10-K


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION 
Washington, D.C. 20549 
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended September 27, 2015
Commission file number 1-15983
______________________________
MERITOR, INC.
(Exact name of registrant as specified in its charter)
Indiana
 
38-3354643
(State or other jurisdiction of incorporation
or organization)
 
(I.R.S. Employer
identification no)
 
 
 
2135 West Maple Road
Troy, Michigan
 
48084-7186
(Address of principal executive offices)
 
(Zip Code)
Registrant’s telephone number, including area code: (248) 435-1000
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Title of each class
 
Name of each exchange on which registered
Common Stock, $1 Par Value
 
New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None
Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes [ X ]       No [  ]
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes [    ]       No [ X ]
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 Regulation 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X ]
     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 definitions of “accelerated filer”, “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
ý
 
Accelerated filer
¨
 
 
 
 
 
Non-accelerated filer
¨
(Do not check if a smaller reporting company)
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 ]
     The aggregate market value of the registrant’s voting and non-voting common equity held by non-affiliates of the registrant on March 27, 2015 (the last business day of the most recently completed second fiscal quarter) was approximately $1,163,098,759
92,874,694 shares of the registrant’s Common Stock, par value $1 per share, were outstanding on November 16, 2015.
DOCUMENTS INCORPORATED BY REFERENCE
     Certain information contained in the definitive Proxy Statement for the Annual Meeting of Shareowners of the registrant to be held on January 28, 2016 is incorporated by reference into Part III.




 
 
 
Page
 
 
 
No.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

ii



PART I


 
Item 1. Business.
 
Overview
 
Meritor, Inc., ("we", "us", or "our"), 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. We serve commercial truck, trailer, military, bus and coach, construction, and other industrial OEMs and certain aftermarkets. Our principal products are axles, undercarriages, drivelines, brakes and braking systems.
 
Meritor was incorporated in Indiana in 2000 in connection with the merger of Meritor Automotive, Inc. and Arvin Industries, Inc. As used in this Annual Report on Form 10-K, the terms "company," "Meritor," "we," "us" and "our" include Meritor, its consolidated subsidiaries and its predecessors unless the context indicates otherwise.
 
Meritor serves a broad range of customers worldwide, including medium- and heavy-duty truck OEMs, specialty vehicle manufacturers, certain aftermarkets, and trailer producers. Our total sales from continuing operations in fiscal year 2015 were approximately $3.5 billion. Our ten largest customers accounted for approximately 75 percent of fiscal year 2015 sales from continuing operations. Sales from operations outside the United States (U.S.) accounted for approximately 51 percent of total sales from continuing operations in fiscal year 2015. Our continuing operations also participated in 5 unconsolidated joint ventures, which we accounted for under the equity method of accounting and that generated revenues of approximately $1.3 billion in fiscal year 2015.
 
Our fiscal year ends on the Sunday nearest to September 30. Fiscal year 2015 ended on September 27, 2015, fiscal year 2014 ended on September 28, 2014 and fiscal year 2013 ended on September 29, 2013. All year and quarter references relate to our fiscal year and fiscal quarters unless otherwise stated. For ease of presentation, September 30 is utilized consistently throughout this report to represent the fiscal year end.
 
Whenever an item in this Annual Report on Form 10-K refers to information under specific captions in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations or Item 8. Financial Statements and Supplementary Data, the information is incorporated in that item by reference.
 
References in this Annual Report on Form 10-K to our belief that we are a leading supplier or the world's leading supplier, and other similar statements as to our relative market position are based principally on calculations we have made. These calculations are based on information we have collected, including company and industry sales data obtained from internal and available external sources as well as our estimates. In addition to such quantitative data, our statements are based on other competitive factors such as our technological capabilities, our engineering, research and development efforts, and our innovative solutions as well as the quality of our products and services, in each case relative to that of our competitors in the markets we address.

Our Business
 
Our reporting segments are as follows:
The Commercial Truck & Industrial segment supplies drivetrain systems and components, including axles, drivelines and braking and suspension systems, for medium- and heavy-duty trucks, off-highway, 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 to commercial vehicle aftermarket customers in North America and Europe. This segment also supplies a wide variety of undercarriage products and systems for trailer applications in North America.
See Note 24 of the Notes to Consolidated Financial Statements under Item 8. Financial Statements and Supplementary Data for financial information by segment for continuing operations for each of the three years ended September 30, 2015, including information on sales and assets by geographic area. The heading "Products" below includes information on certain product sales for each of the three fiscal years ended September 30, 2015.
 

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Business Strategies
 
We are currently a premier global supplier of a broad range of integrated systems, modules and components to OEMs and the aftermarket for the commercial vehicle, transportation and industrial sectors, and we believe we have market-leading positions as a leader in many of the markets we serve. We are working to enhance our leadership positions and capitalize on our existing customer, product and geographic strengths.    For additional market related discussion, see the Trends and Uncertainties section in Item 7.
Our business continues to address a number of other challenging industry-wide issues including the following:
Uncertainty around the global market outlook;
Volatility in price and availability of steel, components and other commodities;
Disruptions in the financial markets and their impact on the availability and cost of credit;
Volatile energy and increasing transportation costs;
Impact of currency exchange rate volatility;
Consolidation and globalization of OEMs and their suppliers; and
Significant pension and retiree medical health care costs.

Other
 
Other significant factors that could affect our results and liquidity in fiscal year 2016 and beyond include:
Significant contract awards or losses of existing contracts or failure to negotiate acceptable terms in contract renewals;
Failure to obtain new business;
Ability to manage possible adverse effects on our European operations, or financing arrangements related thereto, in the event one or more countries exit the European monetary union;
Our ability to implement planned productivity, cost reduction, and other margin improvement initiatives;
Ability to work with our customers to manage rapidly changing production volumes;
Ability to recover and timing of recovery of steel price and other cost increases from our customers;
Any unplanned extended shutdowns or production interruptions by us, our customers or our suppliers;
A significant deterioration or slowdown in economic activity in the key markets in which we operate;
Competitively driven price reductions to our customers;
Potential price increases from our suppliers;
Additional restructuring actions and the timing and recognition of restructuring charges, including any actions associated with the prolonged softness in markets in which we operate;
Higher-than-planned warranty expenses, including the outcome of known or potential recall campaigns;
Uncertainties of asbestos claim litigation and the outcome of litigation with insurance companies regarding the scope of coverage and the long-term solvency of our insurance carriers; and
Restrictive government actions by foreign countries (such as restrictions on transfer of funds and trade protection measures, including export duties, quotas and customs duties and tariffs).

Our specific business strategies are influenced by these industry factors and global trends and are focused on leveraging our resources to continue to develop and produce competitive product offerings. We believe the following strategies will allow us to maintain a balanced portfolio of commercial truck, industrial and aftermarket businesses covering key global markets. See Item

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1A. Risk Factors below for information on certain risks that could have an impact on our business, financial condition or results of operations in the future.

M2016 Strategy

In 2013, we launched M2016 - a clear and concise three-year plan that is intended to drive value for our shareholders, customers and employees. It defines specific financial measures of success for an improved EBITDA margin, reduced debt (including retirement liabilities) and increased revenue through organic growth. We expect that M2016 will continue to be our roadmap from now until the end of 2016.

To achieve the financial measures of success, the plan focuses on four priorities:

Drive operational excellence
Focus on customer value
Reduce product cost
Invest in a high-performing team

Drive Operational Excellence

The Operational Excellence area of M2016 highlights our focus on executing the Meritor Production System, a lean manufacturing initiative designed to improve systems, processes, behaviors and capabilities primarily associated with five core metrics:

Safety - Total case rate is a measure of the rate of recordable workplace injuries normalized per 100 employees per year. We have initiated safety programs throughout our global operations to protect our employees. Our total case rate in fiscal 2015 was 0.76. Our target is to sustain a high level of safety performance that enables us to achieve our M2016 target of less than 0.8. Through a combination of leadership commitment, employee engagement, accountability and investment, we have seen a 70 percent improvement over the last seven years with an average year-over-year improvement of 18 percent.

Quality - We are driving toward further reducing our customer quality issues as measured in parts per million (PPM) through a focus on products, suppliers, lean operations, systems, people and technology. Our M2016 target is to achieve customer parts per million of less than 75. In fiscal year 2015, we achieved the annual goals in our global commercial truck and aftermarket businesses.

Delivery - In fiscal year 2015, we exceeded our Original Equipment Manufacturer (OEM) delivery performance goal with a 99 percent on-time delivery rate in our commercial truck business. We achieved this while managing a significant volume increase in North America with levels of production on certain days higher than any in the company’s history.

Cost - We are targeting net improvement of 2.6 percent each year for labor and burden cost reduction. Major areas of attention include better equipment utilization, reduced changeover time, elimination of waste, improved shift and asset utilization, investing in equipment to improve cycle time and flexibility and employee involvement. Our work in this area had a significant impact on our financial results we reported this year, as we over-achieved our objective.

People - We encourage employees in our manufacturing facilities to submit at least three suggestions annually. In North America, we implemented approximately $1.5 million in improvements in fiscal year 2015 based on employee input. We also saw a significant improvement in employee engagement scores year over year from our salaried employees globally.

Throughout the company, teams are focused on improving workplace safety and quality, implementing cost savings ideas, increasing productivity and efficiency, and streamlining operations. Maintaining a continuous improvement culture is important to improving our business operations and operating results. As part of Operational Excellence, we are also focused on optimizing our global manufacturing footprint to drive additional cost savings.


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Focus on Customer Value

We have established three main goals for improving customer value as part of our M2016 plan. Our first goal is to introduce new products and win new business to drive profitable growth. Second, we are working closely with our customers to achieve the Meritor Value Proposition. Finally, we plan to meet or exceed global customer expectations in terms of quality, delivery, innovation and customer service.

Growing Profitably - Our goal is to drive growth from new customers, new programs and/or new products. For more than 100 years, our products have evolved to meet the changing needs of our customers in all major regions of the world. As technology has advanced, we have designed products that are more fuel efficient, lighter weight, safer, more durable and more reliable. The Meritor brand is well established globally and represents a wide portfolio of high-quality products for many different applications.

Building upon the strength of our core technologies, we intend to expand our presence globally and continue our growth in complementary product lines. Our strategy involves continuing to capitalize on our geographic diversity and product line capability through our many core competencies, global customer relationships and substantial aftermarket presence.

Looking into the future, we believe there is significant revenue potential with an expanded product portfolio. This is a critical element of our plan as it relates to future growth. The result of this focus is that our current and future launch cycle is one of the most aggressive in our company’s history. We have worked with our customers to design axles, brakes, drivelines and suspensions that will enhance the value of their vehicles in alignment with their forward product programs. There are several examples of this that we executed in 2015:

We are now supplying rear axles in North America, Australia and Brazil to PACCAR, an important global customer. We also gained standard positioning for front steer axles with PACCAR in fiscal year 2015.

We launched the superfast 2.28 ratio for our 14X axle platform that can be integrated with Meritor’s RPL35 series driveline. This product combination will effectively handle the higher torques generated from downspeeding, allowing the driver to maintain vehicle speed at lower engine RPMs enhancing vehicle efficiency. And next year, we plan to launch the 14X High Efficiency tandem axle that will offer more than a 1 percent efficiency improvement over our current class-leading 14X, which translates to approximately 1 percent savings in fuel economy.

In our Defense business, we announced that we will supply wheel-ends for approximately 17,000 Joint Light Tactical Vehicles to be manufactured by Oshkosh ("Oshkosh") Corporation over an 8-year timeframe. We are also supplying Navistar with all-wheel-drive components for approximately 2,300 Medium Tactical Vehicles with deliveries starting in January 2017 and concluding in 2019.

In 2016, we will supply rear drive, tag and front steer axles and brakes to MCI in connection with the purchase of almost 800 Commuter Coaches by New Jersey's public transportation corporation over a six-year delivery.
 
In Asia Pacific, we have a new axle and brake program with a major OEM. This customer award supports our new broad range of fully-dressed axle products in the region that offer our customers greater efficiency, localization and cost savings. This program demonstrates how the technology that we are developing in our engineering centers of excellence in North America, Europe and India is applied to meet the needs of other regions. We believe our well-developed infrastructure is expected to be a key enabler of future business growth. In India this year, we launched our hub reduction axle targeting severe service and off-highway applications for emerging markets. This axle is based on Meritor’s current hub reduction design that has provided outstanding performance in harsh applications for more than a decade.

As industry trends continue to drive the need for an increasing amount of equipment to comply with environmental and safety-related regulatory provisions, OEMs select suppliers based not only on the cost and quality of their products but also on their ability to meet stringent environmental and safety requirements and to service and support the customer after the sale. We use our technological and market expertise to develop and engineer products that address mobility, safety, regulatory and environmental concerns.


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To address safety, we have implemented a strategy of focusing on products and technologies that enhance overall vehicle braking performance. As part of this strategy, we are focusing on the integration of braking, stability products and suspension products, as well as the development of electronic control capabilities. Through MeritorWABCO, our joint venture with WABCO Holdings, Inc., we offer electronic braking systems that integrate anti-lock braking systems technology, automatic traction control, collision avoidance systems and other key vehicle control system components to improve braking performance and meet all required stopping distances for commercial vehicles.

Achieving the Meritor Value Proposition - We are recognized globally for our capabilities in designing, testing and manufacturing high quality drivetrain and braking products. With efficiency and safety in mind, our global engineering team works with supply chain and manufacturing to offer a technology-rich portfolio of drivetrain and braking solutions for original equipment manufacturers and the aftermarket.

We effectively manage complexity for low volumes and support our customers’ needs during periods of peak volumes. The quality, durability and on-time delivery of our products has earned us strong positions in most of the markets we support. As we seek to extend and expand our business with existing customers and establish relationships with new ones, our objective is to ensure we are getting a fair value for the recognized benefits of our products and services and the strong brand equity we hold in the marketplace.

We believe the quality of our core product lines, our ability to service our products through our aftermarket capabilities, and our sales and service support teams give us a competitive advantage. An important element of being a preferred supplier is the ability to deliver service through the entire life cycle of the product.

Exceeding Customer Expectations - As part of our overall strategy, we measure customer satisfaction. Our performance in the eyes of our customers is very important. We believe our focus on customer value has led to the business wins we experienced in fiscal year 2015. We are growing our relationships with major global truck manufacturers around the world. The book of business we’re building is significant and reinforces our competitive differentiators.

Reduce Product Cost

A broad collaborative effort between Purchasing, Engineering, Supply Chain, Quality and Operations departments is needed to effectively manage product costs, as we target achieving annual net material reductions (measured against controllable spend) of 2.5 percent annually. We are driving such material performance using three different approaches: commercial negotiations, best-cost-country sourcing (BCC), and technical innovation.

While commercial negotiations with our suppliers will likely always play a role in managing product cost, we are also driving increases in the share of our material cost savings derived from BCC sourcing and technical innovation because we believe BCC sourcing and technical innovation can generate more permanent forms of cost reduction. Aside from driving cost savings opportunities, we believe our BCC strategy allows us to add more balance, as we take advantage of differences in global supplier capabilities. And in the case of technical innovation, we focus on changing product designs to drive lower product costs, while ensuring the quality and delivery standards we require from our global supply base and that our customers expect.

Increasing inventory turns is an important element of improving our working capital performance. We believe we can improve our inventory turnover rate from our current levels. By reducing inventory, we would be able to generate more cash to reinvest in our business, to repay debt, or return to shareholders. We are accomplishing this improvement through localization of our supply base where possible; warehousing close to our facilities for imported supply; improved demand planning so material and supply chain planning teams can better determine how much inventory to hold; increased accuracy in production forecasting; and minimizing or eliminating inventory held to support certain low-volume products.

Invest in a High Performing Team

We believe that our strength to compete in the global market is dependent upon the engagement of every Meritor employee. We want Meritor to be a place where talented people thrive. Around the world, we pride ourselves on collaboration, creativity and commitment. Over the next several years, we will focus on employee satisfaction in four major areas:

Mission
Consistency

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Involvement
Adaptability

Within each of these areas are specific elements that we will focus on annually. In fiscal year 2016, those areas of particular emphasis are expected to be:

Capability Development
Coordination and Integration
Vision
Customer Focus

We recognize that a high-performing team is critical to the level of performance we want to achieve. We have a strong and experienced leadership team and commitment from our employees to create the level of sustainable performance improvement we desire. We will also continue to diversify our workforce because we recognize the value of different opinions and backgrounds in a company as global as Meritor.

