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

FORM 10-Q

QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended December 31, 2017
Commission File No. 1-15983

MERITOR, INC.

(Exact name of registrant as specified in its charter)
 
Indiana
38-3354643
 
 
(State or other jurisdiction of incorporation or
(I.R.S. Employer Identification
 
 
organization)
No.)
 
 
 
 
 
2135 West Maple Road, Troy, Michigan
48084-7186
 
 
(Address of principal executive offices)
(Zip Code)
 
(248) 435-1000

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
 
Yes
X
No
 
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Registration S-T during the preceding twelve months (or for such shorter period that the registrant was required to submit and post such files).
 
Yes
X
No
 
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
X
 
Accelerated filer
 
Non-accelerated filer
 
(Do not check if a smaller reporting company)
Smaller reporting company
 
Emerging growth company
 
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
 
Yes
 
No
X
 
89,184,543 shares of Common Stock, $1.00 par value, of Meritor, Inc. were outstanding on January 30, 2018.



INDEX
 
 
 
Page
No.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

2


MERITOR, INC.

PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(in millions, except per share amounts)
 
Three Months Ended December 31,
 
2017
 
2016
 
(Unaudited)
Sales
$
903

 
$
699

Cost of sales
(763
)
 
(610
)
GROSS MARGIN
140

 
89

Selling, general and administrative
(67
)
 
(53
)
Restructuring costs
(2
)
 

Other operating expense, net
(1
)
 
(3
)
OPERATING INCOME
70

 
33

Other expense, net
(1
)
 

Equity in earnings of affiliates
5

 
10

Interest expense, net
(24
)
 
(21
)
INCOME BEFORE INCOME TAXES
50

 
22

Provision for income taxes
(83
)
 
(6
)
 INCOME (LOSS) FROM CONTINUING OPERATIONS
(33
)
 
16

LOSS FROM DISCONTINUED OPERATIONS, net of tax
(1
)
 

NET INCOME (LOSS)
(34
)
 
16

Less: Net income attributable to noncontrolling interests
(2
)
 
(1
)
NET INCOME (LOSS) ATTRIBUTABLE TO MERITOR, INC.
$
(36
)
 
$
15

NET INCOME (LOSS) ATTRIBUTABLE TO MERITOR, INC.
 
 
 
Net income (loss) from continuing operations
$
(35
)
 
$
15

Loss from discontinued operations
(1
)
 

Net income (loss)
$
(36
)
 
$
15

BASIC EARNINGS (LOSS) PER SHARE
 
 
 
Continuing operations
$
(0.40
)
 
$
0.17

Discontinued operations
(0.01
)
 

       Basic earnings (loss) per share
$
(0.41
)
 
$
0.17

DILUTED EARNINGS (LOSS) PER SHARE
 
 
 
Continuing operations
$
(0.40
)
 
$
0.17

Discontinued operations
(0.01
)
 

       Diluted earnings (loss) per share
$
(0.41
)
 
$
0.17

 
 
 
 
Basic average common shares outstanding
88.6

 
87.1

Diluted average common shares outstanding
88.6

 
88.5


See notes to condensed consolidated financial statements.


3


MERITOR, INC.

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


 
Three Months Ended December 31,
 
2017
 
2016
 
(Unaudited)
Net income (loss)
$
(34
)
 
$
16

Other comprehensive income (loss):
 
 
 
Foreign currency translation adjustments:
 
 
 
     Attributable to Meritor, Inc.
(8
)
 
(28
)
     Attributable to noncontrolling interest
1

 
(2
)
Pension and other postretirement benefit related adjustments
3

 
11

Unrealized gain on investments and foreign exchange contracts

 
1

 Other comprehensive loss, net of tax
(4
)
 
(18
)
Total comprehensive loss
(38
)
 
(2
)
Less: Comprehensive (income) loss attributable to noncontrolling interest
(3
)
 
1

Comprehensive loss attributable to Meritor, Inc.
$
(41
)
 
$
(1
)

See notes to condensed consolidated financial statements.


4


MERITOR, INC.

CONDENSED CONSOLIDATED BALANCE SHEET
(in millions)

 
December 31,
2017
 
September 30,
2017
 
(Unaudited)
ASSETS
 
 
 
CURRENT ASSETS:
 
 
 
Cash and cash equivalents (1)
$
116

 
$
88

Receivables, trade and other, net (1)
456

 
789

Inventories (1)
427

 
378

Other current assets
43

 
43

TOTAL CURRENT ASSETS
1,042

 
1,298

NET PROPERTY (1)
464

 
474

GOODWILL (1)
414

 
414

OTHER ASSETS (1)
525

 
596

TOTAL ASSETS
$
2,445

 
$
2,782

LIABILITIES, MEZZANINE EQUITY AND EQUITY
 
 
 
CURRENT LIABILITIES:
 
 
 
Short-term debt
$
63

 
$
288

       Accounts and notes payable (1)
592

 
622

Other current liabilities
238

 
272

TOTAL CURRENT LIABILITIES
893

 
1,182

LONG-TERM DEBT
751

 
750

RETIREMENT BENEFITS
298

 
314

OTHER LIABILITIES
238

 
239

TOTAL LIABILITIES
2,180

 
2,485

COMMITMENTS AND CONTINGENCIES (See Note 21)

 

MEZZANINE EQUITY:
 
 
 
Convertible debt with cash settlement
2

 
2

EQUITY:
 
 
 
Common stock (December 31, 2017 and September 30, 2017, 102.0 and 101.4 shares issued and 89.2 and 88.6 shares outstanding, respectively)
102

 
101

Additional paid-in capital
770

 
765

Retained earnings
47

 
83

Treasury stock, at cost (at both December 31, 2017 and September 30, 2017, 12.8 shares)
(136
)
 
(136
)
Accumulated other comprehensive loss
(550
)
 
(545
)
Total equity attributable to Meritor, Inc.
233

 
268

Noncontrolling interests (1)
30

 
27

TOTAL EQUITY
263

 
295

TOTAL LIABILITIES, MEZZANINE EQUITY AND EQUITY
$
2,445

 
$
2,782

(1) As of December 31, 2017, Assets and liabilities held for sale were: (i) $3 million Cash and cash equivalents; (ii) $14 million Receivables, trade and other, net; (iii) $2 million Inventories; (iv) $3 million Net property; (v) $1 million Goodwill; (vi) $1 million Other assets; (vii) $15 million Accounts and notes payable; and (viii) $2 million Noncontrolling interests. As of September 30, 2017, Assets and liabilities held for sale were: (i) $1 million Cash and cash equivalents; (ii) $13 million Receivables, trade and other, net; (iii) $2 million Inventories; (iv) $3 million Net property; (v) $1 million Goodwill; (vi) $1 million Other assets; (vii) $12 million Accounts and notes payable; and (viii) $2 million Noncontrolling interests.
See notes to condensed consolidated financial statements.

5


MERITOR, INC.

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(in millions)

 
Three Months Ended December 31,
 
2017
 
2016
 
(Unaudited)
OPERATING ACTIVITIES
 
 
 
CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES (See Note 11)
$
33

 
$
(14
)
INVESTING ACTIVITIES
 
 
 
Capital expenditures
(18
)
 
(17
)
Proceeds from prior year sale of equity method investment
250

 

Cash paid for investment in Transportation Power, Inc.
(3
)
 

Net investing cash flows provided by discontinued operations

 
2

CASH PROVIDED BY (USED FOR) INVESTING ACTIVITIES
229

 
(15
)
FINANCING ACTIVITIES
 
 
 
Borrowings and securitization
(51
)
 

Redemption of notes
(181
)
 

Other financing activities
(1
)
 
(4
)
CASH USED FOR FINANCING ACTIVITIES
(233
)
 
(4
)
EFFECT OF CHANGES IN FOREIGN CURRENCY EXCHANGE
RATES ON CASH AND CASH EQUIVALENTS
(1
)
 
(2
)
CHANGE IN CASH AND CASH EQUIVALENTS
28

 
(35
)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
88

 
160

CASH AND CASH EQUIVALENTS AT END OF PERIOD
$
116

 
$
125


See notes to condensed consolidated financial statements.



6


MERITOR, INC.

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


 
Common
Stock
 
Additional
Paid-in
Capital
 
Retained Earnings (Accumulated
Deficit)
 
Treasury Stock
 
Accumulated
Other
Comprehensive
Loss
 
Total Equity (Deficit)
Attributable to
Meritor, Inc.
 
Noncontrolling
Interests
 
Total
Beginning balance at September 30, 2017
$
101

 
$
765

 
$
83

 
$
(136
)
 
$
(545
)
 
$
268

 
$
27

 
$
295

Comprehensive income (loss)

 

 
(36
)
 

 
(5
)
 
(41
)
 
3

 
(38
)
Equity based compensation expense

 
5

 

 

 

 
5

 

 
5

Vesting of equity based awards
1

 
(1
)
 

 

 

 

 

 

Other equity adjustments

 
1

 

 

 

 
1

 

 
1

Ending Balance at December 31, 2017
$
102

 
$
770

 
$
47


$
(136
)
 
$
(550
)
 
$
233

 
$
30

 
$
263

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance at September 30, 2016
$
99

 
$
876

 
$
(241
)
 
$
(136
)
 
$
(809
)
 
$
(211
)
 
$
25

 
$
(186
)
Comprehensive income

 

 
15

 

 
(16
)
 
(1
)
 
(1
)
 
(2
)
Equity based compensation expense

 
3

 

 

 

 
3

 

 
3

Vesting of equity based awards
2

 
(2
)
 

 

 

 

 

 

Ending Balance at December 31, 2016
$
101

 
$
877

 
$
(226
)

$
(136
)
 
$
(825
)
 
$
(209
)
 
$
24

 
$
(185
)

See notes to condensed consolidated financial statements.

7

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



1. Basis of Presentation
Meritor, Inc. (the “company” or “Meritor”), headquartered in Troy, Michigan, is a premier global supplier of a broad range of integrated systems, modules and components to original equipment manufacturers (“OEMs”) and the aftermarket for the commercial vehicle, transportation and industrial sectors. The company serves commercial truck, trailer, military, bus and coach, construction and other industrial OEMs and certain aftermarkets. The condensed consolidated financial statements are those of the company and its consolidated subsidiaries.
Certain businesses are reported in discontinued operations in the condensed consolidated statement of operations, condensed consolidated statement of cash flows and related notes for all periods presented. Additional information regarding discontinued operations is discussed in Note 4.
In the opinion of the company, the unaudited condensed consolidated financial statements contain all adjustments, consisting solely of adjustments of a normal, recurring nature, necessary to present fairly the financial position, results of operations and cash flows for the periods presented. These statements should be read in conjunction with the company’s audited consolidated financial statements and notes thereto included in the company's Annual Report on Form 10-K for the fiscal year ended September 30, 2017, as amended. The condensed consolidated balance sheet data as of September 30, 2017 was derived from audited financial statements but does not include all annual disclosures required by accounting principles generally accepted in the United States of America. The results of operations for the three months ended December 31, 2017 are not necessarily indicative of the results for the full year.
The company’s fiscal year ends on the Sunday nearest September 30, and its fiscal quarters generally end on the Sundays nearest December 31, March 31 and June 30. The first quarter of fiscal years 2018 and 2017 ended on December 31, 2017 and January 1, 2017, respectively. All year and quarter references relate to the company’s fiscal year and fiscal quarters, unless otherwise stated. For ease of presentation, September 30 and December 31 are used consistently throughout this report to represent the fiscal year end and first fiscal quarter end, respectively.
2. Earnings per Share
Basic earnings (loss) per share is calculated using the weighted average number of shares outstanding during each period. The diluted earnings (loss) per share calculation includes the impact of dilutive common stock options, restricted shares, restricted share units, performance share unit awards and convertible securities, if applicable.
A reconciliation of basic average common shares outstanding to diluted average common shares outstanding is as follows (in millions):
 
Three Months Ended December 31,
 
2017
 
2016
Basic average common shares outstanding
88.6

 
87.1

Impact of restricted shares, restricted share units and performance share units

 
1.4

Impact of convertible notes

 

