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, 2019~~March 29, 2020



☐	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.



Yes	☒	No	☐

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 ~~twelve~~12 months (or for such shorter period that the registrant was required to submit such files).



Yes	☒	No	☐

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).



Yes	☐	No	☒

~~82,579,930~~72,259,278 shares of Common Stock, $1.00 par value, of Meritor, Inc. were outstanding on ~~July 30, 2019.~~April 29, 2020.

INDEX



			Page No.
PART I.	FINANCIAL INFORMATION:

	Item 1.	Financial Statements:

		Condensed Consolidated Statement of Operations - - Three and ~~Nine~~Six Months Ended ~~June 30,~~March 31, 2020 and 2019 ~~and 2018~~	3

		Condensed Consolidated Statement Of Comprehensive Income - - Three and ~~Nine~~Six Months Ended ~~June 30,~~March 31, 2020 and 2019 ~~and 2018~~	4

		Condensed Consolidated Balance Sheet - - ~~June 30, 2019~~March 31, 2020 and September 30, ~~2018~~2019	5

		Condensed Consolidated Statement of Cash Flows - ~~-Nine~~- Six Months Ended ~~June 30,~~March 31, 2020 and 2019 ~~and 2018~~	6

		Condensed Consolidated Statement of Equity - - Three and ~~Nine~~Six Months Ended ~~June 30,~~March 31, 2020 and 2019 ~~and 2018~~	7

		Notes to Condensed Consolidated Financial Statements	9

	Item 2.	Management’s Discussion and Analysis of Financial Conditions and Results of Operations	5248

	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	7263

	Item 4.	Controls and Procedures	7466

PART II.	OTHER INFORMATION:

	Item 1.	Legal Proceedings	7567

	Item 1A.	Risk Factors	7567

	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	7567

	Item 5.	Other Information	7669

	Item 6.	Exhibits	7870

Signatures			7971

MERITOR, INC.

PART I. FINANCIAL INFORMATION

ITEM 1. Financial Statements

CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS

(in millions, except per share amounts)


	Three Months Ended June 30,						Nine Months Ended June 30,						Three Months Ended March 31,						Six Months Ended March 31,
	2019			2018			2019			2018			2020			2019			2020			2019
	(Unaudited)												(Unaudited)
Sales	$	1,166		$	1,129		$	3,360		$	3,098		$	871		$	1,156		$	1,772		$	2,194
Cost of sales	(987		)	(959		)	(2,866		)	(2,625		)	(757		)	(982		)	(1,531		)	(1,879		)
GROSS MARGIN	179			170			494			473
GROSS PROFIT													114			174			241			315
Selling, general and administrative	(73		)	(76		)	(180		)	(218		)	(59		)	(73		)	(129		)	(107		)
Restructuring	1			(3		)	2			(6		)
Other operating expense, net	(3		)	—			(3		)	(12		)
Income from WABCO distribution termination													265			—			265			—
Other operating income (expense), net													(10		)	1			(15		)	1
OPERATING INCOME	104			91			313			237			310			102			362			209
Other income, net	10			9			30			24			14			9			24			20
Equity in earnings of affiliates	9			9			24			20			6			6			12			15
Interest expense, net	(14		)	(14		)	(43		)	(54		)	(16		)	(15		)	(30		)	(29		)
INCOME BEFORE INCOME TAXES	109			95			324			227			314			102			368			215
Provision for income taxes	(21		)	(26		)	(69		)	(131		)	(73		)	(27		)	(86		)	(48		)
INCOME FROM CONTINUING OPERATIONS	88			69			255			96			241			75			282			167
INCOME (LOSS) FROM DISCONTINUED OPERATIONS, net of tax	1			(2		)	—			(3		)	1			(1		)	1			(1		)
NET INCOME	89			67			255			93			242			74			283			166
Less: Net income attributable to noncontrolling interests	(3		)	(3		)	(7		)	(8		)	(1		)	(2		)	(3		)	(4		)
NET INCOME ATTRIBUTABLE TO MERITOR, INC.	$	86		$	64		$	248		$	85		$	241		$	72		$	280		$	162
NET INCOME (LOSS) ATTRIBUTABLE TO MERITOR, INC.
Net income from continuing operations	$	85		$	66		$	248		$	88		$	240		$	73		$	279		$	163
Income (Loss) from discontinued operations	1			(2		)	—			(3		)
Income (loss) from discontinued operations													1			(1		)	1			(1		)
Net income	$	86		$	64		$	248		$	85		$	241		$	72		$	280		$	162
BASIC EARNINGS (LOSS) PER SHARE
Continuing operations	$	1.02		$	0.76		$	2.96		$	1.00		$	3.27		$	0.88		$	3.68		$	1.94
Discontinued operations	0.01			(0.02		)	—			(0.03		)	0.01			(0.01		)	0.01			(0.01		)
Basic earnings per share	$	1.03		$	0.74		$	2.96		$	0.97		$	3.28		$	0.87		$	3.69		$	1.93
DILUTED EARNINGS (LOSS) PER SHARE
Continuing operations	$	0.99		$	0.73		$	2.86		$	0.96		$	3.19		$	0.85		$	3.58		$	1.88
Discontinued operations	0.01			(0.02		)	—			(0.03		)	0.01			(0.01		)	0.01			(0.01		)
Diluted earnings per share	$	1.00		$	0.71		$	2.86		$	0.93		$	3.20		$	0.84		$	3.59		$	1.87

Basic average common shares outstanding	83.0			87.2			83.7			88.1			73.4			83.3			75.8			84.0
Diluted average common shares outstanding	85.6			89.8			86.6			91.2			75.3			85.6			78.0			86.6

See Notes to Condensed Consolidated Financial Statements. ~~Prior periods have been recast, see Note 20.~~

MERITOR, INC.

CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

(in millions)


	Three Months Ended June 30,						Nine Months Ended June 30,						Three Months Ended March 31,						Six Months Ended March 31,
	2019			2018			2019			2018			2020			2019			2020			2019
	(Unaudited)												(Unaudited)
Net income	$	89		$	67		$	255		$	93		$	242		$	74		$	283		$	166
Other comprehensive income (loss):
Foreign currency translation adjustments:
Attributable to Meritor, Inc.	(6		)	(52		)	(3		)	(46		)	(56		)	7			(35		)	3
Attributable to noncontrolling interest	(1		)	(2		)	—			(1		)	—			—			—			1
Pension and other postretirement benefit related adjustments	1			3			2			9			2			1			5			1
Unrealized gain (loss) on cash flow hedges	(2		)	1			(2		)	4
Other comprehensive loss, net of tax	(8		)	(50		)	(3		)	(34		)
Unrealized loss on cash flow hedges													(5		)	(1		)	(3		)	—
Other comprehensive income (loss), net of tax													(59		)	7			(33		)	5
Total comprehensive income	81			17			252			59			183			81			250			171
Less: Comprehensive income attributable to noncontrolling interest	(2		)	(1		)	(7		)	(7		)	(1		)	(2		)	(3		)	(5		)
Comprehensive income attributable to Meritor, Inc.	$	79		$	16		$	245		$	52		$	182		$	79		$	247		$	166

See Notes to Condensed Consolidated Financial Statements.

MERITOR, INC.

CONDENSED CONSOLIDATED BALANCE SHEET

(in millions)


	June 30, 2019			September 30, 2018			March 31, 2020			September 30, 2019
	(Unaudited)						(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	111		$	115		$	508		$	108
Receivables, trade and other, net	625			588			466			551
Inventories	491			477			529			526
Other current assets	32			46			35			31
TOTAL CURRENT ASSETS	1,259			1,226			1,538			1,216
NET PROPERTY	481			483			509			515
GOODWILL	421			421			500			478
OTHER ASSETS	567			596			678			606
TOTAL ASSETS	$	2,728		$	2,726		$	3,225		$	2,815
LIABILITIES, MEZZANINE EQUITY AND EQUITY
LIABILITIES AND EQUITY
CURRENT LIABILITIES:
Short-term debt	$	24		$	94		$	138		$	41
Accounts and notes payable	691			700			541			610
Other current liabilities	296			290			257			285
TOTAL CURRENT LIABILITIES	1,011			1,084			936			936
LONG-TERM DEBT	734			730			1,203			902
RETIREMENT BENEFITS	238			262			315			336
OTHER LIABILITIES	234			332			347			226
TOTAL LIABILITIES	2,217			2,408			2,801			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 (March 31, 2020 and September 30, 2019, 103.7 and 104.1 shares issued and 72.3 and 81.4 shares outstanding, respectively)							105			104
Additional paid-in capital	798			787			803			803
Retained earnings	448			200			771			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 (March 31, 2020 and September 30, 2019, 31.4 and 22.7 shares, respectively)							(573		)	(332		)
Accumulated other comprehensive loss	(569		)	(566		)	(714		)	(681		)
Total equity attributable to Meritor, Inc.	474			287			392			385
Noncontrolling interests	36			30			32			30
TOTAL EQUITY	510			317			424			415
TOTAL LIABILITIES, MEZZANINE EQUITY AND EQUITY	$	2,728		$	2,726
TOTAL LIABILITIES AND EQUITY							$	3,225		$	2,815

See Notes to Condensed Consolidated Financial Statements.

MERITOR, INC.

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

(in millions)


	Nine Months Ended June 30,						Six Months Ended March 31,
	2019			2018			2020			2019
	(Unaudited)						(Unaudited)
OPERATING ACTIVITIES
CASH PROVIDED BY OPERATING ACTIVITIES (See Note 11)	$	194		$	191
Net income							$	283		$	166
Less: Income (loss) from discontinued operations, net of tax							1			(1		)
Income from continuing operations							282			167
Adjustments to income from continuing operations to arrive at cash provided by operating activities:
Depreciation and amortization							50			43
Deferred income tax expense (benefit)							(4		)	16
Restructuring costs							15			(1		)
Equity in earnings of affiliates							(12		)	(15		)
Pension and retiree medical income							(21		)	(19		)
Asbestos related liability remeasurement							—			(31		)
Other adjustments to income from continuing operations							1			8
Dividends received from equity method investments							—			1
Pension and retiree medical contributions							(7		)	(8		)
Restructuring payments							(15		)	(1		)
Changes in off-balance sheet accounts receivable securitization and factoring programs							20			22
Changes in receivables, inventories and accounts payable							(8		)	(91		)
Changes in other current assets and liabilities							(49		)	(33		)
Changes in other assets and liabilities							38			(6		)
Operating cash flows provided by continuing operations							290			52
Operating cash flows used for discontinued operations							—			(1		)
CASH PROVIDED BY OPERATING ACTIVITIES							290			51
INVESTING ACTIVITIES
Capital expenditures	(63		)	(52		)	(33		)	(44		)
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		)
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
Cash paid for acquisition of Transportation Power, Inc., net of cash acquired							(13		)	(3		)
Other investing activities							9			—
CASH USED FOR INVESTING ACTIVITIES							(37		)	(47		)
FINANCING ACTIVITIES
Borrowings and securitization	(46		)	(89		)
Securitization							96			48
Borrowings against revolving line of credit							304			—
Redemption of notes	(24		)	(181		)	—			(19		)
Deferred issuance costs	(4		)	—
Term loan payments							(4		)	—
Other financing activities	(2		)	(3		)	(1		)	(1		)
Net change in debt	(76		)	(273		)	395			28
Repurchase of common stock	(71		)	(63		)	(241		)	(50		)
CASH USED FOR FINANCING ACTIVITIES	(147		)	(336		)
CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES							154			(22		)
EFFECT OF CHANGES IN FOREIGN CURRENCY EXCHANGE RATES ON CASH AND CASH EQUIVALENTS	1			(5		)	(7		)	1
CHANGE IN CASH AND CASH EQUIVALENTS	(4		)	12			400			(17		)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD	115			88			108			115
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	111		$	100		$	508		$	98

See Notes to Condensed Consolidated Financial Statements.

MERITOR, INC.

CONDENSED CONSOLIDATED STATEMENT OF EQUITY

(in millions)

(Unaudited)


	Three months ended June 30, 2019																					Three months ended March 31, 2020
	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 March 31, 2019	$	104	$	793	$	362	$	(286	)		$	(562	)	$	411		$	34	$	445
Comprehensive income	—		—		86		—				(7		)	79			2		81
Beginning Balance at December 31, 2019																						$	105	$	804		$	530	$	(432	)	$	(655	)	$	352		$	32		$	384
Comprehensive income (loss)																						—		—			241		—			(59		)	182			1			183
Equity based compensation expense	—		5		—		—				—			5			—		5			—		(2		)	—		—			—			(2		)	—			(2		)
Repurchase of common stock	—		—		—		(21		)		—			(21		)	—		(21		)	—		—			—		(141		)	—			(141		)	—			(141		)
Ending Balance at June 30, 2019	$	104	$	798	$	448	$	(307	)		$	(569	)	$	474		$	36	$	510
Noncontrolling interest dividend																						—		—			—		—			—			—			(1		)	(1		)
Other equity adjustments																						—		1			—		—			—			1			—			1
Ending Balance at March 31, 2020																						$	105	$	803		$	771	$	(573	)	$	(714	)	$	392		$	32		$	424

	Three months ended June 30, 2018																					Three months ended March 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 March 31, 2018	$	102	$	775	$	104	$	(169	)		$	(530	)	$	282		$	30	$	312
Comprehensive income (loss)	—		—		64		—			��	(48		)	16			1		17
Beginning Balance at December 31, 2018																						$	104	$	790		$	290	$	(286	)	$	(569	)	$	329		$	33		$	362
Comprehensive income																						—		—			72		—			7			79			2			81
Equity based compensation expense	—		4		—		—				—			4			—		4			—		3			—		—			—			3			—			3
Repurchase of common stock	—		—		—		(30		)		—			(30		)	—		(30		)
Ending Balance at June 30, 2018	$	102	$	779	$	168	$	(199	)		$	(578	)	$	272		$	31	$	303
Noncontrolling interest dividends																						—		—			—		—			—			—			(1		)	(1		)
Ending Balance at March 31, 2019																						$	104	$	793		$	362	$	(286	)	$	(562	)	$	411		$	34		$	445

See Notes to Condensed Consolidated Financial Statements.

MERITOR, INC.

CONDENSED CONSOLIDATED STATEMENT OF EQUITY

(in millions)

(Unaudited)


																							Six months ended March 31, 2020
																							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, 2019																							$	104	$	803		$	491	$	(332	)	$	(681	)	$	385		$	30		$	415
Comprehensive income (loss)																							—		—			280		—			(33		)	247			3			250
Equity based compensation expense																							—		1			—		—			—			1			—			1
Vesting of equity based awards																							1		(1		)	—		—			—			—			—			—
Repurchase of common stock																							—		—			—		(241		)	—			(241		)	—			(241		)
Noncontrolling interest dividend																							—		—			—		—			—			—			(1		)	(1		)
Ending Balance at March 31, 2020																							$	105	$	803		$	771	$	(573	)	$	(714	)	$	392		$	32		$	424

	Nine months ended June 30, 2019																						Six months ended March 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		$	102	$	787		$	200	$	(236	)	$	(566	)	$	287		$	30		$	317
Comprehensive income	—		—			248		—			(3		)	245			7			252			—		—			162		—			4			166			5			171
Equity based compensation expense	—		13			—		—			—			13			—			13			—		8			—		—			—			8			—			8
Vesting of equity based awards	2		(2		)	—		—			—			—			—			—			2		(2		)	—		—			—			—			—			—
Repurchase of common stock	—		—			—		(71		)	—			(71		)	—			(71		)	—		—			—		(50		)	—			(50		)	—			(50		)
Noncontrolling interest dividend	—		—			—		—			—			—			(1		)	(1		)
Ending Balance at June 30, 2019	$	104	$	798		$	448	$	(307	)	$	(569	)	$	474		$	36		$	510

	Nine 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 October 1, 2017	$	101	$	765		$	83	$	(136	)	$	(545	)	$	268		$	27		$	295
Comprehensive income (loss)	—		—			85		—			(33		)	52			7			59
Equity based compensation expense	—		14			—		—			—			14			—			14
Vesting of equity based awards	1		(1		)	—		—			—			—			—			—
Repurchase of common stock	—		—			—		(63		)	—			(63		)	—			(63		)
Noncontrolling interest dividends	—		—			—		—			—			—			(1		)	(1		)	—		—			—		—			—			—			(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 March 31, 2019																							$	104	$	793		$	362	$	(286	)	$	(562	)	$	411		$	34		$	445

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~~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, ~~2018~~2019 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~~six months ended ~~June 30, 2019~~March 31, 2020 are not necessarily indicative of the results for the full year.

