Form 10-Q MERITOR INC For: Dec 28
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E-mailUNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended December�28, 2014
Commission File No. 1-15983
MERITOR, INC.
(Exact name of registrant as specified in its charter)
Indiana | 38-3354643 | ||
(State or other jurisdiction of incorporation or | (I.R.S. Employer Identification | ||
organization) | No.) | ||
� | |||
2135 West Maple Road, Troy, Michigan | 48084-7186 | ||
(Address of principal executive offices) | (Zip Code) | ||
(248) 435-1000
(Registrants 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 | |||
98,737,231 shares of Common Stock, $1.00 par value, of Meritor, Inc. were outstanding on December�28, 2014.
INDEX
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Condensed Consolidated Statement of Operations - - Three Months Ended December 31, 2014 and 2013 | |||
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Condensed Consolidated Statement Of Comprehensive Income (Loss) - - Three Months Ended December 31, 2014 and 2013 | |||
� | Condensed Consolidated Balance Sheet - -�December 31, 2014 and September 30, 2014 | ||
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Condensed Consolidated Statement of Cash Flows - - Three Months Ended December 31, 2014 and 2013 | |||
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Condensed Consolidated Statement of Equity (Deficit) - - Three Months Ended December 31, 2014 and 2013 | |||
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MERITOR, INC.
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(in millions, except per share amounts)
Three Months Ended December 31, | |||||||
2014 | 2013 | ||||||
(Unaudited) | |||||||
Sales | $ | 879 | $ | 900 | |||
Cost of sales | (764 | ) | (795 | ) | |||
GROSS MARGIN | 115 | 105 | |||||
Selling, general and administrative | (65 | ) | (59 | ) | |||
Restructuring costs | (3 | ) | (1 | ) | |||
Other operating income (expense), net | 1 | (1 | ) | ||||
OPERATING INCOME | 48 | 44 | |||||
Other income, net | 2 | ||||||
Equity in earnings of affiliates | 9 | 8 | |||||
Interest expense, net | (19 | ) | (27 | ) | |||
INCOME BEFORE INCOME TAXES | 40 | 25 | |||||
Provision for income taxes | (7 | ) | (11 | ) | |||
INCOME FROM CONTINUING OPERATIONS | 33 | 14 | |||||
LOSS FROM DISCONTINUED OPERATIONS, net of tax | (3 | ) | (1 | ) | |||
NET INCOME | 30 | 13 | |||||
Less: Net income attributable to noncontrolling interests | (1 | ) | (2 | ) | |||
NET INCOME ATTRIBUTABLE TO MERITOR, INC. | $ | 29 | $ | 11 | |||
NET INCOME ATTRIBUTABLE TO MERITOR, INC. | |||||||
Net income from continuing operations | $ | 32 | $ | 12 | |||
Loss from discontinued operations | (3 | ) | (1 | ) | |||
������ Net income | $ | 29 | $ | 11 | |||
BASIC EARNINGS (LOSS) PER SHARE | |||||||
Continuing operations | $ | 0.33 | $ | 0.12 | |||
Discontinued operations | (0.03 | ) | (0.01 | ) | |||
������ Basic earnings per share | $ | 0.30 | $ | 0.11 | |||
DILUTED EARNINGS (LOSS) PER SHARE | |||||||
Continuing operations | $ | 0.32 | $ | 0.12 | |||
Discontinued operations | (0.03 | ) | (0.01 | ) | |||
������ Diluted earnings per share | $ | 0.29 | $ | 0.11 | |||
Basic average common shares outstanding | 97.9 | 97.3 | |||||
Diluted average common shares outstanding | 101.2 | 98.7 | |||||
See notes to condensed consolidated financial statements.
Amounts for prior periods have been recast for discontinued operations.
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MERITOR, INC.
CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS)
(in millions)
Three Months Ended December 31, | |||||||
2014 | 2013 | ||||||
(Unaudited) | |||||||
Net income | $ | 30 | $ | 13 | |||
Other comprehensive income (loss): | |||||||
Foreign currency translation adjustments: | |||||||
�����Attributable to Meritor, Inc. | (34 | ) | (10 | ) | |||
�����Attributable to noncontrolling interest | (1 | ) | |||||
�����Other reclassification adjustment | 1 | ||||||
Pension and other postretirement benefit related adjustments | 12 | 10 | |||||
Unrealized loss on foreign exchange contracts | (1 | ) | |||||
Other comprehensive loss, net of tax | (23 | ) | |||||
Total comprehensive income | 7 | 13 | |||||
Less: Comprehensive income attributable to noncontrolling interest | (2 | ) | |||||
Comprehensive income attributable to Meritor, Inc. | $ | 7 | $ | 11 | |||
See notes to condensed consolidated financial statements.
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MERITOR, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(in millions)
December�31, 2014 | September�30, 2014 | ||||||
(Unaudited) | |||||||
ASSETS | |||||||
CURRENT ASSETS: | |||||||
Cash and cash equivalents | $ | 214 | $ | 247 | |||
Receivables, trade and other, net | 511 | 610 | |||||
Inventories | 379 | 379 | |||||
Other current assets | 58 | 56 | |||||
TOTAL CURRENT ASSETS | 1,162 | 1,292 | |||||
NET PROPERTY | 407 | 424 | |||||
GOODWILL | 423 | 431 | |||||
OTHER ASSETS | 354 | 355 | |||||
TOTAL ASSETS | $ | 2,346 | $ | 2,502 | |||
LIABILITIES AND EQUITY (DEFICIT) | |||||||
CURRENT LIABILITIES: | |||||||
Short-term debt | $ | 5 | $ | 7 | |||
������ Accounts and notes payable | 597 | 680 | |||||
Other current liabilities | 292 | 351 | |||||
TOTAL CURRENT LIABILITIES | 894 | 1,038 | |||||
LONG-TERM DEBT | 962 | 965 | |||||
RETIREMENT BENEFITS | 759 | 775 | |||||
OTHER LIABILITIES | 307 | 309 | |||||
TOTAL LIABILITIES | 2,922 | 3,087 | |||||
COMMITMENTS AND CONTINGENCIES (See Note 19) | |||||||
EQUITY (DEFICIT): | |||||||
Common stock (December 31, 2014 and September 30, 2014, 98.7 and 97.8 shares issued and outstanding, respectively) | 98 | 97 | |||||
Additional paid-in capital | 919 | 918 | |||||
Accumulated deficit | (849 | ) | (878 | ) | |||
Accumulated other comprehensive loss | (771 | ) | (749 | ) | |||
Total deficit attributable to Meritor, Inc. | (603 | ) | (612 | ) | |||
Noncontrolling interests | 27 | 27 | |||||
TOTAL DEFICIT | (576 | ) | (585 | ) | |||
TOTAL LIABILITIES AND DEFICIT | $ | 2,346 | $ | 2,502 | |||
See notes to condensed consolidated financial statements.
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MERITOR, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(in millions)
Three Months Ended December 31, | |||||||
2014 | 2013 | ||||||
(Unaudited) | |||||||
OPERATING ACTIVITIES | |||||||
CASH USED FOR OPERATING ACTIVITIES (See Note 9) | $ | (9 | ) | $ | (4 | ) | |
INVESTING ACTIVITIES | |||||||
Capital expenditures | (12 | ) | (12 | ) | |||
CASH USED FOR INVESTING ACTIVITIES | (12 | ) | (12 | ) | |||
FINANCING ACTIVITIES | |||||||
Repayment of term loan | (4 | ) | |||||
Other financing activities | (4 | ) | 3 | ||||
CASH USED FOR FINANCING ACTIVITIES | (4 | ) | (1 | ) | |||
EFFECT OF CHANGES IN FOREIGN CURRENCY EXCHANGE RATES ON CASH AND CASH EQUIVALENTS | (8 | ) | (1 | ) | |||
CHANGE IN CASH AND CASH EQUIVALENTS | (33 | ) | (18 | ) | |||
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD | 247 | 318 | |||||
CASH AND CASH EQUIVALENTS AT END OF PERIOD | $ | 214 | $ | 300 | |||
See notes to condensed consolidated financial statements.
Amounts for prior periods have been recast for discontinued operations.
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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, 2014 | $ | 97 | $ | 918 | $ | (878 | ) | $ | (749 | ) | $ | (612 | ) | $ | 27 | $ | (585 | ) | |||||||||
Comprehensive income | 29 | (22 | ) | 7 | 7 | ||||||||||||||||||||||
Equity based compensation expense | 2 | 2 | 2 | ||||||||||||||||||||||||
Vesting of restricted stock | 1 | (1 | ) | ||||||||||||||||||||||||
Ending Balance at December 31, 2014 | $ | 98 | $ | 919 | $ | (849 | ) | $ | (771 | ) | $ | (603 | ) | $ | 27 | $ | (576 | ) | |||||||||
Beginning balance at September 30, 2013 | $ | 97 | $ | 914 | $ | (1,127 | ) | $ | (734 | ) | $ | (850 | ) | $ | 28 | $ | (822 | ) | |||||||||
Comprehensive income | 11 | 11 | 2 | 13 | |||||||||||||||||||||||
Equity based compensation expense | 1 | 1 | 1 | ||||||||||||||||||||||||
Ending Balance at December 31, 2013 | $ | 97 | $ | 915 | $ | (1,116 | ) | $ | (734 | ) | $ | (838 | ) | $ | 30 | $ | (808 | ) | |||||||||
See notes to condensed consolidated financial statements.
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1. Basis of Presentation
Meritor, Inc. (the company or Meritor ), headquartered in Troy, Michigan, is a premier global supplier of a broad range of integrated systems, modules and components to original equipment manufacturers ( OEMs ) and the aftermarket for the commercial vehicle, transportation and industrial sectors. The company serves commercial truck, trailer, military, bus and coach, construction and other industrial OEMs and certain aftermarkets. The condensed consolidated financial statements are those of the company and its consolidated subsidiaries.
Certain businesses are reported in discontinued operations in the condensed consolidated statement of operations, statement of cash flows and related notes for all periods presented. In the fourth quarter of fiscal year 2014, the company exited its Mascot business, a remanufacturer and distributor of all makes differentials, transmissions and steering gears. The results of operations and cash flows of the companys former Mascot business are presented in discontinued operations in the condensed consolidated statement of operations and condensed consolidated statement of cash flows, and prior period information has been recast to reflect this presentation. 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 companys audited consolidated financial statements and notes thereto included in the Annual Report on Form 10-K, for the fiscal year ended September�30, 2014. The quarter end condensed balance sheet data was derived from audited financial statements but does not include all annual disclosures required by accounting principles generally accepted in the United States of America. The results of operations for the three months ended December�31, 2014, are not necessarily indicative of the results for the full year.
The companys fiscal year ends on the Sunday nearest September 30. The first quarter of fiscal years 2015 and 2014 ended on December�28, 2014 and December�29, 2013, respectively. All year and quarter references relate to the companys fiscal year and fiscal quarters, unless otherwise stated. For ease of presentation, September 30 and December 31 are used consistently throughout this report to represent the fiscal year end and first quarter end, respectively.
2. Earnings per Share
Basic earnings (loss) per share is calculated using the weighted average number of shares outstanding during each period. The diluted earnings (loss) per share calculation includes the impact of dilutive common stock options, restricted shares, 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 December 31, | |||||
2014 | 2013 | ||||
Basic average common shares outstanding | 97.9 | 97.3 | |||
Impact of stock options | 0.1 | ||||
Impact of restricted shares, performance shares and share units | 2.3 | 1.4 | |||
Impact of convertible notes | 0.9 | ||||
Diluted average common shares outstanding | 101.2 | 98.7 | |||
On November 8, 2014, the Board of Directors approved a grant of performance share units to all executives eligible to participate in the long-term incentive plan. Each performance share unit represents the right to receive one share of common stock upon achievement of certain performance and time vesting criteria. The fair value of each performance share unit is $13.74, the companys share price on the grant date of December 1, 2014. The Board of Directors also approved a grant of 0.4 million restricted share units to these executives. The restricted share units vest at the earlier of three years from the date of grant or upon termination of employment with the company under certain circumstances. The fair value of each restricted share unit is $13.74, the company's share price on the grant date of December 1, 2014.
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The actual number of performance share units that will vest depends upon the companys performance relative to the established performance metrics for the three-year performance period of October 1, 2014 to September 30, 2017, measured at the end of the performance period. The number of performance share units will depend on Adjusted EBITDA margin and Adjusted diluted earnings per share from continuing operations at the following weights: 75% associated with achieving an Adjusted EBITDA margin target and 25% associated with achieving an Adjusted diluted earnings per share from continuing operations target. The number of performance share units that vest will be between 0% and 200% of the grant date amount of 0.6 million shares.
On November 7, 2013, the Board of Directors approved a grant of performance share units to all executives eligible to participate in the long-term incentive plan. Each performance share unit represents the right to receive one share of common stock upon achievement of certain performance and time vesting criteria. The fair value of each performance share unit is $7.97, the companys share price on the grant date of December 1, 2013.
The actual number of performance share units that will vest depends upon the companys performance relative to the established M2016 goals for the three-year performance period of October 1, 2013 to September 30, 2016, measured at the end of the performance period. The number of performance share units will depend on meeting the established M2016 goals at the following weights: 50% associated with achieving an Adjusted EBITDA margin target, 25% associated with achieving a net debt including retirement benefit liabilities target, and 25% associated with achieving an incremental booked revenue target. The number of performance share units that vest will be between 0% and 200% of the grant date amount of 1.8 million shares including incremental shares that were issued subsequent to the December 1, 2013 grant date. There were 0.6 million shares related to these performance share units included in the diluted earnings per share calculation for the three months ended December 31, 2014 as certain payout thresholds were achieved in the first quarter of fiscal year 2015 relative to the Adjusted EBITDA, net debt reduction and incremental booked revenue targets.
For the three months ended December�31, 2014, compensation cost related to restricted shares and performance share units was $2 million. As of December�31, 2014, the dilutive impact of previously issued restricted shares and performance share units was 2.3 million shares, compared to 1.4 million shares for the same period in the prior fiscal year.
For the three months ended December�31, 2014 and 2013, options to purchase 0.3 million and 0.8 million shares of common stock, respectively, were excluded in the computation of diluted earnings per share because their exercise price exceeded the average market price for the periods and thus their inclusion would be anti-dilutive.
For the three months ended December�31, 2014, 0.9 million shares were included in the computation of diluted earnings per share because the average stock price exceeded the conversion price for the 7.875 percent convertible notes due 2026. For the three months ended December�31, 2013, the company's convertible senior unsecured notes are excluded from the computation of diluted earnings per share, as the company's average stock price, during this period was less than the conversion price.
3. New Accounting Standards
Accounting standards to be implemented
In April 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-08, Presentation of Financial Statements and Property, Plant, and Equipment: Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. ASU 2014-08 changes the criteria for determining which disposals can be presented as discontinued operations and modifies related disclosure requirements. Under the new guidance, a discontinued operation is defined as a disposal of a component or group of components that represents a strategic shift that has (or will have) a major effect on an entity's operations and financial results. A strategic shift could include a disposal of: (1) a major geographical area of operations; (2) a major line of business; and (3) a major equity method investment. The standard is required to be adopted by public business entities in annual periods beginning on or after December 15, 2014, and interim periods within those annual periods. The company plans to implement this standard in the first quarter of the fiscal year beginning October 1, 2015. The potential impact of this new guidance on its consolidated financial statements is dependent upon future business divestitures. Previous divestitures and amounts currently in discontinued operations will not be impacted.
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In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers. ASU 2014-09 merges revenue recognition standards of the FASB and International Accounting Standards Board (IASB). The FASB and IASB initiated a joint project to clarify the principles for recognizing revenue and to develop a common revenue standard for U.S. GAAP and International Financial Reporting Standards (IFRS) that would: (1) remove inconsistencies and weaknesses in revenue requirements; (2) provide a more robust framework for addressing revenue issues; (3) improve comparability of revenue recognition practices across entities, industries, jurisdictions, and capital markets; (4) provide more useful information to users of financial statements through improved disclosure requirements; and (5) simplify the preparation of financial statements by reducing the number of requirements to which an entity must refer. The standard is required to be adopted by public business entities in annual periods beginning on or after December 15, 2016, and interim periods within those annual periods. The company plans to implement this standard in the first quarter of the fiscal year beginning October 1, 2017 and is currently evaluating the potential impact of this new guidance on its consolidated financial statements.
In June 2014, the FASB issued ASU 2014-12, CompensationStock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period. ASU 2014-12 applies to all reporting entities that grant their employees share-based payments in which the terms of the award provide that a performance target that affects vesting could be achieved after the requisite service period. That is the case when an employee is eligible to retire or otherwise terminate employment before the end of the period in which a performance target (for example, an initial public offering or a profitability target) could be achieved and still be eligible to vest in the award if and when the performance target is achieved. The standard is required to be adopted by public business entities in annual periods beginning on or after December 15, 2015 and interim periods within those annual periods. The company plans to implement this standard in the first quarter of fiscal year 2017 and is currently evaluating the potential impact of this new guidance on its consolidated financial statements.