Diluted average common shares outstanding
88.6


88.5

In November 2017, the Board of Directors approved a grant of performance share units to all executives eligible to participate in the long-term incentive plan. Each performance share unit represents the right to receive one share of common stock or its cash equivalent upon achievement of certain performance and time vesting criteria. The fair value of each performance share unit was $24.79, which was the company’s share price on the grant date of December 1, 2017. The Board of Directors also approved a grant of 0.3 million restricted share units to these executives. The restricted share units vest at the earlier of three years from the date of grant or upon termination of employment with the company under certain circumstances. The fair value of each restricted share unit was $24.79, which was the company's share price on the grant date of December 1, 2017.
The actual number of performance share units that will vest depends upon the company’s performance relative to the established performance metrics for the three-year performance period of October 1, 2017 to September 30, 2020, measured at the end of the performance period. The number of performance share units that vest will depend on adjusted EBITDA margin and adjusted diluted earnings per share from continuing operations at the following weights: 50% associated with achieving an adjusted EBITDA margin target and 50% associated with achieving an adjusted diluted earnings per share from continuing operations target. The

8

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


number of performance share units that vest will be between 0% and 200% of the grant date amount of 0.3 million performance share units.
In November 2016, the Board of Directors approved a grant of performance share units to all executives eligible to participate in the long-term incentive plan. Each performance share unit represents the right to receive one share of common stock or its cash equivalent upon achievement of certain performance and time vesting criteria. The fair value of each performance share unit was $12.77, which was the company’s share price on the grant date of December 1, 2016. The Board of Directors also approved a grant of 0.5 million restricted share units to these executives. The restricted share units vest at the earlier of three years from the date of grant or upon termination of employment with the company under certain circumstances. The fair value of each restricted share unit was $12.77, which was the company's share price on the grant date of December 1, 2016.
The actual number of performance share units that will vest depends upon the company’s performance relative to the established M2019 goals for the three-year performance period of October 1, 2016 to September 30, 2019, measured at the end of the performance period. The number of performance share units will depend on meeting the established M2019 goals at the following weights: 50% associated with achieving an adjusted diluted earnings per share from continuing operations target, 25% associated with achieving revenue growth above market and 25% associated with achieving a net debt to adjusted EBITDA target. The number of performance share units that vest will be between 0% and 200% of the grant date amount of 0.6 million performance share units.
In November 2015, the Board of Directors approved a grant of performance share units to all executives eligible to participate in the long-term incentive plan. Each performance share unit represents the right to receive one share of common stock or its cash equivalent upon achievement of certain performance and time vesting criteria. The fair value of each performance share unit was $10.51, which was the company’s share price on the grant date of December 1, 2015. The Board of Directors also approved a grant of 0.5 million restricted share units to these executives. The restricted share units vest at the earlier of three years from the date of grant or upon termination of employment with the company under certain circumstances. The fair value of each restricted share unit was $10.51, which was the company's share price on the grant date of December 1, 2015.
The actual number of performance share units that will vest depends upon the company’s performance relative to the established performance metrics for the three-year performance period of October 1, 2015 to September 30, 2018, measured at the end of the performance period. The number of performance share units that vest will depend on adjusted EBITDA margin and adjusted diluted earnings per share from continuing operations at the following weights: 50% associated with achieving an adjusted EBITDA margin target and 50% associated with achieving an adjusted diluted earnings per share from continuing operations target. The number of performance share units that vest will be between 0% and 200% of the grant date amount of 0.7 million performance share units.
In November 2014, the Board of Directors approved a grant of performance share units to all executives eligible to participate in the long-term incentive plan. Each performance share unit represents the right to receive one share of common stock or its cash equivalent upon achievement of certain performance and time vesting criteria. The fair value of each performance share unit was $13.74, which was the company’s share price on the grant date of December 1, 2014. The Board of Directors also approved a grant of 0.4 million restricted share units to these executives. The restricted share units vest at the earlier of three years from the date of grant or upon termination of employment with the company under certain circumstances. The fair value of each restricted share unit was $13.74, which was the company’s share price on the grant date of December 1, 2014.
The actual number of performance share units that vested on December 1, 2017 depended upon the company’s performance relative to the established performance metrics for the three-year performance period of October 1, 2014 to September 30, 2017, which was measured at the end of the performance period. The company's performance resulted in the calculated payout of the performance share units at 65% of the grant date amounts.
The potential effect of 1.7 million restricted shares, restricted share units and performance share units is excluded from the diluted earnings per share calculation for the three months ended December 31, 2017 because inclusion in a loss from continuing operations period would reduce the loss per share from continuing operations attributable to common shareholders. For the three months ended December 31, 2016, the dilutive impact of previously issued restricted shares, restricted share units, and performance share units was 1.4 million shares units. For the three months ended December 31, 2017 and December 31, 2016, compensation cost related to restricted shares, restricted share units and performance share units was $5 million and $3 million, respectively.

9

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


For the three months ended December 31, 2017, the potential effect of 1.0 million shares of the company’s 7.875 percent convertible notes due 2026 was excluded in the computation of diluted earnings per share because inclusion in a loss from continuing operations period would reduce the loss per share from continuing operations attributable to common shareholders. For the three months ended December 31, 2016, the company’s 7.875 percent convertible notes due 2026 were excluded from the computation of diluted earnings per share, as the company’s average stock price during this period was less than the conversion price for the notes.
3. New Accounting Standards
Accounting standards to be implemented
In January 2018, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2018-01, Leases (Topic 842): Land Easement Practical Expedient for Transition to Topic 842. ASU 2018-01 permits an entity to elect an optional transition practical expedient to not evaluate land easements that exist or expired before the entity’s adoption of Topic 842 and that were not previously accounted for as leases under Topic 840. The amendments in this update affect the guidance in ASU 2016-02, which is not effective yet. The effective date and the transition requirements for the amendments in ASU 2018-01 are the same as the effective date and transition requirements in ASU 2016-02 as described below. Therefore, the company plans to implement this standard in the first quarter of the fiscal year beginning October 1, 2019 in connection with its planned implementation of ASU 2016-02 and is currently evaluating the potential impact of this new guidance on its consolidated financial statements.

In May 2017, the FASB issued ASU 2017-09, Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting. ASU 2017-09 amends the scope of modification accounting for share-based payment arrangements and provides guidance on when an entity would be required to apply modification accounting. This standard is effective for all entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. Early adoption is permitted, including adoption in any interim period. The amendments in this update should be applied prospectively. The company is currently evaluating the potential impact of this new guidance on its consolidated financial statements.

In March 2017, the FASB issued ASU 2017-08, Receivables—Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities. ASU 2017-08 affects entities who own investments in callable debt securities and aligns the amortization period of premiums on callable debt securities to expectations incorporated in market pricing on the underlying securities. This standard is effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted, including adoption in an interim period. The amendments in this update should be applied on a modified retrospective basis through a cumulative-effective adjustment directly to retained earnings at the beginning of the adoption period. The company does not expect a material impact on its consolidated financial statements from adoption of this guidance.

In March 2017, the FASB issued ASU 2017-07, Compensation—Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. The new guidance requires entities to only include the service cost component of net periodic pension cost and net periodic postretirement benefit cost in operating expenses (together with other employee compensation costs). The other components of net benefit cost, including amortization of prior service cost/credit, are to be included in a separate line item(s) outside of any sub-total of operating income. ASU 2017-07 also provides guidance that only the service cost component of net benefit cost is eligible for capitalization. This standard is effective for public business entities for interim and annual periods beginning after December 15, 2017. The revisions in this amendment are to be applied retrospectively for the presentation of the service cost component and the other components of net periodic pension cost and net periodic postretirement benefit cost in the income statement and prospectively for the capitalization of the service cost component of net periodic pension cost and net periodic postretirement benefit in assets. The company is currently evaluating the potential impact of this new guidance on its consolidated financial statements.

In February 2017, the FASB issued ASU 2017-05, Other Income—Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets. ASU 2017-05 provides guidance which defines an “in substance nonfinancial asset”; unifies guidance related to partial sales of nonfinancial assets; eliminates rules specifically addressing sales of real estate; removes exceptions to the financial asset derecognition model; and clarifies the accounting for contributions of nonfinancial assets to joint ventures. The effective date and the transition requirements for the amendments in ASU 2017-05 are the same as the effective date and transition requirements in Topic 606, described below. The company is currently evaluating the potential impact of this new guidance on its consolidated financial statements.

10

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



In January 2017, the FASB issued ASU 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. The new guidance eliminates the need to determine the fair value of individual assets and liabilities of a reporting unit to measure a goodwill impairment. A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value. The revised guidance will be applied prospectively, and is effective for calendar year-end SEC filers in 2020. Early adoption is permitted for any impairment tests performed after January 1, 2017. The new guidance is not expected to have a material impact on the company's consolidated financial statements.

In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business. The ASU provides clarification on the definition of a business and adds guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. To be considered a business under the new guidance, it must include an input and a substantive process that together significantly contribute to the ability to create output. The amendment removes the evaluation of whether a market participant could replace missing elements. The amendments in this update are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years, and will be applied prospectively. The potential impact of this new guidance will be assessed for future acquisitions or dispositions, but it is not expected to have a material impact on the company's consolidated financial statements.

In October 2016, the FASB issued ASU 2016-16, Accounting for Income Taxes: Intra-Entity Asset Transfers of Assets Other than Inventory. The ASU was issued to remove the prohibition in FASB ASC 740 against the immediate recognition of the current and deferred income tax effects of intra-entity transfers of assets other than inventory. The amendments in this update are effective for public business entities in fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted; however, the guidance can only be adopted in the first interim period of a fiscal year. The company is currently evaluating the potential impact of this new guidance on its consolidated financial statements.

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (a consensus of the Emerging Issues Task Force). The ASU was issued to reduce differences in practice with respect to how specific transactions are classified in the statement of cash flows. The update provides guidance on the following eight types of transactions: debt prepayment or debt extinguishment costs, settlement of zero-coupon debt instruments, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims, proceeds from the settlement of corporate-owned life insurance policies, including bank-owned life insurance policies, distributions received from equity method investments, beneficial interests in securitization transactions and separately identifiable cash flows and application of the predominance principle. The amendments in this update are effective for public business entities in fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted, provided that all of the amendments are adopted in the same period. The guidance requires application using a retrospective transition method. The company is currently evaluating the potential impact of this new guidance on its consolidated financial statements.
  
In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The ASU introduces an approach based on expected losses to estimate credit losses on certain types of financial instruments, including accounts receivable. The ASU also modifies the impairment model for available-for-sale (AFS) debt securities and provides for a simplified accounting model for purchased financial assets with credit deterioration since their origination. The amendments in this update are required to be adopted by public business entities in fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The company is currently evaluating the potential impact of this new guidance on its accounting policies and its consolidated financial statements.

In May 2016, the FASB issued ASU 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients. The ASU clarifies the assessment of the likelihood that revenue will be collected from a contract, the guidance for presenting sales taxes and similar taxes, and the timing for measuring customer payments that are not in cash. The ASU also establishes a practical expedient for contract modifications at the transition. The amendments in this update affect the guidance in ASU 2014-09, which is not effective yet. The effective date and the transition requirements for the amendments in ASU 2016-12 are the same as the effective date and transition requirements in ASU 2014-09 as described below. Therefore, the company plans to implement this standard in the first quarter of the fiscal year beginning October 1, 2018 in connection with its planned implementation of ASU 2014-09 and is currently evaluating the potential impact of this new guidance on its accounting policies and its consolidated financial statements.

In May 2016, the FASB issued ASU 2016-11, Revenue Recognition (Topic 605) and Derivatives and Hedging (Topic 815): Rescission of SEC Guidance Because of Accounting Standards Updates 2014-09 and 2014-16 Pursuant to Staff Announcements

11

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


at the March 3, 2016 EITF Meeting (SEC Update). The ASU was issued to remove from the Codification certain SEC staff guidance that the SEC staff stated would be rescinded: Revenue and Expense Recognition for Freight Services in Process; Accounting for Shipping and Handling Fees and Costs; and Accounting for Consideration Given by a Vendor to a Customer (including a Reseller of the Vendor’s Products). The amendments in this update affect the guidance in ASU 2014-09, which is not effective yet. The effective date and the transition requirements for the amendments in ASU 2016-11 are the same as the effective date and transition requirements in ASU 2014-09 as described below. Therefore, the company plans to implement this standard in the first quarter of the fiscal year beginning October 1, 2018 in connection with its planned implementation of ASU 2014-09 and is currently evaluating the potential impact of this new guidance on its consolidated financial statements.

