MTOR-06.30.2013-10Q
Index


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

FORM 10-Q

QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 2013
Commission File No. 1-15983

MERITOR, INC.

(Exact name of registrant as specified in its charter)

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

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

 
 
Non-accelerated filer
 
 
Smaller reporting company
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
 
Yes
 
No
X
 
97,446,316 shares of Common Stock, $1.00 par value, of Meritor, Inc. were outstanding on June 30, 2013.



INDEX
 
 
 
Page
No.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

2


MERITOR, INC.

PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
CONSOLIDATED STATEMENT OF OPERATIONS
(in millions, except per share amounts)

 
Three Months Ended
June 30,
 
Nine Months Ended June 30,
 
2013
 
2012
 
2013
 
2012
 
(Unaudited)
Sales
$
993

 
$
1,113

 
$
2,792

 
$
3,432

Cost of sales
(884
)
 
(981
)
 
(2,505
)
 
(3,060
)
GROSS MARGIN
109

 
132

 
287

 
372

Selling, general and administrative
(67
)
 
(68
)
 
(194
)
 
(205
)
Pension settlement loss
(36
)
 

 
(36
)
 

Restructuring costs
(12
)
 
(3
)
 
(29
)
 
(30
)
Gain on sale of property

 
16

 

 
16

Other operating expense

 
(1
)
 
(2
)
 
(3
)
OPERATING INCOME (LOSS)
(6
)
 
76

 
26

 
150

       Other income, net

 
1

 

 
6

Equity in earnings of affiliates
15

 
12

 
34

 
41

Interest expense, net
(45
)
 
(25
)
 
(99
)
 
(72
)
INCOME (LOSS) BEFORE INCOME TAXES
(36
)
 
64

 
(39
)
 
125

Provision for income taxes
(1
)
 
(12
)
 
(18
)
 
(49
)
INCOME (LOSS) FROM CONTINUING OPERATIONS
(37
)
 
52

 
(57
)
 
76

LOSS FROM DISCONTINUED OPERATIONS, net of tax
(1
)
 
(1
)
 
(6
)
 
(19
)
NET INCOME (LOSS)
(38
)
 
51

 
(63
)
 
57

Less: Net income attributable to noncontrolling interests

 
(2
)
 

 
(10
)
NET INCOME (LOSS) ATTRIBUTABLE TO MERITOR, INC.
$
(38
)
 
$
49

 
$
(63
)
 
$
47

NET INCOME (LOSS) ATTRIBUTABLE TO MERITOR, INC.
 
 
 
 
 
 
 
Net income (loss) from continuing operations
$
(37
)
 
$
50

 
$
(57
)
 
$
66

Loss from discontinued operations
(1
)
 
(1
)
 
(6
)
 
(19
)
       Net income (loss)
$
(38
)
 
$
49

 
$
(63
)
 
$
47

BASIC EARNINGS (LOSS) PER SHARE
 
 
 
 
 
 
 
Continuing operations
$
(0.38
)
 
$
0.51

 
$
(0.58
)
 
$
0.69

Discontinued operations
(0.01
)
 
(0.01
)
 
(0.07
)
 
(0.20
)
       Basic earnings (loss) per share
$
(0.39
)
 
$
0.50

 
$
(0.65
)
 
$
0.49

DILUTED EARNINGS (LOSS) PER SHARE
 
 
 
 
 
 
 
Continuing operations
$
(0.38
)
 
$
0.51

 
$
(0.58
)
 
$
0.68

Discontinued operations
(0.01
)
 
(0.01
)
 
(0.07
)
 
(0.20
)
       Diluted earnings (loss) per share
$
(0.39
)
 
$
0.50

 
$
(0.65
)
 
$
0.48

 
 
 
 
 
 
 
 
Basic average common shares outstanding
97.2

 
96.4

 
97.0

 
95.7

Diluted average common shares outstanding
97.2

 
97.2

 
97.0

 
97.2



See notes to consolidated financial statements.

3


MERITOR, INC.


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

 
Three Months Ended
June 30,
 
Nine Months Ended June 30,
 
2013
 
2012
 
2013
 
2012
 
(Unaudited)
Net income (loss) attributable to Meritor, Inc.
$
(38
)
 
$
49

 
$
(63
)
 
$
47

Other comprehensive income (loss):
 
 
 
 
 
 
 
Foreign currency translation adjustments
(32
)
 
(40
)
 
(34
)
 
(31
)
Pension and other postretirement benefit related adjustments
25

 

 
23

 
2

Unrealized losses on investments:
 
 
 
 
 
 
 
Unrealized loss on investments and foreign exchange contracts
(1
)
 
(1
)
 
(1
)
 
(1
)
Reclassification adjustment for gain on sale of investments

 

 

 
(2
)
Other comprehensive loss, net of tax
(8
)
 
(41
)
 
(12
)
 
(32
)
Comprehensive income (loss) attributable to Meritor, Inc.
(46
)
 
8

 
(75
)
 
15

Comprehensive income (loss) attributable to noncontrolling interest
(1
)
 
2

 

 
10

Total comprehensive income (loss)
$
(47
)
 
$
10

 
$
(75
)
 
$
25


See notes to consolidated financial statements.


4


MERITOR, INC.

CONDENSED CONSOLIDATED BALANCE SHEET
(in millions)

 
June 30,
2013
 
September 30,
2012
 
(Unaudited)
ASSETS
 
 
 
CURRENT ASSETS:
 
 
 
Cash and cash equivalents
$
228

 
$
257

Receivables, trade and other, net
596

 
542

Inventories
411

 
438

Other current assets
51

 
61

TOTAL CURRENT ASSETS
1,286

 
1,298

NET PROPERTY
384

 
417

GOODWILL
427

 
433

OTHER ASSETS
380

 
353

TOTAL ASSETS
$
2,477

 
$
2,501

LIABILITIES AND EQUITY (DEFICIT)
 
 
 
CURRENT LIABILITIES:
 
 
 
Short-term debt
$
23

 
$
18

       Accounts payable
657

 
697

Other current liabilities
328

 
313

TOTAL CURRENT LIABILITIES
1,008

 
1,028

LONG-TERM DEBT
1,144

 
1,042

RETIREMENT BENEFITS
1,043

 
1,075

OTHER LIABILITIES
341

 
338

EQUITY (DEFICIT):
 
 
 
Common stock (June 30, 2013 and September 30, 2012, 97.4 and 96.5 shares issued and outstanding, respectively)
97

 
96

Additional paid-in capital
912

 
901

Accumulated deficit
(1,168
)
 
(1,105
)
Accumulated other comprehensive loss
(927
)
 
(915
)
Total deficit attributable to Meritor, Inc.
(1,086
)
 
(1,023
)
Noncontrolling interests
27

 
41

TOTAL DEFICIT
(1,059
)
 
(982
)
TOTAL LIABILITIES AND DEFICIT
$
2,477

 
$
2,501


See notes to consolidated financial statements.

5


MERITOR, INC.

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(in millions)

 
Nine Months Ended June 30,
 
2013
 
2012
 
(Unaudited)
OPERATING ACTIVITIES
 
 
 
CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES (See Note 10)
$
(73
)
 
$
22

INVESTING ACTIVITIES
 
 
 
Capital expenditures
(31
)
 
(65
)
Proceeds from sale of property

 
18

Other investing activities
1

 
3

Net investing cash flows used for continuing operations
(30
)
 
(44
)
Net investing cash flows provided by discontinued operations
6

 
28

CASH USED FOR INVESTING ACTIVITIES
(24
)
 
(16
)
FINANCING ACTIVITIES
 
 
 
Repayment of notes and term loan
(427
)
 
(85
)
Proceeds from debt issuance
500

 
100

Debt issuance costs
(12
)
 
(12
)
Other financing activities
10

 

CASH PROVIDED BY FINANCING ACTIVITIES
71

 
3

EFFECT OF CHANGES IN FOREIGN CURRENCY EXCHANGE
RATES ON CASH AND CASH EQUIVALENTS
(3
)
 

CHANGE IN CASH AND CASH EQUIVALENTS
(29
)
 
9

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
257

 
217

CASH AND CASH EQUIVALENTS AT END OF PERIOD
$
228

 
$
226


See notes to consolidated financial statements.

6


MERITOR, INC.

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

 
Common
Stock
 
Additional
Paid-in
Capital
 
Accumulated
Deficit
 
Accumulated
Other
Comprehensive
Loss
 
Total Deficit
Attributable to
Meritor, Inc.
 
Noncontrolling
Interests
 
Total
Beginning balance at September 30, 2012
$
96

 
$
901

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

 
$
(982
)
Comprehensive loss

 

 
(63
)
 
(12
)
 
(75
)
 

 
(75
)
Vesting of restricted stock
1

 
(1
)
 

 

 

 

 

Repurchase of convertible notes

 
(2
)
 

 

 
(2
)
 

 
(2
)
Issuance of convertible notes

 
9

 

 

 
9

 

 
9

Equity based compensation expense

 
5

 

 

 
5

 

 
5

Noncontrolling interest dividends

 

 

 

 

 
(14
)
 
(14
)
Ending Balance at June 30, 2013
$
97

 
$
912

 
$
(1,168
)
 
$
(927
)
 
$
(1,086
)
 
$
27

 
$
(1,059
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance at September 30, 2011
$
94

 
$
897

 
$
(1,157
)
 
$
(829
)
 
$
(995
)
 
$
34

 
$
(961
)
Comprehensive income (loss)

 

 
47

 
(32
)
 
15

 
10

 
25

Issuance of restricted stock
2

 
(2
)
 

 

 

 

 

Equity based compensation expense

 
5

 

 

 
5

 

 
5

Noncontrolling interest dividends

 

 

 

 

 
(2
)
 
(2
)
Ending Balance at June 30, 2012
$
96

 
$
900

 
$
(1,110
)
 
$
(861
)
 
$
(975
)
 
$
42

 
$
(933
)

See notes to consolidated financial statements.

