MTOR-03.31.2014-10Q
Index


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

FORM 10-Q

QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 30, 2014
Commission File No. 1-15983

MERITOR, INC.

(Exact name of registrant as specified in its charter)

 
Indiana
38-3354643
 
 
(State or other jurisdiction of incorporation or
(I.R.S. Employer Identification
 
 
organization)
No.)
 
 
 
 
 
2135 West Maple Road, Troy, Michigan
48084-7186
 
 
(Address of principal executive offices)
(Zip Code)
 

(248) 435-1000
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
 
Yes
X
No
 
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Registration S-T during the preceding twelve months (or for such shorter period that the registrant was required to submit and post such files).
 
Yes
X
No
 
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one)
 
Large accelerated filer
 
 
Accelerated filer
X
 
 
Non-accelerated filer
 
 
Smaller reporting company
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
 
Yes
 
No
X
 
97,844,611 shares of Common Stock, $1.00 par value, of Meritor, Inc. were outstanding on March 30, 2014.



INDEX
 
 
 
Page
No.
 
 
 
 
 
 
 
 
 
 
 
 
 
Consolidated Statement of Operations - - Three and Six Months Ended March 31, 2014 and 2013
 
 
 
 
 
 
 
 
 
 
 
 
Condensed Consolidated Balance Sheet - - March 31, 2014 and September 30, 2013
 
 
 
 
 
 
Condensed Consolidated Statement of Cash Flows - - Six Months Ended March 31, 2014 and 2013
 
 
 
 
 
 
Condensed Consolidated Statement of Equity (Deficit) - - Six Months Ended March 31, 2014 and 2013
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

2


MERITOR, INC.

PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements

CONSOLIDATED STATEMENT OF OPERATIONS
(in millions, except per share amounts)

 
Three Months Ended
March 31,
 
Six Months Ended March 31,
 
2014
 
2013
 
2014
 
2013
 
(Unaudited)
Sales
$
962

 
$
908

 
$
1,869

 
$
1,799

Cost of sales
(846
)
 
(813
)
 
(1,650
)
 
(1,621
)
GROSS MARGIN
116

 
95

 
219

 
178

Selling, general and administrative
(66
)
 
(65
)
 
(125
)
 
(127
)
Restructuring costs
(2
)
 
(11
)
 
(3
)
 
(17
)
Other operating expense

 
(1
)
 
(1
)
 
(2
)
OPERATING INCOME
48

 
18

 
90

 
32

Equity in earnings of affiliates
9

 
10

 
17

 
19

Interest expense, net
(48
)
 
(25
)
 
(75
)
 
(54
)
INCOME (LOSS) BEFORE INCOME TAXES
9

 
3

 
32

 
(3
)
Provision for income taxes
(9
)
 
(7
)
 
(19
)
 
(17
)
INCOME (LOSS) FROM CONTINUING OPERATIONS

 
(4
)
 
13

 
(20
)
INCOME (LOSS) FROM DISCONTINUED OPERATIONS, net of tax
3

 

 
3

 
(5
)
NET INCOME (LOSS)
3

 
(4
)
 
16

 
(25
)
Less: Net income attributable to noncontrolling interests
(2
)
 

 
(4
)
 

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

 
$
(4
)
 
$
12

 
$
(25
)
NET INCOME (LOSS) ATTRIBUTABLE TO MERITOR, INC.
 
 
 
 
 
 
 
Net income (loss) from continuing operations
$
(2
)
 
$
(4
)
 
$
9

 
$
(20
)
Income (loss) from discontinued operations
3

 

 
3

 
(5
)
       Net income (loss)
$
1

 
$
(4
)
 
$
12

 
$
(25
)
BASIC EARNINGS (LOSS) PER SHARE
 
 
 
 
 
 
 
Continuing operations
$
(0.02
)
 
$
(0.04
)
 
$
0.09

 
$
(0.20
)
Discontinued operations
0.03

 

 
0.03

 
(0.05
)
       Basic earnings (loss) per share
$
0.01

 
$
(0.04
)
 
$
0.12

 
$
(0.25
)
DILUTED EARNINGS (LOSS) PER SHARE
 
 
 
 
 
 
 
Continuing operations
$
(0.02
)
 
$
(0.04
)
 
$
0.09

 
$
(0.20
)
Discontinued operations
0.03

 

 
0.03

 
(0.05
)
       Diluted earnings (loss) per share
$
0.01

 
$
(0.04
)
 
$
0.12

 
$
(0.25
)
 
 
 
 
 
 
 
 
Basic average common shares outstanding
97.6

 
97.2

 
97.5

 
96.9

Diluted average common shares outstanding
97.6

 
97.2

 
99.2

 
96.9



See notes to consolidated financial statements.

3


MERITOR, INC.


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

 
Three Months Ended March 31,
 
Six Months Ended March 31,
 
2014
 
2013
 
2014
 
2013
 
(Unaudited)
Net income (loss)
$
3

 
$
(4
)
 
$
16

 
$
(25
)
Other comprehensive income (loss):
 
 
 
 
 
 
 
Foreign currency translation adjustments
10

 
3

 

 
(1
)
Pension and other postretirement benefit related adjustments
10

 
(2
)
 
20

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

 
1

 
2

 

Other comprehensive income (loss), net of tax
22

 
2

 
22

 
(3
)
Total comprehensive income (loss)
25

 
(2
)
 
38

 
(28
)
Less: Comprehensive income attributable to noncontrolling interest
(2
)
 

 
(4
)
 
(1
)
Comprehensive income (loss) attributable to Meritor, Inc.
$
23

 
$
(2
)
 
$
34

 
$
(29
)

See notes to consolidated financial statements.


4


MERITOR, INC.

CONDENSED CONSOLIDATED BALANCE SHEET
(in millions)

 
March 31,
2014
 
September 30,
2013
 
(Unaudited)
ASSETS
 
 
 
CURRENT ASSETS:
 
 
 
Cash and cash equivalents
$
233

 
$
318

Receivables, trade and other, net
618

 
596

Inventories
436

 
414

Other current assets
58

 
56

TOTAL CURRENT ASSETS
1,345

 
1,384

NET PROPERTY
410

 
417

GOODWILL
437

 
434

OTHER ASSETS
339

 
335

TOTAL ASSETS
$
2,531

 
$
2,570

LIABILITIES AND EQUITY (DEFICIT)
 
 
 
CURRENT LIABILITIES:
 
 
 
Short-term debt
$
6

 
$
13

       Accounts and notes payable
696

 
694

Other current liabilities
345

 
339

TOTAL CURRENT LIABILITIES
1,047

 
1,046

LONG-TERM DEBT
1,082

 
1,125

RETIREMENT BENEFITS
868

 
886

OTHER LIABILITIES
316

 
335

TOTAL LIABILITIES
3,313

 
3,392

COMMITMENTS AND CONTINGENCIES (See Note 19)

 

EQUITY (DEFICIT):
 
 
 
Common stock (March 31, 2014 and September 30, 2013, 97.8 and 97.4 shares issued and outstanding, respectively)
97

 
97

Additional paid-in capital
917

 
914

Accumulated deficit
(1,115
)
 
(1,127
)
Accumulated other comprehensive loss
(712
)
 
(734
)
Total deficit attributable to Meritor, Inc.
(813
)
 
(850
)
Noncontrolling interests
31

 
28

TOTAL DEFICIT
(782
)
 
(822
)
TOTAL LIABILITIES AND DEFICIT
$
2,531

 
$
2,570


See notes to consolidated financial statements.

5


MERITOR, INC.

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(in millions)

 
Six Months Ended March 31,
 
2014
 
2013
 
(Unaudited)
OPERATING ACTIVITIES
 
 
 
CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES (See Note 9)
$
18

 
$
(109
)
INVESTING ACTIVITIES
 
 
 
Capital expenditures
(25
)
 
(23
)
        Net investing cash flows provided by discontinued operations
3

 
6

CASH USED FOR INVESTING ACTIVITIES
(22
)
 
(17
)
FINANCING ACTIVITIES
 
 
 
Repayment of notes and term loan
(308
)
 
(236
)
Proceeds from debt issuance
225

 
225

Debt issuance costs
(9
)
 
(6
)
Other financing activities
13

 
2

CASH USED FOR FINANCING ACTIVITIES
(79
)
 
(15
)
EFFECT OF CHANGES IN FOREIGN CURRENCY EXCHANGE
RATES ON CASH AND CASH EQUIVALENTS
(2
)
 
1

CHANGE IN CASH AND CASH EQUIVALENTS
(85
)
 
(140
)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
318

 
257

CASH AND CASH EQUIVALENTS AT END OF PERIOD
$
233

 
$
117


See notes to consolidated financial statements.

6


MERITOR, INC.

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

 
Common
Stock
 
Additional
Paid-in
Capital
 
Accumulated
Deficit
 
Accumulated
Other
Comprehensive
Loss
 
Total Deficit
Attributable to
Meritor, Inc.
 