In April, 2016, the FASB issued ASU 2016-10, Revenue from Contracts with Customers (Topic 606), Identifying Performance Obligations and Licensing. The ASU provides guidance regarding the identification of performance and licensing obligations. The amendments in this update affect the guidance in ASU 2014-09, which is not effective yet. The effective date and the transition requirements for the amendments in ASU 2016-10 are the same as the effective date and transition requirements in ASU 2014-09 as described below. Therefore, the company plans to implement this standard in the first quarter of the fiscal year beginning October 1, 2018 in connection with its planned implementation of ASU 2014-09 and is currently evaluating the potential impact of this new guidance on its consolidated financial statements.

In March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers (Topic 606), Principal versus Agent Considerations (Reporting Revenue Gross versus Net) to clarify certain aspects of the principal-versus-agent guidance in its new revenue recognition standard. The amendments in this update affect the guidance in ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which is not yet effective. The effective date and transition requirements for the amendments in ASU 2016-08 are the same as the effective date and transition requirements of ASU 2014-09. Therefore, the company plans to implement this standard in the first quarter of the fiscal year beginning October 1, 2018 in connection with its planned implementation of ASU 2014-09. The company is currently evaluating the potential impact of this new guidance on its consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The update will require lessees to recognize a right-of-use asset and lease liability for substantially all leases. The standard is required to be adopted by public business entities in fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. The company plans to implement this standard in the first quarter of the fiscal year beginning October 1, 2019 and is currently assessing the potential impact of this new guidance on its on its accounting policies and its consolidated financial statements.

In January 2016, the FASB issued ASU 2016-01, Financial Instruments - Overall (Subtopic 825-10), Recognition and Measurement of Financial Assets and Financial Liabilities, which requires equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income. The guidance is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted. The company does not expect a material impact on its consolidated financial statements from adoption of this guidance.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which requires companies to recognize revenue when a customer obtains control rather than when companies have transferred substantially all risks and rewards of a good or service and requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts. ASU 2014-09 was originally effective for fiscal periods beginning after December 15, 2016, including interim periods within those fiscal periods. In August 2015, the FASB issued ASU 2015-14 which deferred the effective date of ASU 2014-09 by one year making it effective for fiscal periods beginning after December 15, 2017, including interim periods within those fiscal periods, while also providing for early adoption but not before the original effective date. The company plans to implement this standard in the first quarter of the fiscal year beginning October 1, 2018 and is currently evaluating the potential impact of this new guidance on its on its accounting policies and its consolidated financial statements.
Accounting standards implemented during fiscal year 2018
In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. The amendment changes the recognition and presentation requirements of hedge accounting, including eliminating the requirement to separately measure and report hedge ineffectiveness and presenting all items that affect earnings in the same income statement line as the hedged item. The guidance also eases certain documentation and assessment requirements and modifies the accounting components excluded from the assessment of hedge effectiveness. Changes to income statement

12

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


classification and financial statement disclosures were applied prospectively from the date of adoption. The company adopted this standard in the first quarter of fiscal year 2018. This guidance did not have a material impact on the consolidated financial statements.

In October 2016, the FASB issued ASU 2016-17, Consolidation (Topic 810): Interests held through Related Parties that are under Common Control, which alters how a decision maker needs to consider indirect interests in a variable interest entity (VIE) held through an entity under common control. Under the ASU, if a decision maker is required to evaluate whether it is the primary beneficiary of a VIE, it will need to consider only its proportionate indirect interest in the VIE held through a common control party. The company adopted this standard in the first quarter of fiscal year 2018. This guidance did not have a material impact on the consolidated financial statements.

In March 2016, the FASB issued ASU 2016-09, Compensation - Stock Compensation (Topic 718), Improvements to Employee Share-Based Payment Accounting. The ASU intends to simplify how share-based payments are accounted for, including accounting for income taxes, forfeitures and statutory tax withholding requirements, as well as classification in the statement of cash flows. The company adopted this standard in the first quarter of fiscal year 2018. Following adoption of this standard, all excess tax benefits and all tax deficiencies generated in the current and future periods will be prospectively recorded as income tax benefit or expense in the company’s Consolidated Statement of Operations in the reporting period in which they occur. An income tax benefit of approximately $1 million was recognized in the quarterly period ended December 31, 2017 as a result of the adoption of ASU 2016-09 and a corresponding $1 million increase in income from continuing operations and net income during the period. The amendments in the guidance that require application using a modified retrospective transition method did not impact the company. Therefore, there was no cumulative-effect adjustment to retained earnings recognized as of October 2, 2017. The company has elected to continue to estimate forfeitures expected to occur to determine the amount of compensation cost to be recognized in each period.

In March 2016, the FASB issued ASU 2016-07, Investments-Equity Method and Joint Ventures (Topic 323), Simplifying the Transition to the Equity Method of Accounting. The ASU eliminates the requirement to apply the equity method of accounting retrospectively when a reporting entity obtains significant influence over a previously held investment. The company adopted this standard in the first quarter of fiscal year 2018. This guidance did not have a material impact on the consolidated financial statements.

In March 2016, the FASB issued ASU 2016-06, Derivatives and Hedging (Topic 815), Contingent Put and Call Options in Debt Instruments. The ASU clarifies that an exercise contingency itself does not need to be evaluated to determine whether it is in an embedded derivative, just the underlying option. The company adopted this standard in the first quarter of fiscal year 2018. This guidance did not have a material impact on the consolidated financial statements.

In March 2016, the FASB issued ASU 2016-05, Derivatives and Hedging (Topic 815), Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships. The update clarifies that a change in a counterparty to a derivative instrument designated as a hedging instrument would not require the entity to dedesignate the hedging relationship and discontinue the application of hedge accounting. The company adopted this standard in the first quarter of fiscal year 2018. This guidance did not have a material impact on the consolidated financial statements.

In July 2015, the FASB issued ASU 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory, which requires entities that measure inventory using first-in, first-out (FIFO) or average cost to measure inventory at the lower of cost and net realizable value. The company adopted this standard in the first quarter of fiscal year 2018. This guidance did not have a material impact on the consolidated financial statements.

13

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


4. Discontinued Operations
Results of discontinued operations are summarized as follows (in millions):
 
Three Months Ended December 31,
 
2017
 
2016
Sales
$

 
$

 
 
 
 
Loss before income taxes
$
(2
)
 
$

Benefit from income taxes
1

 

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

$

Loss from discontinued operations attributable to the company for the three months ended December 31, 2017 was primarily related to changes in estimates related to legal costs incurred in connection with a previously divested business.
Total discontinued operations assets as of December 31, 2017 and September 30, 2017 were $2 million and $1 million, respectively, and total discontinued operations liabilities as of both December 31, 2017 and September 30, 2017 were $6 million.
5. Assets and Liabilities Held for Sale
During the first quarter of fiscal year 2017, management approved a plan to sell a business within the Commercial Truck & Industrial reporting segment. The company expects to sell the business within one year. The business and its associated assets and liabilities met the criteria for presentation as held for sale as of December 31, 2017.
Assets and liabilities held for sale are measured at the lower of the carrying value or fair value less costs to sell. Upon meeting the held for sale criteria, the company determined the carrying value of the business exceeded the fair value less costs to sell. As a result, an impairment charge of $3 million was recorded within other operating expense, net in the company’s condensed consolidated statement of operations during the first quarter of fiscal year 2017.
6. Goodwill
In accordance with FASB Accounting Standards Codification (ASC) Topic 350-20, “Intangibles - Goodwill and Other”, goodwill is reviewed for impairment annually during the fourth quarter of the fiscal year or more frequently if certain indicators arise. If business conditions or other factors cause the operating results and cash flows of a reporting unit to decline, the company may be required to record impairment charges for goodwill at that time.
The company tests goodwill for impairment at a level of reporting referred to as a reporting unit, which is an operating segment or one level below an operating segment (referred to as a component). A component of an operating segment is a reporting unit if the component constitutes a business for which discrete financial information is available and segment management regularly reviews the operating results of that component. When two or more components of an operating segment have similar economic characteristics, the components are aggregated and deemed a single reporting unit. An operating segment is deemed to be a reporting unit if all of its components are similar, if none of its components are a reporting unit, or if the segment comprises only a single component.
Since completion of initial estimates in the fourth quarter of fiscal year 2017, the company made a $1 million measurement period adjustment to decrease its provisional fair value of certain liabilities assumed in the Fabco transaction (see Note 9), resulting in a corresponding $1 million decrease to goodwill.

14

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


A summary of the changes in the carrying value of goodwill by the company’s two reportable segments are presented below (in millions):
 
Commercial Truck & Industrial
 
Aftermarket
& Trailer
 
Total
Goodwill
$
267

 
$
162

 
$
429

Accumulated impairment losses
(15
)
 

 
(15
)
Beginning balance at September 30, 2017
252

 
162

 
414

Fabco measurement period adjustment
(1
)
 

 
(1
)
Foreign currency translation

 
1

 
1

Balance at December 31, 2017
$
251

 
$
163

 
$
414

7. Restructuring Costs
Restructuring reserves, primarily related to unpaid employee termination benefits, were $5 million at December 31, 2017 and $6 million at September 30, 2017. The changes in restructuring reserves for the three months ended December 31, 2017 and 2016 are as follows (in millions):
 
Employee
Termination
Benefits
 
Plant
Shutdown
& Other
 
Total
Beginning balance at September 30, 2017
$
5

 
$
1

 
$
6

Activity during the period:
 
 
 
 

Charges to continuing operations
2

 

 
2

Cash payments – continuing operations
(2
)
 
(1
)
 
(3
)
Total restructuring reserves at December 31, 2017
5

 

 
5

Less: non-current restructuring reserves
(2
)
 

 
(2
)
Restructuring reserves – current, at December 31, 2017
$
3

 
$

 
$
3

 
 
 
 
 
 
Balance at September 30, 2016
$
15

 
$
1

 
$
16

Activity during the period:
 
 
 
 
 
Charges to continuing operations

 

 

Cash payments – continuing operations
(3
)
 

 
(3
)
Total restructuring reserves at December 31, 2016
12

 
1

 
13

Less: non-current restructuring reserves
(2
)
 

 
(2
)
Restructuring reserves – current, at December 31, 2016
$
10

 
$
1

 
$
11


Restructuring Costs: During the first three months of fiscal year 2018, the company recorded restructuring costs of $2 million primarily associated with labor reduction programs in the Commercial Truck & Industrial segment and Aftermarket and Trailer segments.
8. Income Taxes
For each interim reporting period, the company makes an estimate of the effective tax rate expected to be applicable for the full fiscal year pursuant to FASB ASC Topic 740-270, “Accounting for Income Taxes in Interim Periods.” The rate so determined is used in providing for income taxes on a year-to-date basis. Jurisdictions with a projected loss for the year or an actual year-to-date loss where no tax benefit can be recognized are excluded from the estimated annual effective tax rate. The impact of including these jurisdictions on the quarterly effective rate calculation could result in a higher or lower effective tax rate during a particular quarter, based upon the mix and timing of actual earnings versus annual projections.


15

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


Income tax expense (benefit) is allocated among continuing operations, discontinued operations and other comprehensive income (“OCI”). Such allocation is applied by tax jurisdiction, and in periods in which there is a pre-tax loss from continuing operations and pre-tax income in another category, such as discontinued operations or OCI, income tax expense is allocated to the other sources of income, with a related benefit recorded in continuing operations.