7

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


1. Basis of Presentation
Meritor, Inc., (the "company" or "Meritor"), headquartered in Troy, Michigan, is a premier global supplier of a broad range of integrated systems, modules and components to original equipment manufacturers (“OEMs”) and the aftermarket for the commercial vehicle, transportation and industrial sectors. The company serves commercial truck, trailer, off-highway, military, bus and coach and other industrial OEMs and certain aftermarkets. The consolidated financial statements are those of the company and its consolidated subsidiaries.
Certain businesses are reported in discontinued operations in the consolidated statement of operations, statement of cash flows and related notes for all periods presented. Additional information regarding discontinued operations is discussed in Note 4.
In the opinion of the company, the unaudited financial statements contain all adjustments, consisting solely of adjustments of a normal, recurring nature, necessary to present fairly the financial position, results of operations and cash flows for the periods presented. These statements should be read in conjunction with the company’s audited consolidated financial statements and notes thereto included in the Annual Report on Form 10-K, for the fiscal year ended September 30, 2012. The results of operations for the three and nine months ended June 30, 2013, are not necessarily indicative of the results for the full year.
The company’s fiscal year ends on the Sunday nearest September 30. The third quarter of fiscal years 2013 and 2012 ended on June 30, 2013 and July 1, 2012, 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 June 30 are used consistently throughout this report to represent the fiscal year end and third quarter end, respectively.
The company has evaluated subsequent events through the date that the consolidated financial statements were issued (see Note 23).
2. Earnings per Share
Basic earnings per share is calculated using the weighted average number of shares outstanding during each period. Diluted earnings per share calculation includes the impact of dilutive common stock options, restricted stock, performance share awards and convertible securities, if applicable.
A reconciliation of basic average common shares outstanding to diluted average common shares outstanding is as follows (in millions):
 
Three Months Ended
June 30,
 
Nine Months Ended June 30,
 
2013
 
2012
 
2013
 
2012
Basic average common shares outstanding
97.2

 
96.4

 
97.0

 
95.7

Impact of stock options

 

 

 

Impact of restricted shares and share units

 
0.8

 

 
1.5

Diluted average common shares outstanding
97.2

 
97.2

 
97.0

 
97.2

For the three and nine months ended June 30, 2012, options to purchase 0.7 million shares of common stock were excluded from the computation of diluted earnings per share because their exercise price exceeded the average market price for the period and thus their inclusion would be anti-dilutive. The potential effects of stock options and restricted shares and share units were excluded from the diluted earnings per share calculation for the three and nine months ended June 30, 2013 because their inclusion in a net loss period would reduce the net loss per share. Therefore, options to purchase 0.5 million shares of common stock were excluded from the computation of diluted earnings per share for the three and nine months ended June 30, 2013. In addition, 0.9 million and 0.6 million shares of restricted stock were excluded from the computation of diluted earnings per share for the three and nine months ended June 30, 2013, respectively. The company’s convertible senior unsecured notes are excluded from the computation of diluted earnings per share, as the stock price at the end of the quarter is less than the conversion price.

8

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

3. New Accounting Standards
Accounting standards implemented during fiscal year 2013
In June 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income. The new guidance allows an entity to present components of net income and other comprehensive income in one continuous statement, referred to as the statement of comprehensive income, or in two separate, but consecutive statements. The guidance eliminated the option to report other comprehensive income and its components in the statement of changes in equity. While the new guidance changes the presentation of comprehensive income, there are no changes to the components that are recognized in net income or other comprehensive income under current accounting guidance. This new guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The company adopted this guidance at the beginning of its first quarter of fiscal year 2013 and has reported Other Comprehensive Income as a separate but consecutive statement.
Accounting standards to be implemented
In January 2013, the FASB issued ASU 2013-01, Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities. ASU 2013-01 clarifies which instruments and transactions are subject to the offsetting disclosure requirements established by ASU 2011-11, Disclosures about Offsetting Assets and Liabilities. The new disclosure requirements are effective for fiscal years, and interim periods within those years, beginning on or after January 1, 2013. As such, ASU 2013-01 will be effective October 1, 2013 for the company and will be applied prospectively. The company does not believe the adoption will have a significant impact on the company's consolidated financial statements.
In February 2013, the FASB issued ASU 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. ASU 2013-02 requires reclassification adjustments for items that are reclassified from accumulated other comprehensive income to net income be presented on the financial statements or in a note to the financial statements. The new disclosure requirements are effective for fiscal years, and interim periods within those years, beginning after December 15, 2012. As such, ASU 2013-02 will be effective October 1, 2013 for the company and will be applied prospectively. The company does not believe the adoption will have a significant impact on the company's consolidated financial statements.
4. Discontinued Operations
Results of discontinued operations are summarized as follows (in millions):
 
Three Months Ended
June 30,
 
Nine Months Ended June 30,
 
2013
 
2012
 
2013
 
2012
Sales
$

 
$

 
$

 
$
2

 
 
 
 
 
 
 
 
Loss before income taxes
$
(1
)
 
$
(3
)
 
(6
)
 
(22
)
Benefit for income taxes

 
2

 

 
3

Loss from discontinued operations attributable to Meritor, Inc.
$
(1
)
 
$
(1
)
 
$
(6
)
 
$
(19
)
     Loss from discontinued operations for the three and nine months ended June 30, 2013 was primarily due to environmental remediation costs. Loss from discontinued operations for the three and nine months ended June 30, 2012 related to changes in estimates and adjustments related to certain assets and liabilities retained from previously divested businesses and indemnities provided at the time of sale.

9

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

5. Goodwill
As discussed in Note 22, "Business Segment Information," the company reorganized its management reporting structure in the first quarter of fiscal year 2013 resulting in two reportable segments. The company reviews goodwill for impairment annually during the fourth quarter of the fiscal year, or whenever events occur or circumstances change that would more likely than not reduce the fair value of the reporting unit below its carrying amount. The company tests goodwill for impairment at a level of reporting referred to as a reporting unit, which is an operating segment or one level below an operating segment (referred to as a component). A component of an operating segment is a reporting unit if the component constitutes a business for which discrete financial information is available and segment management regularly reviews the operating results of that component. When two or more components of an operating segment have similar economic characteristics, the components are aggregated and deemed a single reporting unit. An operating segment is deemed to be a reporting unit if all of its components are similar, if none of its components is a reporting unit, or if the segment comprises only a single component.

As a result of the change in reporting segments, the company's reporting units changed. The Commercial Truck and Industrial segment now contains two reporting units. The Aftermarket and Trailer segment remains a single reporting unit. Goodwill was reassigned to the new reporting units using a relative fair value allocation. Giving specific consideration to the changes in reporting units, the company did not observe any factors which caused the company to believe that goodwill is more likely than not impaired.
A summary of the changes in the carrying value of goodwill by reportable segment is presented below (in millions):
 
Commercial Truck & Industrial
 
Aftermarket
& Trailer
 
Commercial Truck
 
Industrial
 
Total
Beginning balance at September 30, 2012
$

 
$
171

 
$
153

 
$
109

 
$
433

Segment reorganization
262

 

 
(153
)
 
(109
)
 

Foreign currency translation
(4
)
 
(2
)
 

 

 
(6
)
Balance at June 30, 2013
$
258

 
$
169

 
$

 
$

 
$
427



10

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

6. Restructuring Costs
     At both June 30, 2013 and September 30, 2012, $24 million and $15 million, respectively, of restructuring reserves primarily related to unpaid employee termination benefits remained in the consolidated balance sheet. The changes in restructuring reserves for the nine months ended June 30, 2013 and 2012 are as follows (in millions):
 
Employee
Termination
Benefits
 
Asset
Impairment
 
Plant
Shutdown
& Other
 
Total
Beginning balance at September 30, 2012
$
15

 
$

 
$

 
$
15

Activity during the period:
 
 
 
 
 
 

Charges to continuing operations
18

 
1

 
10

 
29

Asset write-offs

 
(1
)
 

 
(1
)
Cash payments – continuing operations
(17
)
 

 

 
(17
)
Other
(1
)
 

 
(1
)
 
(2
)
Total restructuring reserves at June 30, 2013
15

 

 
9

 
24

Less: non-current restructuring reserves
(3
)
 

 
(7
)
 
(10
)
Restructuring reserves – current, at June 30, 2013
$
12

 
$

 
$
2

 
$
14

 
 
 
 
 
 
 
 
Balance at September 30, 2011
$
19

 
$

 
$

 
$
19

Activity during the period:
 
 
 
 
 
 
 
Charges to continuing operations
9

 
19

 
2

 
30

Charges to discontinued operations(1)

 

 
1

 
1

Asset write-offs
(1
)
 
(19
)
 

 
(20
)
Cash payments – continuing operations
(14
)
 

 
(1
)
 
(15
)
Cash payments – discontinued operations
(2
)
 

 
(1
)
 
(3
)
Total restructuring reserves at June 30, 2012
11

 

 
1

 
12

Less: non-current restructuring reserves
(5
)
 

 

 
(5
)
Restructuring reserves – current, at June 30, 2012
$
6

 
$

 
$
1

 
$
7

(1) 
Charges to discontinued operations are included in loss from discontinued operations in the consolidated statement of operations.
Variable Labor Reductions: The company is executing a global variable labor headcount reduction plan intended to reduce labor and other costs in response to market conditions. As part of this action, the company expects to eliminate 375 hourly and 50 salaried positions and incur approximately $9 million of restructuring costs in the Commercial Truck & Industrial segment. The company has recognized cumulative costs of approximately $8 million, primarily severance benefits, as of June 30, 2013, of which approximately $5 million was recognized in fiscal year 2012 and $3 million was recognized in the nine months ended June 30, 2013. The remaining restructuring costs for this program are expected to be incurred by the end of fiscal year 2013.
Remanufacturing Consolidation: During the first quarter of fiscal year 2013, the company announced the planned consolidation of its remanufacturing operations in the Aftermarket & Trailer segment resulting in the closure of one remanufacturing plant in Canada. The closure resulted in the elimination of 85 hourly positions including approximately 65 positions which were transferred to the company's facility in Indiana. The company recorded restructuring charges of approximately $1 million and $3 million, during the three and nine months ended June 30, 2013, respectively, associated with employee severance charges and lease termination costs. Restructuring actions associated with the remanufacturing consolidation are substantially complete as of June 30, 2013.