In August 2014, the FASB issued ASU 2014-15, Presentation of Financial Statements Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entitys Ability to Continue as a Going Concern. ASU 2014-15 requires management to assess an entitys ability to continue as a going concern by incorporating and expanding upon certain principles that are currently in U.S. auditing standards. Specifically, ASU 2014-15 (1) provides a definition of the term substantial doubt, (2) requires an evaluation every reporting period including interim periods, (3) provides principles for considering the mitigating effect of managements plans, (4) requires certain disclosures when substantial doubt is alleviated as a result of consideration of managements plans, (5) requires an express statement and other disclosures when substantial doubt is not alleviated, and (6) requires an assessment for a period of one year after the date that the financial statements are issued (or are available to be issued). The standard is required to be adopted by public business entities in annual periods ending after December 15, 2016, and for annual periods and interim periods thereafter. Early application is permitted. The company plans to implement this standard in the fiscal year beginning October 1, 2016 and currently expects this new guidance to have no impact on the companys consolidated financial statements.
4. Discontinued Operations
Results of discontinued operations are summarized as follows (in millions):
Three Months Ended December 31, | |||||||
2014 | 2013 | ||||||
Sales | $ | $ | 7 | ||||
Loss before income taxes | $ | (3 | ) | $ | (2 | ) | |
Benefit from income taxes | 1 | ||||||
Loss from discontinued operations attributable to Meritor, Inc. | $ | (3 | ) | $ | (1 | ) | |
Total discontinued operations assets as of December 31, 2014 and September 30, 2014 were $6 million and $8 million, respectively, and total discontinued operations liabilities as of December 31, 2014 and September 30, 2014 were $18 million and $21 million, respectively.
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Mascot Divestiture
In the fourth quarter of fiscal year 2014, the company disposed of its Mascot business which was part of the companys Aftermarket & Trailer segment. The results of operations and cash flows of the companys Mascot business are presented in discontinued operations in the condensed consolidated statements of operations and condensed consolidated statement of cash flows, and prior period information has been recast to reflect this presentation.
Sales for the three months ended December 31, 2013, were related to the companys former Mascot business.
5. Goodwill
In accordance with FASB Accounting Standards Codification (ASC) Topic 350-20, Intangibles - Goodwill and Other , goodwill is reviewed for impairment annually during the fourth quarter of the fiscal year or more frequently if certain indicators arise. If business conditions or other factors cause the operating results and cash flows of a reporting unit to decline, the company may be required to record impairment charges for goodwill at that time. Given that the companys primary military program is winding down, failure to secure new military contracts could result in a significant decline in the projected cash flows of the defense reporting unit, which could require the company to impair the goodwill. The defense reporting unit is included within the Commercial Truck & Industrial segment and has $20 million of goodwill allocated to it.
The company tests goodwill for impairment at a level of reporting referred to as a reporting unit, which is an operating segment or one level below an operating segment (referred to as a component). A component of an operating segment is a reporting unit if the component constitutes a business for which discrete financial information is available and segment management regularly reviews the operating results of that component. When two or more components of an operating segment have similar economic characteristics, the components are aggregated and deemed a single reporting unit. An operating segment is deemed to be a reporting unit if all of its components are similar, if none of its components are a reporting unit, or if the segment comprises only a single component.
A summary of the changes in the carrying value of goodwill�by the companys two reportable segments are presented below (in millions):
Commercial Truck & Industrial | Aftermarket & Trailer | Total | |||||||||
Beginning balance at September 30, 2014 | $ | 261 | $ | 170 | $ | 431 | |||||
Foreign currency translation | (4 | ) | (4 | ) | (8 | ) | |||||
Balance at December 31, 2014 | $ | 257 | $ | 166 | $ | 423 | |||||
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6. Restructuring Costs
���� At December�31, 2014 and September�30, 2014, $12 million and $11 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 three months ended December�31, 2014 and 2013 are as follows (in millions):
Employee Termination Benefits | Asset Impairment | Plant Shutdown & Other | Total | ||||||||||||
Beginning balance at September 30, 2014 | $ | 11 | $ | $ | $ | 11 | |||||||||
Activity during the period: | |||||||||||||||
Charges to continuing operations | 3 | 3 | |||||||||||||
Cash payments continuing operations | (1 | ) | (1 | ) | |||||||||||
Other | (1 | ) | (1 | ) | |||||||||||
Total restructuring reserves at December 31, 2014 | 12 | 12 | |||||||||||||
Less: non-current restructuring reserves | (2 | ) | (2 | ) | |||||||||||
Restructuring reserves current, at December 31, 2014 | $ | 10 | $ | $ | $ | 10 | |||||||||
Balance at September 30, 2013 | $ | 12 | $ | $ | $ | 12 | |||||||||
Activity during the period: | |||||||||||||||
Charges to continuing operations | 1 | 1 | |||||||||||||
Cash payments continuing operations | (3 | ) | (3 | ) | |||||||||||
Total restructuring reserves at December 31, 2013 | 10 | 10 | |||||||||||||
Less: non-current restructuring reserves | (3 | ) | (3 | ) | |||||||||||
Restructuring reserves current, at December 31, 2013 | $ | 7 | $ | $ | $ | 7 | |||||||||
South America Labor Reduction: During the fourth quarter of fiscal year 2014, the company initiated a South America headcount reduction plan intended to reduce labor costs in response to softening economic conditions in the region. In response to decreasing production volumes in South America, the company plans to eliminate approximately 190 hourly and 20 salaried positions and incurred $7 million of restructuring costs in the fourth quarter of fiscal year 2014, primarily severance benefits, in the Commercial Truck & Industrial segment. This program was substantially complete as of December�31, 2014.
M2016 Action: The company continues to implement certain footprint actions as part of its M2016 strategy. In the first quarter of fiscal year 2015, the company recorded expected severance charges of $3 million associated with the elimination of 51 hourly and 19 salaried positions in the Commercial Truck & Industrial segment associated with the consolidation of certain gearing and machining operations in North America.
7. Income Taxes
For each interim reporting period, the company makes an estimate of the effective tax rate expected to be applicable for the full fiscal year pursuant to FASB ASC Topic 740-270, Accounting for Income Taxes in Interim Periods. The rate so determined is used in providing for income taxes on a year-to-date basis. Jurisdictions with a projected loss for the year or an actual year-to-date loss where no tax benefit can be recognized are excluded from the estimated annual effective tax rate. The impact of including these jurisdictions on the quarterly effective rate calculation could result in a higher or lower effective tax rate during a particular quarter, based upon the mix and timing of actual earnings versus annual projections.
Income tax expense (benefit) is allocated between continuing operations, discontinued operations and other comprehensive income (OCI). Such allocation is applied by tax jurisdiction, and in periods in which there is a pre-tax loss from continuing operations and pre-tax income in another category, such as discontinued operations or OCI, income tax expense is allocated to the other sources of income, with a related benefit recorded in continuing operations.
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For the first three months of fiscal year 2015, the company had approximately $12 million of net pre-tax income compared to a net pre-tax loss of $7 million in the first three months of fiscal year 2014 in tax jurisdictions in which tax expense (benefit) is not recorded. Income or losses arising from these jurisdictions resulted in an adjustment to the valuation allowance, rather than an adjustment to income tax expense. If, in the future, the company is generating taxable income on a sustained basis in jurisdictions where it has recorded valuation allowances, the company's conclusion regarding the need for valuation allowances in these jurisdictions could change. This would result in a reversal of some or all of the valuation allowances.
8. Accounts Receivable Factoring and 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 terminates on June 28, 2015, the company can sell up to, at any point in time, �150 million ($183 million) of eligible trade receivables. The receivables under this program are sold at face value and are excluded from the condensed consolidated balance sheet. The company had utilized �126 million ($154 million) and �99 million ($127 million) of this accounts receivable factoring facility as of December�31, 2014 and September�30, 2014, respectively.
U.S. Factoring Facility: The company has an arrangement to sell trade receivables from AB Volvo and its subsidiaries. Under this arrangement, which terminates on October 29, 2015, the company can sell up to, at any point in time, �65 million ($79 million) of eligible trade receivables. In December 2014, the company amended this agreement to allow for the sale of trade receivables to exceed Nordea Banks commitment at Nordea Banks discretion. The receivables under this program are sold at face value and are excluded from the condensed consolidated balance sheet. The company had utilized �72 million ($88 million) and �64 million ($81 million) of this accounts receivable factoring facility as of December�31, 2014 and September�30, 2014, respectively. As of the end of the first quarter of fiscal year 2015, the company had utilized more than the committed eligible trade receivable amount of $79 million.
���� The above facilities are backed by 364-day liquidity commitments from Nordea Bank which were renewed through September 2015. The commitments are subject to standard terms and conditions for these types of arrangements.
���� United Kingdom Factoring Facility: The company has an arrangement to sell trade receivables from AB Volvo and its European subsidiaries through one of its United Kingdom subsidiaries. Under this arrangement, which expires in February 2018, the company can sell up to, at any point in time, �25 million ($30 million) of eligible trade receivables. The receivables under this program are sold at face value and are excluded from the condensed consolidated balance sheet. The company had utilized �7 million ($8 million) and �6 million ($7 million) of this accounts receivable factoring facility as of December�31, 2014 and September�30, 2014, respectively. The agreement is subject to standard terms and conditions for these types of arrangements including a sole discretion clause whereby the bank retains the right to not purchase receivables, which has not been invoked since the inception of the program.
���� Italy Factoring Facility: The company has an arrangement to sell trade receivables from AB Volvo and its European subsidiaries through one of its Italian subsidiaries. Under this arrangement, which expires in June 2017, the company can sell up to, at any point in time, �30 million ($37 million) of eligible trade receivables. The receivables under this program are sold at face value and are excluded from the condensed consolidated balance sheet. The company had utilized �13 million ($16 million) and �8 million ($10 million) of this accounts receivable factoring facility as of December�31, 2014 and September�30, 2014, respectively. The agreement is subject to standard terms and conditions for these types of arrangements including a sole discretion clause whereby the bank retains the right to not purchase receivables, which has not been invoked since the inception of the program.
���� In addition, several of the companys 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 condensed consolidated balance sheet. The amount of factored receivables excluded from accounts receivable was $17 million and $19 million at December�31, 2014 and September�30, 2014, respectively.
���� Total costs associated with the off-balance sheet arrangements described above were $2 million and $3 million in the three months ended December 31, 2014 and 2013, respectively, and are included in selling, general and administrative expenses in the condensed consolidated statement of operations.
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���� On-balance sheet arrangements
The company has a $100 million U.S. accounts receivables securitization facility. On October 15, 2014, the company entered into an amendment which extends the facility expiration date to October 15, 2017 and sets the maximum permitted priority-debt-to-EBITDA ratio as of the last day of each fiscal quarter under the facility at 2.25 to 1.00. This program is provided by PNC Bank, National Association, as Administrator and Purchaser, and the other Purchasers and Purchaser Agents from time to time (participating lenders), which are party to the agreement. Under this program, the company has the ability to sell an undivided percentage ownership interest in substantially all of its trade receivables (excluding the receivables due from AB Volvo and subsidiaries eligible for sale under the U.S. accounts receivable factoring facility) of certain U.S. subsidiaries to ArvinMeritor Receivables Corporation (ARC), a wholly-owned, special purpose subsidiary. ARC funds these purchases with borrowings from participating lenders under a loan agreement. This program also includes a letter of credit facility pursuant to which ARC may request the issuance of letters of credit issued for the companys U.S. subsidiaries (originators) or their designees, which when issued will constitute a utilization of the facility for the amount of letters of credit issued. Amounts outstanding under this agreement are collateralized by eligible receivables purchased by ARC and are reported as short-term debt in the condensed consolidated balance sheet. At December 31, 2014 and September 30, 2014, no amounts, including letters of credit, were outstanding under this program. This program contains a cross-default to the revolving credit facility. At December 31, 2014, the company was in compliance with all covenants under its credit agreement (see Note 16).
9. Operating Cash Flow
The reconciliation of net income to cash flows used for operating activities is as follows (in millions):
Three Months Ended December 31, | |||||||
2014 | 2013 | ||||||
OPERATING ACTIVITIES | |||||||
Net income | $ | 30 | $ | 13 | |||
Less: Loss from discontinued operations, net of tax | (3 | ) | (1 | ) | |||
Income from continuing operations | 33 | 14 | |||||
Adjustments to income from continuing operations to arrive at cash used for operating activities: | |||||||
Depreciation and amortization | 15 | 16 | |||||
Restructuring costs | 3 | 1 | |||||
Equity in earnings of affiliates | (9 | ) | (8 | ) | |||
Pension and retiree medical expense | 7 | 10 | |||||
Other adjustments to income from continuing operations | 2 | 4 | |||||
Dividends received from affiliates | 5 | 5 | |||||
Pension and retiree medical contributions | (14 | ) | (9 | ) | |||
Restructuring payments | (1 | ) | (3 | ) | |||
Changes in off-balance sheet accounts receivable factoring | 53 | 81 | |||||
Changes in assets and liabilities, excluding effects of acquisitions, divestitures, foreign currency adjustments and discontinued operations | (100 | ) | (109 | ) | |||
Operating cash flows provided by (used for) continuing operations | (6 | ) | 2 | ||||
Operating cash flows used for discontinued operations | (3 | ) | (6 | ) | |||
CASH USED FOR OPERATING ACTIVITIES | $ | (9 | ) | $ | (4 | ) | |
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10. Inventories
Inventories are stated at the lower of cost (using FIFO or average methods) or market (determined on the basis of estimated realizable values) and are summarized as follows (in millions):
December�31, 2014 | September�30, 2014 | ||||||
Finished goods | $ | 153 | $ | 146 | |||
Work in process | 33 | 36 | |||||
Raw materials, parts and supplies | 193 | 197 | |||||
Total | $ | 379 | $ | 379 | |||
11. Other Current Assets
���� Other current assets are summarized as follows (in millions):
December�31, 2014 | September�30, 2014 | ||||||
Current deferred income tax assets | $ | 19 | $ | 21 | |||
Asbestos-related recoveries (see Note 19) | 15 | 15 | |||||
Deposits and collateral | 2 | 4 | |||||
Prepaid and other | 22 | 16 | |||||
Other current assets | $ | 58 | $ | 56 | |||
12. Net Property
���� Net property is summarized as follows (in millions):
December�31, 2014 | September�30, 2014 | ||||||
Property at cost: | |||||||
Land and land improvements | $ | 33 | $ | 34 | |||
Buildings | 229 | 236 | |||||
Machinery and equipment | 885 | 906 | |||||
Company-owned tooling | 148 | 155 | |||||
Construction in progress | 55 | 66 | |||||
Total | 1,350 | 1,397 | |||||
Less accumulated depreciation | (943 | ) | (973 | ) | |||
Net property | $ | 407 | $ | 424 | |||
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13. Other Assets
���� Other assets are summarized as follows (in millions):
December�31, 2014 | September�30, 2014 | ||||||
Investments in non-consolidated joint ventures | $ | 106 | $ | 106 | |||
Asbestos-related recoveries (see Note 19) | 42 | 45 | |||||
Unamortized debt issuance costs | 29 | 30 | |||||
Capitalized software costs, net | 24 | 25 | |||||
Non-current deferred income tax assets, net | 17 | 15 | |||||
Assets for uncertain tax positions | 5 | 5 | |||||
Prepaid pension costs | 107 | 104 | |||||
Other | 24 | 25 | |||||
Other assets | $ | 354 | $ | 355 | |||
In accordance with FASB ASC Topic 350-40, costs relating to internally developed or purchased software in the preliminary project stage and the post-implementation stage are expensed as incurred. Costs in the application development stage that meet the criteria for capitalization are capitalized and amortized using the straight-line basis over the estimated economic useful life of the software.
The company holds a variable interest in a joint venture accounted for under the equity method of accounting. The joint venture manufactures components for commercial vehicle applications primarily on behalf of the company. The variable interest relates to a supply arrangement between the company and the joint venture whereby the company supplies certain components to the joint venture on a cost-plus basis. The company is not the primary beneficiary of the joint venture, as the joint venture partner has shared or absolute control over key manufacturing operations, labor relationships, financing activities and certain other functions of the joint venture. Therefore, the company does not consolidate the joint venture. At December�31, 2014 and September 30, 2014, the companys investment in the joint venture was $43 million. This amount is included in investments in non-consolidated joint ventures in the table above.
