
|
Equity in earnings of affiliates | (6 | ) | | (9 | ) |
Pension and retiree medical income | (10 | ) | | (9 | ) |
Asbestos related liability remeasurement | — |
| | (31 | ) |
Dividends received from equity method investments | — |
| | 1 |
|
Pension and retiree medical contributions | (3 | ) | | (3 | ) |
Restructuring payments | (7 | ) | | (1 | ) |
Changes in receivables, inventories and accounts payable | (31 | ) | | (52 | ) |
Changes in off-balance sheet accounts receivable factoring | 7 |
| | 38 |
|
Changes in other current assets and liabilities | (28 | ) | | (40 | ) |
Changes in other assets and liabilities | (16 | ) | | (4 | ) |
Other, net | 3 |
| | 5 |
|
Cash flows provided by (used for) continuing operations | (18 | ) | | 12 |
|
Cash flows used for discontinued operations | (1 | ) | | (1 | ) |
CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES | $ | (19 | ) | | $ | 11 |
|
Cash provided byused for operating activities in the first ninethree months of fiscal year 20192020 was $194$19 million compared to $191cash provided by operating activities of $11 million in the same period of fiscal year 2018.2019. The decrease in cash provided by operating activities was driven primarily by lower earnings in the first quarter of fiscal year 2020.
|
| | | | | | | |
| Nine Months Ended June 30, |
| 2019 | | 2018 |
INVESTING CASH FLOWS | | | |
Capital expenditures | $ | (63 | ) | | $ | (52 | ) |
Proceeds from sale of equity method investment | — |
| | 250 |
|
Cash paid for acquisition of AA Gear & Manufacturing, Inc. | — |
| | (36 | ) |
Proceeds from sale of a business | — |
| | 4 |
|
Proceeds from settlement of cross-currency swaps | 17 |
| | — |
|
Cash paid for investment in Transportation Power, Inc. | (6 | ) | | (6 | ) |
Proceeds from sale of assets | — |
| | 2 |
|
CASH PROVIDED BY (USED FOR) INVESTING ACTIVITIES | $ | (52 | ) | | $ | 162 |
|
|
| | | | | | | |
| Three Months Ended December 31, |
| 2019 | | 2018 |
INVESTING CASH FLOWS | | | |
Capital expenditures | $ | (16 | ) | | $ | (23 | ) |
Cash paid for investment in Transportation Power, Inc. | — |
| | (3 | ) |
Other investing activities | — |
| | (1 | ) |
CASH USED FOR INVESTING ACTIVITIES | $ | (16 | ) | | $ | (27 | ) |
Cash used for investing activities was $5216 million in the first ninethree months of fiscal year 20192020 compared to cash provided by investing activities of $162$27 million in the same period in fiscal year 2018. The decrease in cash provided by investing activities was driven by $250 million of proceeds received in the first quarter of fiscal year 2018 from the sale of our interest in Meritor WABCO Vehicle Control Systems ("Meritor WABCO") in the fourth quarter of fiscal year 2017 that did not repeat.2019.
| | | Nine Months Ended June 30, | Three Months Ended December 31, |
| 2019 | | 2018 | 2019 | | 2018 |
FINANCING CASH FLOWS | | | | | | |
Borrowings and securitization | $ | (46 | ) | | $ | (89 | ) | |
Redemption of notes | (24 | ) | | (181 | ) | |
Deferred issuance costs | (4 | ) | | — |
| |
Securitization | | $ | 72 |
| | $ | 33 |
|
Borrowings against revolving line of credit | | 65 |
| | 45 |
|
Term loan payments | | (3 | ) | | — |
|
Other financing activities | (2 | ) | | (3 | ) | — |
| | (1 | ) |
Net change in debt | (76 | ) | | (273 | ) | 134 |
| | 77 |
|
Repurchase of common stock | (71 | ) | | (63 | ) | (100 | ) | | (50 | ) |
CASH USED FOR FINANCING ACTIVITIES | $ | (147 | ) | | $ | (336 | ) | |
CASH PROVIDED BY FINANCING ACTIVITIES | | $ | 34 |
| | $ | 27 |
|
Cash used forprovided by financing activities was $147$34 million in the first ninethree months of fiscal year 20192020 compared to $336$27 million in the same period of fiscal year 2018.2019. The decreaseincrease in cash used forprovided by financing activities is primarily related to the redemptionadditional borrowings against our revolving line of our 6.75 percent notes due 2021 (the "6.75 Percent Notes")credit and securitization, offset by additional share repurchases in the first quarter of fiscal year 2018, that did not repeat. In the first quarter of fiscal year 2018, we utilized $185 million to redeem $175 million principal amount of the 6.75 Percent Notes. The decrease in cash used for financing activities was also driven by outstanding borrowings against our revolving credit and securitization facilities, partially offset by the repurchase of 3.0 million shares of common stock for $50 million (including commission costs) in the first quarter of fiscal year 2019 (seeNote 22 of the Notes to the Condensed Consolidated Financial Statements in Part I of this Quarterly Report), the repurchase of 1.0 million shares of common stock for $21 million (including commission costs) in the third quarter of fiscal year 2019, the redemption of $19 million aggregate principal amount outstanding of our 4.0 percent senior convertible notes due 2027 (the "4.0 Percent Convertible Notes") at a price of 100 percent of the accreted principal amount, plus accrued and unpaid interest, in the second quarter of fiscal year 2019 and the redemption of $5 million aggregate principal amount outstanding of the 4.0 Percent Convertible Notes at a price of 100 percent of the accreted principal amount, plus accrued and unpaid interest, in the third quarter of fiscal year 2019.2020.
Liquidity
Our outstanding debt, net of discounts and unamortized debt issuance costs, where applicable, is summarized in the table below (in millions).
| | | June 30, 2019 | | September 30, 2018 | December 31, 2019 | | September 30, 2019 |
Fixed-rate debt securities | $ | 444 |
| | $ | 444 |
| $ | 445 |
| | $ | 444 |
|
Fixed-rate convertible notes | 341 |
| | 364 |
| 342 |
| | 342 |
|
Unamortized discount on convertible notes | (34 | ) | | (37 | ) | (32 | ) | | (34 | ) |
Term loan | | 172 |
| | 175 |
|
Other borrowings | 7 |
| | 53 |
| 152 |
| | 16 |
|
Total debt | $ | 758 |
| | $ | 824 |
| $ | 1,079 |
| | $ | 943 |
|
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 and restructuring and product development programs. We expect fiscal year 20192020 capital expenditures for our business segments to be approximately $105$115 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 2017, we filed a shelf registration statement with the Securities and Exchange Commission ("SEC"), registering an indeterminate 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 June 2024.
Sources of liquidity as of June 30,December 31, 2019, in addition to cash on hand, are as follows (in millions):
| | | Total Facility Size | | Utilized as of 6/30/19 | | Readily Available as of 6/30/19 | | Current Expiration | Total Facility Size | | Utilized as of 12/31/19 | | Readily Available as of 12/31/19 | | Current Expiration |
On-balance sheet arrangements: | | | | | | | | | | | | |
Revolving credit facility (1) | $ | 625 |
| | $ | — |
| | $ | 625 |
| | June 2024 (1) | $ | 625 |
| | $ | 65 |
| | $ | 560 |
| | June 2024 (1) |
Committed U.S. accounts receivable securitization (2) | 110 |
| | 3 |
| | 107 |
| | December 2021 | 115 |
| | 84 |
| | — |
| | December 2022 |
Total on-balance sheet arrangements | $ | 735 |
|
| $ | 3 |
| | $ | 732 |
| | $ | 740 |
|
| $ | 149 |
| | $ | 560 |
| |
Off-balance sheet arrangements: (2) | | | | | | | | | | | | |
Committed Swedish factoring facility (3) | $ | 176 |
| | $ | 160 |
| | $ | — |
| | March 2020 | $ | 169 |
| | $ | 140 |
| | $ | — |
| | March 2020 (5) |
Committed U.S. factoring facility (3) | 75 |
| | 70 |
| | — |
| | February 2023 | 75 |
| | 55 |
| | — |
| | February 2023 |
Uncommitted U.K. factoring facility | 28 |
| | 11 |
| | — |
| | February 2022 | 27 |
| | 4 |
| | — |
| | February 2022 |
Uncommitted Italy factoring facility | 34 |
| | 34 |
| | — |
| | June 2022 | 33 |
| | 23 |
| | — |
| | June 2022 |
Other uncommitted factoring facilities (4) | N/A |
| | 19 |
| | N/A |
| | None | N/A |
| | 18 |
| | N/A |
| | None |
Total off-balance sheet arrangements | 313 |
| | 294 |
| | — |
| | 304 |
| | 240 |
| | — |
| |
Total available sources | $ | 1,048 |
|
| $ | 297 |
| | $ | 732 |
| | $ | 1,044 |
|
| $ | 389 |
| | $ | 560 |
| |
| |
(1) | The availability under the revolving credit facility is subject to a priority debt-to-EBITDA ratio covenant. The facility will expire in November 2023 if the outstanding amount of the 6.25 percent notes due 2024 is greater than $75 million at that time. |
| |
(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. |
| |
(4) | There is no explicit facility size under the agreement, but the counterparty approves the purchase of receivable tranches at its discretion. |
| |
(5) | The company is working to extend this arrangement before its current maturity date. |