Noncontrolling
Interests
 
Total
Beginning balance at September 30, 2013
$
97

 
$
914

 
$
(1,127
)
 
$
(734
)
 
$
(850
)
 
$
28

 
$
(822
)
Comprehensive income

 

 
12

 
22

 
34

 
4

 
38

Equity based compensation expense

 
3

 

 

 
3

 

 
3

Noncontrolling interest dividends

 

 

 

 

 
(1
)
 
$
(1
)
Ending Balance at March 31, 2014
$
97

 
$
917

 
$
(1,115
)
 
$
(712
)
 
$
(813
)
 
$
31

 
$
(782
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance at September 30, 2012
$
96

 
$
901

 
$
(1,105
)
 
$
(915
)
 
$
(1,023
)
 
$
41

 
$
(982
)
Comprehensive income (loss)

 

 
(25
)
 
(4
)
 
(29
)
 
1

 
(28
)
Vesting of restricted stock
1

 
(1
)
 

 

 

 

 

Repurchase of convertible notes

 
(2
)
 

 

 
(2
)
 

 
(2
)
Issuance of convertible notes

 
9

 

 

 
9

 

 
9

Equity based compensation expense

 
3

 

 

 
3

 

 
3

Noncontrolling interest dividends

 

 

 

 

 
(14
)
 
(14
)
Ending Balance at March 31, 2013
$
97

 
$
910

 
$
(1,130
)
 
$
(919
)
 
$
(1,042
)
 
$
28

 
$
(1,014
)

See notes to consolidated financial statements.

7

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



1. Basis of Presentation
Meritor, Inc., (the "company" or "Meritor"), headquartered in Troy, Michigan, is a premier global supplier of a broad range of integrated systems, modules and components to original equipment manufacturers (“OEMs”) and the aftermarket for the commercial vehicle, transportation and industrial sectors. The company serves commercial truck, trailer, off-highway, military, bus and coach and other industrial OEMs and certain aftermarkets. The consolidated financial statements are those of the company and its consolidated subsidiaries.
Certain businesses are reported in discontinued operations in the consolidated statement of operations, statement of cash flows and related notes for all periods presented. Additional information regarding discontinued operations is discussed in Note 4.
In the opinion of the company, the unaudited 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 Annual Report on Form 10-K, for the fiscal year ended September 30, 2013. The results of operations for the three and six months ended March 31, 2014, are not necessarily indicative of the results for the full year.
The company’s fiscal year ends on the Sunday nearest September 30. The second quarter of fiscal years 2014 and 2013 ended on March 30, 2014 and March 31, 2013, respectively. All year and quarter references relate to the company’s fiscal year and fiscal quarters, unless otherwise stated. For ease of presentation, September 30 and March 31 are used consistently throughout this report to represent the fiscal year end and second quarter end, respectively.
2. Earnings per Share
Basic earnings per share is calculated using the weighted average number of shares outstanding during each period. Diluted earnings per share calculation includes the impact of dilutive common stock options, restricted stock, performance share 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,
 
2014
 
2013
 
2014
 
2013
Basic average common shares outstanding
97.6

 
97.2

 
97.5

 
96.9

Impact of stock options

 

 

 

Impact of restricted and performance shares

 

 
1.7

 

Diluted average common shares outstanding
97.6

 
97.2

 
99.2

 
96.9

On November 7, 2013, the Board of Directors approved a grant of performance restricted share units to all executives eligible to participate in the long-term incentive plan. Each performance share unit represents the right to receive one share of common stock upon achievement of certain performance and time vesting criteria. The fair value of each share unit is $7.97, the company’s share price on the grant date of December 1, 2013.
The actual number of performance units that will vest will depend upon the company’s performance relative to the established M2016 goals for the three-year performance period of October 1, 2013 to September 30, 2016, measured at the end of the performance period. The number of shares that vest will be between 0% and 200% of the estimated grant date amount of 1.5 million shares. For both the three and six months ended March 31, 2014, compensation cost recognized related to the performance shares was $1 million.

8

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


For the three and six months ended March 31, 2014 and 2013, options to purchase 0.8 million and 0.5 million shares of common stock, respectively, were excluded from the computation of diluted earnings per share because their exercise price exceeded the average market price for the period and thus their inclusion would be anti-dilutive. The potential effect of 2 million restricted and performance shares is excluded from the diluted earnings per share calculation for the three months ended March 31, 2014 because inclusion in a loss from continuing operations period would reduce the loss per share from continuing operations attributable to common shareholders. The potential effects of restricted shares and share units were excluded from the diluted earnings per share calculation for the three and six months ended March 31, 2013 because their inclusion in a net loss period would reduce the net loss per share. The company’s convertible senior unsecured notes are excluded from the computation of diluted earnings per share, as the company's average stock price during each period is less than the conversion price.
3. New Accounting Standards
Accounting standards implemented during fiscal year 2014
In January 2013, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2013-01, Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities. ASU 2013-01 clarifies which instruments and transactions are subject to the offsetting disclosure requirements established by ASU 2011-11, Disclosures about Offsetting Assets and Liabilities. The new disclosure requirements are effective for fiscal years, and interim periods within those years, beginning on or after January 1, 2013. The company adopted this guidance at the beginning of its first quarter of fiscal year 2014 within Note 17.
In February 2013, the FASB issued ASU 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. ASU 2013-02 requires that reclassification adjustments for items that are reclassified from accumulated other comprehensive income to net income be presented on the financial statements or in a note to the financial statements. The new disclosure requirements are effective for fiscal years, and interim periods within those years, beginning after December 15, 2012. The company adopted this guidance at the beginning of its first quarter of fiscal year 2014 within Note 20.
In July 2013, the FASB issued ASU 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. ASU 2013-11 eliminates the option of presenting unrecognized tax benefits as a liability or as a reduction of a deferred tax asset for a net operating loss or tax credit carryforward. An unrecognized tax benefit, or portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward. The new disclosure requirements are effective for fiscal years, and interim periods within those years, beginning after December 15, 2013 with early adoption permitted. The company adopted this guidance at the beginning of its first quarter of fiscal year 2014. The adoption of ASU 2013-11 did not affect the company's consolidated statement of financial position, results of operations, or cash flows.
Accounting standards to be implemented
In April 2014, the FASB issued ASU 2014-08, Presentation of Financial Statements and Property, Plant, and Equipment: Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. ASU 2014-08 changes the criteria for determining which disposals can be presented as discontinued operations and modifies related disclosure requirements. Under the new guidance, a discontinued operation is defined as a disposal of a component or group of components that represents a strategic shift that has (or will have) a major effect on an entity's operations and financial results. A strategic shift could include a disposal of: (1) a major geographical area of operations; (2) a major line of business; and (3) a major equity method investment. The standard is required to be adopted by public business entities in annual periods beginning on or after December 15, 2014, and interim periods within those annual periods. The company is currently evaluating the potential impact of this new guidance on its consolidated financial statements.

9

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


4. Discontinued Operations
Results of discontinued operations are summarized as follows (in millions):
 
Three Months Ended
March 31,
 
Six Months Ended
March 31,
 
2014
 
2013
 
2014
 
2013
Sales
$

 
$

 
$

 
$

 
 
 
 
 
 
 
 
Loss before income taxes
$
(1
)
 
$

 
(2
)
 
(5
)
Benefit for income taxes
4

 

 
5

 

Income (Loss) from discontinued operations attributable to Meritor, Inc.
$
3

 
$

 
$
3

 
$
(5
)
     Pre-tax loss from discontinued operations for the three and six months ended March 31, 2014 and 2013 was primarily due to environmental remediation costs. The benefit for income taxes was primarily attributable to the expiration of the statue of limitations on certain tax contingencies of previously divested businesses.

5. Goodwill
In accordance with FASB Accounting Standards Codification (ASC) Topic 350-20, “Intangibles – Goodwill and Other”, goodwill is reviewed for impairment annually during the fourth quarter of the fiscal year or more frequently if certain indicators arise. If business conditions or other factors cause the operating results and cash flows of a reporting unit to decline, the company may be required to record impairment charges for goodwill at that time. The company tests goodwill for impairment at a level of reporting referred to as a reporting unit, which is an operating segment or one level below an operating segment (referred to as a component). A component of an operating segment is a reporting unit if the component constitutes a business for which discrete financial information is available and segment management regularly reviews the operating results of that component. When two or more components of an operating segment have similar economic characteristics, the components are aggregated and deemed a single reporting unit. An operating segment is deemed to be a reporting unit if all of its components are similar, if none of its components is a reporting unit, or if the segment comprises only a single component.
A summary of the changes in the carrying value of goodwill by the company's two reportable segments are presented below (in millions):
 
Commercial Truck & Industrial
 
Aftermarket
& Trailer
 
Total
Beginning balance at September 30, 2013
$
262

 
$
172

 
$
434

Foreign currency translation
2

 
1

 
3

Balance at March 31, 2014
$
264

 
$
173

 
$
437



10

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


6. Restructuring Costs
     At both March 31, 2014 and September 30, 2013, $10 million and $12 million, respectively, of restructuring reserves primarily related to unpaid employee termination benefits remained in the consolidated balance sheet. The changes in restructuring reserves for the six months ended March 31, 2014 and 2013 are as follows (in millions):
 
Employee
Termination
Benefits
 
Asset
Impairment
 
Plant
Shutdown
& Other
 
Total
Beginning balance at September 30, 2013
$
12

 
$

 
$

 
$
12

Activity during the period:
 
 
 
 
 
 

Charges to continuing operations
3

 

 

 
3

Cash payments – continuing operations
(4
)
 

 