The company’s fiscal year ends on the Sunday nearest September 30, and its fiscal quarters generally end on the Sundays nearest December 31, March 31 and June 30. The ~~third~~second quarter of fiscal years ~~2019~~2020 and ~~2018~~2019 ended on ~~June 30,~~March 29, 2020 and March 31, 2019, ~~and July 1, 2018,~~ respectively. Fiscal year 2019 ended on 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 30~~March 31 are used consistently throughout this report to represent the fiscal year end and ~~third~~second fiscal quarter end, respectively.

COVID-19 Pandemic Update

In March 2020 the World Health Organization declared a global health pandemic related to the recent outbreak of a novel coronavirus. The COVID-19 pandemic adversely affected the company's financial performance in the second quarter of fiscal year 2020 and will continue to have an adverse impact for at least the remainder of fiscal year 2020. In response to the COVID-19 pandemic, government health officials have recommended and mandated precautions to mitigate the spread of the virus, including shelter-in-place orders, prohibitions on public gatherings and other similar measures. As a result, the company and certain of the company's customers and suppliers have temporarily closed select manufacturing locations beginning late in the second quarter of fiscal year 2020, continuing into the third quarter of fiscal year 2020. The company’s salaried employees are working remotely until further notice. There is uncertainty around the duration and breadth of the COVID-19 pandemic, as well as the impact it will have on the company's operations, supply chain and demand for its products. As a result, the ultimate impact on the company's business, financial condition or operating results cannot be reasonably estimated at this time.

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 March 31,		Six Months Ended March 31,
	2019	2018	2019	2018	2020	2019	2020	2019
Basic average common shares outstanding	83.0	87.2	83.7	88.1	73.4	83.3	75.8	84.0
Impact of restricted shares, restricted share units and performance share units	1.7	1.7	2.1	2.1	1.1	1.5	1.3	1.9
Impact of convertible notes	0.9	0.9	0.8	1.0	0.8	0.8	0.9	0.7
Diluted average common shares outstanding	85.6	89.8	86.6	91.2	75.3	85.6	78.0	86.6

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 ~~one~~1 share of common stock or its cash

MERITOR, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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 ~~0.4~~0.3 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, ~~2018~~2019 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 ~~0.5~~0.4 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.

For the three and nine months ended June 30, 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, 2018, 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, 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, 2018, compensation cost related to restricted shares, restricted share units and performance share units was $4 million and $14 million, respectively.

For the three and nine months ended June 30, 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, 2018, 0.9 million and 1.0 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. New Accounting Standards

Accounting standards implemented during fiscal year ~~2019~~2020

~~In May 2014,~~On October 1, 2019, the ~~Financial Accounting Standards Board ("FASB") issued~~company implemented Accounting Standards Update ("ASU") 2014-09, Revenue from Contracts with Customers, followed by various related amendments (ASU 2016-08, 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 606~~ASU 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 policy~~recognized 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 the~~has included new ~~disclosure requirements; those enhanced disclosures are included in~~and 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~~

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~~Financial Accounting Standards Board ("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~~accounting policies 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. 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~~six months ended ~~June 30, 2019.~~March 31, 2020 and 2019 (in millions).

MERITOR, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)


	Three Months Ended June 30, 2019						Three Months Ended March 31, 2020
Primary Geographical Market	Commercial Truck		Aftermarket, Industrial and Trailer		Total		Commercial Truck		Aftermarket, Industrial and Trailer		Total
U.S.	$	419	$	278	$	697	$	269	$	248	$	517
Canada	—		18		18		—		15		15
Mexico	54		12		66		36		9		45
Total North America	473		308		781		305		272		577
Sweden	75		—		75		63		—		63
Italy	62		4		66		46		3		49
United Kingdom	40		3		43		30		3		33
Other Europe	3		16		19		1		36		37
Total Europe	180		23		203		140		42		182
Brazil	67		—		67		50		—		50
China	44		—		44		26		—		26
India	53		—		53		22		—		22
Other Asia-Pacific	18		—		18		14		—		14
Total sales	$	835	$	331	$	1,166	$	557	$	314	$	871

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 March 31, 2019
Primary Geographical Market	Commercial Truck		Aftermarket, Industrial and Trailer		Total
U.S.	$	413	$	263	$	676
Canada	—		17		17
Mexico	50		13		63
Total North America	463		293		756
Sweden	74		—		74
Italy	59		5		64
United Kingdom	45		2		47
Other Europe	3		19		22
Total Europe	181		26		207
Brazil	63		—		63
China	44		—		44
India	62		—		62
Other Asia-Pacific	24		—		24
Total sales	$	837	$	319	$	1,156

MERITOR, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



	Six Months Ended March 31, 2020
Primary Geographical Market	Commercial Truck		Aftermarket, Industrial and Trailer		Total
U.S.	$	561	$	491	$	1,052
Canada	—		29		29
Mexico	70		18		88
Total North America	631		538		1,169
Sweden	125		—		125
Italy	91		7		98
United Kingdom	63		5		68
Other Europe	2		73		75
Total Europe	281		85		366
Brazil	103		1		104
China	60		—		60
India	44		1		45
Other Asia-Pacific	28		—		28
Total sales	$	1,147	$	625	$	1,772



	Six Months Ended March 31, 2019
Primary Geographical Market	Commercial Truck		Aftermarket, Industrial and Trailer		Total
U.S.	$	763	$	503	$	1,266
Canada	—		35		35
Mexico	97		23		120
Total North America	860		561		1,421
Sweden	148		—		148
Italy	116		9		125
United Kingdom	86		5		91
Other Europe	6		38		44
Total Europe	356		52		408
Brazil	113		—		113
China	85		—		85
India	119		—		119
Other Asia-Pacific	48		—		48
Total sales	$	1,581	$	613	$	2,194

Contract balances

As of ~~June 30, 2019~~March 31, 2020 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~~$435 million and ~~$566~~$517 million, respectively.

For the ~~nine~~three and six months ended ~~June 30,~~March 31, 2020 and March 31, 2019, the company had no material bad-debt ~~expense and there~~expense. There were no material contract assets, contract liabilities or deferred contract costs recorded on the Condensed Consolidated Balance Sheet as of March 31, 2020 and September 30, 2019.

MERITOR, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

~~assets, contract liabilities~~5. Leases

The company’s lease portfolio is comprised of leases 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 ~~deferred contract costs~~less are not recorded on the Condensed Consolidated Balance Sheet ~~as of June 30, 2019.~~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 and six months ended March 31, 2020.

~~Contract costs~~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 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 (in millions)



	Three Months Ended March 31, 2020		Six Months Ended March 31, 2020
Finance lease costs	$	—	$	1
Operating lease costs	5		10
Total lease costs	$	5	$	11

The following table provides a summary of the location and amounts related to finance leases recognized in the Condensed Consolidated Balance Sheet (in millions).



	Classification	March 31, 2020
Finance lease right-of-use assets	Net Property	$	6
Finance lease liabilities	Short-term debt	2
Finance lease liabilities	Long-term debt	4

The ~~company applies the practical expedient provided in Topic 606 and recognizes the incremental costs of obtaining contracts as an expense when incurred if the amortization period~~following table provides a summary of the ~~assets that~~location and amounts related to operating leases recognized in the ~~company otherwise would have recognized is one year or less.~~ Condensed Consolidated Balance Sheet (in millions).



	Classification	March 31, 2020
Operating lease right-of-use assets	Other assets	$	77
Operating lease liabilities	Other current liabilities	14
Operating lease liabilities	Other liabilities	63

MERITOR, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The ~~costs which~~following tables summarize additional information related to our lease agreements.

Supplemental cash flow information related to leases (in millions)



	Six Months Ended March 31, 2020
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	9
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	6
Finance leases	2

Supplemental balance sheet information related to leases



	March 31, 2020
Weighted-average remaining lease term (years):
Operating leases	8.6
Finance leases	2.6
Weighted-average discount rate:
Operating leases	4.5	%
Finance leases	5.2	%

Maturities (in millions)



	Operating Leases			Finance Leases
Remainder of 2020	$	9		$	1
2021	16			3
2022	12			2
2023	12			1
2024	9			—
Thereafter	39			—
Total lease payments	97			7
Less: Impact of discounting future lease payments	(20		)	(1		)
Present value of lease liabilities	$	77		$	6

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 ~~not capitalized are included~~shown in ~~cost of sales.~~the table below (in millions).



	2020		2021		2022		2023		2024		Thereafter		Total
Lease commitments	$	18	$	15	$	14	$	13	$	13	$	25	$	98

~~5. Discontinued Operations~~

~~Results of discontinued operations are summarized as follows (in millions):~~MERITOR, INC.

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 )

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Loss from discontinued operations attributable to the company for the three and nine months ended June 30, 2018 was primarily related to environmental remediation and changes in estimates related to legal costs incurred in connection with a previously divested business.(Unaudited)

6. 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 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~~A summary 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 goodwillchanges in the ~~amount of $12 million for the excess of consideration paid over the fair~~carrying value of goodwill by 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 Trailercompany’s 2 reportable ~~segment. All goodwill recognized is expected to be deductible for income tax purposes over the next 15 years.~~segments are presented below (in millions):

~~Realignment of Reporting Units~~



	Commercial Truck		Aftermarket, Industrial and Trailer			Total
Goodwill	$	261	$	232		$	493
Accumulated impairment losses	—		(15		)	(15		)
Beginning Balance at September 30, 2019	261		217			478
AxleTech measurement period adjustment (see Note 9)	—		1			1
Goodwill acquired from acquisition (see Note 9)	22		—			22
Foreign currency translation	—		(1		)	(1		)
Ending Balance at March 31, 2020	$	283	$	217		$	500

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 two reportable segments are presented below (in millions):~~

Commercial Truck Aftermarket, Industrial and Trailer Total
Goodwill ⁽¹⁾
$ 266
$ 170
$ 436
Accumulated impairment losses ⁽¹⁾
—
(15 ) (15 )
Beginning Balance at September 30, 2018 ⁽¹⁾
266
155
421
AAG measurement period adjustment (see Note 9) —
3
3
Foreign currency translation (3 ) —
(3 )
Ending Balance at June 30, 2019 $ 263
$ 158
$ 421

⁽¹⁾ ~~Amounts have been recast to reflect reportable segment changes (see Note 23).~~

7. Restructuring Costs

Restructuring reserves, primarily related to unpaid employee termination benefits, were $1$7 million at ~~June 30, 2019~~March 31, 2020 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 ~~nine~~six months ended ~~June 30,~~March 31, 2020 and 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		)	15
Cash payments – continuing operations	(2		)	—			(2		)	(15		)
Other	1			—			1			(1		)
Total restructuring reserves at June 30, 2019	1			—			1
Total restructuring reserves at March 31, 2020										7
Less: non-current restructuring reserves	—			—			—			—
Restructuring reserves – current, at June 30, 2019	$	1		$	—		$	1
Restructuring reserves – current, at March 31, 2020										$	7

Balance at September 30, 2017	$	5		$	1		$	6
Balance at September 30, 2018										$	4
Activity during the period:
Charges to continuing operations	6			—			6			(1		)
Cash payments – continuing operations	(6		)	(1		)	(7		)	(1		)
Total restructuring reserves at June 30, 2018	5			—			5
Total restructuring reserves at March 31, 2019										2
Less: non-current restructuring reserves	(1		)	—			(1		)	—
Restructuring reserves – current, at June 30, 2018	$	4		$	—		$	4
Restructuring reserves – current, at March 31, 2019										$	2

Global Restructuring Programs: On September 27, 2019, the company approved and began executing a restructuring plan to reduce salaried and hourly headcount globally. This restructuring plan is intended to reduce labor costs in response to an anticipated decline in most global truck and trailer market volumes. With this restructuring plan, the company expects to incur approximately $20 million in employee severance costs in the aggregate across both of its reportable segments. During the second quarter of fiscal year 2020, the cost of this plan increased by $6 million. During the second quarter of fiscal year 2020, the company incurred $8 million in restructuring costs in the Commercial Truck segment. The total severance costs incurred for this plan are $19 million as of the end of the second quarter for fiscal year 2020. Restructuring actions associated with this plan are expected to be substantially complete by the end of fiscal year 2020.

8. Income Taxes

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

Income tax expense (benefit) is allocated among continuing operations, discontinued operations and other comprehensive income ("OCI"). Such allocation is applied by tax jurisdiction, and in periods in which there is a pre-tax loss from continuing

~~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

MERITOR, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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, 2019,~~March 31, 2020, 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.

On March 27, 2020, the Coronavirus Aid, Relief and Economic Security Act, which includes various income and payroll tax provisions, was signed into law by the U.S. government. In addition, various other coronavirus tax relief initiatives have been implemented around the world. As of the second quarter of fiscal year 2020, these tax initiatives did not have a material impact on the Condensed Consolidated Financial Statements.

For the three months ended ~~June 30,~~March 31, 2020 and 2019, the company had approximately $4$2 million of net pre-tax income in tax jurisdictions in which tax expense (benefit) is not recorded. For the six months ended March 31, 2020, the company had approximately $5 million of net pre-tax income compared to $7$8 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. 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 ~~addition~~acquisition 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 operate~~operates 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 has recorded $1 million in measurement period adjustments to decrease the provisional fair value of receivables, inventory and other assets acquired in the AxleTech transaction, resulting in a ~~$4 million decrease to finite lived intangible assets, a~~corresponding $1 million increase ~~to accounts receivable and a $3 million increase to~~in goodwill. ~~The adjustments were~~This adjustment was made to reflect additional available ~~information~~information. 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).

~~Divestiture~~Acquisition of TransPower Business

On January 16, 2020, Meritor ~~Huayang Vehicle Braking Company Ltd.~~

~~On February 7, 2018, Meritor completed~~acquired 100 percent of the ~~sale of its~~voting equity interest of Transportation Power, Inc. ("TransPower") for a cash purchase price of approximately $15 million, subject to certain purchase price adjustments. Prior to the acquisition, the fair value of the company’s investment in TransPower was $12 million. The TransPower acquisition was accounted for as a business combination. With the addition of TransPower's product portfolio, Meritor ~~Huayang Vehicle Braking Company Ltd~~advances its strategic priorities through increased investment in next-generation technologies.

Pro forma financial information of the company is presented in the following table for the three and six months ended March 31, 2020 and 2019 as if the TransPower acquisition had occurred on October 1, 2018. The pro forma financial information is unaudited and is provided for informational purposes only and does not purport to be indicative of the results which would have actually been attained had the acquisition occurred on October 1, 2018 (in millions).



	Three Months Ended March 31,				Six Months Ended March 31,
	2020		2019		2020		2019
Sales	$	872	$	1,158	$	1,773	$	2,196
Net income attributable to Meritor, Inc.	240		69		279		159

. ~~All assets~~

The purchase price was allocated on a provisional basis as of January 16, 2020. Assets acquired and liabilities assumed were recorded at estimated fair values based on management's estimates, available information, and reasonable and supportable assumptions. Additionally, the company is utilizing a third-party to assist with certain estimates of fair values. The provisional purchase price allocation, which is subject to change and may be subsequently adjusted to reflect final valuation results and other

MERITOR, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

adjustments, is shown below (in millions). The company is reviewing and may record other additional measurement period adjustments in fiscal year 2020. All goodwill resulting from the ~~business were transferred at closing.~~acquisition of TransPower was assigned to the Commercial Truck reportable segment (see Note 6).



	January 16, 2020
Purchase price	$	15
Investments in TransPower	12

Assets acquired and liabilities assumed:
Cash	2
Receivables, net	5
Inventories, net	8
PP&E	10
Accounts payable	(3		)
Other current liabilities	(17		)
Total identifiable net assets acquired	5

Goodwill and other intangible assets resulting from the acquisition of TransPower	22
	$	27

MERITOR, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

10. 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 3/31/20				Utilized as of 3/31/20				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		$	108	N/A		$	13
Total on-balance sheet arrangement:⁽¹⁾		N/A		$	110	N/A		$	3	N/A		$	57		N/A		$	115	N/A		$	108	N/A		$	13
Off-balance sheet arrangements
Committed Swedish factoring facility ⁽²⁾⁽³⁾	March 2020	€	155	$	176	€	140	$	160	€	136	$	158	March 2024	€	155	$	171	€	133	$	147	€	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		48		N/A		58
Uncommitted U.K. factoring facility	February 2022	25		28		10		11		8		9		February 2022	25		28		5		5		6		6
Uncommitted Italy factoring facility	June 2022	30		34		30		34		24		28		June 2022	30		33		22		25		21		23
Other uncommitted factoring facilities ⁽⁴⁾	None	N/A		N/A		18		19		11		12		None	N/A		N/A		17		19		18		20
Total off-balance sheet arrangements		€	210	$	313	€	198	$	294	€	224	$	260		€	210	$	307	€	177	$	244	€	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, 2019~~March 31, 2020 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 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 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.