11

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

Segment Reorganization and Asia Pacific Realignment: On November 12, 2012, the company announced a revised management reporting structure resulting in two business segments to drive efficiencies. On January 8, 2013, the company announced restructuring actions related to its business segment rationalization. On March 26, 2013, the company announced plans to consolidate its operations in China by transferring manufacturing operations to the company's off-highway facility and closing its facility in Wuxi, China. During the third quarter ended June 30, 2013, the company completed the transfer of its on-highway business in China to its majority owned off-highway joint venture.
    
The company has recognized cumulative costs of approximately $21 million associated with these actions. During the three months ended June 30, 2013, the company recognized $9 million within the Commercial Truck & Industrial segment mainly related to a lease termination. During the nine months ended June 30, 2013, the company recorded employee severance charges associated with the elimination of approximately 200 salaried positions (including contract employees) and 50 hourly positions and other exit costs of approximately $15 million and $3 million in the Commercial Truck & Industrial and Aftermarket & Trailer segments, respectively, as well as approximately $3 million at our corporate locations primarily for employee severance benefits. Estimated additional charges associated with these restructuring actions are in the range of $3 million to $5 million which are expected to be incurred by the end of fiscal year 2013.

M2016 Strategy: As part of the company's recently announced M2016 Strategy, a three year plan to achieve sustainable financial strength, the company approved a North American footprint realignment action which will be executed over the next six to nine months. As part of this action, the company expects to eliminate 74 hourly and 12 salaried positions and incur approximately $2 million of restructuring costs in the Commercial Truck & Industrial segment. The company has recognized costs of approximately $2 million within the Commercial Truck & Industrial segment, primarily related to severance benefits, during the three and nine months ended June 30, 2013.
Performance Plus: During fiscal year 2007, the company launched a long-term profit improvement and cost reduction initiative called “Performance Plus.” As part of this program, the company identified significant restructuring actions which would eliminate up to 2,800 positions in North America and Europe and consolidate and combine certain global facilities. The company’s continuing operations recognized restructuring costs in its Commercial Truck & Industrial business segment of $24 million in the first nine months of fiscal year 2012 related to Performance Plus. These costs include $19 million of non-cash charges, including an impairment charge of $17 million for assets held for sale at December 31, 2011. In connection with the then planned sale of St. Priest, France manufacturing facility to Renault Trucks SAS, the company classified certain assets and associated liabilities as held for sale (collectively the “Disposal Group”) at December 31, 2011. Upon comparing the carrying value of the Disposal Group to its fair value less cost to sell, an impairment was identified. The sale of the Disposal Group was completed on January 2, 2012. In addition, other restructuring charges of approximately $5 million associated with employee headcount reduction and plant rationalization costs were recognized in connection with the sale of the disposal group.
Cumulative restructuring costs recorded for this program as of June 30, 2012 are $186 million, including $93 million reported in discontinued operations in the consolidated statement of operations. These costs primarily relate to employee severance and related costs of $117 million, asset impairment charges of $41 million and $28 million primarily associated with pension termination benefits. The company’s Commercial Truck & Industrial segment has recognized cumulative restructuring costs associated with Performance Plus of $82 million. Cumulative restructuring costs of $11 million were recognized by corporate locations and the company’s Aftermarket & Trailer segment. All restructuring actions associated with Performance Plus were complete as of September 30, 2012.
Fiscal Year 2012 European Action: During the second quarter of fiscal year 2012, the company approved a European headcount reduction plan in response to the ongoing economic weakness and uncertainty in that region. In the first nine months of fiscal year 2012, the company recognized approximately $4 million (including $3 million in the third quarter of fiscal year 2012) of restructuring costs associated with this plan in its Commercial Truck & Industrial segment. Restructuring actions associated with this plan were substantially complete as of September 30, 2012.

12

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

7. Other Income, Net
The company recognized a gain on sale of property of $16 million during the third quarter of fiscal year 2012. This gain is associated with the sale of excess land at the company's facility at Cwmbran, Wales.
Other income, net for the nine months ended June 30, 2012 included a $3 million non-operating gain related to the sale of the company’s remaining ownership interest in Gabriel India, Ltd during the prior year's first fiscal quarter. The company’s ownership interest in Gabriel India, Ltd was a legacy investment accounted for under the cost method that the company deemed non-core upon the completion of the sale of its light vehicle businesses.
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 Accounting Standards Codification (ASC) Topic 740-270, “Accounting for Income Taxes in Interim Periods.” The rate so determined is used in providing for income taxes on a year-to-date basis. Jurisdictions with a projected loss for the year or an actual year-to-date loss where no tax benefit can be recognized are excluded from the estimated annual effective tax rate. The impact of including these jurisdictions on the quarterly effective rate calculation could result in a higher or lower effective tax rate during a particular quarter, based upon the mix and timing of actual earnings versus annual projections.
Income tax expense (benefit) is allocated between continuing operations, discontinued operations and other comprehensive income (OCI). Such allocation is applied by tax jurisdiction, and in periods in which there is a pre-tax loss from continuing operations and pre-tax income in another category, such as discontinued operations or OCI, income tax expense is allocated to the other sources of income, with a related benefit recorded in continuing operations.
For the first nine months of fiscal years 2013 and 2012, the company had approximately $91 million and $31 million, respectively, of net pre-tax losses in tax jurisdictions in which a tax benefit is not recorded. Losses arising from these jurisdictions resulted in increasing the valuation allowance, rather than reducing income tax expense.
9. Accounts Receivable Factoring & Securitization
     Off-balance sheet arrangements 
Swedish Factoring Facility: The company has an arrangement to sell trade receivables due from AB Volvo through one of its European subsidiaries. Under this arrangement, which was renewed on June 10, 2013 and which now terminates on June 28, 2014, the company can sell up to, at any point in time, €150 million 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 €142 million ($186 million) and €119 million ($154 million) of this accounts receivable factoring facility as of June 30, 2013 and September 30, 2012, respectively.
U.S. Factoring Facility: The company has an arrangement to sell trade receivables from AB Volvo and its subsidiaries. Under this arrangement, which was renewed on September 28, 2012, and which now terminates on October 29, 2013, the company can sell up to, at any point in time, €65 million ($85 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 €54 million ($71 million) and €51 million ($66 million) of this accounts receivable factoring facility as of June 30, 2013 and September 30, 2012, respectively.
     The above facilities are backed by 364-day liquidity commitments from Nordea Bank which were renewed through March 2014. The commitments are subject to standard terms and conditions for these types of arrangements. The company believes the U.S. Factoring facility will be successfully renewed prior to maturity.
     United Kingdom Factoring Facility: The company entered into an arrangement to sell trade receivables from AB Volvo and its European subsidiaries through one of its United Kingdom subsidiaries. Under this arrangement, which was renewed on January 24, 2013 and now expires in February 2018, the company can sell up to, at any point in time, €25 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 €8 million ($10 million) and €9 million ($12 million) of this accounts receivable factoring facility as of June 30, 2013 and September 30, 2012, respectively. The commitment 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.

13

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

     Italy Factoring Facility: The company entered into an arrangement to sell trade receivables from AB Volvo and its European subsidiaries through one of its Italian subsidiaries. Under this arrangement, which expires in June 2017, the company can sell up to, at any point in time, €30 million 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 €13 million ($17 million) and €13 million ($16 million) of this accounts receivable factoring facility as of June 30, 2013 and September 30, 2012. The commitment is subject to standard terms and conditions for these types of arrangements including a sole discretion clause whereby the bank retains the right to not purchase receivables, which has not been invoked since the inception of the program.
     In addition, several of the company’s subsidiaries, primarily in Europe, factor eligible accounts receivable with financial institutions. Certain receivables are factored without recourse to the company and are excluded from accounts receivable in the consolidated balance sheet. The amount of factored receivables excluded from accounts receivable was $14 million and $7 million at June 30, 2013 and September 30, 2012, respectively.
     Total costs associated with all of the off-balance sheet arrangements described above were $5 million and $7 million in the nine months ended June 30, 2013 and 2012, respectively, and are included in selling, general and administrative expenses in the consolidated statement of operations.
     On-balance sheet arrangements
The company has a $100 million U.S. accounts receivables securitization facility. On June 21, 2013, the company entered into a one-year extension of the facility expiration date, which after the amendment, expires on June 18, 2016. This program is provided by PNC Bank, National Association (PNC), as Administrator, Market Street Funding, LLC, and the other Purchasers and Purchaser Agents from time to time (participating lenders), which are party to the agreement. Under this program, the company has the ability to sell an undivided percentage ownership interest in substantially all of its trade receivables (excluding the receivables due from AB Volvo and subsidiaries eligible for sale under the U.S. Factoring Facility) of certain U.S. subsidiaries to ArvinMeritor Receivables Corporation (ARC), a wholly-owned, special purpose subsidiary. ARC funds these purchases with borrowings from participating lenders under a loan agreement. This program also includes a letter of credit facility pursuant to which ARC may request the issuance of letters of credit issued for the company's U.S. subsidiaries (originators) or their designees, which when issued will constitute a utilization of the facility for the amount of letters of credit issued. Amounts outstanding under this agreement are collateralized by eligible receivables purchased by ARC and are reported as short-term debt in the consolidated balance sheet. At June 30, 2013, no amounts, including letters of credit, were outstanding under this program. This program contains a financial covenant related to the company's priority-debt-to-EBITDA ratio, which is the same as the corresponding covenant in the company's revolving credit facility as it exists on the date of the agreement and a cross default to the revolving credit facility. At June 30, 2013, the company was in compliance with all covenants under its credit agreement (see Note 17).

