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MTOR Meritor

Filed: 4 May 21, 4:24pm

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 April 4, 2021
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)

Indiana38-3354643
(State or other jurisdiction of incorporation or organization)(I.R.S. Employer Identification No.)
 
2135 West Maple Road, Troy, Michigan48084-7186
(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 classTrading Symbol(s)Name of each exchange on which registered
Common Stock, $1 Par ValueMTORNew 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.
YesNo
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 12 months (or for such shorter period that the registrant was required to submit such files).
YesNo
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 FilerAccelerated Filer
Non-accelerated FilerSmaller 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).
YesNo
72,582,057 shares of Common Stock, $1.00 par value, of Meritor, Inc. were outstanding on May 3, 2021.



INDEX
2


MERITOR, INC.
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(in millions, except per share amounts)
Three Months Ended March 31,Six Months Ended March 31,
2021202020212020
(Unaudited)
Sales$983 $871 $1,872 $1,772 
Cost of sales(835)(757)(1,609)(1,531)
GROSS PROFIT148 114 263 241 
Selling, general and administrative(69)(59)(134)(129)
Income from WABCO distribution termination265 265 
Other operating expense, net(2)(10)(9)(15)
OPERATING INCOME77 310 120 362 
Other income, net23 14 37 24 
Equity in earnings of affiliates16 12 
Interest expense, net(17)(16)(45)(30)
INCOME BEFORE INCOME TAXES88 314 128 368 
Provision for income taxes(22)(73)(29)(86)
INCOME FROM CONTINUING OPERATIONS66 241 99 282 
INCOME FROM DISCONTINUED OPERATIONS, net of tax
NET INCOME66 242 99 283 
Less: Net income attributable to noncontrolling interests(3)(1)(4)(3)
NET INCOME ATTRIBUTABLE TO MERITOR, INC.$63 $241 $95 $280 
NET INCOME ATTRIBUTABLE TO MERITOR, INC.
Net income from continuing operations$63 $240 $95 $279 
Income from discontinued operations
Net income$63 $241 $95 $280 
BASIC EARNINGS PER SHARE
Continuing operations$0.87 $3.27 $1.31 $3.68 
Discontinued operations0.01 0.01 
Basic earnings per share$0.87 $3.28 $1.31 $3.69 
DILUTED EARNINGS PER SHARE
Continuing operations$0.86 $3.19 $1.30 $3.58 
Discontinued operations0.01 0.01 
Diluted earnings per share$0.86 $3.20 $1.30 $3.59 
Basic average common shares outstanding72.4 73.4 72.3 75.8 
Diluted average common shares outstanding73.4 75.3 73.3 78.0 
See Notes to Condensed Consolidated Financial Statements.

3


MERITOR, INC.
CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(in millions)

Three Months Ended March 31,Six Months Ended March 31,
2021202020212020
(Unaudited)
Net income$66 $242 $99 $283 
Other comprehensive income (loss):
Foreign currency translation adjustments:
     Attributable to Meritor, Inc.(22)(56)33 (35)
     Attributable to noncontrolling interests(1)
Pension and other postretirement benefit related adjustments
Unrealized gain (loss) on cash flow hedges(5)(3)
Other comprehensive income (loss), net of tax(21)(59)39 (33)
Total comprehensive income45 183 138 250 
Less: Comprehensive income attributable to noncontrolling interests(2)(1)(4)(3)
Comprehensive income attributable to Meritor, Inc.$43 $182 $134 $247 
See Notes to Condensed Consolidated Financial Statements.

4


MERITOR, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(in millions)
March 31,
2021
September 30, 2020
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents$321 $315 
Receivables, trade and other, net604 479 
Inventories510 435 
Other current assets72 54 
TOTAL CURRENT ASSETS1,507 1,283 
NET PROPERTY502 515 
GOODWILL510 501 
OTHER ASSETS621 585 
TOTAL ASSETS$3,140 $2,884 
LIABILITIES AND EQUITY
CURRENT LIABILITIES:
Short-term debt$17 $39 
       Accounts and notes payable593 423 
Other current liabilities279 264 
TOTAL CURRENT LIABILITIES889 726 
LONG-TERM DEBT1,186 1,188 
RETIREMENT BENEFITS176 196 
OTHER LIABILITIES276 279 
TOTAL LIABILITIES2,527 2,389 
COMMITMENTS AND CONTINGENCIES (See Note 16)00
EQUITY:
Common stock (March 31, 2021 and September 30, 2020, 104.0 and 103.7 shares issued and 72.6 and 72.3 shares outstanding, respectively)106 105 
Additional paid-in capital788 808 
Retained earnings831 736 
Treasury stock, at cost (March 31, 2021 and September 30, 2020, 31.4 and 31.4 shares, respectively)(573)(573)
Accumulated other comprehensive loss(575)(614)
Total equity attributable to Meritor, Inc.577 462 
Noncontrolling interests36 33 
TOTAL EQUITY613 495 
TOTAL LIABILITIES AND EQUITY$3,140 $2,884 
See Notes to Condensed Consolidated Financial Statements.
5


MERITOR, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(in millions)
Six Months Ended March 31,
20212020
(Unaudited)
OPERATING ACTIVITIES
Net income$99 $283 
Less: Income from discontinued operations, net of tax
Income from continuing operations99 282 
Adjustments to income from continuing operations to arrive at cash provided by operating activities:
Depreciation and amortization52 50 
Deferred income tax expense (benefit)(4)
Restructuring costs15 
Stock compensation expense10 
Equity in earnings of affiliates(16)(12)
Pension and retiree medical income(26)(21)
Loss on debt extinguishment
Dividends received from equity method investments
Pension and retiree medical contributions(6)(7)
Restructuring payments(8)(15)
Changes in off-balance sheet accounts receivable securitization and factoring programs35 20 
Changes in receivables, inventories and accounts payable(63)(8)
Changes in other current assets and liabilities(49)
Changes in other assets and liabilities38 
Operating cash flows provided by continuing operations107 290 
Operating cash flows used for discontinued operations
CASH PROVIDED BY OPERATING ACTIVITIES107 290 
INVESTING ACTIVITIES
Capital expenditures(26)(33)
Cash paid for acquisition of Transportation Power, Inc., net of cash acquired(13)
Other investing activities(3)
CASH USED FOR INVESTING ACTIVITIES(29)(37)
FINANCING ACTIVITIES
Securitization96 
Borrowings against revolving line of credit304 
Proceeds from debt issuance275 
Redemption of notes(281)
Redemption of convertible notes(53)
Debt issuance costs(5)
Term loan payments(7)(4)
Other financing activities(1)(1)
Net change in debt(72)395 
Repurchase of common stock(241)
CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES(72)154 
EFFECT OF CHANGES IN FOREIGN CURRENCY EXCHANGE
RATES ON CASH AND CASH EQUIVALENTS
(7)
CHANGE IN CASH AND CASH EQUIVALENTS400 
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD315 108 
CASH AND CASH EQUIVALENTS AT END OF PERIOD$321 $508 
See Notes to Condensed Consolidated Financial Statements.
6


MERITOR, INC.
CONDENSED CONSOLIDATED STATEMENT OF EQUITY
(in millions)
(Unaudited)

Three months ended March 31, 2021
Common
Stock
Additional
Paid-in
Capital
Retained EarningsTreasury StockAccumulated
Other
Comprehensive
Loss
Total Equity Attributable to
Meritor, Inc.
Noncontrolling
Interests
Total
Beginning Balance at December 31, 2020$106 $784 $768 $(573)$(555)$530 $35 $565 
Comprehensive income (loss)— — 63 — (20)43 45 
Equity based compensation expense— — — — — 
Noncontrolling interest dividends— — — — — — (1)(1)
Ending Balance at March 31, 2021$106 $788 $831 $(573)$(575)$577 $36 $613 
Three months ended March 31, 2020
Common
Stock
Additional
Paid-in
Capital
Retained EarningsTreasury StockAccumulated
Other
Comprehensive
Loss
Total Equity Attributable to
Meritor, Inc.
Noncontrolling
Interests
Total
Beginning Balance at December 31, 2019$105 $804 $530 $(432)$(655)$352 $32 $384 
Comprehensive income (loss)— — 241 — (59)182 183 
Equity based compensation expense— (2)— — — (2)— (2)
Repurchase of common stock— — — (141)— (141)— (141)
Noncontrolling interest dividend— — — — — — (1)(1)
Other equity adjustments— — — — — 
Ending Balance at March 31, 2020$105 $803 $771 $(573)$(714)$392 $32 $424 
See Notes to Condensed Consolidated Financial Statements.

7


MERITOR, INC.
CONDENSED CONSOLIDATED STATEMENT OF EQUITY
(in millions)
(Unaudited)
Six months ended March 31, 2021
Common
Stock
Additional
Paid-in
Capital
Retained EarningsTreasury StockAccumulated
Other
Comprehensive
Loss
Total Equity Attributable to
Meritor, Inc.
Noncontrolling
Interests
Total
Beginning Balance at September 30, 2020$105 $808 $736 $(573)$(614)$462 $33 $495 
Comprehensive income— — 95 — 39 134 138 
Equity based compensation expense— 10 — — — 10 — 10 
Vesting of equity based awards(1)— — — — — 
Repurchase of convertible notes— (30)— — — (30)— (30)
Noncontrolling interest dividend— — — — — — (1)(1)
Other equity adjustments— — — — — 
Ending Balance at March 31, 2021$106 $788 $831 $(573)$(575)$577 $36 $613 
Six Months Ended March 31, 2020
Common
Stock
Additional
Paid-in
Capital
Retained EarningsTreasury StockAccumulated
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)247 250 
Equity based compensation expense— — — — — 
Vesting of equity based awards(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 
See Notes to Condensed Consolidated Financial Statements.
8


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 products, 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.
In the opinion of the company, the unaudited Condensed Consolidated Financial Statements contain all adjustments, consisting solely of adjustments of a normal, recurring nature, necessary to present fairly the financial position, results of operations and cash flows for the periods presented. These statements should be read in conjunction with the company’s audited Consolidated Financial Statements and notes thereto included in the company's Annual Report on Form 10-K for the fiscal year ended September 30, 2020. The Condensed Consolidated Balance Sheet data as of September 30, 2020 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 six months ended March 31, 2021 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 second quarter of fiscal years 2021 and 2020 ended on April 4, 2021 and March 29, 2020, respectively. Fiscal year 2020 ended on September 27, 2020. 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 March 31 are used consistently throughout this report to represent the fiscal year end and second fiscal quarter end, respectively.
COVID-19 Pandemic Update
In March 2020, the World Health Organization declared a global health pandemic related to the outbreak of a novel coronavirus. The COVID-19 pandemic adversely affected the company's financial performance in the second, third and fourth quarters of fiscal year 2020, and could have an impact on the second half of fiscal year 2021. In response to the COVID-19 pandemic, government health officials at times recommended and mandated precautions to mitigate the spread of the virus, including shelter-in-place orders, prohibitions on public gatherings and other similar measures. The company has been operating as an essential business in the U.S. All of the company's facilities were fully operational at the end of fiscal year 2020 and during the first two quarters of fiscal year 2021. Most of the company’s salaried employees are primarily 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 and 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 March 31,Six Months Ended March 31,
2021202020212020
Basic average common shares outstanding72.4 73.4 72.3 75.8 
Impact of restricted shares, restricted share units and performance share units1.0 1.1 1.0 1.3 
Impact of convertible notes0.8 0.9 
Diluted average common shares outstanding73.4 75.3 73.3 78.0 