Off-balance sheet arrangements

Total costs associated with all of the off-balance sheet arrangements described above were $2$1 million and $1$2 million for the three months ended ~~June 30,~~March 31, 2020 and 2019, ~~and 2018,~~ respectively. Total costs associated with all of the off-balance sheet arrangements described above were $5$2 million and $3 million infor the ~~nine~~six months ended ~~June 30,~~March 31, 2020 and 2019, ~~and 2018,~~ respectively, and are included in selling, general and administrative expenses in the Condensed Consolidated ~~Statements~~Statement 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		March 31, 2020		September 30, 2019
Finished goods	$	154	$	170	$	139	$	153
Work in process	42		41		46		39
Raw materials, parts and supplies	295		266		344		334
Total	$	491	$	477	$	529	$	526

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.~~12. Net Property

Net property is summarized as follows (in millions):


	June 30, 2019			September 30, 2018			March 31, 2020			September 30, 2019
Property at cost:
Land and land improvements	$	30		$	29		$	31		$	31
Buildings	228			228			223			224
Machinery and equipment	928			914			960			935
Company-owned tooling	136			130			141			136
Construction in progress	66			81			52			74
Total	1,388			1,382			1,407			1,400
Less: accumulated depreciation	(907		)	(899		)	(898		)	(885		)
Net property	$	481		$	483		$	509		$	515

~~15.~~13. Investments in Non-Consolidated Joint Ventures

In the fourth quarter of fiscal year 2017, Meritor, Inc. closed on the sale of its interest in Meritor WABCO Vehicle Control Systems (the “Meritor WABCO JV”) to a subsidiary of its joint venture partner, WABCO Holdings Inc ("WABCO"). The company remained the exclusive distributor of a certain range of WABCO’s aftermarket products in the United States and Canada and the non-exclusive distributor in Mexico for a period of 10 years following the completion of the transaction, and the purchase agreement included provisions regarding certain future options of the parties to terminate, at certain points during the first three and a half years, these distribution arrangements at an exercise price of between $225 million and $265 million based on the earnings of the business.

On March 13, 2020, the company exercised the option to terminate its aftermarket distribution arrangement with WABCO. The company received $265 million from WABCO in connection with the termination of the arrangement.

14. Other Assets

Other assets are summarized as follows (in millions):


	June 30, 2019		September 30, 2018		March 31, 2020		September 30, 2019
Investments in non-consolidated joint ventures	$	113	$	102	$	116	$	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		161		149
Intangible assets ⁽¹⁾	13		18
Other	25		22		262		225
Other assets	$	567	$	596	$	678	$	606

15. Other Current Liabilities

Other current liabilities are summarized as follows (in millions):



	March 31, 2020		September 30, 2019
Compensation and benefits	$	87	$	125
Product warranties	16		18
Other	154		142
Other current liabilities	$	257	$	285

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. 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

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,						Six Months Ended March 31,
	2019			2018			2020			2019
Total product warranties – beginning of period	$	54		$	45		$	50		$	54
Accruals for product warranties	21			14			7			15
Payments	(18		)	(12		)	(10		)	(9		)
Change in estimates and other	(5		)	4			(2		)	(3		)
Total product warranties – end of period	52			51			45			57
Less: Non-current product warranties	(34		)	(33		)	(29		)	(37		)
Product warranties – current	$	18		$	18		$	16		$	20

~~17.~~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



	March 31, 2020		September 30, 2019
Asbestos-related liabilities (see Note 20)	$	78	$	82
Liabilities for uncertain tax positions	112		46
Product warranties (see Note 15)	29		32
Other	128		66
Other liabilities	$	347	$	226

~~18.~~17. Long-Term Debt

Long-Term debt, net of discounts where applicable, is summarized as follows (in millions):



	March 31, 2020			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	171			175
6.25 percent notes due 2024	445			444
Financing lease obligation	6			7
Borrowings and securitization	408			9
Unamortized discount on convertible notes	(31		)	(34		)
Subtotal	1,341			943
Less: current maturities	(138		)	(41		)
Long-term debt	$	1,203		$	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, 2019~~March 31, 2020 as the holders are entitled to convert all or a portion of their 7.875 Percent Convertible Notes at any time beginning ~~July~~April 1, ~~2019~~2020 and prior to the close of business on ~~September~~June 30, ~~2019~~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, 2019~~March 31, 2020 was greater than 120 percent of the $12.00

MERITOR, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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, ~~intended~~which 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.

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, 2019,~~March 31, 2020, 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 ~~June~~March 31, 2020, there were $304 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, 2019~~March 31, 2020 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, 2019~~March 31, 2020 and September 30, ~~2018,~~2019, the company had ~~$25~~$17 million and ~~$22~~$30 million, respectively, outstanding under this program at more than one bank.

~~19. Financial Instruments~~

~~Fair values of financial instruments are summarized as follows (in millions):~~

June 30, 2019 September 30, 2018

Carrying
Value

Fair
Value

Carrying
Value

Fair
Value
Cash and cash equivalents $ 111
$ 111
$ 115
$ 115
Short-term debt 24
51
94
116
Long-term debt 734
806
730
776
Foreign exchange forward contracts (other assets) 1
1
2
2
Foreign exchange forward contracts (other liabilities) 1
1
—
—
Foreign currency option contracts (other assets) —
—
—
—
Cross-currency swaps (other assets) —
—
6
6
Cross-currency swaps (other liabilities) 5
5
—
—

MERITOR, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

18. Financial Instruments

Fair values of financial instruments are summarized as follows (in millions):



	March 31, 2020				September 30, 2019
	Carrying Value		Fair Value		Carrying Value		Fair Value
Cash and cash equivalents	$	508	$	508	$	108	$	108
Short-term debt	138		144		41		60
Long-term debt	1,203		1,179		902		953
Foreign exchange forward contracts (other assets)	1		1		—		—
Foreign exchange forward contracts (other liabilities)	3		3		—		—
Cross-currency swaps (other assets)	—		—		10		10
Cross-currency swaps (other liabilities)	—		—		5		5

The following table reflects the offsetting of derivative assets and liabilities (in millions):


	June 30, 2019			September 30, 2018			March 31, 2020				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	(1	)	1	—	—	—
Cross-currency swaps	—	—	—	6	—	6	—	—		—	10	—	10
Derivative Liabilities
Foreign exchange forward contracts	1	—	1	—	—	—	4	(1	)	3	—	—	—
Cross-currency swaps	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, 2019~~ ~~is as follows (in millions):~~

Level 1 Level 2 Level 3
Cash and cash equivalents $ 111
$ —
$ —
Short-term debt —
49
2
Long-term debt —
801
5
Foreign exchange forward contracts (other assets) —
1
—
Foreign exchange forward contracts (other liabilities) —
—
1
Foreign currency option contracts (other assets) —
—
—
Cross-currency Swap (other assets) —
—
—
Cross-currency swaps (other liabilities) —
5
—

MERITOR, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Fair value of financial instruments by the valuation hierarchy at March 31, 2020 is as follows (in millions):



	Level 1		Level 2		Level 3
Cash and cash equivalents	$	508	$	—	$	—
Short-term debt	—		133		11
Long-term debt	—		709		470
Foreign exchange forward contracts (other assets)	—		1		—
Foreign exchange forward contracts (other liabilities)	—		3		—

Fair value of financial instruments by the valuation hierarchy at September 30, ~~2018~~2019 is as follows (in millions):

Level 1 Level 2 Level 3
Cash and cash equivalents $ 115
$ —
$ —
Short-term debt —
114
2
Long-term debt —
771
5
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
—



	Level 1		Level 2		Level 3
Cash and cash equivalents	$	108	$	—	$	—
Short-term debt	—		49		11
Long-term debt	—		782		171
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~~six months ended ~~June 30, 2019~~March 31, 2020 and ~~2018.~~2019.

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, 2019~~March 31, 2020 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~~$69 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 ~~Loss~~Income (Loss) in the statement of shareholders’ equity and is recognized in operating income when the underlying forecasted transaction impacts earnings.

Foreign currency option contracts — The company uses option contracts to mitigate foreign exchange exposure on expected future ~~Indian Rupee-denominated~~foreign currency-denominated purchases. As of ~~June 30, 2019~~March 31, 2020 and September 30, ~~2018,~~2019, the notional amount of the company's ~~Indian rupee~~ foreign exchange contracts outstanding was ~~$114~~$68 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 ~~euro~~foreign currency earnings to U.S. dollars. As of ~~June~~March 31, 2020, there were no option contracts outstanding. As of September 30, 2019, the notional amount of the company's ~~euro~~ option contracts outstanding was ~~$12~~$28 million. ~~As of September 30, 2018, there were no euro 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 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~~and maturities in ~~May 2021.~~October 2022. As of September 30, 2019, the notional amount of the company's cross-currency swap contracts outstanding was $225 million. 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~~second quarter of fiscal year ~~2019,~~2020, the company ~~unwound~~settled these cross-currency ~~swaps~~swap contracts and received proceeds of ~~$19~~$11 million, $2$1 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, 2019 and September 30, 2018, 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			March 31, 2020			September 30, 2019
Retiree medical liability	$	79		$	86		$	63		$	67
Pension liability	163			182			255			271
Other	15			13			14			14
Subtotal	257			281			332			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		$	315		$	336

The components of net periodic pension and retiree medical income included in continuing operations for the three months ended ~~June 30~~March 31 are as follows (in millions):


	2019						2018						2020						2019
	Pension			Retiree Medical			Pension			Retiree Medical			Pension			Retiree Medical			Pension			Retiree Medical
Interest cost	$	13		$	1		$	14		$	1		$	10		$	1		$	14		$	—
Assumed return on plan assets	(24		)	—			(25		)	—			(24		)	—			(25		)	—
Amortization of prior service costs	—			(9		)	—			(9		)
Amortization of prior service benefit													—			(9		)	—			(8		)
Recognized actuarial loss	6			4			7			5			8			3			5			4
Total income	$	(5	)	$	(4	)	$	(4	)	$	(3	)	$	(6	)	$	(5	)	$	(6	)	$	(4	)

The components of net periodic pension and retiree medical income included in continuing operations for the ~~nine~~six months ended ~~June 30~~March 31 are as follows (in millions):


	2019						2018						2020						2019
	Pension			Retiree Medical			Pension			Retiree Medical			Pension			Retiree Medical			Pension			Retiree Medical
Interest cost	$	40		$	2		$	41		$	2		$	21		$	1		$	27		$	1
Assumed return on plan assets	(73		)	—			(74		)	—			(48		)	—			(49		)	—
Amortization of prior service costs	—			(26		)	—			(26		)
Amortization of prior service benefit													—			(18		)	—			(17		)
Recognized actuarial loss	17			12			21			13			16			7			11			8
Total income	$	(16	)	$	(12	)	$	(12	)	$	(11	)	$	(11	)	$	(10	)	$	(11	)	$	(8	)

For the three months ended ~~June 30,~~March 31, 2020 and 2019, ~~and 2018,~~ the non-service cost components of the net periodic pension and Other Post-Employment Benefits ("OPEB") income were $9$11 million and $7$10 million, respectively, and are presented in ~~other income.~~Other income, net. For the ~~nine~~six months ended ~~June 30,~~March 31, 2020 and 2019, ~~and 2018,~~ the non-service cost components of the net periodic pension and OPEB income were ~~$28~~$21 million and ~~$23~~$19 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.Other income, 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.

The company has been designated as a potentially responsible party at ~~ten~~10 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 ~~ten~~10 Superfund sites at ~~June 30, 2019~~March 31, 2020 to be approximately $23 million, of which ~~$11~~$9 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, 2019~~March 31, 2020 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 ~~2.25~~1.50 to ~~3.00~~2.25 percent and is approximately $13 million at ~~June 30, 2019.~~March 31, 2020. The undiscounted estimate of these costs is approximately ~~$14~~$15 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		)	(3		)	(1		)	(4		)
Accruals	2			1			3			1			1			2
Ending Balance at June 30, 2019	$	11		$	4		$	15
Ending Balance at March 31, 2020										$	9		$	4		$	13

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.

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 quarter~~As of ~~fiscal~~January 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’s~~Maremont's operations were eliminated from the ~~company’s consolidated results~~Condensed Consolidated Statement of ~~operations beginning on that date~~Operations 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, 2019~~March 31, 2020 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.

MERITOR, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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~~$87 million as of ~~June 30, 2019~~March 31, 2020 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, 2019~~March 31, 2020 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 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.

~~Indemnifications~~Indemnification

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~~second quarter of fiscal years ~~2019~~2020 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’s~~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, subject to compliance with legal and regulatory requirements and the company’s debt covenants. ~~This authorization supersedes~~During 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. During the second quarter of fiscal year 2020, the company repurchased 5.6 million shares of common stock for $141 million (including commission costs) pursuant to this authorization. As of March 31, 2020, the amount remaining ~~authority~~available for repurchases under ~~the prior November 2018 equity~~this common stock repurchase authorization ~~described below.~~was $59 million. On March 25, 2020, the company suspended activity under its share repurchase program as a result of uncertainties in the global economy due to the COVID-19 pandemic.

MERITOR, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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 the~~The 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 March 31, 2020 and ~~$76 million~~September 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.~~

~~MERITOR, INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

$76 million.

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,~~March 31, 2020 and 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 December 31, 2019													$	(86	)	$	(569	)	$	—		$	(655	)
Other comprehensive income before reclassification	(6		)	—			—			(6		)	(56		)	—			(3		)	(59		)
Amounts reclassified from accumulated other comprehensive loss	—			1			(2		)	(1		)	—			2			(2		)	—
Net current-period other comprehensive income	$	(6	)	$	1		$	(2	)	$	(7	)	(56		)	2			(5		)	(59		)
Balance at June 30, 2019	$	(93	)	$	(474	)	$	(2	)	$	(569	)
Balance at March 31, 2020													$	(142	)	$	(567	)	$	(5	)	$	(714	)

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	11			^(a)
	2			Total before tax
	—			Tax benefit
Total reclassifications for the period	$	2		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 December 31, 2018													$	(94	)	$	(476	)	$	1		$	(569	)
Other comprehensive income before reclassification	(52		)	—			1			(51		)	7			—			—			7
Amounts reclassified from accumulated other comprehensive loss	—			3			—			3			—			1			(1		)	—
Net current-period other comprehensive income	$	(52	)	$	3		$	1		$	(48	)	$	7		$	1		$	(1	)	$	7
Balance at June 30, 2018	$	(87	)	$	(491	)	$	—		$	(578	)
Balance at March 31, 2019													$	(87	)	$	(475	)	$	—		$	(562	)

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).



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	$	(8	)	^(b)
Actuarial losses	9			^(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.

The components of AOCL and the changes in AOCL by components, net of tax, for the ~~nine~~six months ended ~~June 30,~~March 31, 2020 and 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 September 30, 2018	$	(90	)	$	(476	)	$	—		$	(566	)
Balance at September 30, 2019													$	(107	)	$	(572	)	$	(2	)	$	(681	)
Other comprehensive income before reclassification	(3		)	(1		)	—			(4		)	(35		)	—			(3		)	(38		)
Amounts reclassified from accumulated other comprehensive loss	—			3			(2		)	1			—			5			—			5
Net current-period other comprehensive income	$	(3	)	$	2		$	(2	)	$	(3	)	(35		)	5			(3		)	(33		)
Balance at June 30, 2019	$	(93	)	$	(474	)	$	(2	)	$	(569	)
Balance at March 31, 2020													$	(142	)	$	(567	)	$	(5	)	$	(714	)

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).