 
(4
)
Other
(1
)
 

 

 
(1
)
Total restructuring reserves at March 31, 2014
10

 

 

 
10

Less: non-current restructuring reserves
(3
)
 

 

 
(3
)
Restructuring reserves – current, at March 31, 2014
$
7

 
$

 
$

 
$
7

 
 
 
 
 
 
 
 
Balance at September 30, 2012
$
15

 
$

 
$

 
$
15

Activity during the period:
 
 
 
 
 
 
 
Charges to continuing operations
15

 
1

 
1

 
17

Asset write-offs

 
(1
)
 

 
(1
)
Cash payments – continuing operations
(12
)
 

 

 
(12
)
Other

 

 
(1
)
 
(1
)
Total restructuring reserves at March 31, 2013
18

 

 

 
18

Less: non-current restructuring reserves
(3
)
 

 

 
(3
)
Restructuring reserves – current, at March 31, 2013
$
15

 
$

 
$

 
$
15

Variable Labor Reductions: During the fourth quarter of fiscal year 2012, the company initiated a global variable labor headcount reduction plan intended to reduce labor and other costs in response to market conditions. As part of this action, the company eliminated approximately 600 hourly and 120 salaried positions and incurred $10 million of restructuring costs in the Commercial Truck & Industrial segment, primarily severance benefits, of which $5 million was recognized in fiscal year 2013 and $5 million was recognized in fiscal year 2012. Restructuring actions associated with the variable labor reductions were substantially complete as of March 31, 2014.
Remanufacturing Consolidation: During the first quarter of fiscal year 2013, the company announced the planned consolidation of its remanufacturing operations in the Aftermarket & Trailer segment resulting in the closure of one remanufacturing plant in Canada. The closure resulted in the elimination of 85 hourly positions including approximately 65 positions which were transferred to the company's facility in Indiana. The company recorded restructuring charges of $3 million during fiscal year 2013, primarily associated with employee severance charges. Restructuring actions associated with the remanufacturing consolidation were substantially complete as of March 31, 2014.
Segment Reorganization and Asia Pacific Realignment: On November 12, 2012, the company announced a revised management reporting structure resulting in two business segments to drive efficiencies. On January 8, 2013, the company announced restructuring actions related to this business segment rationalization. On March 26, 2013, the company announced plans to consolidate its operations in China by transferring manufacturing operations to the company's off-highway facility and closing its facility in Wuxi, China.
    
During fiscal year 2013, the company recorded employee severance charges and other exit costs associated with the elimination of approximately 200 salaried positions (including contract employees) and 50 hourly positions of $8 million and $3 million in the Commercial Truck & Industrial and Aftermarket & Trailer segments, respectively, as well as $3 million at a corporate location. The company also recognized $2 million within the Commercial Truck & Industrial segment related to a lease termination. Restructuring actions associated with this program were substantially complete as of March 31, 2014.

11

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



M2016 Footprint Actions: As part of the company's M2016 Strategy, a three-year plan to achieve sustainable financial strength, the company approved a North American footprint realignment action and a European Shared Services Reorganization. As part of these actions, the company eliminated 74 hourly and 27 salaried positions and incurred $2 million of restructuring costs, primarily related to severance benefits, in the Commercial Truck & Industrial segment during fiscal year 2013.
7. Income Taxes
For each interim reporting period, the company makes an estimate of the effective tax rate expected to be applicable for the full fiscal year pursuant to FASB ASC Topic 740-270, “Accounting for Income Taxes in Interim Periods.” The rate so determined is used in providing for income taxes on a year-to-date basis. Jurisdictions with a projected loss for the year or an actual year-to-date loss where no tax benefit can be recognized are excluded from the estimated annual effective tax rate. The impact of including these jurisdictions on the quarterly effective rate calculation could result in a higher or lower effective tax rate during a particular quarter, based upon the mix and timing of actual earnings versus annual projections.
Income tax expense (benefit) is allocated between continuing operations, discontinued operations and other comprehensive income (OCI). Such allocation is applied by tax jurisdiction, and in periods in which there is a pre-tax loss from continuing operations and pre-tax income in another category, such as discontinued operations or OCI, income tax expense is allocated to the other sources of income, with a related benefit recorded in continuing operations.
For the first six months of fiscal years 2014 and 2013, the company had approximately $36 million and $52 million, respectively, of net pre-tax losses in tax jurisdictions in which a tax benefit is not recorded. Losses arising from these jurisdictions resulted in increasing the valuation allowance, rather than reducing income tax expense.
8. Accounts Receivable Factoring & Securitization
     Off-balance sheet arrangements 
Swedish Factoring Facility: The company has an arrangement to sell trade receivables due from AB Volvo through one of its European subsidiaries. Under this arrangement, which was renewed on June 10, 2013 and which now terminates on June 28, 2014, the company can sell up to, at any point in time, €150 million ($206 million) of eligible trade receivables. Prior to maturity, the company plans to extend the arrangement. The receivables under this program are sold at face value and are excluded from the consolidated balance sheet. The company had utilized €135 million ($185 million) and €148 million ($199 million) of this accounts receivable factoring facility as of March 31, 2014 and September 30, 2013, respectively.
U.S. Factoring Facility: The company has an arrangement to sell trade receivables from AB Volvo and its subsidiaries. Under this arrangement, which was renewed on October 29, 2013 and which now terminates on October 29, 2014, the company can sell up to, at any point in time, €65 million ($89 million) of eligible trade receivables. The receivables under this program are sold at face value and are excluded from the consolidated balance sheet. The company had utilized €51 million ($70 million) and €48 million ($65 million) of this accounts receivable factoring facility as of March 31, 2014 and September 30, 2013, respectively.
     The above facilities are backed by 364-day liquidity commitments from Nordea Bank which were renewed through October 2014. The commitments are subject to standard terms and conditions for these types of arrangements.
     United Kingdom Factoring Facility: The company has an arrangement to sell trade receivables from AB Volvo and its European subsidiaries through one of its United Kingdom subsidiaries. Under this arrangement, which was renewed on January 24, 2013 and which now expires in February 2018, the company can sell up to, at any point in time, €25 million ($35 million) of eligible trade receivables. The receivables under this program are sold at face value and are excluded from the consolidated balance sheet. The company had utilized €6 million ($8 million) and €7 million ($9 million) of this accounts receivable factoring facility as of March 31, 2014 and September 30, 2013, respectively. The agreement is subject to standard terms and conditions for these types of arrangements including a sole discretion clause whereby the bank retains the right to not purchase receivables, which has not been invoked since the inception of the program.

12

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


     Italy Factoring Facility: The company has an arrangement to sell trade receivables from AB Volvo and its European subsidiaries through one of its Italian subsidiaries. Under this arrangement, which expires in June 2017, the company can sell up to, at any point in time, €30 million ($41 million) of eligible trade receivables. The receivables under this program are sold at face value and are excluded from the consolidated balance sheet. The company had utilized €10 million ($14 million) of this accounts receivable factoring facility as of March 31, 2014 and September 30, 2013, respectively. The agreement is subject to standard terms and conditions for these types of arrangements including a sole discretion clause whereby the bank retains the right to not purchase receivables, which has not been invoked since the inception of the program.
     In addition, several of the company’s subsidiaries, primarily in Europe, factor eligible accounts receivable with financial institutions. Certain receivables are factored without recourse to the company and are excluded from accounts receivable in the consolidated balance sheet. The amount of factored receivables excluded from accounts receivable was $20 million and $18 million at March 31, 2014 and September 30, 2013, respectively.
Brazil Factoring Facility: The company entered into an arrangement to sell trade receivables from MAN and its subsidiaries. Under this arrangement, which began in October 2013 and is valid for invoices dated no later than March 31, 2014, the company can sell up to, at any point in time, R$100 million ($44 million) of eligible trade receivables. The receivables under this program are sold at face value and are excluded from the consolidated balance sheet. The company had utilized R$56 million ($25 million) of this accounts receivable factoring facility as of March 31, 2014. The agreement is subject to standard terms and conditions for these types of arrangements including a sole discretion clause whereby the bank retains the right to not purchase receivables, which has not been invoked since the inception of the program.
     Total costs associated with all of the off-balance sheet arrangements described above were $5 million and $3 million in the six months ended March 31, 2014 and 2013, respectively, and are included in selling, general and administrative expenses in the consolidated statement of operations.
     On-balance sheet arrangements
The company has a $100 million U.S. accounts receivables securitization facility. On June 21, 2013, the company entered into a one-year extension of the facility expiration date, which after the amendment, expires on June 18, 2016. On October 11, 2013, the company entered into an amendment whereby Market Street Funding, LLC assigned its purchase commitment to PNC Bank National Association (PNC). This program is provided by PNC, as Administrator and Purchaser, and the other Purchasers and Purchaser Agents from time to time (participating lenders), which are party to the agreement. Under this program, the company has the ability to sell an undivided percentage ownership interest in substantially all of its trade receivables (excluding the receivables due from AB Volvo and subsidiaries eligible for sale under the U.S. Factoring Facility) of certain U.S. subsidiaries to ArvinMeritor Receivables Corporation (ARC), a wholly-owned, special purpose subsidiary. ARC funds these purchases with borrowings from participating lenders under a loan agreement. This program also includes a letter of credit facility pursuant to which ARC may request the issuance of letters of credit issued for the company's U.S. subsidiaries (originators) or their designees, which when issued will constitute a utilization of the facility for the amount of letters of credit issued. Amounts outstanding under this agreement are collateralized by eligible receivables purchased by ARC and are reported as short-term debt in the consolidated balance sheet. At March 31, 2014, no amounts, including letters of credit, were outstanding under this program. This program contains a financial covenant related to the company's priority-debt-to-EBITDA ratio, which is 2.00 to 1.00 as of the last day of the fiscal quarter throughout the remaining term of the agreement. At March 31, 2014, the company was in compliance with all covenants under its credit agreement (see Note 16).