Cash and Liquidity Needs – At June 30,December 31, 2019, we had $111$108 million in cash and cash equivalents, of which $30$31 million was held in jurisdictions outside of the U.S. that, if repatriated, could result in withholding taxes. It is our intentWe plan to reinvest thoserepatriate substantially all of this cash. An immaterial deferred tax liability for the related withholding taxes has been recorded on the cash balances in our foreignthat we expect to repatriate. In addition, we plan to utilize ongoing cash flow from domestic operations as we expectand external borrowings, 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 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 this covenant as of the quarter end, we have full availability 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,December 31, 2019, we were in compliance with this covenant under our credit agreement.
Equity Repurchase Authorization – On July 21, 2016, ourNovember 7, 2019, the Board of Directors authorized the repurchase of up to $100$325 million of ourthe company's common stock, which was an increase from the prior $250 million authorization approved on July 26, 2019. Repurchases can be made 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 ourthe company’s debt covenants. During the second quarter of fiscal year 2018, we2019, the company repurchased 1.41.3 million shares of common stock for $33$25 million (including commission costs) pursuant to this common stock repurchase authorization. During the first quarter of fiscal year 2020, the company repurchased 4.9 million shares of common stock for $100 million (including commission costs) pursuant to this authorization. DuringAs of December 31, 2019, the third quarter of fiscal year 2018, we repurchased 1.4 million shares of common stockamount remaining available for $30 million (including commission costs) pursuant to this authorization. During the fourth quarter of fiscal year 2018, we repurchased 1.7 million shares of our common stock for $37 million (including commission costs) pursuant to this authorization. The repurchases under this common stock repurchase authorization were complete as of September 30, 2018.was $200 million.
On November 2, 2018, our Board of Directors authorized the repurchase of up to $200 million of our common stock from time to time through open market purchases, privately negotiated transactions or otherwise, subject to compliance with legal and regulatory requirements and our debt covenants. This repurchase authorization superseded the prior July 2016 equity repurchase authorization. In the first quarter of fiscal year 2019, we repurchased 3.0 million shares of common stock for $50 million (including commission costs) pursuant to this repurchase authorization. In the third quarter of fiscal year 2019, we repurchased 1.0 million shares of common stock for $21 million (including commission costs) pursuant to this authorization. The amount remaining available for repurchases under this repurchase authorization was $130 million as of June 30, 2019.
On July 26, 2019, our Board of Directors authorized the repurchase of up to $250 million of our common stock from time to time through open market purchases, privately negotiated transactions or otherwise, subject to compliance with legal and regulatory requirements and our debt covenants. This authorization supersedes the remaining authority under the prior November 2018 equity repurchase authorization described above.
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. The amount remaining available for repurchases under this authorization was $50 million as of September 30, 2018.
On November 2, 2018, our Board of Directors authorized the repurchase of up to $100 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, subject to compliance with legal and regulatory requirements and our debt covenants. This repurchase authorization supersedes the prior July 2016 debt repurchase authorization. The amount remaining available for repurchases under this repurchase authorization was $76 million as of JuneDecember 31, 2019 and September 30, 2019.
Redemption of 6.75 Percent NotesRevolving Credit Facility - On September 28, 2017, we redeemed $100 million of the outstanding $275 million aggregate principal amount of the 6.75 Percent Notes at a price of $1,033.75 per $1,000 of principal amount, plus accrued and unpaid interest. As a result, a loss on debt extinguishment of $5 million was recorded– The revolving credit facility is discussed in the Condensed Consolidated Statement of Operations within Interest expense, net during fiscal year 2017. The redemption was made pursuant to the July 2016 debt repurchase authorization (see Note 2217 of the Notes to the Condensed Consolidated Financial Statementsin Part I of this Quarterly Report).
