Edgar Filing: MERITOR INC

Document

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT

PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended March 31, 2019

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 every Interactive Data File required to be submitted 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 such files).



Yes	X	No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or 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

Securities registered pursuant to Section 12(b) of the Securities Exchange Act of 1934:



Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, $1 Par Value	MTOR	New York Stock Exchange

83,495,058 shares of Common Stock, $1.00 par value, of Meritor, Inc. were outstanding on April 30, 2019.

INDEX



			Page No.
PART I.	FINANCIAL INFORMATION:

	Item 1.	Financial Statements:

		Condensed Consolidated Statement of Operations - - Three and Six Months Ended March 31, 2019 and 2018	3

		Condensed Consolidated Statement Of Comprehensive Income - - Three and Six Months Ended March 31, 2019 and 2018	4

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

		Condensed Consolidated Statement of Cash Flows - - Six Months Ended March 31, 2019 and 2018	6

		Condensed Consolidated Statement of Equity (Deficit) - - Three and Six Months Ended March 31, 2019 and 2018	7

		Notes to Condensed Consolidated Financial Statements	9

	Item 2.	Management’s Discussion and Analysis of Financial Conditions and Results of Operations	51

	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	70

	Item 4.	Controls and Procedures	73

PART II.	OTHER INFORMATION:

	Item 1.	Legal Proceedings	74

	Item 1A.	Risk Factors	74

	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	74

	Item 5.	Other Information	75

	Item 6.	Exhibits	76

Signatures			77

MERITOR, INC.

PART I. FINANCIAL INFORMATION

ITEM 1. Financial Statements

CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS

(in millions, except per share amounts)



	Three Months Ended March 31,						Six Months Ended March 31,
	2019			2018			2019			2018
	(Unaudited)
Sales	$	1,156		$	1,066		$	2,194		$	1,969
Cost of sales	(982		)	(895		)	(1,879		)	(1,666		)
GROSS MARGIN	174			171			315			303
Selling, general and administrative	(73		)	(75		)	(107		)	(142		)
Restructuring	1			(1		)	1			(3		)
Other operating expense, net	—			(11		)	—			(12		)
OPERATING INCOME	102			84			209			146
Other income, net	9			8			20			15
Equity in earnings of affiliates	6			6			15			11
Interest expense, net	(15		)	(16		)	(29		)	(40		)
INCOME BEFORE INCOME TAXES	102			82			215			132
Provision for income taxes	(27		)	(22		)	(48		)	(105		)
INCOME FROM CONTINUING OPERATIONS	75			60			167			27
LOSS FROM DISCONTINUED OPERATIONS, net of tax	(1		)	—			(1		)	(1		)
NET INCOME	74			60			166			26
Less: Net income attributable to noncontrolling interests	(2		)	(3		)	(4		)	(5		)
NET INCOME ATTRIBUTABLE TO MERITOR, INC.	$	72		$	57		$	162		$	21
NET INCOME (LOSS) ATTRIBUTABLE TO MERITOR, INC.
Net income from continuing operations	$	73		$	57		$	163		$	22
Loss from discontinued operations	(1		)	—			(1		)	(1		)
Net income	$	72		$	57		$	162		$	21
BASIC EARNINGS (LOSS) PER SHARE
Continuing operations	$	0.88		$	0.64		$	1.94		$	0.25
Discontinued operations	(0.01		)	—			(0.01		)	(0.01		)
Basic earnings per share	$	0.87		$	0.64		$	1.93		$	0.24
DILUTED EARNINGS (LOSS) PER SHARE
Continuing operations	$	0.85		$	0.63		$	1.88		$	0.24
Discontinued operations	(0.01		)	—			(0.01		)	(0.01		)
Diluted earnings per share	$	0.84		$	0.63		$	1.87		$	0.23

Basic average common shares outstanding	83.3			88.6			84.0			88.6
Diluted average common shares outstanding	85.6			91.2			86.6			91.3

See notes to Condensed Consolidated Financial Statements. Prior period has been recast, see Note 20.