13

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


9. Operating Cash Flow
The reconciliation of net income (loss) to cash flows provided by (used for) operating activities is as follows (in millions):
 
Six Months Ended March 31,
 
2014
 
2013
OPERATING ACTIVITIES
 
 
 
Net income (loss)
$
16

 
$
(25
)
Less: Income (loss) from discontinued operations, net of tax
3

 
(5
)
Income (loss) from continuing operations
13

 
(20
)
Adjustments to income (loss) from continuing operations to arrive at cash provided by (used for) operating activities:
 
 
 
Depreciation and amortization
33

 
33

Restructuring costs
3

 
17

Loss on debt extinguishment
21

 
5

Equity in earnings of affiliates
(17
)
 
(19
)
Pension and retiree medical expense
20

 
22

Other adjustments to income (loss) from continuing operations
5

 
7

Dividends received from affiliates
11

 
7

Pension and retiree medical contributions
(19
)
 
(48
)
Restructuring payments
(4
)
 
(12
)
Changes in off-balance sheet accounts receivable factoring
17

 
(44
)
Changes in assets and liabilities, excluding effects of acquisitions, divestitures, foreign currency adjustments and discontinued operations
(60
)
 
(44
)
Operating cash flows provided by (used for) continuing operations
23

 
(96
)
Operating cash flows used for discontinued operations
(5
)
 
(13
)
CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES
$
18

 
$
(109
)

10. 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,
2014
 
September 30,
2013
Finished goods
$
190

 
$
184

Work in process
38

 
32

Raw materials, parts and supplies
208

 
198

Inventories
$
436

 
$
414


14

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


11. Other Current Assets
     Other current assets are summarized as follows (in millions):
 
March 31,
2014
 
September 30,
2013
Current deferred income tax assets
$
22

 
$
23

Asbestos-related recoveries (see Note 19)
12

 
12

Deposits and collateral
5

 
4

Prepaid and other
19

 
17

Other current assets
$
58

 
$
56

12. Net Property
     Net property is summarized as follows (in millions):
 
March 31,
2014
 
September 30,
2013
Property at cost:
 
 
 
Land and land improvements
$
34

 
$
35

Buildings
242

 
239

Machinery and equipment
919

 
915

Company-owned tooling
155

 
152

Construction in progress
49

 
48

Total
1,399

 
1,389

Less: Accumulated depreciation
(989
)
 
(972
)
Net property
$
410

 
$
417

13. Other Assets
     Other assets are summarized as follows (in millions):
 
March 31,
2014
 
September 30,
2013
Investments in non-consolidated joint ventures
$
111

 
$
102

Asbestos-related recoveries (see Note 19)
59

 
59

Non-current deferred income tax assets, net
9

 
13

Unamortized debt issuance costs
33

 
32

Capitalized software costs, net
26

 
28

Prepaid pension costs
60

 
55

Other
41

 
46

Other assets
$
339

 
$
335

In accordance with FASB ASC Topic 350-40, costs relating to internally developed or purchased software in the preliminary project stage and the post-implementation stage are expensed as incurred. Costs in the application development stage that meet the criteria for capitalization are capitalized and amortized using the straight-line basis over the estimated economic useful life of the software.

15

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


The company holds a variable interest in a joint venture accounted for under the equity method of accounting. The joint venture manufactures components for commercial vehicle applications primarily on behalf of the company. The variable interest relates to a supply arrangement between the company and the joint venture whereby the company supplies certain components to the joint venture on a cost-plus basis. The company is not the primary beneficiary of the joint venture, as the joint venture partner has shared or absolute control over key manufacturing operations, labor relationships, financing activities and certain other functions of the joint venture. Therefore, the company does not consolidate the joint venture. At March 31, 2014, the company’s investment in the joint venture was $39 million representing the company’s maximum exposure to loss. This amount is included in investments in non-consolidated joint ventures in the table above.
14. Other Current Liabilities
     Other current liabilities are summarized as follows (in millions):
 
March 31,
2014
 
September 30,
2013
Compensation and benefits
$
137

 
$
141

Income taxes
17

 
8

Taxes other than income taxes
49

 
47

Accrued interest
15

 
16

Product warranties
24

 
20

Restructuring (see Note 6)
7

 
9

Asbestos-related liabilities (see Note 19)
18

 
18

Indemnity obligations (see Note 19)
12

 
12

Other
66

 
68

Other current liabilities
$
345

 
$
339


The company records estimated product warranty costs at the time of shipment of products to customers. Warranty reserves are primarily based on factors that include past claims experience, sales history, product manufacturing and engineering changes and industry developments. Liabilities for product recall campaigns are recorded at the time the company’s obligation is probable and can be reasonably estimated. Policy repair actions to maintain customer relationships are recorded as other liabilities at the time an obligation is probable and can be reasonably estimated. Product warranties, including recall campaigns, not expected to be paid within one year are recorded as a non-current liability.
A summary of the changes in product warranties is as follows (in millions):
 
Six Months Ended March 31,
 
2014
 
2013
Total product warranties – beginning of period
$
57

 
$
44

Accruals for product warranties
9

 
12

Payments
(12
)
 
(8
)
Change in estimates and other
3

 
(2
)
Total product warranties – end of period
57

 
46

Less: Non-current product warranties
(33
)
 
(29
)
Product warranties – current
$
24

 
$
17


16

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


15. Other Liabilities
Other liabilities are summarized as follows (in millions):
 
March 31,
2014
 
September 30,
2013
Asbestos-related liabilities (see Note 19)
$
96

 
$
96

Restructuring (see Note 6)
3

 
3

Non-current deferred income tax liabilities
102

 
100

Liabilities for uncertain tax positions
11

 
17

Product warranties (see Note 14)
33

 
37

Environmental
10

 
11

Indemnity obligations
20

 
26

Other
41

 
45

Other liabilities
$
316

 
$
335

16. Long-Term Debt
     Long-Term Debt, net of discounts where applicable, is summarized as follows (in millions):
 
March 31,
2014
 
September 30,
2013
8.125 percent notes due 2015
$
84

 
$
84

10.625 percent notes due 2018 (net of issuance discount of $3)

 
247

4.625 percent convertible notes due 2026 (1)
55

 
55

4.0 percent convertible notes due 2027 (1)
200

 
200

7.875 percent convertible notes due 2026 (net of issuance discount of $22 and $23, respectively) (1)
228

 
227

6.75 percent notes due 2021 (2)
275

 
275

6.25 percent notes due 2024 (2)
225

 

Term loan

 
45

Capital lease obligation
28

 
28

Other borrowings
31

 
18

Unamortized gain on interest rate swap termination
2

 
2

Unamortized discount on convertible notes
(40
)
 
(43
)
Subtotal
1,088

 
1,138

Less: current maturities
(6
)
 
(13
)
Long-term debt
$
1,082

 
$
1,125

(1)The 4.625 percent, 4.0 percent and 7.875 percent convertible notes contain a put and call feature, which allows for earlier redemption beginning in 2016, 2019 and 2020, respectively.
(2) The 6.75 percent and 6.25 percent notes contain a call option, which allows for early redemption.
Revolving Credit Facility
On February 13, 2014, the company amended and restated its revolving credit facility. Pursuant to the revolving credit agreement as amended, the company has a $499 million revolving credit facility, $89 million of which matures in April 2017 for banks not electing to extend their commitments under the revolving credit facility, and $410 million of which matures in February 2019. The availability under this facility is dependent upon various factors, including performance against certain financial covenants as highlighted below.


17

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


  The availability under the revolving credit facility is subject to certain financial covenants based on (i) the ratio of the company's priority debt (consisting principally of amounts outstanding under the revolving credit facility, U.S. accounts receivable securitization and factoring programs, and third-party non-working capital foreign debt) to EBITDA and (ii) the amount of annual capital expenditures. The company is required to maintain a total priority-debt-to-EBITDA ratio, as defined in the agreement, of 2.25 to 1.00 as of the last day of the fiscal quarter throughout the term of the agreement. At March 31, 2014, the company was in compliance with all covenants under the revolving credit facility with a ratio of approximately 0.34x for the priority debt-to-EBITDA covenant.
     Availability under the revolving credit facility is also subject to a collateral test, pursuant to which borrowings on the revolving credit facility cannot exceed 1.0x the collateral test value. The collateral test is performed on a quarterly basis. At March 31, 2014, the revolving credit facility was collateralized by approximately $604 million of the company's assets, primarily consisting of eligible domestic U.S. accounts receivable, inventory, plant, property and equipment, intellectual property and the company's investment in all or a portion of certain of its wholly-owned subsidiaries.
     Borrowings under the revolving credit facility are subject to interest based on quoted LIBOR rates plus a margin and a commitment fee on undrawn amounts, both of which are based upon the company's current corporate credit rating for senior secured facilities. At March 31, 2014, the margin over LIBOR rate was 350 basis points, and the commitment fee was 50 basis points. Overnight revolving credit loans are at the prime rate plus a margin of 250 basis points.
Certain of the company's subsidiaries, as defined in the revolving credit agreement, irrevocably and unconditionally guarantee amounts outstanding under the revolving credit facility. Similar subsidiary guarantees are provided for the benefit of the holders of the notes outstanding under the company's indentures (see Note 22).
No borrowings were outstanding under the revolving credit facility at March 31, 2014 and September 30, 2013. The amended and extended revolving credit facility includes $100 million of availability for the issuance of letters of credit. At March 31, 2014 and September 30, 2013, there were no letters of credit outstanding under the revolving credit facility.