On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (“U.S. tax reform”). The U.S. tax reform makes broad and complex changes to the U.S. tax code that will affect the company's fiscal year ending September 30, 2018, including, but not limited to, reducing the U.S. federal corporate tax rate and requiring a one-time transition tax on certain unrepatriated earnings of foreign subsidiaries. The U.S. tax reform reduces the federal corporate tax rate to 21 percent in the fiscal year ending September 30, 2018. Section 15 of the Internal Revenue Code stipulates that the company's fiscal year ending September 30, 2018 will have a blended corporate tax rate of 24.5 percent, which is based on the applicable tax rates before and after the U.S. tax reform and the number of days in the year.

The Securities and Exchange Commission (“SEC”) staff issued Staff Accounting Bulletin (“SAB”) 118, which provides guidance on accounting for the tax effects of the U.S. tax reform. SAB 118 provides a measurement period that should not extend beyond one year from the U.S. tax reform enactment date for companies to complete the accounting under Accounting Standards Codification (“ASC”) 740. In accordance with SAB 118, a company must reflect the income tax effects of those aspects of the U.S. tax reform for which the accounting under ASC 740 is complete. To the extent that a company’s accounting for certain income tax effects of the U.S. tax reform is incomplete but the company is able to determine a reasonable estimate, it must record a provisional estimate in the financial statements. If a company cannot determine a provisional estimate to be included in the financial statements, it should continue to apply ASC 740 on the basis of the provisions of the tax laws that were in effect immediately before the enactment of the U.S. tax reform.

Specifically, the company has included discrete tax expense in the first quarter financial statements related to provisional amounts under SAB 118 for the impact of the revaluation of U.S. deferred tax assets and liabilities due to the federal income tax rate reduction from 35 percent to 21 percent. In order to properly account for the blended tax rate in place for fiscal year 2018, the company estimated the deferred tax assets and liabilities expected to reverse during the current fiscal year and applied a tax rate of 24.5 percent. All other deferred tax assets and liabilities are expected to reverse in fiscal year 2019 or later and were revalued at 21 percent. Additionally, the company has estimated its liability and included provisional amounts for the one-time transition tax as a discrete tax expense. The company will elect to offset the liability associated with this transition tax by utilizing foreign tax credit carryovers. The revaluation of the deferred tax assets and the transition tax resulted in a non-cash charge of $77 million in the first quarter.

Tax expense recognized in the quarter related to the transition tax and rate change on net deferred tax assets and liabilities are considered provisional under SAB 118. The company will continue to refine its accumulated earnings and profit pools and the allocation of cash and non-cash earnings for purposes of calculating the transition tax liability. Additionally, net deferred tax assets were reevaluated as of the enactment date using estimated fiscal year 2018 utilization amounts. The company will update the impact of the rate change on the net deferred tax assets as it continues to account for deferred activity throughout the current year.

The company has not accounted for the tax impacts related to the Global Intangible Low Tax Income (“GILTI”), Base Erosion Anti Abuse Tax (“BEAT”) or Foreign Derived Intangible Income (“FDII”) regimes or any of the other provisions of the U.S. tax reform that are not effective until fiscal year 2019. The company has elected to treat GILTI as a period cost and, therefore, has not recognized deferred taxes for basis differences that may reverse as GILTI tax in future periods.

There were no adjustments to measurement period items during the quarter, as this was the first reporting period after enactment.

In evaluating its ability to recover these net deferred tax assets, the company utilizes a consistent approach which considers its historical operating results, including an assessment of the degree to which any gains or losses are driven by items that are unusual in nature, and tax planning strategies. In addition, the company reviews changes in near-term market conditions and other factors that impact future operating results. In the first quarter of fiscal year 2018, a tax planning strategy was implemented that resulted in a $4 million tax benefit from the reversal of a tax valuation allowance in Sweden. As of December 31, 2017, the company continues to maintain the valuation allowances in Brazil, France, the U.K., along with certain U.S. states and other jurisdictions, as the company believes the negative evidence that it will be able to recover these net deferred tax assets continues to outweigh the positive evidence. If, in the future, the company generates taxable income on a sustained basis, its conclusion regarding the need for valuation allowances in these jurisdictions could change.


16

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


For the three months ended December 31, 2017, the company had approximately $2 million of net pre-tax income compared to $1 million of net pre-tax loss in the same period in fiscal year 2017 in tax jurisdictions in which tax expense (benefit) is not recorded.
9. Acquisitions
Fabco
Since completion of initial estimates in the fourth quarter of fiscal year 2017, the company made a $1 million measurement period adjustment to decrease its provisional fair value of certain liabilities assumed in the Fabco transaction, resulting in a corresponding $1 million decrease to goodwill. No portion of the $1 million adjustment was recorded in current-period earnings that would have been recorded in the previous reporting period if the adjustment to the provisional amount had been recognized as of the acquisition date. This adjustment was made to reflect updated valuation results. Final valuations of trademarks, intellectual property, and other intangible assets are not complete. The company may record other additional measurement period adjustments in fiscal year 2018.
10. Accounts Receivable Factoring and Securitization
Off-balance sheet arrangements 
Swedish Factoring Facility: The company has an arrangement to sell trade receivables from AB Volvo through one of its European subsidiaries. Under this arrangement with Nordea Bank, which expires in March 2020, the company can sell up to, at any point in time, €155 million ($185 million) of eligible trade receivables. The amount of eligible receivables sold may exceed Nordea Bank's commitment at Nordea Bank's discretion. The receivables under this program are sold at face value and are excluded from the consolidated balance sheet. The company had utilized €169 million ($202 million) and €139 million ($164 million) of this accounts receivable factoring facility as of December 31, 2017 and September 30, 2017, respectively.
The facility is backed by a 364-day liquidity commitment from Nordea Bank which extends through April 23, 2018. The commitment is subject to standard terms and conditions for this type of arrangement.
U.S. Factoring Facility: The company has an arrangement to sell trade receivables from AB Volvo and its U.S. subsidiaries through one of its U.S. subsidiaries. Under this arrangement with Nordea Bank, which expires in February 2019, the company can sell up to, at any point in time, €80 million ($96 million) of eligible trade receivables. The amount of eligible receivables sold may exceed Nordea Bank’s commitment at Nordea Bank’s discretion. The receivables under this program are sold at face value and are excluded from the consolidated balance sheet. The company had utilized €37 million ($44 million) and €37 million ($43 million) of this accounts receivable factoring facility as of December 31, 2017 and September 30, 2017, respectively.
United Kingdom Factoring Facility: The company has an arrangement to sell trade receivables from AB Volvo and its European subsidiaries through one of its United Kingdom subsidiaries. On January 23, 2018, Meritor extended this United Kingdom factoring facility with Nordea Bank until February 2, 2022. All other terms of the agreement remain unchanged. Under this arrangement, the company can sell up to, at any point in time, €25 million ($30 million) of eligible trade receivables. The receivables under this program are sold at face value and are excluded from the consolidated balance sheet. The company had utilized €10 million ($12 million) and €7 million ($9 million) of this accounts receivable factoring facility as of December 31, 2017 and September 30, 2017, respectively. The agreement is subject to standard terms and conditions for these types of arrangements, including a sole discretion clause whereby the bank retains the right to not purchase receivables, which has not been invoked since the inception of the program.
Italy Factoring Facility: The company has an arrangement to sell trade receivables from AB Volvo and its European subsidiaries through one of its Italian subsidiaries. Under this arrangement with Nordea Bank, which expires in June 2022, the company can sell up to, at any point in time, €30 million ($36 million) of eligible trade receivables. The receivables under this program are sold at face value and are excluded from the consolidated balance sheet. The company had utilized €26 million ($31 million) and €22 million ($26 million) of this accounts receivable factoring facility as of December 31, 2017 and September 30, 2017, respectively. The agreement is subject to standard terms and conditions for these types of arrangements, including a sole discretion clause whereby the bank retains the right to not purchase receivables, which has not been invoked since the inception of the program.
In addition to the above facilities, a number of the company’s subsidiaries, primarily in Europe, factor eligible accounts receivable with financial institutions. Certain receivables are factored without recourse to the company and are excluded from accounts receivable in the consolidated balance sheet. The amount of factored receivables excluded from accounts receivable under these arrangements was $25 million and $19 million at December 31, 2017 and September 30, 2017, respectively.

17

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


Total costs associated with all of the off-balance sheet arrangements described above were $2 million and $1 million in the three months ended December 31, 2017 and 2016, respectively, and are included in selling, general and administrative expenses in the condensed consolidated statements of operations.
On-balance sheet arrangements
U.S. Securitization Facility: On December 5, 2017, the company extended its $100 million U.S. accounts receivables securitization facility with PNC Bank until December 7, 2020. The maximum permitted priority debt-to-EBITDA ratio as of the last day of each fiscal quarter under the facility is 2.25 to 1.00. This program is provided by PNC Bank, National Association, as Administrator and Purchaser, and the other Purchasers and Purchaser Agents from time to time (participating lenders), which are party to the agreement. Under this program, the company has the ability to sell an undivided percentage ownership interest in substantially all of its trade receivables (excluding the receivables due from AB Volvo and subsidiaries eligible for sale under the U.S. accounts receivable factoring facility) of certain U.S. subsidiaries to ArvinMeritor Receivables Corporation (“ARC”), a wholly-owned, special purpose subsidiary. ARC funds these purchases with borrowings from participating lenders under a loan agreement. This program also includes a letter of credit facility pursuant to which ARC may request the issuance of letters of credit issued for the company’s U.S. subsidiaries (originators) or their designees, which when issued will constitute a utilization of the facility for the amount of letters of credit issued. Amounts outstanding under this agreement are collateralized by eligible receivables purchased by ARC and are reported as short-term debt in the condensed consolidated balance sheet. At December 31, 2017 and September 30, 2017, $38 million and $89 million, respectively, were outstanding under this program, and no amounts were outstanding for letters of credit. This securitization program contains a cross default to the revolving credit facility. At certain times during any given month, the company may sell eligible accounts receivable under this program to fund intra-month working capital needs. In such months, the company would then typically utilize the cash received from customers throughout the month to repay the borrowings under the program. Accordingly, during any given month, the company may borrow under this program amounts exceeding the amounts shown as outstanding at fiscal quarter ends.

18

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


11. Operating Cash Flows
The reconciliation of net income to cash flows provided by (used for) operating activities is as follows (in millions):
 
Three Months Ended December 31,
 
2017
 
2016
OPERATING ACTIVITIES
 
 
 
Net income (loss)
$
(34
)
 
$
16

Less: Loss from discontinued operations, net of tax
(1
)
 

Income (loss) from continuing operations
(33
)
 
16

Adjustments to income from continuing operations to arrive at cash provided by (used for) operating activities:
 
 
 
Depreciation and amortization
21

 
17

Deferred income tax expense
73

 
4

Loss on debt extinguishment
8

 

Restructuring costs
2

 

Asset impairment charges

 
3

Equity in earnings of affiliates
(5
)
 
(10
)
Pension and retiree medical expense (income)
(8
)
 
4

Other adjustments to income (loss) from continuing operations
5

 
4

Dividends received from equity method investments
6

 
5

Pension and retiree medical contributions
(12
)
 
(10
)
Restructuring payments
(3
)
 
(3
)
Changes in off-balance sheet accounts receivable securitization and factoring programs
55

 
39

Changes in assets and liabilities, excluding effects of acquisitions, divestitures, foreign currency adjustments and discontinued operations
(76
)
 
(84
)
Operating cash flows provided by (used for) continuing operations
33

 
(15
)
Operating cash flows provided by discontinued operations

 
1

CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES
$
33

 
$
(14
)
12. Inventories
Inventories are stated at the lower of cost (using FIFO or average methods) or net realizable value (determined on the basis of estimated realizable values) and are summarized as follows (in millions):
 
December 31,
2017
 
September 30,
2017
Finished goods
$
166

 
$
139

Work in process
35

 
34

Raw materials, parts and supplies
226

 
205

Total
$
427

 
$
378


19

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


13. Other Current Assets
     Other current assets are summarized as follows (in millions):
 
December 31,
2017
 
September 30,
2017
Asbestos-related recoveries (see Note 21)
$
10

 
$
14

Prepaid and other
33

 
29

Other current assets
$
43

 
$
43

14. Net Property
     Net property is summarized as follows (in millions):
 
December 31,
2017
 
September 30,
2017
Property at cost:
 
 
 
Land and land improvements
$
30

 
$
30

Buildings
241

 
240

Machinery and equipment
908

 
892

Company-owned tooling
127

 
126

Construction in progress
53

 
69

Total
1,359

 
1,357

Less: accumulated depreciation
(895
)
 
(883
)
Net property
$
464

 
$
474

15. Other Assets
     Other assets are summarized as follows (in millions):
 
December 31,
2017
 
September 30,
2017
Investments in non-consolidated joint ventures
$
99

 
$
101

Asbestos-related recoveries (see Note 21)
48

 
32

Unamortized revolver debt issuance costs
7

 
8

Capitalized software costs, net
25

 
27

Deferred income tax assets, net
157

 
229

Assets for uncertain tax positions
45

 
48

Prepaid pension costs
141

 
135

Other
3

 
16

Other assets
$
525

 
$
596

In accordance with FASB ASC Topic 350-40, costs relating to internally developed or purchased software in the preliminary project stage and the post-implementation stage are expensed as incurred. Costs in the application development stage that meet the criteria for capitalization are capitalized and amortized using the straight-line basis over the estimated economic useful life of the software.
The company holds a variable interest in a joint venture accounted for under the equity method of accounting. The joint venture manufactures components for commercial vehicle applications primarily on behalf of the company. The variable interest relates to a supply arrangement between the company and the joint venture whereby the company supplies certain components to the joint venture on a cost-plus basis. The company is not the primary beneficiary of the joint venture, as the joint venture partner has shared or absolute control over key manufacturing operations, labor relationships, financing activities and certain other functions of the joint venture. Therefore, the company does not consolidate the joint venture. At December 31, 2017 and September 30, 2017, the company’s investment in the joint venture was $57 million and $54 million, respectively.