14

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

10. Operating Cash Flow
The reconciliation of net income (loss) to cash flows used for operating activities is as follows (in millions):
 
Nine Months Ended June 30,
 
2013
 
2012
OPERATING ACTIVITIES
 
 
 
Net income (loss)
$
(63
)
 
$
57

Less: Loss from discontinued operations, net of tax
(6
)
 
(19
)
Income (loss) from continuing operations
(57
)
 
76

Adjustments to income (loss) from continuing operations to arrive at cash provided by (used for) operating activities:
 
 
 
Depreciation and amortization
49

 
48

Restructuring costs
29

 
30

Loss on debt extinguishment
24

 

Equity in earnings of affiliates
(34
)
 
(41
)
Pension and retiree medical expense
69

 
40

Gain on sale of property

 
(16
)
Other adjustments to income (loss) from continuing operations
4

 
11

Dividends received from affiliates
14

 
35

Pension and retiree medical contributions
(88
)
 
(104
)
Restructuring payments
(17
)
 
(15
)
Changes in off-balance sheet accounts receivable factoring
46

 
16

Changes in assets and liabilities, excluding effects of acquisitions, divestitures, foreign currency adjustments and discontinued operations
(98
)
 
(45
)
Operating cash flows provided by (used for) continuing operations
(59
)
 
35

Operating cash flows used for discontinued operations
(14
)
 
(13
)
CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES
$
(73
)
 
$
22


15

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

11. Inventories
Inventories are stated at the lower of cost (using FIFO or average methods) or market (determined on the basis of estimated realizable values) and are summarized as follows (in millions):
 
June 30,
2013
 
September 30,
2012
Finished goods
$
163

 
$
185

Work in process
46

 
48

Raw materials, parts and supplies
202

 
205

Total
$
411

 
$
438

12. Other Current Assets
     Other current assets are summarized as follows (in millions):
 
June 30,
2013
 
September 30,
2012
Current deferred income tax assets, net
$
22

 
$
27

Asbestos-related recoveries (see Note 20)
11

 
11

Deposits and collateral
4

 
4

Prepaid and other
14

 
19

Other current assets
$
51

 
$
61

13. Net Property
     Net property is summarized as follows (in millions):
 
June 30,
2013
 
September 30,
2012
Property at cost:
 
 
 
Land and land improvements
$
35

 
$
39

Buildings
224

 
253

Machinery and equipment
899

 
909

Company-owned tooling
151

 
156

Construction in progress
37

 
65

Total
1,346

 
1,422

Less accumulated depreciation
(962
)
 
(1,005
)
Net property
$
384

 
$
417


16

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

14. Other Assets
     Other assets are summarized as follows (in millions):
 
June 30,
2013
 
September 30,
2012
Investments in non-consolidated joint ventures
$
173

 
$
169

Asbestos-related recoveries (see Note 20)
63

 
63

Non-current deferred income tax assets, net
14

 
12

Unamortized debt issuance costs
33

 
29

Capitalized software costs, net
28

 
29

Prepaid pension costs
35

 
11

Other
34

 
40

Other assets
$
380

 
$
353

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 June 30, 2013, the company’s investment in the joint venture was $36 million representing the company’s maximum exposure to loss. This amount is included in investments in non-consolidated joint ventures in the table above.
15. Other Current Liabilities
     Other current liabilities are summarized as follows (in millions):
 
June 30,
2013
 
September 30,
2012
Compensation and benefits
$
136

 
$
136

Income taxes
11

 
15

Taxes other than income taxes
45

 
41

Accrued interest
17

 
5

Product warranties
20

 
16

Restructuring (see Note 6)
14

 
11

Asbestos-related liabilities (see Note 20)
18

 
19

Other
67

 
70

Other current liabilities
$
328

 
$
313


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. Product warranties, including recall campaigns, not expected to be paid within one year are recorded as a non-current liability.


17

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

A summary of the changes in product warranties is as follows (in millions):
 
Nine Months Ended June 30,
 
2013
 
2012
Total product warranties – beginning of period
$
44

 
$
48

Accruals for product warranties (1)
24

 
17

Payments
(13
)
 
(14
)
Change in estimates and other
1

 
(7
)
Total product warranties – end of period
56

 
44

Less: Non-current product warranties
(36
)
 
(28
)
Product warranties – current
$
20

 
$
16

(1) Includes a $12 million specific warranty contingency related to a non-safety, product performance issue recognized during the quarter ended June 30, 2013 (see Note 20).
16. Other Liabilities
Other liabilities are summarized as follows (in millions):
 
June 30,
2013
 
September 30,
2012
Asbestos-related liabilities (see Note 20)
$
93

 
$
93

Restructuring (see Note 6)
10

 
4

Non-current deferred income tax liabilities
99

 
101

Liabilities for uncertain tax positions
20

 
27

Product warranties (see Note 15)
36

 
28

Environmental
12

 
10

Indemnity obligations
28

 
32

Other
43

 
43

Other liabilities
$
341

 
$
338


18

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

17. Long-Term Debt
     Long-Term Debt, net of discounts where applicable, is summarized as follows (in millions):
 
June 30,
2013
 
September 30,
2012
8-1/8 percent notes due 2015
$
84

 
$
250

10-5/8 percent notes due 2018 (net of issuance discount of $3) (2)
247

 
247

4.625 percent convertible notes due 2026(1)
55

 
300

4.0 percent convertible notes due 2027(1)
200

 
200

7.875 percent convertible notes due 2026(1) (net of issuance discount of $24)
226

 

6-3/4 percent notes due 2021 (2)
275

 

Term loan
93

 
98

Lines of credit and other
29

 
13

Unamortized gain on interest rate swap termination
3

 
10

Unamortized discount on convertible notes
(45
)
 
(58
)
Subtotal
1,167

 
1,060

Less: current maturities
(23
)
 
(18
)
Long-term debt
$
1,144

 
$
1,042

(1) 
The 4.625 percent, 4.0 percent and 7.875 percent convertible notes contain a put and call feature, which allows for earlier redemption beginning in 2016, 2019 and 2020, respectively.
(2) 
The 6-3/4 percent and 10-5/8 percent notes contain a call option, which allows for early redemption.
Revolving Credit Facility
 On April 23, 2012, the company amended and restated its revolving credit facility. Pursuant to the revolving credit facility agreement as amended, the company has a $429 million revolving credit facility, $14 million of which matures in January 2014 for a bank not electing to extend its commitments under the revolving credit facility existing at March 31, 2012 and the remaining $415 million of which matures in April 2017. The availability under this facility is dependent upon various factors, including principally performance against certain financial covenants as highlighted below.
  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 (i) 2.50 to 1.00 as of the last day of the fiscal quarter commencing with the fiscal quarter ending on or about March 31, 2012 through and including the fiscal quarter ending on or about September 30, 2012, (ii) 2.25 to 1.00 as of the last day of each fiscal quarter commencing with the fiscal quarter ending on or about December 31, 2012 through and including the fiscal quarter ending on or about September 30, 2013, and (iii) 2.00 to 1.00 as of the last day of each fiscal quarter thereafter. At June 30, 2013, the company was in compliance with all covenants under its credit agreement with a ratio of approximately 0.71x for the priority debt-to-EBITDA covenant.
     Availability under the amended and extended 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 June 30, 2013, the revolving credit facility was collateralized by approximately $590 million of the company's assets, primarily consisting of eligible domestic U.S. accounts receivable, inventory, plant, property and equipment, intellectual property and the company's investment in all or a portion of certain of its wholly-owned subsidiaries.
     Borrowings under the revolving credit facility are subject to interest based on quoted LIBOR rates plus a margin and a commitment fee on undrawn amounts, both of which are based upon the company's current corporate credit rating for senior secured facilities. At June 30, 2013, the margin over LIBOR rate was 425 basis points and the commitment fee was 50 basis points. Overnight revolving credit loans are at the prime rate plus a margin of 325 basis points.

19

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

Certain of the company's subsidiaries, as defined in the 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 June 30, 2013 and September 30, 2012. The amended and extended revolving credit facility includes $100 million of availability for the issuance of letters of credit. At June 30, 2013, there were no letters of credit outstanding under the revolving credit facility, while $1 million in letters of credit were outstanding on September 30, 2012.
Issuance of Debt Securities
On May 31, 2013, the company completed an offering of debt securities consisting of the issuance of $275 million of 8-year, 6-3/4 percent notes due June 15, 2021 (the "2021 Notes"). The offering and sale were made pursuant to a registration statement on Form S-3 filed by the company with the Securities and Exchange Commission. The 2021 Notes were issued at 100 percent of their principal amount. The proceeds from the sale of the 2021 Notes were $275 million and were primarily used to complete a cash tender offer for $167 million of the company’s previously outstanding $250 million 8-1/8 percent notes due 2015.
The 2021 Notes mature on June 15, 2021 and bear interest at a fixed rate of 6-3/4 percent per annum. The company pays interest on the 2021 Notes semi-annually, in arrears, on June 15 and December 15 of each year. The 2021 Notes constitute senior unsecured obligations of the company and rank equally in right of payment with existing and future senior unsecured indebtedness, and effectively junior to existing and future secured indebtedness to the extent of the security therefor. The 2021 Notes are guaranteed on a senior unsecured basis by each of the company's subsidiaries from time to time guaranteeing its senior secured credit facility. The guarantees rank equally with existing and future senior unsecured indebtedness of the guarantors and will be effectively subordinated to all of the existing and future secured indebtedness of the guarantors, to the extent of the value of the assets securing such indebtedness.
Prior to June 15, 2016, the company may redeem, at its option, from time to time, the 2021 Notes, in whole or in part, at a redemption price equal to the 100 percent of the principal amount of the 2021 Notes to be redeemed plus an applicable premium (as defined in the indenture under which the 2021 Notes were issued) and any accrued and unpaid interest. On or after June 15, 2016, the company may redeem, at its option, from time to time, the 2021 Notes, in whole or in part, at the redemption prices (expressed as percentages of the principal amount of the 2021 Notes to be redeemed) set forth below, plus accrued and unpaid interest, if any, if redeemed during the 12-month period beginning on June 15 of the years indicated below:
Year
     