The purpose of M2016 is to secure our base business by driving excellence throughout our global operations, enhancing customer relationships, executing a robust product development cycle and improving material performance in a sustainable way. We defined the nine initiatives that we believed would create the change we needed to improve our financial performance, and we are executing on those initiatives. We have strong momentum going into the last year of our transformational M2016 plan. We expect that continued execution on our M2016 strategy will drive value for our shareholders while positioning us for profitable growth opportunities beyond 2016.


Products
 
Meritor designs, develops, manufactures, markets, distributes, sells, services and supports a broad range of products for use in the transportation and industrial sectors. In addition to sales of original equipment systems and components, we provide our original equipment, aftermarket and remanufactured products to vehicle OEMs, their dealers (who in turn sell to motor carriers and commercial vehicle users of all sizes), independent distributors, and other end-users in certain aftermarkets.

The following chart sets forth, for each of the fiscal years 2013, 2014 and 2015, information about product sales comprising more than 10% of consolidated revenue in any of those years. A narrative description of our principal products follows the chart.
 
Product Sales:
 
 
Fiscal Year Ended
September 30,
 
2015
 
2014
 
2013
Axles, Undercarriage and Drivelines
74
%
 
78
%
 
78
%
Brakes and Braking Systems
25
%
 
21
%
 
20
%
Other
1
%
 
1
%
 
2
%
Total
100
%
 
100
%
 
100
%
 

Axles, Undercarriage & Drivelines
 
We believe we are one of the world's leading independent suppliers of axles for medium- and heavy-duty commercial vehicles, with the leading market position in axle manufacturing in North America, South America and Europe, and are one of the major axle manufacturers in the Asia-Pacific region. Our extensive truck axle product line includes a wide range of front steer axles and rear drive axles. Our front steer and rear drive axles can be equipped with our cam, wedge or air disc brakes, automatic slack adjusters, complete wheel-end equipment such as hubs, rotors and drums, and (through our MeritorWABCO joint venture) anti-lock braking systems (“ABS”) and vehicle stability control systems.
 


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We supply heavy-duty axles in certain global regions for use in numerous off-highway vehicle applications, including construction, material handling, and mining. We also supply axles for use in military tactical wheeled vehicles, principally in North America. These products are designed to tolerate high tonnage and operate under extreme geographical and climate conditions. In addition, we have other off-highway vehicle products that are currently in development for certain other regions. We also supply axles for use in buses, coaches and recreational vehicles, fire trucks and other specialty vehicles in North America, Asia Pacific and Europe, and we believe we are a leading supplier of bus and coach axles in North America.
 
We are one of the major manufacturers of heavy-duty trailer axles in North America. Our trailer axles are available in more than 40 models in capacities from 20,000 to 30,000 pounds for virtually all heavy trailer applications and are available with our broad range of suspension modules, brake products, including drum brakes, disc brakes, anti-lock and trailer stability control systems, and ABS (through our MeritorWABCO joint venture).
 
We supply universal joints and driveline components, including our Permalube™ universal joint and RPL Permalube™ driveline, which are maintenance free, permanently lubricated designs used often in the high mileage on-highway market. We supply drivelines in a variety of global regions, for use in numerous on-highway vehicle applications, including construction, material handling and mining. We supply transfer cases and drivelines for use in military tactical wheeled vehicles, principally in North America. We also supply transfer cases for use in specialty vehicles in North America. Anti-lock brakes and stability control systems (which we supply through our MeritorWABCO joint venture) are also used in military vehicles and specialty vehicles. In addition, we supply trailer air suspension systems and products with an increasing market presence in North America. We also supply advanced suspension modules for use in light-, medium- and heavy-duty military tactical wheeled vehicles, principally in North America.
 
Brakes and Braking Systems
 
We believe we are one of the leading independent suppliers of air brakes to medium- and heavy-duty commercial vehicle manufacturers in North America and Europe. In Brazil, one of the largest truck and trailer markets in the world, we believe that Master Sistemas Automotivos Limitada, our 49%-owned joint venture with Randon S. A. Vehiculos e Implementos, is a leading supplier of brakes and brake-related products.

Through manufacturing facilities located in North America, Asia Pacific and Europe, we manufacture a broad range of foundation air brakes, as well as automatic slack adjusters for brake systems. Our foundation air brake products include cam drum brakes, which offer improved lining life and tractor/trailer interchangeability; wedge drum brakes, which are lightweight and provide automatic internal wear adjustment; air disc brakes, which provide enhanced stopping distance and improved fade resistance for demanding applications; and wheel-end components such as hubs, drums and rotors.
 
Our brakes and brake system components also are used in military tactical wheeled vehicles, principally in North America. We also supply brakes for use in buses, coaches and recreational vehicles, fire trucks and other specialty vehicles in North America and Europe, and we believe we are the leading supplier of bus and coach brakes in North America. We also supply brakes for commercial vehicles, buses and coaches in Asia Pacific.
 
U.S. Federal regulations require that new medium- and heavy-duty vehicles sold in the United States be equipped with ABS. We believe that Meritor WABCO Vehicle Control Systems, our 50%-owned joint venture with WABCO, is a leading supplier of ABS and a supplier of other electronic and pneumatic control systems (such as stability control and collision avoidance systems) for North American heavy-duty commercial vehicles. The joint venture also supplies hydraulic ABS to the North American medium-duty truck market and produces stability control and collision mitigation systems for tractors and trailers, which are designed to help maintain vehicle stability and aid in reducing tractor-trailer rollovers and other incidents.

Other Products
 
In addition to the products discussed above, we sell other complementary products, including third party and private label items, through our aftermarket distribution channels. These products are generally sold under master distribution or similar agreements with outside vendors and include brake shoes and friction materials; automatic slack adjusters; yokes and shafts; wheel-end hubs and drums; ABS and stability control systems; shock absorbers and air springs; air brakes, air systems, air dryers and compressors.


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Customers; Sales and Marketing
 
Meritor has numerous customers worldwide and has developed long-standing business relationships with many of these customers. Our ten largest customers accounted for approximately 75 percent of our total sales from continuing operations in fiscal year 2015. Sales to AB Volvo, Daimler AG and Navistar International Corporation represented approximately 24 percent, 20 percent and 11 percent, respectively, of our sales in fiscal year 2015. No other customer accounted for 10% or more of our total sales in fiscal year 2015.

Original Equipment Manufacturers (OEMs)
 
In North America, we design, engineer, market and sell products principally to OEMs, dealers and distributors. While our North American sales are typically direct to the OEMs, our ultimate commercial truck customers include trucking and transportation fleets. Fleet customers may specify our components and integrated systems for installation in the vehicles they purchase from OEMs. We employ what we refer to as a “push-pull” marketing strategy. We “push” for being the standard product at the OEM. At the same time, our district field managers then call on fleets and OEM dealers to “pull-through” our components on specific truck purchases. For all other markets, we specifically design, engineer, market and sell products principally to OEMs for their market-specific needs or product specifications.
 
For certain large OEM customers, our supply arrangements are generally negotiated on a long-term contract basis for a multi-year period that may require us to provide annual cost reductions through price reductions or other cost benefits for the OEMs. If we are unable to generate sufficient cost savings in the future to offset such price reductions, our gross margins will be adversely affected. Sales to other OEMs are typically made through open order releases or purchase orders at market-based prices that do not require the purchase of a minimum number of products. The customer typically has the right to cancel or delay these orders on reasonable notice. We typically compete to either retain business or try to win new business from OEMs when long-term contracts expire.
 
We have established leading positions in many of the markets we serve as a global supplier of a broad range of drivetrain systems, brakes and components. Based on available industry data and internal company estimates, our market-leading positions include independent truck drive axles (i.e. those manufactured by an independent, non-captive supplier) in North America, Europe, South America and India; truck drivelines in North America; truck air brakes in North America and South America (through a joint venture); and military wheeled vehicle drivetrains, suspensions and brakes in North America.
 
Our global customer portfolio includes companies such as AB Volvo, Daimler AG, Navistar International Corporation, Oshkosh, MAN, Iveco, PACCAR, Ashok Leyland, Scania, XCMG and Ford.
 
Aftermarket
 
We market and sell truck, trailer, off-highway and other products principally to, and service such products principally for, OEMs, their parts marketing operations, their dealers and other independent distributors and service garages within the aftermarket industry. Our product sales are generated through long-term agreements with certain of our OEM customers and distribution agreements and sales to independent dealers and distributors. Sales to other OEMs are typically made through open order releases or purchase orders at market based prices which do not require the purchase of a minimum number of products. The customer typically has the right to cancel or delay these orders on reasonable notice.
 
Our product offerings allow us to service all stages of our customers’ vehicle ownership lifecycle. In North America, we stock and distribute hundreds of parts from top national brands to our customers or what we refer to as our “all makes” strategy. Our district field managers call on our OEM and independent customers to market our full product line capabilities on a regular basis to seek to ensure that we satisfy our customers’ needs. Our aftermarket business sells products under the following brand names: Meritor; Meritor Wabco; Euclid; Trucktechnic; and Meritor AllFit.
 
Based on available industry data and internal company estimates, we believe our North America aftermarket business has the overall market leadership position for the portfolio of products that we offer.
  
Competition
 
We compete worldwide with a number of North American and international providers of components and systems, some of which are owned by or associated with some of our customers. The principal competitive factors are price, quality, service, product performance, design and engineering capabilities, new product innovation and timely delivery. Certain OEMs manufacture their own components that compete with the types of products we supply.

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Our major competitors for axles are Dana Holding Corp. and, in certain markets, OEMs that manufacture axles for use in their own products. Emerging competitors for axles include Daimler Truck North America’s Detroit Axle and American Axle Corporation and from China, Hande, Fuwa and Ankai. Our major competitors for brakes are WABCO, Bendix/Knorr Bremse and, in certain markets, OEMs that manufacture brakes for use in their own products. Our major competitors for industrial applications are MAN, AxleTech International, Oshkosh, AM General, Marmon-Herrington, Dana Holding Corp., Knorr, Kessler & Co., Carraro, NAF, Sisu and, in certain markets, OEMs that manufacture industrial products for use in their own vehicles. Our major competitors for trailer applications are Hendrickson, BPW and SAF-Holland.
 
See Item 1A. Risk Factors for information on certain risks associated with our competitive environment.
 
Raw Materials and Suppliers
 
Our purchases of raw materials and parts are concentrated over a limited number of suppliers. We are dependent upon our suppliers' ability to meet cost performance, quality specifications and delivery schedules. The inability of a supplier to meet these requirements, the loss of a significant supplier, or work stoppages, could have an adverse effect on our ability to meet our customers' delivery requirements.

The cost of our core products is susceptible to changes in overall steel commodity prices, including ingredients used for various grades of steel. We have generally structured our major steel supplier and customer contracts to absorb and pass on normal index-related market fluctuations in steel prices. While we have had steel pricing adjustment programs in place with most major OEMs, the price adjustment programs tend to lag behind the movement in steel costs and have generally not contemplated non-steel index related increases.

Significant future volatility in the commodity markets or a deterioration in product demand may require us to pursue customer increases through surcharges or other pricing arrangements. In addition, if suppliers are inadequate for our needs, or if prices remain at current levels or increase and we are unable to either pass these prices to our customer base or otherwise mitigate the costs, our operating results could be further adversely affected.

We continuously work to address these competitive challenges by reducing costs and, as needed, restructuring operations. We manage supplier risk by conducting periodic assessments for all major suppliers and more frequent rigorous assessments of high-risk suppliers. On an ongoing basis, we monitor third party financial statements, conduct surveys through supplier questionnaires, and conduct site visits. We have developed a chronic supplier improvement process where we identify and develop actions to address ongoing financial, quality and delivery issues to further mitigate potential risk. We are proactive in managing our supplier relationships to avoid supply disruption. Our process employs dual sourcing and resourcing trigger points that cause us to take aggressive actions and then monitor the progress closely.

Divestitures and Restructuring
 
As described above, our business strategies are focused on enhancing our market position by continuously evaluating the competitive differentiation of our product portfolio, focusing on our strengths and core competencies, and growing the businesses that offer the most attractive returns. Implementing these strategies involves various types of strategic initiatives.
 
As part of our strategy to refocus our business and dedicate our resources to our core capabilities, we regularly review the prospects of our existing businesses to determine whether any of them should be modified, restructured, sold or otherwise discontinued. In the fourth quarter of fiscal year 2014, we completed the disposition of our Mascot all-makes remanufacturing business, which was part of the Aftermarket & Trailer segment (see Note 3 of the Notes to Consolidated Financial Statements under Item 8. Financial Statements and Supplementary Data below).

Restructuring Actions

M2016 Footprint Actions: As part of our M2016 Strategy, we announced a North American footprint realignment action and a European shared services reorganization. In fiscal year 2015, we announced the consolidation of certain gearing and machining operations in North America and notified approximately 40 hourly and salaried employees in the Commercial Truck & Industrial segment that their positions were being eliminated due to the planned closure of a North America manufacturing facility. In fiscal year 2015, $5 million of severance and other restructuring charges were recognized associated with the closure of this facility. To date, we have eliminated approximately 140 hourly and salaried positions and incurred approximately $7 million of restructuring costs associated with M2016 Footprint Actions, primarily in the Commercial Truck & Industrial segment. Restructuring actions associated with this program were substantially complete as of September 30, 2015.

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South America Labor Reduction I: During the fourth quarter of fiscal year 2014, we initiated a South America headcount reduction plan intended to reduce labor costs in response to softening economic conditions in the region. In response to decreasing production volumes in South America, we eliminated approximately 190 hourly and 20 salaried positions and incurred $7 million of restructuring costs, primarily severance benefits, in the Commercial Truck & Industrial segment. This plan was completed in fiscal year 2014.
South America Labor Reduction II: During fiscal year 2015, a restructuring plan to further reduce headcount in South America was approved by the local union. This restructuring plan was in response to the current economic environment in South America which continued to weaken throughout 2015. With this restructuring plan, we eliminated approximately 230 hourly and 20 salaried positions and incurred $6 million in employee separation costs in the Commercial Truck & Industrial segment during the third quarter of fiscal year 2015. Restructuring actions associated with this program were substantially complete as of September 30, 2015.
Closure of a Corporate Engineering Facility: During the second quarter of fiscal year 2015, we notified approximately 30 salaried and contract employees that their positions were being eliminated due to the planned closure of a corporate engineering facility. We recorded severance expenses of $2 million associated with this plan. Restructuring actions associated with this program were substantially complete as of September 30, 2015.
European Labor Reduction: During the second quarter of fiscal year 2015, we initiated a European headcount reduction plan intended to reduce labor costs in response to continued soft markets in the region. We eliminated approximately 20 hourly and 20 salaried positions and recorded $2 million of expected severance expenses in the Commercial Truck & Industrial segment in fiscal year 2015. Restructuring actions associated with this program were substantially complete as of June 30, 2015.
Variable Labor Reductions: In fiscal year 2013, we recognized $5 million of restructuring costs associated with a global variable labor headcount reduction plan. This plan was completed in fiscal year 2013.
Segment Reorganization and Asia-Pacific Realignment: In fiscal year 2013, we announced certain plans to revise our management reporting structure and consolidate our operations in China. During fiscal year 2013, we recorded employee severance charges and other exit costs of $16 million associated with these actions. These costs related to the elimination of approximately 200 salaried positions (including contract employees) and 50 hourly positions and a lease termination. This plan was completed in fiscal year 2013.

See Item 1A. Risk Factors for information on certain risks associated with strategic initiatives.
 
Joint Ventures
 
As the industries in which we operate have become more globalized, joint ventures and other cooperative arrangements have become an important element of our business strategies. These strategic alliances provide for sales, product design, development and manufacturing in certain product and geographic areas. As of September 30, 2015, our continuing operations participated in the following non-consolidated joint ventures:
 
 
Key Products
 
Country
Meritor WABCO Vehicle Control Systems
Antilock braking and air systems and various safety systems
 
U.S.
Master Sistemas Automotivos Limitada
Braking systems
 
Brazil
Sistemas Automotrices de Mexico S.A. de C.V.
Axles, drivelines and brakes
 
Mexico
Ege Fren Sanayii ve Ticaret A.S.
Braking systems
 
Turkey
Automotive Axles Limited
Rear drive axle assemblies and braking systems
 
India

Aggregate sales of our non-consolidated joint ventures were $1,288 million, $1,268 million and $1,552 million in fiscal years 2015, 2014 and 2013, respectively.
 
In accordance with accounting principles generally accepted in the United States, our consolidated financial statements include the financial position and operating results of those joint ventures in which we have control. For additional information on our unconsolidated joint ventures and percentage ownership thereof see Note 13 of the Notes to Consolidated Financial Statements under Item 8. Financial Statements and Supplementary Data below.
 