20

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


TransPower

In the first quarter of fiscal year 2018, Meritor completed a $3 million strategic investment in Transportation Power, Inc. (“Transpower”). The company holds a variable interest in TransPower, a variable interest entity (“VIE”). The VIE develops electrical drive solutions and supplies integrated drive systems, full electric truck solutions and energy-storage subsystems to major manufacturers of trucks, school buses, refuse vehicles and terminal tractors. The variable interest relates principally to an investment between the company and TransPower. The company is not the primary beneficiary of the VIE, as other owners have control over the significant activities of TransPower, the development of intellectual property and manufacturing. Therefore, the company does not consolidate the VIE. At December 31, 2017, the company’s investment in the VIE was $3 million, representing the company’s maximum exposure to loss.
16. Other Current Liabilities
     Other current liabilities are summarized as follows (in millions):
 
December 31,
2017
 
September 30,
2017
Compensation and benefits
$
81

 
$
117

Income taxes
16

 
11

Taxes other than income taxes
31

 
34

Accrued interest
14

 
9

Product warranties
16

 
18

Environmental reserves (see Note 21)
5

 
5

Restructuring (see Note 7)
3

 
5

Asbestos-related liabilities (see Note 21)
19

 
19

Indemnity obligations (see Note 21)
2

 
2

Other
51

 
52

Other current liabilities
$
238

 
$
272

The company records estimated product warranty costs at the time of shipment of products to customers. Warranty reserves are primarily based on factors that include past claims experience, sales history, product manufacturing and engineering changes and industry developments. Liabilities for product recall campaigns are recorded at the time the company’s obligation is probable and can be reasonably estimated. Policy repair actions to maintain customer relationships are recorded as other liabilities at the time an obligation is probable and can be reasonably estimated. Product warranties, including recall campaigns, not expected to be paid within one year are recorded as a non-current liability.
A summary of the changes in product warranties is as follows (in millions):
 
Three Months Ended December 31,
 
2017
 
2016
Total product warranties – beginning of period
$
45

 
$
44

Accruals for product warranties
3

 
3

Payments
(4
)
 
(3
)
Change in estimates and other
1

 
(4
)
Total product warranties – end of period
45

 
40

Less: Non-current product warranties
(29
)
 
(24
)
Product warranties – current
$
16

 
$
16


21

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


17. Other Liabilities
Other liabilities are summarized as follows (in millions):
 
December 31,
2017
 
September 30,
2017
Asbestos-related liabilities (see Note 21)
$
123

 
$
124

Restructuring (see Note 7)
2

 
1

Non-current deferred income tax liabilities
12

 
12

Liabilities for uncertain tax positions
30

 
32

Product warranties (see Note 16)
29

 
27

Environmental (see Note 21)
4

 
4

Indemnity obligations (see Note 21)
10

 
10

Other
28

 
29

Other liabilities
$
238

 
$
239

18. Long-Term Debt
     Long-Term debt, net of discounts where applicable, is summarized as follows (in millions):
 
December 31,
2017
 
September 30,
2017
3.25 percent convertible notes due 2037(1)(3)
$
318

 
$
317

4.0 percent convertible notes due 2027(1)(4)
24

 
24

7.875 percent convertible notes due 2026(1)(5)
22

 
22

6.75 percent notes due 2021(2)(6)

 
173

6.25 percent notes due 2024(2)(7)
443

 
443

Capital lease obligation
12

 
12

Borrowings and securitization
38

 
89

Unamortized discount on convertible notes (8)
(43
)
 
(42
)
Subtotal
814

 
1,038

Less: current maturities
(63
)
 
(288
)
Long-term debt
$
751

 
$
750

(1) The 3.25 percent convertible notes due 2037, 4.0 percent convertible notes due 2027 and 7.875 percent convertible notes due 2026 contain a put and call feature, which allows for earlier redemption beginning in 2025, 2019 and 2020, respectively.
(2) The 6.75 percent notes and 6.25 percent notes contain a call option, which allows for early redemption.
(3) The 3.25 percent convertible notes due 2037 are presented net of $7 million and $8 million unamortized issuance costs as of December 31, 2017 and September 30, 2017, respectively.
(4) The 4.0 percent convertible notes due 2027 are presented net of unamortized issuance costs of an insignificant amount as of December 31, 2017 and September 30, 2017.
(5) The 7.875 percent convertible notes due 2026 are presented net of unamortized issuance costs of an insignificant amount as of December 31, 2017 and September 30, 2017, and $1 million original issuance discount as of December 31, 2017 and September 30, 2017.
(6) The 6.75 percent notes due 2021 are presented net of $2 million unamortized issuance costs as of September 30, 2017.
(7) The 6.25 percent notes due 2024 are presented net of $7 million unamortized issuance costs as of December 31, 2017 and September 30, 2017.
(8) The carrying amount of the equity component related to convertible debt.

Repurchase of Debt Securities
On November 2, 2017, the company redeemed the remaining $175 million aggregate principal amount outstanding of the company's 6.75 percent notes due 2021 (the “6.75 Percent Notes”) at a price of $1,033.75 per $1,000 of principal amount, plus

22

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


accrued and unpaid interest. The redemption resulted in a loss on debt extinguishment of approximately $8 million. The loss on debt extinguishment is included in Interest expense, net in the condensed consolidated statement of operations. The redemption was made pursuant to a special authorization from the Board of Directors in connection with the sale of the Meritor WABCO JV. As of September 30, 2017, the company announced its intention to redeem all of the remaining $175 million aggregate principal amount then outstanding of the company's 6.75 Percent Notes. As a result, the 6.75 Percent Notes were classified as current as of September 30, 2017.
On September 28, 2017, the company redeemed $100 million of the $275 million aggregate principal amount outstanding of the company's 6.75 Percent Notes at a price of $1,033.75 per $1,000 of principal amount, plus accrued and unpaid interest. As a result, a loss on debt extinguishment of $5 million was recorded in the company's consolidated statement of operations within Interest expense, net during the fourth quarter of fiscal year 2017. The redemption was made under the company's July 2016 debt repurchase authorization (see Note 22).
The company used the net proceeds, after issuance costs and discounts, of approximately $317 million from the offering of the 3.25 percent senior convertible notes due 2037 (the “3.25 Percent Convertible Notes”) to acquire portions of its outstanding 7.875 percent senior convertible notes due 2026 (the “7.875 Percent Convertible Notes”) and its 4.0 percent senior convertible notes due 2027 (the “4.0 Percent Convertible Notes”) in transactions that settled concurrently with the closing of the 3.25 Percent Convertible Note offering on September 22, 2017. In total, the company repurchased $117 million of the $140 million principal amount of its 7.875 Percent Convertible Notes and $119 million of the $143 million principal amount of its 4.0 Percent Convertible Notes. The 7.875 Percent Convertible Notes and 4.0 Percent Convertible Notes were repurchased at premiums equal to 130 percent and 16 percent, respectively, above their principal amount. These repurchases were accounted for as extinguishments of debt, and accordingly the company recognized a loss on debt extinguishment of $31 million in the aggregate ($23 million with respect to the 7.875 Percent Convertible Notes and $8 million with respect to the 4.0 Percent Convertible Notes). The loss on extinguishment was recorded in the condensed consolidated statement of operations within Interest expense, net during fiscal year 2017.

Current Classification of 7.875 Percent Convertible Notes
The 7.875 Percent Convertible Notes were classified as current as of December 31, 2017 as the holders of the company's 7.875 Percent Convertible Notes are entitled to convert all or a portion of their 7.875 Percent Convertible Notes at any time beginning January 1, 2018 and prior to the close of business on March 30, 2018 at a rate of 83.3333 shares of common stock per $1,000 principal amount at maturity of the 7.875 Percent Convertible Notes (representing a conversion price of approximately $12.00 per share). The 7.875 Percent Convertible Notes are convertible as the closing price of shares of the company's common stock for at least 20 trading days during the 30 consecutive trading-day period ending on December 29, 2017 was greater than 120 percent of the $12.00 conversion price associated with the 7.875 Percent Convertible Notes.
The 7.875 Percent Convertible Notes were classified as current as of September 30, 2017 as the holders of the company's 7.875 Percent Convertible Notes were entitled to convert all or a portion of their 7.875 Percent Convertible Notes at any time beginning October 1, 2017 and prior to the close of business on December 30, 2017 at a rate of 83.3333 shares of common stock per $1,000 principal amount at maturity of the 7.875 Percent Convertible Notes (representing a conversion price of approximately $12.00 per share). The 7.875 Percent Convertible Notes were convertible as the closing price of shares of the company's common stock for at least 20 trading days during the 30 consecutive trading-day period ending on September 29, 2017 was greater than 120 percent of the $12.00 conversion price associated with the 7.875 Percent Convertible Notes.
The 7.875 Percent Convertible Notes surrendered for conversion, if any, would be settled in cash up to the principal amount at maturity of the 7.875 Percent Convertible Notes and cash, stock or a combination of cash and stock, at the company’s election, for the remainder of the conversion value of the 7.875 Percent Convertible Notes in excess of the principal amount at maturity and cash in lieu of any fractional shares, subject to and in accordance with the provisions of the indenture that governs the 7.875 Percent Convertible Notes.
As a result of the 7.875 Percent Convertible Notes becoming currently convertible for cash up to the principal amount of $23 million at the holder's option, $2 million of permanent equity was reclassified as mezzanine equity.

Revolving Credit Facility
On March 31, 2017, the company amended and restated its revolving credit facility. Pursuant to the revolving credit agreement as amended, the company has a $525 million revolving credit facility that matures in March 2022. Additionally, $4 million was capitalized as deferred issuance costs and will be amortized over the term of the agreement. The availability under this facility is dependent upon various factors, including performance against certain financial covenants as highlighted below.