9


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

In November 2020, the Board of Directors approved a grant of 0.3 million performance share units to all executives eligible to participate in the long-term incentive plan. Each performance share unit represents the right to receive 1 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 $26.98, which was the company’s share price on the grant date of December 1, 2020. The Board of Directors also approved a grant of 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 $26.98, which was the company's share price on the grant date of December 1, 2020.
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, 2020 to September 30, 2023, measured at the end of the performance period. The number of performance share units that vest will depend on adjusted EBITDA margin and adjusted diluted earnings per share from continuing operations (which, solely for purposes of our long-term incentive plan, includes an adjustment for the value of deferred tax assets in jurisdictions with net operating loss carry forwards or tax credits) which are each weighted at 50%. The number of performance share units that vest will be between 0% and 200% of the grant date amount of 0.3 million performance share units.
On December 1, 2020, in response to retention and attrition concerns resulting from the COVID-19 pandemic’s impact on the company’s incentive compensation plans, and to continue to incentivize executive performance in a difficult and uncertain environment, the Compensation Committee of the Board of Directors adjusted the threshold level of the performance metrics required to be achieved for payout for the fiscal 2019-2021 performance cycle. The target and maximum levels were not modified. The impact of this adjustment did not have a material impact on the company's Condensed Consolidated Financial Statements.

3. New Accounting Standards
Accounting standards implemented during fiscal year 2021
On October 1, 2020, the company implemented Accounting Standards Update ("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 guidance had an impact on the company's accounting policies and procedures related to calculation of allowance for doubtful accounts receivable but did not have a material impact on its Condensed Consolidated Financial Statements.
On October 1, 2020, the company implemented 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 guidance did not have a material impact on the company's Condensed Consolidated Financial Statements
Accounting standards to be implemented
Implementation of the following standards may result in a significant change in practice and/or have a significant financial impact on the company.
In August 2020, the FASB issued ASU 2020-06, Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity (Subtopic 815-40). The ASU simplifies the accounting for certain financial instruments with characteristics of debt and equity, including convertible instruments and contracts on an entity’s own equity. ASC 470-20 outlines five models to allocate the proceeds attributable to the issuance of a convertible debt instrument. This ASU removes from U.S. GAAP the separation models for convertible debt with a cash conversion feature (CCF) and convertible debt with a beneficial conversion feature (BCF). As a result of adopting this ASU, entities are not required to separately present in equity an embedded conversion feature in such debt. Instead, they should account for a convertible debt instrument wholly as debt. Applying the separation models in ASC 470-20 to convertible instruments with a CCF or BCF involves the recognition of a debt discount, which is amortized to interest expense. The elimination of CCF and BCF models will reduce reported interest expense and increase reported net income for convertible instruments issued within the scope of those models before the adoption of ASU 2020-06. The amendments in this ASU are required to be adopted by public business entities in fiscal years
10


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

beginning after December 15, 2021, including interim periods within those fiscal years. Early adoption is permitted, but not earlier than for a fiscal year beginning after December 15, 2020, including interim periods within those fiscal years. Entities are permitted to adopt the guidance through either a modified retrospective method of transition or a fully retrospective method of transition. The company is currently evaluating the potential impact of this guidance on its accounting policies and its Condensed Consolidated Financial Statements.

4. Revenue
Disaggregation of revenue

In the following tables, revenue is disaggregated for each of our operating segments by primary geographical market for the three months ended March 31, 2021 and 2020 (in millions).
Three Months Ended March 31, 2021
Primary Geographical MarketCommercial TruckAftermarket & IndustrialTotal
U.S.$337 $177 $514 
Canada14 14 
Mexico44 49 
Total North America381 196 577 
Sweden74 74 
Italy58 63 
United Kingdom36 39 
Other Europe35 38 
Total Europe171 43 214 
Brazil81 82 
China34 35 
India50 50 
Other Asia-Pacific25 25 
Total sales$742 $241 $983 

Three Months Ended March 31, 2020 (1)
Primary Geographical MarketCommercial TruckAftermarket & IndustrialTotal
U.S.$307 $211 $518 
Canada15 15 
Mexico39 44 
Total North America346 231 577 
Sweden63 63 
Italy46 49 
United Kingdom30 33 
Other Europe36 37 
Total Europe140 42 182 
Brazil50 50 
China26 26 
India22 22 
Other Asia-Pacific14 14 
Total sales$598 $273 $871 
(1) Amounts for the three months ended March 31, 2020 have been recast to reflect reportable segment changes.
11


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


Six Months Ended March 31, 2021
Primary Geographical MarketCommercial TruckAftermarket & IndustrialTotal
U.S.$647 $347 $994 
Canada26 26 
Mexico80 10 90 
Total North America727 383 1,110 
Sweden151 151 
Italy111 10 121 
United Kingdom77 82 
Other Europe70 75 
Total Europe344 85 429 
Brazil137 138 
China64 65 
India83 83 
Other Asia-Pacific47 47 
Total sales$1,402 $470 $1,872 

Six Months Ended March 31, 2020 (1)
Primary Geographical MarketCommercial TruckAftermarket & IndustrialTotal
U.S.$635 $417 $1,052 
Canada29 29 
Mexico78 10 88 
Total North America713 456 1,169 
Sweden125 125 
Italy91 98 
United Kingdom63 68 
Other Europe73 75 
Total Europe281 85 366 
Brazil103 104 
China60 60 
India44 45 
Other Asia-Pacific28 28 
Total sales$1,229 $543 $1,772 
(1) Amounts for the six months ended March 31, 2020 have been recast to reflect reportable segment changes.


As of March 31, 2021 and September 30, 2020, Trade receivables, net, which are included in Receivables, trade and other, net, on the Condensed Consolidated Balance Sheet, were $553 million and $421 million, respectively.

For the three and six months ended March 31, 2021 and March 31, 2020, the company had no material bad-debt expense. There were no material contract assets, contract liabilities or deferred contract costs recorded on the Condensed Consolidated Balance Sheet as of March 31, 2021 and September 30, 2020.
12


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


5. Restructuring Costs
Restructuring reserves, primarily related to unpaid employee termination benefits, were $7 million at March 31, 2021 and $10 million at September 30, 2020. Restructuring costs are recorded within Other operating expense, net within the Condensed Consolidated Statement of Operations. The changes in restructuring reserves for the six months ended ended March 31, 2021 and 2020 are as follows (in millions):
Employee Termination BenefitsPlant
 Shutdown
 & Other
Total
Balance at September 30, 2020$10 $$10 
Activity during the period:
Charges
Cash payments(8)(8)
Other(1)(2)(3)
Total restructuring reserves at March 31, 2021
Less: non-current restructuring reserves
Restructuring reserves – current, at March 31, 2021$$$
Balance at September 30, 2019$$$
Activity during the period:
Charges15 15 
Cash payments(15)(15)
Other(1)(1)
Total restructuring reserves at March 31, 2020
Less: non-current restructuring reserves
Restructuring reserves – current, at March 31, 2020$$$

Global Restructuring Programs Fiscal Year 2021: On November 11, 2020, the company approved a restructuring plan to close 3 U.S. manufacturing plants and 1 European administration office in its Aftermarket & Industrial segment and consolidate their operations into existing facilities. The site closures include:

Chicago, Illinois
Livermore, California
Livonia, Michigan
Zurich, Switzerland

The closures impact approximately 150 hourly and salaried workers. These restructuring plans are intended to optimize the company’s manufacturing footprint, reduce costs and increase efficiencies. With this restructuring plan, the company expects to incur up to $19 million in restructuring charges in the Aftermarket & Industrial segment, consisting of an impact on long-lived assets of $9 million, severance related costs of $5 million and other associated costs of $5 million. During the first six months of fiscal year 2021, the company incurred $6 million in restructuring costs related to this plan. Restructuring actions associated with this plan are expected to be substantially complete by the end of 2021.

Global Restructuring Program Fiscal Year 2020: On June 2, 2020, the company approved and began executing a restructuring plan to reduce labor costs and align with current market forecasts. Under this plan, the company expects to incur approximately $13 million in employee severance costs that affects approximately 8 percent of its global salaried positions, and will eliminate certain hourly roles. During fiscal year 2020, the company incurred $10 million in restructuring costs related to this plan of which $7 million was in the Commercial Truck segment and $3 million related to the Aftermarket & Industrial
13


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

segment. During the first six months of fiscal year 2021, the company incurred $2 million in restructuring costs related to this plan in the Commercial Truck segment. Restructuring actions associated with this plan are substantially complete.

6. Income Taxes
For the three months ended March 31, 2021, and 2020 the company recognized tax expense of $22 million and $73 million, respectively. This resulted in effective tax rates of 25% and 23%, respectively. For the six months ended March 31, 2021 and 2020, the company recognized tax expense of $29 million and $86 million, respectfully. This resulted in an effective tax rate of 23% for both periods.

7. 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 ExpirationTotal Facility Size as of 3/31/21Utilized as of 3/31/21Utilized as of 9/30/20
EURUSDEURUSDEURUSD
On-balance sheet arrangement
Committed U.S. accounts receivable securitization (1)
March 2024N/A$110 N/A$N/A$
Total on-balance sheet arrangement: (1)
N/A$110 N/A$N/A$
Off-balance sheet arrangements
Committed Swedish factoring facility (2)(3)
March 2024155 $183 89 $105 86 $100 
Committed U.S. factoring facility (2)
February 2023N/A75 N/A44 N/A30 
Uncommitted U.K. factoring facilityFebruary 202225 29 
Uncommitted Italy factoring facilityJune 202230 35 19 22 
Other uncommitted factoring facilities (4)
NoneN/AN/A17 20 12 14 
Total off-balance sheet arrangements210 $322 129 $196 107 $154 
(1) Availability subject to adequate eligible accounts receivable available for sale. The utilized amount includes $4 million of letters of credit as of March 31, 2021 and $3 million as of September 30, 2020.
(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 June 22, 2021.
(4) There is no explicit facility size under the agreement, but the counterparty approves the purchase of receivable tranches at its discretion.
Off-balance sheet arrangements 
On March 31, 2021, the U.S. accounts receivable securitization facility with PNC bank was increased from $95 million to $110 million. Total costs associated with all of the off-balance sheet arrangements described above were $1 million for each of the three months ended March 31, 2021 and 2020. Total costs associated with all of the off-balance sheet arrangements described above were $2 million for each of the six months ended March 31, 2021 and 2020, and are included in selling, general and administrative expenses in the Condensed Consolidated Statement of Operations.