14. Other Current Liabilities
���� Other current liabilities are summarized as follows (in millions):
December�31, 2014 | September�30, 2014 | ||||||
Compensation and benefits | $ | 111 | $ | 146 | |||
Income taxes | 10 | 8 | |||||
Taxes other than income taxes | 44 | 50 | |||||
Accrued interest | 12 | 15 | |||||
Product warranties | 23 | 27 | |||||
Restructuring (see Note 6) | 10 | 9 | |||||
Asbestos-related liabilities (see Note 19) | 16 | 17 | |||||
Indemnity obligations (see Note 19) | 8 | 11 | |||||
Other | 58 | 68 | |||||
Other current liabilities | $ | 292 | $ | 351 | |||
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 companys obligation is probable and can be reasonably estimated. Policy repair actions to maintain customer relationships are recorded as other liabilities at the time an obligation is probable and can be reasonably estimated. Product warranties, including recall campaigns, not expected to be paid within one year are recorded as a non-current liability.
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A summary of the changes in product warranties is as follows (in millions):
Three Months Ended December 31, | |||||||
2014 | 2013 | ||||||
Total product warranties beginning of period | $ | 51 | $ | 57 | |||
Accruals for product warranties | 2 | 4 | |||||
Payments | (5 | ) | (4 | ) | |||
Change in estimates and other | 1 | 1 | |||||
Total product warranties end of period | 49 | 58 | |||||
Less: Non-current product warranties | (26 | ) | (34 | ) | |||
Product warranties current | $ | 23 | $ | 24 | |||
15. Other Liabilities
Other liabilities are summarized as follows (in millions):
December�31, 2014 | September�30, 2014 | ||||||
Asbestos-related liabilities (see Note 19) | $ | 105 | $ | 105 | |||
Restructuring (see Note 6) | 2 | 2 | |||||
Non-current deferred income tax liabilities | 103 | 103 | |||||
Liabilities for uncertain tax positions | 12 | 14 | |||||
Product warranties (see Note 14) | 26 | 24 | |||||
Environmental (see Note 19) | 8 | 7 | |||||
Indemnity obligations (see Note 19) | 16 | 17 | |||||
Other | 35 | 37 | |||||
Other liabilities | $ | 307 | $ | 309 | |||
16. Long-Term Debt
�����Long-Term Debt, net of discounts where applicable, is summarized as follows (in millions):
December�31, 2014 | September�30, 2014 | ||||||
4.625 percent convertible notes due 2026 (1) | 55 | 55 | |||||
4.0 percent convertible notes due 2027 (1) | 162 | 162 | |||||
7.875 percent convertible notes due 2026�(net of issuance discount of $20 and $21, respectively) (1) | 230 | 229 | |||||
6.75 percent notes due 2021 (2) | 275 | 275 | |||||
6.25 percent notes due 2024 (2) | 225 | 225 | |||||
Capital lease obligation | 24 | 26 | |||||
Export financing arrangements | 26 | 31 | |||||
Unamortized discount on convertible notes | (30 | ) | (31 | ) | |||
Subtotal | 967 | 972 | |||||
Less: current maturities | (5 | ) | (7 | ) | |||
Long-term debt | $ | 962 | $ | 965 | |||
(1) The 4.625 percent, 4.0 percent and 7.875 percent convertible notes contain a put and call feature, which allows for earlier redemption beginning in 2016, 2019 and 2020, respectively.
(2) The 6.75 percent and 6.25 percent notes contain a call option, which allows for early redemption.
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Revolving Credit Facility
On February 13, 2014, the company amended and restated its senior secured revolving credit facility. Pursuant to the revolving credit agreement as amended, the company has a $499 million revolving credit facility, $89 million of which matures in April 2017 for banks not electing to extend their commitments under the revolving credit facility, and $410 million of which matures in February 2019. The availability under this facility is dependent upon various factors, including 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 companys priority debt (consisting principally of amounts outstanding under the revolving credit facility, U.S. accounts receivable securitization and factoring programs, and third-party non-working capital foreign debt) to EBITDA and (ii) the amount of annual capital expenditures. The company is required to maintain a total priority-debt-to-EBITDA ratio, as defined in the agreement, of 2.25 to 1.00 or less as of the last day of each fiscal quarter throughout the term of the agreement.
The availability under the revolving credit facility is also subject to a collateral test, pursuant to which borrowings on the revolving credit facility cannot exceed 1.0x the collateral test value. The collateral test is performed on a quarterly basis. At December�31, 2014, the revolving credit facility was collateralized by approximately $606 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 companys current corporate credit rating for senior secured facilities. At December�31, 2014, the margin over LIBOR rate was 350 basis points and the commitment fee was 50 basis points. Overnight revolving credit loans are at the prime rate plus a margin of 250 basis points.
Certain of the companys subsidiaries, as defined in the revolving credit agreement, irrevocably and unconditionally guarantee amounts outstanding under the revolving credit facility. Similar subsidiary guarantees are provided for the benefit of the holders of the publicly held notes outstanding under the companys indentures (see Note 22).
No borrowings were outstanding under the revolving credit facility at December�31, 2014 and September 30, 2014. The amended and extended revolving credit facility includes $100 million of availability for the issuance of letters of credit. At December�31, 2014 and September 30, 2014, there were no letters of credit outstanding under the revolving credit facility.
Debt Securities
In December 2014, the company filed a shelf registration statement with the Securities and Exchange Commission, registering an unlimited amount of debt and/or equity securities that the company may offer in one or more offerings on terms to be determined at the time of sale.�The December 2014 shelf registration statement superseded and replaced the shelf registration statement filed in February 2012, as amended.
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 time. The financing rate is equal to the 30-day LIBOR plus 475 basis points per annum. Under this arrangement, the company can also enter into lease arrangements with GE Capital for completed equipment. The lease term is 60 months and the lease interest rate is equal to the 5-year Swap Rate published by the Federal Reserve Board plus 564 basis points. As of December�31, 2014 and September 30, 2014, the company had $13 million outstanding under this capital lease arrangement. In addition, the company had another $11 million and $13 million outstanding through other capital lease arrangements at December�31, 2014 and September 30, 2014, respectively.
Letter of Credit Facilities
On February 21, 2014, the company entered into an arrangement to amend and restate the letter of credit facility with Citicorp USA, Inc., as administrative agent and issuing bank, and the other lenders party thereto. Under the terms of this amended credit agreement, the company has the right to obtain the issuance, renewal, extension and increase of letters of credit up to an aggregate availability of $30 million through December 19, 2015. From December 20, 2015 through March 19, 2019, the aggregate availability is $25 million. This facility contains covenants and events of default generally similar to those existing in the companys public debt indentures. There were $25 million of letters of credit outstanding under this facility at December�31, 2014 and September 30, 2014. In addition, the company had another $8 million and $9 million of letters of credit outstanding through other letter of credit facilities at December�31, 2014 and September�30, 2014, respectively.
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Export financing arrangements
The company entered into a number of export financing arrangements through its Brazilian subsidiary during fiscal year 2014.� The export financing arrangements are issued under an incentive program of the Brazilian government to fund working capital for Brazilian companies in exportation programs.� The arrangements bear interest at 5.5 percent and have maturity dates in 2016 and 2017. There were $26 million and $29 million outstanding under these arrangements�at December 31, 2014 and September 30, 2014, respectively. In addition, the company had another $2 million outstanding through a similar arrangement through its India subsidiary at September 30, 2014, which had no outstanding balance at December 31, 2014.
Other
One of the company's consolidated joint ventures in China participates in a bills of exchange program to settle its obligations with its trade suppliers. These programs are common in China and generally require the participation of local banks. Under these programs, the company's joint venture issues notes payable through the participating banks to its trade suppliers. If the issued notes payable remain unpaid on their respective due dates, this could constitute an event of default under the companys revolving credit facility if the defaulted amount exceeds $35 million per bank. As of December�31, 2014 and September 30, 2014, the company had $22 million and $32 million, respectively, outstanding under this program at more than one bank.
17. Financial Instruments
Fair values of financial instruments are summarized as follows (in millions):
December�31, 2014 | September�30, 2014 | ||||||||||||||
Carrying Value | Fair Value | Carrying Value | Fair Value | ||||||||||||
Cash and cash equivalents | $ | 214 | $ | 214 | $ | 247 | $ | 247 | |||||||
Short-term debt | 5 | 5 | 7 | 7 | |||||||||||
Long-term debt | 962 | 1,197 | 965 | 1,143 | |||||||||||
Foreign exchange forward contracts (asset) | 2 | 2 | 2 | 2 | |||||||||||
Short-term foreign currency option contracts (asset) | 4 | 4 | 2 | 2 | |||||||||||
Long-term foreign currency option contracts (asset) | 1 | 1 | 1 | 1 | |||||||||||
The following table reflects the offsetting of derivative assets and liabilities (in millions):
December 31, 2014 | September�30, 2014 | ||||||||||||||||
Gross Amounts Recognized | Gross Amounts Offset | Net Amounts Reported | Gross Amounts Recognized | Gross Amounts Offset | Net Amounts Reported | ||||||||||||
Derivative Asset | |||||||||||||||||
Foreign exchange forward contract | 3 | (1 | ) | 2 | 2 | 2 | |||||||||||
Derivative Liabilities | |||||||||||||||||
Foreign exchange forward contract | 2 | (2 | ) | ||||||||||||||
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. |
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" | Level 3 inputs are unobservable inputs, including inputs that are available in situations where there is little, if any, market activity for the related instrument. |
In instances where inputs used to measure fair value fall into different levels in the above fair value hierarchy, fair value measurements in their entirety are categorized based on the lowest priority level input that is significant to the valuation. The company's assessment of the significance of particular inputs to these fair value measurements requires judgment and considers factors specific to each asset or liability.
Fair value of financial instruments by the valuation hierarchy at December�31, 2014 is as follows (in millions):
Level 1 | Level 2 | Level 3 | |||||||||
Cash and cash equivalents | $ | 214 | $ | $ | |||||||
Short-term debt | 5 | ||||||||||
Long-term debt | 1,152 | 45 | |||||||||
Foreign exchange forward contracts (asset) | 2 | ||||||||||
Short-term foreign currency option contracts | 4 | ||||||||||
Long-term foreign currency option contracts | 1 | ||||||||||
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 December�31, 2014 or September�30, 2014.
���� 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. For derivative instruments that are designated and qualify as a cash flow hedge, the effective portion of changes in the fair value of the contracts is recorded in Accumulated Other Comprehensive Loss (AOCL) in the statement of shareowners equity and is recognized in operating income when the underlying forecasted transaction impacts earnings.
Foreign currency option contracts - The company uses option contracts to mitigate foreign currency exposure on expected future Indian Rupee denominated purchases. The contracts were entered into during April 2014 with effective dates from the start of fiscal year 2015 through the end of fiscal year 2016. The fair value of foreign currency option contracts is based on a third-party proprietary model, which incorporates inputs at varying unobservable weights of quoted spot rates, market volatility, forward rates, and time utilizing market instruments with similar quality and maturity characteristics. The company did not elect hedge accounting for these derivatives. Changes in fair value associated with these contracts are recorded in cost of sales in the consolidated statement of operations. Net unrealized losses totaled $1 million as of December 31, 2014.
The company generally does not hedge against its foreign currency exposure related to translations to U.S. dollars of financial results denominated in foreign currencies. In November 2014, the company entered into a series of foreign currency option contracts with a total notional amount of $48 million to reduce volatility in the translation of Brazilian Real earnings to U.S. dollars. These foreign currency option contracts do not qualify for a hedge accounting election but are expected to mitigate foreign currency translation exposure of Brazilian Real earnings to U.S. dollars. The fair value of the foreign currency option contracts is based on a third-party proprietary model, which incorporates inputs at varying unobservable weights of quoted spot rates, market volatility, forward rates, and time utilizing market instruments with similar quality and maturity characteristics. Changes in fair value associated with these contracts are recorded in other income (expense), net, in the consolidated statement of operations. Net unrealized gains totaled $1 million as of December 31, 2014. The contracts effective dates begin at the start of the second quarter of fiscal year 2015 and mature at the end of fiscal year 2015.
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18. Retirement Benefit Liabilities
���� Retirement benefit liabilities consisted of the following (in millions):
December�31, 2014 | September�30, 2014 | ||||||
Retiree medical liability | $ | 473 | $ | 479 | |||
Pension liability | 312 | 323 | |||||
Other | 17 | 16 | |||||
Subtotal | 802 | 818 | |||||
Less: current portion (included in compensation and benefits, Note 14) | (43 | ) | (43 | ) | |||
Retirement benefits | $ | 759 | $ | 775 | |||
The components of net periodic pension and retiree medical expense included in continuing operations for the three months ended December 31 are as follows (in millions):
2014 | 2013 | ||||||||||||||
Pension | Retiree Medical | Pension | Retiree Medical | ||||||||||||
Interest cost | 18 | 5 | 20 | 6 | |||||||||||
Assumed return on plan assets | (28 | ) | (26 | ) | |||||||||||
Amortization of prior service costs | (2 | ) | |||||||||||||
Recognized actuarial loss | 7 | 5 | 6 | 6 | |||||||||||
Total expense (income) | $ | (3 | ) | $ | 10 | $ | $ | 10 | |||||||
19. Contingencies
Environmental
���� Federal, state and local requirements relating to the discharge of substances into the environment, the disposal of hazardous wastes and other activities affecting the environment have, and will continue to have, an impact on the operations of the company. The process of estimating environmental liabilities is complex and dependent upon evolving physical and scientific data at the sites, uncertainties as to remedies and technologies to be used and the outcome of discussions with regulatory agencies. The company records liabilities for environmental issues in the accounting period in which they are considered to be probable and the cost can be reasonably estimated. At environmental sites in which more than one potentially responsible party has been identified, the company records a liability for its allocable share of costs related to its involvement with the site, as well as an allocable share of costs related to insolvent parties or unidentified shares. At environmental sites in which Meritor is the only potentially responsible party, the company records a liability for the total probable and estimable costs of remediation before consideration of recovery from insurers or other third parties.
���� The company has been designated as a potentially responsible party at nine Superfund sites, excluding sites as to which the companys records disclose no involvement or as to which the companys liability has been finally determined. Management estimates the total reasonably possible costs the company could incur for the remediation of Superfund sites at December�31, 2014 to be approximately $17 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.
���� In addition to the Superfund sites, various other lawsuits, claims and proceedings have been asserted against the company, alleging violations of federal, state and local environmental protection requirements, or seeking remediation of alleged environmental impairments, principally at previously disposed-of properties. For these matters, management has estimated the total reasonably possible costs the company could incur at December�31, 2014 to be approximately $33 million, of which $16 million is probable and recorded as a liability.
21
�����Included in the companys 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 0.50 to 2.50 percent and is approximately $9 million at December�31, 2014. The undiscounted estimate of these costs is approximately $9 million.
���� The following are the components of the Superfund and non-Superfund environmental reserves (in millions):
Superfund Sites | Non-Superfund Sites | Total | |||||||||
Beginning balance at September 30, 2014 | $ | 2 | $ | 17 | $ | 19 | |||||
Payments and other | (1 | ) | (1 | ) | |||||||
Accruals | |||||||||||
Balance at December 31, 2014 | $ | 2 | $ | 16 | $ | 18 | |||||
Environmental reserves are included in Other Current Liabilities (see Note 14) and Other Liabilities (see Note 15) in the condensed consolidated balance sheet.
���� The actual amount of costs or damages for which the company may be held responsible could materially exceed the foregoing estimates because of uncertainties, including the financial condition of other potentially responsible parties, the success of the remediation, discovery of new contamination and other factors that make it difficult to predict actual costs accurately. However, based on managements 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 companys 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 companys estimates. Management cannot assess the possible effect of compliance with future requirements.
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 5,600 and 5,700 pending asbestos-related claims at December�31, 2014 and September�30, 2014, respectively. Although Maremont has been named in these cases, in the cases where actual injury has been alleged, very few claimants have established that a Maremont product caused their injuries. Plaintiffs lawyers often sue dozens or even hundreds of defendants in individual lawsuits, seeking damages against all named defendants irrespective of the disease or injury and irrespective of any causal connection with a particular product. For these reasons, the total number of claims filed is not necessarily the most meaningful factor in determining Maremont's asbestos-related liability.
���� Maremonts asbestos-related reserves and corresponding asbestos-related recoveries are summarized as follows (in millions):
December�31, 2014 | September�30, 2014 | ||||||
Pending and future claims | $ | 73 | $ | 73 | |||
Billed but unpaid claims | 2 | 3 | |||||
Asbestos-related liabilities | $ | 75 | $ | 76 | |||
Asbestos-related insurance recoveries | $ | 46 | $ | 49 | |||
A portion of the asbestos-related recoveries and reserves are included in Other Current Assets and Liabilities, with the majority of the amounts recorded in Other Assets and Liabilities (see Notes 11, 13, 14 and 15).