23

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


The availability under the revolving credit facility is subject to certain financial covenants based on (i) the ratio of the company’s priority debt (consisting principally of amounts outstanding under the revolving credit facility, U.S. accounts receivable securitization and factoring programs, and third-party non-working capital foreign debt) to EBITDA and (ii) the amount of annual capital expenditures. The company is required to maintain a total priority debt-to-EBITDA ratio, as defined in the agreement, of 2.25 to 1.00 or less as of the last day of each fiscal quarter throughout the term of the agreement.
The availability under the revolving credit facility is also subject to a collateral test, pursuant to which borrowings on the revolving credit facility cannot exceed 1.0x the collateral test value. The collateral test is performed on a quarterly basis. At December 31, 2017, the revolving credit facility was collateralized by approximately $726 million of the company's assets, primarily consisting of eligible domestic U.S. accounts receivable, inventory, plant, property and equipment, intellectual property and the company's investment in all or a portion of certain of its wholly-owned subsidiaries.
Borrowings under the revolving credit facility are subject to interest based on quoted LIBOR rates plus a margin and a commitment fee on undrawn amounts, both of which are based upon the company’s current corporate credit rating. At December 31, 2017, the margin over LIBOR rate was 300 basis points and the commitment fee was 45 basis points. Overnight revolving credit loans are at the prime rate plus a margin of 200 basis points.
Certain of the company’s subsidiaries, as defined in the revolving credit agreement, irrevocably and unconditionally guarantee amounts outstanding under the revolving credit facility. Similar subsidiary guarantees are provided for the benefit of the holders of the publicly held notes outstanding under the company’s indentures (see Note 24).
No borrowings were outstanding under the revolving credit facility at December 31, 2017 and September 30, 2017. The amended and extended revolving credit facility includes $100 million of availability for the issuance of letters of credit. At December 31, 2017 and September 30, 2017, there were no letters of credit outstanding under the revolving credit facility.

Debt Securities
In December 2017, the company filed a shelf registration statement with the Securities and Exchange Commission, registering an unlimited amount of debt and/or equity securities that the company may offer in one or more offerings on terms to be determined at the time of sale. The December 2017 shelf registration statement superseded and replaced the shelf registration statement filed in December 2014, as amended.

Capital Leases
In March 2012, the company entered into a master lease agreement with Wells Fargo Equipment Finance, under which the company can enter into lease arrangements for equipment. Each lease term is 60 months and the lease interest rate is equal to the 5-year Swap Rate published by the Federal Reserve Board plus 564 basis points. The company had $2 million and $3 million outstanding under this capital lease arrangement as of December 31, 2017 and September 30, 2017, respectively. In addition, the company had another $9 million and $10 million outstanding through other capital lease arrangements at December 31, 2017 and September 30, 2017, respectively.

Letter of Credit Facilities
On February 21, 2014, the company entered into an arrangement to amend and restate the letter of credit facility with Citicorp USA, Inc., as administrative agent and issuing bank, and the other lenders party thereto. Under the terms of this amended credit agreement, which expires in March 2019, the company has the right to obtain the issuance, renewal, extension and increase of letters of credit up to an aggregate availability of $25 million. This facility contains covenants and events of default generally similar to those existing in the company’s public debt indentures. There were $16 million and $18 million of letters of credit outstanding under this facility at December 31, 2017 and September 30, 2017, respectively. The company had another $5 million of letters of credit outstanding through other letter of credit facilities at December 31, 2017 and September 30, 2017.

Export Financing Arrangements
The company entered into a number of export financing arrangements through its Brazilian subsidiary during fiscal year 2014.  The export financing arrangements were issued under an incentive program of the Brazilian government to fund working capital for Brazilian companies in exportation programs. The arrangements bore interest at 5.5 percent and had maturity dates in 2017. These financing arrangements were paid off at maturity, as of March 31, 2017.

24

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



Other
One of the company's consolidated joint ventures in China participates in a bills of exchange program to settle its obligations with its trade suppliers. These programs are common in China and generally require the participation of local banks. Under these programs, the company's joint venture issues notes payable through the participating banks to its trade suppliers. If the issued notes payable remain unpaid on their respective due dates, this could constitute an event of default under the company’s revolving credit facility if the defaulted amount exceeds $35 million per bank. As of December 31, 2017 and September 30, 2017, the company had $22 million and $24 million, respectively, outstanding under this program at more than one bank.
19. Financial Instruments
Fair values of financial instruments are summarized as follows (in millions):
 
December 31, 2017
 
September 30, 2017
 
Carrying
Value
 
Fair
Value
 
Carrying
Value
 
Fair
Value
Cash and cash equivalents
$
116

 
$
116

 
$
88

 
$
88

Short-term debt
63

 
92

 
288

 
329

Long-term debt
751

 
851

 
750

 
859

Foreign exchange forward contracts (other assets)

 

 

 

Foreign exchange forward contracts (other liabilities)
3

 
3

 
3

 
3

Short-term foreign currency option contracts (other assets)
2

 
2

 
2

 
2

Long-term foreign currency option contracts (other assets)
1

 
1

 
1

 
1


The following table reflects the offsetting of derivative assets and liabilities (in millions):
 
December 31, 2017
 
September 30, 2017
 
Gross
Amounts Recognized
 
Gross Amounts
Offset
 
Net Amounts
Reported
 
Gross
Amounts Recognized
 
Gross Amounts
Offset
 
Net Amounts
Reported
Derivative Asset
 
 
 
 
 
 
 
 
 
 
 
Foreign exchange forward contract

 

 

 

 

 

Derivative Liabilities
 
 
 
 
 
 
 
 
 
 
 
Foreign exchange forward contract
3

 

 
3

 
3

 

 
3

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

Level 3 inputs are unobservable inputs, including inputs that are available in situations where there is little, if any, market activity for the related instrument.
In instances where inputs used to measure fair value fall into different levels in the above fair value hierarchy, fair value measurements in their entirety are categorized based on the lowest priority level input that is significant to the valuation. The company's assessment of the significance of particular inputs to these fair value measurements requires judgment and considers factors specific to each asset or liability.

25

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


Fair value of financial instruments by the valuation hierarchy at December 31, 2017 is as follows (in millions):
 
Level 1
 
Level 2
 
Level 3
Cash and cash equivalents
$
116

 
$

 
$

Short-term debt

 
88

 
4

Long-term debt

 
843

 
8

Foreign exchange forward contracts (asset)

 

 

Foreign exchange forward contracts (liability)

 
3

 

Short-term foreign currency option contracts (asset)

 

 
2

Long-term foreign currency option contracts (asset)

 

 
1

Fair value of financial instruments by the valuation hierarchy at September 30, 2017 is as follows (in millions):
 
Level 1
 
Level 2
 
Level 3
Cash and cash equivalents
$
88

 
$

 
$

Short-term debt

 
325

 
4

Long-term debt

 
851

 
8

Foreign exchange forward contracts (asset)

 

 

Foreign exchange forward contracts (liability)

 
3

 

Short-term foreign currency option contracts (asset)

 

 
2

Long-term foreign currency option contracts (asset)

 

 
1

The tables below provide a reconciliation of changes in fair value of the Level 3 financial assets and liabilities measured at fair value in the condensed consolidated balance sheet for the three months ended December 31, 2017 and 2016, respectively. No transfers of assets between any of the Levels occurred during these periods.
Three months ended December 31, 2017 (in millions)
 
Short-term foreign currency option contracts (asset)
 
Long-term foreign currency option contracts (asset)
 
Total
Fair Value as of September 30, 2017
 
$
2

 
$
1

 
$
3

Total unrealized gains (losses):
 
 
 
 
 


Included in other income
 

 

 

Included in cost of sales
 

 

 

Total realized gains (losses):
 
 
 
 
 


Included in other income
 

 

 

Included in cost of sales
 

 

 

Purchases, issuances, sales and settlements:
 
 
 
 
 


Purchases
 

 

 

Settlements
 

 

 

Transfer in and / or out of Level 3 (1)
 

 

 

Reclass between short-term and long-term
 

 

 

Fair Value as of December 31, 2017
 
$
2

 
$
1

 
$
3


26

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


Three months ended December 31, 2016 (in millions)
 
Short-term foreign currency option contracts (asset)
 
Long-term foreign currency option contracts (asset)
 
Total
Fair Value as of September 30, 2016
 
$

 
$
2

 
$
2

Total unrealized gains (losses):
 
 
 
 
 
 
Included in other income
 

 

 

Included in cost of sales
 

 
1

 
1

Total realized gains (losses):
 
 
 
 
 
 
Included in other income
 

 

 

Included in cost of sales
 

 

 

Purchases, issuances, sales and settlements:
 
 
 
 
 
 
Purchases
 

 

 

Settlements
 

 

 

Transfer in and / or out of Level 3 (1)
 

 

 

Reclass between short-term and long-term
 
1

 
(1
)
 

Fair Value as of December 31, 2016
 
$
1

 
$
2

 
$
3

(1) Transfers as of the last day of the reporting period.
Cash and cash equivalents — All highly liquid investments purchased with an original maturity of three months or less are considered to be cash equivalents. The carrying value approximates fair value because of the short maturity of these instruments. The company did not have any cash equivalents as of December 31, 2017 or September 30, 2017.
     Short- and long-term debt — Fair values are based on transaction prices at public exchange for publicly traded debt. For debt instruments that are not publicly traded, fair values are based on interest rates that would be currently available to the company for issuance of similar types of debt instruments with similar terms and remaining maturities.
Foreign exchange forward contracts — The company uses foreign exchange forward purchase and sale contracts with terms of 18 months or less to hedge its exposure to changes in foreign currency exchange rates. The fair value of foreign exchange forward contracts is based on a model which incorporates observable inputs including quoted spot rates, forward exchange rates and discounted future expected cash flows utilizing market interest rates with similar quality and maturity characteristics. For derivative instruments that are designated and qualify as cash flow hedges, the effective portion of changes in the fair value of the contracts is recorded in Accumulated Other Comprehensive Loss in the statement of shareholders’ equity and is recognized in operating income when the underlying forecasted transaction impacts earnings.
Foreign currency option contracts — The company uses option contracts to mitigate foreign exchange exposure on expected future Indian Rupee-denominated purchases. As of December 31, 2017 and September 30, 2017, the notional amount of the company's Indian rupee foreign exchange contracts outstanding was $152 million and $172 million, respectively. The company did not elect hedge accounting for these derivatives. Changes in fair value associated with these contracts are recorded in cost of sales in the consolidated statement of operations.
The company uses option contracts to mitigate the risk of volatility in the translation of euro earnings to U.S. dollars. As of December 31, 2017 and September 30, 2017, the notional amount of the company's euro option contracts outstanding was $46 million and $58 million, respectively. These option contracts did not qualify for a hedge accounting election. Changes in fair value associated with these contracts are recorded in the consolidated statement of operations in other income, net.
The company uses option contracts to mitigate the risk of volatility in the translation of Swedish krona to U.S. dollars. As of December 31, 2017 and September 30, 2017, the notional amount of the company's Swedish krona option contracts outstanding was $51 million and $71 million, respectively. These option contracts did not qualify for a hedge accounting election. Changes in fair value associated with these contracts are recorded in the consolidated statement of operations in other income, net.
The company uses option contracts to mitigate foreign exchange exposure on expected future South Korean won-denominated purchases. As of December 31, 2017, the notional amount of the company's South Korean won foreign exchange contracts outstanding was $33 million. As of September 30, 2017, there were no South Korean won foreign exchange option contracts outstanding. The company did not elect hedge accounting for these derivatives. Changes in fair value associated with these contracts are recorded in cost of sales in the consolidated statement of operations.