MERITOR, INC.

CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

(in millions)



	Three Months Ended March 31,						Six Months Ended March 31,
	2019			2018			2019			2018
	(Unaudited)
Net income	$	74		$	60		$	166		$	26
Other comprehensive income (loss):
Foreign currency translation adjustments:
Attributable to Meritor, Inc.	7			14			3			6
Attributable to noncontrolling interest	—			—			1			1
Pension and other postretirement benefit related adjustments	1			3			1			6
Unrealized gain (loss) on investments and foreign exchange contracts	(1		)	3			—			3
Other comprehensive income, net of tax	7			20			5			16
Total comprehensive income	81			80			171			42
Less: Comprehensive income attributable to noncontrolling interest	(2		)	(3		)	(5		)	(6		)
Comprehensive income attributable to Meritor, Inc.	$	79		$	77		$	166		$	36

See notes to Condensed Consolidated Financial Statements.

MERITOR, INC.

CONDENSED CONSOLIDATED BALANCE SHEET

(in millions)



	March 31, 2019			September 30, 2018
	(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	98		$	115
Receivables, trade and other, net	636			588
Inventories	530			477
Other current assets	41			46
TOTAL CURRENT ASSETS	1,305			1,226
NET PROPERTY	479			483
GOODWILL	419			421
OTHER ASSETS	597			596
TOTAL ASSETS	$	2,800		$	2,726
LIABILITIES, MEZZANINE EQUITY AND EQUITY
CURRENT LIABILITIES:
Short-term debt	$	118		$	94
Accounts and notes payable	728			700
Other current liabilities	292			290
TOTAL CURRENT LIABILITIES	1,138			1,084
LONG-TERM DEBT	738			730
RETIREMENT BENEFITS	246			262
OTHER LIABILITIES	232			332
TOTAL LIABILITIES	2,354			2,408
COMMITMENTS AND CONTINGENCIES (See Note 21)
MEZZANINE EQUITY:
Convertible debt with cash settlement	1			1
EQUITY:
Common stock (March 31, 2019 and September 30, 2018, 103.9 and 102.2 shares issued and 83.5 and 84.9 shares outstanding, respectively)	104			102
Additional paid-in capital	793			787
Retained earnings	362			200
Treasury stock, at cost (March 31, 2019 and September 30, 2018, 20.4 and 17.3 shares, respectively)	(286		)	(236		)
Accumulated other comprehensive loss	(562		)	(566		)
Total equity attributable to Meritor, Inc.	411			287
Noncontrolling interests	34			30
TOTAL EQUITY	445			317
TOTAL LIABILITIES, MEZZANINE EQUITY AND EQUITY	$	2,800		$	2,726

See notes to Condensed Consolidated Financial Statements.

MERITOR, INC.

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

(in millions)



	Six Months Ended March 31,
	2019			2018
	(Unaudited)
OPERATING ACTIVITIES
CASH PROVIDED BY OPERATING ACTIVITIES (See Note 11)	$	51		$	72
INVESTING ACTIVITIES
Capital expenditures	(44		)	(35		)
Proceeds from sale of equity method investment	—			250
Cash paid for investment in Transportation Power, Inc.	(3		)	(3		)
Proceeds from sale of a business	—			4
CASH PROVIDED BY (USED FOR) INVESTING ACTIVITIES	(47		)	216
FINANCING ACTIVITIES
Borrowings and securitization	48			(60		)
Redemption of notes	(19		)	(181		)
Other financing activities	(1		)	(2		)
Net change in debt	28			(243		)
Repurchase of common stock	(50		)	(33		)
CASH USED FOR FINANCING ACTIVITIES	(22		)	(276		)
EFFECT OF CHANGES IN FOREIGN CURRENCY EXCHANGE RATES ON CASH AND CASH EQUIVALENTS	1			—
CHANGE IN CASH AND CASH EQUIVALENTS	(17		)	12
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD	115			88
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	98		$	100

See notes to Condensed Consolidated Financial Statements.