14


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

8. 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):
March 31,
2021
September 30,
2020
Finished goods$139 $119 
Work in process49 38 
Raw materials, parts and supplies322 278 
Total$510 $435 

9. Net Property
    Net property is summarized as follows (in millions):
March 31,
2021
September 30,
2020
Property at cost:
Land and land improvements$33 $32 
Buildings238 228 
Machinery and equipment1,045 1,002 
Company-owned tooling158 151 
Construction in progress38 63 
Total1,512 1,476 
Less: accumulated depreciation(1,010)(961)
Net property$502 $515 

10. Other Assets
Other assets are summarized as follows (in millions):
March 31,
2021
September 30,
2020
Prepaid pension costs$206 $179 
Deferred income tax assets30 30 
Investments in non-consolidated joint ventures119 107 
Other266 269 
Other assets$621 $585 

During the second quarter of fiscal year 2021, the company recognized a $22 million pre-tax loss recovery, net of legal expenses, on the overpayment of value added taxes ("VAT") in Brazil. Of the amount recognized, $15 million was recognized in Sales consistent with the company’s VAT policy, $10 million in Other income, net and $3 million as expense in Selling, general and administrative. $19 million was recorded in Other current assets and $6 million recorded in Other assets as VAT credits to offset future income tax liabilities. $3 million was recorded in Current liabilities associated with legal expenses.
15


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

11. Other Current Liabilities
Other current liabilities are summarized as follows (in millions):
March 31,
2021
September 30,
2020
Compensation and benefits$103 $91 
Product warranties19 19 
Other157 154 
Other current liabilities$279 $264 

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.
A summary of the changes in product warranties is as follows (in millions):
Six Months Ended March 31,
20212020
Total product warranties – beginning of period$54 $50 
Accruals for product warranties12 
Payments(10)(10)
Change in estimates and other(2)(2)
Total product warranties – end of period54 45 
Less: non-current product warranties(35)(29)
Product warranties – current$19 $16 

12. Other Liabilities
Other liabilities are summarized as follows (in millions):
March 31,
2021
September 30,
2020
Asbestos-related liabilities (see Note 16)$64 $67 
Liabilities for uncertain tax positions80 73 
Product warranties (see Note 11)35 35 
Other97 104 
Other liabilities$276 $279 

16


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

13. Long-Term Debt
Long-Term debt, net of discounts where applicable, is summarized as follows (in millions):
March 31,
2021
September 30,
2020
3.25 percent convertible notes due 2037$321 $320 
7.875 percent convertible notes due 202623 
4.50 percent notes due 2028270 
6.25 percent notes due 2025296 295 
6.25 percent notes due 2024174 446 
Term loan due 2024159 166 
Finance lease obligation10 
Unamortized discount on convertible notes(27)(29)
Subtotal1,203 1,227 
Less: current maturities(17)(39)
Long-term debt$1,186 $1,188 

Repurchase of 7.875 Percent Convertible Notes
On October 16, 2020, the company issued a notice of redemption for all of the $23 million aggregate principal amount outstanding of its 7.875 percent senior convertible notes due 2026 (the "7.875 Percent Convertible Notes"). As a result of the issuance of the notice of redemption, the 7.875 Percent Convertible Notes were convertible at any time prior to the close of business on November 30, 2020 at a rate of 83.3333 shares of common stock per $1,000 original principal amount of the 7.875 Percent Convertible Notes. All remaining outstanding 7.875 Percent Convertible Notes were surrendered in November 2020 for conversion and were settled in cash up to the accreted principal amount of the 7.875 Percent Convertible Notes and also settled in cash for the remainder of the conversion obligation in excess of the accreted principal amount, in accordance with the provisions of the indenture that governed the 7.875 Percent Convertible Notes. The conversion of the 7.875 Percent Convertible Notes was settled for $53 million, of which $23 million represented principal repayment and $30 million represented the payment of conversion in excess of the accreted principal. There was 0 loss on extinguishment. As of December 31, 2020, the 7.875 Percent Convertible Notes were fully redeemed. The 7.875 Percent Convertible Notes were classified as current as of September 30, 2020.
Repurchase of 6.25 Percent Notes due 2024
On December 16, 2020, the company redeemed $275 million of the outstanding $450 million aggregate principal amount of its 6.25 percent notes due 2024 (the "6.25 Percent Notes due 2024") for an aggregate purchase price of $287 million (including accrued interest of $6 million). The redemption price was equal to 102.083% of the principal amount of the 6.25 Percent Notes due 2024 redeemed, plus accrued and unpaid interest thereon up to but excluding the redemption date of December 16, 2020. This redemption was accounted for as an extinguishment of debt, and accordingly the company recognized a loss on debt extinguishment of $8 million. The loss on extinguishment is recorded in the Condensed Consolidated Statement of Operations within Interest expense, net. As of March 31, 2021, $175 million principal amount of the 6.25 Percent Notes due 2024 remained outstanding.

On May 4, 2021 the company issued a notice of redemption for the remaining $175 million principal amount outstanding of the 6.25 Percent Notes due 2024 for an expected aggregate purchase price of $180 million (including expected accrued interest of $3 million). The redemption price will be equal to 101.042% of the principal amount of the 6.25 Percent Notes due 2024 to be redeemed, plus accrued and unpaid interest, if any, thereon up to but excluding the redemption date, which is expected to be June 3, 2021.
4.50 Percent Notes due 2028
On December 1, 2020, the company completed the offering and sale of $275 million aggregate principal amount of its 4.50% notes due 2028 (the "4.50 Percent Notes"), including related guarantees by the subsidiaries of the company who from time to time guarantee the company’s senior secured revolving credit facility as it may be amended, extended, replaced or refinanced, or any subsequent credit facility, to qualified institutional buyers in reliance on Rule 144A under the Securities Act of 1933, as amended (the "Securities Act"), and to non-U.S. persons in offshore transactions outside the United States in
17


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

reliance on Regulation S under the Securities Act in a private placement exempt from the registration requirements of the Securities Act.

The net proceeds to the company from the sale of the 4.50 Percent Notes after deducting estimated offering expenses payable by the company were approximately $270 million. The company used the net proceeds from the offering, together with cash on hand, to redeem $275 million of the outstanding $450 million aggregate principal amount of its 6.25 Percent Notes due 2024, as described above.

The 4.50 Percent Notes will mature on December 15, 2028 and bear interest at a fixed rate of 4.500% per annum. The company will pay interest on the 4.50 Percent Notes from December 1, 2020 semi-annually, in arrears, on June 15 and December 15 of each year, beginning June 15, 2021. The 4.50 Percent Notes constitute senior unsecured obligations of the company and rank equally in right of payment with its existing and future senior unsecured indebtedness, and effectively junior to its existing and future secured indebtedness to the extent of the security therefor.

The 4.50 Percent Notes provide that, prior to December 15, 2023, the company may redeem, at its option, from time to time, the 4.50 Percent Notes, in whole or in part, at a redemption price equal to the sum of (i) 100% of the principal amount of the 4.50 Percent Notes to be redeemed, plus (ii) the applicable premium as of the redemption date on the 4.50 Percent Notes to be redeemed, plus (iii) accrued and unpaid interest, if any, to, but not including, the redemption date (subject to the right of holders of record on the relevant regular record date to receive interest due on an interest payment date that is on or prior to the redemption date) on the 4.50 Percent Notes to be redeemed.

The 4.50 Percent Notes provide that, on or after December 15, 2023, the company may redeem, at its option, from time to time, the 4.50 Percent Notes, in whole or in part, at the redemption prices (expressed as percentages of the principal amount of the 4.50 Percent Notes to be redeemed) set forth below, plus accrued and unpaid interest, if any, to, but not including, the redemption date (subject to the right of holders of record on the relevant regular record date to receive interest due on an interest payment date that is on or prior to the redemption date) on the 4.50 Percent Notes to be redeemed, if redeemed during the 12-month period beginning on December 15 of the years indicated below:

YearRedemption Price
2023102.250 %
2024101.125 %
2025 and thereafter100.000 %

The 4.50 Percent Notes also provide that, prior to December 15, 2023, the company may redeem, at its option, from time to time, up to 35% of the aggregate principal amount of the 4.50 Percent Notes with the net cash proceeds of one or more public sales of the company’s common stock at a redemption price equal to 104.500% of the principal amount of the 4.50 Percent Notes to be redeemed, plus accrued and unpaid interest, if any, to, but not including, the redemption date (subject to the right of holders of record on the relevant regular record date to receive interest due on an interest payment date that is on or prior to the redemption date) on the 4.50 Percent Notes to be redeemed so long as at least 65% of the aggregate principal amount of the 4.50 Percent Notes remains outstanding after each such redemption and notice of any such redemption is mailed within 90 days of any such sale of common stock.

If a change of control (as defined in the ninth supplemental indenture under which the 4.50 Percent Notes were issued) occurs, unless the company has exercised its right to redeem the 4.50 Percent Notes, each holder of the 4.50 Percent Notes may require the company to repurchase some or all of such holder’s 4.50 Percent Notes at a purchase price equal to 101% of the principal amount of the 4.50 Percent Notes to be repurchased, plus accrued and unpaid interest, if any, to, but not including, the repurchase date (subject to the right of holders of record on the relevant regular record date to receive interest due on an interest payment date that is on or prior to the repurchase date) on the 4.50 Percent Notes to be repurchased.

Revolving Credit Facility
On November 9, 2020, the company's senior secured revolving credit facility was increased by $60 million to $685 million through the addition of a new lender.
18


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

The availability under the senior secured revolving credit facility is subject to a financial covenant 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 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. Availability under the senior secured revolving credit facility was constrained to $276 million on the last day of the second quarter of fiscal year 2021 due primarily to lower EBITDA in the third and fourth quarters of fiscal year 2020, which were impacted by the COVID-19 pandemic. The company has full availability until the next measurement point at the end of the third quarter of fiscal year 2021.
At March 31, 2021 and September 30, 2020, there were 0 borrowings outstanding under the senior secured revolving credit facility. The senior secured revolving credit facility includes $100 million of availability for the issuance of letters of credit. At March 31, 2021 and September 30, 2020, there were 0 letters of credit outstanding under the senior secured revolving credit facility.
Debt Securities
In November 2020, the company filed a shelf registration statement with the SEC registering an indeterminate amount of debt and/or equity securities that the company may offer in one or more offerings on terms to be determined at the time of sale. The November 2020 shelf registration statement superseded and replaced the company's shelf registration statement filed in December 2017.
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 March 31, 2021 and September 30, 2020, the company had $22 million and $16 million, respectively, outstanding under this program at more than one bank.