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	$	(18	)	^(a)
Actuarial losses	23			^(a)
	5			Total before tax
	—			Tax benefit
Total reclassifications for the period	$	5		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
Balance at September 30, 2018	$	(90	)	$	(476	)	$	—	$	(566	)
Other comprehensive income before reclassification	3			(1		)	—		2
Amounts reclassified from accumulated other comprehensive loss	—			2			—		2
Net current-period other comprehensive income	$	3		$	1		$	—	$	4
Balance at March 31, 2019	$	(87	)	$	(475	)	$	—	$	(562	)

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 benefit	$	(17	)	^(b)
Actuarial losses	19			^(b)
	2			Total before tax
	—			Tax benefit
Total reclassifications for the period	$	2		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.

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 ~~two~~2 reportable segments at ~~June 30, 2019,~~March 31, 2020, 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.

•

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.

MERITOR, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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 March 31, 2020
External Sales	$	835	$	331	$	—		$	1,166	$	557	$	314	$	—		$	871
Intersegment Sales	34		9		(43		)	—		31		5		(36		)	—
Total Sales	$	869	$	340	$	(43	)	$	1,166	$	588	$	319	$	(36	)	$	871
Three Months Ended June 30, 2018⁽¹⁾
Three Months Ended March 31, 2019
External Sales	$	819	$	310	$	—		$	1,129	$	837	$	319	$	—		$	1,156
Intersegment Sales	35		9		(44		)	—		39		10		(49		)	—
Total Sales	$	854	$	319	$	(44	)	$	1,129	$	876	$	329	$	(49	)	$	1,156

	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, 2018 have been recast to reflect reportable segment changes.~~



	Commercial Truck		Aftermarket, Industrial and Trailer		Eliminations			Total
Six Months Ended March 31, 2020
External Sales	$	1,147	$	625	$	—		$	1,772
Intersegment Sales	63		11		(74		)	—
Total Sales	$	1,210	$	636	$	(74	)	$	1,772
Six Months Ended March 31, 2019
External Sales	$	1,581	$	613	$	—		$	2,194
Intersegment Sales	74		19		(93		)	—
Total Sales	$	1,655	$	632	$	(93	)	$	2,194

MERITOR, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)


	Three Months Ended June 30,						Nine Months Ended June 30,						Three Months Ended March 31,						Six Months Ended March 31,
	2019			2018⁽³⁾			2019			2018⁽³⁾			2020			2019			2020			2019
Segment adjusted EBITDA:
Commercial Truck	$	93		$	100		$	258		$	263		$	55		$	88		$	111		$	165
Aftermarket, Industrial and Trailer	54			38			146			108			49			52			89			92
Segment adjusted EBITDA	147			138			404			371			104			140			200			257
Unallocated legacy and corporate expense, net ⁽¹⁾	(1		)	(3		)	—			(15		)	3			(1		)	5			1
Interest expense, net	(14		)	(14		)	(43		)	(54		)	(16		)	(15		)	(30		)	(29		)
Provision for income taxes	(21		)	(26		)	(69		)	(131		)	(73		)	(27		)	(86		)	(48		)
Depreciation and amortization	(21		)	(22		)	(64		)	(64		)	(26		)	(21		)	(50		)	(43		)
Noncontrolling interests	(3		)	(3		)	(7		)	(8		)	(1		)	(2		)	(3		)	(4		)
Loss on sale of receivables	(2		)	(1		)	(5		)	(3		)	(1		)	(2		)	(2		)	(3		)
Asset impairment charges	(1		)	—			(1		)	(2		)
Restructuring	1			(3		)	2			(6		)	(10		)	1			(15		)	1
Transaction costs													(5		)	—			(5		)	—
Income from WABCO distribution termination													265			—			265			—
Asbestos related liability remeasurement ⁽²⁾	—			—			31			—			—			—			—			31
Income from continuing operations attributable to Meritor, Inc.	$	85		$	66		$	248		$	88		$	240		$	73		$	279		$	163


⁽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 ~~nine~~six months ended ~~June 30,~~March 31, 2019 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, 2018 have been recast to reflect reportable segment changes.~~


	June 30, 2019			September 30, 2018⁽³⁾			March 31, 2020			September 30, 2019
Segment Assets:
Commercial Truck	$	1,846		$	1,764		$	1,682		$	1,659
Aftermarket, Industrial and Trailer	609			589			810			815
Total segment assets	2,455			2,353			2,492			2,474
Corporate ⁽¹⁾	567			633			977			567
Less: Accounts receivable sold under off-balance sheet factoring programs ⁽²⁾	(294		)	(260		)	(244		)	(226		)
Total assets	$	2,728		$	2,726		$	3,225		$	2,815


⁽¹⁾	Corporate assets consist primarily of cash, deferred income taxes and prepaid pension costs.


⁽²⁾	At ~~June 30, 2019~~March 31, 2020 and September 30, ~~2018,~~2019, segment assets include ~~$294~~$244 million and ~~$260~~$226 million, respectively, of accounts receivable sold under off-balance sheet accounts receivable factoring programs (see Note 10). 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 March 31, 2020
	Parent			Guarantors			Non- Guarantors			Elims			Consolidated			Parent			Guarantors			Non- Guarantors			Elims			Consolidated
Sales
External	$	—		$	696		$	470		$	—		$	1,166		$	—		$	515		$	356		$	—		$	871
Subsidiaries	—			24			46			(70		)	—			—			21			27			(48		)	—
Total sales	—			720			516			(70		)	1,166			—			536			383			(48		)	871
Cost of sales	(17		)	(599		)	(441		)	70			(987		)	(11		)	(461		)	(333		)	48			(757		)
GROSS MARGIN	(17		)	121			75			—			179
GROSS PROFIT																(11		)	75			50			—			114
Selling, general and administrative	(30		)	(28		)	(15		)	—			(73		)	(9		)	(33		)	(17		)	—			(59		)
Restructuring	—			1			—			—			1
Income from WABCO distribution termination																265			—			—			—			265
Other operating expense, net	(3		)	—			—			—			(3		)	(1		)	(6		)	(3		)	—			(10		)
OPERATING INCOME (LOSS)	(50		)	94			60			—			104
OPERATING INCOME																244			36			30			—			310
Other income (expense), net	14			(2		)	(2		)	—			10			44			(9		)	(21		)	—			14
Equity in earnings of affiliates	—			6			3			—			9			—			5			1			—			6
Interest income (expense), net	(32		)	11			7			—			(14		)	(31		)	9			6			—			(16		)
INCOME (LOSS) BEFORE INCOME TAXES	(68		)	109			68			—			109
Benefit (provision) for income taxes	19			(18		)	(22		)	—			(21		)
INCOME BEFORE INCOME TAXES																257			41			16			—			314
Provision for income taxes																(58		)	(11		)	(4		)	—			(73		)
Equity income from continuing operations of subsidiaries	134			37			—			(171		)	—			41			2			—			(43		)	—
INCOME FROM CONTINUING OPERATIONS	85			128			46			(171		)	88			240			32			12			(43		)	241
INCOME (LOSS) FROM DISCONTINUED OPERATIONS, net of tax	1			—			—			—			1
INCOME FROM DISCONTINUED OPERATIONS, net of tax																1			1			1			(2		)	1
NET INCOME	86			128			46			(171		)	89			241			33			13			(45		)	242
Less: Net income attributable to noncontrolling interests	—			—			(3		)	—			(3		)	—			—			(1		)	—			(1		)
NET INCOME ATTRIBUTABLE TO MERITOR, INC.	$	86		$	128		$	43		$	(171	)	$	86		$	241		$	33		$	12		$	(45	)	$	241

MERITOR, INC.

CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME (LOSS)

(In millions)

(Unaudited)


	Three Months Ended June 30, 2019															Three Months Ended March 31, 2020
	Parent			Guarantors			Non- Guarantors			Elims			Consolidated			Parent			Guarantors			Non- Guarantors			Elims			Consolidated
Net income	$	86		$	128		$	46		$	(171	)	$	89		$	241		$	33		$	13		$	(45	)	$	242
Other comprehensive loss, net of tax	(7		)	(2		)	(3		)	4			(8		)	(59		)	(70		)	(71		)	141			(59		)
Total comprehensive income	79			126			43			(167		)	81
Total comprehensive income (loss)																182			(37		)	(58		)	96			183
Less: Comprehensive income attributable to noncontrolling interests	—			—			(2		)	—			(2		)	—			—			(1		)	—			(1		)
Comprehensive income attributable to Meritor, Inc.	$	79		$	126		$	41		$	(167	)	$	79
Comprehensive income (loss) attributable to Meritor, Inc.																$	182		$	(37	)	$	(59	)	$	96		$	182

MERITOR, INC.

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

(In millions)

(Unaudited)


	Three Months Ended June 30, 2018 ⁽¹⁾															Three Months Ended March 31, 2019
	Parent			Guarantors			Non- Guarantors			Elims			Consolidated			Parent			Guarantors			Non- Guarantors			Elims			Consolidated
Sales
External	$	—		$	629		$	500		$	—		$	1,129		$	—		$	677		$	479		$	—		$	1,156
Subsidiaries	—			40			61			(101		)	—			—			28			51			(79		)	—
Total sales	—			669			561			(101		)	1,129			—			705			530			(79		)	1,156
Cost of sales	(20		)	(559		)	(481		)	101			(959		)	(16		)	(590		)	(455		)	79			(982		)
GROSS MARGIN	(20		)	110			80			—			170
GROSS PROFIT																(16		)	115			75			—			174
Selling, general and administrative	(30		)	(27		)	(19		)	—			(76		)	(28		)	(30		)	(15		)	—			(73		)
Restructuring	(2		)	(1		)	—			—			(3		)
Other operating income, net																—			—			1			—			1
OPERATING INCOME (LOSS)	(52		)	82			61			—			91			(44		)	85			61			—			102
Other income (expense), net	28			(15		)	(4		)	—			9			50			(14		)	(27		)	—			9
Equity in earnings of affiliates	—			6			3			—			9			—			3			3			—			6
Interest income (expense), net	(26		)	6			6			—			(14		)	(33		)	12			6			—			(15		)
INCOME (LOSS) BEFORE INCOME TAXES	(50		)	79			66			—			95			(27		)	86			43			—			102
Benefit (provision) for income taxes	7			(13		)	(20		)	—			(26		)	20			(22		)	(25		)	—			(27		)
Equity income from continuing operations of subsidiaries	109			39			—			(148		)	—			80			9			—			(89		)	—
INCOME FROM CONTINUING OPERATIONS	66			105			46			(148		)	69			73			73			18			(89		)	75
LOSS FROM DISCONTINUED OPERATIONS, net of tax	(2		)	(2		)	(2		)	4			(2		)	(1		)	—			—			—			(1		)
NET INCOME	64			103			44			(144		)	67			72			73			18			(89		)	74
Less: Net income attributable to noncontrolling interests	—			—			(3		)	—			(3		)	—			—			(2		)	—			(2		)
NET INCOME ATTRIBUTABLE TO MERITOR, INC.	$	64		$	103		$	41		$	(144	)	$	64		$	72		$	73		$	16		$	(89	)	$	72

⁽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															Three Months Ended March 31, 2019
	Parent			Guarantors			Non- Guarantors			Elims			Consolidated			Parent		Guarantors		Non- Guarantors			Elims			Consolidated
Net income	$	64		$	103		$	44		$	(144	)	$	67		$	72	$	73	$	18		$	(89	)	$	74
Other comprehensive loss, net of tax	(48		)	(57		)	(8		)	63			(50		)
Other comprehensive income, net of tax																7		1		1			(2		)	7
Total comprehensive income	16			46			36			(81		)	17			79		74		19			(91		)	81
Less: Comprehensive income attributable to noncontrolling interests	—			—			(1		)	—			(1		)	—		—		(2		)	—			(2		)
Comprehensive income attributable to Meritor, Inc.	$	16		$	46		$	35		$	(81	)	$	16		$	79	$	74	$	17		$	(91	)	$	79

MERITOR, INC.

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

(In millions)

(Unaudited)


	Nine Months Ended June 30, 2019															Six Months Ended March 31, 2020
	Parent			Guarantors			Non- Guarantors			Elims			Consolidated			Parent			Guarantors			Non- Guarantors			Elims			Consolidated
Sales
External	$	—		$	1,962		$	1,398		$	—		$	3,360		$	—		$	1,050		$	722		$	—		$	1,772
Subsidiaries	—			84			154			(238		)	—			—			44			62			(106		)	—
Total sales	—			2,046			1,552			(238		)	3,360			—			1,094			784			(106		)	1,772
Cost of sales	(48		)	(1,723		)	(1,333		)	238			(2,866		)	(27		)	(930		)	(680		)	106			(1,531		)
GROSS MARGIN	(48		)	323			219			—			494
GROSS PROFIT																(27		)	164			104			—			241
Selling, general and administrative	(83		)	(85		)	(12		)	—			(180		)	(33		)	(62		)	(34		)	—			(129		)
Restructuring	—			1			1			—			2
Income from WABCO distribution termination																265			—			—			—			265
Other operating expense, net	(3		)	—			—			—			(3		)	(1		)	(6		)	(8		)	—			(15		)
OPERATING INCOME (LOSS)	(134		)	239			208			—			313
OPERATING INCOME																204			96			62			—			362
Other income (expense), net	64			(11		)	(23		)	—			30			44			(2		)	(18		)	—			24
Equity in earnings of affiliates	—			16			8			—			24			—			9			3			—			12
Interest income (expense), net	(97		)	35			19			—			(43		)	(62		)	20			12			—			(30		)
INCOME (LOSS) BEFORE INCOME TAXES	(167		)	279			212			—			324
Benefit (provision) for income taxes	50			(52		)	(67		)	—			(69		)
INCOME BEFORE INCOME TAXES																186			123			59			—			368
Provision for income taxes																(46		)	(26		)	(14		)	—			(86		)
Equity income from continuing operations of subsidiaries	365			86			—			(451		)	—			139			30			—			(169		)	—
INCOME FROM CONTINUING OPERATIONS	248			313			145			(451		)	255			279			127			45			(169		)	282
LOSS FROM DISCONTINUED OPERATIONS, net of tax	—			—			—			—			—
INCOME FROM DISCONTINUED OPERATIONS, net of tax																1			1			1			(2		)	1
NET INCOME	248			313			145			(451		)	255			280			128			46			(171		)	283
Less: Net income attributable to noncontrolling interests	—			—			(7		)	—			(7		)	��			—			(3		)	—			(3		)
NET INCOME ATTRIBUTABLE TO MERITOR, INC.	$	248		$	313		$	138		$	(451	)	$	248		$	280		$	128		$	43		$	(171	)	$	280

MERITOR, INC.

CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME (LOSS)

(In millions)

(Unaudited)


	Nine Months Ended June 30, 2019															Six Months Ended March 31, 2020
	Parent			Guarantors			Non- Guarantors			Elims			Consolidated			Parent			Guarantors			Non- Guarantors			Elims			Consolidated
Net income	$	248		$	313		$	145		$	(451	)	$	255		$	280		$	128		$	46		$	(171	)	$	283
Other comprehensive loss, net of tax	(3		)	(9		)	(11		)	20			(3		)	(33		)	(40		)	(39		)	79			(33		)
Total comprehensive income	245			304			134			(431		)	252			247			88			7			(92		)	250
Less: Comprehensive income attributable to noncontrolling interests	—			—			(7		)	—			(7		)	—			—			(3		)	—			(3		)
Comprehensive income attributable to Meritor, Inc.	$	245		$	304		$	127		$	(431	)	$	245		$	247		$	88		$	4		$	(92	)	$	247

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.~~



	Six Months Ended March 31, 2019
	Parent			Guarantors			Non- Guarantors			Elims			Consolidated
Sales
External	$	—		$	1,266		$	928		$	—		$	2,194
Subsidiaries	—			60			108			(168		)	—
Total sales	—			1,326			1,036			(168		)	2,194
Cost of sales	(31		)	(1,124		)	(892		)	168			(1,879		)
GROSS PROFIT	(31		)	202			144			—			315
Selling, general and administrative	(53		)	(57		)	3			—			(107		)
Other operating income, net	—			—			1			—			1
OPERATING INCOME (LOSS)	(84		)	145			148			—			209
Other income (expense), net	50			(9		)	(21		)	—			20
Equity in earnings of affiliates	—			10			5			—			15
Interest income (expense), net	(65		)	24			12			—			(29		)
INCOME (LOSS) BEFORE INCOME TAXES	(99		)	170			144			—			215
Benefit (provision) for income taxes	31			(34		)	(45		)	—			(48		)
Equity income from continuing operations of subsidiaries	231			49			—			(280		)	—
INCOME FROM CONTINUING OPERATIONS	163			185			99			(280		)	167
LOSS FROM DISCONTINUED OPERATIONS, net of tax	(1		)	—			—			—			(1		)
NET INCOME	162			185			99			(280		)	166
Less: Net income attributable to noncontrolling interests	—			—			(4		)	—			(4		)
NET INCOME ATTRIBUTABLE TO MERITOR, INC.	$	162		$	185		$	95		$	(280	)	$	162

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



	Six Months Ended March 31, 2019
	Parent		Guarantors			Non- Guarantors			Elims			Consolidated
Net income	$	162	$	185		$	99		$	(280	)	$	166
Other comprehensive income (loss), net of tax	4		(7		)	(8		)	16			5
Total comprehensive income	166		178			91			(264		)	171
Less: Comprehensive income attributable to noncontrolling interests	—		—			(5		)	—			(5		)
Comprehensive income attributable to Meritor, Inc.	$	166	$	178		$	86		$	(264	)	$	166

MERITOR, INC.