MERITOR, INC.

CONDENSED CONSOLIDATED STATEMENT OF EQUITY

(in millions)

(Unaudited)



	Three months ended March 31, 2019
	Common Stock		Additional Paid-in Capital		Retained Earnings		Treasury Stock			Accumulated Other Comprehensive Loss			Total Equity Attributable to Meritor, Inc.			Noncontrolling Interests			Total
Beginning Balance at December 31, 2018	$	104	$	790	$	290	$	(286	)	$	(569	)	$	329		$	33		$	362
Comprehensive income	—		—		72		—			7			79			2			81
Equity based compensation expense	—		3		—		—			—			3			—			3
Noncontrolling interest dividend	—		—		—		—			—			—			(1		)	(1		)
Ending Balance at March 31, 2019	$	104	$	793	$	362	$	(286	)	$	(562	)	$	411		$	34		$	445

	Three months ended March 31, 2018
	Common Stock		Additional Paid-in Capital		Retained Earnings		Treasury Stock			Accumulated Other Comprehensive Loss			Total Equity Attributable to Meritor, Inc.			Noncontrolling Interests			Total
Beginning Balance at December 31, 2017	$	102	$	770	$	47	$	(136	)	$	(550	)	$	233		$	30		$	263
Comprehensive income	—		—		57		—			20			77			3			80
Equity based compensation expense	—		5		—		—			—			5			—			5
Repurchase of common stock	—		—		—		(33		)	—			(33		)	—			(33		)
Noncontrolling interest dividends	—		—		—		—			—			—			(1		)	(1		)
Other equity adjustments	—		—		—		—			—			—			(2		)	(2		)
Ending Balance at March 31, 2018	$	102	$	775	$	104	$	(169	)	$	(530	)	$	282		$	30		$	312

MERITOR, INC.



	Six months ended March 31, 2019
	Common Stock		Additional Paid-in Capital			Retained Earnings		Treasury Stock			Accumulated Other Comprehensive Loss			Total Equity Attributable to Meritor, Inc.			Noncontrolling Interests			Total
Beginning Balance at September 30, 2018	$	102	$	787		$	200	$	(236	)	$	(566	)	$	287		$	30		$	317
Comprehensive income	—		—			162		—			4			166			5			171
Equity based compensation expense	—		8			—		—			—			8			—			8
Vesting of equity based awards	2		(2		)	—		—			—			—			—			—
Repurchase of common stock	—		—			—		(50		)	—			(50		)	—			(50		)
Noncontrolling interest dividend	—		—			—		—			—			—			(1		)	(1		)
Ending Balance at March 31, 2019	$	104	$	793		$	362	$	(286	)	$	(562	)	$	411		$	34		$	445

	Six months ended March 31, 2018
	Common Stock		Additional Paid-in Capital			Retained Earnings		Treasury Stock			Accumulated Other Comprehensive Loss			Total Equity Attributable to Meritor, Inc.			Noncontrolling Interests			Total
Beginning Balance at October 1, 2017	$	101	$	765		$	83	$	(136	)	$	(545	)	$	268		$	27		$	295
Comprehensive income	—		—			21		—			15			36			6			42
Equity based compensation expense	—		10			—		—			—			10			—			10
Vesting of equity based awards	1		(1		)	—		—			—			—			—			—
Repurchase of common stock	—		—			—		(33		)	—			(33		)	—			(33		)
Noncontrolling interest dividends	—		—			—		—			—			—			(1		)	(1		)
Other equity adjustments	—		1			—		—			—			1			(2		)	(1		)
Ending Balance at March 31, 2018	$	102	$	775		$	104	$	(169	)	$	(530	)	$	282		$	30		$	312

See notes to Condensed Consolidated Financial Statements.