Term Loan
     On February 13, 2014, the company repaid the outstanding balance on the term loan of $41 million and recognized a $2 million loss on the repayment associated with unamortized debt issuance costs.
Debt Securities
In February 2012, the company filed a shelf registration statement with the Securities and Exchange Commission, which was amended in November 2012, registering up to $750 million of debt and/or equity securities that may be offered in one or more series on terms to be determined at the time of sale. The amount remaining at March 31, 2014 is $250 million.
Issuance of Debt Securities - 2024 Notes
On February 13, 2014, the company completed an offering of debt securities consisting of the issuance of $225 million of 10-year, 6.25 percent notes due February 15, 2024 (the "2024 Notes"). The offering and sale were made pursuant to an existing indenture dated as of April 1, 1998. The 2024 Notes were issued at 100 percent of their principal amount. The proceeds from the sale of the 2024 Notes were $225 million and were primarily used to redeem the company’s previously outstanding $250 million 10.625 percent notes due 2018.
The 2024 Notes mature on February 15, 2024 and bear interest at a fixed rate of 6.25 percent per annum. The company pays interest on the 2024 Notes semi-annually, in arrears, on February 15 and August 15 of each year. The 2024 Notes constitute senior unsecured obligations of the company and rank equally in right of payment with existing and future senior unsecured indebtedness, and effectively junior to existing and future secured indebtedness to the extent of the security therefor. The 2024 Notes are guaranteed on a senior unsecured basis by each of the company's subsidiaries from time to time guaranteeing its senior secured credit facility. The guarantees rank equally with existing and future senior unsecured indebtedness of the guarantors and will be 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.

18

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


Prior to February 15, 2019, the company may redeem, at its option, from time to time, the 2024 Notes, in whole or in part, at a redemption price equal to 100 percent of the principal amount of the 2024 Notes to be redeemed plus an applicable premium (as defined in the indenture under which the 2024 Notes were issued) and any accrued and unpaid interest. On or after February 15, 2019, the company may redeem, at its option, from time to time, the 2024 Notes, in whole or in part, at the redemption prices (expressed as percentages of the principal amount of the 2024 Notes to be redeemed) set forth below, plus accrued and unpaid interest, if any, if redeemed during the 12-month period beginning on February 15 of the years indicated below:
Year
     
Redemption Price
2019
 
103.125%
2020
 
102.083%
2021
 
101.042%
2022 and thereafter
 
100.000%
Prior to February 15, 2017, the company also may redeem, at its option, from time to time, up to 35 percent of the aggregate principal amount of the 2024 Notes with the net cash proceeds of one or more public sales of the company's common stock at a redemption price equal to 106.25 percent of the principal amount, plus accrued and unpaid interest, if any, so long as at least 65 percent of the aggregate principal amount of 2024 Notes originally issued 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 indenture under which the 2024 Notes were issued) occurs, unless the company has exercised its right to redeem the 2024 Notes, each holder of 2024 Notes may require the company to repurchase some or all of such holder's 2024 Notes at a purchase price equal to 101 percent of the principal amount of the 2024 Notes to be repurchased, plus accrued and unpaid interest, if any.
Repurchase of Debt Securities
On March 15, 2014, the company exercised a call option on its 10.625 percent notes due March 15, 2018. The notes were redeemed at a premium of 5.313 percent of their principal amount. The repurchase of $250 million of 10.625 percent notes was accounted for as an extinguishment of debt and, accordingly, the company recognized a net loss on debt extinguishment of $19 million, which consist of $6 million of unamortized discount and deferred issuance costs, and $13 million of premium. The net loss on debt extinguishment is included in interest expense, net in the consolidated statement of operations.
2013 Convertible Senior Unsecured Notes
In December 2012, the company issued $250 million of 7.875 percent convertible senior unsecured notes due 2026 (the “2013 Convertible Notes”). The 2013 Convertible Notes were sold by the company to qualified institutional buyers in a private placement exempt from the registration requirements of the Securities Act of 1933. The 2013 Convertible Notes have an initial principal amount of $900 per note and will accrete to $1,000 per note on December 1, 2020 at an effective interest rate of 10.9 percent. Net proceeds received by the company, after issuance costs and discounts, were approximately $220 million.
The company pays 7.875 percent cash interest on the principal amount at maturity of the 2013 Convertible Notes semi-annually in arrears on June 1 and December 1 of each year to holders of record at the close of business on the preceding May 15 and November 15, respectively, and at maturity to the holders that present the 2013 Convertible Notes for payment. Interest accrues on the principal amount at maturity thereof from and including the date the 2013 Convertible Notes are issued or from, and including, the last date in respect of which interest has been paid or provided for, as the case may be, to, but excluding, the next interest payment date.
The 2013 Convertible Notes are fully and unconditionally guaranteed on a senior unsecured basis by certain of the company's subsidiaries. The 2013 Convertible Notes are senior unsecured obligations and rank equally in right of payment with all of the company's existing and future senior unsecured indebtedness and are junior to any of the company existing and future secured indebtedness.
The 2013 Convertible Notes will be convertible in certain circumstances into cash up to the principal amount at maturity of the 2013 Convertible Notes surrendered for conversion and, if applicable, shares of the company's common stock (subject to a conversion share cap as described below), based on an initial conversion rate, subject to adjustment, equivalent to 83.3333 shares per $1,000 principal amount at maturity of 2013 Convertible Notes (which represents an initial conversion price of $12.00 per share), only under the following circumstances:

19

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


(1) Prior to June 1, 2025, during any calendar quarter after the calendar quarter ending December 31, 2012, if the closing sale price of the Company's common stock for 20 or more trading days in a period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter exceeds 120 percent of the applicable conversion price in effect on the last trading day of the immediately preceding calendar quarter;
(2) Prior to June 1, 2025, during the five business day period after any five consecutive trading day period in which the trading price per $1,000 principal amount at maturity of 2013 Convertible Notes was equal to or less than 97 percent of the conversion value of the 2013 Convertible Notes on each trading day during such five consecutive trading day period;
(3) Prior to June 1, 2025, if the company has called the 2013 Convertible Notes for redemption;
(4) Prior to June 1, 2025, upon the occurrence of specified corporate transactions; or
(5) At any time on or after June 1, 2025.
On or after December 1, 2020, the company may redeem the 2013 Convertible Notes at its option, in whole or in part, at a redemption price in cash equal to 100 percent of the principal amount at maturity of the 2013 Convertible Notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date. Further, holders may require the company to purchase all or a portion of their 2013 Convertible Notes at a purchase price in cash equal to 100 percent of the principal amount at maturity of the 2013 Convertible Notes to be purchased, plus accrued and unpaid interest, on December 1, 2020 or upon certain fundamental changes. The maximum number of shares of common stock those 2013 Convertible Notes are convertible into is 19,208,404 shares.
The company used the net proceeds of approximately $220 million from the offering of the 2013 Notes (after discounts and issuance costs) and additional cash to acquire a portion of its outstanding 4.625 percent convertible senior notes due 2026 (the “4.625 percent notes”) in transactions that settled concurrently with the closing of the 2013 Convertible Note offering. Approximately $245 million of $300 million principal amount of the 4.625 percent notes were acquired for an aggregate purchase price of approximately $236 million (including accrued interest). The company recognized a loss on debt extinguishment of $5 million.
Accounting guidance requires that cash-settled convertible debt, such as the company's 2013 Convertible Notes be separated into debt and equity components at issuance and a value be assigned to each. The value assigned to the debt component is the estimated fair value, as of the issuance date, of a similar bond without the conversion feature. The difference between the bond cash proceeds and this estimated fair value, representing the value assigned to the equity component, is recorded as a debt discount. The company measures the debt component at fair value by utilizing a discounted cash flow model. This model utilizes observable inputs such as contractual repayment terms, benchmark forward yield curves, and yield curves and quoted market prices of its own nonconvertible debt. The yield curves are acquired from an independent source that is widely used in the financial industry and reviewed internally by personnel with appropriate expertise in valuation methodologies. The estimated fair value of the debt component of the Notes was $216 million (Level 2). The amount of the equity component recognized was $9 million.
Capital Leases
     On March 20, 2012, the company entered into an arrangement to finance equipment acquisitions for various U.S. locations. Under this arrangement, the company can request financing from GE Capital Commercial, Inc. (GE Capital) for progress payments for equipment under construction, not to exceed $10 million at any point in time. The financing rate is equal to the 30-day LIBOR plus 475 basis points per annum. Under this arrangement, the company can also enter into lease arrangements with GE Capital for completed equipment. The lease term is 60 months and the lease interest rate is equal to the 5-year Swap Rate published by the Federal Reserve Board plus 564 basis points. As of March 31, 2014, the company had $28 million outstanding under these and other capital lease arrangements.