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Research and Development
 
We have significant research, development, engineering and product design capabilities. We spent $69 million in fiscal year 2015 and $71 million in each of fiscal years 2014 and 2013 on company-sponsored research, development and engineering. We employ professional engineers and scientists globally and have additional engineering capabilities through contract arrangements in low-cost countries. We also have advanced technical centers in North America, South America, Europe and Asia Pacific (primarily in India and China).

Patents and Trademarks
 
We own or license many United States and foreign patents and patent applications in our engineering and manufacturing operations and other activities. While in the aggregate these patents and licenses are considered important to the operation of our businesses, management does not consider them of such importance that the loss or termination of any one of them would materially affect a business segment or Meritor as a whole.
 
Our registered trademarks for Meritor® and the Bull design are important to our business. Other significant trademarks owned by us include Euclid® and Trucktechnic® for aftermarket products.
 
Substantially all of our U.S.-held intellectual property rights are subject to a first-priority perfected security interest securing our obligations to the lenders under our credit facility. See Note 16 of the Notes to Consolidated Financial Statements under Item 8. Financial Statements and Supplementary Data below.
 
Employees
 
At September 30, 2015, we had approximately 8,400 full-time employees (which includes consolidated joint ventures). At that date, 16 employees in the United States and Canada were covered by collective bargaining agreements and most of our facilities outside of the United States and Canada were unionized. We believe our relationship with unionized employees is satisfactory.
 
Environmental Matters
 
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 our operations. We record 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, we record a liability for our allocable share of costs related to our involvement with the site, as well as an allocable share of costs related to insolvent parties or unidentified shares. At environmental sites in which we are the only potentially responsible party, we record a liability for the total estimated costs of remediation before consideration of recovery from insurers or other third parties.
 
We have been designated as a potentially responsible party at nine Superfund sites, excluding sites as to which our records disclose no involvement or as to which our liability has been finally determined. In addition to Superfund sites, various other lawsuits, claims and proceedings have been asserted against us, alleging violations of federal, state and local environmental protection requirements or seeking remediation of alleged environmental impairments, principally at previously disposed-of properties. We have established reserves for these liabilities when they are considered to be probable and reasonably estimable. See Note 23 of the Notes to Consolidated Financial Statements under Item 8. Financial Statements and Supplementary Data below for information as to our estimates of the total reasonably possible costs we could incur and the amounts recorded as a liability as of September 30, 2015, and as to changes in environmental accruals during fiscal year 2015.
 
The process of estimating environmental liabilities is complex and dependent on physical and scientific data at the site, uncertainties as to remedies and technologies to be used, and the outcome of discussions with regulatory agencies. The actual amount of costs or damages for which we may be held responsible could materially exceed our current estimates because of uncertainties, including the financial condition of other potentially responsible parties, the success of the remediation and other factors that make it difficult to predict actual costs accurately. However, based on management's assessment, after consulting with Meritor's General Counsel and with outside advisors who specialize in environmental matters, and subject to the difficulties inherent in estimating these future costs, we believe that our 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 adverse effect on our 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 remedy could significantly change our estimates. Management cannot assess the possible effect of compliance with future requirements.

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International Operations
 
We believe our international operations provide us with geographical diversity and help us to weather the cyclical nature of our business. Approximately 55 percent of our total assets as of September 30, 2015 and 51 percent of fiscal year 2015 sales from continuing operations were outside the U.S. See Note 24 of the Notes to Consolidated Financial Statements under Item 8. Financial Statements and Supplementary Data below for financial information by geographic area for the three fiscal years ended September 30, 2015.
 
Our international operations are subject to a number of risks inherent in operating abroad (see Item 1A. Risk Factors below). There can be no assurance that these risks will not have a material adverse impact on our ability to increase or maintain our foreign sales or on our financial condition or results of operations.
 
Our operations are also exposed to global market risks, including foreign currency exchange rate risk related to our transactions denominated in currencies other than the U.S. dollar. We have a foreign currency cash flow hedging program in place to help reduce the company’s exposure to changes in exchange rates. We use foreign currency forward contracts to manage the company’s exposures arising from foreign currency exchange risk. Gains and losses on the underlying foreign currency exposures are partially offset with gains and losses on the foreign currency forward contracts. It is our policy not to enter into derivative financial instruments for speculative purposes and, therefore, we hold no derivative instruments for trading purposes. See Item 7A. Quantitative and Qualitative Disclosures About Market Risk and Note 17 of the Notes to Consolidated Financial Statements under Item 8. Financial Statements and Supplementary Data below.
 
Seasonality; Cyclicality
 
We may experience seasonal variations in the demand for our products, to the extent OEM vehicle production fluctuates. Historically, for most of our operations, demand has been somewhat lower in the quarters ended September 30 and December 31, when OEM plants may close for summer shutdowns and holiday periods or when there are fewer selling days during the quarter. Our aftermarket business and our operations in India and China generally experience seasonally higher demand in the quarters ending March 31 and June 30.
 
In addition, the industries in which we operate have been characterized historically by periodic fluctuations in overall demand for trucks, trailers and other specialty vehicles for which we supply products, resulting in corresponding fluctuations in demand for our products. Production and sales of the vehicles for which we supply products generally depend on economic conditions and a variety of other factors that are outside of our control, including freight tonnage, customer spending and preferences, vehicle age, labor relations and regulatory requirements. See Item 1A. Risk Factors below. Cycles in the major vehicle industry markets of North America and Europe are not necessarily concurrent or related. It is part of our strategy to continue to seek to expand our operations globally to help mitigate the effect of periodic fluctuations in demand of the vehicle industry in one or more particular countries.

See section Trends and Uncertainties in Item 7. Management's Discussion and Analysis for estimated commercial truck production volumes for selected original equipment (OE) markets based on available sources and management's estimates.
 
Available Information
 
We make available free of charge through our web site (www.Meritor.com) our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, all amendments to those reports, and other filings we make with the Securities and Exchange Commission (“SEC”), as soon as reasonably practicable after they are filed.
 

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Cautionary Statement
 
This Annual Report on Form 10-K contains statements relating to future results of the company (including certain projections and business trends) that are “forward-looking statements” as defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements are typically identified by words or phrases such as “believe,” “expect,” “anticipate,” “estimate,” “should,” “are likely to be,” “will” and similar expressions. Actual results may differ materially from those projected as a result of certain risks and uncertainties, including but not limited to reliance on major original equipment manufacturer (“OEM”) customers and possible negative outcomes from contract negotiations with our major customers, including failure to negotiate acceptable terms in contract renewal negotiations and our ability to obtain new customers; the outcome of actual and potential product liability, warranty and recall claims; our ability to successfully manage rapidly changing volumes in the commercial truck markets and work with our customers to manage demand expectations in view of rapid changes in production levels; global economic and market cycles and conditions; availability and sharply rising costs of raw materials, including steel, and our ability to manage or recover such costs; our ability to manage possible adverse effects on our European operations, or financing arrangements related thereto, in the event one or more countries exit the European monetary union; risks inherent in operating abroad (including foreign currency exchange rates, implications of foreign regulations relating to pensions and potential disruption of production and supply due to terrorist attacks or acts of aggression); rising costs of pension and other postemployment benefits; the ability to achieve the expected benefits of restructuring actions; the demand for commercial and specialty vehicles for which we supply products; whether our liquidity will be affected by declining vehicle productions in the future; OEM program delays; demand for and market acceptance of new and existing products; successful development of new products; labor relations of our company, our suppliers and customers, including potential disruptions in supply of parts to our facilities or demand for our products due to work stoppages; the financial condition of our suppliers and customers, including potential bankruptcies; possible adverse effects of any future suspension of normal trade credit terms by our suppliers; potential difficulties competing with companies that have avoided their existing contracts in bankruptcy and reorganization proceedings; potential impairment of long-lived assets, including goodwill; potential adjustment of the value of deferred tax assets; competitive product and pricing pressures; the amount of our debt; our ability to continue to comply with covenants in our financing agreements; our ability to access capital markets; credit ratings of our debt; the outcome of existing and any future legal proceedings, including any litigation with respect to environmental or asbestos-related matters; possible changes in accounting rules; and other substantial costs, risks and uncertainties, including but not limited to those detailed herein and from time to time in other filings of the company with the SEC. See also the following portions of this Annual Report on Form 10-K: Item 1. Business , “Customers; Sales and Marketing”; “Competition”; “Raw Materials and Supplies”; “Employees”; “Environmental Matters”; “International Operations”; and “Seasonality; Cyclicality”; Item 1A. Risk Factors; Item 3. Legal Proceedings; and Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. These forward-looking statements are made only as of the date hereof, and the company undertakes no obligation to update or revise the forward-looking statements, whether as a result of new information, future events or otherwise, except as otherwise required by law.

Item 1A. Risk Factors
 
Our business, financial condition and results of operations can be impacted by a number of risks, including those described below and elsewhere in this Annual Report on Form 10-K, any one of which could cause our actual results to vary materially from recent results or from anticipated future results. Any of these individual risks could materially and adversely affect our business, financial condition and results of operations. This effect could be compounded if multiple risks were to occur.
 
We may not be able to execute our M2016 Strategy.

In 2013, we announced our M2016 Strategy, a three-year plan to achieve sustainable financial strength. In connection with the plan, we established certain financial goals relating to adjusted EBITDA margins, debt reduction and incremental revenue. The M2016 Strategy is based on our current planning assumptions, and achievement of the plan is subject to a number of risks. Our assumptions include that we are able to secure new business wins (a significant portion of which generates sales by the year 2016); we are able to reduce costs and increase pricing; and any increases in raw materials prices are substantially offset by customer recovery mechanisms. If our assumptions are incorrect, if management is not able to execute the plan or if our business suffers from any number of additional risks set forth herein, we may not be able to achieve the financial goals we have announced.


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We depend on large OEM customers, and loss of sales to these customers or failure to negotiate acceptable terms in contract renewal negotiations, or to obtain new customers, could have an adverse impact on our business.
     
We are dependent upon large OEM customers with substantial bargaining power with respect to price and other commercial terms. In addition, we have long-term contracts with certain of these customers that are subject to renegotiation and renewal from time to time. Loss of all or a substantial portion of sales to any of our large volume customers for whatever reason (including, but not limited to, loss of contracts or failure to negotiate acceptable terms in contract renewal negotiations, loss of market share by these customers, insolvency of such customers, reduced or delayed customer requirements, plant shutdowns, strikes or other work stoppages affecting production by such customers), continued reduction of prices to these customers, or a failure to obtain new customers, could have a significant adverse effect on our financial results. There can be no assurance that we will not lose all or a portion of sales to our large volume customers, or that we will be able to offset continued reduction of prices to these customers with reductions in our costs or by obtaining new customers.
 
During fiscal year 2015, sales to our three largest customers, AB Volvo, Daimler AG and Navistar International Corporation, represented approximately 24 percent, 20 percent and 11 percent, respectively, of our sales from continuing operations. No other customer accounted for 10% or more of our total sales from continuing operations in fiscal year 2015.
 
The level of our sales to large OEM customers, including the realization of future sales from awarded business or obtaining new business or customers, is inherently subject to a number of risks and uncertainties, including the number of vehicles that these OEM customers actually produce and sell. Several of our significant customers have major union contracts that expire periodically and are subject to renegotiation. Any strikes or other actions that affect our customers' production during this process would also affect our sales. Further, to the extent that the financial condition, including bankruptcy or market share of any of our largest customers, deteriorates or their sales otherwise continue to decline, our financial position and results of operations could be adversely affected. In addition, our customers generally have the right to replace us with another supplier under certain circumstances. Accordingly, we may not in fact realize all of the future sales represented by our awarded business. Any failure to realize these sales could have a material adverse effect on our financial condition and results of operations.
 
Our ability to manage rapidly changing production and sales volume in the commercial vehicle market may adversely affect our results of operations.
 
Production and sales in the commercial vehicle market have been volatile in recent years. Our business may experience difficulty in adapting to rapidly changing production and sales volumes. In an upturn of the cycle when demand increases from what had recently been a historical low for production, we may have difficulty in meeting such extreme or rapidly increasing demand. This difficulty may include not having sufficient manpower or working capital to meet the needs of our customers or relying on other suppliers who may not be able to respond quickly to a changed environment when demand increases rapidly. In contrast, in the downturn of the cycle, we may have difficulty sustaining profitability given fixed costs (as further discussed below).

 A further downturn in the global economy could materially adversely affect our results of operations, financial condition and cash flows.

Although the global economy has improved since the global economic recession that began in late 2008 and continued through 2009, the recession had a significant adverse impact on our business, customers and suppliers. Our cash and liquidity needs were impacted by the level, variability and timing of our customers' worldwide vehicle production and other factors outside of our control. If the global economy were to take another significant downturn, depending upon the length, duration and severity of another recession, our results of operations, financial condition and cash flow would be materially adversely affected again.
 
Our levels of fixed costs can make it difficult to adjust our cost base to the extent necessary, or to make such adjustments on a timely basis, and continued volume declines can result in non-cash impairment charges as the value of certain long-lived assets is reduced. As a result, our financial condition and results of operations have been and would be expected to continue to be adversely affected during periods of prolonged declining production and sales volumes in the commercial vehicle markets.
 
The negative impact on our financial condition and results of operations from continued volume declines could also have negative effects on our liquidity. If cash flows are not available from our operations, we may be required to rely on the banking and credit markets to meet our financial commitments and short-term liquidity needs; however, we cannot predict whether that funding will be available at all or on commercially reasonable terms. In addition, in the event of reduced sales, levels of receivables would decline, which would lead to a decline in funding available under our U.S. receivables facilities or under our European factoring arrangements.
 

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Our working capital requirements may negatively affect our liquidity and capital resources.
 
Our working capital requirements can vary significantly, depending in part on the level, variability and timing of our customers' worldwide vehicle production and the payment terms with our customers and suppliers. As production volumes increase, our working capital requirements to support the higher volumes generally increase. If our working capital needs exceed our other cash flows from operations, we would look to our cash balances and availability for borrowings under our borrowing arrangements to satisfy those needs, as well as potential sources of additional capital, which may not be available on satisfactory terms or in adequate amounts.

In addition, since many of our accounts receivable factoring programs support our working capital requirements in Europe, any dissolution of the European monetary union, if it were to occur, or any other termination of our European factoring agreements could have a material adverse effect on our liquidity if we were unable to renegotiate such agreements or find alternative sources of liquidity.

One of our consolidated joint ventures in China participates in bills of exchange programs to settle accounts receivable from its customers and obligations to its trade suppliers. These programs are common in China and generally require the participation of local banks. Any disruption in these programs, if it were to occur, could have an adverse effect on our liquidity if we were unable to find alternative sources of liquidity.

Our liquidity, including our access to capital markets and financing, could be constrained by limitations in the overall credit market, our credit ratings, our ability to comply with financial covenants in our debt instruments, and our suppliers suspending normal trade credit terms on our purchases, or by other factors beyond our control.
 
Our current senior secured revolving credit facility matures in February 2019. Upon expiration of this facility, we will require a new or renegotiated facility (which may be smaller and have less favorable terms than our current facility) or other financing arrangements. Our ability to access additional capital in the long term will depend on availability of capital markets and pricing on commercially reasonable terms as well as our credit profile at the time we are seeking funds, and there is no guarantee that we will be able to access additional capital.
 
On November 17, 2015, our Standard & Poor’s corporate credit rating, senior secured credit rating, and senior unsecured credit rating were B+, BB and B, respectively. Our Moody’s Investors Service corporate credit rating, senior secured credit rating, and senior unsecured credit rating are B1, Ba1 and B2, respectively. Any lowering of our credit ratings could increase our cost of future borrowings and could reduce our access to capital markets and result in lower trading prices for our securities.

Our liquidity could also be adversely impacted if our suppliers were to suspend normal trade credit terms and require more accelerated payment terms, including payment in advance or payment on delivery of purchases. If this were to occur, we would be dependent on other sources of financing to bridge the additional period between payment of our suppliers and receipt of payments from our customers.

In December 2012, the SEC brought administrative proceedings against five accounting firms, including the Chinese affiliate of our independent registered public accounting firm, alleging that they had refused to produce audit work papers and other documents related to certain other China-based companies under investigation by the SEC for potential accounting fraud. On January 22, 2014, an initial administrative law decision was issued, censuring these Chinese accounting firms and suspending four of the five firms from practicing before the SEC for a period of six months.