14. Financial Instruments
Fair values of financial instruments are summarized as follows (in millions):
March 31, 2021September 30, 2020
Carrying
Value
Fair
Value
Carrying
Value
Fair
Value
Cash and cash equivalents$321 $321 $315 $315 
Short-term debt17 16 39 58 
Long-term debt1,186 1,307 1,188 1,259 
Foreign currency option contracts (other assets)
Foreign exchange forward contracts (other assets)
Foreign exchange forward contracts (other liabilities)
19


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


The following table reflects the offsetting of derivative assets and liabilities (in millions):
March 31, 2021September 30, 2020

Gross
Amounts Recognized
Gross Amounts
Offset
Net Amounts
Reported
Gross
Amounts Recognized
Gross Amounts
Offset
Net Amounts
Reported
Derivative Assets
Foreign currency option contracts$$$$$$
Foreign exchange forward contracts
Derivative Liabilities
Foreign exchange forward contracts— 

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 March 31, 2021 is as follows (in millions):
Level 1Level 2Level 3
Cash and cash equivalents$321 $$
Short-term debt16 
Long-term debt1,154 153 
Foreign exchange forward contracts (other assets)
Foreign exchange forward contracts (other liabilities)

Fair value of financial instruments by the valuation hierarchy at September 30, 2020 is as follows (in millions):
Level 1Level 2Level 3
Cash and cash equivalents$315 $$
Short-term debt43 15 
Long-term debt1,103 156 
Foreign exchange forward contracts (other liabilities)
Foreign currency option contracts (other assets)

No transfers of assets between any of the Levels occurred during the three and six months ended March 31, 2021 and 2020.
20


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

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.
 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 varying terms that extend through fiscal year 2025 to hedge its exposure to changes in foreign currency exchange rates. As of March 31, 2021 and September 30, 2020, the notional amount of the company's foreign exchange contracts outstanding under its foreign currency cash flow hedging program was $71 million and $65 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 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 foreign currency-denominated purchases. As of March 31, 2021 and September 30, 2020, the notional amount of the company's foreign exchange contracts outstanding was $25 million and $39 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 foreign currency earnings to U.S. dollars. As of March 31, 2021 and September 30, 2020, the notional amount of the company's option contracts outstanding was $10 million and $24 million, respectively. These option contracts did not qualify for a hedge accounting election. Changes in fair value associated with these contracts are recorded in the Condensed Consolidated Statement of Operations in other income, net.
The 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 has utilized 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 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 2019, the company entered into multiple cross-currency swaps 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 second quarter of fiscal year 2020, the company settled these cross-currency swap contracts and received proceeds of $11 million, $1 million of which related to net accrued interest receivable.
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.

21


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

15. Retirement Benefit Liabilities
Retirement benefit liabilities consisted of the following (in millions):
March 31,
2021
September 30,
2020
Retiree medical liability$51 $52 
Pension liability120 139 
Other17 17 
Subtotal188 208 
Less: current portion (included in compensation and benefits, Note 11)(12)(12)
Retirement benefits$176 $196 

The components of net periodic pension and retiree medical income included in continuing operations for the three months ended March 31 are as follows (in millions):
20212020
PensionRetiree MedicalPensionRetiree Medical
Interest cost$(8)$(1)$(10)$(1)
Assumed return on plan assets24 24 
Amortization of prior service benefit
Recognized actuarial loss(8)(3)(8)(3)
Total income$$$$


The components of net periodic pension and retiree medical income included in continuing operations for the six months ended March 31 are as follows (in millions):
20212020
PensionRetiree MedicalPensionRetiree Medical
Interest cost$(17)$(1)$(21)$(1)
Assumed return on plan assets48 48 
Amortization of prior service benefit18 18 
Recognized actuarial loss(16)(6)(16)(7)
Total income$15 $11 $11 $10 

For the three months ended March 31, 2021 and 2020, the non-service cost components of the net periodic pension and Other Post-Employment Benefits ("OPEB") income were $13 million and $11 million, respectively, and are presented in Other income, net. For the six months ended March 31, 2021 and 2020, the non-service cost components of the net periodic pension and OPEB income were $26 million and $21 million, respectively, and are presented in Other income, net.

22


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

16. 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 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 10 Superfund sites at March 31, 2021 to be approximately $22 million, of which $10 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 March 31, 2021 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 0 to 1.50 percent and is approximately $13 million at March 31, 2021. The undiscounted estimate of these costs is approximately $14 million.
The following are the components of the Superfund and non-Superfund environmental reserves (in millions):
Superfund SitesNon-Superfund SitesTotal
Beginning Balance at September 30, 2020$11 $$16 
Payments and other(2)(1)(3)
Accruals
Ending Balance at March 31, 2021$10 $$14 

Environmental reserves are included in Other Current Liabilities (see Note 11) and Other Liabilities (see Note 12) 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.
23


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

Asbestos
    Rockwell International Corporation ("Rockwell") — ArvinMeritor, Inc. ("AM"), a predecessor of Meritor, along with many other companies, has 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 1,200 pending active asbestos claims in lawsuits that name AM, together with many other companies, as defendants as of March 31, 2021 and September 30, 2020. In March 2021, AM entered into a tolling agreement with an asbestos plaintiff's law firm. Under the terms of this agreement, AM agreed to toll the statute of limitations from expiring on asbestos claims in exchange for the plaintiff's firm agreeing not to raise a claim until there is product identification linking AM. The plaintiff firm also agreed to dismiss pending active claims for which product identification was not yet determined. The dismissal of these claims is expected to occur in the third fiscal quarter of fiscal year 2021. According to the terms of the tolling agreement, if the plaintiff's firm subsequently links AM's product to the plaintiff, they will refile a claim against AM.
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, 2020. Management continuously monitors the underlying claims data and experience for the purpose of assessing the appropriateness of the assumptions used to estimate the liability.

As of September 30, 2020, the best estimate of the company's obligation for asbestos-related claims over the next 38 years was $78 million. The company recognized a liability for pending and future claims over the next 38 years of $75 million as of March 31, 2021. The ultimate cost of resolving pending and future claims is estimated based on the history of claims and expenses for plaintiffs represented by law firms in jurisdictions with an established history with Rockwell.

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 company recognizes insurance recoveries when the claim for recovery is deemed probable and to the extent an insurable loss has been recognized in the financial statements. The company’s determination is based on analysis of the underlying insurance policies, historical experience with insurers, ongoing review of the solvency of insurers, and consideration of any insurance settlements The insurance receivables for Rockwell asbestos-related liabilities totaled $59 million and $62 million as of March 31, 2021 and September 30, 2020, 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. However, the amount of reasonably possible and estimable losses in excess of the recorded asbestos-related liabilities was determined to be immaterial.

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, labor and employment-related matters, and the periods of indemnification vary in duration.
24


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

The company is not aware of any claims or other information that would give rise to material payments under such indemnification obligations.
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. 

17. Shareholders' Equity
There were 0 dividends declared or paid in the first or second quarter of fiscal years 2021 and 2020. 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 November 7, 2019, the Board of Directors authorized the repurchase of up to $325 million of 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, subject to compliance with legal and regulatory requirements and the company’s debt covenants. As of the end of fiscal year 2020, the company had repurchased 11.8 million shares of common stock for $266 million (including commission costs) pursuant to this authorization. There were 0 repurchases in the first or second quarter of fiscal year 2021. As of March 31, 2021, the amount remaining available for repurchases under this common stock repurchase authorization 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.
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. The remaining authority under the common stock repurchase authorization was superseded by the July 2019 authorization described above. As of March 31, 2021 and September 30, 2020, the amount remaining available for repurchase under this debt repurchase authorization was $76 million.
In November 2020, we filed a shelf registration statement with the Securities and Exchange Commission ("SEC"), registering an indeterminate amount of debt and/or equity securities that we may offer in one or more offerings on terms to be determined at the time of sale.
Accumulated Other Comprehensive Loss ("AOCL")
The components of AOCL and the changes in AOCL by components, net of tax, for the three months ended March 31, 2021 and 2020 are as follows (in millions):
Foreign Currency TranslationEmployee Benefit Related AdjustmentsUnrealized Income (Loss) on cash flow hedgesTotal
Balance at December 31, 2020$(74)$(480)$(1)$(555)
Other comprehensive income before reclassification(22)(22)
Amounts reclassified from accumulated other comprehensive loss
Net current-period other comprehensive income(22)(20)
Balance at March 31, 2021$(96)$(478)$(1)$(575)
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MERITOR, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Details about Accumulated Other Comprehensive Income ComponentsAmount Reclassified from Accumulated Other Comprehensive IncomeAffected Line Item in the Consolidated Statement of Operations
Employee Benefit Related Adjustment
Prior service benefit$(9)(a)
Actuarial losses11 (a)
Total before tax
Tax benefit
Total reclassifications for the period$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 15 for additional details), which is recorded in other income (expense), net.

Foreign Currency TranslationEmployee Benefit Related AdjustmentsUnrealized Income (Loss) on cash flow hedgesTotal
Balance at December 31, 2019$(86)$(569)$$(655)
Other comprehensive income before reclassification(56)(3)(59)
Amounts reclassified from accumulated other comprehensive loss(2)
Net current-period other comprehensive income(56)(5)(59)
Balance at March 31, 2020$(142)$(567)$(5)$(714)
Details about Accumulated Other Comprehensive Income ComponentsAmount Reclassified from Accumulated Other Comprehensive IncomeAffected Line Item in the Consolidated Statement of Operations
Employee Benefit Related Adjustment
Prior service benefit$(9)(b)
Actuarial losses11 (b)
Total before tax
Tax benefit
Total reclassifications for the period$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 15 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 six months ended March 31, 2021 and 2020 are as follows (in millions):
Foreign Currency TranslationEmployee Benefit Related AdjustmentsUnrealized Income (Loss) on cash flow hedgesTotal
Balance at September 30, 2020$(129)$(483)$(2)$(614)
Other comprehensive income before reclassification33 35 
Amounts reclassified from accumulated other comprehensive loss
Net current-period other comprehensive income33 39 
Balance at March 31, 2021$(96)$(478)$(1)$(575)
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MERITOR, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Details about Accumulated Other Comprehensive Income ComponentsAmount Reclassified from Accumulated Other Comprehensive IncomeAffected Line Item in the Consolidated Statement of Operations
Employee Benefit Related Adjustment
Prior service benefit$(18)(a)
Actuarial losses22 (a)
Total before tax
Tax benefit
Total reclassifications for the period$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 15 for additional details), which is recorded in other income (expense), net.
Foreign Currency TranslationEmployee Benefit Related AdjustmentsUnrealized Income (Loss) on cash flow hedgesTotal
Balance at September 30, 2019$(107)$(572)$(2)$(681)
Other comprehensive income before reclassification(35)(3)(38)
Amounts reclassified from accumulated other comprehensive loss
Net current-period other comprehensive income(35)(3)(33)
Balance at March 31, 2020$(142)$(567)$(5)$(714)
Details about Accumulated Other Comprehensive Income ComponentsAmount Reclassified from Accumulated Other Comprehensive IncomeAffected Line Item in the Consolidated Statement of Operations
Employee Benefit Related Adjustment
Prior service benefit$(18)(b)
Actuarial losses23 (b)
Total before tax
Tax benefit
Total reclassifications for the period$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 15 for additional details), which is recorded in other income (expense), net.

18. Business Segment Information
Segment information is summarized as follows (in millions):


Commercial TruckAftermarket & IndustrialEliminationsTotal
Three Months Ended March 31, 2021
External Sales$742 $241 $— $983 
Intersegment Sales35 (41)— 
Total Sales$777 $247 $(41)$983 
Three Months Ended March 31, 2020 (1)
External Sales$598 $273 $— $871 
Intersegment Sales33 (37)— 
Total Sales$631 $277 $(37)$871 
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MERITOR, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)



Commercial TruckAftermarket & IndustrialEliminationsTotal
Six Months Ended March 31, 2021
External Sales$1,402 $470 $— $1,872 
Intersegment Sales66 11 (77)— 
Total Sales$1,468 $481 $(77)$1,872 
Six Months Ended March 31, 2020 (1)
External Sales$1,229 $543 $— $1,772 
Intersegment Sales65 (74)— 
Total Sales$1,294 $552 $(74)$1,772 
(1) Amounts for the three and six months ended March 31, 2020 have been recast to reflect reportable segment changes.