Redemption Price
2016
 
105.063%
2017
 
103.375%
2018
 
101.688%
2019 and thereafter
 
100.000%
Prior to June 15, 2016, the company also may redeem, at its option, from time to time, up to 35 percent of the aggregate principal amount of the 2021 Notes with the net cash proceeds of one or more public sales of the company's common stock at a redemption price equal to 106.75 percent of the principal amount, plus accrued and unpaid interest, if any, so long as at least 65 percent of the aggregate principal amount of 2021 Notes originally issued remains outstanding after each such redemption and notice of any such redemption is mailed within 90 days of any such sale of common stock.
     If a Change of Control (as defined in the indenture under which the 2021 Notes were issued) occurs, unless the company has exercised its right to redeem the 2021 Notes, each holder of 2021 Notes may require the company to repurchase some or all of such holder's 2021 Notes at a purchase price equal to 101 percent of the principal amount of the 2021 Notes to be repurchased, plus accrued and unpaid interest, if any.
Repurchase of Debt Securities
On May 31, 2013, the company completed a cash tender offer for its 8-1/8 percent notes due September 15, 2015. The notes were repurchased at approximately 114 percent of their principal amount. The repurchase of $167 million of 8-1/8 percent notes was accounted for as an extinguishment of debt and, accordingly, the company recognized a net loss on debt extinguishment of $19 million, which is included in interest expense, net in the consolidated statement of operations.


20

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

Convertible Senior Unsecured Notes due 2026
In December 2012, the company issued $250 million of 7.875 percent convertible senior unsecured notes due 2026 (the “2026 Notes”). The 2026 Notes were sold by the company to qualified institutional buyers in a private placement exempt from the registration requirements of the Securities Act of 1933. The 2026 Notes have an initial principal amount of $900 per note and will accrete to $1,000 per note on December 1, 2020 at an effective interest rate of 10.9 percent. Net proceeds received by the company, after issuance costs and discounts, were approximately $220 million.
The company pays 7.875 percent cash interest on the principal amount at maturity of the 2026 Notes semi-annually in arrears on June 1 and December 1 of each year to holders of record at the close of business on the preceding May 15 and November 15, respectively, and at maturity to the holders that present the 2026 Notes for payment. Interest accrues on the principal amount at maturity thereof from and including the date the 2026 Notes are issued or from, and including, the last date in respect of which interest has been paid or provided for, as the case may be, to, but excluding, the next interest payment date.
The 2026 Notes are fully and unconditionally guaranteed on a senior unsecured basis by certain of the company's subsidiaries. The 2026 Notes are senior unsecured obligations and rank equally in right of payment with all of the company's existing and future senior unsecured indebtedness and are junior to any of the company existing and future secured indebtedness.
The 2026 Notes will be convertible in certain circumstances into cash up to the principal amount at maturity of the 2026 Note surrendered for conversion and, if applicable, shares of the company's common stock (subject to a conversion share cap as described below), based on an initial conversion rate, subject to adjustment, equivalent to 83.3333 shares per $1,000 principal amount at maturity of 2026 Notes (which represents an initial conversion price of $12.00 per share), only under the following circumstances:
(1) Prior to June 1, 2025, during any calendar quarter after the calendar quarter ending December 31, 2012, if the closing sale price of the Company's common stock for 20 or more trading days in a period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter exceeds 120 percent of the applicable conversion price in effect on the last trading day of the immediately preceding calendar quarter;
(2) Prior to June 1, 2025, during the five business day period after any five consecutive trading day period in which the trading price per $1,000 principal amount at maturity of Notes was equal to or less than 97 percent of the conversion value of the Notes on each trading day during such five consecutive trading day period;
(3) Prior to June 1, 2025, if the company has called the Notes for redemption;
(4) Prior to June 1, 2025, upon the occurrence of specified corporate transactions; or
(5) At any time on or after June 1, 2025.
On or after December 1, 2020, the company may redeem the Notes at its option, in whole or in part, at a redemption price in cash equal to 100 percent of the principal amount at maturity of the Notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date. Further, holders may require the company to purchase all or a portion of their Notes at a purchase price in cash equal to 100 percent of the principal amount at maturity of the Notes to be purchased, plus accrued and unpaid interest, on December 1, 2020 or upon certain fundamental changes. The maximum number of shares of common stock those Notes are convertible into is 19,208,404 shares.
The company used the net proceeds of approximately $220 million from the offering of the Notes (after discounts and issuance costs) and additional cash to acquire a portion of its outstanding 4.625 percent convertible senior notes due 2026 (the “4.625 percent notes”) in transactions that settled concurrently with the closing of the 7.875 percent note offering. Approximately $245 million of $300 million principal amount of the 4.625 percent notes were acquired for an aggregate purchase price of approximately $236 million (including accrued interest). The company recognized a loss on debt extinguishment of $5 million.

21

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

Accounting guidance requires that cash-settled convertible debt, such as the company's 7.875 percent convertible senior unsecured notes due 2026, be separated into debt and equity components at issuance and a value be assigned to each. The value assigned to the debt component is the estimated fair value, as of the issuance date, of a similar bond without the conversion feature. The difference between the bond cash proceeds and this estimated fair value, representing the value assigned to the equity component, is recorded as a debt discount. The company measures the debt component at fair value by utilizing a discounted cash flow model. This model utilizes observable inputs such as contractual repayment terms, benchmark forward yield curves, and yield curves and quoted market prices of its own nonconvertible debt. The yield curves are acquired from an independent source that is widely used in the financial industry and reviewed internally by personnel with appropriate expertise in valuation methodologies. The estimated fair value of the debt component of the Notes was $216 million (Level 2). The amount of the equity component recognized was $9 million.
Term Loan
     As part of the amendment and restatement of the revolving credit facility, on April 23, 2012, the company entered into a $100 million term loan agreement with a maturity date of April 23, 2017. The term loan will amortize over a period of 5 years from the effective date as follows: $5 million principal to be repaid during year one, $10 million principal to be repaid in each of the years two, three and four; and the remaining principal balance to be paid in year five. Payments will be made on a quarterly basis for the duration of the term loan. As of June 30, 2013, the margin over LIBOR rate was 425 basis points. The company has the ability to prepay the term loan at any time without penalty or premium. At June 30, 2013, the outstanding balance on the term loan was $93 million.
Capital Leases
     On March 20, 2012, the company entered into an arrangement to finance equipment acquisitions for various U.S. locations. Under this arrangement, the company can request financing from GE Capital Commercial, Inc. (GE Capital) for progress payments for equipment under construction, not to exceed $10 million at any point in time. The financing rate is equal to the 30-day LIBOR plus 575 basis points per annum. Under this arrangement, the company can also enter into lease arrangements with GE Capital for completed equipment. The lease term is 60 months and the lease interest rate is equal to the 5-year Swap Rate published by the Federal Reserve Board plus 564 basis points. As of June 30, 2013, the company had $14 million outstanding under these and other capital lease arrangements.
Letter of Credit Facilities
The company entered into a five-year credit agreement dated as of November 18, 2010 with Citicorp USA, Inc., as administrative agent and issuing bank, the other lenders party thereto and the Bank of New York Mellon, as paying agent. Under the terms of this credit agreement, as amended, the company has the right to obtain the issuance, renewal, extension and increase of letters of credit up to an aggregate availability of $30 million. This facility contains covenants and events of default generally similar to those existing in our public debt indentures. There were $27 million and $30 million of letters of credit outstanding under this facility at June 30, 2013 and September 30, 2012, respectively. In addition, the company had another $9 million and $18 million of letters of credit outstanding through other letter of credit facilities at June 30, 2013 and September 30, 2012, respectively.

22

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

Accounts Receivable Securitization
 
The company has a $100 million U.S. accounts receivables securitization facility. On June 21, 2013, the company entered into a one-year extension of the facility expiration date, which after the amendment, expires on June 18, 2016. This program is provided by PNC Bank, National Association (PNC), as Administrator, Market Street Funding, LLC, and the other Purchasers and Purchaser Agents from time to time (participating lenders), which are party to the agreement. Under this program, the company has the ability to sell an undivided percentage ownership interest in substantially all of its trade receivables (excluding the receivables due from AB Volvo and subsidiaries eligible for sale under the U.S. Factoring Facility) of certain U.S. subsidiaries to ArvinMeritor Receivables Corporation (ARC), a wholly-owned, special purpose subsidiary. ARC funds these purchases with borrowings from participating lenders under a loan agreement. This program also includes a letter of credit facility pursuant to which ARC may request the issuance of letters of credit issued for the company's U.S. subsidiaries (originators) or their designees, which when issued will constitute a utilization of the facility for the amount of letters of credit issued. Amounts outstanding under this agreement are collateralized by eligible receivables purchased by ARC and are reported as short-term debt in the consolidated balance sheet. At June 30, 2013, no amounts, including letters of credit, were outstanding under this program. This program contains a financial covenant related to the company's priority-debt-to-EBITDA ratio, which is identical to the corresponding covenant in the company's revolving credit facility as it exists on the date of the agreement. In addition, this securitization program contains and a cross default to the company's revolving credit facility. The weighted average interest rate on borrowings under this arrangement was approximately 1.53 percent at June 30, 2013.
18. Financial Instruments
     Fair values of financial instruments are summarized as follows (in millions):
 