27

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


The fair value of foreign exchange option contracts is based on third-party proprietary models, which incorporate inputs at varying unobservable weights of quoted spot rates, market volatility, forward rates and time utilizing market instruments with similar quality and maturity characteristics.
20. Retirement Benefit Liabilities
Retirement benefit liabilities consisted of the following (in millions):
 
December 31,
2017
 
September 30,
2017
Retiree medical liability
$
95

 
$
104

Pension liability
212

 
219

Other
15

 
15

Subtotal
322

 
338

Less: current portion (included in compensation and benefits, Note 16)
(24
)
 
(24
)
Retirement benefits
$
298

 
$
314

The components of net periodic pension and retiree medical expense included in continuing operations for the three months ended December 31 are as follows (in millions):
 
2017
 
2016
 
Pension
 
Retiree Medical
 
Pension
 
Retiree Medical
Interest cost
$
13

 
$
1

 
$
13

 
$
4

Assumed return on plan assets
(24
)
 

 
(23
)
 

Amortization of prior service costs

 
(9
)
 

 
(1
)
Recognized actuarial loss
7

 
4

 
7

 
4

Total expense (income)
$
(4
)
 
$
(4
)
 
$
(3
)
 
$
7


21. Contingencies
Environmental
    Federal, state and local requirements relating to the discharge of substances into the environment, the disposal of hazardous wastes and other activities affecting the environment have, and will continue to have, an impact on the operations of the company. The process of estimating environmental liabilities is complex and dependent upon evolving physical and scientific data at the sites, uncertainties as to remedies and technologies to be used and the outcome of discussions with regulatory agencies. The company records liabilities for environmental issues in the accounting period in which they are considered to be probable and the cost can be reasonably estimated. At environmental sites in which more than one potentially responsible party has been identified, the company records a liability for its allocable share of costs related to its involvement with the site, as well as an allocable share of costs related to insolvent parties or unidentified shares. At environmental sites in which Meritor is the only potentially responsible

party, the company records a liability for the total probable and estimable costs of remediation before consideration of recovery from insurers or other third parties.
     The company has been designated as a potentially responsible party at nine Superfund sites, excluding sites as to which the company’s records disclose no involvement or as to which the company’s liability has been finally determined. Additionally, one site operated by a predecessor of the company has been proposed for addition to the Superfund National Priorities List.  Management estimates the total reasonably possible costs the company could incur for the remediation of the nine Superfund sites at December 31, 2017 to be approximately $5 million, of which $2 million is probable and recorded as a liability. Included in reasonably possible amounts are estimates for certain remediation actions that may be required if current actions are deemed inadequate by the regulators.

28

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


     In addition to the Superfund sites, various other lawsuits, claims and proceedings have been asserted against the company, alleging violations of federal, state and local environmental protection requirements, or seeking remediation of alleged environmental impairments, principally at previously disposed-of properties. For these matters, management has estimated the total reasonably possible costs the company could incur at December 31, 2017 to be approximately $19 million, of which $7 million is probable and recorded as a liability.
     Included in the company’s environmental liabilities are costs for on-going operation, maintenance and monitoring at environmental sites in which remediation has been put into place. This liability is discounted using discount rates in the range of 1.75 to 2.75 percent and is approximately $6 million at December 31, 2017. The undiscounted estimate of these costs is approximately $7 million.
     The following are the components of the Superfund and non-Superfund environmental reserves (in millions):
 
Superfund Sites
 
Non-Superfund Sites
 
Total
Beginning balance at September 30, 2017
$
2

 
$
7

 
$
9

Payments and other

 
(1
)
 
(1
)
Accruals

 
1

 
1

Balance at December 31, 2017
$
2

 
$
7

 
$
9

Environmental reserves are included in Other Current Liabilities (see Note 16) and Other Liabilities (see Note 17) in the condensed consolidated balance sheet.
     The actual amount of costs or damages for which the company may be held responsible could materially exceed the foregoing estimates because of uncertainties, including the financial condition of other potentially responsible parties, the success of the remediation, discovery of new contamination and other factors that make it difficult to predict actual costs accurately. However, based on management’s assessment, after consulting with outside advisors that specialize in environmental matters, and subject to the difficulties inherent in estimating these future costs, the company believes that its expenditures for environmental capital investment and remediation necessary to comply with present regulations governing environmental protection and other expenditures for the resolution of environmental claims will not have a material effect on the company’s business, financial condition or results of operations. In addition, in future periods, new laws and regulations, changes in remediation plans, advances in technology and additional information about the ultimate clean-up remedies could significantly change the company’s estimates. Management cannot assess the possible effect of compliance with future requirements.
In April 2016, the company was served with several complaints filed against the company and other defendants in the United States District Court for the Northern District of Mississippi. The complaints were amended in July 2016.  These complaints allege damages, including diminution of property value, concealment/fraud and emotional distress resulting from alleged environmental pollution in and around a neighborhood in Grenada, Mississippi. Rockwell owned and operated a facility near the neighborhood from 1965 to 1985. The company filed answers to the complaints in July 2016. In May 2017, the company was served with a complaint filed against the company and other defendants by the Mississippi Attorney General in the Chancery Court of Grenada County, Mississippi.  The complaint alleges that operations at the above-referenced Grenada facility caused contamination of off-site groundwater and surface waters. Subsequently, the company removed this action to the United States District Court for the Northern District of Mississippi; plaintiffs have moved to have the case remanded to Chancery Court. The company intends to defend itself vigorously against these claims. The company believes at this time that liabilities associated with this case, while possible, are not probable and estimable, and therefore has not recorded any accrual for them as of December 31, 2017 and September 30, 2017. Further, a reasonably possible range of loss cannot be estimated at this time.
Asbestos
     Maremont Corporation (“Maremont”), a subsidiary of Meritor, manufactured friction products containing asbestos from 1953 through 1977, when it sold its friction product business. Arvin Industries, Inc., a predecessor of the company, acquired Maremont in 1986. Maremont and many other companies are defendants in suits brought by individuals claiming personal injuries as a result of exposure to asbestos-containing products.
Maremont had approximately 2,600 and 2,800 pending asbestos-related claims at December 31, 2017 and September 30, 2017, respectively. Although Maremont has been named in these cases, in the cases where actual injury has been alleged, very few claimants have established that a Maremont product caused their injuries. Plaintiffs’ lawyers often sue dozens or even hundreds

29

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


of defendants in individual lawsuits, seeking damages against all named defendants irrespective of the disease or injury and irrespective of any causal connection with a particular product. For these reasons, the total number of claims filed is not necessarily the most meaningful factor in determining Maremont's asbestos-related liability.
     Maremont’s asbestos-related reserves and corresponding asbestos-related recoveries are summarized as follows (in millions):
 
December 31,
2017
 
September 30,
2017
Pending and future claims
$
68

 
$
68

Billed but unpaid claims
1

 
2

Asbestos-related liabilities
$
69

 
$
70

Asbestos-related insurance recoveries
$
21

 
$
25

A portion of the asbestos-related recoveries and reserves are included in Other Current Assets and Liabilities, with the majority of the amounts recorded in Other Assets and Liabilities (see Note 13, Note 15, Note 16 and Note 17).
        Pending and Future Claims: Maremont engaged Bates White LLC (“Bates White”), a consulting firm with extensive experience estimating costs associated with asbestos litigation, to assist with determining the estimated cost of resolving pending and future asbestos-related claims that have been, and could reasonably be expected to be, filed against Maremont. Although it is not possible to estimate the full range of costs because of various uncertainties, Bates White advised Maremont that it would be possible to determine an estimate of a reasonable forecast of the cost of the probable settlement and defense costs of resolving pending and future asbestos-related claims, based on historical data and certain assumptions with respect to events that may occur in the future.
     As of September 30, 2017, Bates White provided a reasonable and probable estimate that consisted of a range of equally likely possibilities of Maremont’s obligation for asbestos personal injury claims over the next ten years of $68 million to $82 million. After consultation with Bates White, management recognized a liability of $68 million as of each of December 31, 2017 and September 30, 2017 for pending and future claims over the next ten years. The ultimate cost of resolving pending and future claims is estimated based on the history of claims and expenses for plaintiffs represented by law firms in jurisdictions with an established history with Maremont. Maremont has recognized incremental insurance receivables associated with recoveries expected for asbestos-related liabilities as the estimate of asbestos-related liabilities for pending and future claims changes.
     Assumptions: The following assumptions were made by Maremont after consultation with Bates White and are included in their study:
Pending and future claims were estimated for a ten-year period ending in fiscal year 2027;
Maremont believes that the litigation environment could change significantly beyond ten years and that the reliability of estimates of future probable expenditures in connection with asbestos-related personal injury claims will decline for each year further in the future. As a result, estimating a probable liability beyond ten years is difficult and uncertain;
On a per claim basis, defense and processing costs for pending and future claims will be at the level consistent with Maremont’s prior experience; and
The ultimate indemnity cost of resolving nonmalignant claims with plaintiffs’ law firms in jurisdictions without an established history with Maremont cannot be reasonably estimated.
Recoveries: Maremont has historically had insurance that reimburses a substantial portion of the costs incurred defending against asbestos-related claims. The insurance receivable related to asbestos-related liabilities was $21 million and $25 million as of December 31, 2017 and September 30, 2017, respectively. The receivable is for coverage provided by one insurance carrier based on a coverage-in-place agreement. Maremont currently expects to exhaust the remaining limits provided by this coverage sometime in the next ten years. The difference between the estimated liability and insurance receivable is primarily related to exhaustion of settled insurance coverage within the forecasted period.

30

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


Maremont maintained insurance coverage with other insurance carriers that management believed also covers indemnity and defense costs. During fiscal year 2013, Maremont re-initiated lawsuits against these carriers, seeking a declaration of its rights to coverage for asbestos claims and to facilitate an orderly and timely collection of insurance proceeds. During the first quarter of fiscal year 2016, the dispute related to these insurance policies was settled. As a part of this settlement, on December 12, 2015, Maremont received $17 million in cash, of which $5 million was recognized as a reduction in asbestos expense and $12 million was recorded as a liability to the insurance carrier as it is required to be returned to the carrier if additional asbestos liability is not incurred. During the fourth quarter of fiscal year 2016, Maremont recognized an additional $9 million of the cash settlement proceeds as a reduction in asbestos expense. During the first quarter of fiscal year 2017, the company recognized the remaining $3 million of the cash settlement proceeds as a reduction in asbestos expense. The settlement also provides additional recovery for Maremont if certain future defense and indemnity spending thresholds are met.
     The amounts recorded for the asbestos-related reserves and recoveries from insurance companies are based upon assumptions and estimates derived from currently known facts. All such estimates of liabilities and recoveries for asbestos-related claims are subject to considerable uncertainty because such liabilities and recoveries are influenced by variables that are difficult to predict. The future litigation environment for Maremont could change significantly from its past experience, due, for example, to changes in the mix of claims filed against Maremont in terms of plaintiffs’ law firms, jurisdictions and diseases; legislative or regulatory developments; Maremont’s approach to defending claims; or payments to plaintiffs from other defendants. Estimated recoveries are influenced by coverage issues among insurers and the continuing solvency of various insurance companies. If the assumptions with respect to the estimation period, 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 Maremont’s asbestos-related claims, and the effect on the company, could differ materially from current estimates and, therefore, could have a material impact on the company’s financial condition and results of operations.
     Rockwell International (“Rockwell”) — ArvinMeritor, Inc. (“AM”), a subsidiary of Meritor, along with many other companies, has also been named as a defendant in lawsuits alleging personal injury as a result of exposure to asbestos used in certain components of Rockwell products many years ago. Liability for these claims was transferred at the time of the spin-off of the automotive business from Rockwell in 1997. Rockwell had approximately 1,600 pending active asbestos claims in lawsuits that name AM, together with many other companies, as defendants at December 31, 2017 and September 30, 2017.
A significant portion of the claims do not identify any of Rockwell’s products or specify which of the claimants, if any, were exposed to asbestos attributable to Rockwell’s products, and past experience has shown that the vast majority of the claimants will likely never identify any of Rockwell’s products. Historically, AM has been dismissed from the vast majority of similar claims filed in the past with no payment to claimants. For those claimants who do show that they worked with Rockwell’s products, management nevertheless believes it has meritorious defenses, in substantial part due to the integrity of the products involved and the lack of any impairing medical condition on the part of many claimants.
     The Rockwell legacy asbestos-related reserves and corresponding asbestos-related recoveries are summarized as follows (in millions):
 
December 31,
2017
 
September 30,
2017
Pending and future claims
$
63

 
$
63

Billed but unpaid claims
1

 
2

Asbestos-related liabilities
$
64

 
$
65

Asbestos-related insurance recoveries
$
38

 
$
38

Pending and Future Claims: The company engaged Bates White to assist with determining whether it would be possible to estimate the cost of resolving pending and future Rockwell legacy asbestos-related claims that have been, and could reasonably be expected to be, filed against the company. As of September 30, 2017, Bates White provided a reasonable and probable estimate that consisted of a range of equally likely possibilities of Rockwell’s obligation for asbestos personal injury claims over the next ten years of $63 million to $74 million. After consultation with Bates White, management recognized a liability for the pending and future claims over the next ten years of $63 million as of each of December 31, 2017 and September 30, 2017. The ultimate cost of resolving pending and future claims is estimated based on the history of claims and expenses for plaintiffs represented by law firms in jurisdictions with an established history with Rockwell.