Three Months Ended March 31,Six Months Ended March 31,
2021
2020 (2)
2021
2020 (2)
Segment adjusted EBITDA:
Commercial Truck$73 $58 $136 $115 
Aftermarket & Industrial34 46 69 85 
Segment adjusted EBITDA107 104 205 200 
Unallocated legacy and corporate expense, net (1)
Interest expense, net(17)(16)(45)(30)
Provision for income taxes(22)(73)(29)(86)
Depreciation and amortization(25)(26)(52)(50)
Noncontrolling interests(3)(1)(4)(3)
Loss on sale of receivables(1)(1)(2)(2)
Restructuring(2)(10)(8)(15)
Brazil VAT Credit (3)
22 22 
Transaction costs(5)(5)
Income from WABCO distribution termination265 265 
Income from continuing operations attributable to Meritor, Inc.$63 $240 $95 $279 
(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) Amounts for the three and six months ended March 31, 2020 have been recast to reflect reportable segment changes.
(3) Amount relates to the one-time recognition of a value added tax credit in Brazil.
March 31,
2021
September 30,
2020
Segment Assets:
Commercial Truck$1,920 $1,666 
Aftermarket & Industrial679 658 
Total segment assets2,599 2,324 
Corporate (1)
737 714 
Less: Accounts receivable sold under off-balance sheet factoring programs (2)
(196)(154)
Total assets$3,140 $2,884 
(1) Corporate assets consist primarily of cash, deferred income taxes and prepaid pension costs.
(2) At March 31, 2021 and September 30, 2020, segment assets include $196 million and $154 million, respectively, of accounts receivable sold under off-balance sheet accounts receivable factoring programs (see Note 7). These sold receivables are included in segment assets as the CODM reviews segment assets inclusive of these balances.
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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 products, 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.
COVID-19 Pandemic Update
In March 2020 the World Health Organization declared a global health pandemic related to the outbreak of a novel coronavirus. The COVID-19 pandemic adversely affected our financial performance in the second, third and fourth quarters of fiscal year 2020, and could have an impact on the second half of fiscal year 2021. In response to the COVID-19 pandemic, government health officials at times recommended and mandated precautions to mitigate the spread of the virus, including shelter-in-place orders, prohibitions on public gatherings and other similar measures. The company has been operating as an essential business in the U.S. All of our facilities were fully operational at the end of fiscal year 2020 and during the first and second quarter of fiscal year 2021. Our salaried employees are primarily 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 and operating results cannot be reasonably estimated at this time.

Employee Health and Safety

In fiscal year 2020, we established and executed a “Safe Start” plan for the reopening of plants, test labs, distribution centers and administrative facilities. We intend to operate under the plan's enhanced safety guidelines for the foreseeable future. To ensure consistent application and compliance with the plan's safety protocols, in fiscal year 2020 we expanded the role of our Vice President and General Auditor to include responsibilities as Chief Safety Compliance Officer.
Operations

We have complied with various 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 during the second and third quarters of fiscal 2020. All of our facilities were fully operational by the end of fiscal year 2020 and during the first and second quarter of fiscal year 2021.

As we serve the transportation, industrial and defense industries, we continue to support customers who are actively engaged in the COVID-19 pandemic response. As the COVID-19 situation evolves, we will continue to monitor government and other mandates to understand the potential impact on our operations.

Change in Non-GAAP Measures
Beginning in the second quarter of fiscal year 2021, we revised our presentation of two non-GAAP measures, adjusted income (loss) from continuing operations and adjusted diluted earnings (loss) per share, to better align with the SEC’s guidance. An adjustment for non-cash tax expense related to the use of deferred tax assets in jurisdictions with net operating loss carryforwards or tax credits will no longer be included in these two non-GAAP measures; however the underlying availability and the benefits of the tax attributes to offset future taxable income has not changed. For comparability, references to prior period non-GAAP measures have been updated to show the effect of omitting this adjustment from adjusted income (loss) from continuing operations and adjusted diluted earnings (loss) per share.

2nd Quarter Fiscal Year 2021 Results
Our sales for the second quarter of fiscal year 2021 were $983 million, compared to $871 million in the same period in the prior fiscal year, an increase of 13 percent year over year. The increase in sales was primarily driven by higher global truck production in all markets, partially offset by the impact of the termination of our distribution arrangement with WABCO Holdings, Inc. ("WABCO"), which occurred late in the second quarter of fiscal year 2020.
Net income attributable to Meritor for the second quarter of fiscal year 2021 was $63 million compared to $241 million in the same period in the prior fiscal year. Lower net income year over year was driven primarily by $203 million of after-tax
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MERITOR, INC.
income associated with the termination of our distribution arrangement with WABCO during the second quarter of fiscal year 2020, partially offset by the recognition of $15 million of after-tax income related to value added tax credits in our wholly-owned Brazilian subsidiary during the second quarter of fiscal year 2021 and cost reduction actions executed in the second half of fiscal year 2020.
Adjusted EBITDA (see Non-GAAP Financial Measures below) for the second quarter of fiscal year 2021 was $111 million compared to $107 million in the same period in the prior fiscal year. Our adjusted EBITDA margin (see Non-GAAP Financial Measures below) in the second quarter of fiscal year 2021 was 11.3 percent compared to 12.3 percent in the same period in the prior fiscal year. The increase in adjusted EBITDA year over year was driven primarily by higher sales and cost reduction actions executed in the second half of the prior fiscal year, partially offset by higher incentive compensation and freight costs. Adjusted EBITDA margin decreased year over year due primarily to increased incentive compensation expense.
Net income from continuing operations attributable to the company for the second quarter of fiscal year 2021 was $63 million compared to $240 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 second quarter of fiscal year 2021 was $50 million compared to $48 million in the same period in the prior fiscal year, as updated
Cash provided by operating activities was $63 million in the second quarter of fiscal year 2021 compared to cash provided by operating activities of $309 million in the second quarter of fiscal year 2020. The decrease in operating cash flow year over year was driven primarily by $265 million of cash received in fiscal year 2020 from the termination of the distribution arrangement with WABCO in the second quarter of fiscal year 2020.

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 six months ended March 31, 2021 and 2020 based on available sources and management’s estimates.
Three Months Ended March 31,PercentSix Months Ended
March 31,
Percent
20212020Change20212020Change
Estimated Commercial Truck production (in thousands):
North America, Heavy-Duty Trucks69 61 13 %134 130 %
North America, Medium-Duty Trucks61 60 %123 120 %
North America, Trailers61 57 %117 136 (14)%
Western Europe, Heavy- and Medium-Duty Trucks108 98 10 %222 204 %
South America, Heavy- and Medium-Duty Trucks33 22 50 %66 52 27 %
India, Heavy- and Medium-Duty Trucks55 43 28 %113 91 24 %

North America:
During fiscal year 2021, we expect Heavy-Duty Truck production volumes to significantly increase from the levels experienced in fiscal year 2020.

Western Europe:
During fiscal year 2021, we expect production volumes in Western Europe to increase from the levels experienced in fiscal year 2020.

South America:
During fiscal year 2021, we expect production volumes to significantly increase from the levels experienced in fiscal year 2020.

China:
During fiscal year 2021, we expect production volumes to increase from the levels experienced in fiscal year 2020.
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MERITOR, INC.

India:
During fiscal year 2021, we expect production volumes to significantly increase from the levels experienced in fiscal year 2020.

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 and financial markets, as well as our industry, operations, workforce, supply chains, distribution systems and demand for our products;
Uncertainty around the global economic outlook;
Volatility in price and availability of steel, components, transportation costs and other commodities, including energy;
Potential for disruptions in the financial markets and their impact on the availability and cost of credit;
Impact of currency exchange rate volatility; and
Consolidation and globalization of OEMs and their suppliers.
Other significant factors that could affect our results and liquidity include:
Significant contract awards or losses of existing contracts or failure to negotiate acceptable terms in contract renewals;
Ability to successfully execute and implement strategic initiatives, including the ability to launch a significant number of new products, 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 work with our customers to manage rapidly changing production volumes, including in the event of production interruptions affecting us, our customers or our suppliers;
Competitively driven price reductions to our 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).

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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, free cash flow and free cash flow conversion.
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 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. Free cash flow conversion is defined as free cash flow over adjusted income from continuing operations attributable to the company. Beginning in the second quarter of fiscal year 2021, the company will no longer include an adjustment for non-cash tax expense related to the use of deferred tax assets in jurisdictions with net operating loss carryforwards or tax credits in adjusted income (loss) from continuing operations and adjusted diluted earnings (loss) per share.
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, adjusted diluted earnings (loss) per share from continuing operations and free cash flow conversion are meaningful measures of performance to investors as they are commonly utilized to analyze financial performance in our industry, perform analytical comparisons, measure value creation, 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. Free cash flow conversion is a specific financial measure of our M2022 plan used to measure the company's ability to convert earnings to free cash flow and provides useful information about our ability to achieve strategic goals.
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 free cash flow conversion as key metrics to determine management’s performance under our performance-based compensation plans, provided that, solely for this purpose, adjusted diluted earnings (loss) from continuing operations also includes an adjustment for the use of deferred tax assets in jurisdictions with net operating loss carryforwards or tax credits.
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 conversion 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 or cash flow conversion calculations as an indicator of our financial performance. Free cash flow and free cash flow conversion 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, these non-GAAP cash flow measures do not reflect cash used to repay debt or cash received from the divestitures of businesses or sales of other assets and thus do not reflect funds available for investment or other discretionary uses. 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.
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MERITOR, INC.

Adjusted income (loss) from continuing operations attributable to the company and adjusted diluted earnings (loss) per share from continuing operations are reconciled to Income (loss) from continuing operations attributable to the company and Diluted earnings (loss) per share from continuing operations below (in millions, except per share amounts).
Three Months Ended March 31,Six Months Ended March 31,
2021
2020 (3)
2021
2020 (3)
Income from continuing operations attributable to the company$63 $240 $95 $279 
Restructuring10 15 
Loss on debt extinguishment— — — 
Income from WABCO distribution termination— (265)— (265)
Brazil VAT Credit (1)
(22)— (22)— 
Transaction costs— — 
Tax effect of adjustments (2)
58 57 
Adjusted income from continuing operations attributable to the company$50 $48 $93 $91 
Diluted earnings per share from continuing operations$0.86 $3.19 $1.30 $3.58 
Impact of adjustments on diluted earnings per share(0.18)(2.55)(0.03)(2.41)
Adjusted diluted earnings per share from continuing operations$0.68 $0.64 $1.27 $1.17 
(1) Amount relates to a pre-tax loss recovery, net of legal expenses, on the overpayment of VAT in Brazil.
(2) Amount for the three months ended March 31, 2021 includes $7 million of income tax expense related to the Brazil VAT credit. Amount for the six months ended March 31, 2021 includes $7 million of income tax expense related to the Brazil VAT credit, $2 million of income tax benefits for the loss on debt extinguishment and $1 million of income tax benefits related to restructuring. Amount for the three months ended 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. Amount for 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.
(3) For comparability, amounts for the three and six months ended March 31, 2020 have been updated to show the effect of omitting the non-cash tax adjustment from the calculation of adjusted income from continuing operations attributable to the company and adjusted diluted earnings per share from continuing operations.