On February 6, 2015, the Chinese accounting firms agreed to a censure and to pay $500,000 each to the SEC to settle the dispute and avoid suspension of their ability to practice before the SEC and audit U.S.-listed companies. The settlement requires the Chinese accounting firms to follow specific procedures to provide the SEC with access to these Chinese accounting firms’ audit documents via the China Securities Regulatory Commission. If the Chinese accounting firms do not comply with the specified procedures, the SEC could impose penalties including suspensions or recommence the administrative proceedings.

As our independent registered public accounting firm previously utilized the work of its Chinese affiliate in auditing our Chinese operations for fiscal year 2013, we may be adversely affected if the Chinese affiliate of our independent registered public accounting firm fails to comply with the specified procedures, and the SEC suspends the Chinese affiliate or recommences the administrative proceedings. If we (like other U.S. multinational companies similarly situated) were not able to timely file our periodic reports with the SEC because our independent registered public accounting firm concludes that a scope limitation exists with respect to the audit of our annual financial statements or the review of our quarterly financial statements, this could adversely impact our ability to raise capital in the U.S. public markets.


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We operate in an industry that is cyclical and that has periodically experienced significant year-to-year fluctuations in demand for vehicles; we also experience seasonal variations in demand for our products.
 
The industries in which we operate have been characterized historically by significant periodic fluctuations in overall demand for medium- and heavy-duty trucks and other vehicles for which we supply products, resulting in corresponding fluctuations in demand for our products. The length and timing of any cycle in the vehicle industry cannot be predicted with certainty.
 
Production and sales of the vehicles for which we supply products generally depend on economic conditions and a variety of other factors that are outside our control, including freight tonnage, customer spending and preferences, vehicle age, labor relations and regulatory requirements. In particular, demand for our Commercial Truck & Industrial segment products can be affected by a pre-buy before the effective date of new regulatory requirements, such as changes in emissions standards. Historically, implementation of new, more stringent, emissions standards, has increased heavy-duty truck demand prior to the effective date of the new regulations, and correspondingly decreased this demand after the new standards are implemented. In addition, any expected increase in the heavy-duty truck demand prior to the effective date of new emissions standards may be offset by instability in the financial markets and resulting economic contraction in the U.S. and worldwide markets.
 
Sales from the aftermarket portion of our Aftermarket & Trailers segment depend on overall levels of truck ton miles and gross domestic product (GDP), among other things, and may be influenced by times of slower economic growth or economic contraction based on the average age of commercial truck fleets.
 
We may also experience seasonal variations in the demand for our products to the extent that vehicle production fluctuates. Historically, for most of our business, demand has been somewhat lower in the quarters ended September 30 and December 31, when OEM plants may close during model changeovers and vacation and holiday periods or when there are fewer selling days during the quarter. In addition, our aftermarket business and our operations in India and China generally experience seasonally higher demand in the quarters ending March 31 and June 30.
 
Disruptions in the financial markets could impact the availability and cost of credit which could negatively affect our business.

Disruptions in the financial markets, including the bankruptcy, insolvency or restructuring of certain financial institutions, and the lack of liquidity generally could impact the availability and cost of incremental credit for many companies and may adversely affect the availability of credit already arranged. Such disruptions could adversely affect the U.S. and world economy, further negatively impacting consumer spending patterns in the transportation and industrial sectors. In addition, as our customers and suppliers respond to rapidly changing consumer preferences, they may require access to additional capital. If that capital is not available or its cost is prohibitively high, their business would be negatively impacted which could result in further restructuring or even reorganization under bankruptcy laws. Any such negative impact, in turn, could negatively affect our business either through loss of sales to any of our customers so affected or through inability to meet our commitments (or inability to meet them without excess expense) because of loss of supplies from any of our suppliers so affected. There are no assurances that government responses to these disruptions will restore consumer confidence or improve the liquidity of the financial markets.
 
In addition, disruptions in the capital and credit markets, as were experienced a few years ago, could adversely affect our ability to draw on our senior secured revolving credit facility. Our access to funds under that credit facility is dependent on the ability of the banks that are parties to the facility to meet their funding commitments. Those banks may not be able to meet their funding commitments to us if they experience shortages of capital and liquidity or if they experience excessive volumes of borrowing requests from Meritor and other borrowers within a short period of time. Longer-term disruptions in the capital and credit markets as a result of uncertainty, changing or increased regulation, reduced alternatives, or failures of significant financial institutions could adversely affect our access to liquidity needed for our business. Any disruption could require us to take measures to conserve cash until the markets stabilize or until alternative credit arrangements or other funding for our business needs can be arranged.
 
Continued fluctuation in the prices of raw materials and transportation costs has adversely affected our business and, together with other factors, will continue to pose challenges to our financial results.
 
Prices of raw materials, primarily steel, for our manufacturing needs and costs of transportation have fluctuated sharply in recent years, including rapid increases which had a negative impact on our operating income for certain periods. These steel price increases, along with increasing transportation costs, created pressure on profit margins, and if they recur in the future, they could unfavorably impact our financial results going forward. While we have had steel pricing adjustment programs in place with most major OEMs, the price adjustment programs have tended to lag the increase in steel costs and have generally not contemplated all non-index-related increases in steel costs. Raw material price fluctuation, together with the volatility of the commodity markets will continue to pose risks to our financial results. If we are unable to pass price increases on to our customer base or otherwise mitigate the costs, our operating income could be adversely affected.

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Escalating price pressures from customers may adversely affect our business.
 
Pricing pressure by OEMs is a characteristic, to a certain extent, of the commercial vehicle industry. Virtually all OEMs have aggressive price reduction initiatives and objectives each year with their suppliers, and such actions are expected to continue in the future. Accordingly, we must be able to reduce our operating costs in order to maintain our current margins. Price reductions have impacted our margins and may do so in the future. There can be no assurance that we will be able to avoid future customer price reductions or offset future customer price reductions through improved operating efficiencies, new manufacturing processes, sourcing alternatives or other cost reduction initiatives.
 
We operate in a highly competitive industry.
 
Each of Meritor's businesses operates in a highly competitive environment. We compete worldwide with a number of North American and international providers of components and systems, some of which are owned by or associated with some of our customers. Certain OEMs manufacture products for their own use that compete with the types of products we supply, and any future increase in this activity could displace Meritor's sales.
 
Many companies in our industry have undertaken substantial changes in contractual obligations to current and former employees, primarily with respect to pensions and other postemployment benefits. The bankruptcy or insolvency of a major competitor has resulted in certain companies eliminating or reducing some or all of these obligations as well as their debt obligations, which could give that competitor a cost advantage over us.
 
Exchange rate fluctuations could adversely affect our financial condition and results of operations.
 
As a result of our substantial international operations, we are exposed to foreign currency risks that arise from our normal business operations, including risks in connection with our transactions that are denominated in foreign currencies. While we employ financial instruments to hedge certain of our foreign currency exchange risks relating to these transactions, our efforts to manage these risks may not be successful. In addition, we translate sales and other results denominated in foreign currencies into U.S. dollars for purposes of our consolidated financial statements. As a result, appreciation of the U.S. dollar against these foreign currencies generally will have a negative impact on our reported revenues and operating income, while depreciation of the U.S. dollar against these foreign currencies will generally have a positive effect on reported revenues and operating income. For fiscal years 2013, 2014 and 2015, our reported financial results were adversely affected by appreciation of the U.S. dollar against foreign currencies.
 
A disruption in supply of raw materials or parts could impact our production and increase our costs.
 
Some of our significant suppliers have experienced weak financial condition in recent years that resulted in filing for protection under the bankruptcy laws. In addition, some of our significant suppliers are located in developing countries. We are dependent upon the ability of our suppliers to meet performance and quality specifications and delivery schedules. The inability of a supplier to meet these requirements, the loss of a significant supplier, or any labor issues or work stoppages at a significant supplier could disrupt the supply of raw materials and parts to our facilities and could have an adverse effect on us.
 
Work stoppages or similar difficulties could significantly disrupt our operations.
 
A work stoppage at one or more of our manufacturing facilities could have a material adverse effect on our business. In addition, if a significant customer were to experience a work stoppage, that customer could halt or limit purchases of our products, which could result in shutting down the related manufacturing facilities. Also, a significant disruption in the supply of a key component due to a work stoppage at one of our suppliers could result in shutting down manufacturing facilities, which could have a material adverse effect on our business.
 
Our international operations are subject to a number of risks.
 
We have a significant number of facilities and operations outside the United States, including investments and joint ventures in developing countries. During fiscal year 2015, approximately 51 percent of our sales from continuing operations were generated outside of the United States. Our strategy to grow in emerging markets may put us at risk due to the risks inherent in operating in such markets. In particular, we have grown over an extended period of time, and intend as part of our strategy to continue to grow, in India and Brazil. Our international operations are subject to a number of risks inherent in operating abroad, including, but not limited to:

risks with respect to currency exchange rate fluctuations (as more fully discussed above);

17




risks to our liquidity if the European monetary union were to dissolve and we were unable to renegotiate European factoring agreements;

local economic and political conditions;

disruptions of capital and trading markets;

possible terrorist attacks or acts of aggression that could affect vehicle production or the availability of raw materials or supplies;

restrictive governmental actions (such as restrictions on transfer of funds and trade protection measures, including export duties, quotas and customs duties and tariffs);

changes in legal or regulatory requirements;

import or export licensing requirements;

limitations on the repatriation of funds;

difficulty in obtaining distribution and support;

nationalization;

the laws and policies of the United States affecting trade, foreign investment and loans;

the ability to attract and retain qualified personnel;

tax laws; and

labor disruptions.

There can be no assurance that these risks will not have a material adverse impact on our ability to increase or maintain our foreign sales or on our financial condition or results of operations.
 
A violation of the financial covenants in our senior secured revolving credit facility could result in a default thereunder and could lead to an acceleration of our obligations under this facility and, potentially, other indebtedness.
 
Our ability to borrow under our existing financing arrangements depends on our compliance with covenants in the related agreements and on our performance against covenants in our bank credit facility that require compliance with certain financial ratios as of the end of each fiscal quarter. To the extent that we are unable to maintain compliance with these requirements or to perform against the financial ratio covenants due to one or more of the various risk factors discussed herein or otherwise, our ability to borrow, and our liquidity, would be adversely impacted.
Availability under the senior secured revolving credit facility is subject to a collateral test, performed quarterly, pursuant to which borrowings on the senior secured revolving credit facility cannot exceed 1.0x the collateral test value. Availability under the senior secured revolving credit facility is also subject to certain financial covenants based on (i) the ratio of our priority debt (consisting principally of amounts outstanding under the senior secured revolving credit facility, U.S. accounts receivable securitization and factoring programs, and third-party non-working capital foreign debt) to EBITDA and (ii) the amount of annual capital expenditures. We are required to maintain a total priority-debt-to-EBITDA ratio, as defined in the agreement, of not more than 2.25 to 1.00 as of the last day of each fiscal quarter through maturity.
 If an amendment or waiver is needed (in the event we do not meet one of these covenants) and not obtained, we would be in violation of that covenant, and the lenders would have the right to accelerate the obligations upon the vote of the lenders holding more than 50% of outstanding loans thereunder. A default under the senior secured revolving credit facility could also constitute a default under our outstanding convertible notes as well as our U.S. receivables facility and could result in the acceleration of these obligations. In addition, a default under our senior secured revolving credit facility could result in a cross-default or the acceleration of our payment obligations under other financing agreements. If our obligations under our senior secured revolving credit facility and other financing arrangements are accelerated as described above, our assets and cash flow may be insufficient

18



to fully repay these obligations, and the lenders under our senior secured revolving credit facility could institute foreclosure proceedings against our assets.
 
Our strategic initiatives may be unsuccessful, may take longer than anticipated, or may result in unanticipated costs.
 
The success and timing of any future divestitures and acquisitions will depend on a variety of factors, many of which are not within our control. If we engage in acquisitions, we may finance these transactions by issuing additional debt or equity securities. The additional debt from any such acquisitions, if consummated, could increase our debt to capitalization ratio. In addition, the ultimate benefit of any acquisition would depend on our ability to successfully integrate the acquired entity or assets into our existing business and to achieve any projected synergies. There is no assurance that the total costs and total cash costs associated with any current and future restructuring will not exceed our estimates, or that we will be able to achieve the intended benefits of these restructurings.

We are exposed to environmental, health and safety and product liabilities.
 
Our business is subject to liabilities with respect to environmental and health and safety matters. In addition, we are required to comply with federal, state, local and foreign laws and regulations governing the protection of the environment and health and safety, and we could be held liable for damages arising out of human exposure to hazardous substances or other environmental or natural resource damages. Environmental health and safety laws and regulations are complex, change frequently and tend to be increasingly stringent. As a result, our future costs to comply with such laws may increase significantly. There is also an inherent risk of exposure to warranty and product liability claims, as well as product recalls, in the commercial vehicle industry if our products fail to perform to specifications or are alleged to cause property damage, injury or death.
 
With respect to environmental liabilities, we have been designated as a potentially responsible party at nine Superfund sites (excluding sites as to which our records disclose no involvement or as to which our liability has been finally determined). In addition to the Superfund sites, various other lawsuits, claims and proceedings have been asserted against us alleging violations of federal, state and local and foreign environmental protection requirements or seeking remediation of alleged environmental impairments. We have established reserves for these liabilities when we determine that the company has a probable obligation and we can reasonably estimate it, but the process of estimating environmental liabilities is complex and dependent on evolving physical and scientific data at the site, uncertainties as to remedies and technologies to be used, and the outcome of discussions with regulatory agencies. The actual amount of costs or damages for which we may be held responsible could materially exceed our current estimates because of these and other uncertainties which make it difficult to predict actual costs accurately. In future periods, new laws and regulations, changes in remediation plans, advances in technology and additional information about the ultimate clean-up remedy could significantly change our estimates and have a material impact on our financial position and results of operations. Management cannot assess the possible effect of compliance with future requirements.
 
We are exposed to asbestos litigation liability.
 
One of our subsidiaries, Maremont Corporation, manufactured friction products containing asbestos from 1953 through 1977, when it sold its friction product business. We 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. We, along with many other companies, have also been named as a defendant in lawsuits alleging personal injury as a result of exposure to asbestos used in certain components of products of Rockwell International Corporation. Liability for these claims was transferred to us at the time of the spin-off of Rockwell's automotive business to Meritor in 1997.
 
The uncertainties of asbestos claim litigation, the outcome of litigation with insurance companies regarding the scope of coverage and the long-term solvency of our insurance carriers make it difficult to predict accurately the ultimate resolution of asbestos claims. The possibility of adverse rulings or new legislation affecting asbestos claim litigation or the settlement process increases that uncertainty. Although we have established reserves to address asbestos liability and corresponding receivables for recoveries from our insurance carriers, if our assumptions with respect to the nature of pending and future claims, the cost to resolve claims and the amount of available insurance prove to be incorrect, the actual amount of liability for asbestos-related claims, and the effect on us, could differ materially from our current estimates and, therefore, could have a material impact on our financial position and results of operations.
 
We are exposed to the rising cost of pension and other postemployment benefits.
 
The commercial vehicle industry, like other industries, continues to be impacted by the cost of pension and other postemployment benefits. In estimating our expected obligations under our pension and postemployment benefit plans, we make certain assumptions as to economic and demographic factors, such as discount rates, investment returns and health care cost trends.

19



If actual experience of these factors is worse than our assumptions, our obligations could grow which could in turn increase the amount of mandatory contributions to these plans in the coming years. Our pension plans and other postemployment benefits are underfunded by $109 million and $438 million, respectively, as of September 30, 2015.

Impairment in the carrying value of long-lived assets and goodwill could negatively affect our operating results and financial condition.
 
We have a significant amount of long-lived assets and goodwill on our consolidated balance sheet. Under generally accepted accounting principles, long-lived assets, excluding goodwill, are required to be reviewed for impairment whenever adverse events or changes in circumstances indicate a possible impairment. If business conditions or other factors cause our operating results and cash flows to decline, we may be required to record non-cash impairment charges. Goodwill must be evaluated for impairment at least annually. If the carrying value of our reporting units exceeds their current fair value, the goodwill is considered impaired and is reduced to fair value via a non-cash charge to earnings. Events and conditions that could result in impairment in the value of our long-lived assets and goodwill include changes impacting the industries in which we operate, particularly the impact of the current downturn in the global economy, as well as competition and advances in technology, adverse changes in the regulatory environment, or other factors leading to reduction in expected long-term sales or operating results. If the value of long-lived assets or goodwill is impaired, our earnings and financial condition could be adversely affected. Although the company continues to work toward securing participation in additional military programs, based on sales expectations for currently awarded programs, the company's fair value of the Defense business did not exceed its carrying value. As a result, we have recorded an impairment of $15 million, pre-tax, of goodwill. In addition, we recognized a $2 million impairment of long-lived assets in the fourth quarter of fiscal year 2015.
 