MERITOR, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Basis of Presentation

Meritor, Inc. (the "company" or "Meritor"), headquartered in Troy, Michigan, is a premier global supplier of a broad range of integrated systems, modules and components to original equipment manufacturers ("OEMs") and the aftermarket for the commercial vehicle, transportation and industrial sectors. The company serves commercial truck, trailer, military, bus and coach, construction and other industrial OEMs and certain aftermarkets. The Condensed Consolidated Financial Statements are those of the company and its consolidated subsidiaries.

Certain businesses are reported in discontinued operations in the Condensed Consolidated Statement of Operations, Condensed Consolidated Statement of Cash Flows and related notes for all periods presented. Additional information regarding discontinued operations is discussed in Note 5.

In the opinion of the company, the unaudited Condensed Consolidated Financial Statements contain all adjustments, consisting solely of adjustments of a normal, recurring nature, necessary to present fairly the financial position, results of operations and cash flows for the periods presented. These statements should be read in conjunction with the company’s audited consolidated financial statements and notes thereto included in the company's Annual Report on Form 10-K for the fiscal year ended September 30, 2018. The Condensed Consolidated Balance Sheet data as of September 30, 2018 was derived from audited financial statements but does not include all annual disclosures required by accounting principles generally accepted in the United States of America. The results of operations for the three and six months ended March 31, 2019 are not necessarily indicative of the results for the full year.

The company’s fiscal year ends on the Sunday nearest September 30, and its fiscal quarters generally end on the Sundays nearest December 31, March 31 and June 30. The second quarter of fiscal years 2019 and 2018 ended on March 31, 2019 and April 1, 2018, respectively. All year and quarter references relate to the company’s fiscal year and fiscal quarters, unless otherwise stated. For ease of presentation, September 30 and March 31 are used consistently throughout this report to represent the fiscal year end and second 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 March 31,		Six Months Ended March 31,
	2019	2018	2019	2018
Basic average common shares outstanding	83.3	88.6	84.0	88.6
Impact of restricted shares, restricted share units and performance share units	1.5	1.6	1.9	1.6
Impact of convertible notes	0.8	1.0	0.7	1.1
Diluted average common shares outstanding	85.6	91.2	86.6	91.3

In November 2018, 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 $16.50, which was the company’s share price on the grant date of December 1, 2018. 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 $16.50, which was the company's share price on the grant date of December 1, 2018.

The actual number of performance share units that will vest depends upon the company’s performance relative to the established performance metrics for the three-year performance period of October 1, 2018 to September 30, 2021, 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

MERITOR, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

margin target and 50% associated with achieving an adjusted diluted earnings per share from continuing operations target. The number of performance share units that vest will be between 0% and 200% of the grant date amount of 0.5 million performance share units.

In November 2015, the Board of Directors approved a grant of performance share units to all executives eligible to participate in the long-term incentive plan. Each performance share unit represents the right to receive one share of common stock or its cash equivalent upon achievement of certain performance and time vesting criteria. The fair value of each performance share unit was $10.51, which was the company’s share price on the grant date of December 1, 2015. The Board of Directors also approved a grant of 0.5 million restricted share units to these executives. The restricted share units vest at the earlier of three years from the date of grant or upon termination of employment with the company under certain circumstances. The fair value of each restricted share unit was $10.51, which was the company's share price on the grant date of December 1, 2015.

The actual number of performance share units that vested depended upon the company’s performance relative to the established performance metrics for the three-year performance period of October 1, 2015 to September 30, 2018, which was measured at the end of the performance period.

For the three and six months ended March 31, 2019, the dilutive impact of previously issued restricted shares, restricted share units and performance share units was 1.5 million and 1.9 million shares, respectively. For the three and six months ended March 31, 2018, the dilutive impact of previously issued restricted shares, restricted share units and performance share units was 1.6 million shares. For the three and six months ended March 31, 2019, compensation cost related to restricted shares, restricted share units and performance share units was $3 million and $8 million, respectively. For the three and six months ended March 31, 2018, compensation cost related to restricted shares, restricted share units and performance share units was $5 million and $10 million, respectively.