31

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


  Assumptions: The following assumptions were made by the company after consultation with Bates White and are included in their study:
Pending and future claims were estimated for a ten-year period ending in fiscal year 2027;
The company believes that the litigation environment could change significantly beyond ten years and that the reliability of estimates of future probable expenditures in connection with asbestos-related personal injury claims will decline for each year further in the future. As a result, estimating a probable liability beyond ten years is difficult and uncertain;
On a per claim basis, defense and processing costs for pending and future claims will be at the level consistent with the company’s prior experience; and
The ultimate indemnity cost of resolving nonmalignant claims with plaintiff’s law firms in jurisdictions without an established history with Rockwell cannot be reasonably estimated.
Recoveries: Rockwell has insurance coverage that management believes covers indemnity and defense costs, over and above self-insurance retentions, for a significant portion of these claims. In 2004, the company initiated litigation against certain of these carriers to enforce the insurance policies. During the fourth quarter of fiscal year 2016, the company executed settlement agreements with two of these carriers, thereby resolving the litigation against those particular carriers. Pursuant to the terms of one of those settlement agreements, in the fourth quarter of fiscal year 2016 the company received $32 million in cash from an insurer, of which $10 million was recognized as a reduction in asbestos expense, and $22 million was recorded as a liability to the insurance carrier as it is required to be returned to the carrier if additional asbestos liability is not ultimately incurred. During fiscal year 2017 and the first quarter of fiscal year 2018, Rockwell recognized an additional $10 million and $2 million, respectively, of the cash settlement proceeds as a reduction in asbestos expense. Pursuant to the terms of a second settlement agreement, in the fourth quarter of fiscal year 2016 the company recorded a $12 million receivable to reflect expected reimbursement of future defense and indemnity payments under a coverage-in-place arrangement with that insurer. In addition to the coverage provided from the settlement agreements executed during the fourth quarter of fiscal year 2016, the company maintains a receivable of $7 million related to a previously executed coverage-in-place arrangement with other insurers. The insurance receivable for Rockwell's asbestos-related liabilities totaled $38 million as of each of December 31, 2017 and September 30, 2017. Included in these amounts are insurance receivables of $17 million as of each of December 31, 2017 and September 30, 2017, which are associated with policies in dispute and have been fully reserved.
The amounts recorded for the asbestos-related reserves and recoveries from insurance companies are based upon assumptions and estimates derived from currently known facts. All such estimates of liabilities and recoveries for asbestos-related claims are subject to considerable uncertainty because such liabilities and recoveries are influenced by variables that are difficult to predict. The future litigation environment for Rockwell could change significantly from its past experience, due, for example, to changes in the mix of claims filed against Rockwell in terms of plaintiffs’ law firms, jurisdictions and diseases; legislative or regulatory developments; Rockwell’s approach to defending claims; or payments to plaintiffs from other defendants. Estimated recoveries are influenced by coverage issues among insurers and the continuing solvency of various insurance companies. If the assumptions with respect to the estimation period, the nature of pending claims, the cost to resolve claims and the amount of available insurance prove to be incorrect, the actual amount of liability for Rockwell asbestos-related claims, and the effect on the company, could differ materially from current estimates and, therefore, could have a material impact on the company’s financial condition and results of operations.
Indemnifications
The company has provided indemnifications in conjunction with certain transactions, primarily divestitures. These indemnities address a variety of matters, which may include environmental, tax, asbestos and employment-related matters, and the periods of indemnification vary in duration.
In December 2005, the company guaranteed a third party’s obligation to reimburse another party for payment of health and prescription drug benefits to a group of retired employees. The retirees were former employees of a wholly-owned subsidiary of the company prior to it being acquired by the company. The wholly-owned subsidiary, which was part of the company’s light vehicle aftermarket business, was sold by the company in fiscal year 2006. Prior to May 2009, except as set forth hereinafter, the third party met its obligations to reimburse the other party. In May 2009, the third party filed for bankruptcy protection under Chapter 11 of the U.S. Bankruptcy Code, requiring the company to recognize its obligations under the guarantee. The company recorded a $28 million liability in fiscal year 2009 for this matter. At each of December 31, 2017 and September 30, 2017, the remaining estimated liability for this matter was approximately $10 million.
   In connection with the sale of its interest in MSSC in October 2009, the company provided certain indemnities to the buyer for its share of potential obligations related to pension funding shortfall, environmental and other contingencies, and valuation of

32

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


certain accounts receivable and inventories. At December 31, 2017 and September 30, 2017, the company's remaining exposure was approximately $1 million, which is included in other liabilities in the condensed consolidated balance sheet.
The company is not aware of any other claims or other information that would give rise to material payments under such indemnifications.
Other
The company identified certain sales transactions for which value-added tax was potentially required to be remitted to certain tax jurisdictions for tax years 2010 through 2017. At December 31, 2017 and September 30, 2017, the company’s estimate of the probable liability was $10 million and $12 million, respectively.

In addition, various lawsuits, claims and proceedings, other than those specifically disclosed in the condensed consolidated financial statements, have been or may be instituted or asserted against the company, relating to the conduct of the company’s business, including those pertaining to product liability, warranty or recall claims, intellectual property, safety and health, contract and employment matters. Although the outcome of other litigation cannot be predicted with certainty, and some lawsuits, claims or proceedings may be disposed of unfavorably to the company, management believes the disposition of matters that are pending will not have a material effect on the company’s business, financial condition, results of operations or cash flows. 
22. Shareholders' Equity
Common Stock and Debt Repurchase Authorizations
  On July 21, 2016, the Board of Directors authorized the repurchase of up to $100 million of the company’s common stock and up to $150 million aggregate principal amount of any of the company’s debt securities (including convertible debt securities), in each case from time to time through open market purchases, privately negotiated transactions or otherwise, until September 30, 2019, subject to compliance with legal and regulatory requirements and the company's debt covenants. As of December 31, 2017, there was an insignificant amount of common stock and $100 million in debt security repurchases that were made under these authorizations.
Accumulated Other Comprehensive Loss (AOCL)
The components of AOCL and the changes in AOCL by components, net of tax, for three months ended December 31, 2017 and 2016 are as follows (in millions):
 
Foreign Currency Translation
 
Employee Benefit Related Adjustments
 
Unrealized Loss, net of tax
 
Total
Balance at September 30, 2017
$
(41
)
 
$
(500
)
 
$
(4
)
 
$
(545
)
Other comprehensive income (loss) before reclassification
(8
)
 
1

 

 
(7
)
Amounts reclassified from accumulated other comprehensive loss

 
2

 

 
2

Net current-period other comprehensive income (loss)
$
(8
)
 
$
3

 
$

 
$
(5
)
Balance at December 31, 2017
$
(49
)
 
$
(497
)
 
$
(4
)
 
$
(550
)

33

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


 
Details about Accumulated Other Comprehensive Income Components
 
Amount Reclassified from Accumulated Other Comprehensive Income
 
Affected Line Item in the Consolidated Statement of Operations
 
Employee Benefit Related Adjustment
 
 
 
 
 
Prior service costs
 
$
(9
)
 
(a) 
 
Actuarial losses
 
$
11

 
(a) 
 
 
 
2

 
Total before tax
 
 
 

 
Tax benefit
 
Total reclassifications for the period
 
$
2

 
Net of tax
 
(a)  These accumulated other comprehensive income components are included in the computation of net periodic pension and retiree medical expense (see Note 20 for additional details), which is recorded in cost of sales and selling, general and administrative expenses.
 
 
Foreign Currency Translation
 
Employee Benefit Related Adjustments
 
Unrealized Loss, net of tax
 
Total
Balance at September 30, 2016
$
(66
)
 
$
(740
)
 
$
(3
)
 
$
(809
)
Other comprehensive income (loss) before reclassification
(28
)
 
1

 
1

 
(26
)
Amounts reclassified from accumulated other comprehensive loss - net of tax

 
10

 

 
10

Net current-period other comprehensive income (loss)
$
(28
)
 
$
11

 
$
1

 
$
(16
)
Balance at December 31, 2016
$
(94
)
 
$
(729
)
 
$
(2
)
 
$
(825
)
 
Details about Accumulated Other Comprehensive Income Components
 
Amount Reclassified from Accumulated Other Comprehensive Income
 
Affected Line Item in the Consolidated Statement of Operations
 
Employee Benefit Related Adjustment
 
 
 
 
 
Prior service costs
 
$
(1
)
 
(b) 
 
Actuarial losses
 
11

 
(b) 
 
 
 
10

 
Total before tax
 
 
 

 
Tax expense
 
Total reclassifications for the period
 
$
10

 
Net of tax
 
 
 
 
 
 
 
 
 
 
 
 
 
(b)  These accumulated other comprehensive income components are included in the computation of net periodic pension and retiree medical expense (see Note 20 for additional details), which is recorded in cost of sales and selling, general and administrative expenses.
 
23. Business Segment Information
The company defines its operating segments as components of its business where separate financial information is available and is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. The company’s Chief Operating Decision Maker (“CODM”) is the Chief Executive Officer.
      The company has two reportable segments at December 31, 2017, as follows:
The Commercial Truck & Industrial segment supplies drivetrain systems and components, including axles, drivelines and braking and suspension systems, primarily for medium- and heavy-duty trucks, military, construction, bus and coach, fire and emergency and other applications in North America, South America, Europe and Asia Pacific. This segment also includes the company's aftermarket businesses in Asia Pacific and South America; and
The Aftermarket & Trailer segment supplies axles, brakes, drivelines, suspension parts and other replacement parts to commercial vehicle and industrial aftermarket customers, primarily in North America and Europe. This segment also supplies a wide variety of undercarriage products and systems for trailer applications in North America.


34

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


     Segment adjusted EBITDA is defined as income (loss) from continuing operations before interest expense, income taxes, depreciation and amortization, non-controlling interests in consolidated joint ventures, loss on sale of receivables, restructuring expense, asset impairment charges and other special items as determined by management. Segment adjusted EBITDA excludes unallocated legacy and corporate income (expense), net. The company uses segment adjusted EBITDA as the primary basis for the CODM to evaluate the performance of each of its reportable segments.
     The accounting policies of the segments are the same as those applied in the condensed consolidated financial statements, except for the use of segment adjusted EBITDA. The company may allocate certain common costs, primarily corporate functions, between the segments differently than the company would for stand alone financial information prepared in accordance with GAAP. These allocated costs include expenses for shared services such as information technology, finance, communications, legal and human resources. The company does not allocate interest expense and certain legacy and other corporate costs not directly associated with the segment.
     Segment information is summarized as follows (in millions):
 
Commercial Truck
& Industrial
 
Aftermarket
& Trailer
 
Eliminations
 
Total
Three Months Ended December 31, 2017
 
 
 
 
 
 
 
External Sales
$
717

 
$
186

 
$

 
$
903

Intersegment Sales
21

 
9

 
(30
)
 

Total Sales
$
738

 
$
195

 
$
(30
)
 
$
903

Three Months Ended December 31, 2016
 
 
 
 
 
 
 
External Sales
$
521

 
$
178

 
$

 
$
699

Intersegment Sales
18

 
6

 
(24
)
 

Total Sales
$
539

 
$
184

 
$
(24
)
 
$
699

 
 
 
 
 
 
 
 


35

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


 
Three Months Ended December 31,
 
2017

2016
Segment adjusted EBITDA:
 
 
 
Commercial Truck & Industrial
$
80

 
$
42

Aftermarket & Trailer
21

 
22

Segment adjusted EBITDA
101


64

Unallocated legacy and corporate expense, net (1)
(2
)
 

Interest expense, net
(24
)
 
(21
)
Provision for income taxes
(83
)
 
(6
)
Depreciation and amortization
(21
)
 
(17
)
Noncontrolling interests
(2
)
 
(1
)
Loss on sale of receivables
(2
)
 
(1
)
Asset impairment charges

 
(3
)
Restructuring costs
(2