The value of our deferred tax assets could become impaired, which could materially and adversely affect our results of operations and financial condition.
 
In accordance with the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 740 “Income Taxes,” each quarter we determine the probability of the realization of deferred tax assets, using significant judgments and estimates with respect to, among other things, historical operating results, expectations of future earnings and tax planning strategies. If we determine in the future that there is not sufficient positive evidence to support the valuation of these assets, due to the risk factors described herein or other factors, we may be required to adjust the valuation allowance to reduce our deferred tax assets. Such a reduction could result in material non-cash expenses in the period in which the valuation allowance is adjusted and could have a material adverse effect on our results of operations and financial condition. In addition, future changes in laws or regulations could have a material impact on the company's overall tax position.
 
Our overall effective tax rate is equal to our total tax expense as a percentage of our total earnings before tax. However, tax expenses and benefits are determined separately for each tax paying component (an individual entity) or group of entities that is consolidated for tax purposes in each jurisdiction. Losses in certain jurisdictions which have valuation allowances against their deferred tax assets provide no current financial statement tax benefit unless required under the intra-period allocation requirements of ASC Topic 740. As a result, changes in the mix of projected earnings between jurisdictions, among other factors, could have a significant impact on our overall effective tax rate.
 
Our unrecognized tax benefits recorded in accordance with FASB ASC Topic 740 could significantly change.
 
FASB ASC Topic 740, “Income Taxes,” defines the confidence level that a tax position must meet in order to be recognized in the financial statements. This topic requires that the tax effects of a position be recognized only if it is "more-likely-than-not" to be sustained based solely on its technical merits as of the reporting date. The more-likely-than-not threshold represents a positive assertion by management that a company is entitled to the economic benefits of a tax position. If a tax position is not considered more-likely-than-not to be sustained based solely on its technical merits, no benefits of the position are to be recognized. Moreover, the more-likely-than-not threshold must continue to be met in each reporting period to support continued recognition of a benefit. In the event that the more-likely-than-not threshold is not met, we would be required to change the relevant tax position which could have an adverse effect on our results of operations and financial condition.
 

20



Restriction on use of tax attributes from tax law “ownership change”.
 
Section 382 of the U.S. Internal Revenue Code of 1986, as amended, limits the ability of a corporation that undergoes an “ownership change” to use its tax attributes, such as net operating losses and tax credits. In general, an “ownership change” occurs if shareholders owning five percent or more (applying certain look-through rules) of an issuer's outstanding common stock, collectively, increase their ownership percentage by more than fifty percentage points within any three year period over such shareholders' lowest percentage ownership during this period. If we were to issue new shares of stock, such new shares could contribute to such an “ownership change” under U.S. tax law. Moreover, not every event that could contribute to such an “ownership change” is within our control. If an “ownership change” under Section 382 were to occur, our ability to utilize tax attributes in the future may be limited.
 
Assertions against us or our customers relating to intellectual property rights could materially impact our business.
 
Our industry is characterized by companies that hold large numbers of patents and other intellectual property rights and that vigorously pursue, protect and enforce intellectual property rights. From time to time, third parties may assert against us and our customers and distributors their patent and other intellectual property rights to technologies that are important to our business.

Claims that our products or technology infringe third-party intellectual property rights, regardless of their merit or resolution, are frequently costly to defend or settle and divert the efforts and attention of our management and technical personnel. In addition, many of our supply agreements require us to indemnify our customers and distributors from third-party infringement claims, which have in the past and may in the future require that we defend those claims and might require that we pay damages in the case of adverse rulings. Claims of this sort also could harm our relationships with our customers and might deter future customers from doing business with us. We do not know whether we will prevail in these proceedings given the complex technical issues and inherent uncertainties in intellectual property litigation. If any pending or future proceedings result in an adverse outcome, we could be required to:

cease the manufacture, use or sale of the infringing products or technology;

pay substantial damages for infringement;

expend significant resources to develop non-infringing products or technology;

license technology from the third-party claiming infringement, which license may not be available on commercially reasonable terms, or at all;

enter into cross-licenses with our competitors, which could weaken our overall intellectual property portfolio;

lose the opportunity to license our technology to others or to collect royalty payments based upon successful protection and assertion of our intellectual property against others;

pay substantial damages to our customers or end users to discontinue use or replace infringing technology with non-infringing technology; or

relinquish rights associated with one or more of our patent claims, if our claims are held invalid or otherwise unenforceable.
    
Any of the foregoing results could have a material adverse effect on our business, financial condition and results of operations.
 
We utilize a significant amount of intellectual property in our business. If we are unable to protect our intellectual property, our business could be adversely affected.
 
Our success depends in part upon our ability to protect our intellectual property. To accomplish this, we rely on a combination of intellectual property rights, including patents, trademarks and trade secrets, as well as customary contractual protections with our customers, distributors, employees and consultants, and security measures to protect our trade secrets. We cannot guarantee that:

any of our present or future patents will not lapse or be invalidated, circumvented, challenged, abandoned or, in the case of third-party patents licensed or sub-licensed to us, be licensed to others;

21




any of our pending or future patent applications will be issued or have the coverage originally sought;

our intellectual property rights will be enforced in jurisdictions where competition may be intense or where legal protection may be weak; or

any of the trademarks, trade secrets or other intellectual property rights that we presently employ in our business will not lapse or be invalidated, circumvented, challenged, abandoned or licensed to others.

In addition, we may not receive competitive advantages from the rights granted under our patents and other intellectual property rights. Our competitors may develop technologies that are similar or superior to our proprietary technologies, duplicate our proprietary technologies, or design around the patents we own or license. Our existing and future patents may be circumvented, blocked, licensed to others, or challenged as to inventorship, ownership, scope, validity or enforceability. Effective intellectual property protection may be unavailable or more limited in one or more relevant jurisdictions relative to those protections available in the United States, or may not be applied for in one or more relevant jurisdictions. If we pursue litigation to assert our intellectual property rights, an adverse decision in any of these legal actions could limit our ability to assert our intellectual property rights, limit the value of our technology or otherwise negatively impact our business, financial condition and results of operations.

We are a party to a number of patent and intellectual property license agreements. Some of these license agreements require us to make one-time or periodic payments. We may need to obtain additional licenses or renew existing license agreements in the future. We are unable to predict whether these license agreements can be obtained or renewed on acceptable terms.

A failure of our information technology infrastructure could adversely impact our business and operations.
 
We recognize the increasing volume of cyber attacks and employ commercially practical efforts to provide reasonable assurance such attacks are appropriately mitigated. Each year, we evaluate the threat profile of our industry to stay abreast of trends and to provide reasonable assurance our existing countermeasures will address any new threats identified. Despite our implementation of security measures, our IT systems and those of our service providers are vulnerable to circumstances beyond our reasonable control including acts of malfeasance, acts of terror, acts of government, natural disasters, civil unrest, and denial of service attacks any of which may lead to the theft of our intellectual property and trade secrets, or business disruption. To the extent that any disruption or security breach results in a loss or damage to our data or an inappropriate disclosure of confidential information, it could cause significant damage to our reputation, affect our relationships with our customers, suppliers and employees, and lead to claims against the company and ultimately harm our business. Additionally, we may be required to incur significant costs to protect against damage caused by these disruptions or security breaches in the future.

Item 1B. Unresolved Staff Comments.
 
None.
 
Item 2. Properties.
 
At September 30, 2015, our operating segments, including all consolidated joint ventures, had the following facilities in the United States, Europe, South America, Canada, Mexico and the Asia-Pacific region. For purposes of these numbers, multiple facilities in one geographic location are counted as one facility.
 
 
Manufacturing and Distribution Facilities
 
Engineering Facilities, Sales
Offices, Warehouses and
Service Centers
Commercial Truck & Industrial
19
 
15
Aftermarket & Trailer
7
 
8
Other
 
4
Total
26
 
27
These facilities had an aggregate floor space of approximately 9.4 million square feet, substantially all of which is in use. We owned approximately 63 percent and leased approximately 37 percent of this floor space. Substantially all of our owned domestic plants and equipment are subject to liens securing our obligations under our revolving credit facility with a group of banks (see Note 16 of the Notes to Consolidated Financial Statements under Item 8. Financial Statements and Supplementary Data). In the

22



opinion of management, our properties have been well maintained, are in sound operating condition and contain all equipment and facilities necessary to operate at present levels.
 
A summary of floor space (in square feet) of these facilities at September 30, 2015, (including new space under construction) is as follows:
 
 
 
Owned Facilities
 
Leased Facilities
 
 
Location
 
Commercial Truck & Industrial
 
Aftermarket
& Trailer
 
Other
 
Commercial Truck & Industrial
 
Aftermarket
& Trailer
 
Other
 
Total
United States
 
2,029,291

 
802,631

 
417,800

 
487,039

 
460,327

 

 
4,197,088

Canada
 

 

 

 

 
261,361

 

 
261,361

Europe
 
1,870,150

 
68,326

 

 
528,076

 
45,613

 
12,766

 
2,524,931

Asia-Pacific
 
173,155

 

 

 
998,641

 
87,335

 

 
1,259,131

Latin America
 
494,913

 

 

 
571,743

 
50,024

 

 
1,116,680

Total
 
4,567,509

 
870,957

 
417,800

 
2,585,499

 
904,660

 
12,766

 
9,359,191




Item 3. Legal Proceedings
 
See Note 20 of the Notes to Consolidated Financial Statements under Item 8. Financial Statements and Supplementary Data for information with respect to three class action lawsuits filed against the company as a result of modifications made to its retiree medical benefits.
See Note 23 of the Notes to Consolidated Financial Statements under Item 8. Financial Statements and Supplementary Data for information with respect to asbestos-related litigation.
See Item 1. Business, “Environmental Matters” and Note 23 of the Notes to Consolidated Financial Statements under Item 8. Financial Statements and Supplementary Data for information relating to environmental proceedings.
On July 10, 2014, Sistemas Automotrices de Mexico, S.A. de C.V. (“Sisamex”), a Mexican joint venture between our subsidiary Meritor Heavy Vehicle Systems, LLC (“Meritor HVS”) and Quimmco, S.A. de C.V. ("Quimmco"), filed a lawsuit against Meritor HVS in the Northern District of Illinois, seeking, among other relief, a declaration of Sisamex’s exclusive right to manufacture certain products and the components thereof for sale in Mexico. On July 13, 2014, Meritor HVS filed a lawsuit against Sisamex and Quimmco in the Northern District of Illinois, seeking, among other relief, a declaration that Sisamex may not manufacture without Meritor HVS's consent the components at issue in Sisamex's lawsuit and that Sisamex must instead purchase those components from Meritor HVS. On July 23, 2014, the parties to the two actions filed a joint motion seeking an order that the two actions are related and that both actions be heard before the same judge. The motion was granted. Shortly after the cases were filed, both parties filed cross motions to dismiss the other party’s complaint. The Court heard oral arguments on the motions on November 24, 2014 and on January 28, 2015 denied both parties' motions. The case is currently in discovery.
Various other lawsuits, claims and proceedings have been or may be instituted or asserted against Meritor or our subsidiaries relating to the conduct of our business, including those pertaining to product liability, tax, warranty or recall claims, intellectual property, safety and health, contract and employment matters. Although the outcome of litigation cannot be predicted with certainty and some lawsuits, claims or proceedings may be disposed of unfavorably to Meritor, management believes, after consulting with Meritor's General Counsel, that the disposition of matters that are pending will not have a material effect on our business, financial condition or results of operations.
Item 4. Mine Safety Disclosures.

Not applicable.

Item 4A. Executive Officers of the Registrant.
 
The name, age, positions and offices held with Meritor and principal occupations and employment during the past five years of each of our executive officers as of November 18, 2015, are as follows:


23



Ivor J. Evans, 73 - Executive Chairman since April 2015. Chairman and Chief Executive Officer from August 2013 until April 2015 and President from August 2013 until June 2014. Executive Chairman and Interim Chief Executive Officer and President from May 2013 until August 2013. Mr. Evans has been a director since May 2005. He served as Vice Chairman of Union Pacific Corporation from January 2004 until his retirement in March 2005, and served as a member of the Union Pacific board of directors from 1999 to 2005. He had served as President and Chief Operating Officer of Union Pacific Railroad from 1998 until January 2004. From 1989 until 1998, he served in various executive positions at Emerson Electric Company (technology and engineering applications), including Senior Vice President, Industrial Components and Equipment. Prior to that, he was President of Blackstone Corp. from 1985 to 1989 and previously spent 21 years serving in key operations roles for General Motors Corporation (automotive).
 
Jeffrey A. Craig, 55 - Chief Executive Officer and President since April 2015 and President and Chief Operating Officer from June 2014 until April 2015. Mr. Craig has served as a director of Meritor since April 2015. Senior Vice President and President, Commercial Truck and Industrial from February 2013 until May 2014. Senior Vice President and Chief Financial Officer from May 2008 until January 2013. Acting Controller from May 2008 to January 2009. Senior Vice President and Controller from May 2007 until May 2008. Vice President and Controller from May 2006 until April 2007. Prior to that, he was President and Chief Executive Officer of GMAC Commercial Finance (commercial lending service) from 2001 to May 2006, and President and Chief Executive Officer of GMAC’s Business Credit division from 1999 to 2001. He joined GMAC as general auditor in 1997 from Deloitte & Touche, where he served as an audit partner.

Kevin Nowlan, 43 - Senior Vice President and Chief Financial Officer since May 2013. Vice President and Chief Financial Officer from February 2013 until April 2013. Vice President and Controller of Meritor from December 2010 until February 2013 and Vice President and Treasurer from July 2009 until his appointment as Vice President and Controller. From July 2008 until July 2009, served as Vice President and Assistant Treasurer of Meritor and from March 2007 until July 2008 served as Vice President of Shared Services. Prior to that, Mr. Nowlan was Director of Capital Planning for General Motors Acceptance Corp. (“GMAC”) from 2006 until 2007 and worked in various roles at GMAC and General Motors Corporation (automotive) since 1995.

Sandra Quick, 49 - Senior Vice President, General Counsel and Corporate Secretary since February 2014. Group Vice President and General Counsel for the Electronics and Interiors Division of Johnson Controls, Inc. from April 2012 until February 2014. Vice President and General Counsel for the North American and South American operations of Johnson Controls Automotive Experience Group from August 2007 until April 2012. Vice President, General Counsel and Secretary for Toyoda Gosei North America Corporation from June 2000 until July 2007. North American Legal Counsel for Valeo Electrical Systems, Inc. from September 1998 until June 2000. Senior Counsel for ITT Automotive, Inc. from June 1995 until September 1998. Associate Litigation Attorney at Dickinson Wright PLLC from September 1991 until June 1995.

Timothy Heffron, 51 - Vice President, Human Resources and Chief Information Officer since August 2013. Vice President, Chief Information Officer and Shared Services from July 2011 until August 2013. Vice President of Shared Services from June 2008 until July 2011. Executive Vice President and Chief Information Officer of GMAC Commercial Finance from January 2002 until June 2008. Director of Reengineering for GMAC from December 1999 until December 2001. Director of Global Information Technology for General Motors from June 1999 until November 1999. Assistant General Auditor for GMAC from March 1998 until May 1999. Prior to that, spent nine years in public accounting, most recently as an audit senior manager with Ernst & Young.
Chris Villavarayan, 45 - President, Americas since January 2014. Vice President of Global Manufacturing and Supply Chain Management from June 2012 until January 2014. Managing Director of Meritor India and CEO of MHVSIL from November 2009 until June 2012. Led Meritor Heavy Vehicle Systems (India) Ltd., a joint venture with the Kalyani Group in Mysore, India, from January 2010 until June 2012. General Manager of Operations Planning and Strategy for Meritor from September 2007 until November 2009. Director of Corporate Manufacturing from December 2006 until September 2007. Regional Manager of Continuous Improvement from April 2005 until December 2006. Project Engineer from October 2001 until April 2005. Project Coordinator and Site Manager of Meritor St. Thomas, Ontario facility from June 2000 until October 2001.