For the three and six months ended March 31, 2019, 0.8 million and 0.7 million shares, respectively, were included in the computation of diluted earnings per share, as the company's average stock price during these periods exceeded the conversion price for the 7.875 percent convertible notes due 2026. For the three and six months ended March 31, 2018, 1.0 million and 1.1 million shares, respectively, were included in the computation of diluted earnings per share, as the company's average stock price during these periods exceeded the conversion price for the 7.875 percent convertible notes due 2026.

3. New Accounting Standards

Accounting standards implemented during fiscal year 2019

In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2014-09, Revenue from Contracts with Customers, followed by various related amendments (ASU 2016-08, ASU 2016-10, ASU 2016-11, ASU 2016-12, ASU 2016-20, ASU 2017-05, ASU 2017-06, ASU 2017-13, and ASU 2017-14) collectively referred to as "Topic 606", which requires companies to recognize revenue when a customer obtains control rather than when companies have transferred substantially all risks and rewards of a good or service and requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts. The company adopted Topic 606 in the first quarter of the fiscal year beginning October 1, 2018. As a result, the company has changed its accounting policy for revenue recognition as detailed below.

The company applied Topic 606 using the modified retrospective approach (i.e., by recognizing the cumulative effect of initially applying Topic 606 as an adjustment to the opening balance of equity at October 1, 2018). Therefore, the comparative information has not been adjusted and continues to be reported under Topic 605. There was no adjustment to the opening balance of equity at October 1, 2018 as there was no significant impact to previously recorded revenue or expense. The guidance has been applied to all existing contracts at the date of initial application. The adoption of Topic 606 had an immaterial impact to our Condensed Consolidated Balance Sheet, Condensed Consolidated Statement of Operations, and Condensed Consolidated Statement of Cash Flows but did require enhanced disclosures to meet the new disclosure requirements; those enhanced disclosures are included in Note 4.

In March 2017, the FASB issued ASU 2017-07, Compensation—Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. The guidance requires entities to only include the service cost component of net periodic pension cost and net periodic postretirement benefit cost in operating expenses (together with other employee compensation costs). The other components of net benefit cost, including amortization of prior service cost/credit, are to be included in a separate line item(s) outside of any sub-total of operating income. ASU 2017-07 also provides guidance that only the service cost component of net benefit cost is eligible for capitalization. The revisions in this amendment

MERITOR, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

are to be applied retrospectively for the presentation of the service cost component and the other components of net periodic pension cost and net periodic postretirement benefit cost in the income statement and prospectively for the capitalization of the service cost component of net periodic pension cost and net periodic postretirement benefit in assets. The company adopted this standard in the first quarter of fiscal year 2019. Amounts previously reflected in Operating Income were reclassified to Other income (expense) in accordance with the provisions of ASU 2017-07. Refer to Note 20 for amounts that were reclassified.

In July 2018, the FASB issued ASU 2018-09, Codification Improvements. The amendments in this ASU result from the FASB’s standing project to address suggestions on the Accounting Standards Codification ("ASC") and to make other incremental improvements to GAAP. The amendments include changes to clarify the ASC or correct unintended application of guidance that is not expected to have a significant effect on current accounting practice or create a significant administrative cost to most entities.

Some of the amendments in this ASU were effective upon issuance. Others have transition guidance with effective dates for annual periods beginning after December 15, 2018, for public business entities, or are conforming amendments that have been made to recently issued guidance that is not yet effective that may require application of the transition and effective date guidance in the original ASU.

The company adopted certain amendments in this ASU in the first quarter of fiscal year 2019. Those certain amendments had effective dates for annual periods beginning after December 15, 2017, for public business entities. The amendments that were adopted in the first quarter of fiscal year 2019 did not have a material impact on the company's condensed consolidated financial statements. The company plans to implement the remaining amendments beginning October 1, 2019 and is currently evaluating the potential impact on its condensed consolidated financial statements.