On November 2, 2017, we redeemed the remaining $175 million aggregate principal amount outstanding of the 6.75 Percent Notes at a price of $1,033.75 per $1,000 of principal amount, plus accrued and unpaid interest. As a result, a loss on debt extinguishment of $8 million was recorded in the Condensed Consolidated Statement of Operations within Interest expense, net. The redemption was made pursuant to a special authorization from the Board of Directors in connection with the sale of Meritor WABCO.
Redemption of 4.0 Percent Notes - On February 15, 2019, we redeemed $19 million aggregate principal amount outstanding of the 4.0 Percent Convertible Notes at a price of 100 percent of the accreted principal amount, plus accrued and unpaid interest. On June 7, 2019, we redeemed the remaining $5 million aggregate principal amount outstanding of the 4.0 Percent Convertible Notes at a price equal to 100 percent of the accreted principal amount, plus accrued and unpaid interest. The 4.0 Percent Convertible Notes were classified as current as of September 30, 2018 as the securities were redeemable at the option of the holder on February 15, 2019, at a repurchase price in cash equal to 100 percent of the accreted principal amount of the securities to be repurchased, plus accrued and unpaid interest.Report.
Revolving Credit Facility – On June 7, 2019, we amended and restated our revolving credit facility. Pursuant to the revolving credit agreement, as amended, we have a $625 million revolving credit facility and a $175 million term loan facility intended for our acquisition of AxleTech that mature in June 2024 (with a springing maturity in November 2023 if the outstanding amount of the 6.25 percent Notes is greater than $75 million).
The availability under the revolving credit facility is subject to certain financial covenants based on 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. 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, 2019, we were in compliance with all covenants under the revolving credit facility with a ratio of approximately 0.2x for the priority debt-to-EBITDA ratio covenant.
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 either our current corporate credit rating or our total leverage ratio, as defined in the agreement. At June 30, 2019, the margin over LIBOR rate was 200 basis points and the commitment fee was 30 basis points. Overnight revolving credit loans are at the prime rate plus a margin of 100 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 24 of the Notes to the Condensed Consolidated Financial Statements in Part I of this Quarterly Report).
At June 30, 2019 and September 30, 2018, there were no borrowings outstanding under the revolving credit facility. The amended and extended revolving credit facility includes $100 million of availability for the issuance of letters of credit. At June 30, 2019 and September 30, 2018, there were no letters of credit outstanding under the revolving credit facility.
U.S. Securitization ProgramOther – As of September 30, 2018, the U.S. accounts receivable securitization facility size was $100 million. On October 4, 2018, we entered into an amendment that increased the size of the facilityRefer to $110 million and extended its expiration date to December 2021. 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 party to the agreement from time to time (participating lenders). 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 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 consolidated balance sheet. As of June 30, 2019, there were no borrowings outstanding under this program, and $3 million of letters of credit were issued. As of September 30, 2018, $46 million was outstanding under this program, and $11 million of letters of credit were issued. This securitization program contains a cross default to our revolving credit facility. As of June 30, 2019, we were in compliance with all covenants under our credit agreement (seeNote 1817 of the Notes to the Condensed Consolidated Financial Statementsin 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 year ends.
Capital Leases – We had $7 million of outstanding capital lease arrangements at both June 30, 2019 and September 30, 2018.
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, 2019 and September 30, 2018, we had $25 million and $22 million, respectively, outstanding under this program at more than one bank.Report.
Credit Ratings – At July 30, 2019,January 28, 2020, our Standard & Poor’s corporate credit rating and senior unsecured credit rating were BB and BB-, respectively, and our Moody’s Investors Service corporate credit rating and senior unsecured credit rating were Ba3 and B1, 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,December 31, 2019 of $294$240 million, of which $230$195 million was attributable to committed factoring facilities involving the sale of AB Volvo accounts receivables. The remaining amount of $64$45 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-day364-day liquidity commitment from Nordea Bank, which was renewed through January 10,June 22, 2020. 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 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 expired in March 2019, we had the right to obtain the issuance, renewal, extension and increase of letters of credit up to an aggregate availability of $25 million. This facility contained covenants and events of default generally similar to those existing in our public debt indentures. There were $1 million of letters of credit outstanding under this facility at September 30, 2018. On March 20, 2019, we allowed this facility to expire. The letters of credit previously provided under this facility were replaced with letters of credit issued under our U.S. accounts receivable securitization facility with PNC Bank. There were $8 million of letters of credit outstanding through other letter of credit facilities as of June 30,December 31, 2019 and September 30, 2018,2019, respectively.