22
�������� 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 a reasonable and probable estimate that consisted of a range of equally likely possibilities of Maremont's obligation for asbestos personal injury claims over the next ten years of $73 million to $105 million. Management recognized a liability of $73 million as of December�31, 2014 and September�30, 2014 for pending and future claims over the next ten years. The ultimate cost of resolving pending and future claims is estimated based on the history of claims and expenses for plaintiffs represented by law firms in jurisdictions with an established history with Maremont. Historically, Maremont has recognized incremental insurance receivables associated with recoveries expected for asbestos-related liabilities as the estimate of asbestos-related liabilities for pending and future claim changes. However, Maremont currently expects to exhaust the limits of its settled insurance coverage prior to the end of the ten-year forecasted liability period. Maremont believes it has additional insurance coverage; however, certain carriers have disputed coverage under policies they issued (see "Recoveries" below).
�����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 2024; |
" | Maremont believes that the litigation environment could change significantly beyond ten years and that the reliability of estimates of future probable expenditures in connection with asbestos-related personal injury claims will decline for each year further in the future. As a result, estimating a probable liability beyond ten years is difficult and uncertain; |
" | On a per claim basis, defense and processing costs for pending and future claims will be at the level consistent with Maremonts prior experience; |
" | Potential payments made to claimants from other sources, including other defendants and 524(g) trusts favorably impact Maremont'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 insurance receivable related to asbestos-related liabilities is $46 million and $49 million as of December�31, 2014 and September�30, 2014, respectively. The receivable is for coverage provided by one insurance carrier based on a coverage in place agreement. Maremont currently expects to exhaust the remaining limits provided by this coverage sometime in the next ten years. Maremont maintained insurance coverage with other insurance carriers that management believes covers indemnity and defense costs. Maremont has incurred liabilities allocable to these policies but has not yet billed these insurance carriers, and no receivable has been recorded for these policies. During fiscal year 2013, Maremont reinitiated a lawsuit against these carriers, seeking a declaration of its rights to insurance for asbestos claims and to facilitate an orderly and timely collection of insurance proceeds. The difference between the estimated liability and insurance receivable is primarily related to exhaustion of settled insurance coverage within the forecasted period and proceeds 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.
���� 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; Maremonts approach to defending claims; or payments to plaintiffs from other defendants. Estimated recoveries are influenced by coverage issues among insurers and the continuing solvency of various insurance companies. If the assumptions with respect to the estimation period, the nature of pending and future claims, the cost to resolve claims and the amount of available insurance prove to be incorrect, the actual amount of liability for Maremonts asbestos-related claims, and the effect on the company, could differ materially from current estimates and, therefore, could have a material impact on the companys financial condition and results of operations.
23
���� Rockwell International ("Rockwell") ArvinMeritor, Inc. (AM), a subsidiary of Meritor, along with many other companies, has also been named as a defendant in lawsuits alleging personal injury as a result of exposure to asbestos used in certain components of Rockwell products many years ago. Liability for these claims was transferred at the time of the spin-off of the automotive business from Rockwell in 1997. Rockwell had approximately 2,900 and 2,800 pending active asbestos claims in lawsuits that name AM, together with many other companies, as defendants at December�31, 2014 and September�30, 2014, respectively.
A significant portion of the claims do not identify any of Rockwells products or specify which of the claimants, if any, were exposed to asbestos attributable to Rockwells products, and past experience has shown that the vast majority of the claimants will likely never identify any of Rockwells 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 Rockwells products, management nevertheless believes it has meritorious defenses, in substantial part due to the integrity of the products involved and the lack of any impairing medical condition on the part of many claimants.
���� The Rockwell legacy asbestos-related reserves and corresponding asbestos-related recoveries are summarized as follows (in millions):
December�31, 2014 | September�30, 2014 | ||||||
Pending and future claims | $ | 48 | $ | 48 | |||
Billed but unpaid claims | 2 | 2 | |||||
Asbestos-related liabilities | $ | 50 | $ | 50 | |||
Asbestos-related insurance recoveries | $ | 11 | $ | 11 | |||
Pending and Future Claims: 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. Bates White prepares these cost estimates annually in September. As of September�30, 2014, Bates White provided a reasonable and probable estimate that consisted of a range of equally likely possibilities of Rockwells obligation for asbestos personal injury claims over the next ten years of $48 million to $62 million. Management recognized a liability for the pending and future claims over the next ten years of $48 million as of December�31, 2014 and September�30, 2014. 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.
��Assumptions: The following assumptions were made by the company after consultation with Bates White and are included in their study:
" | Pending and future claims were estimated for a ten-year period ending in fiscal year 2024; |
" | The company believes that the litigation environment could change significantly beyond ten years and that the reliability of estimates of future probable expenditures in connection with asbestos-related personal injury claims will decline for each year further in the future. As a result, estimating a probable liability beyond ten years is difficult and uncertain; |
" | On a per claim basis, defense and processing costs for pending and future claims will be at the level consistent with the company's prior experience; |
" | 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 Rockwell cannot be reasonably estimated. |
24
Recoveries: The insurance receivable related to asbestos-related liabilities is $11 million as of each of December�31, 2014 and September�30, 2014. Included in these amounts are insurance receivables of $8 million as of each of December�31, 2014 and September�30, 2014 that are associated with policies in dispute. Rockwell has 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 in various stages of the litigation process. 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. The amounts recognized for policies in dispute are based on consultation with advisors, status of settlement negotiations with certain insurers and underlying analysis performed by management. The remaining receivable recognized is related to coverage provided by one carrier based on a coverage-in-place insurance arrangement. If the assumptions with respect to the estimation period, the nature of pending claims, the cost to resolve claims and the amount of available insurance prove to be incorrect, the actual amount of liability for Rockwell asbestos-related claims, and the effect on the company, could differ materially from current estimates and, therefore, could have a material impact on the companys financial condition and results of operations.
Indemnifications
The company has provided indemnifications in conjunction with certain transactions, primarily divestitures. These indemnities address a variety of matters, which may include environmental, tax, asbestos and employment-related matters, and the periods of indemnification vary in duration.
In December 2005, the company guaranteed a third partys 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 companys 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 December�31, 2014 and September�30, 2014, the remaining estimated liability for this matter was approximately $14 million.
���� 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 December�31, 2014 and September�30, 2014, the company has recognized estimates for such indemnities, primarily related to income tax matters, of $1 million and $2 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 December�31, 2014 and September�30, 2014 is approximately $2 million and $5 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 identified a non-safety related, potential product performance issue arising from a defective supplier component. During fiscal year 2013, the company notified all major customers and initiated a sampling campaign. Management estimated the total costs the company could incur for a full campaign to be in the range of $12 million to $20 million, of which $12 million was recorded as a specific warranty contingency reserve. In the fourth quarter of fiscal 2013, the company received $5 million of non-cash cost recovery from the component supplier. During the second half of fiscal year 2014, the company worked with customers to determine the appropriate next steps. As of September�30, 2014, no field failures were identified during the sampling campaign, and only minor defects were found in a small number of components tested. As a result, in the fourth quarter of fiscal year 2014, the company determined a full campaign to be unnecessary and moved to a fix-as-find approach with an extended warranty, thereby reducing the accrual significantly. As of December 31, 2014 and September�30, 2014, the estimated cost the company could incur for this non-safety related, potential product performance issue was $3 million.
25
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. At December�31, 2014 and September 30, 2014, the company recorded $6 million as its estimate of the probable liability.
In the fourth quarter of fiscal year 2013, the company identified additional sales transactions for which value added tax was required to be remitted. At December�31, 2014 and September 30, 2014, the company recorded a $5 million liability primarily associated with tax years 2009 through 2013.
In addition, various lawsuits, claims and proceedings, other than those specifically disclosed in the condensed consolidated financial statements, have been or may be instituted or asserted against the company, relating to the conduct of the companys 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 companys business, financial condition, results of operations or cash flows.�
20. Accumulated Other Comprehensive Loss (AOCL)
���� The components of AOCL and the changes in AOCL by components, net of tax, for three months ended December�31, 2014 and 2013 are as follows (in millions):
Foreign Currency Translation | Employee Benefit Related Adjustments | Unrealized Loss, net of tax | Total | ||||||||||||
Balance at September 30, 2014 | $ | 41 | $ | (789 | ) | $ | (1 | ) | $ | (749 | ) | ||||
Other comprehensive loss before reclassification | (34 | ) | (1 | ) | (35 | ) | |||||||||
Amounts reclassified from accumulated other comprehensive loss - net of tax | 1 | 12 | 13 | ||||||||||||
Net current-period other comprehensive income | $ | (33 | ) | $ | 12 | $ | (1 | ) | $ | (22 | ) | ||||
Balance at December 31, 2014 | $ | 8 | $ | (777 | ) | $ | (2 | ) | $ | (771 | ) | ||||
| � | Details about Accumulated Other Comprehensive Income Components | Amount Reclassified from Accumulated Other Comprehensive Income | Affected Line Item in the Consolidated Statement of Operations | ||||
| � | Employee Benefit Related Adjustment | ||||||
| � | Actuarial losses | $ | 12 | (a)� | |||
| � | 12 | Total before tax | |||||
| � | Tax (benefit) expense | ||||||
| � | 12 | Net of tax | |||||
| � | |||||||
| � | Foreign Currency Translation Related Adjustment | ||||||
| � | Other reclassification adjustment | $ | 1 | (b)� | |||
| � | 1 | Total before tax | |||||
| � | Tax (benefit) expense | ||||||
| � | 1 | Net of tax | |||||
| � | |||||||
| � | Total reclassifications for the period | $ | 13 | Net of tax | |||
| � | |||||||
| � | (a) �These accumulated other comprehensive income components are included in the computation of net periodic pension and retiree medical expense (see Note 18 for additional details). | ||||||
| � | |||||||
| � | (b) �These accumulated other comprehensive income components are included in the computation of loss from discontinued operations (see Note 4). | ||||||
| � | |||||||
26
Foreign Currency Translation | Employee Benefit Related Adjustments | Unrealized Loss, net of tax | Total | ||||||||||||
Balance at September 30, 2013 | $ | 61 | $ | (792 | ) | $ | (3 | ) | $ | (734 | ) | ||||
Other comprehensive loss before reclassification | (10 | ) | (10 | ) | |||||||||||
Amounts reclassified from accumulated other comprehensive loss - net of tax | 10 | 10 | |||||||||||||
Net current-period other comprehensive income (loss) | $ | (10 | ) | $ | 10 | $ | $ | ||||||||
Balance at December 31, 2013 | $ | 51 | $ | (782 | ) | $ | (3 | ) | $ | (734 | ) | ||||
| � | Details about Accumulated Other Comprehensive Income Components | Amount Reclassified from Accumulated Other Comprehensive Income | Affected Line Item in the Consolidated Statement of Operations | ||||
| � | Employee Benefit Related Adjustment | ||||||
| � | Prior service costs | $ | (2 | ) | (b)� | ||
| � | Actuarial losses | 12 | (b)� | ||||
| � | 10 | Total before tax | |||||
| � | Tax (benefit) expense | ||||||
| � | 10 | Net of tax | |||||
| � | |||||||
| � | Total reclassifications for the period | $ | 10 | Net of tax | |||
| � | |||||||
| � | (b) �These accumulated other comprehensive income components are included in the computation of net periodic pension and retiree medical expense (see Note 18 for additional details). | ||||||
| � | |||||||
21. Business Segment Information
The company defines its operating segments as components of its business where separate financial information is available and is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. The companys Chief Operating Decision Maker (CODM) is the Chief Executive Officer.
����� The company has two reportable segments at December�31, 2014, as follows:
" | The Commercial Truck & Industrial segment supplies drivetrain systems and components, including axles, drivelines and braking and suspension systems, primarily for medium- and heavy-duty trucks, military, construction, bus and coach, fire and emergency and other applications in North America, South America, Europe and Asia Pacific. This segment also includes the company's aftermarket businesses in Asia Pacific and South America; and |
" | The Aftermarket & Trailer segment supplies axles, brakes, drivelines, suspension parts and other replacement parts to commercial vehicle and industrial aftermarket customers. This segment also supplies a wide variety of undercarriage products and systems for trailer applications in North America. |
�����Segment EBITDA is defined as income (loss) from continuing operations before interest expense, income taxes, depreciation and amortization, non-controlling interests in consolidated joint ventures, loss on sale of receivables, restructuring expense 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. Amounts related to prior quarters have been recast to reflect Mascot in discontinued operations (see Note 4).
27
�����Segment information is summarized as follows (in millions):
Commercial Truck & Industrial | Aftermarket & Trailer | Eliminations | Total | ||||||||||||
Three Months Ended December 31, 2014 | |||||||||||||||
External Sales | $ | 678 | $ | 201 | $ | $ | 879 | ||||||||
Intersegment Sales | 25 | 7 | (32 | ) | |||||||||||
Total Sales | $ | 703 | 208 | $ | (32 | ) | $ | 879 | |||||||
Three Months Ended December 31, 2013 | |||||||||||||||
External Sales | $ | 703 | $ | 197 | $ | $ | 900 | ||||||||
Intersegment Sales | 24 | 5 | (29 | ) | |||||||||||
Total Sales | $ | 727 | 202 | $ | (29 | ) | $ | 900 | |||||||
Three Months Ended December 31, | |||||||
2014 | 2013 (2) | ||||||
Segment EBITDA: | |||||||
Commercial Truck & Industrial | $ | 56 | $ | 53 | |||
Aftermarket & Trailer | 25 | 21 | |||||
Segment EBITDA | 81 | 74 | |||||
Unallocated legacy and corporate costs, net (1) | (2 | ) | (2 | ) | |||
Interest expense, net | (19 | ) | (27 | ) | |||
Provision for income taxes | (7 | ) | (11 | ) | |||
Depreciation and amortization | (15 | ) | (16 | ) | |||
Noncontrolling interests | (1 | ) | (2 | ) | |||
Loss on sale of receivables | (2 | ) | (3 | ) | |||
Restructuring costs | (3 | ) | (1 | ) | |||
Income from continuing operations attributable to Meritor, Inc. | $ | 32 | $ | 12 | |||
(1) | Unallocated legacy and corporate costs, net represents items that are not directly related to the company's business segments. These costs primarily include asbestos-related charges, pension and retiree medical costs associated with sold businesses and other legacy costs for environmental and product liability. |
(2) Amounts for prior periods have been recast for discontinued operations.
Segment Assets: | December�31, 2014 | September�30, 2014 | |||||
Commercial Truck & Industrial | $ | 1,688 | $ | 1,755 | |||
Aftermarket & Trailer | 448 | 458 | |||||
Total segment assets | 2,136 | 2,213 | |||||
Corporate(1) | 493 | 533 | |||||
Less: Accounts receivable sold under off-balance sheet factoring programs(2) | (283 | ) | (244 | ) | |||
Total assets | $ | 2,346 | $ | 2,502 | |||
(1)� | Corporate assets consist primarily of cash, deferred income taxes and prepaid pension costs. |
(2)� | At December�31, 2014 and September�30, 2014, segment assets include $283 million and $244 million, respectively, of accounts receivable sold under off-balance sheet accounts receivable factoring programs (see Note 8). These sold receivables are included in segment assets as the CODM reviews segment assets inclusive of these balances. |
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22. Supplemental Guarantor Condensed Consolidating Financial Statements
Article 3-10 of Regulation S-X (S-X Rule 3-10) requires that separate financial information for issuers and guarantors of registered securities be filed in certain circumstances. Certain of the company's 100% owned subsidiaries, as defined in the credit agreement (the Guarantors), irrevocably and unconditionally guarantee amounts outstanding under the senior secured revolving credit facility. Similar subsidiary guarantees were provided for the benefit of the holders of the notes outstanding under the company's indentures (see Note 16).
Schedule I of Article 5-04 of Regulation S-X (S-X Rule 5-04) requires that condensed financial information of the registrant (Parent) be filed when the restricted net assets of consolidated subsidiaries exceed 25 percent of consolidated net assets as of the end of the most recently completed fiscal year.
In lieu of providing separate audited financial statements for the Parent and Guarantors, the company has included the accompanying condensed consolidating financial statements as permitted by S-X Rules 3-10 and 5-04. These condensed consolidating financial statements are presented on the equity method. Under this method, the investments in subsidiaries are recorded at cost and adjusted for the Parent's share of the subsidiary's cumulative results of operations, capital contributions and distribution and other equity changes. The Guarantors are combined in the condensed consolidated financial statements. Certain subsidiaries in China and India are restricted by law from transfer of cash by dividends, loans or advances to Parent, which exceeded 25 percent of consolidated net assets of Parent as of September 30, 2014. As of December�31, 2014, the companys proportionate share of net assets restricted from transfer by law was $34 million.
29
Index������������������������
MERITOR, INC.