Free cash flow is reconciled to cash provided by operating activities below (in millions).
Three Months Ended March 31,Six Months Ended March 31,
2021202020212020
Cash provided by operating activities$63 $309 $107 $290 
Capital expenditures(16)(17)(26)(33)
Free cash flow$47 $292 $81 $257 
Free cash flow / Net income from continuing operations attributable to the company75 %122 %85 %92 %
Free cash flow conversion (Free cash flow / Adjusted income from continuing operations attributable to the company)94 %608 %87 %282 %
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MERITOR, INC.
Adjusted EBITDA and segment adjusted EBITDA are reconciled to net income attributable to Meritor, Inc. below (dollars in millions).
Three Months Ended March 31,Six Months Ended March 31,
2021202020212020
Net income attributable to Meritor, Inc.$63 $241 $95 $280 
Income from discontinued operations, net of tax, attributable to Meritor, Inc.— (1)— (1)
Income from continuing operations, net of tax, attributable to Meritor, Inc.$63 $240 $95 $279 
Interest expense, net17 16 45 30 
Provision for income taxes22 73 29 86 
Depreciation and amortization25 26 52 50 
Noncontrolling interests
Loss on sale of receivables
Restructuring10 15 
Transaction costs— — 
Income from WABCO distribution termination— (265)— (265)
Brazil VAT Credit (1)
(22)— (22)— 
Adjusted EBITDA$111 $107 $213 $205 
Adjusted EBITDA margin (2)
11.3 %12.3 %11.4 %11.6 %
Unallocated legacy and corporate expense (income), net (3)
(4)(3)(8)(5)
Segment adjusted EBITDA$107 $104 $205 $200 
Commercial Truck (4)
Segment adjusted EBITDA$73 $58 $136 $115 
Segment adjusted EBITDA margin (5)
9.4 %9.2 %9.3 %8.9 %
Aftermarket & Industrial (4)
Segment adjusted EBITDA$34 $46 69 $85 
Segment adjusted EBITDA margin (5)
13.8 %16.6 %14.3 %15.4 %
(1) Amount relates to a pre-tax loss recovery, net of legal expenses, on the overpayment of VAT in Brazil.
(2) Adjusted EBITDA margin equals adjusted EBITDA divided by consolidated sales from continuing operations.
(3) 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.
(4) Amounts for the three and six months ended March 31, 2020 have been recast to reflect reportable segment changes.
(5) Segment adjusted EBITDA margin equals segment adjusted EBITDA divided by consolidated sales from continuing operations, either in the aggregate or by segment as applicable.


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MERITOR, INC.
Results of Operations
Three Months Ended March 31, 2021 Compared to Three Months Ended March 31, 2020

   Sales
The following table reflects total company and business segment sales for the three months ended March 31, 2021 and 2020 (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
March 31,
  Dollar Change Due To
2021
2020 (1)
Dollar
Change
%
Change
CurrencyVolume/ Other
Sales:
Commercial Truck
            North America$381 $346 $35 10 %$— $35 
            Europe171 140 31 22 %15 16 
            South America81 50 31 62 %(16)47 
     China34 26 31 %
     India50 22 28 127 %(1)29 
     Other25 14 11 79 %
          Total External Sales$742 $598 $144 24 %$$141 
            Intersegment Sales35 33 %(1)
          Total Sales$777 $631 $146 23 %$$140 
Aftermarket & Industrial
            North America$196 $231 $(35)(15)%$— $(35)
            Europe43 42 %(2)
            Other— N/A— 
          Total External Sales$241 $273 $(32)(12)%$$(35)
            Intersegment Sales50 %— 
          Total Sales$247 $277 $(30)(11)%$$(35)
Total External Sales$983 $871 $112 13 %$$106 
(1) Amounts for the three months ended March 31, 2020 have been recast to reflect reportable segment changes.
Commercial Truck sales were $777 million in the second quarter of fiscal year 2021, up 23 percent compared to the second quarter of fiscal year 2020. The increase in sales in the second quarter of fiscal year 2021 was primarily driven by higher global truck production in all markets.

Aftermarket & Industrial sales were $247 million in the second quarter of fiscal year 2021, down 11 percent compared to the second quarter of fiscal year 2020. The decrease in sales in the second quarter of fiscal year 2021 was primarily due to the impact from the termination of the WABCO distribution arrangement which occurred late in the second quarter of fiscal year 2020.

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MERITOR, INC.
Three Months Ended March 31,  
20212020Dollar
Change
%
Change
Sales$983 $871 $112 13 %
Cost of sales(835)(757)78 10 %
GROSS PROFIT148 114 34 30 %
Selling, general and administrative(69)(59)10 17 %
Income from WABCO distribution termination— 265 (265)N/A
Other operating expense, net(2)(10)(8)(80)%
Other income, net23 14 64 %
Equity in earnings of affiliates(1)(17)%
Interest expense, net(17)(16)%
INCOME BEFORE INCOME TAXES88 314 (226)(72)%
Provision for income taxes(22)(73)(51)(70)%
INCOME FROM CONTINUING OPERATIONS66 241 (175)(73)%
INCOME FROM DISCONTINUED OPERATIONS, net of tax— (1)(100)%
NET INCOME66 242 (176)(73)%
Less: Net income attributable to noncontrolling interests(3)(1)(200)%
NET INCOME ATTRIBUTABLE TO MERITOR, INC.$63 $241 $(178)(74)%

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 March 31, 2021 was $835 million compared to $757 million in the same period in the prior fiscal year, representing an increase of 10 percent, primarily driven by increased market volumes. Total cost of sales was 84.9 percent and 86.9 percent of sales for the three-month periods ended March 31, 2021 and 2020, respectively.
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 March 31, 2021 increased $56 million compared to the same period in the prior fiscal year due to higher volumes and increased freight costs.
Labor and overhead costs for the three months ended March 31, 2021 increased by $22 million compared to the same period in the prior fiscal year primarily due to higher volume in our North American and European locations.
Other, net for the three months ended March 31, 2021 was flat compared to the same period in the prior fiscal year.
Gross profit was $148 million and $114 million for the three-month periods ended March 31, 2021 and 2020, respectively. Gross profit as a percentage of sales was 15.1 percent and 13.1 percent for the three-month periods ended March 31, 2021 and 2020, respectively.
Other Income Statement Items
Selling, general and administrative expenses ("SG&A") for the three months ended March 31, 2021 and 2020 were $69 million and $59 million, respectively. SG&A was higher in the second quarter of fiscal year 2021 primarily due to increased incentive compensation costs.
Other income, net for the three months ended March 31, 2021 and 2020 were $23 million and $14 million, respectively. Other income, net was higher in the second quarter of fiscal year 2021 primarily due to the recognition of $10 million of other income related to value-added tax credits in our wholly-owned Brazilian subsidiary during the second quarter of fiscal year 2021.
Provision for income taxes was $22 million for the three months ended March 31, 2021 compared to $73 million in the same period in the prior fiscal year. The decrease in tax expense is primarily related to the tax effect of the proceeds received from the termination of the WABCO distribution agreement during the second quarter of fiscal year 2020, partially offset by the tax effect of the Brazilian VAT credits recorded in the second quarter of fiscal year 2021.
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MERITOR, INC.

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 March 31, 2021 and 2020 (dollars in millions).


Segment adjusted EBITDASegment adjusted EBITDA margins
Three Months Ended March 31,Three Months Ended March 31,
2021
2020 (1)
Change2021
2020 (1)
Change
Commercial Truck$73 $58 $15 9.4 %9.2 %0.20  pts
Aftermarket & Industrial34 46 (12)13.8 %16.6 %(2.80) pts
Segment adjusted EBITDA$107 $104 $10.9 %11.9 %(1.00) pts
(1) Amounts for the three months ended March 31, 2020 have been recast to reflect reportable segment changes.    

Significant items impacting year-over-year segment adjusted EBITDA include the following (in millions):
Commercial TruckAftermarket & IndustrialTOTAL
Segment adjusted EBITDA– Quarter ended March 31, 2020 (1)
$58 $46 $104 
Higher short-and long-term variable compensation(14)(5)(19)
Lower earnings from unconsolidated affiliates(1)— (1)
Impact of foreign currency exchange rates(6)(5)
Volume, mix, pricing and other36 (8)28 
Segment adjusted EBITDA – Quarter ended March 31, 2021$73 $34 $107 
(1) Amounts for the three months ended March 31, 2020 have been recast to reflect reportable segment changes. 

Commercial Truck segment adjusted EBITDA was $73 million in the second quarter of fiscal year 2021, up $15 million from the same period in the prior fiscal year. Segment adjusted EBITDA margin increased from 9.2 percent in the second quarter of fiscal year 2020 to 9.4 percent in the second quarter of fiscal year 2021. The increase in segment adjusted EBITDA and segment adjusted EBITDA margin was driven primarily by conversion on higher revenue and cost reduction actions, partially offset by higher incentive compensation and freight costs.

Aftermarket & Industrial segment adjusted EBITDA was $34 million in the second quarter of fiscal year 2021, down $12 million from the same period in the prior fiscal year. Segment adjusted EBITDA margin decreased from 16.6 percent in the second quarter of fiscal year 2020 to 13.8 percent in the second quarter of fiscal year 2021. The decrease in segment adjusted EBITDA and segment adjusted EBITDA margin was driven primarily by the impact from the termination of the WABCO distribution arrangement during the second quarter of fiscal year 2020 and increased incentive compensation costs, partially offset by cost reduction actions.





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MERITOR, INC.
Results of Operations
Six Months Ended March 31, 2021 Compared to Six Months Ended March 31, 2020

   Sales
The following table reflects total company and business segment sales for the six months ended March 31, 2021 and 2020 (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.
Six Months Ended March 31,  Dollar Change Due To
2021
2020 (1)
Dollar
Change
%
Change
CurrencyVolume/ Other
Sales:
Commercial Truck
            North America$727 $713 $14 %$— $14 
            Europe344 281 63 22 %29 34 
            South America137 103 34 33 %(35)69 
     China64 60 %(1)
     India83 44 39 89 %(2)41 
     Other47 28 19 68 %16 
          Total External Sales$1,402 $1,229 $173 14 %$— $173 
            Intersegment Sales66 65 %(4)
          Total Sales$1,468 $1,294 $174 13 %$$169 
Aftermarket & Industrial
            North America$383 $456 $(73)(16)%$— $(73)
            Europe85 85 — — %(6)
            Other— — %— — 
          Total External Sales$470 $543 $(73)(13)%$$(79)
            Intersegment Sales11 22 %(2)
          Total Sales$481 $552 $(71)(13)%$10 $(81)
Total External Sales$1,872 $1,772 $100 %$$94 
(1) Amounts for the six months ended March 31, 2020 have been recast to reflect reportable segment changes.
Commercial Truck sales were $1,468 million in the first six months of fiscal year 2021, up 13% percent compared to the first six months of fiscal year 2020, driven by higher global truck production in all markets.
Aftermarket & Industrial sales were $481 million in the first six months of fiscal year 2021, down 13% percent compared to the first six months of fiscal year 2020 primarily due to the impact from the termination of the WABCO distribution arrangement.