Contingencies
Contingencies related to environmental, asbestos and other matters are discussed in Note 2120 of the Notes to the 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 Annual Report on Form 10-K for the fiscal year ended September 30, 20182019 (the "2018"2019 Form 10-K"). Our critical accounting estimates are consistent with those described in Item 7 of our 20182019 Form 10-K.
New Accounting Pronouncements
New Accounting Pronouncements are discussed in Note 34 of the Notes to the Condensed Consolidated Financial Statements in Part I of this Quarterly Report.
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 Condensed 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 as cash flow hedges of underlying foreign currency forecasted purchases and sales. Changes in the fair value of these contracts are recorded in Accumulated other comprehensive loss in the Condensed Consolidated Statement of Equity and is recognized in operating income when the underlying forecasted transaction impacts earnings. These contracts generally mature within 18 months.
We use cross-currency swap contracts to hedge a portion of our net investment in a foreign subsidiary against volatility in foreign exchange rates. These derivative instruments are designated and qualify as hedges of net investments in foreign operations. Settlements and changes in fair values of the instruments are recognized in foreign currency translation adjustments, a component of other comprehensive income (loss) in the Condensed Consolidated Statement of Comprehensive Income, to offset the changes in the values of the net investments being hedged.
In the third quarter of fiscal year 2018, we2019, the company entered into multiple cross-currency swaps. These swaps hedged a portion of the net investment in a certain European subsidiary against volatility in the euro/U.S. dollar foreign exchange rate. In the third quarter of fiscal year 2019, the company unwound these cross-currency swaps and received proceeds of $19 million, $2 million of which related to net accrued interest receivable. The company also entered into multiple new cross-currency swaps with a combined notional amount of $225 million. These swaps hedge a portion of the net investment in a certain European subsidiary against volatility in the euro/U.S. dollar foreign exchange rate. They mature in October 2022.
Interest rate risk relates to the gain/increase or loss/decrease we could incur in our debt balances and interest expense associated with changes in interest rates. To manage this risk, we 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.
Market Risk
| | | Assuming a 10% Increase in Rates | | Assuming a 10% Decrease in Rates | | Increase (Decrease) in | Assuming a 10% Increase in Rates | | Assuming a 10% Decrease in Rates | | Increase (Decrease) in |
Foreign Currency Sensitivity: | | | | | | | | |
Forward contracts in USD (1) | $ | 2.6 |
| | $ | (2.6 | ) | | Fair Value | $ | 0.7 |
| | $ | (0.7 | ) | | Fair Value |
Forward contracts in Euro (1) | (2.6 | ) | | 2.6 |
| | Fair Value | (3.0 | ) | | 3.0 |
| | Fair Value |
Foreign exchange swap (1) | | (7.3 | ) | | 7.3 |
| | Fair Value |
Foreign currency denominated debt (2) | 0.5 |
| | (0.5 | ) | | Fair Value | 0.5 |
| | (0.5 | ) | | Fair Value |
Foreign currency option contracts in USD | 1.0 |
| | 0.5 |
| | Fair Value | 4.0 |
| | (0.8 | ) | | Fair Value |
Foreign currency option contracts in Euro | (0.3 | ) | | 4.5 |
| | Fair Value | (0.1 | ) | | 2.5 |
| | Fair Value |
Cross-currency swaps | (26.3 | ) | | 26.3 |
| | Fair Value | (25.1 | ) | | 25.3 |
| | Fair Value |
| | | | | | | | |
| Assuming a 50 BPS Increase in Rates | | Assuming a 50 BPS Decrease in Rates | | Increase (Decrease) in | Assuming a 50 BPS Increase in Rates | | Assuming a 50 BPS Decrease in Rates | | Increase (Decrease) in |
Interest Rate Sensitivity: | | | | | | | | |
Debt – fixed rate (3) | $ | (33.1 | ) | | $ | 35.3 |
| | Fair Value | $ | (33.2 | ) | | $ | 35.3 |
| | Fair Value |
Debt – variable rate | — |
| | — |
| | Cash flow | (1.6 | ) | | 1.6 |
| | Cash flow |
(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,December 31, 2019, the fair value of outstanding foreign currency denominated debt was $5 million. A 10% decrease in quoted currency exchange rates would result in a decrease of $1$0.5 million in foreign currency denominated debt. At June 30,December 31, 2019, a 10% increase in quoted currency exchange rates would result in an increase of $1$0.5 million in foreign currency denominated debt.