CONSOLIDATING STATEMENT OF OPERATIONS
(In millions)
(Unaudited)
Three Months Ended December 31, 2014 | |||||||||||||||||||
Parent | Guarantors | Non- Guarantors | Elims | Consolidated | |||||||||||||||
Sales | |||||||||||||||||||
External | $ | $ | 403 | $ | 476 | $ | $ | 879 | |||||||||||
Subsidiaries | 30 | 16 | (46 | ) | |||||||||||||||
Total sales | 433 | 492 | (46 | ) | 879 | ||||||||||||||
Cost of sales | (14 | ) | (371 | ) | (425 | ) | 46 | (764 | ) | ||||||||||
GROSS MARGIN | (14 | ) | 62 | 67 | 115 | ||||||||||||||
Selling, general and administrative | (18 | ) | (28 | ) | (19 | ) | (65 | ) | |||||||||||
Restructuring costs | (3 | ) | (3 | ) | |||||||||||||||
Other operating income | 1 | 1 | |||||||||||||||||
OPERATING INCOME (LOSS) | (32 | ) | 31 | 49 | 48 | ||||||||||||||
Other income, net | 2 | 2 | |||||||||||||||||
Equity in earnings of affiliates | 7 | 2 | 9 | ||||||||||||||||
Interest income (expense), net | (29 | ) | 7 | 3 | (19 | ) | |||||||||||||
INCOME (LOSS) BEFORE INCOME TAXES | (61 | ) | 45 | 56 | 40 | ||||||||||||||
Provision for income taxes | (7 | ) | (7 | ) | |||||||||||||||
Equity income from continuing operations of subsidiaries | 93 | 45 | (138 | ) | |||||||||||||||
INCOME FROM CONTINUING OPERATIONS | 32 | 90 | 49 | (138 | ) | 33 | |||||||||||||
LOSS FROM DISCONTINUED OPERATIONS, net of tax | (3 | ) | (3 | ) | (3 | ) | 6 | (3 | ) | ||||||||||
NET INCOME | 29 | 87 | 46 | (132 | ) | 30 | |||||||||||||
Less: Net income attributable to noncontrolling interests | (1 | ) | (1 | ) | |||||||||||||||
NET INCOME ATTRIBUTABLE TO MERITOR, INC. | $ | 29 | $ | 87 | $ | 45 | $ | (132 | ) | $ | 29 | ||||||||
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MERITOR, INC.
CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME (LOSS)
(In millions)
(Unaudited)
� | Three Months Ended December 31, 2014 | ||||||||||||||||||
Parent | Guarantors | Non- Guarantors | Elims | Consolidated | |||||||||||||||
Net income | $ | 29 | $ | 87 | $ | 46 | $ | (132 | ) | $ | 30 | ||||||||
Other comprehensive loss | (22 | ) | (27 | ) | (9 | ) | 35 | (23 | ) | ||||||||||
Total comprehensive income | 7 | 60 | 37 | (97 | ) | 7 | |||||||||||||
Less: Comprehensive income attributable to noncontrolling interests | |||||||||||||||||||
Comprehensive income attributable to Meritor, Inc. | $ | 7 | $ | 60 | $ | 37 | $ | (97 | ) | $ | 7 | ||||||||
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Index������������������������
MERITOR, INC.
CONSOLIDATING STATEMENT OF OPERATIONS
(In millions)
(Unaudited)
Three Months Ended December 31, 2013 | |||||||||||||||||||
Parent | Guarantors | Non- Guarantors | Elims | Consolidated | |||||||||||||||
Sales | |||||||||||||||||||
External | $ | $ | 309 | $ | 591 | $ | $ | 900 | |||||||||||
Internal | 33 | 14 | (47 | ) | |||||||||||||||
Total sales | 342 | 605 | (47 | ) | 900 | ||||||||||||||
Cost of sales | (13 | ) | (297 | ) | (532 | ) | 47 | (795 | ) | ||||||||||
GROSS MARGIN | (13 | ) | 45 | 73 | 105 | ||||||||||||||
Selling, general and administrative | (17 | ) | (23 | ) | (19 | ) | (59 | ) | |||||||||||
Restructuring costs | (1 | ) | (1 | ) | |||||||||||||||
Other operating expense | (1 | ) | (1 | ) | |||||||||||||||
OPERATING INCOME (LOSS) | (30 | ) | 21 | 53 | 44 | ||||||||||||||
Equity in earnings of affiliates | 6 | 2 | 8 | ||||||||||||||||
Interest income (expense), net | (34 | ) | 9 | (2 | ) | (27 | ) | ||||||||||||
INCOME (LOSS) BEFORE INCOME TAXES | (64 | ) | 36 | 53 | 25 | ||||||||||||||
Provision for income taxes | (2 | ) | (9 | ) | (11 | ) | |||||||||||||
Equity income from continuing operations of subsidiaries | 76 | 38 | (114 | ) | |||||||||||||||
INCOME FROM CONTINUING OPERATIONS | 12 | 72 | 44 | (114 | ) | 14 | |||||||||||||
LOSS FROM DISCONTINUED OPERATIONS, net of tax | (1 | ) | (1 | ) | (1 | ) | 2 | (1 | ) | ||||||||||
NET INCOME | 11 | 71 | 43 | (112 | ) | 13 | |||||||||||||
Less: Net income attributable to noncontrolling interests | (2 | ) | (2 | ) | |||||||||||||||
NET INCOME ATTRIBUTABLE TO MERITOR, INC. | $ | 11 | $ | 71 | $ | 41 | $ | (112 | ) | $ | 11 | ||||||||
32
MERITOR, INC.
CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME (LOSS)
(In millions)
(Unaudited)
Three Months Ended December 31, 2013 | |||||||||||||||||||
Parent | Guarantors | Non- Guarantors | Elims | Consolidated | |||||||||||||||
Net income | $ | 11 | $ | 71 | $ | 43 | $ | (112 | ) | $ | 13 | ||||||||
Other comprehensive income (loss) | 5 | (11 | ) | 6 | |||||||||||||||
Total comprehensive income | 11 | 76 | 32 | (106 | ) | 13 | |||||||||||||
Less: Comprehensive income attributable to noncontrolling interests | (2 | ) | (2 | ) | |||||||||||||||
Comprehensive income attributable to Meritor, Inc. | $ | 11 | $ | 76 | $ | 30 | $ | (106 | ) | $ | 11 | ||||||||
33
December�31, 2014 | |||||||||||||||||||
Parent | Guarantors | Non- Guarantors | Elims | Consolidated | |||||||||||||||
CURRENT ASSETS: | |||||||||||||||||||
Cash and cash equivalents | $ | 67 | $ | 2 | $ | 145 | $ | $ | 214 | ||||||||||
Receivables trade and other, net | 1 | 39 | 471 | 511 | |||||||||||||||
Inventories | 165 | 214 | 379 | ||||||||||||||||
Other current assets | 11 | 19 | 28 | 58 | |||||||||||||||
TOTAL CURRENT ASSETS | 79 | 225 | 858 | 1,162 | |||||||||||||||
NET PROPERTY | 13 | 156 | 238 | 407 | |||||||||||||||
GOODWILL | 277 | 146 | 423 | ||||||||||||||||
OTHER ASSETS | 75 | 127 | 152 | 354 | |||||||||||||||
INVESTMENTS IN SUBSIDIARIES | 2,236 | 304 | (2,540 | ) | |||||||||||||||
TOTAL ASSETS | $ | 2,403 | $ | 1,089 | $ | 1,394 | $ | (2,540 | ) | $ | 2,346 | ||||||||
CURRENT LIABILITIES: | |||||||||||||||||||
Short-term debt | $ | 1 | $ | 3 | $ | 1 | $ | $ | 5 | ||||||||||
Accounts and notes payable | 51 | 208 | 338 | 597 | |||||||||||||||
Other current liabilities | 86 | 69 | 137 | 292 | |||||||||||||||
TOTAL CURRENT LIABILITIES | 138 | 280 | 476 | 894 | |||||||||||||||
LONG-TERM DEBT | 918 | 9 | 35 | 962 | |||||||||||||||
RETIREMENT BENEFITS | 646 | 113 | 759 | ||||||||||||||||
INTERCOMPANY PAYABLE (RECEIVABLE) | 1,256 | (1,705 | ) | 449 | |||||||||||||||
OTHER LIABILITIES | 48 | 210 | 49 | 307 | |||||||||||||||
EQUITY (DEFICIT) ATTRIBUTABLE TO �������MERITOR, INC. | (603 | ) | 2,295 | 245 | (2,540 | ) | (603 | ) | |||||||||||
NONCONTROLLING INTERESTS | 27 | 27 | |||||||||||||||||
TOTAL LIABILITIES AND EQUITY (DEFICIT) | $ | 2,403 | $ | 1,089 | $ | 1,394 | $ | (2,540 | ) | $ | 2,346 | ||||||||
34
September�30, 2014 | |||||||||||||||||||
Parent | Guarantors | Non- Guarantors | Elims | Consolidated | |||||||||||||||
CURRENT ASSETS: | |||||||||||||||||||
Cash and cash equivalents | $ | 71 | $ | 5 | $ | 171 | $ | $ | 247 | ||||||||||
Receivables trade and other, net | 1 | 45 | 564 | 610 | |||||||||||||||
Inventories | 151 | 228 | 379 | ||||||||||||||||
Other current assets | 9 | 18 | 29 | 56 | |||||||||||||||
TOTAL CURRENT ASSETS | 81 | 219 | 992 | 1,292 | |||||||||||||||
NET PROPERTY | 13 | 158 | 253 | 424 | |||||||||||||||
GOODWILL | 277 | 154 | 431 | ||||||||||||||||
OTHER ASSETS | 75 | 128 | 152 | 355 | |||||||||||||||
INVESTMENTS IN SUBSIDIARIES | 2,185 | 267 | (2,452 | ) | |||||||||||||||
TOTAL ASSETS | $ | 2,354 | $ | 1,049 | $ | 1,551 | $ | (2,452 | ) | $ | 2,502 | ||||||||
CURRENT LIABILITIES: | |||||||||||||||||||
Short-term debt | $ | 1 | $ | 3 | $ | 3 | $ | $ | 7 | ||||||||||
Accounts and notes payable | 46 | 230 | 404 | 680 | |||||||||||||||
Other current liabilities | 97 | 87 | 167 | 351 | |||||||||||||||
TOTAL CURRENT LIABILITIES | 144 | 320 | 574 | 1,038 | |||||||||||||||
LONG-TERM DEBT | 916 | 10 | 39 | 965 | |||||||||||||||
RETIREMENT BENEFITS | 656 | 119 | 775 | ||||||||||||||||
INTERCOMPANY PAYABLE (RECEIVABLE) | 1,198 | (1,736 | ) | 538 | |||||||||||||||
OTHER LIABILITIES | 52 | 208 | 49 | 309 | |||||||||||||||
EQUITY (DEFICIT) ATTRIBUTABLE TO �������MERITOR, INC. | (612 | ) | 2,247 | 205 | (2,452 | ) | (612 | ) | |||||||||||
NONCONTROLLING INTERESTS | 27 | 27 | |||||||||||||||||
TOTAL LIABILITIES AND EQUITY (DEFICIT) | $ | 2,354 | $ | 1,049 | $ | 1,551 | $ | (2,452 | ) | $ | 2,502 | ||||||||
35
Three Months Ended December 31, 2014 | |||||||||||||||||||
Parent | Guarantors | Non- Guarantors | Elims | Consolidated | |||||||||||||||
CASH FLOWS PROVIDED BY (USED FOR) �������OPERATING ACTIVITIES | $ | (14 | ) | $ | 3 | $ | 2 | $ | $ | (9 | ) | ||||||||
INVESTING ACTIVITIES | |||||||||||||||||||
Capital expenditures | (1 | ) | (5 | ) | (6 | ) | (12 | ) | |||||||||||
CASH USED FOR INVESTING ACTIVITIES | (1 | ) | (5 | ) | (6 | ) | (12 | ) | |||||||||||
FINANCING ACTIVITIES | |||||||||||||||||||
Intercompany advances | 11 | (11 | ) | ||||||||||||||||
Other financing activities | (1 | ) | (3 | ) | (4 | ) | |||||||||||||
CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES | 11 | (1 | ) | (14 | ) | (4 | ) | ||||||||||||
EFFECT OF CHANGES IN FOREIGN CURRENCY �������EXCHANGE RATES ON CASH AND CASH �������EQUIVALENTS | (8 | ) | (8 | ) | |||||||||||||||
CHANGE IN CASH AND CASH EQUIVALENTS | (4 | ) | (3 | ) | (26 | ) | (33 | ) | |||||||||||
CASH AND CASH EQUIVALENTS AT BEGINNING �������OF PERIOD | 71 | 5 | 171 | 247 | |||||||||||||||
CASH AND CASH EQUIVALENTS AT END OF �������PERIOD | $ | 67 | $ | 2 | $ | 145 | $ | $ | 214 | ||||||||||
36
Three Months Ended December 31, 2013 | |||||||||||||||||||
Parent | Guarantors | Non- Guarantors | Elims | Consolidated | |||||||||||||||
CASH FLOWS PROVIDED BY (USED FOR) �������OPERATING ACTIVITIES | $ | (16 | ) | $ | 5 | $ | 7 | $ | $ | (4 | ) | ||||||||
INVESTING ACTIVITIES | |||||||||||||||||||
Capital expenditures | (1 | ) | (5 | ) | (6 | ) | (12 | ) | |||||||||||
CASH USED FOR INVESTING ACTIVITIES | (1 | ) | (5 | ) | (6 | ) | (12 | ) | |||||||||||
FINANCING ACTIVITIES | |||||||||||||||||||
Repayment term loan | (4 | ) | (4 | ) | |||||||||||||||
Intercompany advances | (3 | ) | 3 | ||||||||||||||||
Other financing activities | (1 | ) | 4 | 3 | |||||||||||||||
CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES | (7 | ) | (1 | ) | 7 | (1 | ) | ||||||||||||
EFFECT OF CHANGES IN FOREIGN CURRENCY �������EXCHANGE RATES ON CASH AND CASH �������EQUIVALENTS | (1 | ) | (1 | ) | |||||||||||||||
CHANGE IN CASH AND CASH EQUIVALENTS | (24 | ) | (1 | ) | 7 | (18 | ) | ||||||||||||
CASH AND CASH EQUIVALENTS AT BEGINNING �������OF PERIOD | 144 | 6 | 168 | 318 | |||||||||||||||
CASH AND CASH EQUIVALENTS AT END OF �������PERIOD | $ | 120 | $ | 5 | $ | 175 | $ | $ | 300 | ||||||||||
Basis of Presentation
Certain information and footnote disclosures normally included in financial statements prepared in conformity with generally accepted accounting principles have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. As of December�31, 2014 and September 30, 2014, Parent only obligations included $672 million and $684 million of pension and retiree medical benefits, respectively, (see Note 18). All debt is debt of the Parent other than $48 million and $55 million at December�31, 2014 and September 30, 2014, respectively (see Note 16), and is primarily related to capital lease obligations and lines of credit. Cash dividends paid to the Parent by subsidiaries and investments accounted for by the equity method were $7 million and $5 million for the three months ended December�31, 2014 and 2013, respectively.
37
MERITOR, INC.
Item 2. Managements Discussion and Analysis of Financial Conditions and Results of Operations
OVERVIEW
Meritor, Inc. (the "company", "our", "we" or "Meritor"), headquartered in Troy, Michigan, is a premier global supplier of a broad range of integrated systems, modules and components to original equipment manufacturers ( OEMs ) and the aftermarket for the commercial vehicle, transportation and industrial sectors. The company serves commercial truck, trailer, military, bus and coach, construction, and other industrial OEMs and certain aftermarkets. Meritor common stock is traded on the New York Stock Exchange under the ticker symbol MTOR.
1st Quarter Fiscal Year 2015 results
Our sales for the first quarter of fiscal year 2015 were $879 million, a decrease compared to $900 million in the same period in the prior fiscal year. Our sales decrease was primarily driven by lower commercial truck production in Europe and South America as well as lower revenue from our defense business. Sales were also negatively impacted by the translation effect of the weaker Euro and Brazilian Real. The decrease in sales was partially offset by higher sales in North America, as the Class 8 truck market continued to strengthen.
Net income from continuing operations attributable to the company in the first quarter of fiscal year 2015 was $32 million, or $0.32 per diluted share, compared to $12 million, or $0.12 per diluted share, in the same period in the prior fiscal year. Net income attributable to the company for the first quarter of fiscal year 2015 was $29 million compared to $11 million in the same period in the prior fiscal year.
Adjusted EBITDA (see Non-GAAP Financial Measures below) for the first quarter of fiscal year 2015 was $79 million compared to $72 million in the same period in the prior fiscal year. Our Adjusted EBITDA margin in the first quarter of fiscal year 2015 was 9.0 percent compared to 8.0 percent in the same period a year ago. Total Adjusted EBITDA and Adjusted EBITDA margin increased compared to the prior year primarily due to pricing and material, labor and burden performance.