The company also adopted the following ASUs during fiscal year 2019, none of which had a material impact to the financial statements or financial statement disclosures:



ASU		Effective Date
2016-01	Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities	October 1, 2018
2016-15	Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (a consensus of the Emerging Issues Task Force)	October 1, 2018
2016-16	Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory	October 1, 2018
2016-18	Statement of Cash Flows (Topic 230): Restricted Cash (a consensus of the FASB Emerging Issues Task Force)	October 1, 2018
2017-01	Business Combinations (Topic 805): Clarifying the Definition of a Business	October 1, 2018
2017-09	Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting	October 1, 2018
2017-10	Service Concession Arrangements (Topic 853): Determining the Customer of the Operation Services (a consensus of the FASB Emerging Issues Task Force)	October 1, 2018
2018-03	Technical Corrections and Improvements to Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities	October 1, 2018
2018-04	Investments—Debt Securities (Topic 320) and Regulated Operations (Topic 980): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 117 and SEC Release No. 33-9273 (SEC Update)	October 1, 2018
2018-08	Not-For-Profit Entities (Topic 958): Clarifying the Scope and the Accounting Guidance for Contributions Received and Contributions Made	October 1, 2018

Accounting standards to be implemented

The following represent the standards that may result in a significant change in practice and/or have a significant financial impact to the company.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The update will require lessees to recognize a right-of-use asset and lease liability for substantially all leases. The standard is required to be adopted by public business entities in fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted.

MERITOR, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The company plans to implement this standard in the first quarter of the fiscal year beginning October 1, 2019, and is currently assessing the potential impact of this guidance on its accounting policies and its condensed consolidated financial statements. The company plans to implement this standard using the additional and optional transition method as provided by ASU 2018-11. Please see discussion of ASU 2018-11 below.

In June 2016, the FASB 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 guidance on its accounting policies and its condensed consolidated financial statements.

In February 2018, the FASB issued ASU 2018-02, Income Statement—Reporting Comprehensive Income (Topic 220). The guidance in ASU 2018-02 allows an entity to elect to reclassify the stranded tax effects related to the Tax Cuts and Jobs Act of 2017 ("U.S. tax reform") from accumulated other comprehensive income into retained earnings. ASU 2018-02 is effective for fiscal years beginning after December 15, 2018, with early adoption permitted. The company is currently evaluating the potential impact of this new guidance on its condensed consolidated financial statements.

In July 2018, the FASB issued ASU 2018-10, Codification Improvements to Topic 842. The amendments in this ASU affect narrow aspects of the guidance issued in ASU 2016-02, Leases (Topic 842), which is not yet effective. The effective date and transition requirements for this ASU are the same as those for ASU 2016-02 as described 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 assessing the potential impact of this new guidance on its accounting policies and its condensed consolidated financial statements.

In July 2018, the FASB issued ASU 2018-11, Leases (Topic 842): Targeted Improvements. The amendments in this ASU affect the guidance issued in ASU 2016-02, Leases (Topic 842), which is not yet effective. The amendments provide entities with an additional (and optional) transition method to adopt the new leases standard. Under this new transition method, an entity initially applies the new leases standard at the adoption date and recognizes a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. The amendments also provide lessors with a practical expedient to not separate nonlease components from the associated lease component and, instead, to account for those components as a single component in certain circumstances. The effective date for this ASU are the same as those for ASU 2016-02 as described above. Therefore, the company plans to implement this standard in the first quarter of the fiscal year beginning October 1, 2019 in connection with its planned implementation of ASU 2016-02 and is currently assessing the potential impact of this new guidance on its accounting policies and its condensed consolidated financial statements.

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement. The amendments in this ASU add, modify, and eliminate certain disclosure requirements on fair value measurements in Topic 820. The amendments in this update are effective for all entities for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Certain amendments should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. Others should be applied retrospectively. Early adoption is permitted. An entity is permitted to early adopt any removed or modified disclosures upon issuance of this ASU and delay adoption of the additional disclosures until their effective date. The company is currently evaluating the potential impact of this new guidance on its condensed consolidated financial statements.