(3) At June 30,December 31, 2019, the fair value of outstanding debt was $857$1,195 million. A 50 basis points decrease in quoted interest rates would result in an increase of $35$35.3 million in the fair value of fixed rate debt. A 50 basis points increase in quoted interest rates would result in a decrease of $33$33.2 million in the fair value of fixed rate debt.
Item 4. Controls and Procedures
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,December 31, 2019. Based upon that evaluation, the Chief Executive Officer and the Chief Financial Officer have concluded that, as of June 30,December 31, 2019, our disclosure controls and procedures were effective to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and to ensure that information required to be disclosed by us in the reports we file or submit is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
There have been no changes in the company’s internal control over financial reporting that occurred during the quarter ended June 30,December 31, 2019 that materially affected, or are reasonably likely to materially affect, the company’s internal control over financial reporting.
In connection with the rule, the company continues to review and document its disclosure controls and procedures, including the company’s internal control over financial reporting, and may from time to time make changes aimed at enhancing their effectiveness and ensuring that the company’s systems evolve with the business.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Except as set forth in Note 2120 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, 2018, as amended.2019.
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, 2018 and the company's Quarterly Report on Form 10-Q for the period ended December 31, 2018.2019.
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,December 31, 2019:
|
| | | | | | | | | | |
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, 2019 | — |
| $ | — |
| — |
| $ | 150,060,376 |
|
May 1- 31, 2019 | 726,473 |
| $ | 20.44 |
| 726,473 |
| $ | 135,213,780 |
|
June 1- 30, 2019 | 273,527 |
| $ | 20.66 |
| 273,527 |
| $ | 129,562,852 |
|
Total | 1,000,000 |
| | | 1,000,000 |
| | 129,562,852 |
|
|
| | | | | | | | | | |
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) |
October 1- 31, 2019 | 3,245,056 |
| $ | 18.42 |
| 3,245,056 |
| $ | 240,210,940 |
|
November 1- 30, 2019 | 1,140,408 |
| $ | 24.70 |
| 1,140,408 |
| $ | 212,048,300 |
|
December 1- 31, 2019 | 483,385 |
| $ | 25.13 |
| 483,385 |
| $ | 199,899,691 |
|
Total | 4,868,849 |
| | | 4,868,849 |
| | 199,899,691 |
|
| |
(1) | On November 2, 2018, the Board of Directors authorized the repurchase of up to $200 million of the company's common stock and up to $100 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, subject to compliance with legal and regulatory requirements and the company's debt covenants. On July 26, 2019, the Board of Directors authorized the repurchase of up to $250 million of the company’s common stock from time to time through open market purchases, privately negotiated transactions or otherwise, subject to compliance with legal and regulatory requirements and the company’s debt covenants. This authorization supersedessuperseded the remaining authority under the prior November 2018 equity repurchase authorization. On November 7, 2019, the Board of Directors increased the amount of the repurchase authorization to $325 million. |
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 thirdfirst quarter of fiscal 20192020 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 thirdfirst quarter of fiscal 20192020 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.
Item 5. Other Information
Cautionary Statement
This Quarterly Report on Form 10-Q contains statements relating to future results of the company (including certain outlooks, 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 European markets or 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 benefits; the ability to achieve the expected benefits of strategic initiatives and restructuring actions; our ability to successfully integrate the products and technologies of Fabco Holdings, Inc., AA Gear Mfg., Inc., AxleTech and AxleTechTransportation Power, Inc. and future results of such acquisitions, including their generation of revenue and their being accretive; the demand for commercial and specialty vehicles for which we supply products; whether our liquidity will be affected by declining vehicle production 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 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 proceedings or related liabilities with respect to environmental, asbestos-related, or other matters; possible changes in accounting rules; 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. 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.