Cash flows used by operating activities was $9 million in the first quarter of fiscal year 2015 compared to cash flows used for operating activities of $4 million, partly due to higher variable incentive compensation payments than the same period in the prior fiscal year.
Discontinued Operations
In the fourth quarter of fiscal year 2014, we exited our former Mascot business, a remanufacturer and distributor of all makes differentials, transmissions and steering gears. The results of operations and cash flows of our former Mascot business are presented in discontinued operations in the condensed consolidated statement of operations, and condensed consolidated statement of cash flows, and prior period information has been recast to reflect this presentation.
����Trends and Uncertainties
���� Production Volumes
���� The following table reflects estimated commercial truck production volumes for selected original equipment (OE) markets for the three months ended December�31, 2014 and 2013 based on available sources and managements estimates.
Three Months Ended December 31, | Percent | |||||||
2014 | 2013 | Change | ||||||
Estimated Commercial Truck production (in thousands) | ||||||||
North America, Heavy-Duty Trucks | 77 | 60 | 28 | �% | ||||
North America, Medium-Duty Trucks | 58 | 51 | 14 | �% | ||||
Western Europe, Heavy- and Medium-Duty Trucks | 100 | 129 | (22 | )% | ||||
South America, Heavy- and Medium-Duty Trucks | 29 | 43 | (33 | )% | ||||
�����
During fiscal year 2015, we expect a modest increase in production volumes in North America compared to the levels experienced in fiscal year 2014. We expect production volumes in Western Europe to weaken compared to the levels experienced in fiscal year 2014. We anticipate a significant decrease in production volumes in South America resulting from the difficult economic climate. Production volumes in China are expected to decrease slightly during fiscal year 2015 compared to levels experienced in fiscal year 2014. We expect the market in India to be up in fiscal year 2015 due to an improving economic climate.
38
MERITOR, INC.
Sales for our primary military program were at their peak during the third quarter of fiscal year 2012 and began to decline in fiscal year 2013. The program is expected to continue to wind down in 2015. We are working to secure our participation in new military programs with various OEMs. However, failure to secure new military contracts could have a longer-term negative impact on our Commercial Truck and Industrial Segment. In addition, even if sales of our military programs do return to historical levels, the profitability on these sales could be lower than what we have recognized in recent periods.
Industry-Wide Issues
Our business continues to address a number of other challenging industry-wide issues including the following:
" | Uncertainty around the global market outlook; |
" | Volatility in price and availability of steel, components and other commodities; |
" | Disruptions in the financial markets and their impact on the availability and cost of credit; |
" | Volatile energy and increasing transportation costs; |
" | Impact of currency exchange rate volatility; |
" | Consolidation and globalization of OEMs and their suppliers; and |
" | Significant pension and retiree medical health care costs. |
Other
Other significant factors that could affect our results and liquidity in fiscal year 2015 and beyond include:
" | Significant contract awards or losses of existing business or failure to negotiate acceptable terms in contract renewals; |
" | Failure to obtain new business; |
" | Failure to secure new military contracts as our primary military program winds down; |
" | Ability to manage possible adverse effects on our European operations, or financing arrangements related thereto, in the event one or more countries exit the European monetary union; |
" | Ability to work with our customers to manage rapidly changing production volumes; |
" | Ability to recover and timing of recovery of steel price and other cost increases from our customers; |
" | Any unplanned extended shutdowns or production interruptions by us, our customers or our suppliers; |
" | A significant deterioration or slowdown in economic activity in the key markets in which we operate; |
" | Any costs associated with the divesture or wind down of any portion of our businesses; |
" | Higher-than-planned price reductions to our customers; |
" | Potential price increases from our suppliers; |
" | Additional restructuring actions and the timing and recognition of restructuring charges, including any actions associated with the prolonged softness in markets in which we operate; |
" | Higher-than-planned warranty expenses, including the outcome of known or potential recall campaigns; |
" | Our ability to implement planned productivity, cost reduction, and other margin improvement initiatives; |
" | Uncertainties of asbestos claim litigation and the outcome of litigation with insurance companies regarding the scope of coverage and the long-term solvency of our insurance carriers; and |
" | Restrictive government actions by foreign countries (such as restrictions on transfer of funds and trade protection measures, including export duties and quotas and customs duties and tariffs). |
39
MERITOR, INC.
NON-GAAP FINANCIAL MEASURES
In addition to the results reported in accordance with accounting principles generally accepted in the United States (GAAP), we have provided information regarding non-GAAP financial measures. These non-GAAP financial measures include Adjusted income (loss) from continuing operations, Adjusted diluted earnings (loss) per share from continuing operations, Adjusted EBITDA, Adjusted EBITDA margin, and Free cash flow.
���� Adjusted income (loss) from continuing operations and Adjusted diluted earnings (loss) per share from continuing operations are defined as reported income or loss from continuing operations and reported diluted earnings (loss) per share from continuing operations before restructuring expenses, asset impairment charges and other special items as determined by management. Adjusted EBITDA is defined as income (loss) from continuing operations before interest, income taxes, depreciation and amortization, non-controlling interests in consolidated joint ventures, loss on sale of receivables, restructuring expenses, asset impairment charges and other special items as determined by management. Adjusted EBITDA margin is defined as Adjusted EBITDA divided by consolidated sales from continuing operations. Free cash flow is defined as cash flows provided by (used for) operating activities less capital expenditures.
���� Management believes these non-GAAP financial measures are useful to both management and investors in their analysis of the company's financial position and results of operations. In particular, management believes that Adjusted EBITDA, Adjusted EBITDA margin and Adjusted diluted earnings (loss) per share from continuing operations are meaningful measures of performance as they are commonly utilized by management and the investment community to analyze operating performance in our industry. Further, management uses Adjusted EBITDA for planning and forecasting future periods. In addition, we use Segment EBITDA as the primary basis for the Chief Operating Decision Maker (CODM) to evaluate the performance of each of our reportable segments. Segment EBITDA is defined as income (loss) from continuing operations before interest expense, income taxes, depreciation and amortization, non-controlling interests in consolidated joint ventures, loss on sale of receivables, restructuring expense and asset impairment charges. Management believes that Free cash flow is useful in analyzing our ability to service and repay debt and return value directly to shareholders.
���� Adjusted income (loss) from continuing operations, Adjusted diluted earnings (loss) per share from continuing operations and Adjusted EBITDA should not be considered a substitute for the reported results prepared in accordance with GAAP and should not be considered as an alternative to net income as an indicator of our operating performance or to cash flows as a measure of liquidity. Free cash flow should not be considered a substitute for cash provided by (used for) operating activities, or other cash flow statement data prepared in accordance with GAAP, or as a measure of financial position or liquidity. In addition, these non-GAAP cash flow measures do not reflect cash used to repay debt or cash received from the divestitures of businesses or sales of other assets and thus do not reflect funds available for investment or other discretionary uses. These non-GAAP financial measures, as determined and presented by the company, may not be comparable to related or similarly titled measures reported by other companies. Set forth below are reconciliations of these non-GAAP financial measures to the most directly comparable financial measures calculated in accordance with GAAP.
Adjusted income from continuing operations attributable to the company and adjusted diluted earnings per share from continuing operations are reconciled to income from continuing operations attributable to the company and diluted earnings per share from continuing operations below (in millions, except per share amounts).
Three Months Ended December 31, | |||||||
2014 | 2013 (1) | ||||||
Adjusted income from continuing operations attributable to the company, net of tax | $ | 35 | $ | 13 | |||
Restructuring costs, net of tax | (3 | ) | (1 | ) | |||
�����������Income from continuing operations attributable to the company | $ | 32 | $ | 12 | |||
Adjusted diluted earnings per share from continuing operations | $ | 0.35 | $ | 0.13 | |||
Impact of adjustments on diluted earnings per share | (0.03 | ) | (0.01 | ) | |||
�����������Diluted earnings per share from continuing operations | $ | 0.32 | $ | 0.12 | |||
(1) Amounts for prior periods have been recast for discontinued operations.
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MERITOR, INC.
Free cash flow is reconciled to cash flows used for operating activities below (in millions).
Three Months Ended December 31, | |||||||
2014 | 2013�(1) | ||||||
Cash used for operating activities | $ | (9 | ) | $ | (4 | ) | |
Capital expenditures | (12 | ) | (12 | ) | |||
Free cash flow | $ | (21 | ) | $ | (16 | ) | |
(1) Amounts for prior periods have been recast for discontinued operations.
Adjusted EBITDA is reconciled to net income attributable to Meritor, Inc. in Results of Operations below.
41
MERITOR, INC.
��Results of Operations
The following is a summary of our financial results is (in millions, except per share amounts):
Three Months Ended December 31, | |||||||
2014 | 2013 (2) | ||||||
SALES: | |||||||
Commercial Truck & Industrial | $ | 703 | $ | 727 | |||
Aftermarket & Trailer | 208 | 202 | |||||
Intersegment Sales | (32 | ) | (29 | ) | |||
SALES | $ | 879 | $ | 900 | |||
SEGMENT EBITDA: | |||||||
Commercial Truck & Industrial | $ | 56 | $ | 53 | |||
Aftermarket & Trailer | 25 | 21 | |||||
SEGMENT EBITDA | 81 | 74 | |||||
Unallocated legacy and corporate costs, net (1) | (2 | ) | (2 | ) | |||
ADJUSTED EBITDA | 79 | 72 | |||||
Interest expense, net | (19 | ) | (27 | ) | |||
Provision for income taxes | (7 | ) | (11 | ) | |||
Depreciation and amortization | (15 | ) | (16 | ) | |||
Noncontrolling interests | (1 | ) | (2 | ) | |||
Loss on sale of receivables | (2 | ) | (3 | ) | |||
Restructuring costs | (3 | ) | (1 | ) | |||
INCOME FROM CONTINUING OPERATIONS, net of tax, attributable to Meritor, Inc. | $ | 32 | $ | 12 | |||
LOSS FROM DISCONTINUED OPERATIONS, net of tax, attributable to Meritor, Inc. | (3 | ) | (1 | ) | |||
NET INCOME attributable to Meritor, Inc. | $ | 29 | $ | 11 | |||
DILUTED EARNINGS (LOSS) PER SHARE attributable to Meritor, Inc. | |||||||
Continuing operations | $ | 0.32 | $ | 0.12 | |||
Discontinued operations | (0.03 | ) | (0.01 | ) | |||
Diluted earnings per share | $ | 0.29 | $ | 0.11 | |||
DILUTED AVERAGE COMMON SHARES OUTSTANDING | 101.2 | 98.7 | |||||
(1)� | Unallocated legacy and corporate costs, net represents items that are not directly related to our business segments. These costs primarily include asbestos-related charges, pension and retiree medical costs associated with sold businesses and other legacy costs for environmental and product liability charges. |
(2) Amounts for prior periods have been recast for discontinued operations.
42
MERITOR, INC.
Three Months Ended December 31, 2014 Compared to Three Months Ended December 31, 2013
�� Sales
The following table reflects total company and business segment sales for the three months ended December�31, 2014 and 2013. The reconciliation is intended to reflect the trend in business segment sales and to illustrate the impact that changes in foreign currency exchange rates, volumes and other factors had on sales. Business segment sales include intersegment sales (in millions).
Three months Ended | Dollar Change Due To | |||||||||||||||||||||
December 31, | Dollar | % | Volume / | |||||||||||||||||||
2014 | 2013 | Change | Change | Currency | Other | |||||||||||||||||
Sales: | ||||||||||||||||||||||
Commercial Truck & Industrial | $ | 703 | $ | 727 | $ | (24 | ) | (3 | )% | $ | (29 | ) | $ | 5 | ||||||||
Aftermarket & Trailer | 208 | 202 | 6 | 3 | �% | (7 | ) | 13 | ||||||||||||||
Intersegment Sales | (32 | ) | (29 | ) | (3 | ) | (10 | )% | 6 | (9 | ) | |||||||||||
TOTAL SALES | $ | 879 | $ | 900 | $ | (21 | ) | (2 | )% | $ | (30 | ) | $ | 9 | ||||||||
���� Commercial Truck & Industrial sales were $703 million in the first quarter of fiscal year 2015, down 3 percent compared to the first quarter of fiscal year 2014. The decrease in sales were impacted by the Euro VI pre-buy which favorably impacted sales a year ago, lower production in South America and lower revenue from our defense business. In addition, the strengthening of the US dollar against most currencies, primarily the Brazilian Real and Euro, unfavorably impacted sales by $29 million in the first quarter of fiscal year 2015 compared to the same period in fiscal year 2014. The decrease in revenue was partially offset by higher sales in North America, as the Class 8 truck market continued to strengthen.
���� Aftermarket & Trailer sales were $208 million in the first quarter of fiscal year 2015, up 3 percent compared to the first quarter of fiscal year 2014. The increase was primarily due to higher revenue from our trailer business.
Cost of Sales and Gross Profit
���� Cost of sales primarily represents materials, labor and overhead production costs associated with the companys products and production facilities. Cost of sales for the three months ended December�31, 2014 was $764 million compared to $795 million in the prior year, representing a decrease of 4 percent. Total cost of sales was 86.9 percent and 88.3 percent of sales for the three month periods ended December�31, 2014 and 2013, respectively.
���� The following table summarizes significant factors contributing to the changes in costs of sales during the first quarter of fiscal year 2015 compared to the same quarter in the prior year (in millions):
Cost of Sales | |||
Three months ended December 31, 2013 | $ | 795 | |
Volume, mix and other, net | (2 | ) | |
Foreign exchange | (29 | ) | |
Three months ended December 31, 2014 | $ | 764 | |
���� Changes in the components of cost of sales year over year are summarized as follows (in millions):
Change in Cost of Sales | |||
Lower material costs | $ | (11 | ) |
Lower labor and overhead costs | (21 | ) | |
Other, net | 1 | ||
Total change in costs of sales | $ | (31 | ) |
Material costs represent the majority of our cost of sales and include raw materials, composed primarily of steel and purchased components. Material costs for the three months ended December�31, 2014 decreased $11 million compared to the same period in the prior fiscal year primarily due to the movement in foreign currency rates, lower volume, and material cost savings.
43
MERITOR, INC.
Labor and overhead costs decreased $21 million compared to the same period in the prior fiscal year primarily due to movement in foreign currency rates, lower revenue, and savings associated with labor and burden cost reduction programs.
Other, net increased by $1 million compared to the same period in the prior fiscal year.
Gross margin for the three months ended December�31, 2014 was $115 million compared to $105 million in the same period last year. Gross margin, as a percentage of sales, was 13.1 percent and 11.7 percent for the three months ended December�31, 2014 and 2013, respectively. This improvement in gross margin percentage was primarily driven by pricing and material, labor and burden performance.
Other Income Statement Items
���� Selling, general and administrative expenses for the three months ended December�31, 2014 and 2013 are summarized as follows (in millions):
Three Months Ended | Three Months Ended | ||||||||||||||||||
December�31, 2014 | December�31, 2013 | Increase (Decrease) | |||||||||||||||||
SG&A | Amount | % of sales | Amount | % of sales | |||||||||||||||
Loss on sale of receivables | $ | (2 | ) | (0.2 | )% | $ | (3 | ) | (0.3 | )% | $ | (1 | ) | (0.1) pts | |||||
Short and long-term variable �����compensation | (8 | ) | (0.9 | )% | (6 | ) | (0.7 | )% | 2 | 0.2 pts | |||||||||
Long-term liability reduction | �% | 5 | 0.6 | �% | 5 | 0.6 pts | |||||||||||||
All other SG&A | (55 | ) | (6.3 | )% | (55 | ) | (6.1 | )% | 0.2 pts | ||||||||||
Total SG&A | $ | (65 | ) | (7.4 | )% | $ | (59 | ) | (6.5 | )% | $ | 6 | 0.9 pts | ||||||
������In the first quarter of fiscal year 2014, we executed a change to our long-term disability benefit plan reducing the duration for which we provide medical and dental benefits to individuals on long-term disability to be more consistent with market practices. This resulted in a $5 million reduction in the liability associated with these benefits.
All other SG&A represents normal selling, general and administrative expense and remained constant year over year.
Restructuring costs of $3 million compared to $1 million were recorded during the first three months of December 31, 2014 and 2013, respectively. These costs primarily relate to employee severance in our Commercial Truck & Industrial segment.
���� Operating income for the first quarter of fiscal year 2015 was $48 million, compared to $44 million in the same period in the prior fiscal year. Key items affecting operating income are discussed above.
���� Equity in earnings of other affiliates was $9 million in the first quarter of fiscal year 2015, compared to $8 million in the same period in the prior fiscal year. The increase was primarily due to higher earnings from our North American joint ventures.