CONDENSED CONSOLIDATING BALANCE SHEET

(In millions)

(Unaudited)


	June 30, 2019												March 31, 2020
	Parent		Guarantors			Non- Guarantors		Elims			Consolidated		Parent		Guarantors			Non- Guarantors		Elims			Consolidated
CURRENT ASSETS:
Cash and cash equivalents	$	27	$	5		$	79	$	—		$	111	$	351	$	4		$	153	$	—		$	508
Receivables trade and other, net	3		81			541		—			625		—		78			388		—			466
Inventories	—		260			231		—			491		—		297			232		—			529
Other current assets	4		11			17		—			32		6		10			19		—			35
TOTAL CURRENT ASSETS	34		357			868		—			1,259		357		389			792		—			1,538
NET PROPERTY	21		240			220		—			481		21		265			223		—			509
GOODWILL	—		254			167		—			421		—		360			140		—			500
OTHER ASSETS	147		189			231		—			567		177		239			262		—			678
INVESTMENTS IN SUBSIDIARIES	4,188		960			—		(5,148		)	—		4,531		888			—		(5,419		)	—
TOTAL ASSETS	$	4,390	$	2,000		$	1,486	$	(5,148	)	$	2,728	$	5,086	$	2,141		$	1,417	$	(5,419	)	$	3,225
CURRENT LIABILITIES:
Short-term debt	$	23	$	—		$	1	$	—		$	24	$	33	$	—		$	105	$	—		$	138
Accounts and notes payable	54		292			345		—			691		50		226			265		—			541
Other current liabilities	144		65			87		—			296		68		90			99		—			257
TOTAL CURRENT LIABILITIES	221		357			433		—			1,011		151		316			469		—			936
LONG-TERM DEBT	730		—			4		—			734		1,200		—			3		—			1,203
RETIREMENT BENEFITS	218		—			20		—			238		291		1			23		—			315
INTERCOMPANY PAYABLE (RECEIVABLE)	2,691		(2,856		)	165		—			—		2,932		(3,030		)	98		—			—
OTHER LIABILITIES	55		118			61		—			234		120		124			103		—			347
MEZZANINE EQUITY	1		—			—		—			1
EQUITY ATTRIBUTABLE TO MERITOR, INC.	474		4,381			767		(5,148		)	474		392		4,730			689		(5,419		)	392
NONCONTROLLING INTERESTS	—		—			36		—			36		—		—			32		—			32
TOTAL LIABILITIES, MEZZANINE EQUITY AND EQUITY	$	4,390	$	2,000		$	1,486	$	(5,148	)	$	2,728
TOTAL LIABILITIES AND EQUITY													$	5,086	$	2,141		$	1,417	$	(5,419	)	$	3,225

MERITOR, INC.

CONDENSED CONSOLIDATING BALANCE SHEET

(In millions)

(Unaudited)


	September 30, 2018												September 30, 2019
	Parent		Guarantors			Non- Guarantors		Elims			Consolidated		Parent		Guarantors			Non- Guarantors		Elims			Consolidated
CURRENT ASSETS:
Cash and cash equivalents	$	24	$	6		$	85	$	—		$	115	$	4	$	4		$	100	$	—		$	108
Receivables trade and other, net	2		62			524		—			588		3		92			456		—			551
Inventories	—		242			235		—			477		—		292			234		—			526
Other current assets	6		12			28		—			46		6		10			15		—			31
TOTAL CURRENT ASSETS	32		322			872		—			1,226		13		398			805		—			1,216
NET PROPERTY	24		241			218		—			483		21		260			234		—			515
GOODWILL	—		250			171		—			421		—		337			141		—			478
OTHER ASSETS	179		182			235		—			596		170		225			211		—			606
INVESTMENTS IN SUBSIDIARIES	3,583		855			—		(4,438		)	—		4,432		899			—		(5,331		)	—
TOTAL ASSETS	$	3,818	$	1,850		$	1,496	$	(4,438	)	$	2,726	$	4,636	$	2,119		$	1,391	$	(5,331	)	$	2,815
CURRENT LIABILITIES:
Short-term debt	$	47	$	—		$	47	$	—		$	94	$	32	$	—		$	9	$	—		$	41
Accounts and notes payable	64		297			339		—			700		53		283			274		—			610
Other current liabilities	77		71			142		—			290		77		109			99		—			285
TOTAL CURRENT LIABILITIES	188		368			528		—			1,084		162		392			382		—			936
LONG-TERM DEBT	726		—			4		—			730		898		—			4		—			902
RETIREMENT BENEFITS	241		—			21		—			262		312		1			23		—			336
INTERCOMPANY PAYABLE (RECEIVABLE)	2,325		(2,640		)	315		—			—		2,833		(3,005		)	172		—			—
OTHER LIABILITIES	50		124			158		—			332		46		112			68		—			226
MEZZANINE EQUITY	1		—			—		—			1
EQUITY ATTRIBUTABLE TO MERITOR, INC.	287		3,998			440		(4,438		)	287		385		4,619			712		(5,331		)	385
NONCONTROLLING INTERESTS	—		—			30		—			30		—		—			30		—			30
TOTAL LIABILITIES, MEZZANINE EQUITY AND EQUITY	$	3,818	$	1,850		$	1,496	$	(4,438	)	$	2,726
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														Six Months Ended March 31, 2020
	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															$	370		$	17		$	(97	)	$	—	$	290
INVESTING ACTIVITIES
Capital expenditures	(2		)	(32		)	(29		)	—		(63		)	(1		)	(17		)	(15		)	—		(33		)
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 paid for acquisition of TransPower, net of cash acquired															(13		)	—			—			—		(13		)
Other investing activities															9			—			—					9
CASH USED FOR INVESTING ACTIVITIES															(5		)	(17		)	(15		)	—		(37		)
FINANCING ACTIVITIES
Borrowings and securitization	—			—			(46		)	—		(46		)
Redemption of notes	(24		)	—			—			—		(24		)
Deferred issuance costs	(4		)	—			—			—		(4		)
Securitization															—			—			96			—		96
Borrowings against revolving line of credit															304			—			—			—		304
Term loan payments															(4		)	—			—			—		(4		)
Repurchase of common stock	(71		)	—			—			—		(71		)	(241		)	—			—			—		(241		)
Intercompany advances	86			—			(86		)	—		—			(76		)	—			76			—		—
Other financing activities	(1		)	(1		)	—			—		(2		)	(1		)	—			—			—		(1		)
CASH USED FOR FINANCING ACTIVITIES	(14		)	(1		)	(132		)	—		(147		)
CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES															(18		)	—			172			—		154
EFFECT OF CHANGES IN FOREIGN CURRENCY EXCHANGE RATES ON CASH AND CASH EQUIVALENTS	—			—			1			—		1			—			—			(7		)	—		(7		)
CHANGE IN CASH AND CASH EQUIVALENTS	3			(1		)	(6		)	—		(4		)	347			—			53			—		400
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		$	351		$	4		$	153		$	—	$	508

MERITOR, INC.

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

(In millions)

(Unaudited)


	Nine Months Ended June 30, 2018														Six Months Ended March 31, 2019
	Parent			Guarantors			Non- Guarantors			Elims		Consolidated			Parent			Guarantors			Non- Guarantors			Elims		Consolidated
CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES	$	(26	)	$	31		$	186		$	—	$	191		$	32		$	23		$	(4	)	$	—	$	51
INVESTING ACTIVITIES
Capital expenditures	(3		)	(25		)	(24		)	—		(52		)	(2		)	(23		)	(19		)	—		(44		)
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		)
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
Cash paid for investment in TransPower															(3		)	—			—			—		(3		)
CASH USED FOR INVESTING ACTIVITIES															(5		)	(23		)	(19		)	—		(47		)
FINANCING ACTIVITIES
Borrowings and securitization	—			—			(89		)	—		(89		)
Securitization															—			—			48			—		48
Redemption of notes	(181		)	—			—			—		(181		)	(19		)	—			—			—		(19		)
Repurchase of common stock	(63		)	—			—			—		(63		)	(50		)	—			—			—		(50		)
Intercompany advances	67			—			(67		)	—		—			29			—			(29		)	—		—
Other financing activities	(1		)	(2		)	—			—		(3		)	—			(1		)	—			—		(1		)
CASH USED FOR FINANCING ACTIVITIES	(178		)	(2		)	(156		)	—		(336		)
CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES															(40		)	(1		)	19			—		(22		)
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			(13		)	(1		)	(3		)	—		(17		)
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		$	11		$	5		$	82		$	—	$	98

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, 2019~~March 31, 2020 and September 30, ~~2018,~~2019, Parent-only obligations included ~~$224~~$295 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$108 million and ~~$51~~$13 million at ~~June 30, 2019~~March 31, 2020 and September 30, ~~2018,~~2019, respectively (see Note ~~18)~~17), ~~and~~which is primarily related to U.S. accounts receivable securitization and ~~capital~~financing lease obligations. There were $23 million cash dividends paid to the Parent by subsidiaries and investments accounted for by the equity method for the six months ended March 31, 2020. There were $29 million of cash dividends paid to the Parent by subsidiaries and investments accounted for by the equity method for the ~~nine~~six months ended ~~June 30, 2019 and June 30, 2018, respectively.~~March 31, 2019.

MERITOR, INC.

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

OVERVIEW

Meritor, Inc. (the "company," "our," "we" or "Meritor"), headquartered in Troy, Michigan, is a premier global supplier of a broad range of integrated systems, modules and components to original equipment manufacturers ("OEMs") and the aftermarket for the commercial vehicle, transportation and industrial sectors. The company serves commercial truck, trailer, military, bus and coach, construction, and other industrial OEMs and certain aftermarkets. Meritor common stock is traded on the New York Stock Exchange under the ticker symbol MTOR.

~~3rd~~COVID-19 Pandemic Update

In March 2020 the World Health Organization declared a global health pandemic related to the recent outbreak of a novel coronavirus. The COVID-19 pandemic adversely affected our financial performance in the second quarter of fiscal year 2020 and will continue to have an adverse impact for at least the remainder of fiscal year 2020. In response to the COVID-19 pandemic, government health officials have recommended and mandated precautions to mitigate the spread of the virus, including shelter-in-place orders, prohibitions on public gatherings and other similar measures. As a result, we and certain of our customers and suppliers have temporarily closed select manufacturing locations beginning late in the second quarter of fiscal year 2020, continuing into the third quarter of fiscal year 2020. Our salaried employees are working remotely until further notice. There is uncertainty around the duration and breadth of the COVID-19 pandemic, as well as the impact it will have on our operations, supply chain and demand for our products. As a result, the ultimate impact on our business, financial condition or operating results cannot be reasonably estimated at this time.

Employee Health and Safety

We have established and began execution of a “Safe Start” plan for the reopening of plants, in addition to test labs, distribution centers and administrative facilities. We will operate under these enhanced safety guidelines for the foreseeable future. To ensure consistent application and compliance with these safety protocols, we have expanded the role of our Vice President and General Auditor to include responsibilities as Chief Safety Compliance Officer.

Operations

We are complying with shelter-in-place and similar government orders in various locations around the world, as applicable. The impact of the COVID-19 pandemic led to suspended production in most of our global commercial truck manufacturing facilities beginning late in the second quarter of fiscal year 2020 and continuing into the third quarter of fiscal year 2020. A majority of our operations in North America and Europe are now running limited production, with expectations that facilities in India and South America will restart in early May. Our operations in China were temporarily suspended in mid-January and resumed production in mid-February and are now fully operational.

However, as we also serve the transportation, industrial and defense industries, we will continue to help support customers who are actively engaged in the COVID-19 pandemic response. Our Aftermarket business remained fully operational to maintain the supply of critical replacement parts to the vital truck and trailer transportation network. Our Industrial businesses also remained operational throughout March and April at varying levels to support the production of vehicles deemed critical, including defense, bus and coach, terminal tractor, fire and rescue and off-highway applications. We will continue to monitor government and other mandates to understand the potential impact on our operations in other areas.

Cost Reductions

We have implemented a series of cost reduction measures to preserve our financial flexibility, including a reduction to the base salary of each of our executive officers and salaried employees in the United States and Canada of between 40 percent and 60 percent effective April 1 through April 30, 2020 and a reduction between 20 percent and 60 percent effective May 1, 2020. Additionally, we suspended certain employer-paid retirement and pension contributions and modified certain retiree health benefits effective May 1, 2020. We will continue to evaluate further cost reduction measures as the impact of the COVID-19 pandemic becomes clearer. We lowered our incentive compensation accrual to align with the revised performance expectations for the year.

2nd Quarter Fiscal Year ~~2019~~2020 Results

Our sales for the ~~third~~second quarter of fiscal year ~~2019~~2020 were ~~$1,166~~$871 million, ~~an increase~~a decrease compared to ~~$1,129~~$1,156 million in the same period in the prior fiscal year. The ~~increase~~decrease in sales was driven by ~~higher truck~~lower global production ~~primarily~~volumes, including changes in ~~North America,~~customer

MERITOR, INC.

demand and the impact of government mandates as a result of COVID-19, partially offset by sales from our AxleTech business, which we acquired in the ~~strengthening~~fourth quarter of ~~the U.S. dollar against most currencies.~~fiscal year 2019.

Net income attributable to Meritor for the ~~third~~second quarter of fiscal year ~~2019~~2020 was ~~$86~~$241 million compared to ~~$64~~$72 million in the same period in the prior fiscal year. Higher net income year over year was ~~primarily attributable to conversion on increased revenue and lower~~driven by $203 million of after tax income ~~tax expense.~~associated with the termination of our distribution arrangement with WABCO Holdings, Inc. ("WABCO").

Adjusted EBITDA (see Non-GAAP Financial Measures below) for the ~~third~~second quarter of fiscal year ~~2019~~2020 was ~~$146~~$107 million compared to ~~$135~~$139 million in the same period in the prior fiscal year. Our adjusted EBITDA margin (see Non-GAAP Financial Measures below) in the ~~third~~second quarter of fiscal year ~~2019~~2020 was ~~12.5~~12.3 percent compared to 12.0 percent in the same period in the prior fiscal year. The ~~increase~~decrease in adjusted EBITDA ~~and adjusted EBITDA margin~~ year over year was driven primarily by ~~conversion on higher~~lower revenue, ~~and the impact of Aftermarket pricing actions implemented earlier this year,~~ partially offset by ~~higher~~lower incentive compensation costs and lower material, labor and burden costs. Incentive compensation was reduced $10 million in the quarter to align with revised performance expectations due to the COVID-19 pandemic. We also recognized a $4 million benefit resulting from a tax law change in India.

Net income from continuing operations attributable to the company for the ~~third~~second quarter of fiscal year ~~2019~~2020 was ~~$85~~$240 million compared to ~~$66~~$73 million in the same period in the prior fiscal year. Adjusted income from continuing operations attributable to the company (see Non-GAAP Financial Measures below) for the ~~third~~second quarter of fiscal year ~~2019~~2020 was $~~103~~56 million compared to ~~$80~~$88 million in the same period in the prior fiscal year.