20

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


Letter of Credit Facilities
On February 21, 2014, the company entered into an arrangement to amend and restate the letter of credit facility with Citicorp USA, Inc., as administrative agent and issuing bank, and the other lenders party thereto. Under the terms of this amended credit agreement, the company has the right to obtain the issuance, renewal, extension and increase of letters of credit up to an aggregate availability of $30 million through December 19, 2015. From December 20, 2015 through March 19, 2019 the aggregate availability is $25 million. This facility contains covenants and events of default generally similar to those existing in our public debt indentures. There were $26 million and $27 million of letters of credit outstanding under this facility at March 31, 2014 and September 30, 2013, respectively. In addition, the company had another $10 million and $9 million of letters of credit outstanding through other letter of credit facilities at March 31, 2014 and September 30, 2013, respectively.
17. Financial Instruments
     Fair values of financial instruments are summarized as follows (in millions):
 
March 31,
2014
 
September 30,
2013
 
Carrying
Value
 
Fair
Value
 
Carrying
Value
 
Fair
Value
Cash and cash equivalents
$
233

 
$
233

 
$
318

 
$
318

Short-term debt
6

 
6

 
13

 
13

Long-term debt
1,082

 
1,312

 
1,125

 
1,266

Foreign exchange forward contracts (asset)
1

 
1

 

 

Foreign exchange forward contracts (liability)

 

 
1

 
1


The following table reflects the offsetting of derivative assets and liabilities (in millions):
 
March 31, 2014
 
September 30, 2013
 
Gross
Amounts Recognized
 
Gross Amounts
Offset
 
Net Amounts
Reported
 
Gross
Amounts Recognized
 
Gross Amounts
Offset
 
Net Amounts
Reported
Derivative Asset
 
 
 
 
 
 
 
 
 
 
 
Foreign exchange forward contract
1

 

 
1

 

 

 

Derivative Liabilities
 
 
 
 
 
 
 
 
 
 
 
Foreign exchange forward contract

 

 

 
1

 

 
1


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

Level 3 inputs are unobservable inputs, including inputs that are available in situations where there is little, if any, market activity for the related instrument.

21

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


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 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, 2014 is as follows (in millions):
 
Level 1
 
Level 2
 
Level 3
Cash and cash equivalents
$
233

 
$

 
$

Short-term debt

 

 
6

Long-term debt

 
1,259

 
53

Foreign exchange forward contracts (asset)

 
1

 

Foreign exchange forward contracts (liability)

 

 


Cash and cash equivalents — All highly liquid investments purchased with an original maturity of three months or less are considered to be cash equivalents. The carrying value approximates fair value because of the short maturity of these instruments. The company did not have any cash equivalents at March 31, 2014 or September 30, 2013.
     Short- and Long-term debt — Fair values are based on transaction prices at public exchange for publicly traded debt. For debt instruments that are not publicly traded, fair values are based on interest rates that would be currently available to the company for issuance of similar types of debt instruments with similar terms and remaining maturities.
Foreign exchange forward contracts — The company uses foreign exchange forward purchase and sale contracts with terms of one year or less to hedge its exposure to changes in foreign currency exchange rates. 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.
18. Retirement Benefit Liabilities
     Retirement benefit liabilities consisted of the following (in millions):
 
March 31,
2014
 
September 30,
2013
Retiree medical liability
$
506

 
$
513

Pension liability
391

 
396

Other
19

 
25

Subtotal
916

 
934

Less: current portion (included in compensation and benefits, Note 14)
(48
)
 
(48
)
Retirement benefits
$
868

 
$
886



22

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


The components of net periodic pension and retiree medical expense included in continuing operations for the three months ended March 31 are as follows (in millions):
 
2014
 
2013
 
Pension
 
Retiree Medical
 
Pension
 
Retiree Medical
Service cost
$

 
$

 
$

 
$
1

Interest cost
20

 
7

 
22

 
5

Assumed return on plan assets
(26
)
 

 
(28
)
 

Amortization of prior service costs

 
(2
)
 

 
(2
)
Recognized actuarial loss
6

 
5

 
6

 
6

Settlement charge

 

 
2

 

Total expense
$

 
$
10

 
$
2

 
$
10


The components of net periodic pension and retiree medical expense included in continuing operations for the six months ended March 31 are as follows (in millions):
 
2014
 
2013
 
Pension
 
Retiree Medical
 
Pension
 
Retiree Medical
Service cost
$

 
$

 
$
1

 
$
1

Interest cost
40

 
13

 
43

 
10

Assumed return on plan assets
(52
)
 

 
(57
)
 

Amortization of prior service costs

 
(4
)
 

 
(4
)
Recognized actuarial loss
12

 
11

 
13

 
13

Settlement charge

 

 
2

 

Total expense
$

 
$
20

 
$
2

 
$
20


19. 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 nine Superfund sites, excluding sites as to which the company’s records disclose no involvement or as to which the company’s liability has been finally determined. Management estimates the total reasonably possible costs the company could incur for the remediation of Superfund sites at March 31, 2014 to be approximately $18 million, of which $2 million is probable and recorded as a liability. Included in reasonably possible amounts are estimates for certain remediation actions that may be required if current actions are deemed inadequate by the regulators.

23

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


     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, 2014 to be approximately $37 million, of which $17 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 0.25 to 3 percent and is approximately $9 million at March 31, 2014. The undiscounted estimate of these costs is approximately $10 million.
     Following are the components of the Superfund and non-Superfund environmental reserves (in millions):
 
Superfund Sites
 
Non-Superfund Sites
 
Total
Beginning balance at September 30, 2013
$
2

 
$
17

 
$
19

Payments and other

 
(3
)
 
(3
)
Accruals

 
3

 
3

Balance at March 31, 2014
$
2

 
$
17

 
$
19


Environmental reserves are included in Other Current Liabilities (see Note 14) and Other Liabilities (see Note 15) in the 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.
Asset Retirement Obligations
The company has identified conditional asset retirement obligations for which a reasonable estimate of fair value could not be made because the potential settlement dates cannot be determined at this time. Due to the long term, productive nature of the company’s manufacturing operations, absent plans or expectations of plans to initiate asset retirement activities, the company was not able to reasonably estimate the settlement date for the related obligations. Therefore, the company has not recognized conditional asset retirement obligations for which there are no plans or expectations of plans to retire the asset.
Asbestos
     Maremont Corporation (“Maremont”), a subsidiary of Meritor, manufactured friction products containing asbestos from 1953 through 1977, when it sold its friction product business. Arvin Industries, Inc., a predecessor of the company, acquired Maremont in 1986. Maremont and many other companies are defendants in suits brought by individuals claiming personal injuries as a result of exposure to asbestos-containing products. Maremont had approximately 5,700 and 5,400 pending asbestos-related claims at March 31, 2014 and September 30, 2013, respectively. Although Maremont has been named in these cases, in the cases where actual injury has been alleged, very few claimants have established that a Maremont product caused their injuries. Plaintiffs’ lawyers often sue dozens or even hundreds of defendants in individual lawsuits on behalf of hundreds or thousands of claimants, seeking damages against all named defendants irrespective of the disease or injury and irrespective of any causal connection with a particular product. For these reasons, Maremont does not consider the number of claims filed or the damages alleged to be a meaningful factor in determining its asbestos-related liability.

24

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


     Maremont’s asbestos-related reserves and corresponding asbestos-related recoveries are summarized as follows (in millions):
 