June 30,
2013
 
September 30,
2012
 
Carrying
Value
 
Fair
Value
 
Carrying
Value
 
Fair
Value
Cash and cash equivalents
$
228

 
$
228

 
$
257

 
$
257

Short-term debt
23

 
23

 
18

 
17

Long-term debt
1,144

 
1,261

 
1,042

 
1,036

Foreign exchange forward contracts (asset)

 

 
3

 
3

Foreign exchange forward contracts (liability)

 

 
1

 
1

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

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

23

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

Fair value of financial instruments by the valuation hierarchy at June 30, 2013 is as follows (in millions):
 
Level 1
 
Level 2
 
Level 3
Short-term debt
$

 
$

 
$
23

Long-term debt

 
1,162

 
99

Foreign exchange forward contracts (asset)

 

 

Foreign exchange forward contracts (liability)

 

 


Cash and cash equivalents — All highly liquid investments purchased with an original maturity of three months or less are considered to be cash equivalents. The carrying value approximates fair value because of the short maturity of these instruments. The company did not have any cash equivalents at June 30, 2013 or September 30, 2012.
     Short- and Long-term debt — Fair values are based on transaction prices at public exchange for publicly traded debt. For debt instruments that are not publicly traded, fair values are based on interest rates that would be currently available to the company for issuance of similar types of debt instruments with similar terms and remaining maturities.
Foreign exchange forward contracts — The company uses foreign exchange forward purchase and sale contracts with terms of one year or less to hedge its exposure to changes in foreign currency exchange rates. The fair value of foreign exchange forward contracts is based on a model which incorporates observable inputs including quoted spot rates, forward exchange rates and discounted future expected cash flows utilizing market interest rates with similar quality and maturity characteristics.
19. Retirement Benefit Liabilities
     Retirement benefit liabilities consisted of the following (in millions):
 
June 30,
2013
 
September 30,
2012
Retiree medical liability
$
556

 
$
559

Pension liability
510

 
540

Other
25

 
24

Subtotal
1,091

 
1,123

Less: current portion (included in compensation and benefits, Note 15)
(48
)
 
(48
)
Retirement benefit liabilities
$
1,043

 
$
1,075


The components of net periodic pension and retiree medical expense included in continuing operations for the three months ended June 30 are as follows:
 
2013
 
2012
 
Pension
 
Retiree Medical
 
Pension
 
Retiree Medical
Service cost
$
1

 
$

 
$
1

 
$

Interest cost
21

 
6

 
23

 
6

Assumed return on plan assets
(29
)
 

 
(27
)
 

Amortization of prior service costs

 
(2
)
 

 
(2
)
Recognized actuarial loss
7

 
7

 
6

 
7

Settlement charge
36

 

 

 

Total expense
$
36

 
$
11

 
$
3

 
$
11



24

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

The components of net periodic pension and retiree medical expense included in continuing operations for the nine months ended June 30 are as follows:
 
2013
 
2012
 
Pension
 
Retiree Medical
 
Pension
 
Retiree Medical
Service cost
$
2

 
$
1

 
$
2

 
$

Interest cost
64

 
16

 
69

 
18

Assumed return on plan assets
(86
)
 

 
(79
)
 

Amortization of prior service costs

 
(6
)
 

 
(6
)
Recognized actuarial loss
20

 
20

 
16

 
20

Settlement charge
38

 

 

 

Total expense
$
38

 
$
31

 
$
8

 
$
32


Canadian Pension Plans Settlement: During the quarter ended June 30, 2013, the company settled five of its Canadian defined benefit pension plans via non-participating annuity contract purchases and lump-sum payments. These actions relieve the company of primary responsibility for the pension obligations associated with these plans and eliminate significant risks related to the obligation and assets used to effect the settlement. The company recognized a pre-tax settlement loss of $36 million ($27 million after-tax) associated with these actions in the third quarter of fiscal year 2013. This loss is primarily due to the recognition of previously unrecognized actuarial losses that were included in accumulated other comprehensive loss.

U.S. Plan Lump-sum Actions: In June 2013, the company amended its U.S. Retirement Plan to allow all terminated vested participants with an accrued benefit of $5,000 or less to receive a full lump-sum distribution of their benefit. The lump-sum amount will be rolled into an individual retirement account for those participants that have an accrued benefit of $1,000 to $5,000 who do not make an affirmative election to receive their benefits. For those participants with an accrued benefit of less than $1,000, the benefits will be automatically distributed to the participant.

Additionally, in June 2013, the company announced a special election window to offer voluntary lump-sum pension payouts to eligible terminated vested participants with an accrued benefit in the U.S. Retirement Plan that, if accepted, would settle the company's obligation to them. The program provides participants with a one-time choice of electing to receive a lump-sum settlement of their remaining pension benefit. Lump-sum distributions under this election window are expected to be paid in September 2013.
20. Contingencies
Environmental
     Federal, state and local requirements relating to the discharge of substances into the environment, the disposal of hazardous wastes and other activities affecting the environment have, and will continue to have, an impact on the operations of the company. The process of estimating environmental liabilities is complex and dependent upon evolving physical and scientific data at the sites, uncertainties as to remedies and technologies to be used and the outcome of discussions with regulatory agencies. The company records liabilities for environmental issues in the accounting period in which they are considered to be probable and the cost can be reasonably estimated. At environmental sites in which more than one potentially responsible party has been identified, the company records a liability for its allocable share of costs related to its involvement with the site, as well as an allocable share of costs related to insolvent parties or unidentified shares. At environmental sites in which Meritor is the only potentially responsible party, the company records a liability for the total probable and estimable costs of remediation before consideration of recovery from insurers or other third parties.
     The company has been designated as a potentially responsible party at nine Superfund sites, excluding sites as to which the company’s records disclose no involvement or as to which the company’s liability has been finally determined. Management estimates the total reasonably possible costs the company could incur for the remediation of Superfund sites at June 30, 2013 to be approximately $19 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.

25

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

     In addition to the Superfund sites, various other lawsuits, claims and proceedings have been asserted against the company, alleging violations of federal, state and local environmental protection requirements, or seeking remediation of alleged environmental impairments, principally at previously disposed-of properties. For these matters, management has estimated the total reasonably possible costs the company could incur at June 30, 2013 to be approximately $43 million, of which $18 million is probable and recorded as a liability.
     Included in the company’s environmental liabilities are costs for on-going operation, maintenance and monitoring at environmental sites in which remediation has been put into place. This liability is discounted using discount rates in the range of 0.25 to 3 percent and is approximately $10 million at June 30, 2013. The undiscounted estimate of these costs is approximately $11 million.
     Following are the components of the Superfund and non-Superfund environmental reserves (in millions):
 
Superfund Sites
 
Non-Superfund Sites
 
Total
Beginning balance at September 30, 2012
$
2

 
$
15

 
$
17

Payments and other
(1
)
 
(4
)
 
(5
)
Accruals(1)
1

 
7

 
8

Balance at June 30, 2013
$
2

 
$
18

 
$
20


(1) 
Includes $6 million recognized in loss from discontinued operations in the consolidated statement of operations.
Environmental reserves are included in Other Current Liabilities and Other Liabilities (see Note 16) in the consolidated balance sheet.
     The actual amount of costs or damages for which the company may be held responsible could materially exceed the foregoing estimates because of uncertainties, including the financial condition of other potentially responsible parties, the success of the remediation, discovery of new contamination and other factors that make it difficult to predict actual costs accurately. However, based on management’s assessment, after consulting with outside advisors that specialize in environmental matters, and subject to the difficulties inherent in estimating these future costs, the company believes that its expenditures for environmental capital investment and remediation necessary to comply with present regulations governing environmental protection and other expenditures for the resolution of environmental claims will not have a material effect on the company’s business, financial condition or results of operations. In addition, in future periods, new laws and regulations, changes in remediation plans, advances in technology and additional information about the ultimate clean-up remedies could significantly change the company’s estimates. Management cannot assess the possible effect of compliance with future requirements.
Asset Retirement Obligations
The company has identified conditional asset retirement obligations for which a reasonable estimate of fair value could not be made because the potential settlement dates cannot be determined at this time. Due to the long term, productive nature of the company’s manufacturing operations, absent plans or expectations of plans to initiate asset retirement activities, the company was not able to reasonably estimate the settlement date for the related obligations. Therefore, the company has not recognized conditional asset retirement obligations for which there are no plans or expectations of plans to retire the asset.
Asbestos
     Maremont Corporation (“Maremont”), a subsidiary of Meritor, manufactured friction products containing asbestos from 1953 through 1977, when it sold its friction product business. Arvin Industries, Inc., a predecessor of the company, acquired Maremont in 1986. Maremont and many other companies are defendants in suits brought by individuals claiming personal injuries as a result of exposure to asbestos-containing products. Maremont had approximately 5,000 pending asbestos-related claims at June 30, 2013 and September 30, 2012. Although Maremont has been named in these cases, in the cases where actual injury has been alleged, very few claimants have established that a Maremont product caused their injuries. Plaintiffs’ lawyers often sue dozens or even hundreds of defendants in individual lawsuits on behalf of hundreds or thousands of claimants, seeking damages against all named defendants irrespective of the disease or injury and irrespective of any causal connection with a particular product. For these reasons, Maremont does not consider the number of claims filed or the damages alleged to be a meaningful factor in determining its asbestos-related liability.