Cash provided by operating activities was ~~$143~~$309 million in the ~~third~~second quarter of fiscal year ~~2019~~2020 compared to ~~$119~~$40 million in the ~~third~~second quarter of fiscal year ~~2018. Higher earnings helped drive~~2019. The increase in cash ~~flow performance in~~provided by operating activities was driven primarily by $265 million of cash received from the ~~third~~termination of the distribution arrangement with WABCO.

Equity Repurchase Authorization

In the second 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 ~~1.0~~5.6 million shares of our common stock for ~~$21~~$141 million (including commission costs) pursuant to the November ~~2018~~2019 equity repurchase authorization described in the Liquidity section below. The amount remaining available for repurchases under that repurchase authorization was ~~$130~~$59 million as of ~~June 30, 2019.~~March 31, 2020.

~~Acquisition of AxleTech Business~~WABCO Distribution Arrangement

On ~~July 26, 2019,~~March 13, 2020, we ~~acquired 100 percent of AxleTech's shares for approximately $175~~exercised our option to terminate our aftermarket distribution arrangement with WABCO. We received $265 million from WABCO in ~~cash, subject to certain purchase price adjustments. The addition of AxleTech enhances our growth platform~~connection with the ~~addition~~termination 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.~~

~~MERITOR, INC.~~

arrangement.

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,~~March 31, 2020 and 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 March 31,		Percent		Six Months Ended March 31,		Percent
	2019	2018	Change		2019	2018	Change		2020	2019	Change		2020	2019	Change
Estimated Commercial Truck production (in thousands):	Estimated Commercial Truck production (in thousands):								Estimated Commercial Truck production (in thousands):
North America, Heavy-Duty Trucks	93	78	19	%	266	218	22	%	61	89	(31	)%	130	173	(25	)%
North America, Medium-Duty Trucks	77	72	7	%	212	194	9	%	60	70	(14	)%	120	135	(11	)%
North America, Trailers	86	81	6	%	250	227	10	%	55	78	(29	)%	135	165	(18	)%
Western Europe, Heavy- and Medium-Duty Trucks	125	124	1	%	392	367	7	%	88	127	(31	)%	197	257	(23	)%
South America, Heavy- and Medium-Duty Trucks	31	25	24	%	85	74	15	%	22	23	(4	)%	52	50	4	%
India, Heavy- and Medium-Duty Trucks	110	113	(3	)%	343	342	—	%	66	118	(44	)%	114	233	(51	)%

North America:

During ~~the fourth quarter of~~ fiscal year ~~2019,~~2020, we expect production volumes to ~~remain relatively consistent with~~significantly decrease from the levels

experienced in ~~the first nine months of~~ fiscal year

2019.

MERITOR, INC.

Western Europe:

During ~~the fourth quarter of~~ fiscal year ~~2019,~~2020, we expect production volumes in Western Europe to significantly 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.~~2019.

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 ~~the~~

~~first nine months of~~ fiscal year 2019.

~~India:~~China:

During ~~the fourth quarter of~~ fiscal year ~~2019,~~2020, we expect production volumes to decrease from the levels experienced in ~~the~~fiscal 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 regarding the duration and severity of the COVID-19 pandemic and its effects on public health, the global economy, financial markets and operations, including additional expense related to enhancing safety measures for our employees;

Uncertainty around the global ~~market~~economic 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:

~~MERITOR, INC.~~

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 timing~~volumes, 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;~~

~~Potential~~customers 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).

MERITOR, INC.

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.~~

~~MERITOR, INC.~~

Management believes these non-GAAP financial measures are useful to both management and investors in their analysis of the company's financial position and results of operations. In particular, adjusted EBITDA, adjusted EBITDA margin, segment adjusted EBITDA, segment adjusted EBITDA margin, adjusted income (loss) from continuing operations attributable to the company and adjusted diluted earnings (loss) per share from continuing operations are meaningful measures of performance to investors as they are commonly utilized to analyze financial performance in our industry, perform analytical comparisons, benchmark performance between periods and measure our performance against externally communicated targets.

Free cash flow is used by investors and management to analyze our ability to service and repay debt and return value directly to shareholders. ~~Net debt~~Free cash flow over adjusted ~~EBITDA~~income from continuing operations is a specific financial measure inof our ~~current M2019~~M2022 plan used to measure the ~~company’s leverage in order~~company'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 debt~~free cash flow over adjusted ~~EBITDA~~income 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.

MERITOR, INC.

Adjusted income from continuing operations attributable to the company and adjusted diluted earnings per share from continuing operations are reconciled to Income from continuing operations attributable to the company and Diluted earnings per share from continuing operations below (in millions, except per share amounts).

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

~~MERITOR, INC.~~



	Three Months Ended March 31,						Six Months Ended March 31,
	2020			2019			2020			2019
Income from continuing operations attributable to the company	$	240		$	73		$	279		$	163
Restructuring	10			(1		)	15			(1		)
Non-cash tax expense ⁽¹⁾	8			16			17			27
U.S. tax reform impacts ⁽²⁾	—			—			—			(7		)
Asbestos related liability remeasurement ⁽³⁾	—			—			—			(31		)
Income from WABCO distribution termination	(265		)	—			(265		)	—
Income tax expense ⁽⁴⁾	58			—			57			6
Transaction costs ⁽⁵⁾	5			—			5			—
Adjusted income from continuing operations attributable to the company	$	56		$	88		$	108		$	157

Diluted earnings per share from continuing operations	$	3.19		$	0.85		$	3.58		$	1.88
Impact of adjustments on diluted earnings per share	(2.45		)	0.18			(2.20		)	(0.07		)
Adjusted diluted earnings per share from continuing operations	$	0.74		$	1.03		$	1.38		$	1.81

⁽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 ~~nine~~six months ended ~~June 30,~~March 31, 2019 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 ~~nine~~six months ended ~~June 30,~~March 31, 2019 includes $31 million related to the remeasurement of the Maremont net asbestos liability based on the Maremont prepackaged plan of reorganization.

⁽⁴⁾The ~~nine~~three months ended ~~June 30,~~March 31, 2020 includes $62 million of income tax expense related to the WABCO distribution arrangement termination, $3 million of income tax benefits related to restructuring and $1 million of income tax benefits related to AxleTech transaction costs. The six months ended March 31, 2020 includes $62 million of income tax expense related to the WABCO distribution arrangement termination, $4 million of income tax benefits related to restructuring and $1 million of income tax benefits related to AxleTech transaction costs. The six months ended March 31, 2019 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.

⁽⁵⁾Represents transaction fees and inventory step-up amortization related to the acquisitions of AxleTech and TransPower.

Free cash flow is reconciled to cash provided by operating activities below (in millions).


	Three Months Ended June 30,						Nine Months Ended June 30,						Three Months Ended March 31,						Six Months Ended March 31,
	2019			2018			2019			2018			2020			2019			2020			2019
Cash provided by operating activities	$	143		$	119		$	194		$	191		$	309		$	40		$	290		$	51
Capital expenditures	(19		)	(17		)	(63		)	(52		)	(17		)	(21		)	(33		)	(44		)
Free cash flow	$	124		$	102		$	131		$	139		$	292		$	19		$	257		$	7

Free cash flow conversion⁽¹⁾													521		%	22		%	238		%	4		%

⁽¹⁾ Represents free cash flow divided by adjusted income from continuing operations.

MERITOR, INC.

Adjusted EBITDA and segment adjusted EBITDA are reconciled to net income attributable to Meritor, Inc. below (dollars in millions).


	Three Months Ended June 30,						Nine Months Ended June 30,						Three Months Ended March 31,						Six Months Ended March 31,
	2019			2018			2019			2018			2020			2019			2020			2019
Net income attributable to Meritor, Inc.	$	86		$	64		$	248		$	85		$	241		$	72		$	280		$	162
Loss (income) from discontinued operations, net of tax, attributable to Meritor, Inc.	(1		)	2			—			3			(1		)	1			(1		)	1
Income from continuing operations, net of tax, attributable to Meritor, Inc.	$	85		$	66		$	248		$	88		$	240		$	73		$	279		$	163

Interest expense, net	14			14			43			54			16			15			30			29
Provision for income taxes	21			26			69			131			73			27			86			48
Depreciation and amortization	21			22			64			64			26			21			50			43
Noncontrolling interests	3			3			7			8			1			2			3			4
Loss on sale of receivables	2			1			5			3			1			2			2			3
Asset impairment charges	1			—			1			2
Asbestos related liability remeasurement	—			—			(31		)	—			—			—			—			(31		)
Restructuring	(1		)	3			(2		)	6			10			(1		)	15			(1		)
Transaction costs													5			—			5			—
Income from WABCO distribution termination													(265		)	—			(265		)	—
Adjusted EBITDA	$	146		$	135		$	404		$	356		$	107		$	139		$	205		$	258

Adjusted EBITDA margin ⁽¹⁾	12.5		%	12.0		%	12.0		%	11.5		%	12.3		%	12.0		%	11.6		%	11.8		%

Unallocated legacy and corporate expense, net ⁽²⁾	1			3			—			15
Unallocated legacy and corporate expense (income), net ⁽²⁾													(3		)	1			(5		)	(1		)
Segment adjusted EBITDA	$	147		$	138		$	404		$	371		$	104		$	140		$	200		$	257

Commercial Truck ⁽³⁾
Commercial Truck
Segment adjusted EBITDA	$	93		$	100		$	258		$	263		$	55		$	88		$	111		$	165
Segment adjusted EBITDA margin ⁽⁴⁾	10.7		%	11.7		%	10.2		%	11.2		%
Segment adjusted EBITDA margin ⁽³⁾													9.4		%	10.0		%	9.2		%	10.0		%

Aftermarket, Industrial and Trailer ⁽³⁾
Aftermarket, Industrial and Trailer
Segment adjusted EBITDA	$	54		$	38		$	146		$	108		$	49		$	52		$	89		$	92
Segment adjusted EBITDA margin⁽⁴⁾	15.9		%	11.9		%	15.0		%	12.4		%
Segment adjusted EBITDA margin⁽³⁾													15.4		%	15.8		%	14.0		%	14.6		%

⁽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, 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~~

~~MERITOR, INC.~~

~~Net debt is reconciled to total debt and adjusted EBITDA is reconciled to net income attributable to Meritor, Inc. below (dollars in millions).~~

June 30,
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.

MERITOR, INC.

Results of Operations

Three Months Ended ~~June 30, 2019~~March 31, 2020 Compared to Three Months Ended ~~June 30, 2018~~March 31, 2019

Sales

The following table reflects total company and business segment sales for the three months ended ~~June 30,~~March 31, 2020 and 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
2019
2018 ⁽¹⁾

Dollar
Change

%
Change
Currency Volume/ Other
Sales:
Commercial Truck
            North America $ 473
$ 431
$ 42
10 % $ —
$ 42
            Europe 180
196
(16 ) (8 )% (11 ) (5 )
            South America 67
55
12
22 % (7 ) 19
     China 44
53
(9 ) (17 )% (3 ) (6 )
     India 53
58
(5 ) (9 )% (1 ) (4 )
     Other 18
26
(8 ) (31 )% (1 ) (7 )
          Total External Sales $ 835
$ 819
$ 16
2 % $ (23 ) $ 39
            Intersegment Sales 34
35
(1 ) (3 )% (3 ) 2
          Total Sales $ 869
$ 854
$ 15
2 % $ (26 ) $ 41

Aftermarket, Industrial and Trailer
            North America $ 308
$ 279
$ 29
10 % $ (1 ) $ 30
            Europe 23
31
(8 ) (26 )% (1 ) (7 )
          Total External Sales $ 331
$ 310
$ 21
7 % $ (2 ) $ 23
            Intersegment Sales 9
9
—
— % (2 ) 2
          Total Sales $ 340
$ 319
$ 21
7 % $ (4 ) $ 25

Total External Sales $ 1,166

$ 1,129
$ 37
3 % $ (25 ) $ 62

⁽¹⁾ ~~Amounts for the three months ended June 30, 2018 have been recast to reflect reportable segment changes.~~



	Three Months Ended March 31,									Dollar Change Due To
	2020		2019		Dollar Change			% Change		Currency			Volume/ Other
Sales:
Commercial Truck
North America	$	305	$	463	$	(158	)	(34	)%	$	—		$	(158	)
Europe	140		181		(41		)	(23	)%	(5		)	(36		)
South America	50		63		(13		)	(21	)%	(9		)	(4		)
China	26		44		(18		)	(41	)%	(1		)	(17		)
India	22		62		(40		)	(65	)%	—			(40		)
Other	14		24		(10		)	(42	)%	—			(10		)
Total External Sales	$	557	$	837	$	(280	)	(33	)%	$	(15	)	$	(265	)
Intersegment Sales	31		39		(8		)	(21	)%	(2		)	(6		)
Total Sales	$	588	$	876	$	(288	)	(33	)%	$	(17	)	$	(271	)

Aftermarket, Industrial and Trailer
North America	$	272	$	293	$	(21	)	(7	)%	$	—		$	(21	)
Europe	42		26		16			62	%	(2		)	18
Total External Sales	$	314	$	319	$	(5	)	(2	)%	$	(2	)	$	(3	)
Intersegment Sales	5		10		(5		)	(50	)%	(1		)	(4		)
Total Sales	$	319	$	329	$	(10	)	(3	)%	$	(3	)	$	(7	)

Total External Sales	$	871	$	1,156	$	(285	)	(25	)%	$	(17	)	$	(268	)

Commercial Truck sales were ~~$869~~$588 million in the ~~third~~second quarter of fiscal year ~~2019, up 2~~2020, down 33 percent compared to the ~~third~~second quarter of fiscal year ~~2018.~~2019. The ~~increase~~decrease in sales was driven primarily by ~~increased production~~decreased market volumes for most regions across the segment, including changes in ~~North America, partially offset by~~customer demand and the ~~strengthening~~impact of government mandates as a result of the ~~U.S. dollar against most currencies.~~COVID-19 pandemic.

Aftermarket, Industrial and Trailer sales were ~~$340~~$319 million in the ~~third~~second quarter of fiscal year ~~2019, up 7~~2020, down 3 percent compared to the ~~third~~second quarter of fiscal year ~~2018. Higher~~2019. Lower sales were primarily driven by ~~increased industrial~~decreased volumes across the segment, including changes in customer demand and ~~pricing actions within~~the impact of government mandates as a result of the COVID-19 pandemic, partially offset by revenue generated from our ~~Aftermarket~~AxleTech business.

MERITOR, INC.



	Three Months Ended March 31,
	2020			2019			Dollar Change			% Change
Sales	$	871		$	1,156		$	(285	)	(25	)%
Cost of sales	(757		)	(982		)	225			23	%
GROSS PROFIT	114			174			(60		)	(34	)%
Selling, general and administrative	(59		)	(73		)	14			19	%
Income from WABCO distribution termination	265			—			265			N/A
Other operating income (expense), net	(10		)	1			(11		)	(1,100	)%
Other income, net	14			9			5			56	%
Equity in earnings of affiliates	6			6			—			—	%
Interest expense, net	(16		)	(15		)	(1		)	(7	)%
INCOME BEFORE INCOME TAXES	314			102			212			208	%
Provision for income taxes	(73		)	(27		)	(46		)	(170	)%
INCOME FROM CONTINUING OPERATIONS	241			75			166			221	%
INCOME (LOSS) FROM DISCONTINUED OPERATIONS, net of tax	1			(1		)	2			(200	)%
NET INCOME	242			74			168			227	%
Less: Net income attributable to noncontrolling interests	(1		)	(2		)	1			(50	)%
NET INCOME ATTRIBUTABLE TO MERITOR, INC.	$	241		$	72		$	169		235	%

Cost of Sales and Gross Profit

Cost of sales primarily represents materials, labor and overhead production costs associated with the company’s products and production facilities. Cost of sales for the three months ended ~~June 30, 2019~~March 31, 2020 was ~~$987~~$757 million compared to ~~$959~~$982 million in the same period in the prior fiscal year, representing ~~an increase~~a decrease of 323 percent, primarily driven by ~~increased~~decreased market volumes. Total cost of sales was ~~84.6~~86.9 and 84.9 percent of sales for the three-month periods ended ~~June 30,~~March 31, 2020 and 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):

~~MERITOR, INC.~~

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, 2019 increased $38~~March 31, 2020 decreased $204 million compared to the same period in the prior fiscal year primarily due to ~~higher~~lower volumes, ~~and higher~~ year-over-year steel ~~prices.~~prices and layered capacity costs.