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MERITOR, INC.
Six Months Ended March 31,  
20212020Dollar
Change
%
Change
Sales$1,872 $1,772 $100 %
Cost of sales(1,609)(1,531)78 %
GROSS PROFIT263 241 22 %
Selling, general and administrative(134)(129)%
Income from WABCO distribution termination— 265 (265)N/A
Other operating expense, net(9)(15)(6)(40)%
Other income, net37 24 13 54 %
Equity in earnings of affiliates16 12 33 %
Interest expense, net(45)(30)15 50 %
INCOME BEFORE INCOME TAXES128 368 (240)(65)%
Provision for income taxes(29)(86)(57)(66)%
INCOME FROM CONTINUING OPERATIONS99 282 (183)(65)%
INCOME FROM DISCONTINUED OPERATIONS, net of tax— (1)100 %
NET INCOME99 283 (184)(65)%
Less: Net income attributable to noncontrolling interests(4)(3)33 %
NET INCOME ATTRIBUTABLE TO MERITOR, INC.$95 $280 $(185)(66)%

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 six months ended March 31, 2021 was $1,609 million compared to $1,531 million in the same period in the prior fiscal year, representing an increase of 5 percent, primarily due to higher production volumes. Total cost of sales was 86.0 percent and 86.4 percent of sales for the six-month periods ended March 31, 2021 and 2020, respectively.
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 six months ended March 31, 2021 increased $47 million compared to the same period in the prior fiscal year due to increased volumes and higher freight costs.
Labor and overhead costs increased $33 million compared to the same period in the prior fiscal year primarily due to higher volumes in our U.S. and European locations.
Other, net for the six months ended March 31, 2021 decreased $2 million compared to the same period in the prior fiscal year.
Gross profit was $263 million and $241 million for the six-month periods ended March 31, 2021 and 2020, respectively. Gross profit as a percentage of sales was 14.0 percent and 13.6 percent for the six-month periods ended March 31, 2021 and 2020, respectively.
Other Income Statement Items
Selling, general and administrative expenses for the six months ended March 31, 2021 and 2020 were $134 million and $129 million, respectively. SG&A increased by $5 million primarily due to higher incentive costs and electrification costs, partly offset by cost reduction actions.
Other income, net for the six months ended March 31, 2021 and 2020 were $37 million and $24 million, respectively. Other income, net increased primarily due to the recognition of $10 million of other income related to value-added tax credits in our wholly-owned Brazilian subsidiary during the second quarter of fiscal year 2021.
Equity in earnings of affiliates was $16 million for the six months ended March 31, 2021 compared to $12 million in the same period in the prior year. The increase was primarily due to the recognition of a VAT credit of $6 million at our joint venture in Brazil during the first quarter of fiscal year 2021.
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MERITOR, INC.
Interest expense, net for the six months ended March 31, 2021 and 2020 was $45 million and $30 million, respectively. The increase in interest expense, net is attributable to higher interest costs year over year as well as $8 million of debt extinguishment costs incurred in the first quarter of fiscal year 2021.

Provision for income taxes was $29 million in the first six months of fiscal year 2021 compared to $86 million in the same period in the prior fiscal year. The decrease in tax expense is primarily related to the tax effect of the proceeds received from the termination of the WABCO distribution arrangement during the second quarter of fiscal year 2020, partially offset by the tax effect of the Brazilian VAT credits recorded in the second quarter of fiscal year 2021.

Segment Adjusted EBITDA and Segment Adjusted EBITDA Margins
The following table reflects segment adjusted EBITDA and segment adjusted EBITDA margins for the six months ended March 31, 2021 and 2020 (dollars in millions).


Segment adjusted EBITDASegment adjusted EBITDA margins
Six Months Ended March 31,Six Months Ended March 31,
2021
2020 (1)
Change2021
2020 (1)
Change
Commercial Truck$136 $115 $21 9.3 %8.9 %0.4  pts
Aftermarket & Industrial69 85 (16)14.3 %15.4 %(1.1) pts
Segment adjusted EBITDA$205 $200 $11.0 %11.3 %(0.3) pts
(1) Amounts for the six months ended March 31, 2020 have been recast to reflect reportable segment changes. 

Significant items impacting year-over-year segment adjusted EBITDA include the following (in millions):
Commercial TruckAftermarket & IndustrialTOTAL
Segment adjusted EBITDA– Six Months Ended March 31, 2020 (1)
$115 $85 $200 
Higher short-and long-term variable compensation(17)(6)(23)
Higher earnings from unconsolidated affiliates— 
Impact of foreign currency exchange rates(13)(9)
Volume, mix, pricing and other47 (14)33 
Segment adjusted EBITDA - Six Months Ended March 31, 2021$136 $69 $205 
(1) Amounts for the six months ended March 31, 2020 have been recast to reflect reportable segment changes. 

Commercial Truck segment adjusted EBITDA was $136 million in the first six months of fiscal year 2021, up $21 million from the same period in the prior fiscal year. Segment adjusted EBITDA margin increased from 8.9 percent in the first six months of fiscal year 2020 to 9.3 percent in the first six months of fiscal year 2021. The increase in segment adjusted EBITDA and segment adjusted EBITDA margin was driven primarily by conversion on higher revenue, and cost reduction actions, partially offset by higher incentive compensation, freight and electrification costs.
Aftermarket & Industrial segment adjusted EBITDA was $69 million in the first six months of fiscal year 2021, down $16 million from the same period in the prior fiscal year. Segment adjusted EBITDA margin decreased from 15.4 percent in the first six months of fiscal year 2020 to 14.3 percent in the first six months of fiscal year 2021. The decrease in segment adjusted EBITDA and segment adjusted EBITDA margin was driven primarily by the impact from the termination of the WABCO distribution arrangement and higher incentive compensation costs, partially offset by cost reduction actions.
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MERITOR, INC.
Financial Condition
Cash Flows (in millions)
Six Months Ended March 31,
20212020
OPERATING CASH FLOWS
Income from continuing operations$99 $282 
Depreciation and amortization52 50 
Deferred income tax expense (benefit)(4)
Restructuring costs15 
Stock compensation expense10 
Equity in earnings of affiliates(16)(12)
Pension and retiree medical income(26)(21)
Loss on debt extinguishment— 
Dividends received from equity method investments— 
Pension and retiree medical contributions(6)(7)
Restructuring payments(8)(15)
Proceeds from WABCO distribution termination— 265 
Income from WABCO distribution termination— (265)
Changes in receivables, inventories and accounts payable(63)(8)
Changes in off-balance sheet accounts receivable factoring35 20 
Changes in other current assets and liabilities(49)
Changes in other assets and liabilities38 
Cash flows provided by continuing operations107 290 
Cash flows used for discontinued operations— — 
CASH PROVIDED BY OPERATING ACTIVITIES$107 $290 
    
Cash provided by operating activities in the first six months of fiscal year 2021 was $107 million compared to $290 million in the same period of fiscal year 2020. The decrease in cash provided by operating activities was due to $265 million of cash received from the WABCO distribution arrangement termination in the second quarter of fiscal year 2020.
Six Months Ended March 31,


20212020
INVESTING CASH FLOWS
Capital expenditures$(26)$(33)
Cash paid for acquisition of TransPower, net of cash acquired— (13)
Other investing activities(3)
CASH USED FOR INVESTING ACTIVITIES$(29)$(37)

Cash used for investing activities was $29 million in the first six months of fiscal year 2021 compared to $37 million in the same period in fiscal year 2020.
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MERITOR, INC.
Six Months Ended March 31,


20212020
FINANCING CASH FLOWS
Securitization$— $96 
Borrowings against revolving line of credit— 304 
Proceeds from debt issuance275 — 
Redemption of notes(281)— 
Redemption of convertible notes(53)— 
Debt issuance costs(5)— 
Term loan payments(7)(4)
Other financing activities(1)(1)
Net change in debt(72)395 
Repurchase of common stock— (241)
CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES$(72)$154 

Cash used for financing activities was $72 million in the first six months of fiscal year 2021 compared to cash provided by financing activities of $154 million in the same period of fiscal year 2020. The increase in cash used for financing activities is primarily related to the redemption of $275 million aggregate principal amount of our 6.25 Percent Notes due 2024 and the remaining $23 million of the 7.875 Percent Convertible Notes, partially offset by the issuance of $275 million aggregate principal amount of our 4.50 Percent Notes.

Liquidity
Our outstanding debt, net of discounts and unamortized debt issuance costs, where applicable, is summarized in the table below (in millions).
March 31, 2021September 30, 2020
Fixed-rate debt securities$740 $741 
Fixed-rate convertible notes321 343 
Unamortized discount on convertible notes(27)(29)
Term loan159 166 
Other borrowings10 
Total debt$1,203 $1,227 

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 2021 capital expenditures for our business segments to be approximately $95 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.
We believe our current financing arrangements provide us with the financial flexibility required to maintain our operations during 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.
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MERITOR, INC.
Sources of liquidity as of March 31, 2021, in addition to cash on hand, are as follows (in millions):
Total Facility
Size
Utilized as of
3/31/2021
Readily Available as of
3/31/2021
Current Expiration
On-balance sheet arrangements:
Senior secured revolving credit facility (1)
$685 $— $276 
June 2024 (1)
Committed U.S. accounts receivable securitization (2)
110 106 March 2024
Total on-balance sheet arrangements$795 $$382 
Off-balance sheet arrangements: (2)
Committed Swedish factoring facility (3)(4)
$183 $105 $— March 2024
Committed U.S. factoring facility (3)
75 44 — February 2023
Uncommitted U.K. factoring facility29 — February 2022
Uncommitted Italy factoring facility35 22 — June 2022
Other uncommitted factoring facilities (5)
N/A20 N/AN/A
Total off-balance sheet arrangements$322 $196 $— 
Total available sources$1,117 $200 $382 
(1)The availability under the senior secured revolving credit facility is subject to a priority debt-to-EBITDA ratio covenant, as measured on the last day of the quarter based on trailing twelve month EBITDA as defined in the credit agreement. Availability was constrained on the last day of the second quarter of fiscal year 2021 due primarily to lower EBITDA in the third and fourth quarters of fiscal year 2020, which were impacted by the COVID-19 pandemic. The company has full availability until the next measurement point at the end of the third quarter of fiscal year 2021. The facility will expire in November 2023 if the outstanding principal 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. On March 31, 2021, the U.S. accounts receivable securitization facility with PNC bank was increased from $95 million to $110 million.
(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 through June 22, 2021.
(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 March 31, 2021, we had $321 million in cash and cash equivalents. Of our total cash held in jurisdictions outside of the U.S, we plan to repatriate approximately $38 million of cash, with respect to which no withholding taxes are expected to be owed. Of our total cash held in jurisdictions outside of the U.S., $29 million, if repatriated, could result in withholding taxes. In addition, we plan to utilize ongoing cash flow from domestic operations and external borrowings, to meet our liquidity needs in the U.S.
On March 31, 2021, the U.S. accounts receivable securitization facility with PNC bank was increased from $95 million to $110 million.
Our availability under the senior secured 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 senior secured 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 senior secured 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 senior secured revolving credit facility. At March 31, 2021, we were in compliance with the priority debt-to-EBITDA ratio covenant with a ratio of approximately 0.81x, which includes the income we recognized related to the termination of the WABCO distribution arrangement.
Equity Repurchase Authorization – On November 7, 2019, the Board of Directors authorized the repurchase of up to $325 million of 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, subject to compliance with legal and regulatory requirements and the company’s debt covenants. On March 25, 2020, we suspended activity under our share repurchase program as a result of uncertainties in the global economy due to the COVID-19 pandemic. As of March 31, 2021 and September 30, 2020, the amount remaining available for repurchases under this common stock repurchase authorization was $59 million.