���� Interest expense, net for the first quarter of fiscal year 2015 was $19 million, compared to $27 million in the same period in the prior fiscal year. The decrease was primarily attributable to the capital market transactions we executed in fiscal year 2014 that reduced our gross debt balances and lowered our cost of debt. During the second quarter of fiscal year 2014, we exercised a call option to redeem $250 million principal amount of our 10.625 percent notes due 2018 at a premium of 5.313 percent of their principal amount and repaid the balance of our $41 million term loan, both of which were funded by cash and the issuance of $225 million of 6.25 percent notes due in 2024. During the fourth quarter of fiscal year 2014, we repurchased the remaining $84 million principal amount of our 8.125 percent notes due 2015 and repurchased $38 million principal amount of our 4.0 percent convertible notes due 2027, each at a premium of 7 percent of their principal amount. In addition interest expense was favorably impacted by $2 million due to interest earned on a refund of a judicial deposit in Brazil, which will not repeat going forward.
����Provision for income taxes was $7 million in the first quarter of fiscal year 2015 compared to $11 million in the same period in the prior fiscal year. The reduction in tax expense was primarily attributable to a tax law change and lower earnings in jurisdictions in which we recognize tax expense.
Income from continuing operations (before noncontrolling interests) for the first quarter of fiscal year 2015 was $33 million compared to $14 million in the same period in the prior fiscal year. The reasons for the improvement are discussed above.
���� Loss from discontinued operations, net of tax was $3 million and $1 million for the three months ended December�31, 2014 and 2013, respectively, primarily related to the operations of our former Mascot business.
44
MERITOR, INC.
���� Net income attributable to Meritor, Inc. was $29 million for the first quarter of fiscal year 2015 compared to $11 million in the same period in the prior fiscal year. The various factors affecting net income are discussed above.
�
Segment EBITDA and EBITDA Margins
Segment EBITDA is defined as income (loss) from continuing operations before interest expense, income taxes, depreciation and amortization, noncontrolling interests in consolidated joint ventures, loss on sale of receivables, restructuring expense, and asset impairment charges. We use Segment EBITDA as the primary basis for the Chief Operating Decision Maker (CODM) to evaluate the performance of each of our reportable segments.
As discussed previously, we disposed of our Mascot business during the fourth quarter of fiscal year 2014. The Mascot business has been classified as part of discontinued operations at September 30, 2014, and all prior period amounts have been recast to reflect this presentation.
���� The following table reflects Segment EBITDA and Segment EBITDA margins for the three months ended December�31, 2014 and 2013 (dollars in millions).
Segment EBITDA | Segment EBITDA Margins | ||||||||||||||||||
Three Months Ended December 31, | Three Months Ended December 31, | ||||||||||||||||||
2014 | 2013 | Change | 2014 | 2013 | Change | ||||||||||||||
Commercial Truck & Industrial | $ | 56 | $ | 53 | $ | 3 | 8.0 | % | 7.3 | % | 0.7 pts | ||||||||
Aftermarket & Trailer | 25 | 21 | 4 | 12.0 | % | 10.4 | % | 1.6 pts | |||||||||||
Segment EBITDA | $ | 81 | $ | 74 | $ | 7 | 9.2 | % | 8.2 | % | 1.0 pts | ||||||||
���� Significant items impacting year-over-year Segment EBITDA include the following:
Commercial Truck & Industrial | Aftermarket & Trailer | TOTAL | |||||||||
Segment EBITDA Quarter ended December 31, 2013 | $ | 53 | $ | 21 | $ | 74 | |||||
Higher earnings from unconsolidated affiliates | 1 | 1 | |||||||||
Impact of foreign currency exchange rates | (3 | ) | (1 | ) | (4 | ) | |||||
Volume, mix, pricing and other | 5 | 5 | 10 | ||||||||
Segment EBITDA Quarter ended December 31, 2014 | $ | 56 | $ | 25 | $ | 81 | |||||
Commercial Truck & Industrial Segment EBITDA was $56 million in the first quarter of fiscal year 2015 and $53 million in the first quarter of fiscal year 2014. Segment EBITDA margin increased to 8.0 percent compared to 7.3 percent in the same period in the prior fiscal year. The increase in Segment EBITDA and EBITDA margin reflects the continued execution of our M2016 initiatives, including pricing and reduced product and operating costs, as well as the conversion on higher sales in North America, all of which more than offset the unfavorable impact associated with lower defense revenue, lower commercial vehicle demand in South America and movement in foreign currency rates.
���� Aftermarket & Trailer Segment EBITDA was $25 million in the first quarter of fiscal year 2015 and $21 million in the first quarter of fiscal year 2014. Segment EBITDA margin increased to 12.0 percent compared to 10.4 percent in the same period in the prior fiscal year. The increase in segment EBITDA margin and EBITDA margin is primarily due to conversion on slightly higher sales in North America and pricing actions executed last year.
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Financial Condition
Cash Flows (in millions)
Three Months Ended December 31, | |||||||
2014 | 2013 | ||||||
OPERATING CASH FLOWS | |||||||
Income from continuing operations | $ | 33 | $ | 14 | |||
Depreciation and amortization | 15 | 16 | |||||
Restructuring costs | 3 | 1 | |||||
Equity in earnings of affiliates | (9 | ) | (8 | ) | |||
Pension and retiree medical expense | 7 | 10 | |||||
Dividends received from equity method investments | 5 | 5 | |||||
Pension and retiree medical contributions | (14 | ) | (9 | ) | |||
Restructuring payments | (1 | ) | (3 | ) | |||
Increase in working capital | (54 | ) | (84 | ) | |||
Changes in off-balance sheet accounts receivable securitization and factoring | 53 | 81 | |||||
Other, net | (44 | ) | (21 | ) | |||
Cash flows provided by (used for) continuing operations | (6 | ) | 2 | ||||
Cash flows used for discontinued operations | (3 | ) | (6 | ) | |||
CASH USED FOR OPERATING ACTIVITIES | $ | (9 | ) | $ | (4 | ) | |
���� Cash used for operating activities for the first three months of fiscal year 2015 was $9 million compared to $4 million in the same period of fiscal year 2014 due in part to higher variable incentive compensation payments.
Three Months Ended December 31, | |||||||
2014 | 2013 | ||||||
INVESTING CASH FLOWS | |||||||
Capital expenditures | $ | (12 | ) | $ | (12 | ) | |
CASH USED FOR INVESTING ACTIVITIES | $ | (12 | ) | $ | (12 | ) | |
���� Cash used for investing activities was $12 million for the first three months of fiscal year 2015 and 2014.
Three Months Ended December 31, | |||||||
2014 | 2013 | ||||||
FINANCING CASH FLOWS | |||||||
Repayment of term loan | $ | $ | (4 | ) | |||
Other financing activities | (4 | ) | 3 | ||||
CASH USED FOR FINANCING ACTIVITIES | $ | (4 | ) | $ | (1 | ) | |
���� Cash used for financing activities was $4 million for the first three months of fiscal year 2015 compared to $1 million in the same period of fiscal year 2014.
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Liquidity
Our outstanding debt, net of discounts where applicable, is summarized as follows (in millions).
December�31, | September�30, | ||||||
2014 | 2014 | ||||||
Fixed-rate debt securities | $ | 500 | $ | 500 | |||
Fixed-rate convertible notes | 447 | 446 | |||||
Unamortized discount on convertible notes | (30 | ) | (31 | ) | |||
Other borrowings | 50 | 57 | |||||
Total debt | $ | 967 | $ | 972 | |||
Overview Our principal operating and capital requirements are for working capital needs, capital expenditure requirements, debt service requirements, funding of pension and retiree medical costs, restructuring and product development programs. We expect fiscal year 2015 capital expenditures for our business segments to be in the range of $80 million to $90 million.
���� We generally fund our operating and capital needs with cash on hand, cash flow from operations, our various accounts receivable securitization and factoring arrangements and availability under our revolving credit facility. Cash in excess of local operating needs is generally used to reduce amounts outstanding, if any, under our revolving credit facility or U.S. accounts receivable securitization program. Our ability to access additional capital in the long term will depend on availability of capital markets and pricing on commercially reasonable terms as well as our credit profile at the time we are seeking funds. We continuously evaluate our capital structure to ensure the most appropriate and optimal structure and may, from time to time, retire, repurchase, exchange or redeem outstanding indebtedness, issue new equity or debt securities or enter into new lending arrangements if conditions warrant.
In December 2014, the company filed a shelf registration statement with the Securities and Exchange Commission, registering an unlimited amount of debt and/or equity securities that the company may offer in one or more offerings on terms to be determined at the time of sale.� The December 2014 shelf registration statement superseded and replaced the shelf registration statement filed in February 2012, as amended.
���� We believe our current financing arrangements provide us with the financial flexibility required to maintain our operations and fund future growth, including actions required to improve our market share and further diversify our global operations, through the term of our revolving credit facility, which matures in February 2019.
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���� Sources of liquidity as of December�31, 2014, in addition to cash on hand, are as follows (in millions):
Total Facility Size | Utilized as of 12/31/14 | Readily Available as of 12/31/14 | Current Expiration | ||||||||||
On-balance sheet arrangements: | |||||||||||||
Revolving credit facility (1) | $ | 499 | $ | $ | 499 | February 2019 | |||||||
Committed U.S. accounts receivable securitization(2) | 100 | 67 | October 2017 | ||||||||||
Total on-balance sheet arrangements | 599 | 566 | |||||||||||
Off-balance sheet arrangements: (2) | |||||||||||||
Swedish Factoring Facility | $ | 183 | $ | 154 | $ | June 2015 | |||||||
U.S. Factoring Facility | 79 | 88 | October 2015 | ||||||||||
U.K. Factoring Facility | 30 | 8 | February 2018 | ||||||||||
Italy Factoring Facility | 37 | 16 | June 2017 | ||||||||||
Other uncommitted factoring facilities | 24 | 17 | Various | ||||||||||
Letter of credit facility | 30 | 25 | 5 | March 2019 | |||||||||
Total off-balance sheet arrangements | 383 | 308 | 5 | ||||||||||
Total available sources | $ | 982 | $ | 308 | $ | 571 | |||||||
(1) | The availability under the revolving credit facility is subject to a collateral test and a priority debt-to-EBITDA ratio covenant and a reduction to $410 million in April 2017 as discussed under Revolving Credit Facility below. |
(2) | Availability subject to adequate eligible accounts receivable available for sale. |
Cash and Liquidity Needs Our cash and liquidity needs have been affected by the level, variability and timing of our customers worldwide vehicle production and other factors outside of our control. At December�31, 2014, we had $214 million in cash and cash equivalents.
���� Our availability under the revolving credit facility is subject to a collateral test and a priority debt-to-EBITDA ratio covenant, as defined in the agreement, which may limit our borrowings under the agreement as of each quarter end. As long as we are in compliance with those covenants as of the quarter end, we have full availability (up to the amount of collateral under the collateral test) under the revolving credit facility every other day during the quarter. Our future liquidity is subject to a number of factors, including access to adequate funding under our revolving credit facility, access to other borrowing arrangements such as factoring or securitization facilities, vehicle production schedules and customer demand. Even taking into account these and other factors, management expects to have sufficient liquidity to fund our operating requirements through the term of our revolving credit facility. At December�31, 2014, the company was in compliance with all covenants under its credit agreement.
Equity and Equity-Linked Repurchase Authorization In June 2014, our Board of Directors authorized the repurchase of up to $210 million of our equity and equity-linked securities (including convertible debt securities), subject to the achievement of our M2016 net debt reduction target and compliance with legal and regulatory requirements and our debt covenants. In September 2014, our Board authorized the repurchase of up to $40 million of our equity or equity-linked securities (including convertible debt securities) under the $210 million authorization that may be made annually without regard to achievement of the M2016 net debt reduction target. These authorizations have no stated expiration, and no repurchases have been made under them.
Debt Repurchase Program - On January 22, 2015, the Offering Committee of our Board of Directors approved a repurchase program for up to $150 million of any of our public debt securities (including without limitation convertible debt securities) from time to time through open market purchases or privately negotiated transactions or otherwise, until September 30, 2016, subject to compliance with legal and regulatory requirements and our debt covenants. This repurchase program is in addition to the equity and equity-linked repurchase authorizations described above.
Revolving Credit Facility On February 13, 2014, we amended and restated our senior secured revolving credit facility. Pursuant to the revolving credit agreement as amended, we have a $499 million revolving credit facility, $89 million of which matures in April 2017 for banks that elected not to extend their commitments under the revolving credit facility, and $410 million of which matures in February 2019. The availability under this facility is dependent upon various factors, including principally performance against certain financial covenants as highlighted below.
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��The availability under the revolving credit facility is subject to certain financial covenants based on (i) the ratio of our 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. We are required to maintain a total priority-debt-to-EBITDA ratio, as defined in the agreement, of 2.25 to 1.00 or less as of the last day of each fiscal quarter throughout the term of the agreement. At December�31, 2014, we were in compliance with all covenants under the revolving credit facility with a ratio of approximately 0.37 for the priority debt-to-EBITDA ratio covenant.
���� The availability under the revolving credit facility is also subject to a collateral test, pursuant to which borrowings on the revolving credit facility cannot exceed 1.0x the collateral test value. The collateral test is performed on a quarterly basis. At December�31, 2014, the revolving credit facility was collateralized by approximately $606 million of the companys assets, primarily consisting of eligible domestic U.S. accounts receivable, inventory, plant, property and equipment, intellectual property and the companys 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 our current corporate credit rating for the senior secured facilities. At December�31, 2014, the margin over LIBOR rate was 350 basis points, and the commitment fee was 50 basis points. Overnight revolving credit loans are at the prime rate plus a margin of 250 basis points.
Certain of the companys subsidiaries, as defined in the revolving credit agreement, irrevocably and unconditionally guarantee amounts outstanding under the revolving credit facility. Similar subsidiary guarantees are provided for the benefit of the holders of the publicly-held notes outstanding under the companys indentures (see Note 22 to the condensed consolidated financial statements).
No borrowings were outstanding under the revolving credit facility at December�31, 2014 and September 30, 2014. The amended and extended revolving credit facility includes $100 million of availability for the issuance of letters of credit. At December�31, 2014 and September 30, 2014, there were no letters of credit outstanding under the revolving credit facility.
U.S. Securitization Program We have a $100 million U.S. accounts receivables securitization facility. On October 15, 2014, we entered into an amendment which extends the facility expiration date to October 15, 2017 and sets the maximum permitted priority-debt-to-EBITDA ratio as of the last day of each fiscal quarter under the facility at 2.25 to 1.00. This program is provided by PNC Bank, National Association, as Administrator and Purchaser, and the other Purchasers and Purchaser Agents from time to time (participating lenders), which are party to the agreement. Under this program, we have the ability to sell an undivided percentage ownership interest in substantially all of our trade receivables (excluding the receivables due from AB Volvo and subsidiaries eligible for sale under the U.S. accounts receivable factoring facility) of certain U.S. subsidiaries to ArvinMeritor Receivables Corporation (ARC), a wholly-owned, special purpose subsidiary. ARC funds these purchases with borrowings from participating lenders under a loan agreement. This program also includes a letter of credit facility pursuant to which ARC may request the issuance of letters of credit issued for our U.S. subsidiaries (originators) or their designees, which when issued will constitute a utilization of the facility for the amount of letters of credit issued. Amounts outstanding under this agreement are collateralized by eligible receivables purchased by ARC and are reported as short-term debt in the condensed consolidated balance sheet. At December�31, 2014 and September 30, 2014, no amounts, including letters of credit, were outstanding under this program. This securitization program contains a cross default to our revolving credit facility. At certain times during any given month, we may sell eligible accounts receivable under this program to fund intra-month working capital needs. In such months, we would then typically utilize the cash we receive from our customers throughout the month to repay the borrowings under the program. Accordingly, during any given month, we may borrow under this program in amounts exceeding the amounts shown as outstanding at fiscal quarter ends.
Capital Leases On March 20, 2012, we entered into an arrangement to finance equipment acquisitions at our various U.S. locations. Under this arrangement, we can request financing from GE Capital Commercial, Inc. (GE Capital) for progress payments for equipment under construction, not to exceed $10 million at any time. The financing rate is equal to the 30-day LIBOR plus 475 basis points per annum. Under this arrangement, we 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 December�31, 2014 and September 30, 2014, we had $13 million outstanding under this capital lease arrangement. In addition, we had another $11 million and $13 million outstanding through other capital lease arrangements at December�31, 2014 and September 30, 2014, respectively.
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Export financing arrangements We entered into a number of export financing arrangements through our Brazilian subsidiary during fiscal year 2014. The export financing arrangements are issued under an incentive program of the Brazilian government to fund working capital for Brazilian companies in exportation programs.�The arrangements bear interest at 5.5 percent and have maturity dates in 2016 and 2017. There were $26 million and $29 million outstanding under these arrangements at December�31, 2014 and September 31, 2014, respectively. In addition, we had another $2 million outstanding through a similar arrangement through an India subsidiary at September 30, 2014, which had no outstanding balance at December 31, 2014.