March 31,
2014
 
September 30,
2013
Pending and future claims
$
73

 
$
73

Billed but unpaid claims
1

 
1

Asbestos-related liabilities
74

 
74

Asbestos-related insurance recoveries
58

 
58

A portion of the asbestos-related recoveries and reserves are included in Other Current Assets and Liabilities, with the majority of the amounts recorded in Other Assets and Liabilities (see Notes 11, 13, 14 and 15).
         Pending and Future Claims: Maremont engages Bates White LLC (Bates White), a consulting firm with extensive experience estimating costs associated with asbestos litigation, to assist with determining the estimated cost of resolving pending and future asbestos-related claims that have been, and could reasonably be expected to be, filed against Maremont. Bates White prepares these cost estimates annually in September. Although it is not possible to estimate the full range of costs because of various uncertainties, Bates White advised Maremont that it would be possible to determine an estimate of a reasonable forecast of the cost of the probable settlement and defense costs of resolving pending and future asbestos-related claims, based on historical data and certain assumptions with respect to events that may occur in the future.
     Bates White provided an estimate of the reasonably possible range of Maremont's obligation for asbestos personal injury claims over the next ten years of $73 million to $80 million. Management recognized a liability of $73 million as of March 31, 2014 and September 30, 2013, as the most likely and probable liability for pending and future claims over the next ten years. The ultimate cost of resolving pending and future claims is estimated based on the history of claims and expenses for plaintiffs represented by law firms in jurisdictions with an established history with Maremont. Historically, Maremont has recognized incremental insurance receivables associated with recoveries expected for asbestos-related liabilities as the estimate of asbestos-related liabilities for pending and future claim changes. Maremont currently expects to exhaust the limits of its settled insurance coverage prior to the end of the ten-year forecasted liability period. Maremont believes it has additional insurance coverage; however, certain carriers have disputed coverage under policies they issued (see "Recoveries" below). Because no insurance receivable is currently recognized for these policies in dispute, Maremont recognized a $9 million charge in the fourth quarter of fiscal year 2013 associated with its annual valuation of asbestos-related liabilities. If Maremont is unable to recognize recoveries from disputed policies, it is reasonably possible that the annual valuation could result in a charge to be recognized in the fourth quarter of fiscal year 2014.
     Assumptions: The following assumptions were made by Maremont after consultation with Bates White and are included in their study:
Pending and future claims were estimated for a ten-year period ending in fiscal year 2023. The ten-year assumption is considered appropriate as Maremont has reached certain longer-term agreements with key plaintiff law firms, and filings of mesothelioma claims have been relatively stable over the last few years;
Maremont believes that the litigation environment may change significantly beyond ten years and that the reliability of estimates of future probable expenditures in connection with asbestos-related personal injury claims will likely decline for each year further in the future. As a result, estimating a probable liability beyond ten years is difficult and uncertain;
Defense and processing costs for pending and future claims will be at the level consistent with Maremont’s prior experience;
Potential payments made to claimants from other sources, including other defendants and 524(g) trusts favorably impact the company's estimated liability in the future; and
The ultimate indemnity cost of resolving nonmalignant claims with plaintiffs’ law firms in jurisdictions without an established history with Maremont cannot be reasonably estimated.

25

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


Recoveries: Maremont has insurance that reimburses a substantial portion of the costs incurred defending against asbestos-related claims. The insurance receivable related to asbestos-related liabilities is $58 million as of March 31, 2014 and September 30, 2013. The receivable at March 31, 2014 is for coverage provided by two insurance carriers based on coverage in place agreements. Maremont currently expects to exhaust the remaining limits provided by this coverage sometime in the next ten years. Maremont maintained insurance coverage with other insurance carriers that management believes covers indemnity and defense costs. Maremont has incurred liabilities allocable to these policies but has not yet billed these insurance carriers, and no receivable has been recorded for disputed policies. During fiscal year 2013, Maremont reinitiated a lawsuit against these carriers, seeking a declaration of its rights to insurance for asbestos claims and to facilitate an orderly and timely collection of insurance proceeds. The difference between the estimated liability and insurance receivable is primarily related to proceeds received from settled insurance policies and claims for which coverage under Maremont's insurance policies is in dispute with the insurer. Certain insurance policies have been settled in cash prior to the ultimate settlement of the related asbestos liabilities. Amounts received from insurance settlements generally reduce recorded insurance receivables.
     The amounts recorded for the asbestos-related reserves and recoveries from insurance companies are based upon assumptions and estimates derived from currently known facts. All such estimates of liabilities and recoveries for asbestos-related claims are subject to considerable uncertainty because such liabilities and recoveries are influenced by variables that are difficult to predict. The future litigation environment for Maremont could change significantly from its past experience, due, for example, to changes in the mix of claims filed against Maremont in terms of plaintiffs’ law firm, jurisdiction and disease; legislative or regulatory developments; Maremont’s approach to defending claims; or payments to plaintiffs from other defendants. Estimated recoveries are influenced by coverage issues among insurers and the continuing solvency of various insurance companies. If the assumptions with respect to the estimation period, nature of pending and future claims, the cost to resolve claims and the amount of available insurance prove to be incorrect, the actual amount of liability for Maremont’s asbestos-related claims, and the effect on the company, could differ materially from current estimates and, therefore, could have a material impact on the company’s financial condition and results of operations.
     Rockwell International (Rockwell) — ArvinMeritor, Inc. (AM), a subsidiary of Meritor, along with many other companies, has also been named as a defendant in lawsuits alleging personal injury as a result of exposure to asbestos used in certain components of Rockwell products many years ago. Liability for these claims was transferred at the time of the spin-off of the automotive business from Rockwell in 1997. At March 31, 2014 and September 30, 2013, there were approximately 2,800 and 2,600, respectively, pending active asbestos claims in lawsuits that name AM, together with many other companies, as defendants. A significant portion of the claims do not identify any of Rockwell’s products or specify which of the claimants, if any, were exposed to asbestos attributable to Rockwell’s products, and past experience has shown that the vast majority of the claimants will likely never identify any of Rockwell’s products. Historically, AM has been dismissed from the vast majority of similar claims filed in the past with no payment to claimants. For those claimants who do show that they worked with Rockwell’s products, management nevertheless believes it has meritorious defenses, in substantial part due to the integrity of the products involved and the lack of any impairing medical condition on the part of many claimants. For these reasons, the company does not consider the number of claims filed or the damages alleged to be a meaningful factor in determining asbestos-related liabilities.
     The Rockwell legacy asbestos-related reserves and corresponding asbestos-related recoveries are summarized as follows (in millions):
 
March 31,
2014
 
September 30,
2013
Pending and future claims
$
40

 
$
40

Asbestos-related insurance recoveries
13

 
13

The company engages Bates White to assist with determining whether it would be possible to estimate the cost of resolving pending and future Rockwell legacy asbestos-related claims that have been, and could reasonably be expected to be, filed against the company. As of September 30, 2013, Bates White provided an estimate that consisted of a range of equally likely possibilities of Rockwell’s obligation for asbestos personal injury claims over the next ten years of $40 million to $45 million. Management recognized a liability of $40 million as of March 31, 2014 and September 30, 2013, as the most likely and probable liability for pending and future claims over the next ten years. The company is experiencing higher-than-expected defense costs in the first six months of fiscal year 2014. Therefore, the next annual valuation at September 30, 2014, may result in an increased obligation estimate. 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.


26

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


The following assumptions were made by the company after consultation with Bates White and are included in their study:
Pending and future claims were estimated for a ten-year period ending in fiscal year 2023. The ten-year assumption is considered appropriate as Rockwell has reached certain longer-term agreements with key plaintiff law firms, and filings of mesothelioma claims have been relatively stable over the last few years;
The company believes that the litigation environment may change significantly beyond ten years, and that the reliability of estimates of future probable expenditures in connection with asbestos-related personal injury claims will likely decline for each year further in the future. As a result, estimating a probable liability beyond ten years is difficult and uncertain;
Defense and processing costs for pending and future claims will be at the level consistent with the company's longer-term experience and will not have the significant volatility experienced in the recent years;
Potential payments made to claimants from other sources, including other defendants and 524(g) trusts favorably impact the company's estimated liability in the future; and
The ultimate indemnity cost of resolving nonmalignant claims with plaintiff’s law firms in jurisdictions without an established history with Rockwell cannot be reasonably estimated.
The insurance receivable related to asbestos-related liabilities is $13 million at March 31, 2014 and September 30, 2013. Included in these amounts are insurance receivables of $9 million at March 31, 2014 and September 30, 2013 that are associated with policies in dispute. Rockwell maintained insurance coverage that management believes covers indemnity and defense costs, over and above self-insurance retentions, for most of these claims. The company shares these policies with two other nonrelated companies. The three companies have collectively initiated claims against certain of these carriers to enforce the insurance policies, which are in various stages of the litigation process. Rockwell expects to recover some portion of defense and indemnity costs it has incurred to date, over and above self-insured retentions, and some portion of the costs for defending asbestos claims going forward. The amounts recognized for policies in dispute are based on consultation with advisors, status of settlement negotiations with certain insurers, expected rights of the nonrelated companies, and underlying analysis performed by management. The remaining un-disputed receivable recognized is related to coverage provided by one carrier based on an insurance agreement in place. If the assumptions with respect to the estimation period, nature of pending claims, the cost to resolve claims and the amount of available insurance prove to be incorrect, the actual amount of liability for Rockwell asbestos-related claims, and the effect on the company, could differ materially from current estimates and, therefore, could have a material impact on the company’s financial condition and results of operations.     
Indemnifications
In December 2005, the company guaranteed a third party’s obligation to reimburse another party for payment of health and prescription drug benefits to a group of retired employees. The retirees were former employees of a wholly-owned subsidiary of the company prior to it being acquired by the company. The wholly-owned subsidiary, which was part of the company’s light vehicle aftermarket business, was sold by the company in fiscal year 2006. Prior to May 2009, except as set forth hereinafter, the third party met its obligations to reimburse the other party. In May 2009, the third party filed for bankruptcy protection under Chapter 11 of the U.S. Bankruptcy Code requiring the company to recognize its obligations under the guarantee. The company recorded a $28 million liability in fiscal year 2009 for this matter. At March 31, 2014 and September 30, 2013, the remaining estimated liability for this matter was approximately $15 million and $17 million, respectively.
     The company has provided indemnifications in conjunction with certain transactions, primarily divestitures. These indemnities address a variety of matters, which may include environmental, tax, asbestos and employment-related matters, and the periods of indemnification vary in duration.
On January 3, 2011, the company completed the sale of its Body Systems business. The sale agreement contains certain customary representations, warranties and covenants of the seller and the purchaser. The agreement also includes provisions governing post-closing indemnities between the seller and the purchaser for losses arising from specified events. At March 31, 2014 and September 30, 2013 the company has recognized estimates for such indemnities, primarily related to income tax matters, of $2 million and $3 million, respectively. This amount is included in other liabilities in the accompanying condensed consolidated balance sheet.
In connection with the sale of its interest in Meritor Suspension Systems Company in October 2009, the company provided certain indemnifications to the buyer for its share of potential obligations related to pension funding shortfall, environmental and other contingencies, and valuation of certain accounts receivable and inventories. The company's estimated exposure under these indemnities at March 31, 2014 and September 30, 2013 is approximately $8 million and $11 million, respectively, and is included in other current liabilities and other liabilities in the condensed consolidated balance sheet.