In April 2019, the FASB issued ASU 2019-04, Codification Improvements to Topic 326, Financial Instruments—Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments. The amendments in this ASU affect a variety of Topics in the Codification (ASU 2016-01, Financial Instruments - Overall (Subtopic 825-10), Recognition and Measurement of Financial Assets and Financial Liabilities; ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments; and ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities).

For the amendments in this ASU that are applicable to ASU 2016-01, which Meritor has adopted, the effective date is the first quarter of fiscal year 2021 with early adoption permitted. For the amendments in this ASU that are applicable to ASU 2016-13, which Meritor has not yet adopted, the effective dates and transition requirements for the amendments related to this ASU are the

MERITOR, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

same as the effective dates and transition requirements in ASU 2016-13. For the amendments in this ASU that are applicable to ASU 2017-12, which Meritor has adopted, the effective date is the first quarter of fiscal year 2020 with early adoption permitted. The company is currently evaluating the potential impact of this new guidance on its consolidated financial statements.

4. Revenue

Revenue is measured based on the consideration to which the company expects to be entitled, and is presented net of any estimates of customer sales allowances, incentives, rebates, and returns. The company recognizes revenue when it satisfies a performance obligation by transferring control over a product or service to a customer.

Taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction, that are collected by the company from a customer, are excluded from revenue.

Shipping and handling costs associated with outbound freight after control of a product has transferred to a customer are accounted for as a fulfillment cost, as opposed to a distinct performance obligation, and are included in cost of sales.

Nature of goods and services

The following is a description of principal activities - separated by reportable segments - from which the company generates its revenue.

The Commercial Truck segment supplies drivetrain systems and components, including axles, drivelines and braking and suspension systems, primarily for medium- and heavy-duty trucks and other applications in North America, South America, Europe and Asia Pacific. This segment also includes the company's aftermarket businesses in Asia Pacific and South America.

The Aftermarket, Industrial and Trailer segment supplies axles, brakes, drivelines, suspension parts and other replacement parts to commercial vehicle and industrial aftermarket customers, primarily in North America and Europe. In addition, this segment supplies drivetrain systems and certain components, including axles, drivelines, brakes and suspension systems for military, construction, bus and coach, fire and emergency and other applications in North America and Europe. It also supplies a variety of undercarriage products and systems for trailer applications in North America.

Although the company may enter into long-term supply arrangements with its major customers, the prices and volumes are not fixed over the term of the arrangements and a contract does not exist under the scope of Topic 606 until prices and volumes are known. As such, individual customer releases or purchase orders represent the contract with the customer.

The company accounts for individual products and services separately if they are distinct (i.e., if a product or service is separately identifiable from other items and if a customer can benefit from it on its own or with other resources that are readily available to the customer). The company has identified certain performance obligations related to brake pad fitting and axle dressing where it is acting as an agent and, therefore, recognizes revenue on a net basis for satisfaction of those performance obligations.

The company recognizes revenue for the sale of goods at the point in time when the customer takes control of the goods. As such, revenue is recognized upon shipment of product and transfer of ownership to the customer. The amount of revenue recognized is based on the purchase order price and adjusted for variable consideration (i.e., customer sales allowances, incentives, rebates, and returns). Provisions for customer sales allowances, incentives, rebates, and returns are recorded as a reduction of sales at the time of revenue recognition based primarily on historical experience. The company’s payment terms with customers are customary and vary by customer and geography but typically range from 30 to 90 days.

The company provides warranties on some of its products. The company records estimated product warranty costs at the time of shipment of products to customers (see Note 16 and Note 17).

MERITOR, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Disaggregation of revenue

In the following tables, revenue is disaggregated for each of our operating segments by primary geographical market for the three and six months ended March 31, 2019.



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



	Six Months Ended March 31, 2019
Primary Geographical Market	Commercial Truck		Aftermarket, Industrial and Trailer		Total
U.S.	$	763	$	503	$	1,266
Canada	—		35		35
Mexico	97		23		120
Total North America	860		561		1,421
Sweden