26

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

     Maremont’s asbestos-related reserves and corresponding asbestos-related recoveries are summarized as follows (in millions):
 
June 30,
2013
 
September 30,
2012
Pending and future claims
$
75

 
$
75

Asbestos-related insurance recoveries
67

 
67

A portion of the asbestos-related recoveries and reserves are included in Other Current Assets and Liabilities, with the majority of the amounts recorded in Other Assets and Liabilities (see Notes 12, 14, 15 and 16).
     Prior to February 2001, Maremont participated in the Center for Claims Resolution (“CCR”) and shared with other CCR members in the payment of defense and indemnity costs for asbestos-related claims. The CCR handled the resolution and processing of asbestos claims on behalf of its members until February 2001, when it was reorganized and discontinued negotiating shared settlements. Since the CCR was reorganized in 2001, Maremont has handled asbestos-related claims through its own defense counsel and has taken a more aggressive defensive approach that involves examining the merits of each asbestos-related claim. Although the company expects legal defense costs to continue at higher levels than when it participated in the CCR, the company believes its litigation strategy has reduced the average indemnity cost per claim.
     Pending and Future Claims: Maremont engages Bates White LLC (Bates White), a consulting firm with extensive experience estimating costs associated with asbestos litigation, to assist with determining the estimated cost of resolving pending and future asbestos-related claims that have been, and could reasonably be expected to be, filed against Maremont. Bates White prepares these cost estimates annually in September. Although it is not possible to estimate the full range of costs because of various uncertainties, Bates White advised Maremont that it would be possible to determine an estimate of a reasonable forecast of the cost of the probable settlement and defense costs of resolving pending and future asbestos-related claims, based on historical data and certain assumptions with respect to events that may occur in the future.
     Bates White provided an estimate of the reasonably possible range of Maremont’s obligation for asbestos personal injury claims over the next ten years of $72 million to $88 million. Maremont recognized a liability of $75 million at June 30, 2013 and September 30, 2012. 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.
     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 2022. The ten-year assumption is considered appropriate as Maremont has reached certain longer-term agreements with key plaintiff law firms and filings of mesothelioma claims have been relatively stable over the last few years resulting in an improvement in the reliability of future projections over a longer time period;
Maremont believes that the litigation environment will 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;
Defense and processing costs for pending and future claims filed outside of Madison County, Illinois will be at the level consistent with Maremont’s prior experience;
Potential payments made to claimants from other sources, including other defendants and 524(g) trusts favorably impact the company's estimated liability in the future; and
The ultimate indemnity cost of resolving nonmalignant claims with plaintiffs’ law firms in jurisdictions without an established history with Maremont cannot be reasonably estimated.
Recoveries: Maremont has insurance that reimburses a substantial portion of the costs incurred defending against asbestos-related claims. The coverage also reimburses Maremont for any indemnity paid on those claims. The coverage is provided by several insurance carriers based on insurance agreements in place. Incorporating historical information with respect to buy-outs and settlements of coverage, and excluding any policies in dispute, the insurance receivable related to asbestos-related liabilities is $67 million as of June 30, 2013 and September 30, 2012. The difference between the estimated liability and insurance receivable is primarily related to proceeds received from settled insurance policies. Certain insurance policies have been settled in cash prior to the ultimate settlement of the related asbestos liabilities. Amounts received from insurance settlements generally reduce recorded insurance receivables. Receivables for policies in dispute are not recorded.

27

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

     The amounts recorded for the asbestos-related reserves and recoveries from insurance companies are based upon assumptions and estimates derived from currently known facts. All such estimates of liabilities and recoveries for asbestos-related claims are subject to considerable uncertainty because such liabilities and recoveries are influenced by variables that are difficult to predict. The future litigation environment for Maremont could change significantly from its past experience, due, for example, to changes in the mix of claims filed against Maremont in terms of plaintiffs’ law firm, jurisdiction and disease; legislative or regulatory developments; Maremont’s approach to defending claims; or payments to plaintiffs from other defendants. Estimated recoveries are influenced by coverage issues among insurers and the continuing solvency of various insurance companies. If the assumptions with respect to the estimation period, nature of pending and future claims, the cost to resolve claims and the amount of available insurance prove to be incorrect, the actual amount of liability for Maremont’s asbestos-related claims, and the effect on the company, could differ materially from current estimates and, therefore, could have a material impact on the company’s financial condition and results of operations.
     Rockwell International (Rockwell) — ArvinMeritor, Inc. (AM), a subsidiary of Meritor, along with many other companies, has also been named as a defendant in lawsuits alleging personal injury as a result of exposure to asbestos used in certain components of Rockwell products many years ago. Liability for these claims was transferred at the time of the spin-off of the automotive business from Rockwell in 1997. At June 30, 2013 and September 30, 2012, there were approximately 2,500 pending active asbestos claims in lawsuits that name AM, together with many other companies, as defendants. A significant portion of the claims do not identify any of Rockwell’s products or specify which of the claimants, if any, were exposed to asbestos attributable to Rockwell’s products, and past experience has shown that the vast majority of the claimants will likely never identify any of Rockwell’s products. Historically, AM has been dismissed from the vast majority of similar claims filed in the past with no payment to claimants. For those claimants who do show that they worked with Rockwell’s products, management nevertheless believes it has meritorious defenses, in substantial part due to the integrity of the products involved and the lack of any impairing medical condition on the part of many claimants. For these reasons, the company does not consider the number of claims filed or the damages alleged to be a meaningful factor in determining asbestos-related liabilities. The company defends these cases vigorously.
     Rockwell's asbestos-related reserves and corresponding asbestos-related recoveries are summarized as follows (in millions):
 
June 30,
2013
 
September 30,
2012
Pending and future claims
$
36

 
$
37

Asbestos-related insurance recoveries
7

 
7

The company engages Bates White to assist with determining whether it would be possible to estimate the cost of resolving pending and future Rockwell legacy asbestos-related claims that have been, and could reasonably be expected to be, filed against the company. As of September 30, 2012, Bates White provided an estimate of the reasonably possible range of Rockwell’s obligation for asbestos personal injury claims over the next ten years of $37 million to $45 million. The company recognized a liability of $36 million and $37 million at June 30, 2013 and September 30, 2012, respectively. 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.
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 2022. The ten year assumption is considered appropriate as Rockwell has reached certain longer-term agreements with key plaintiff law firms. In addition, filings of mesothelioma claims have been relatively stable over the last few years resulting in an improvement in the reliability of future projections over a longer time period;
The company believes that the litigation environment will change significantly beyond ten years, and that the reliability of estimates of future probable expenditures in connection with asbestos-related personal injury claims declines for each year further in the future. As a result, estimating a probable liability beyond ten years is difficult and uncertain;
Defense and processing costs for pending and future claims will be at the level consistent with the company's longer-term experience and will not have the significant volatility experienced in the recent years;
Potential payments made to claimants from other sources, including other defendants and 524(g) trusts favorably impact the company's estimated liability in the future; and
The ultimate indemnity cost of resolving nonmalignant claims with plaintiff’s law firms in jurisdictions without an established history with Rockwell cannot be reasonably estimated.


28

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

In addition to the probable liability for pending and future claims discussed above, the company also recognized a liability of approximately $7 million in fiscal year 2012 associated with a previously disclosed asbestos-related claim (Gordon Bankhead) which was settled during the fourth quarter of fiscal year 2012. The payment required by this settlement agreement was made in the first quarter of fiscal year 2013.
     Rockwell maintained insurance coverage that management believes covers indemnity and defense costs, over and above self-insurance retentions, for most of these claims. The company has initiated claims against certain of these carriers to enforce the insurance policies, which are currently being disputed. The company expects to recover some portion of defense and indemnity costs it has incurred to date, over and above self-insured retentions, and some portion of the costs for defending asbestos claims going forward. Based on consultation with advisors and underlying analysis performed by management, the company has recorded an insurance receivable related to Rockwell legacy asbestos-related liabilities of $7 million at June 30, 2013 and September 30, 2012. If the assumptions with respect to the estimation period, nature of pending claims, the cost to resolve claims and the amount of available insurance prove to be incorrect, the actual amount of liability for Rockwell asbestos-related claims, and the effect on the company, could differ materially from current estimates and, therefore, could have a material impact on the company’s financial condition and results of operations.
Indemnifications
In December 2005, the company guaranteed a third party’s obligation to reimburse another party for payment of health and prescription drug benefits to a group of retired employees. The retirees were former employees of a wholly-owned subsidiary of the company prior to it being acquired by the company. The wholly-owned subsidiary, which was part of the company’s light vehicle aftermarket business, was sold by the company in fiscal year 2006. Prior to May 2009, except as set forth hereinafter, the third party met its obligations to reimburse the other party. In May 2009, the third party filed for bankruptcy protection under Chapter 11 of the U.S. Bankruptcy Code requiring the company to recognize its obligations under the guarantee. The company recorded a $28 million liability in fiscal year 2009 for this matter. At June 30, 2013 and September 30, 2012, the remaining estimated liability for this matter was approximately $18 million and $19 million, respectively.
     The company has provided indemnifications in conjunction with certain transactions, primarily divestitures. These indemnities address a variety of matters, which may include environmental, tax, asbestos and employment-related matters, and the periods of indemnification vary in duration.
On January 3, 2011, the company completed the sale of its Body Systems business. The sale agreement contains certain customary representations, warranties and covenants of the seller and the purchaser. The agreement also includes provisions governing post-closing indemnities between the seller and the purchaser for losses arising from specified events. At June 30, 2013 and September 30, 2012 the company has recognized estimates for such indemnities, primarily related to income tax matters, of $3 million and $4 million, respectively. This amount is included in other liabilities in the accompanying condensed consolidated balance sheet.
In connection with the sale of its interest in MSSC in October 2009, the company provided certain indemnifications to the buyer for its share of potential obligations related to pension funding shortfall, environmental and other contingencies, and valuation of certain accounts receivable and inventories. The company's estimated exposure under these indemnities at June 30, 2013 and September 30, 2012 is approximately $11 million and $14 million, respectively, and is included in other current liabilities and 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
As a result of performing ongoing product conformance testing in the ordinary course of business, the company recently identified a non-safety related, potential product performance issue arising from a defective supplier component which the company is in the process of investigating. To the company's knowledge, there have been no failures in the field. The company has notified all major customers and has initiated a campaign. Although the company is in the early stages of testing and has no definitive basis to determine what the exposure will ultimately be, the company believes it is a finite population affecting up to 6,000 axles. Management has estimated the total reasonably possible costs the company could incur at June 30, 2013 to be in the range of $12 million to $20 million, of which $12 million is probable and recorded as a specific warranty contingency reserve (see Note 15). The supplier has acknowledged the defect and the company is investigating potential options for reimbursement with respect to the issue, although the company cannot assure that it will achieve any level of reimbursement for the issue.