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MERITOR, INC.
Debt Repurchase Authorization – 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. The amount remaining available for repurchases under this repurchase authorization was $76 million as of March 31, 2021 and September 30, 2020.

On May 4, 2021, we issued a notice of redemption for all of the remaining $175 million principal amount of the 6.25 Percent Notes due 2024. The redemption will be made pursuant to a special authorization from the Board of Directors. Refer to Note 13 of the Notes to the Condensed Consolidated Financial Statements in Part I of this Quarterly Report.
Revolving Credit Facility – The senior secured revolving credit facility is discussed in Note 13 of the Notes to the Condensed Consolidated Financial Statements in Part I of this Quarterly Report.
Redemption of 7.875 Percent Convertible Notes, Redemption of 6.25 Percent Notes Due 2024, and Issuance of 4.50 Percent Notes - Refer to Note 13 of the Notes to the Condensed Consolidated Financial Statements in Part I of this Quarterly Report.
Other – Refer to Note 13 of the Notes to the Condensed Consolidated Financial Statements in Part I of this Quarterly Report.
Credit Ratings – At May 3, 2021, 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.
Subsidiary Guarantees of Debt Certain of the company's 100% owned subsidiaries, as defined in the credit agreement for the senior secured revolving credit facility (collectively, the "Guarantors") irrevocably and unconditionally guarantee amounts outstanding under the senior secured revolving credit facility on a joint and several basis. Similar subsidiary guarantees are provided for the benefit of the holders of the notes outstanding under the company's indentures. The notes are guaranteed on a senior unsecured basis by each of the company’s subsidiaries from time to time guaranteeing its senior secured revolving credit facility, as it may be amended, extended, replaced or refinanced, or any subsequent credit facility. The guarantees remain in effect until the earlier to occur of payment in full of the notes or termination or release of the applicable corresponding guarantee under the company’s senior secured revolving credit facility, as it may be amended, extended, replaced or refinanced, or any subsequent credit facility. The guarantees rank equally with existing and future senior unsecured indebtedness of the Guarantors and are effectively subordinated to all of the existing and future secured indebtedness of the Guarantors, to the extent of the value of the assets securing such indebtedness.

The following represents summarized financial information, in millions, of Meritor, Inc. ("Parent") and the Guarantors (collectively, "the Combined Entities"). The information has been prepared on a combined basis and excludes any investments of the Parent or Guarantors in non-guarantor subsidiaries. Intercompany transactions and amounts between the Combined Entities have been eliminated. Equity income from continuing operations of subsidiaries has been eliminated.


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MERITOR, INC.
Statement of Operations InformationSix Months Ended
March 31, 2021
Year ended
September 30, 2020
Net Sales$1,040 $1,863 
Gross profit112 188 
Net income (loss) from continuing operations(5)190 
Net income (loss)(5)191 
Net income (loss) attributable to Meritor, Inc.(5)191 
Balance Sheet InformationMarch 31, 2021September 30, 2020
Current Assets$585 $566 
Non-current Assets1,072 1,053 
Current Liabilities455 413 
Non-current Liabilities1,518 1,639 
Redeemable Preferred Stock— — 
Noncontrolling Interest— — 

At March 31, 2021 and September 30, 2020, amounts owed by the Combined Entities to non-guarantor entities totaled approximately $32 million and $100 million, respectively, and amounts owed to the Combined Entities from non-guarantor entities totaled approximately $219 million and $156 million, respectively. For the six months ended March 31, 2021, intercompany sales from the Combined Entities to non-guarantor subsidiaries was $45 million. For the six months ended March 31, 2021, intercompany sales from non-guarantor subsidiaries to the Combined Entities was $77 million. For the year ended September 30, 2020, intercompany sales from the Combined Entities to non-guarantor subsidiaries was $79 million. For the year ended September 30, 2020, intercompany sales from non-guarantor subsidiaries to the Combined Entities was $102 million.

Off-Balance Sheet Arrangements
Accounts Receivable Factoring Arrangements – We participate in accounts receivable factoring programs with a total amount utilized at March 31, 2021 of $196 million, of which $149 million was attributable to committed factoring facilities involving the sale of AB Volvo accounts receivables. The remaining amount of $47 million was related to factoring by certain of our European subsidiaries under uncommitted factoring facilities with financial institutions. The receivables under all of these programs are sold at face value and are excluded from the consolidated balance sheet. Total facility size, utilized amounts, readily available amounts and expiration dates for each of these programs are shown in the table above under Liquidity.
The Swedish facility is backed by a 364-day liquidity commitment from Nordea Bank, which was renewed through June 22, 2021. Commitments under all of our factoring facilities are subject to standard terms and conditions for these types of arrangements (including, in the case of the U.K. and Italy commitments, a sole discretion clause whereby the bank retains the right to not purchase receivables, which has not been invoked since the inception of the respective programs).
Letter of Credit Facilities – There were $12 million and $8 million of off-balance sheet letters of credit outstanding through letter of credit facilities as of March 31, 2021 and September 30, 2020, respectively.
Contingencies
Contingencies related to environmental, asbestos and other matters are discussed in Note 16 of the Notes to the Condensed Consolidated Financial Statements in Part I of this Quarterly Report.
Critical Accounting Policies
Our significant accounting policies are consistent with those described in Note 2 to our Consolidated Financial Statements in Item 8 of our Annual Report on Form 10-K for the fiscal year ended September 30, 2020 (the "2020 Form 10-K"). Our critical accounting estimates are consistent with those described in Item 7 of our 2020 Form 10-K.
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MERITOR, INC.
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.
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 have varying terms that extend through fiscal year 2025.
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 2019, we entered into multiple cross-currency 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 second quarter of fiscal year 2020, we settled these cross-currency swap contracts and received proceeds of $11 million, $1 million of which related to net accrued interest receivable.
Interest rate risk relates to the gain/increase or loss/decrease we could incur in our debt balances and interest expense associated with changes in interest rates. To manage this risk, we enter into interest rate swaps from time to time to economically convert portions of our fixed-rate debt into floating rate exposure, ensuring that the sensitivity of the economic value of debt falls within our corporate risk tolerances. It is our policy not to enter into derivative instruments for speculative purposes, and therefore, we hold no derivative instruments for trading purposes.
Included below is a sensitivity analysis to measure the potential gain (loss) in the fair value of financial instruments with exposure to market risk (in millions). The model assumes a 10% hypothetical change (increase or decrease) in exchange rates and instantaneous, parallel shifts of 50 basis points in interest rates.
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MERITOR, INC.

Market Risk
Assuming a
10% Increase
in Rates
Assuming a
10% Decrease
in Rates
Change In
Foreign Currency Sensitivity:
Forward contracts in USD (1)
$(2.0)$2.0 Fair Value
Forward contracts in Euro (1)
(1.3)1.3 Fair Value
Foreign currency denominated debt (2)
0.9 (0.9)Fair Value
Foreign currency option contracts in USD0.5 — Fair Value
Foreign currency option contracts in Euro(0.1)0.7 Fair Value
Assuming a 50
BPS Increase
in Rates
Assuming a 50
 BPS Decrease
in Rates
Change In
Interest Rate Sensitivity:
Debt – fixed rate (3)
$(41.7)$44.3 Fair Value
Debt – variable rate(0.8)0.8 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 March 31, 2021, the fair value of outstanding foreign currency denominated debt was $8.6 million. A 10% decrease in quoted currency exchange rates would result in a decrease of $0.9 million in foreign currency denominated debt. At March 31, 2021, a 10% increase in quoted currency exchange rates would result in an increase of $0.9 million in foreign currency denominated debt.
(3)At March 31, 2021, the fair value of outstanding debt was $1,323 million. A 50 basis points decrease in quoted interest rates would result in an increase of $44.3 million in the fair value of fixed rate debt. A 50 basis points increase in quoted interest rates would result in a decrease of $41.7 million in the fair value of fixed rate debt.

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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 March 31, 2021. Based upon that evaluation, the Chief Executive Officer and the Chief Financial Officer have concluded that, as of March 31, 2021, 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 March 31, 2021 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.
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MERITOR, INC.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Except as set forth in Note 16 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, 2020.
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, 2020.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Issuer repurchases
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 second quarter of fiscal year 2021 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 second quarter of fiscal year 2021 to satisfy tax obligations upon the vesting of restricted shares. The company does not believe such purchases or transactions described above are issuer repurchases for the purposes of this Item 2 of Part II of this Quarterly Report on Form 10-Q.
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MERITOR, INC.
Item 5. Other Information
Cautionary Statement
This Quarterly Report on Form 10-Q contains statements relating to future results of the company (including certain 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 and financial markets, as well as our industry, operations, workforce, supply chains, distribution systems and demand for our products; 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 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.

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MERITOR, INC.
Item 6. Exhibits
3-a
3-b**
10-a**
22**
31-a**
31-b**
32-a**
32-b**
101.INSInline 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.SCHInline XBRL TAXONOMY EXTENSION SCHEMA
101.PREInline XBRL TAXONOMY EXTENSION PRESENTATION LINKBASE
101.LABInline XBRL TAXONOMY EXTENSION LABEL LINKBASE
101.CAL Inline XBRL TAXONOMY EXTENSION CALCULATION LINKBASE
101.DEF Inline XBRL TAXONOMY EXTENSION DEFINITION LINKBASE
104Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101)
** Filed herewith.


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MERITOR, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
     MERITOR, INC.
 
Date:May 4, 2021By:/s/Hannah S. Lim-Johnson
 Hannah S. Lim-Johnson
Senior Vice President, Chief Legal Officer and Corporate Secretary
 (For the registrant)
  
Date:May 4, 2021By:/s/Carl D. Anderson II
Carl D. Anderson II
Senior Vice President, Chief Financial Officer
 
Date:May 4, 2021By:/s/Paul D. Bialy
Paul D. Bialy
Vice President, Chief Accounting Officer
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