Joseph Plomin, 53 - President, International since January 2014. Vice President of International from July 2013 until January 2014. Vice President of Global Brakes from May 2012 until July 2013. Vice President of Truck North America and South America from July 2011 until May 2012. Vice President of Commercial Vehicle Systems Truck from September 2007 until July 2011. Prior to joining Meritor, Mr. Plomin held a variety of executive positions at Delco Remy International, including President of Electrical Aftermarket from February 2006 until October 2006; Senior Vice President of Sales/Marketing/Product Line Management from October 2006 until September 2007; General Manager/Senior Vice President of Heavy Duty/Industrial Division from June 2001 until February 2006; and Senior Vice President of Sales and Marketing, Electrical Division from September 1998 until December 2000.

Robert Speed, 44 - President, Aftermarket & Trailer and Chief Procurement Officer since April 2015. Vice President and Chief Procurement Officer from February 2014 until April 2015. Vice President of Procurement from March 2013 until February 2014. Vice President of Purchasing from January 2012 until March 2013. Managing Director of Meritor’s Australia operations

24



from July 2010 until January 2012. Senior Director of Finance, Truck Americas, from February 2009 until July 2010. Senior Director of Finance, Truck Group, from July 2008 until February 2009. Director of Finance for Truck and Procurement from January 2008 until July 2008. Director of Financial Planning and Analysis from March 2006 until January 2008. Prior to joining Meritor, Mr. Speed was Manager of Capital Markets at NOP Automotive Worldwide from February 2005 until March 2006. Director of Finance & Administration at NOP Automotive Worldwide from September 2000 until June 2003. Manager of Finance at NOP Automotive Worldwide from February 2000 until August 2000. M&A Arbitrage Trader at Peter Securities, LLC from July 1998 until February 2000. Senior Equity Trader at First of America Bank from May 1997 until July 1998.

There are no family relationships, as defined in Item 401 of Regulation S-K, between any of the above executive officers and any director, executive officer or person nominated to become a director or executive officer. No officer of Meritor was selected pursuant to any arrangement or understanding between him or her and any person other than Meritor. All executive officers are elected annually.

25



PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
 
Meritor's common stock, par value $1 per share (“Common Stock”), is listed on the New York Stock Exchange (“NYSE”) and trades under the symbol "MTOR." On November 16, 2015, there were 15,582 shareowners of record of Meritor's Common Stock.
 
The high and low sale prices per share of Meritor Common Stock for each quarter of fiscal years 2015 and 2014 were as follows:
 
 
 
Fiscal Year 2015
 
Fiscal Year 2014
Quarter Ended
 
High
 
Low
 
High
 
Low
December 31
 
$
14.99

 
$
9.73

 
$
9.93

 
$
6.61

March 31
 
15.46

 
12.04

 
12.68

 
9.41

June 30
 
14.42

 
12.25

 
14.75

 
11.17

September 30
 
14.22

 
10.98

 
14.09

 
11.41


There were no dividends declared and paid in fiscal year 2015 or in fiscal year 2014. Our payment of cash dividends and the amount of the dividend are subject to review and change at the discretion of our Board of Directors.

Our revolving credit facility permits us to declare and pay up to $40 million of dividends in any fiscal year provided that no default or unmatured default, as defined in the agreement, has occurred and is continuing at the date of declaration or payment. 

Additionally, our indentures permit us to pay dividends under the following primary conditions:

if a default on the notes, as defined in the indentures, has not occurred and is not continuing or shall not occur as a consequence of the payment;
if the interest coverage ratio, as defined in the indentures, is greater than 2.00 to 1.00 after giving effect to the dividend;
if the cumulative amount of the dividends paid does not exceed certain cumulative cash and earnings measurements;

if the dividends are less than $60 million per fiscal year (with a carryover to the next fiscal year of up to $60 million if unused in the current fiscal year); and
if after giving effect to the dividend, the total leverage ratio, as defined in the indenture, would not exceed 4.00 to 1.00.

See Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters for information on securities authorized for issuance under equity compensation plans.
 
Issuer repurchases
 
The independent trustee of our 401(k) plans purchases shares in the open market to fund investments by employees in our common stock, one of the investment options available under such plans, and any matching contributions in company stock we provide under certain of such plans. In addition, our stock incentive plans permit payment of an option exercise price by means of cashless exercise through a broker and permit the satisfaction of the minimum statutory tax obligations upon exercise of options and the vesting of restricted stock units through stock withholding. However, the company does not believe such purchases or transactions are issuer repurchases for the purposes of this Item 5 of this Report on Form 10-K. In addition, our stock incentive plans also permit the satisfaction of tax obligations upon the vesting of restricted stock through stock withholding. There were no shares withheld in fiscal year 2015.
 

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Shareowner Return Performance Presentation
 
The line graph below compares the cumulative total shareowner return of the S&P 500, Meritor, Inc. and the peer group of companies for the period from September 30, 2010 to September 30, 2015, assuming a fixed investment of $100 at the respective closing prices on the last day of each fiscal year and reinvestment of cash dividends.

 
 
 
 
9/10
 
9/11
 
9/12
 
9/13
 
9/14
 
9/15
Meritor, Inc.
 
100.00

 
45.43

 
27.28

 
50.58

 
69.82

 
68.40

S&P 500
 
100.00

 
101.14

 
131.69

 
157.17

 
188.18

 
187.02

Peer Group(1)
 
100.00

 
88.53

 
103.81

 
156.42

 
158.15

 
140.82



(1) 
The peer group consists of representative commercial vehicle suppliers of approximately comparable products to Meritor. The peer group consists of Accuride Corporation, Commercial Vehicle Group, Inc., Cummins Inc., Dana Holding Corporation, Haldex AB, Modine Manufacturing Company, SAF-Holland SA, Stoneridge, Inc., and Wabco Holdings Inc.
 
The information included under the heading “Shareowner Return Performance Presentation” is not to be treated as “soliciting material” or as “filed” with the SEC, and is not incorporated by reference into any filing by the company under the Securities Act of 1933 or the Securities Exchange Act of 1934 that is made on, before or after the date of filing of this Annual Report on Form 10-K.

27



Item 6. Selected Financial Data.
 
The following sets forth selected consolidated financial data. The data should be read in conjunction with the information included under Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations and Item 8. Financial Statements and Supplementary Data below. Fiscal years 2013, 2012, and 2011 have been recast to reflect our Mascot business as discontinued operations.
 
 
Year Ended September 30,
 
2015
 
2014
 
2013
 
2012
 
2011
 
(in millions, except per share amounts)
SUMMARY OF OPERATIONS
 
 
 
 
 

 
 
 
 
Sales
 
 
 
 
 

 
 
 
 
Commercial Truck & Industrial
$
2,739

 
$
2,980

 
$
2,920

 
$
3,613

 
$
3,828

Aftermarket & Trailer
884

 
920

 
871

 
906

 
915

Intersegment Sales
(118
)
 
(134
)
 
(119
)
 
(135
)
 
(159
)
Total Sales
$
3,505

 
$
3,766

 
$
3,672

 
$
4,384

 
$
4,584

 
 
 
 
 
 
 
 
 
 
Operating Income
$
128

 
$
217

 
$
7

 
$
173

 
$
172

Income Before Income Taxes
67

 
315

 
51

 
137

 
157

Net Income Attributable to Noncontrolling Interests
(1
)
 
(5
)
 
(2
)
 
(11
)
 
(17
)
Net Income (Loss) Attributable to Meritor, Inc.:
 
 
 
 
 

 
 
 
 
Income (Loss) from Continuing Operations
$
65

 
$
279

 
$
(15
)
 
$
69

 
$
64

Loss from Discontinued Operations
(1
)
 
(30
)
 
(7
)
 
(17
)
 
(1
)
Net Income (Loss)
$
64

 
$
249

 
$
(22
)
 
$
52

 
$
63

 
 
 
 
 
 
 
 
 
 
BASIC EARNINGS (LOSS) PER SHARE
 
 
 
 
 

 
 
 
 
Continuing Operations
$
0.67

 
$
2.86

 
$
(0.15
)
 
$
0.72

 
$
0.68

Discontinued Operations
(0.01
)
 
(0.31
)
 
(0.07
)
 
(0.18
)
 
(0.01
)
Basic Earnings (Loss) per Share
$
0.66

 
$
2.55

 
$
(0.22
)
 
$
0.54

 
$
0.67

 
 
 
 
 
 
 
 
 
 
DILUTED EARNINGS (LOSS) PER SHARE
 
 
 
 
 

 
 
 
 
Continuing Operations
$
0.65

 
$
2.81

 
$
(0.15
)
 
$
0.71

 
$
0.66

Discontinued Operations
(0.01
)
 
(0.30
)
 
(0.07
)
 
(0.17
)
 
(0.01
)
Diluted Earnings (Loss) per Share
$
0.64

 
$
2.51

 
$
(0.22
)
 
$
0.54

 
$
0.65

 
 
 
 
 
 
 
 
 
 
FINANCIAL POSITION AT SEPTEMBER 30
 
 
 
 
 

 
 
 
 
Total Assets (1)
$
2,195

 
$
2,485

 
$
2,552

 
$
2,489

 
$
2,649

Short-term Debt
15

 
7

 
13

 
18

 
84

Long-term Debt (1)
1,036

 
948

 
1,107

 
1,030

 
936

(1)
Prior year amounts have been recast to reflect the early adoption of ASU 2015-03, Interest — Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs.





28



Income (loss) from continuing operations attributable to Meritor, Inc. in the selected financial data information presented above includes the following items specific to the period of occurrence (in millions):
 
 
 
 
Year Ended September 30,
 
2015
 
2014
 
2013
 
2012
 
2011
Pretax items:
 
 
 
 
 
 
 
 
 
Restructuring costs
$
(16
)
 
$
(10
)
 
$
(23
)
 
$
(39
)
 
$
(22
)
Goodwill and asset impairment charges
(17
)
 

 

 

 

Impact of curtailment gain, pension settlement loss and pension plan freeze
(59
)
 
15

 
(109
)
 

 

Antitrust settlement with Eaton (including recovery of past legal fees)

 
209

 

 

 

Gain on sale of equity investment

 

 
125

 

 

Specific warranty contingency, net of supplier recovery

 
(8
)
 
(7
)
 

 

Loss on debt extinguishment
(25
)
 
(31
)
 
(19
)
 

 

Gain on sale of property

 

 

 
16

 

Asbestos-related liability remeasurement
(1
)
 
(20
)
 
(7
)
 
(18
)
 

Non-operating gains, net
5

 

 
3

 
7

 
10

After tax items:
 
 
 
 
 
 
 
 
 
Deferred tax asset valuation allowance benefit (expense)
(16
)
 

 

 

 



Loss from discontinued operations attributable to Meritor, Inc. in the selected financial data information presented above includes the following items specific to the period of occurrence (in millions):
 
 
 
 
Year Ended September 30,
 
2015
 
2014
 
2013
 
2012
 
2011
Pretax items:
 
 
 
 
 
 
 
 
 
        Gain (loss) on divestitures of businesses, net
$

 
$
(23
)
 
$

 
$
(1
)
 
$
19

        Restructuring costs

 

 
(3
)
 
(1
)
 
(9
)
Charge for contingency and indemnity obligation

 

 

 
(10
)
 
(4
)


29



Item 7. Management’s Discussion and Analysis of Financial Conditions and Results of Operations.
 
Overview
 
Headquartered in Troy, Michigan, we are a premier global supplier of a broad range of integrated systems, modules and components to OEMs and the aftermarket for the commercial vehicle, transportation and industrial sectors. We serve commercial truck, trailer, military, bus and coach, construction, and other industrial OEMs and certain aftermarkets. Meritor common stock is traded on the New York Stock Exchange under the ticker symbol MTOR.

Our sales for fiscal year 2015 were $3,505 million, a decrease compared to $3,766 million in the prior year. The decrease in sales was the result of the strengthening of the US dollar against most currencies, primarily the euro and Brazilian real. In addition, unfavorable macro-economic conditions in South America and China resulted in lower production in these regions, and we experienced lower revenue from our Defense business compared to the prior fiscal year. The production decreases were partially offset by higher sales in North America, as the Class 8 truck market reached its strongest production levels since 2006.

Adjusted EBITDA (see Non-GAAP Financial Measures below) for fiscal year 2015 was $334 million compared to $314 million in fiscal year 2014. Our Adjusted EBITDA margin (see Non-GAAP Financial Measures below) in fiscal year 2015 was 9.5 percent compared to 8.3 percent in the same period a year ago. Despite lower revenue, Adjusted EBITDA and Adjusted EBITDA margin increased compared to the prior fiscal year primarily due to material, labor and burden performance pricing actions, and lower SG&A expense which more than offset the impact of lower revenue. Net income attributable to the company for fiscal year 2015 and 2014 was $64 million and $249 million, respectively.

Net income from continuing operations attributable to the company for fiscal years 2015 and 2014 was $65 million and $279 million, respectively. Adjusted income from continuing operations attributable to the company for fiscal years 2015 and 2014 was $155 million and $101 million, respectively. See Non-GAAP Financial Measures below.

Cash flows provided by operating activities were $97 million in fiscal year 2015 compared to cash flows provided by operating activities of $215 million in the prior fiscal year. The decrease is primarily due to the $209 million in proceeds received from the settlement of the Eaton antitrust litigation in the prior fiscal year, partially offset by an increase in more cash provided by our accounts receivable factoring program and lower contributions to our pension plans.
Canadian and German Pension Settlements
During fiscal year 2015, we settled the remaining liabilities associated with our Canadian pension plans through lump-sum payments made from plan assets to plan participants and by purchasing annuity contracts from an insurance company. We recognized a primarily non-cash pre-tax settlement loss of $16 million associated with the annuity purchases and lump-sum payments. We settled a net pension obligation of $16 million using $20 million of pension plan assets, such that the assets and liabilities were derecognized from the balance sheet during the quarter ended September 30, 2015.

Additionally, in fiscal year 2015, we settled the remaining liabilities associated with our German pension plans by purchasing annuity contracts from an insurance company. We recognized a primarily non-cash pre-tax settlement loss of $43 million associated with the annuity purchases. We settled a net pension obligation of $91 million, which was derecognized from the balance sheet during the quarter ended September 30, 2015.

Defense Goodwill and Asset Impairment

Sales for our primary military program were at their peak during fiscal year 2012 and began to decline in fiscal year 2013. The program wound down to insignificant levels in 2015 and is expected to remain insignificant until completion of the program.

In the fourth quarter of fiscal year 2015, the U.S. Army awarded a new contract for the production of the Joint Light Tactical Vehicle (JLTV) to Oshkosh. We expect production for this program to ramp up over the next several years. Although we expect to supply wheel-ends on this program, our revenue will be significantly less than if the program was awarded differently and we were supplying our ProTec Independent Suspension.

We continue to work toward securing participation in additional military programs, however based on sales expectations for currently awarded programs, the fair value of our Defense business did not exceed its carrying value. As a result, we have recorded an impairment of $15 million, pre-tax, of goodwill. In addition, we made certain capital investments and commitments to supply our ProTec Independent Suspension had the JLTV program been awarded differently. As a result, we recorded an impairment of $2 million of long-lived assets in the fourth quarter of fiscal year 2015.


30



Valuation Allowance (VA)
In prior years, we established valuation allowances against our U.S. net deferred tax assets and the net deferred tax assets of our 100-percent-owned subsidiaries, including those in France, Germany, Italy, Sweden, U.K. and certain other countries. In evaluating our ability to recover these net deferred tax assets, we utilize a consistent approach which considers our historical operating results, including an assessment of the degree to which any gains or losses are driven by items that are unusual in nature and tax planning strategies. In addition, we review changes in near-term market conditions and other factors that impact future operating results.
During the fourth quarter of fiscal year 2015, as a result of sustained profitability in Germany, Italy, Mexico and Sweden evidenced by a strong earnings history and additional positive evidence, we determined it was more likely than not future earnings will be sufficient to realize deferred tax assets in these jurisdictions. Accordingly, we reversed valuation allowances in Germany, Italy, Mexico, and Sweden, resulting in non-cash income tax benefits of $16 million.
We continue to maintain the valuation allowances in the U.S., France, U.K. and certain other jurisdictions, as we believe the negative evidence that we will be able to recover these net deferred tax assets continues to outweigh the positive evidence. If, in the future, we generate taxable income on a sustained basis in jurisdictions where we have recorded valuation allowances, our conclusion regarding the need for valuation allowances in these jurisdictions could change. Accordingly, although we were profitable in the U.S. in 2014 and 2015, we have not generated enough positive evidence to warrant a reversal of the U.S. valuation allowance, so we continue to record a full valuation allowance against the U.S. net deferred tax assets. Although the weight of negative evidence related to cumulative losses is decreasing as we deliver on our M2016 plan, we believe that this objectively-measured negative evidence outweighs the subjectively-determined positive evidence and, as such, we have not changed our judgment regarding the need for a full valuation allowance in 2015.
Continued improvement in our operating results, however, could lead to reversal of some or all of these valuation allowances in the future. Consumption of tax attributes to offset profits will reduce the overall level of deferred tax assets subject to valuation allowance.