Labor and overhead costs decreased by $8$23 million compared to the same period in the prior fiscal ~~year.~~year primarily due to lower volumes.

Gross ~~margin~~profit was ~~$179~~$114 million and ~~$170~~$174 million for the three-month periods ended ~~June 30,~~March 31, 2020 and 2019, ~~and 2018,~~ respectively. Gross ~~margin~~profit as a percentage of sales was ~~15.4~~13.1 and 15.1 percent for the three-month periods ended ~~June 30,~~March 31, 2020 and 2019, ~~and 2018,~~ respectively. Gross ~~margin~~profit as a percentage of sales ~~increased~~decreased as lower sales more than offset lower material, primarily ~~due to conversion on higher revenue which was partially offset by higher material~~steel, labor and burden and freight costs.

Other Income Statement Items

Selling, general and administrative expenses ("SG&A") for the three months ended ~~June 30,~~March 31, 2020 and 2019 were $59 million and ~~2018 are summarized as follows (dollars in millions):~~

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~~$73 million, ~~related to previous cash settlements with insurance companies for recoveries~~respectively. This decrease was primarily driven by lower incentive compensation of ~~defense and indemnity~~$15 million, partially offset by additional costs ~~associated with asbestos liabilities~~generated from our AxleTech business, which was acquired in the ~~third~~fourth quarter 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).~~2019.

~~MERITOR, INC.~~

~~Other operating expense~~Provision for income taxes was $3$73 million in the third 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.

~~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~~March 31, 2020 compared to ~~$26~~$27 million in the same period in the prior fiscal year. ~~Higher pre-tax income during the third quarter of fiscal year 2019 compared~~The increase in tax expense is primarily related to the ~~same quarter in~~tax effect of the ~~prior year was~~proceeds received from the termination of the WABCO distribution arrangement, partially offset by a ~~reduction~~decrease in ~~the current year annualized effective tax rate. Additionally, we recorded a $4 million tax charge related to~~earnings in certain jurisdictions that do not have a tax ~~accrual recorded in the third quarter of fiscal year 2018, that did not repeat.~~valuation allowance.

~~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,~~March 31, 2020 and 2019 ~~and 2018~~ (dollars in millions).

MERITOR, INC.

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

⁽¹⁾ ~~Amounts for the three months ended June 30, 2018 have been recast to reflect reportable segment changes.~~



	Segment adjusted EBITDA							Segment adjusted EBITDA margins
	Three Months Ended March 31,							Three Months Ended March 31,
	2020		2019		Change			2020		2019		Change
Commercial Truck	$	55	$	88	$	(33	)	9.4	%	10.0	%	(0.6	) pts
Aftermarket, Industrial and Trailer	49		52		(3		)	15.4	%	15.8	%	(0.4	) pts
Segment adjusted EBITDA	$	104	$	140	$	(36	)	11.9	%	12.1	%	(0.2	) pts

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

~~MERITOR, INC.~~



	Commercial Truck			Aftermarket, Industrial and Trailer			TOTAL
Segment adjusted EBITDA– Quarter ended March 31, 2019	$	88		$	52		$	140
Impact of foreign currency exchange rates	(4		)	(1		)	(5		)
Volume, mix, pricing and other	(29		)	(2		)	(31		)
Segment adjusted EBITDA – Quarter ended March 31, 2020	$	55		$	49		$	104

⁽¹⁾ ~~Amounts for the three months ended June 30, 2018 have been recast to reflect reportable segment changes.~~

Commercial Truck segment adjusted EBITDA was ~~$93~~$55 million in the ~~third~~second quarter of fiscal year ~~2019,~~2020, down $7$33 million from the same period in the prior fiscal year. Segment adjusted EBITDA margin decreased from ~~11.7~~10.0 percent in the ~~third~~second quarter of fiscal year ~~2018~~2019 to ~~10.7~~9.4 percent in the ~~third~~second 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~~lower incentive compensation 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.~~and lower material, labor and burden costs.

Aftermarket, Industrial and Trailer segment adjusted EBITDA was ~~$54~~$49 million in the ~~third~~second quarter of fiscal year ~~2019, up $16~~2020, down $3 million from the same period in the prior fiscal year. Segment adjusted EBITDA margin ~~increased~~decreased from ~~11.9~~15.8 percent in the ~~third~~second quarter of fiscal year ~~2018~~2019 to ~~15.9~~15.4 percent in the ~~third~~second quarter of fiscal year ~~2019.~~2020. The ~~increase~~decrease in segment adjusted EBITDA and segment adjusted EBITDA margin was driven primarily by ~~pricing actions within our Aftermarket business.~~lower volumes, partially offset by lower incentive compensation costs.

MERITOR, INC.

Results of Operations

~~Nine~~Six Months Ended ~~June 30, 2019~~March 31, 2020 Compared to ~~Nine~~Six Months Ended ~~June 30, 2018~~March 31, 2019

Sales

The following table reflects total company and business segment sales for the ~~nine~~six months ended ~~June 30,~~March 31, 2020 and 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.~~



	Six Months Ended March 31,									Dollar Change Due To
	2020		2019		Dollar Change			% Change		Currency			Volume/ Other
Sales:
Commercial Truck
North America	$	631	$	860	$	(229	)	(27	)%	$	—		$	(229	)
Europe	281		356		(75		)	(21	)%	(8		)	(67		)
South America	103		113		(10		)	(9	)%	(13		)	3
China	60		85		(25		)	(29	)%	(2		)	(23		)
India	44		119		(75		)	(63	)%	—			(75		)
Other	28		48		(20		)	(42	)%	(1		)	(19		)
Total External Sales	$	1,147	$	1,581	$	(434	)	(27	)%	$	(24	)	$	(410	)
Intersegment Sales	63		74		(11		)	(15	)%	(3		)	(8		)
Total Sales	$	1,210	$	1,655	$	(445	)	(27	)%	$	(27	)	$	(418	)

Aftermarket, Industrial and Trailer
North America	$	538	$	561	$	(23	)	(4	)%	$	—		$	(23	)
Europe	85		52		33			63	%	(3		)	36
Other	2		—		2			N/A		—			2
Total External Sales	$	625	$	613	$	12		2	%	$	(3	)	$	15
Intersegment Sales	11		19		(8		)	(42	)%	(2		)	(6		)
Total Sales	$	636	$	632	$	4		1	%	$	(5	)	$	9

Total External Sales	$	1,772	$	2,194	$	(422	)	(19	)%	$	(27	)	$	(395	)

Commercial Truck sales were ~~$2,524~~$1,210 million in the first ~~nine~~six months of fiscal year ~~2019, up 7~~2020, down 27 percent compared to the first ~~nine~~six months of fiscal year ~~2018.~~2019. The ~~increase~~decrease in sales was driven primarily by ~~higher truck production~~decreased market volumes for most regions across the segment, including changes in ~~North America~~customer demand and ~~increased market share, partially offset by~~ the ~~strengthening~~impact of government mandates as a result of the ~~U.S. dollar against most currencies.~~COVID-19 pandemic.

Aftermarket, Industrial and Trailersales were ~~$972~~$636 million in the first ~~nine~~six months of fiscal year ~~2019,~~2020, up 121 percent compared to the first ~~nine~~six months of fiscal year ~~2018.~~2019. Higher sales were primarily driven by ~~increased~~revenue generated from our AxleTech business we acquired in the fourth quarter of fiscal year 2019, partially offset by decreased volumes across ~~North America~~the segment, including changes in customer demand and ~~pricing actions within our Aftermarket business.~~the impact of government mandates as a result of the COVID-19 pandemic.

MERITOR, INC.



	Six Months Ended March 31,
	2020			2019			Dollar Change			% Change
Sales	$	1,772		$	2,194		$	(422	)	(19	)%
Cost of sales	(1,531		)	(1,879		)	348			19	%
GROSS PROFIT	241			315			(74		)	(23	)%
Selling, general and administrative	(129		)	(107		)	(22		)	(21	)%
Income from WABCO distribution termination	265			—			265			N/A
Other operating income (expense), net	(15		)	1			(16		)	(1,600	)%
Other income, net	24			20			4			20	%
Equity in earnings of affiliates	12			15			(3		)	(20	)%
Interest expense, net	(30		)	(29		)	(1		)	(3	)%
INCOME BEFORE INCOME TAXES	368			215			153			71	%
Provision for income taxes	(86		)	(48		)	(38		)	(79	)%
INCOME FROM CONTINUING OPERATIONS	282			167			115			69	%
INCOME (LOSS) FROM DISCONTINUED OPERATIONS, net of tax	1			(1		)	2			200	%
NET INCOME	283			166			117			70	%
Less: Net income attributable to noncontrolling interests	(3		)	(4		)	1			(25	)%
NET INCOME ATTRIBUTABLE TO MERITOR, INC.	$	280		$	162		$	118		73	%

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~~six months ended ~~June 30, 2019~~March 31, 2020 was ~~$2,866~~$1,531 million compared to ~~$2,625~~$1,879 million in the same period in the prior fiscal year, representing ~~an increase~~a decrease of 919 percent, primarily driven by ~~increased~~decreased market volumes. Total cost of sales was ~~85.3~~86.4 and ~~84.7~~85.6 percent of sales for the ~~nine-month~~six-month periods ended ~~June 30,~~March 31, 2020 and 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):

~~MERITOR, INC.~~

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 costs represent the majority of our cost of sales and include raw materials, composed primarily of steel, and purchased components. Material costs for the ~~nine~~six months ended ~~June 30, 2019 increased $229~~March 31, 2020 decreased $310 million compared to the same period in the prior fiscal year primarily due to ~~higher~~lower volumes, ~~and higher~~ year-over-year steel ~~prices.~~prices and layered capacity costs.

Labor and overhead costs~~increased $13~~decreased by $43 million compared to the same period in the prior fiscal year primarily due to ~~higher~~lower volumes.

Gross ~~margin~~profit was ~~$494~~$241 million and ~~$473~~$315 million for the ~~nine-month~~six-month periods ended ~~June 30,~~March 31, 2020 and 2019, ~~and 2018,~~ respectively. Gross ~~margin,~~profit as a percentage of sales was ~~14.7~~13.6 and ~~15.3~~14.4 percent for the ~~nine-month~~six-month periods ended ~~June 30,~~March 31, 2020 and 2019, ~~and 2018,~~ respectively. Gross ~~margin~~profit as a percentage of sales decreased ~~primarily due to higher freight and other layered capacity costs driven by significant production levels, which~~as lower sales more than offset ~~the impact of conversion on higher revenue.~~lower material, primarily steel, labor and burden and freight costs.

Other Income Statement Items

~~SG&A~~Selling, general and administrative expenses for the ~~nine~~six months ended ~~June 30,~~March 31, 2020 and 2019 were $129 million 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).~~$107 million, respectively.

We recognized $31 million related to remeasuring the Maremont asbestos liability based on the ~~Maremont~~terms of the plan of reorganization in the first quarter of fiscal year 2019 (see Note 2120 of the Notes to the Condensed Consolidated Financial Statements in Part I of this Quarterly Report). ~~We recognized $7~~Excluding Maremont, SG&A decreased primarily due to lower incentive compensation costs in the second quarter of fiscal year 2020, partially offset by additional costs generated from our AxleTech business, which was acquired in the fourth quarter of fiscal year 2019, as well as higher electrification costs.

Provision for income taxes was $86 million ~~related to previous cash settlements with insurance companies for recoveries of defense and indemnity costs associated with asbestos liabilities~~ in the first ~~nine~~six months of fiscal year ~~2018, which is included in~~

~~MERITOR, INC.~~

~~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~~2020 compared to ~~$131~~$48 million in the same period in the prior fiscal year. The ~~nine months ended June 30, 2018 included $43 million of non-cash~~increase in tax expense is primarily related to the ~~remeasurement of our deferred~~ tax ~~attributes as a result~~effect of the ~~U.S. tax reform and $34 million of non-cash tax expense related to~~proceeds received from 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 refinementtermination of the ~~one-time deemed repatriation. Also impacting the first nine months of fiscal year 2019 was~~WABCO distribution arrangement, partially offset by 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~~decrease in earnings in certain jurisdictions that do not have a tax valuation ~~allowance compared to the prior year.~~allowance.

~~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.~~

MERITOR, INC.

Segment Adjusted EBITDA and Segment Adjusted EBITDA Margins

The following table reflects segment adjusted EBITDA and segment adjusted EBITDA margins for the ~~nine~~six months ended ~~June 30,~~March 31, 2020 and 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.~~

~~MERITOR, INC.~~



	Segment adjusted EBITDA							Segment adjusted EBITDA margins
	Six Months Ended March 31,							Six Months Ended March 31,
	2020		2019		Change			2020		2019		Change
Commercial Truck	$	111	$	165	$	(54	)	9.2	%	10.0	%	(0.8	) pts
Aftermarket, Industrial and Trailer	89		92		(3		)	14.0	%	14.6	%	(0.6	) pts
Segment adjusted EBITDA	$	200	$	257	$	(57	)	11.3	%	11.7	%	(0.4	) pts

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			Aftermarket, Industrial and Trailer			TOTAL
Segment adjusted EBITDA– Six months ended March 31, 2019	$	165		$	92		$	257
Lower earnings from unconsolidated affiliates	(3		)	—			(3		)
Impact of foreign currency exchange rates	(7		)	(2		)	(9		)
Volume, mix, pricing and other	(44		)	(1		)	(45		)
Segment adjusted EBITDA – Six months ended March 31, 2020	$	111		$	89		$	200

Commercial Truck segment adjusted EBITDA was ~~$258~~$111 million in the first ~~nine~~six months of fiscal year ~~2019,~~2020, down $5$54 million from the same period in the prior fiscal year. Segment adjusted EBITDA margin decreased from ~~11.2~~10.0 percent ~~for~~in the first ~~nine~~six months of fiscal year ~~2018~~2019 to ~~10.2~~9.2 percent in the first ~~nine~~six months of fiscal year ~~2019.~~2020. The decrease in segment adjusted EBITDA and segment adjusted EBITDA margin were driven primarily by lower volumes, partially offset by lower freight, labor and burden and material costs and lower incentive compensation costs.

Aftermarket, Industrial and Trailer segment adjusted EBITDA was $89 million in the first six months of fiscal year 2020, down $3 million from the same period in the prior fiscal year. Segment adjusted EBITDA margin decreased from 14.6 percent in the first six months of fiscal year 2019 to 14.0 percent in the first six months of fiscal year 2020. The decrease in segment adjusted EBITDA and segment adjusted EBITDA margin was driven primarily by ~~higher net steel, freight and other layered capacity costs,~~lower volumes, partially offset by ~~conversion on higher revenue and continued material performance. Segment adjusted EBITDA was also unfavorably impacted by~~ the ~~strengthening of~~impact from our AxleTech business, as the ~~U.S. dollar against most currencies.~~benefit from executed synergies continue to ramp up to full run rate, as well as lower incentive compensation costs.

~~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.

MERITOR, INC.

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

~~MERITOR, INC.~~



	Six Months Ended March 31,
	2020			2019
OPERATING CASH FLOWS
Income from continuing operations	$	282		$	167
Depreciation and amortization	50			43
Deferred income tax expense (benefit)	(4		)	16
Restructuring costs	15			(1		)
Equity in earnings of affiliates	(12		)	(15		)
Pension and retiree medical income	(21		)	(19		)
Asbestos related liability remeasurement	—			(31		)
Dividends received from equity method investments	—			1
Pension and retiree medical contributions	(7		)	(8		)
Restructuring payments	(15		)	(1		)
Changes in receivables, inventories and accounts payable	(8		)	(91		)
Changes in off-balance sheet accounts receivable factoring	20			22
Changes in other current assets and liabilities	(49		)	(33		)
Changes in other assets and liabilities	38			(6		)
Other, net	1			8
Cash flows provided by continuing operations	290			52
Cash flows used for discontinued operations	—			(1		)
CASH PROVIDED BY OPERATING ACTIVITIES	$	290		$	51

Cash provided by operating activities in the first ~~nine~~six months of fiscal year ~~2019~~2020 was ~~$194~~$290 million compared to ~~$191~~$51 million in the same period of fiscal year ~~2018.~~2019. The increase in cash provided by operating activities was driven primarily by $265 million of cash received from the WABCO distribution arrangement termination in the second 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



	Six Months Ended March 31,
	2020			2019
INVESTING CASH FLOWS
Capital expenditures	$	(33	)	$	(44	)
Cash paid for acquisition of TransPower, net of cash acquired	(13		)	(3		)
Other investing activities	9			—
CASH USED FOR INVESTING ACTIVITIES	$	(37	)	$	(47	)

Cash used for investing activities was $5237 million in the first ~~nine~~six months of fiscal year ~~2019~~2020 compared to ~~cash provided by investing activities of $162~~$47 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.