27

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


The company is not aware of any other claims or other information that would give rise to material payments under such indemnifications.
Other
As a result of performing ongoing product conformance testing in the ordinary course of business, the company identified a non-safety related, potential product performance issue arising from a defective supplier component. During fiscal year 2013, the company notified all major customers and initiated a campaign. Management estimated the total reasonably possible costs the company could incur to be in the range of $12 million to $20 million, of which $12 million was considered probable and recorded as a specific warranty contingency reserve (see Note 14). No field failures have been identified in the early stages of testing, and the program has shifted to collecting defective components from higher mileage and severe duty applications to facilitate a reliability and survivability test. In the fourth quarter of fiscal 2013, the company received $5 million of non-cash cost recovery from the component supplier.
The company is evaluating certain sale transactions to determine if value added tax was required to be remitted to certain tax jurisdictions for the tax years 2007 through 2012. The company's estimated reasonably possible exposure for this matter is $6 million to $9 million. The company recorded approximately $6 million as its estimate of the probable liability at March 31, 2014 and September 30, 2013.
In the fourth quarter of fiscal year 2013, the company identified additional sales transactions for which value added tax was required to be remitted. The company recorded a $5 million liability primarily associated with tax years 2009 through 2013.
In addition, various lawsuits, claims and proceedings, other than those specifically disclosed in the 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. 
20. Accumulated Other Comprehensive Loss (AOCL)
     AOCL and the changes in AOCL by components, net of tax are as follows (in millions):
 
Foreign Currency Translation
 
Employee Benefit Related Adjustments
 
Unrealized Loss, net of tax
 
Total
Balance at September 30, 2013
$
61

 
$
(792
)
 
$
(3
)
 
$
(734
)
Other comprehensive income before reclassification

 
2

 
2

 
4

Amounts reclassified from accumulated other comprehensive loss - net of tax

 
18

 

 
18

Net current-period other comprehensive income
$

 
$
20

 
$
2

 
$
22

Balance at March 31, 2014
$
61

 
$
(772
)
 
$
(1
)
 
$
(712
)


28

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


 
Details about Accumulated Other Comprehensive Income Components
 
Amount Reclassified from Accumulated Other Comprehensive Income
 
Affected Line Item in the Consolidated Statement of Operations
 
Employee Benefit Related Adjustment
 
 
 
 
 
Prior service costs
 
$
(4
)
 
(a) 
 
Acturial losses
 
23

 
(a) 
 
 
 
19

 
Total before tax
 
 
 
(1
)
 
Tax benefit
 
 
 
18

 
Net of tax
 
 
 
 
 
 
 
Total reclassifications for the period
 
$
18

 
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 18 for additional details).
 

21. Business Segment Information
The company defines its operating segments as components of its business where separate financial information is available and is evaluated regularly by the chief operating decision maker (CODM) in deciding how to allocate resources and in assessing performance. The company’s CODM is the Chief Executive Officer.
      The company has two reportable segments at March 31, 2014, as follows:
The Commercial Truck & Industrial segment supplies drivetrain systems and components, including axles, drivelines and braking and suspension systems, primarily for medium- and heavy-duty trucks, military, construction, bus and coach, fire and emergency and other applications in North America, South America, Europe and Asia Pacific. This segment also includes the company's aftermarket businesses in Asia Pacific and South America; and
The Aftermarket & Trailer segment supplies axles, brakes, drivelines, suspension parts and other replacement and remanufactured parts, including transmissions, to commercial vehicle aftermarket customers. This segment also supplies a wide variety of undercarriage products and systems for trailer applications in North America.

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

29

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


     Segment information is summarized as follows (in millions):
 
Commercial Truck
& Industrial
 
Aftermarket
& Trailer
 
Eliminations
 
Total
Three Months Ended March 31, 2014
 
 
 
 
 
 
 
External Sales
$
736

 
$
226

 
$

 
$
962

Intersegment Sales
27

 
6

 
(33
)
 

Total Sales
$
763

 
232

 
$
(33
)
 
$
962

Three Months Ended March 31, 2013
 
 
 
 
 
 
 
External Sales
$
689

 
$
219

 
$

 
$
908

Intersegment Sales
23

 
5

 
(28
)
 

Total Sales
$
712

 
224

 
$
(28
)
 
$
908

 
Commercial
 Truck
 
Aftermarket &
 Trailer
 
Eliminations
 
Total
Six Months Ended March 31, 2014
 
 
 
 
 
 
 
External Sales
$
1,439

 
$
430

 
$

 
$
1,869

Intersegment Sales
51

 
10

 
(61
)
 

Total Sales
$
1,490

 
$
440

 
$
(61
)
 
$
1,869

Six Months Ended March 31, 2013
 
 
 
 
 
 
 
External Sales
$
1,383

 
$
416

 
$

 
$
1,799

Intersegment Sales
44

 
11

 
(55
)
 

Total Sales
$
1,427

 
$
427

 
$
(55
)
 
$
1,799


 
Three Months Ended March 31,
 
Six Months Ended March 31,
 
2014
 
2013
 
2014
 
2013
Segment EBITDA:
 
 
 
 
 
 
 
Commercial Truck & Industrial
$
57

 
$
37

 
$
110

 
$
71

Aftermarket & Trailer
22

 
22

 
41

 
35

Segment EBITDA
79


59


151

 
106

Unallocated legacy and corporate costs, net (1)
(1
)
 
(1
)
 
(3
)
 
(2
)
Interest expense, net
(48
)
 
(25
)
 
(75
)
 
(54
)
Provision for income taxes
(9
)
 
(7
)
 
(19
)
 
(17
)
Depreciation and amortization
(17
)
 
(17
)
 
(33
)
 
(33
)
Noncontrolling interests
(2
)
 

 
(4
)
 

Loss on sale of receivables
(2
)
 
(2
)
 
(5
)
 
(3
)
Restructuring costs
(2
)
 
(11
)
 
(3
)
 
(17
)
Income (loss) from continuing operations attributable to Meritor, Inc.
$
(2
)

$
(4
)

$
9

 
$
(20
)

(1)
Unallocated legacy and corporate costs, net represents items that are not directly related to our business segments and primarily include pension and medical costs associated with sold business and other legacy costs for environmental and product liability.

30

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


Segment Assets:
March 31,
2014
 
September 30,
2013
Commercial Truck & Industrial
$
1,882

 
$
1,822

Aftermarket & Trailer
498

 
485

Total segment assets
2,380

 
2,307

Corporate(1)
473

 
568

Less: Accounts receivable sold under off-balance sheet factoring programs(2)
(322
)
 
(305
)
Total assets
$
2,531

 
$
2,570


(1) 
Corporate assets consist primarily of cash, deferred income taxes and prepaid pension costs.
(2) 
At March 31, 2014 and September 30, 2013 segment assets include $322 million and $305 million, respectively, of accounts receivable sold under off-balance sheet accounts receivable factoring programs (See Note 8). These sold receivables are included in segment assets as the CODM reviews segment assets inclusive of these balances.

31

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


22. Supplemental Guarantor Condensed Consolidating Financial Statements
Article 3-10 of Regulation S-X (S-X Rule 3-10) requires that separate financial information for issuers and guarantors of registered securities be filed in certain circumstances. Certain of the company's 100% owned subsidiaries, as defined in the credit agreement (the Guarantors), irrevocably and unconditionally guarantee amounts outstanding under the senior secured revolving credit facility. Similar subsidiary guarantees were provided for the benefit of the holders of the notes outstanding under the company's indentures (see Note 16).
Article 5-04 of Regulation S-X (S-X Rule 5-04) requires that condensed financial information of the registrant (parent) be filed when the restricted net assets of consolidated subsidiaries exceed 25 percent of consolidated net assets as of the end of the most recently completed fiscal year.
In lieu of providing separate audited financial statements for the parent and guarantors, the company has included the accompanying condensed consolidating financial statements as permitted by S-X Rules 3-10 and 5-04. These condensed consolidating financial statements are presented on the equity method. Under this method, the investments in subsidiaries are recorded at cost and adjusted for the parent's share of the subsidiary's cumulative results of operations, capital contributions and distribution and other equity changes. The Guarantors are combined in the condensed consolidated financial statements. Certain subsidiaries in China and India are restricted by law from transfer of cash by dividends, loans or advances to parent. As of March 31, 2014 the company’s proportionate share of net assets restricted from transfer by law was $41 million.

32

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


 
Three Months Ended March 31, 2014
 
Parent
 
Guarantors
 
Non-
Guarantors
 
Elims
 
Consolidated
Sales
 
 
 
 
 
 
 
 
 
External
$