Capital Market Transactions
In the third quarter of fiscal year 2015, we issued an additional $225 million aggregate principal amount of our existing 6.25 percent notes due 2024. Upon completion of the offering, the aggregate principal amount of outstanding notes of this series was $450 million. The proceeds from the sale of these additional notes due 2024 were used to replenish available cash used to pay $179 million, including premium and fees, to repurchase $110 million principal amount at maturity of our 7.875 percent convertible notes due 2026 during the third and fourth quarters of 2015. In the fourth quarter of fiscal year 2015, we used the remaining net proceeds, along with cash, to purchase annuities to satisfy our obligations under our Canadian and German pension plans for our employees.

Equity and Equity-Linked Repurchase Authorization
In June 2014, our Board of Directors authorized the repurchase of up to $210 million of our equity and equity-linked securities (including convertible debt securities), subject to the achievement of our M2016 net debt reduction target and compliance with legal and regulatory requirements and our debt covenants. In September 2014, our Board authorized the repurchase of up to $40 million of our equity or equity-linked securities (including convertible debt securities) under the $210 million authorization that may be made annually without regard to achievement of the M2016 net debt reduction target. These authorizations have no stated expiration. Under these authorizations, in fiscal year 2015, we repurchased 4.2 million shares of our common stock for $55 million and $19 million principal amount of the company's 4.0 percent convertible notes due 2027 (see Note 16 of the Notes to Consolidated Financial Statements). The amount remaining available for repurchases under the equity and equity-linked repurchase authorizations was $136 million as of September 30, 2015.
As part of the equity and equity-linked repurchase authorization, in August 2015, we entered into a 10b5-1 stock repurchase plan. Under this plan, from October 1, 2015 through November 13, 2015, we have repurchased approximately 1.8 million shares for $20 million. As of November 18, 2015, we have repurchased 6 million common shares under the Equity and Equity-Linked Repurchase Authorization. The amount remaining available for repurchases under the equity and equity-linked repurchase authorizations was $116 million as of October 31, 2015.


31



Trends and Uncertainties

 Industry Production Volumes

 The following table reflects estimated on-highway commercial truck production volumes for selected original equipment (OE) markets based on available sources and management's estimates.
 
 
Year Ended September 30,
 
2015
 
2014
 
2013
 
2012
 
2011
Estimated Commercial Truck production (in thousands):
 
 
 
 
 
 
 
 
 
North America, Heavy-Duty Trucks
328


281


243


295


224

North America, Medium-Duty Trucks
234


219


197


182


159

North America, Trailers
301

 
254

 
238

 
237

 
197

Western Europe, Heavy- and Medium-Duty Trucks
398


395


383


394


407

South America, Heavy- and Medium-Duty Trucks
89


156


186


165


204

India, Heavy- and Medium-Duty Trucks
270

 
215

 
226

 
315

 
339

North America:
During fiscal year 2015, production volumes in North America increased compared to the levels experienced in fiscal year 2014. We expect production volumes in North America to remain strong during fiscal year 2016 but at decreased levels compared to those experienced in fiscal year 2015.
Western Europe:
During fiscal year 2015, production volumes in Western Europe increased slightly compared to the levels experienced in fiscal year 2014. During fiscal year 2016, we expect production volumes in Western Europe to increase modestly compared to the levels experienced in fiscal year 2015, as we continue to see registrations increasing and freight fundamentals improving.
South America:
During fiscal year 2015, production volumes in South America significantly decreased on a year-over-year basis as a result of the difficult economic climate in Brazil. During fiscal year 2016, we expect the markets in South America to remain consistent with the depressed levels experienced in the second half of fiscal year 2015.
China:
During fiscal year 2015, production volumes in China decreased on a year-over-year basis as a result of the local economic climate. During fiscal year 2016, we expect production volumes in China to remain consistent with levels experienced in fiscal year 2015.
India:
During fiscal year 2015, production volumes in India increased due to an improving economic climate compared to the levels experienced in fiscal year 2014. During fiscal year 2016, we expect production volumes to continue to improve compared to the levels experienced in fiscal year 2015.
Industry-Wide Issues
Our business continues to address a number of other challenging industry-wide issues including the following:
Uncertainty around the global market outlook;
Volatility in price and availability of steel, components and other commodities;
Disruptions in the financial markets and their impact on the availability and cost of credit;
Volatile energy and increasing transportation costs;
Impact of currency exchange rate volatility;

32



Consolidation and globalization of OEMs and their suppliers; and
Significant pension and retiree medical health care costs.
Other
Other significant factors that could affect our results and liquidity in fiscal year 2016 and beyond include:
Significant contract awards or losses of existing contracts or failure to negotiate acceptable terms in contract renewals;
Failure to obtain new business;
Our ability to manage possible adverse effects on our European operations, or financing arrangements related thereto, in the event one or more countries exit the European monetary union;
Our ability to implement planned productivity, cost reduction, and other margin improvement initiatives;
Our ability to work with our customers to manage rapidly changing production volumes;
Our ability to recover and timing of recovery of steel price and other cost increases from our customers;
Any unplanned extended shutdowns or production interruptions by us, our customers or our suppliers;
A significant deterioration or slowdown in economic activity in the key markets in which we operate;
Competitively driven price reductions to our customers;
Potential price increases from our suppliers;
Additional restructuring actions and the timing and recognition of restructuring charges, including any actions associated with the prolonged softness in markets in which we operate;
Higher-than-planned warranty expenses, including the outcome of known or potential recall campaigns;
Uncertainties of asbestos claim litigation and the outcome of litigation with insurance companies regarding the scope of coverage and the long-term solvency of our insurance carriers; and
Restrictive government actions by foreign countries (such as restrictions on transfer of funds and trade protection measures, including export duties, quotas and customs duties and tariffs).

NON-GAAP FINANCIAL MEASURES
In addition to the results reported in accordance with accounting principles generally accepted in the United States (GAAP), we have provided information regarding non-GAAP financial measures. These non-GAAP financial measures include Adjusted income (loss) from continuing operations, Adjusted diluted earnings (loss) per share from continuing operations, Adjusted EBITDA, Adjusted EBITDA margin, Free cash flow, and Net debt including retirement liabilities.
     Adjusted income (loss) from continuing operations and Adjusted diluted earnings (loss) per share from continuing operations are defined as reported income (loss) from continuing operations and reported diluted earnings or loss per share from continuing operations before restructuring expenses, asset impairment charges and other special items as determined by management. Adjusted EBITDA is defined as income (loss) from continuing operations before interest, income taxes, depreciation and amortization, non-controlling interests in consolidated joint ventures, loss on sale of receivables, restructuring expenses, asset impairment charges and other special items as determined by management. Adjusted EBITDA margin is defined as Adjusted EBITDA divided by consolidated sales from continuing operations. Free cash flow is defined as cash flows provided by (used for) operating activities less capital expenditures. Net debt including retirement liabilities is defined as total debt plus pension assets, pension liability, retiree medical liability and other retirement benefits less cash and cash equivalents.

33



     Management believes these non-GAAP financial measures are useful to both management and investors in their analysis of the company's financial position and results of operations. In particular, management believes that Adjusted EBITDA, Adjusted EBITDA margin and Adjusted diluted earnings (loss) per share from continuing operations are meaningful measures of performance as they are commonly utilized by management and the investment community to analyze operating performance in our industry. Further, management uses Adjusted EBITDA for planning and forecasting future periods. In addition, we use Segment EBITDA as the primary basis for the Chief Operating Decision Maker (CODM) to evaluate the performance of each of our reportable segments. 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 expense and asset impairment charges. Management believes that free cash flow is useful in analyzing our ability to service and repay debt and return value directly to shareholders. Net debt, including retirement liabilities, is a specific financial measure which is part of our three-year plan, M2016, to reduce debt and other balance sheet liabilities.
     Adjusted income (loss) from continuing operations and Adjusted diluted earnings (loss) per share from continuing operations and Adjusted EBITDA should not be considered a substitute for the reported results prepared in accordance with GAAP and should not be considered as an alternative to net income as an indicator of our operating performance or to cash flows as a measure of liquidity. Free cash flow should not be considered a substitute for cash provided by (used for) operating activities, or other cash flow statement data prepared in accordance with GAAP, or as a measure of financial position or liquidity. In addition, these non-GAAP cash flow measures do not reflect cash used to repay debt or cash received from the divestitures of businesses or sales of other assets and thus do not reflect funds available for investment or other discretionary uses. These non-GAAP financial measures, as determined and presented by the company, may not be comparable to related or similarly titled measures reported by other companies. Net debt should not be considered a substitute for total debt as reported on the balance sheet. Set forth below are reconciliations of these non-GAAP financial measures to the most directly comparable financial measures calculated in accordance with GAAP.
Adjusted income (loss) from continuing operations attributable to the company and adjusted diluted earnings (loss) per share from continuing operations are reconciled to income (loss) from continuing operations attributable to the company and diluted earnings (loss) per share from continuing operations below (in millions, except per share amounts).
 
Year Ended September 30,
 
2015
 
2014
 
2013 (2)
Adjusted income from continuing operations attributable to the company, net of tax
$
155

 
$
101

 
$
41

Antitrust settlement with Eaton (1)

 
208

 

Restructuring costs
(14
)
 
(7
)
 
(22
)
Specific warranty contingency, net of supplier recovery

 
8

 
(7
)
Pension settlement losses
(55
)
 

 
(100
)
Gain on sale of equity investment

 

 
92

Loss on debt extinguishment
(24
)
 
(31
)
 
(19
)
Goodwill and asset impairment charges
(13
)
 

 

       Income tax benefit (VA reversal)
16

 

 

Income (loss) from continuing operations attributable to the company

$
65


$
279

 
$
(15
)
Adjusted diluted earnings per share from continuing operations
$
1.55

 
$
1.02

 
$
0.42

Impact of adjustments on diluted earnings per share
(0.90
)
 
1.79

 
(0.57
)
Diluted earnings (loss) per share from continuing operations
$
0.65

 
$
2.81

 
$
(0.15
)

(1) Adjustment associated with our share of the antitrust settlement with Eaton less legal expenses incurred in fiscal year 2014.
(2) In fiscal year 2014, amounts for fiscal year 2013 were recast for discontinued operations.

34



Free cash flow is reconciled to cash flows provided by (used for) operating activities below (in millions).
 
Year Ended September 30,
 
2015
 
2014
 
2013
Cash provided by (used for) operating activities
$
97

 
$
215

 
$
(96
)
Capital expenditures
(79
)
 
(77
)
 
(54
)
Free cash flow
$
18

 
$
138

 
$
(150
)

Net debt, including retirement liabilities, is reconciled to total debt (in millions).

 
September 30,
 
2015
 
2014 (1)
Short-term debt
$
15

 
$
7

Long-term debt
1,036

 
948

Total debt
1,051

 
955

 
 
 
 
Pension assets - non-current
(110
)
 
(104
)
Pension liability - current
5

 
8

Pension liability - non-current
214

 
315

Pension liability
109

 
219

 
 
 
 
Retiree medical liability - current
33

 
33

Retiree medical liability - non-current
405

 
446

Retire medical liability
438

 
479

 
 
 
 
Other retirement benefits - current
1

 
2

Other retirement benefits - non-current
13

 
14

Subtotal
1,612

 
1,669

 
 
 
 
Less: Cash and cash equivalents
(193
)
 
(247
)
Net debt, including retirement liabilities
$
1,419

 
$
1,422


(1)
Prior year amounts have been recast to reflect the early adoption of ASU 2015-03, Interest — Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs.


35



Adjusted EBITDA is reconciled to net income attributable to Meritor, Inc. in “Results of Operations” below.


Results of Operations
 
     The following is a summary of our financial results for the last three fiscal years.
 
 
Year Ended September 30,
 
2015
 
2014
 
2013
 
(in millions, except per share amounts)
Sales:
 
 
 
 
 

Commercial Truck & Industrial
$
2,739

 
$
2,980

 
$
2,920

Aftermarket & Trailer
884

 
920

 
871

Intersegment Sales
(118
)
 
(134
)
 
(119
)
SALES
$
3,505

 
$
3,766

 
$
3,672

SEGMENT EBITDA:
 
 
 
 
 
Commercial Truck & Industrial
$
216

 
$
218

 
$
192

Aftermarket & Trailer
123

 
106

 
87

SEGMENT EBITDA
339

 
324

 
279

       Unallocated legacy and corporate costs, net (1)
(5
)
 
(10
)
 
(15
)
ADJUSTED EBITDA
334

 
314

 
264

Interest expense, net
(105
)
 
(130
)
 
(126
)
Provision for income taxes
(1
)
 
(31
)
 
(64
)
Depreciation and amortization
(65
)
 
(67
)
 
(67
)
Restructuring costs
(16
)
 
(10
)
 
(23
)
Loss on sale of receivables
(5
)
 
(8
)
 
(6
)
Pension settlement losses
(59
)
 

 
(109
)
Antitrust settlement with Eaton, net of tax (2)

 
208

 

Gain on sale of equity investment

 

 
125

Specific warranty contingency, net of supplier recovery

 
8

 
(7
)
Goodwill and asset impairment charges
(17
)
 

 

Noncontrolling interests
(1
)
 
(5
)
 
(2
)
INCOME (LOSS) FROM CONTINUING OPERATIONS, attributable to Meritor, Inc.
65

 
279

 
(15
)
LOSS FROM DISCONTINUED OPERATIONS, net of tax

(1
)
 
(30
)
 
(7
)
NET INCOME (LOSS) attributable to Meritor, Inc.
$
64

 
$
249

 
$
(22
)
DILUTED EARNINGS (LOSS) PER SHARE, attributable to Meritor, Inc.
 
 
 
 
 
Continuing operations
$
0.65

 
$
2.81

 
$
(0.15
)
Discontinued operations
(0.01
)
 
(0.30
)
 
(0.07
)
Diluted earnings (loss) per share
$
0.64

 
$
2.51

 
$
(0.22
)
DILUTED AVERAGE COMMON SHARES OUTSTANDING
100.1

 
99.2

 
97.1


(1) 
Unallocated legacy and corporate costs, net represents items that are not directly related to our business segments. These costs primarily include asbestos-related charges, pension and retiree medical costs associated with sold businesses and other legacy costs for environmental charges.
(2) 
Adjustment associated with our share of the antitrust settlement with Eaton less legal expenses incurred in fiscal year 2014.


36



Fiscal Year 2015 Compared to Fiscal Year 2014
 
Sales
 
The following table reflects total company and business segment sales for fiscal years 2015 and 2014 (in millions). The reconciliation of the dollar change is intended to reflect the trend in business segment sales and to illustrate the impact that changes in foreign currency exchange rates, volumes and other factors had on sales. Business segment sales include intersegment sales.
 
 
 
 
 
 
 
 
 
 
Dollar Change Due To
 
2015
 
2014
 
Dollar
Change
 
%
Change
 
Currency
 
Volume/ Other
Sales:
 
 
 
 


 


 
 
 
 
Commercial Truck & Industrial
 
 
 
 


 


 
 
 
 
            North America
$
1,560

 
$
1,447

 
$
113

 
8
 %
 
$

 
$
113

            Europe
574

 
644

 
(70
)
 
(11
)%
 
(120
)
 
50

            South America
198

 
408

 
(210
)
 
(51
)%
 
(53
)
 
(157
)
     China
90

 
146

 
(56
)
 
(38
)%
 
(2
)
 
(54
)
     India
140

 
114

 
26

 
23
 %
 
(5
)
 
31

     Other Asia Pacific
87

 
117

 
(30
)
 
(26
)%
 
(13
)
 
(17
)
          Total External Sales
$
2,649

 
$
2,876

 
$
(227
)
 
(8
)%
 
$
(193
)
 
$
(34
)
            Intersegment Sales
90

 
104

 
(14
)
 
(13
)%
 
(24
)
 
10

          Total Sales
$
2,739

 
$
2,980

 
$
(241
)
 
(8
)%
 
$
(217
)
 
$
(24
)
 
 
 
 
 
 
 
 
 
 
 
 
Aftermarket & Trailer
 
 
 
 
 
 
 
 
 
 
 
            North America
$
734

 
$
739

 
$
(5
)
 
(1
)%
 
$
(12
)
 
$
7

            Europe
122

 
151

 
(29
)
 
(19
)%
 
(21
)
 
(8
)
          Total External Sales
$
856

 
890

 
$
(34
)
 
(4
)%
 
(33
)
 
$
(1
)
            Intersegment Sales
28

 
30

 
(2
)
 
(7
)%
 
(21
)
 
19

          Total Sales
$
884

 
$
920

 
$
(36
)
 
(4
)%
 
(54
)
 
$
18

 
 
 
 
 
 
 
 
 
 
 
 
Total Sales
$
3,505

 
$
3,766

 
$
(261
)
 
(7
)%
 
(226
)
 
$
(35
)
Commercial Truck & Industrial sales were $2,739 million in fiscal year 2015, down 8 percent from fiscal year 2014. The decrease in sales was the result of the strengthening of the US dollar against most currencies, primarily the euro and Brazilian real, which unfavorably impacted sales by $193 million in fiscal year 2015 compared to the prior fiscal year. In addition, unfavorable macro-economic conditions in South America and China resulted in lower production in these regions, and we experienced lower revenue from our Defense business compared to the prior period. These production decreases were partially offset by higher sales in North America, as the Class 8 truck market reached its strongest production levels since 2006.
 