Restructuring Plan
On July 29, 2019, the company approved a restructuring plan related to the integration of its acquisition of AxleTech. This restructuring plan is intended to realize certain targeted synergies following the acquisition, primarily from the elimination of cost overlap. With this restructuring plan, the Company expects to incur $11 million of total costs in the Aftermarket, Industrial and Trailer segment with approximately $7 million related to employee severance charges and approximately $4 million related to lease termination costs. Restructuring associated with severance actions are expected to be substantially completed by fiscal year 2020. The lease term expires in fiscal year 2023.
Amended and Restated By-laws
On July 29, 2019, the Board of Directors approved an amendment and restatement of the company’s Amended and Restated By-Laws to implement shareholder “proxy access” provisions. Under the proxy access by-law contained in the company’s Amended and Restated By-Laws, an eligible shareholder (or qualifying group of up to 20 shareholders) owning at least 3% of the company’s outstanding common stock continuously for at least three years may generally nominate qualifying director candidates, and require that the company include such shareholder’s or group of shareholders’ proxy access director nominees in the company’s proxy materials for an annual meeting of shareholders, constituting up to the greater of two candidates or 20% of the Board, provided that such shareholders and their director nominees satisfy the requirements specified in the Amended and Restated By-Laws. Proxy access will be available to the company’s shareholders for the first time in connection with the company’s annual meeting of shareholders in 2020 and is subject to the additional eligibility, procedural and disclosure requirements set forth in the Amended and Restated By-Laws. For the 2020 annual meeting of shareholders, proxy access nomination notices are required to be submitted on or after September 26, 2019 and on or before October 26, 2019.
In connection with the adoption of the proxy access provisions described above, the Amended and Restated By-Laws were also amended to update the advance notice and related by-law provisions concerning shareholder notices of business to be brought before meetings of shareholders, including covered proposals and nominations. These updates, among other things, address required supplements and updates to shareholder notices, the submission of completed questionnaires, representations and agreements, and the required disclosures and categories of information to be included in a compliant notice, including notices applicable to shareholder director nominees. The preceding summary of amendments to the company’s Amended and Restated By-Laws is qualified in its entirety by reference to the Amended and Restated By-Laws, which are attached hereto as Exhibit 3-b-1 and are incorporated herein by reference.
Item 6. Exhibits
|
| |
3-a3-a** | |
3-b-1** | |
3-b-2*3-b** | |
10-a10-a** | Fourth Amendment and RestatementForm of Restricted Stock Agreement relating to Fourth Amended and Restated Credit Agreement, dated as of June 7, 2019, among Meritor, ArvinMeritor Finance Ireland (“AFI”),for Directors under the financial institutions party thereto and JPMorgan Chase Bank, N.A., as Administrative Agent, filed as Exhibit 10-a to Meritor’s Current Report on Form 8-K filed on June 10, 2019, is incorporated herein by reference.2020 Long-Term Incentive Plan. |
10-b10-b** | |
10-c** | |
10-d** | Form of May 3, 2019 by and among Meritor, Inc., Janus Merger Sub, LLC, CAX Parent, LLC, and Carlyle Equity Opportunity GP, L.P., solely in its capacity as Holder Representative, filed as Exhibit 10-a to Meritor’s Current Report on Restricted Share Unit Agreement for Employees under the 2020 Long-Term Incentive Plan. |
10-e** | |
31-a** | |
31-b** | |
32-a** | |
32-b** | |
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.
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: | July 31, 2019January 30, 2020 | By: | /s/ | April Miller BoiseScott M. Confer |
| | | | April Miller BoiseScott M. Confer |
| | | | Senior Vice President,Interim Chief Legal Officer and Corporate Secretary |
| | | | (For the registrant) |
| | | | |
Date: | July 31, 2019 | By: | /s/ | Paul D. Bialy |
| | | | Paul D. Bialy |
| | | | Vice President, Chief Accounting Officer |
| | | | |
| | | | |
Date: | July 31, 2019January 30, 2020 | By: | /s/ | Carl D. Anderson |
| | | | Carl D. Anderson |
| | | | Senior Vice President, Chief Financial Officer |
| | | | |
| | | | |
Date: | January 30, 2020 | By: | /s/ | Paul D. Bialy |
| | | | Paul D. Bialy |
| | | | Vice President, Chief Accounting Officer |