MERITOR, INC.


	Nine Months Ended June 30,						Six Months Ended March 31,
	2019			2018			2020			2019
FINANCING CASH FLOWS
Borrowings and securitization	$	(46	)	$	(89	)
Securitization							$	96		$	48
Borrowings against revolving line of credit							304			—
Redemption of notes	(24		)	(181		)	—			(19		)
Deferred issuance costs	(4		)	—
Term loan payments							(4		)	—
Other financing activities	(2		)	(3		)	(1		)	(1		)
Net change in debt	(76		)	(273		)	395			28
Repurchase of common stock	(71		)	(63		)	(241		)	(50		)
CASH USED FOR FINANCING ACTIVITIES	$	(147	)	$	(336	)
CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES							$	154		$	(22	)

Cash ~~used for~~provided by financing activities was ~~$147~~$154 million in the first ~~nine~~six months of fiscal year ~~2019~~2020 compared to ~~$336~~cash used for financing activities of $22 million in the same period of fiscal year ~~2018.~~2019. The ~~decrease~~increase in cash ~~used for~~provided by financing activities is primarily related to the redemption of our 6.75 percent notes due 2021 (the "6.75 Percent Notes") 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 outstandingadditional borrowings against our revolving line of credit and securitization ~~facilities, partially~~in anticipation of the potential cash flow impact of the COVID-19 pandemic, offset by ~~the repurchase of 3.0 million shares of common stock for $50 million (including commission costs)~~additional share repurchases in the first ~~quarter~~six months 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.

~~MERITOR, INC.~~

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			March 31, 2020			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		)	(31		)	(34		)
Term loan							171			175
Other borrowings	7			53			414			16
Total debt	$	758		$	824		$	1,341		$	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 ~~2019~~2020 capital expenditures for our business segments to be approximately ~~$105~~$85 million.

We generally fund our operating and capital needs with cash on hand, cash flows from operations, our various accounts receivable securitization and factoring arrangements and availability under our revolving credit facility. Cash in excess of local operating needs is generally used to reduce amounts outstanding, if any, under our revolving credit facility or U.S. accounts receivable securitization program. Our ability to access additional capital in the long term will depend on availability of capital markets and pricing on commercially reasonable terms, as well as our credit profile at the time we are seeking funds. We continuously evaluate our capital structure to ensure the most appropriate and optimal structure and may, from time to time, retire, repurchase, exchange or redeem outstanding indebtedness or common equity, issue new equity or debt securities or enter into new lending arrangements if conditions warrant.

In December 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 under the uncertain times of the COVID-19 pandemic 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.

MERITOR, INC.

Sources of liquidity as of ~~June 30, 2019,~~March 31, 2020, 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 3/31/20		Readily Available as of 3/31/20		Current Expiration
On-balance sheet arrangements:
Revolving credit facility ⁽¹⁾	$	625	$	—	$	625	June 2024⁽¹⁾	$	625	$	304	$	321	June 2024⁽¹⁾
Committed U.S. accounts receivable securitization ⁽²⁾	110		3		107		December 2021	115		108		—		December 2022
Total on-balance sheet arrangements	$	735	$	3	$	732		$	740	$	412	$	321
Off-balance sheet arrangements: ⁽²⁾
Committed Swedish factoring facility ⁽³⁾⁽⁴⁾	$	176	$	160	$	—	March 2020	$	171	$	147	$	—	March 2024
Committed U.S. factoring facility ⁽³⁾	75		70		—		February 2023	75		48		—		February 2023
Uncommitted U.K. factoring facility	28		11		—		February 2022	28		5		—		February 2022
Uncommitted Italy factoring facility	34		34		—		June 2022	33		25		—		June 2022
Other uncommitted factoring facilities ⁽⁴⁾⁽⁵⁾	N/A		19		N/A		None	N/A		19		N/A		N/A
Total off-balance sheet arrangements	313		294		—			307		244		—
Total available sources	$	1,048	$	297	$	732		$	1,047	$	656	$	321


⁽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⁾	The facility is backed by a 364-day liquidity commitment from Nordea Bank which extends through June 22, 2020.


⁽⁵⁾	There is no explicit facility size under the agreement, but the counterparty approves the purchase of receivable tranches at its discretion.

Cash and Liquidity Needs – At ~~June 30, 2019,~~March 31, 2020, we had ~~$111~~$508 million in cash and cash equivalents, of which ~~$30~~$24 million was held in jurisdictions outside of the U.S. that, if repatriated, could result in withholding taxes. ~~It is our intent~~We plan to ~~reinvest those~~repatriate substantially all of this cash. An immaterial deferred tax liability for the related withholding taxes has been recorded on the cash ~~balances in our foreign~~that we expect to repatriate. In addition, we plan to utilize ongoing cash flow from domestic operations ~~as we expect~~and 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, 2019,~~March 31, 2020, we were in compliance with ~~this~~the priority debt to EBITDA ratio covenant ~~under our credit agreement.~~with a ratio of approximately 0.90x, which includes the income recognized related to the termination of the WABCO distribution arrangement.

Equity Repurchase Authorization – On ~~July 21, 2016, our~~November 7, 2019, the Board of Directors authorized the repurchase of up to ~~$100~~$325 million of ~~our~~the 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 ~~our~~the company’s debt covenants. During ~~the second quarter of~~ fiscal year ~~2018, we~~2019, the company repurchased ~~1.4~~1.3 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. During the ~~third~~second quarter of fiscal year ~~2018, we~~2020, the company repurchased ~~1.4~~5.6 million shares of common stock for ~~$30~~$141 million (including commission costs) pursuant to this authorization. ~~During~~As of March 31, 2020, the ~~fourth quarter of fiscal year 2018, we repurchased 1.7 million shares of our common stock~~amount remaining available for ~~$37 million (including commission costs) pursuant to this authorization. The~~ repurchases under this common stock repurchase authorization ~~were complete~~was $59 million. On March 25, 2020, we suspended activity under our share repurchase program as a result of ~~September 30, 2018.~~uncertainties in the global economy due to the COVID-19 pandemic.

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

MERITOR, INC.

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.~~

~~MERITOR, INC.~~

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 ~~June~~March 31, 2020 and September 30, 2019.

~~Redemption of 6.75 Percent Notes~~Revolving 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).~~

~~MERITOR, INC.~~

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 Program~~Other – ~~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 facility~~Refer 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,~~April 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, 2019~~March 31, 2020 of ~~$294~~$244 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~~$49 million was related to factoring by certain of our European subsidiaries under uncommitted factoring facilities with financial institutions. The receivables under all of these programs are sold at face value and are excluded from the consolidated balance sheet. Total facility size, utilized amounts, readily available amounts and expiration dates for each of these programs are shown in the table above under Liquidity.

The Swedish facility is backed by a ~~364-day~~364-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).

~~MERITOR, INC.~~

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, 2019~~both March 31, 2020 and September 30, ~~2018, respectively.~~2019.

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~~Consolidated Financial Statements in Item 8 of our Annual Report on Form 10-K for the fiscal year ended September 30, ~~2018~~2019 (the ~~"2018~~"2019 Form 10-K"). Our critical accounting estimates are consistent with those described in Item 7 of our ~~2018~~2019 Form 10-K.

New Accounting Pronouncements

New Accounting Pronouncements are discussed in Note 3 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.

MERITOR, INC.

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,~~2019, we entered into multiple cross-currency ~~swaps.~~swap contracts with a combined notional amount of $225 million and maturities in October 2022. 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~~second quarter of fiscal year ~~2019, the company unwound~~2020, we settled these cross-currency ~~swaps~~swap contracts and received proceeds of ~~$19~~$11 million, $2$1 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.

~~MERITOR, INC.~~

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	$	(0.5	)	$	0.5		Fair Value
Forward contracts in Euro ⁽¹⁾	(2.6		)	2.6			Fair Value	(2.0		)	2.0			Fair Value
Foreign currency denominated debt ⁽²⁾	0.5			(0.5		)	Fair Value	0.4			(0.4		)	Fair Value
Foreign currency option contracts in USD	1.0			0.5			Fair Value	—			—			Fair Value
Foreign currency option contracts in Euro	(0.3		)	4.5			Fair Value	—			0.5			Fair Value
Cross-currency swaps	(26.3		)	26.3			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	$	(25.2	)	$	26.8		Fair Value
Debt – variable rate	—			—			Cash flow	(2.9		)	2.9			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, 2019,~~March 31, 2020, the fair value of outstanding foreign currency denominated debt was $5$4 million. A 10% decrease in quoted currency exchange rates would result in a decrease of $1$0.4 million in foreign currency denominated debt. At ~~June 30, 2019,~~March 31, 2020, a 10% increase in quoted currency exchange rates would result in an increase of $1$0.4 million in foreign currency denominated debt.

MERITOR, INC.

(3)At ~~June 30, 2019,~~March 31, 2020, the fair value of outstanding debt was ~~$857~~$1,323 million. A 50 basis points decrease in quoted interest rates would result in an increase of ~~$35~~$26.8 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~~$25.2 million in the fair value of fixed rate debt.

MERITOR, INC.

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, 2019.~~March 31, 2020. Based upon that evaluation, the Chief Executive Officer and the Chief Financial Officer have concluded that, as of ~~June 30, 2019,~~March 31, 2020, 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, 2019~~March 31, 2020 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.

MERITOR, INC.

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~~2019, other than the addition of the following risk factor regarding the recent coronavirus outbreak:

The recent coronavirus outbreak is having, and is expected to have, an adverse effect on our business.

In March 2020 the World Health Organization declared a global health pandemic related to the recent outbreak of a novel coronavirus. The COVID-19 pandemic is adversely affecting, and is expected to continue to adversely affect for at least the remainder of fiscal year 2020, public health, the global economy and financial markets, as well as our industry, operations, workforce, supply chains and distribution systems. We have experienced, and expect to continue to experience, unpredictable reductions in demand for certain of our products, as well as restrictions on our ability to operate. In response to the COVID-19 pandemic, government health officials have recommended and mandated precautions to mitigate the spread of the virus, including shelter-in-place orders, prohibitions on public gatherings and other similar measures. As a result, we and certain of our customers and suppliers have temporarily closed select manufacturing locations over the past several months. It is currently unclear how long these closures will be required, or if further closures may be necessary in the future. Our results will be adversely impacted by any such closures and other actions taken to contain the spread or mitigate the impact of the COVID-19 pandemic. There is uncertainty around the duration and breadth of the COVID-19 pandemic, and as a result the ultimate impact on our business, financial condition or operating results cannot be reasonably estimated at this time. The situation is rapidly evolving and additional impacts, including expenses related to subsequent commercial or employment related litigation, may arise that we are not aware of currently.

Additionally, the impacts described above and other impacts of the COVID-19 pandemic and responses to it may substantially increase the risk to us from the other risks described in the company's ~~Quarterly~~Annual Report on Form ~~10-Q~~10-K for the ~~period~~fiscal year ended ~~December 31, 2018.~~September 30, 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, 2019:~~March 31, 2020:

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⁾
January 1- 31, 2020	3,885,821	$	25.73	3,885,821	$	99,899,695
February 1- 29, 2020	1,682,704	$	24.19	1,682,704	$	59,199,494
March 1- 31, 2020	—	$	—	—	$	59,199,494
Total	5,568,525			5,568,525		59,199,494

(1)

MERITOR, INC.

The independent trustee of our 401(k) plans purchases shares in the open market to fund investments by employees in our common stock, one of the investment options available under such plans, and any matching contributions in company stock we provide under certain of such plans. In addition, our stock incentive plans permit payment of an option exercise price by means of cashless exercise through a broker and permit the satisfaction of the minimum statutory tax obligations upon exercise of options and the vesting of restricted stock units through stock withholding. There were no shares withheld in the ~~third~~second quarter of fiscal ~~2019~~2020 to satisfy tax obligations for exercise of options. In addition, our stock incentive plans also permit the satisfaction of tax obligations upon the vesting of restricted stock through stock withholding. There were no shares withheld in the ~~third~~second quarter of fiscal ~~2019~~2020 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.

MERITOR, INC.

Item 5. Other Information

Cautionary Statement

This Quarterly Report on Form 10-Q contains statements relating to future results of the company (including certain 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 the duration and severity of the COVID-19 pandemic and its effects on public health, the global economy, financial markets and operations; 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 ~~AxleTech~~Transportation 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.

~~MERITOR, INC.~~

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.

MERITOR, INC.

Item 6. Exhibits



3-a	Amended and Restated Articles of Incorporation of Meritor effective January 23, 2020, filed as Exhibit 3-a to Meritor’s ~~Annual~~Quarterly Report on Form ~~10-K~~10-Q for the fiscal ~~year~~quarter ended ~~September 27, 2015,~~December 29, 2019, is incorporated herein by reference.
3-b-1**	~~Redline Amended and Restated By-laws of Meritor effective July 29, 2019~~
3-b-2**3-b	Amended and Restated By-laws of Meritor effective ~~July~~January 23, 2020, filed as Exhibit 3-b to Meritor's Quarterly Report on Form 10-Q for the fiscal quarter ended December 29, 2019, is incorporated herein by reference.
~~10-a~~10-a**	~~Fourth~~ Amendment ~~and Restatement Agreement relating~~No. 1 to Fourth Amended and Restated Credit Agreement, dated as of ~~June 7, 2019,~~March 12, 2020, among Meritor, ~~ArvinMeritor Finance Ireland (“AFI”),~~the subsidiaries named therein, 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.~~Agent.
~~10-b~~10-b**	~~Agreement and Plan~~Extension dated March 19, 2020 of ~~Merger~~Receivables Purchase Agreement dated as of ~~May 3, 2019~~March 22, 2017, by and among Meritor ~~Inc., Janus Merger Sub, LLC, CAX Parent, LLC,~~HVS AB, as seller, and ~~Carlyle Equity Opportunity GP, L.P., solely in its capacity~~Viking Asset Purchaser No 7 IC, as ~~Holder Representative, filed~~purchaser, and Citicorp Trustee Company Limited, as ~~Exhibit 10-a to Meritor’s Current Report on Form 8-K filed on May 8, 2019, is incorporated herein by reference.~~programme trustee.
31-a**	Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) under the Exchange Act
31-b**	Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) under the Exchange Act
32-a**	Certification of the Chief Executive Officer pursuant to Rule 13a-14(b) under the Exchange Act and 18 U.S.C. Section 1350
32-b**	Certification of the Chief Financial Officer pursuant to Rule 13a-14(b) under the Exchange Act and 18 U.S.C. Section 1350
101.INS	Inline XBRL INSTANCE DOCUMENT - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document
101.SCH	Inline XBRL TAXONOMY EXTENSION SCHEMA
101.PRE	Inline XBRL TAXONOMY EXTENSION PRESENTATION LINKBASE
101.LAB	Inline XBRL TAXONOMY EXTENSION LABEL LINKBASE
101.CAL	Inline XBRL TAXONOMY EXTENSION CALCULATION LINKBASE
101.DEF	Inline XBRL TAXONOMY EXTENSION DEFINITION LINKBASE
104	Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101)

** Filed herewith.

MERITOR, INC.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.



		MERITOR, INC.

Date:	~~July 31, 2019~~April 30, 2020	By:	/s/	~~April Miller Boise~~Scott M. Confer
				~~April Miller Boise~~Scott M. Confer
				~~Senior Vice President,~~Interim Chief Legal Officer and Corporate Secretary
				(For the registrant)

Date:	~~July 31, 2019~~April 30, 2020	By:	/s/	Carl D. Anderson II
				Carl D. Anderson II
				Senior Vice President, Chief Financial Officer


Date:	April 30, 2020	By:	/s/	Paul D. Bialy
				Paul D. Bialy
				Vice President, Chief Accounting Officer


~~Date:~~	~~July 31, 2019~~	~~By:~~	~~/s/~~	~~Carl D. Anderson~~
				~~Carl D. Anderson~~
				~~Senior Vice President, Chief Financial Officer~~

7971



	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



	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



	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



	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



	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



	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



	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



	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