Aftermarket & Trailer sales were $884 million in fiscal year 2015, down 4 percent from fiscal year 2014. The decrease was primarily due to the unfavorable impact of the strengthening US dollar on our aftermarket business in Europe.
 
Cost of Sales and Gross Profit
 
Cost of sales primarily represents material, labor and overhead production costs associated with the company’s products and production facilities. Cost of sales for fiscal year 2015 was $3,043 million compared to $3,279 million in the prior year, representing a 7.2 percent decrease. Total cost of sales was approximately 86.8 percent of sales for fiscal year 2015 compared to approximately 87.1 percent for the prior fiscal year.
 

37



The following table summarizes significant factors contributing to the changes in costs of sales during fiscal year 2015 compared to the prior fiscal year (in millions):
 
 
Cost of Sales
Fiscal year ended September 30, 2014
$
3,279

Volumes, mix and other, net
(50
)
Foreign exchange
(186
)
Fiscal year ended September 30, 2015
$
3,043


Changes in the components of cost of sales year over year are summarized as follows (in millions):
 
Lower material costs
$
(160
)
Lower labor and overhead costs
(89
)
Other, net
13

Total decrease in costs of sales
$
(236
)
Material costs represent the majority of our cost of sales and include raw materials, composed primarily of steel and purchased components. Material costs decreased by $160 million compared to the prior fiscal year primarily due to the movement in foreign currency rates, lower volume, and material cost savings.
 
Labor and overhead costs decreased by $89 million compared to the prior fiscal year primarily due to the movement in foreign currency rates, lower revenue, and savings associated with labor and burden cost reduction programs.

Other, net increased by $13 million compared to the prior fiscal year. The increase was primarily due to a $15 million
immediate recognition of negative prior service costs related to the curtailment of our retiree medical liability in the prior fiscal year partially offset by a decrease in foreign currency transaction losses.

Gross margin, for fiscal year 2015 was $462 million compared to $487 million in fiscal year 2014. Gross margin, as a percentage of sales, was 13.2 percent and 12.9 percent for fiscal years 2015 and 2014, respectively.

 
Other Income Statement Items
 
Selling, general and administrative expenses (SG&A) for fiscal years 2015 and 2014 are summarized as follows (in millions):
 
 
2015
 
2014
 
Increase (Decrease)
 
Amount
 
% of
sales
 
Amount
 
% of
sales
 
 
 
 
SG&A
 
 
 
 
 
 
 
 
 
 
 
Loss on sale of receivables
$
5

 
0.1
%
 
$
8

 
0.2
 %
 
$
(3
)
 
(0.1) pts

Short- and long-term variable compensation
27

 
0.8
%
 
35

 
0.9
 %
 
(8
)
 
(0.1) pts

Legal fee recovery from the Eaton settlement

 
%
 
(20
)
 
(0.5
)%
 
20

 
0.5 pts

Asbestos-related liability remeasurement
(2
)
 
%
 
20

 
0.5
 %
 
(22
)
 
(0.5) pts

Long-term liability reduction

 
%
 
(5
)
 
(0.1
)%
 
5

 
0.1
  pts
All other SG&A
213

 
6.0
%
 
220

 
5.8
 %
 
(7
)
 
0.2
  pts
Total SG&A
$
243

 
6.9
%
 
$
258

 
6.8
 %
 
$
(15
)
 
0.1
  pts
In the fourth quarter of fiscal year 2014, we incurred a $20 million charge associated with the re-measurement of our asbestos liabilities, net of expected insurance recoveries. The increase in our fiscal year 2014 net liability was primarily due to increased claim filings and higher projected defense costs.

38



 In the third quarter of fiscal year 2014, as a result of the settlement with Eaton, ZF Meritor was obligated to reimburse the company $20 million for the recovery of current and prior period legal expenses. We recognized the recovery in SG&A as the historical incurrence of these costs was included in SG&A in the consolidated statements of operations in prior periods.  
In the first quarter of fiscal year 2014, we executed a change to our long-term disability benefit plan reducing the duration for which we provide medical and dental benefits to individuals on long-term disability to be more consistent with market practices. This resulted in a $5 million reduction in the liability associated with these benefits.
All other SG&A represents normal selling, general and administrative expense and decreased year over year. Total SG&A as a percentage of sales remained relatively flat year over year.
Pension settlement losses of $59 million were recognized during the fiscal year 2015. During the fourth quarter of fiscal year 2015, we recognized a $16 million loss associated with the settlement of our remaining Canadian pension plans through lump-sum payments and an annuity purchase and $43 million associated with the settlement of our remaining German pension plans through an annuity purchase. The loss was non-cash and relates primarily to the acceleration of previously unrecognized actuarial losses already reflected in equity.
Goodwill Impairment costs of $15 million were recognized during the fourth quarter of fiscal year 2015 for the company's Defense reporting unit, which is included in the Commercial Truck and Industrial segment.
Restructuring costs were $16 million in fiscal year 2015, compared to $10 million in fiscal year 2014. In fiscal year 2015, our Commercial Truck & Industrial segment and corporate locations recognized $14 million and $2 million, respectively, of restructuring costs primarily related to employee severance costs. In fiscal year 2014, our Commercial Truck & Industrial segment and our Aftermarket & Trailer segment recognized $8 million and $1 million, respectively, of restructuring costs primarily related to employee severance costs. In addition, we recognized $1 million of restructuring costs at our corporate locations in fiscal year 2014.

Operating income for fiscal year 2015 was $128 million, compared to $217 million in fiscal year 2014. Key items affecting income are discussed above.
 
Equity in earnings of ZF Meritor was $190 million in fiscal year 2014 related to our share of the earnings related to the antitrust settlement with Eaton in the third quarter of fiscal year 2014.

Equity in earnings of affiliates was $39 million in fiscal year 2015, compared to $38 million in the prior year.

Interest expense, net was $105 million and $130 million in fiscal years 2015 and 2014, respectively. The decrease was primarily attributable to the capital markets transactions we executed in fiscal year 2015 that lowered our cost of debt as well as lower losses on debt extinguishments. In fiscal year 2015, we repurchased $110 million principal amount at maturity of our 7.875 percent convertible notes due 2026, of which $85 million were repurchased at a premium equal to approximately 64 percent of their principal amount in the third quarter of fiscal year 2015, and $25 million were repurchased at a premium equal to approximately 58 percent of their principal amount in the fourth quarter of fiscal year 2015. In addition, in fiscal year 2015, we repurchased $19 million principal amount of our 4.0 percent convertible notes due 2027. In fiscal year 2015, we recognized a $24 million loss on debt extinguishment, which is included in Interest expense, net, primarily related to the repurchase of our 7.875 percent convertible notes due 2026.

During fiscal year 2014, we exercised a call option to redeem $250 million principal amount of our 10.625 percent notes due 2018 at a premium equal to 5 percent of their principal amount and repaid the balance of our $45 million term loan, both of which were funded by available cash and the issuance of $225 million principal amount of our 6.25 percent notes due 2024. In the fourth quarter of fiscal year 2014, we repurchased the remaining $84 million principal amount of our 8.125 percent notes due 2015 as well as $38 million principal amount of our 4.0 percent convertible notes due 2027. We recognized a $31 million loss on debt extinguishment, which is included in Interest expense, net, related to these transactions.

Provision for income taxes was $1 million in fiscal year 2015 compared to $31 million in fiscal year 2014. The decrease in provision for income taxes was primarily attributable to tax benefits for the reversal of valuation allowances in Germany, Italy, Mexico and Sweden of $16 million. Provision for income taxes in fiscal year 2015 also decreased due to lower earnings in tax-paying jurisdictions.

Income from continuing operations (before noncontrolling interests) for fiscal year 2015 was $66 million compared to $284 million in fiscal year 2014. The reasons for the decrease are previously discussed.


39



Loss from discontinued operations for fiscal year 2015 was $1 million, compared to a loss of $30 million in the prior year. Significant items included in results from discontinued operations in fiscal year 2015 and 2014 include the following (in millions):
 
 
Year Ended
September 30,
 
2015
 
2014
Operating loss, net (primarily Mascot)
$

 
$
(8
)
Loss on Mascot disposal (1)

 
(23
)
Environmental remediation charges


 
(4
)
Other, net
(2
)
 
(2
)
Loss before income taxes
(2
)
 
(37
)
Benefit for income taxes
1

 
7

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

$
(30
)
(1) Includes loss on sale, severance and other disposal costs.

Net income attributable to noncontrolling interests was $1 million in fiscal year 2015 compared to $5 million in fiscal year 2014. Noncontrolling interests represent our minority partners’ share of income or loss associated with our less than 100-percent-owned consolidated subsidiaries.
 
Net Income attributable to Meritor, Inc. was $64 million for fiscal year 2015 compared to net income of $249 million for fiscal year 2014.Various factors affecting the decrease in net income were previously discussed.
 
Segment EBITDA and EBITDA Margins
Segment EBITDA is defined as income (loss) from continuing operations before interest expense, income taxes, depreciation and amortization, noncontrolling interests in consolidated joint ventures, loss on sale of receivables, restructuring expense, and asset impairment charges. We use Segment EBITDA as the primary basis for the Chief Operating Decision Maker (CODM) to evaluate the performance of each of our reportable segments. Segment EBITDA margin is defined as Segment EBITDA divided by consolidated sales from continuing operations.

The following table reflects Segment EBITDA and EBITDA margins for fiscal years 2015 and 2014 (dollars in millions).
 
 
Segment EBITDA
 
Segment EBITDA Margins
 
2015
 
2014
 
$ Change
 
%
Change
 
2015
 
2014
 
Change
Commercial Truck & Industrial
$
216

 
$
218

 
$
(2
)
 
(1
)%
 
7.9
%
 
7.3
%
 
0.6 pts
Aftermarket & Trailer
123

 
106

 
17

 
16
 %
 
13.9
%
 
11.5
%
 
2.4 pts
Segment EBITDA
$
339

 
$
324

 
$
15

 
5
 %
 
9.7
%
 
8.6
%
 
1.1 pts
Significant items impacting year-over-year Segment EBITDA include the following:
 
 
Commercial
Truck & Industrial
 
Aftermarket
& Trailer
 
TOTAL
Segment EBITDA–Year ended September 30, 2014
$
218

 
$
106

 
$
324

Higher earnings from unconsolidated affiliates
1

 

 
1

Impact of foreign currency exchange rates
(35
)
 
(6
)
 
(41
)
Short and long-term variable compensation
7

 
2

 
9

Volume, mix, pricing and other
25

 
21

 
46

Segment EBITDA – Year ended September 30, 2015
$
216

 
$
123

 
$
339


40



Commercial Truck & Industrial Segment EBITDA was $216 million in fiscal year 2015, compared to $218 million in the prior fiscal year. Segment EBITDA margin increased to 7.9 percent in fiscal year 2015 compared to 7.3 percent in the prior fiscal year. The increase in Segment EBITDA margin despite a decrease in Segment EBITDA reflects the continued execution of our M2016 initiatives, including cost performance and pricing actions. This performance was more than offset by the impact of lower revenue and foreign currency translation.

Aftermarket & Trailer Segment EBITDA was $123 million in fiscal year 2015, up $17 million compared to the prior fiscal year. Segment EBITDA margin increased to 13.9 percent in the current fiscal year compared to 11.5 percent in fiscal year 2014. The increases in Segment EBITDA and Segment EBITDA margin were driven by continued cost performance and pricing actions.

Fiscal Year 2014 Compared to Fiscal Year 2013
 
Sales
 
The following table reflects total company and business segment sales for fiscal years 2014 and 2013. The reconciliation is intended to reflect the trend in business segment sales and to illustrate the impact that changes in foreign currency exchange rates, volumes and other factors had on sales. Business segment sales include intersegment sales (in millions).
 
 
 
 
 
 
 
 
 
 
Dollar Change Due To
 
2014
 
2013
 
Dollar
Change
 
%
Change
 
Currency
 
Volume
/ Other
Sales:
 
 
 
 
 
 
 
 
 
 
 
Commercial Truck & Industrial
$
2,980

 
$
2,920

 
$
60

 
2
%
 
$
(41
)
 
$
101

Aftermarket & Trailer
920

 
871

 
49

 
6
%
 
4

 
45

Intersegment Sales
(134
)
 
(119
)
 
(15
)
 
13
%
 
(10
)
 
(5
)
TOTAL SALES
$
3,766

 
$
3,672

 
$
94

 
3
%
 
$
(47
)
 
$
141

Commercial Truck & Industrial sales were $2,980 million in fiscal year 2014, up 2 percent from fiscal year 2013, reflecting higher production primarily in our North America truck market partially offset by lower commercial truck production in South America and a step down in our FMTV military program. North America industry-wide production volumes for heavy-duty trucks increased 16% in fiscal year 2014 as compared to fiscal year 2013. In addition, we experienced slightly higher sales in Europe in fiscal year 2014 compared to the prior fiscal year driven by sales in advance of Europe's implementation of the new commercial truck emission standards in January 2014. Sales in South America declined in fiscal year 2014 compared to fiscal year 2013 due to macro-economic conditions in the region. Foreign currency exchange rates, primarily the depreciation of the Brazilian real, unfavorably impacted sales by $41 million compared to the prior fiscal year.
  Aftermarket & Trailer sales were $920 million in fiscal year 2014, up 6 percent from fiscal year 2013. The increase was primarily due to higher revenue across all parts of the segment.
 
Cost of Sales and Gross Profit
 
Cost of sales primarily represents materials, labor and overhead production costs associated with the company’s products and production facilities. Cost of sales for the fiscal year ended September 30, 2014 was $3,279 million compared to $3,277 million in the prior year. Total cost of sales was approximately 87.1 percent of sales for the fiscal year ended September 30, 2014 compared to approximately 89.2 percent for the prior fiscal year.
 
The following table summarizes significant factors contributing to the changes in costs of sales during fiscal year 2014 compared to the prior fiscal year (in millions):
 
 
Cost of Sales
Fiscal year ended September 30, 2013
$
3,277

Volumes, mix and other, net
34

Foreign exchange
(32
)
Fiscal year ended September 30, 2014
$
3,279


41




Changes in the components of cost of sales year over year are summarized as follows (in millions):
 
Higher material costs
$
65

Lower labor and overhead costs
(26
)
Other, net
(37
)
Total increase in costs of sales
$
2

Material costs represent the majority of our cost of sales and include raw materials, composed primarily of steel and purchased components. Material costs increased by $65 million compared to the prior fiscal year primarily as a result of higher volume partially offset by material cost savings and movement in foreign currency rates, primarily the depreciation of the Brazilian real.
 
Labor and overhead costs decreased by $26 million compared to the prior fiscal year. The decrease was primarily due to a specific warranty contingency recorded in fiscal year 2013 that was substantially reversed in fiscal year 2014, savings associated with labor and burden cost reduction programs and movement in foreign currency rates, primarily the depreciation of the Brazilian real.

Other, net decreased by $37 million compared to the prior fiscal year. The decrease was primarily due to a $15 million immediate recognition of negative prior service costs related to the curtailment on our retiree medical liability and a decrease in foreign currency transaction losses.

Gross margin, for fiscal year 2014 was $487 million compared to $395 million in fiscal year 2013. Gross margin, as a percentage of sales, was 12.9 percent and 10.8 percent for fiscal years 2014 and 2013, respectively.

Other Income Statement Items
 
Selling, general and administrative expenses (SG&A) for fiscal years 2014 and 2013 are summarized as follows (in millions):