29

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

On March 31, 2008, S&E Quick Lube, a filter distributor, filed suit in U.S. District Court for the District of Connecticut alleging that several filter manufacturers and their affiliated corporate entities, including a prior subsidiary of the company, engaged in a conspiracy to fix prices, rig bids and allocate U.S. customers for aftermarket automotive filters. This suit was a purported class action on behalf of direct purchasers of filters from the defendants. Several parallel purported class actions, including on behalf of indirect purchasers of filters, were filed by other plaintiffs in a variety of jurisdictions in the United States and Canada. The U.S. cases were consolidated into a multi-district litigation proceeding in Federal court for the Northern District of Illinois. On April 16, 2009, the Attorney General of the State of Florida filed a complaint with the U.S. District Court for the Northern District of Illinois based on these same allegations. In April 2012, the company settled with indirect purchasers for $3.1 million. In August 2012, the company entered into a settlement agreement for the remaining claims with the U.S. direct purchasers for $8.3 million. The settlement payment was made during the first quarter of fiscal year 2013. Following this settlement, the only remaining plaintiffs in the litigation are those who filed their actions in Canada. The company believes any liability associated with the claims of such plaintiffs will be immaterial.
The company is evaluating certain sale transactions to determine if value added tax was required to be remitted to certain tax jurisdictions for the tax years 2007 through 2012. The company's estimated reasonably possible exposure for this matter is $6 million to $9 million. The company recorded approximately $6 million as its estimate of the probable liability at June 30, 2013 and September 30, 2012.
In addition, various lawsuits, claims and proceedings, other than those specifically disclosed in the consolidated financial statements, have been or may be instituted or asserted against the company, relating to the conduct of the company’s business, including those pertaining to product liability, warranty or recall claims, intellectual property, safety and health, contract and employment matters. Although the outcome of other litigation cannot be predicted with certainty, and some lawsuits, claims or proceedings may be disposed of unfavorably to the company, management believes the disposition of matters that are pending will not have a material effect on the company’s business, financial condition, results of operations or cash flows. 
21. Accumulated Other Comprehensive Loss (AOCL)
     The components of AOCL as reported in the consolidated balance sheet are as follows (in millions):
 
June 30,
2013
 
September 30,
2012
Foreign currency translation
$
59

 
$
93

Employee benefit related adjustments
(987
)
 
(1,010
)
Unrealized gains, net
1

 
2

Accumulated Other Comprehensive Loss
$
(927
)
 
$
(915
)

22. Business Segment Information
The company defines its operating segments as components of its business where separate financial information is available and is evaluated regularly by the chief operating decision maker (CODM) in deciding how to allocate resources and in assessing performance. The company’s CODM is the Chief Executive Officer. On November 12, 2012, the company announced a revised management reporting structure resulting in two business segments. Prior period segment financial information presented has been recast to reflect the revised reporting structure.
      The company has two reportable segments at June 30, 2013, as follows:
The Commercial Truck & Industrial segment supplies drivetrain systems and components, including axles, drivelines and braking and suspension systems, for medium- and heavy-duty trucks, off-highway, military, construction, bus and coach, fire and emergency and other applications in North America, South America, Europe and Asia Pacific. This segment also includes the company's aftermarket businesses in Asia Pacific and South America; and
The Aftermarket & Trailer segment supplies axles, brakes, drivelines, suspension parts and other replacement and remanufactured parts, including transmissions, to commercial vehicle aftermarket customers in North America and Europe. This segment also supplies a wide variety of undercarriage products and systems for trailer applications in North America.
     

30

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

Segment EBITDA is defined as income (loss) from continuing operations before interest expense, income taxes, depreciation and amortization, non-controlling interests in consolidated joint ventures, loss on sale of receivables, restructuring costs and asset impairment charges. The company uses Segment EBITDA as the primary basis for the CODM to evaluate the performance of each of its reportable segments.
     The accounting policies of the segments are the same as those applied in the Consolidated Financial Statements, except for the use of Segment EBITDA. The company may allocate certain common costs, primarily corporate functions, between the segments differently than the company would for stand alone financial information prepared in accordance with GAAP. These allocated costs include expenses for shared services such as information technology, finance, communications, legal and human resources. The company does not allocate interest expense and certain legacy and other corporate costs not directly associated with the Segments’ EBITDA.
     Segment information is summarized as follows (in millions):
 
Commercial Truck
& Industrial
 
Aftermarket
& Trailer
 
Eliminations
 
Total
Three Months Ended June 30, 2013
 
 
 
 
 
 
 
External Sales
$
760

 
$
233

 
$

 
$
993

Intersegment Sales
24

 
5

 
(29
)
 

Total Sales
$
784

 
238

 
$
(29
)
 
$
993

Three Months Ended June 30, 2012
 
 
 
 
 
 
 
External Sales
$
874

 
$
239

 
$

 
$
1,113

Intersegment Sales
28

 
6

 
(34
)
 

Total Sales
$
902

 
245

 
$
(34
)
 
$
1,113

 
Commercial
 Truck
 
Aftermarket &
 Trailer
 
Eliminations
 
Total
Nine Months Ended June 30, 2013
 
 
 
 
 
 
 
External Sales
$
2,143

 
$
649

 
$

 
$
2,792

Intersegment Sales
68

 
16

 
(84
)
 

Total Sales
$
2,211

 
$
665

 
$
(84
)
 
$
2,792

Nine Months Ended June 30, 2012
 
 
 
 
 
 
 
External Sales
$
2,746

 
$
686

 
$

 
$
3,432

Intersegment Sales
83

 
20

 
(103
)
 

Total Sales
$
2,829

 
$
706

 
$
(103
)
 
$
3,432



31

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

 
Three Months Ended
June 30,
 
Nine Months Ended June 30,
 
2013
 
2012
 
2013
 
2012
Segment EBITDA:
 
 
 
 
 
 
 
Commercial Truck & Industrial
$
67

 
$
71

 
$
138

 
$
207

Aftermarket & Trailer
25

 
22

 
60

 
63

Segment EBITDA
92

 
93

 
198

 
270

Unallocated legacy and corporate costs, net(1)
(5
)
 
(1
)
 
(7
)
 
(4
)
Interest expense, net
(45
)
 
(25
)
 
(99
)
 
(72
)
Provision for income taxes
(1
)
 
(12
)
 
(18
)
 
(49
)
Depreciation and amortization
(16
)
 
(15
)
 
(49
)
 
(48
)
Noncontrolling interests

 
(2
)
 

 
(10
)
Loss on sale of receivables
(2
)
 
(1
)
 
(5
)
 
(7
)
Restructuring costs
(12
)
 
(3
)
 
(29
)
 
(30
)
Specific warranty contingency (see Note 20)
(12
)
 

 
(12
)
 

Pension settlement loss
(36
)
 

 
(36
)
 

Gain on sale of property

 
16

 

 
16

 
 
 
 
 
 
 
 
Income (loss) from continuing operations attributable to Meritor, Inc.
$
(37
)
 
$
50

 
$
(57
)
 
$
66

(1) 
Unallocated legacy and corporate costs, net represent items that are not directly related to our business segments and include pension and retiree medical costs associated with sold businesses and other legacy costs for environmental and product liability matters. In addition, the third quarter of fiscal year 2013, unallocated legacy and corporate costs, net includes approximately $4 million of executive severance related to the company's former Chief Executive Officer.
Segment Assets:
June 30,
2013
 
September 30,
2012
Commercial Truck & Industrial(1)
$
1,834

 
$

Aftermarket & Trailer
470

 
505

Commercial Truck (1)

 
1,341

Industrial(1)

 
423

Total segment assets
2,304

 
2,269

Corporate(2)
471

 
487

Less: Accounts receivable sold under off-balance sheet factoring programs(3)
(298
)
 
(255
)
Total assets
$
2,477

 
$
2,501

(1) 
In fiscal year 2013, the company reorganized its management structure resulting in two reportable segments.
(2) 
Corporate assets consist primarily of cash, deferred income taxes and prepaid pension costs.
(3) 
At June 30, 2013 and September 30, 2012 segment assets include $298 million and $255 million, respectively, of accounts receivable sold under off-balance sheet accounts receivable factoring programs (See Note 9). These sold receivables are included in segment assets as the CODM reviews segment assets inclusive of these balances.

32

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

23. Subsequent Events
Sale of Ownership Interest in Suspensys Sistemas Automotivos LTDA
On July 30, 2013, subsidiaries of Meritor completed the sale of the company's overall 50 percent ownership interest in Suspensys Sistemas Automotivos LTDA (the “Suspensys JV”) to the company's joint venture partner, Randon S.A. Implementos E Participações (“Randon”). The Suspensys JV was formed in 2002 and is primarily engaged in the manufacture and sale of air and mechanical suspension systems for trucks, buses and trailers, trailer axles, third axles, hubs and drums for trucks, buses and trailers. The purchase price for the sale was $195 million, which was composed of $190 million in cash (approximately $4 million of which was in the form of a pre-closing cash dividend) and $5 million in lease abatements for a facility in Brazil leased to the company from the Suspensys JV. The sale was completed pursuant to a Purchase and Sale Agreement dated as of April 29, 2013.
24. Supplemental Guarantor Condensed Consolidating Financial Statements
Certain of the company’s wholly-owned subsidiaries, as defined in the credit agreement (the Guarantors) irrevocably and unconditionally provide joint and sever