Other One of our consolidated joint ventures in China participates in a bills of exchange program to settle its obligations with its trade suppliers. These programs are common in China and generally require the participation of local banks. Under these programs, our joint venture issues notes payable through the participating banks to its trade suppliers. If the issued notes payable remain unpaid on their respective due dates, this could constitute an event of default under our revolving credit facility if the defaulted amount exceeds $35 million per bank. As of December�31, 2014 and September 30, 2014, we had $22 million and $32 million, respectively, outstanding under this program at more than one bank.
Credit Ratings At December 31, 2014, our Standard & Poors corporate credit rating, senior secured credit rating, and senior unsecured credit rating were B+, BB and B, respectively. Our Moodys Investors Service corporate credit rating, senior secured credit rating, and senior unsecured credit rating were B2, Ba2 and B3, respectively. Any lowering of our credit ratings could increase our cost of future borrowings and could reduce our access to capital markets and result in lower trading prices for our securities.
Off-Balance Sheet Arrangements
���� Accounts Receivable Factoring Arrangements We participate in accounts receivable factoring programs with total amounts utilized at December�31, 2014, of $283 million, of which $242 million was attributable to committed factoring facilities involving the sale of AB Volvo accounts receivables. The remaining amount of $41 million was related to factoring by certain of our European subsidiaries under uncommitted factoring facilities with financial institutions. The receivables under all of these programs are sold at face value and are excluded from the consolidated balance sheet. Total facility size, utilized amounts, readily available amounts and expiration dates for each of these programs are shown in the table above under Liquidity.
The Swedish and U.S. factoring facilities are backed by 364-day liquidity commitments from Nordea Bank which were renewed through September 2015. Commitments under all of our factoring facilities are subject to standard terms and conditions for these types of arrangements (including, in case of the U.K. and Italy commitments, a sole discretion clause whereby the bank retains the right to not purchase receivables, which has not been invoked since the inception of the respective programs).
���� Letter of Credit Facilities On February 21, 2014, we amended and restated our letter of credit facility with Citicorp USA, Inc., as administrative agent and issuing bank, and the other lenders party thereto. Under the terms of this amended credit agreement, we have the right to obtain the issuance, renewal, extension and increase of letters of credit up to an aggregate availability of $30 million through December 19, 2015. From December 20, 2015 through March 19, 2019 the aggregate availability is $25 million. This facility contains covenants and events of default generally similar to those existing in our public debt indentures. At December�31, 2014 and September 30, 2014, we had $25 million of letters of credit outstanding under this facility. In addition, we had another $8 million and $9 million of letters of credit outstanding through other letter of credit facilities at December�31, 2014 and September 30, 2014, respectively.
Contingencies
Contingencies related to environmental, asbestos and other matters are discussed in Note 19 of the Notes to Condensed Consolidated Financial Statements of Part I of this Quarterly Report.
Critical Accounting Policies
Our defined benefit pension plans and retirement medical plans are accounted for on an actuarial basis, which requires the selection of various assumptions, including the mortality of participants. The mortality assumptions for participants in our U.S. plans incorporates future mortality improvements from tables published by the Society of Actuaries (SOA). We periodically review the mortality experience of our U.S. plans participants against these assumptions.
In October 2014, the SOA issued new mortality and mortality improvement tables that raised the life expectancies, which could have the effect of increasing the amount of estimated aggregate benefit payments to our U.S. plans' participants. If we determine that the tables represent the best estimate of our plans' mortality, we would incorporate the tables into our 2015 year-end measurement of the plans benefit obligations. This would result in an increase to our U.S. pension and OPEB obligations.
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New Accounting Pronouncements
New Accounting Pronouncements are discussed in Note 3 of the Notes to Condensed Consolidated Financial Statements in Item 1. Financial Statements.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
���� We are exposed to certain global market risks, including foreign currency exchange risk and interest rate risk associated with our debt.
���� As a result of our substantial international operations, we are exposed to foreign currency risks that arise from our normal business operations, including in connection with our transactions that are denominated in foreign currencies. In addition, we translate sales and financial results denominated in foreign currencies into U.S. dollars for purposes of our consolidated financial statements. As a result, appreciation of the U.S. dollar against these foreign currencies generally will have a negative impact on our reported revenues and operating income while depreciation of the U.S. dollar against these foreign currencies will generally have a positive effect on reported revenues and operating income. For the first quarter of fiscal year 2015, our reported financial results were adversely affected by the appreciation of the U.S. dollar against foreign currencies relative to the prior year. We generally do not hedge against our foreign currency exposure related to translations to U.S. dollars of our financial results denominated in foreign currencies. However, in the first quarter of fiscal year 2015, due to the volatility of the Brazilian Real as compared to the U.S. dollar, we entered into a series of foreign currency option contracts that do not qualify for hedge accounting but are expected to mitigate foreign currency translation exposure of Brazilian Real earnings to U.S. dollars. The contracts' effective dates begin at the start of the second quarter of fiscal year 2015 and mature at the end of fiscal year 2015. Changes in fair value associated with these option contracts are recorded in other income (expense), net, in the consolidated statement of operations.
���� We use foreign currency forward contracts to minimize the earnings exposures arising from foreign currency exchange risk on foreign currency purchases and sales. Gains and losses on the underlying foreign currency exposures are partially offset with gains and losses on the foreign currency forward contracts. Under this cash flow hedging program, we designate the foreign currency contracts (the contracts) as cash flow hedges of underlying foreign currency forecasted purchases and sales. The effective portion of changes in the fair value of the contracts is recorded in Accumulated Other Comprehensive Loss (AOCL) in the statement of shareowners equity and is recognized in operating income when the underlying forecasted transaction impacts earnings. The contracts generally mature within 12 months.
�We use option contracts to mitigate foreign currency exposure on expected future Indian Rupee denominated purchases. The contracts were entered into during April 2014 with effective dates from the start of fiscal year 2015 through the end of fiscal year 2016. Changes in fair value associated with these contracts are recorded in cost of sales in the consolidated statement of operations.
Interest rate risk relates to the gain/increase or loss/decrease we could incur in our debt balances and interest expense associated with changes in interest rates. To manage this risk, we enter into interest rate swaps from time to time to economically convert portions of our fixed-rate debt into floating rate exposure, ensuring that the sensitivity of the economic value of debt falls within our corporate risk tolerances. It is our policy not to enter into derivative instruments for speculative purposes, and therefore, we hold no derivative instruments for trading purposes.
Included below is a sensitivity analysis to measure the potential gain (loss) in the fair value of financial instruments with exposure to market risk. The model assumes a 10 percent hypothetical change (increase or decrease) in exchange rates and instantaneous, parallel shifts of 50 basis points in interest rates.
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Market Risk
Assuming a 10% Increase in Rates | Assuming a 10% Decrease in Rates | Increase (Decrease) in | |||||||
Foreign Currency Sensitivity: | |||||||||
Forward contracts in USD | $ | 1.6 | $ | (1.6 | ) | Fair Value | |||
Forward contracts in Euro | (3.3 | ) | 3.3 | Fair Value | |||||
Foreign currency denominated debt (1) | 3.7 | (3.7 | ) | Fair Value | |||||
Foreign currency option contracts in USD | 2.3 | 0.3 | Fair Value | ||||||
Foreign currency option contracts in Euro | (2.0 | ) | 2.9 | Fair Value | |||||
Assuming a 50 BPS Increase in Rates | Assuming a 50 �BPS Decrease in Rates | Increase (Decrease) in | |||||||
Interest Rate Sensitivity: | |||||||||
Debt - fixed rate(2) | $ | (42.3 | ) | $ | 44.4 | Fair Value | |||
Debt variable rate | Cash flow | ||||||||
Interest rate swaps | Fair Value | ||||||||
(1) | Includes only the risk related to the derivative instruments and does not include the risk related to the underlying exposure. The analysis assumes overall derivative instruments and debt levels remain unchanged for each hypothetical scenario. |
At December�31, 2014, a 10% decrease in quoted currency exchange rates would result in a potential loss of $4 million in foreign currency denominated debt. At December�31, 2014, a 10% increase in quoted currency exchange rates would result in a potential gain of $4 million in foreign currency denominated debt.
(2) | At December�31, 2014, the fair value of outstanding debt was $1,202 million. A 50 basis points decrease in quoted interest rates would result in an increase of $44 million in the fair value of fixed rate debt. A 50 basis points increase in quoted interest rates would result in an decrease of $42 million in the fair value of fixed rate debt. |
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Item 4. Controls and Procedures
As required by Rule 13a-15 under the Securities Exchange Act of 1934 (the Exchange Act ), management, with the participation of the chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures as of December�31, 2014. Based upon that evaluation, the Chief Executive Officer and the Chief Financial Officer have concluded that, as of December�31, 2014, our disclosure controls and procedures were effective to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SECs rules and forms and to ensure that information required to be disclosed by us in the reports we file or submit is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
���� There have been no changes in the companys internal control over financial reporting that occurred during the quarter ended December�31, 2014 that materially affected, or are reasonably likely to materially affect, the companys internal control over financial reporting.
���� In connection with the rule, the company continues to review and document its disclosure controls and procedures, including the companys internal control over financial reporting, and may from time to time make changes aimed at enhancing their effectiveness and ensuring that the companys systems evolve with the business.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Except as set forth in this Quarterly Report below and under Note 19 Contingencies, there have been no material developments in legal proceedings involving the company or its subsidiaries since those reported in the companys Annual Report on Form 10-K for the fiscal year ended September 30, 2014.
On July 10, 2014, Sistemas Automotrices de Mexico, S.A. de C.V. ( Sisamex ), a Mexican joint venture between our subsidiary Meritor Heavy Vehicle Systems, LLC ( Meritor HVS ) and Quimmco, S.A. de C.V. ("Quimmco"), filed a lawsuit against Meritor HVS in the Northern District of Illinois, seeking, among other relief, a declaration of Sisamexs exclusive right to manufacture certain products and the components thereof for sale in Mexico. On July 13, 2014, Meritor HVS filed a lawsuit against Sisamex and Quimmco in the Northern District of Illinois, seeking, among other relief, a declaration that Sisamex may not manufacture without Meritor HVS's consent the components at issue in Sisamex's lawsuit and that Sisamex must instead purchase those components from Meritor HVS. On July 23, 2014, the parties to the two actions filed a joint motion seeking an order that the two actions are related and that both actions be heard before the same judge. The motion was granted. Shortly after the cases were filed, both parties filed cross motions to dismiss the other partys complaint. The Court heard oral arguments on the motions on November 24, 2014 and indicated it expected to issue an opinion by the end of January 2015.
Item 1A. Risk Factors
There have been no material changes in risk factors involving the company or its subsidiaries from those previously disclosed in the companys Annual Report on Form 10-K for the fiscal year ended September 30, 2014.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Issuer repurchases
On June 23, 2014, we announced that our Board of Directors authorized the repurchase of up to $210 million of our equity and equity-linked securities (including convertible debt securities), subject to the achievement of our M2016 net debt reduction target and compliance with legal and regulatory requirements and our debt covenants. In September 2014, our Board authorized the repurchase of up to $40 million of our equity or equity-linked securities (including convertible debt securities) under the $210 million authorization that may be made annually without regard to achievement of the M2016 net debt reduction target. These authorizations have no stated expiration, and no repurchases have been made under them.
���� The independent trustee of our 401(k) plans purchases shares in the open market to fund investments by employees in our common stock, one of the investment options available under such plans, and any matching contributions in company stock we provide under certain of such plans. In addition, our stock incentive plans permit payment of an option exercise price by means of cashless exercise through a broker and permit the satisfaction of the minimum statutory tax obligations upon exercise of options and the vesting of restricted stock units through stock withholding. However, the company does not believe such purchases or transactions are issuer repurchases for the purposes of this Item 2 of Part II of this Quarterly Report on Form 10-Q. In addition, our stock incentive plans also permit the satisfaction of tax obligations upon the vesting of restricted stock through stock withholding. There were no shares withheld in the first quarter of fiscal 2015.
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Item 5. Other Information
Cautionary Statement
This Quarterly Report on Form 10-Q contains statements relating to future results of the company (including certain projections and business trends) that are forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements are typically identified by words or phrases such as believe, expect, anticipate, estimate, should, are likely to be, will and similar expressions. Actual results may differ materially from those projected as a result of certain risks and uncertainties, including but not limited to reduced production for certain military programs and our ability to secure new military programs as our primary military program winds down by design through 2015; reliance on major original equipment manufacturer ( OEM ) customers and possible negative outcomes from contract negotiations with our major customers, including failure to negotiate acceptable terms in contract renewal negotiations and our ability to obtain new customers; the outcome of actual and potential product liability, warranty and recall claims; our ability to successfully manage rapidly changing volumes in the commercial truck markets and work with our customers to manage demand expectations in view of rapid changes in production levels; global economic and market cycles and conditions; availability and sharply rising costs of raw materials, including steel, and our ability to manage or recover such costs; our ability to manage possible adverse effects on our European operations, or financing arrangements related thereto, in the event one or more countries exit the European monetary union; risks inherent in operating abroad (including foreign currency exchange rates, implications of foreign regulations relating to pensions and potential disruption of production and supply due to terrorist attacks or acts of aggression); rising costs of pension and other postemployment benefits; the ability to achieve the expected benefits of restructuring actions; the demand for commercial and specialty vehicles for which we supply products; whether our liquidity will be affected by declining vehicle productions in the future; OEM program delays; demand for and market acceptance of new and existing products; successful development of new products; labor relations of our company, our suppliers and customers, including potential disruptions in supply of parts to our facilities or demand for our products due to work stoppages; the financial condition of our suppliers and customers, including potential bankruptcies; possible adverse effects of any future suspension of normal trade credit terms by our suppliers; potential difficulties competing with companies that have avoided their existing contracts in bankruptcy and reorganization proceedings; potential impairment of long-lived assets, including goodwill; potential adjustment of the value of deferred tax assets; competitive product and pricing pressures; the amount of our debt; our ability to continue to comply with covenants in our financing agreements; our ability to access capital markets; credit ratings of our debt; the outcome of existing and any future legal proceedings, including any litigation with respect to environmental or asbestos-related matters; possible changes in accounting rules; and other substantial costs, risks and uncertainties, including but not limited to those detailed herein and from time to time in other filings of the company with the SEC. See also the following portions of our Annual Report on Form 10-K for the year ended September 30, 2014: Item 1. Business, Customers; Sales and Marketing ; Competition ; Raw Materials and Supplies ; Employees ; Environmental Matters ; International Operations ; and Seasonality; Cyclicality ; Item 1A.Risk Factors; Item 3.Legal Proceedings; and Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. These forward-looking statements are made only as of the date hereof, and the company undertakes no obligation to update or revise the forward-looking statements, whether as a result of new information, future events or otherwise, except as otherwise required by law.
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MERITOR, INC.
Item 6. Exhibits
3-a | Restated Articles of Incorporation of Meritor, filed as Exhibit 4.01 to Meritors Registration Statement on Form S-4, as amended (Registration Statement No. 333-36448) ("Form S-4"), is incorporated herein by reference. |
3-a-1 | Articles of Amendment of Restated Articles of Incorporation of Meritor filed as exhibit 3-a-1 to Meritors Quarterly Report on Form 10-Q for the quarterly period ended April 3, 2011, is incorporated herein by reference. |
3-b | By-laws of Meritor, filed as Exhibit 3 to Meritor's Quarterly Report on Form 10-Q for the quarterly period ended June 29, 2003 (File No. 1-15983), is incorporated by reference. |
10-a | Fourth Amendment to the Receivables Purchase Agreement dated as of October 15, 2014 by and among Arvin Meritor Receivables Corporation, as Seller, Meritor, Inc., as Initial Servicer, and PNC Bank, National Association, as Related Committed Purchaser, as LC Participant, as a Purchase Agent, as LC Bank and as Administrator, filed as Exhibit 10 to Meritors Current Report on Form 8-K filed on October 20, 2014, is incorporated herein by reference. |
10-b | Amendment No. 6 dated as of December 16, 2014 to Receivables Purchase Agreement dated as of October 29, 2010, as amended, by and among Meritor Heavy Vehicle Braking Systems (USA), LLC (formerly known as Meritor Heavy Vehicle Braking Systems (USA), Inc.), Meritor Heavy Vehicle Systems, LLC and Meritor Aftermarket USA, LLC, as sellers, Viking Asset Purchaser No. 7 IC, an incorporated cell of Viking Global Finance ICC, as purchaser, and Citicorp Trustee Company Limited, as programme trustee.** |
12 | Computation of ratio of earnings to fixed charges** |
21 | List of Subsidiaries of Meritor, Inc.** |
23 | Consent of Bates White LLC** |
31-a | Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) under the Exchange Act** |
31-b | Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) under the Exchange Act** |
32-a | Certification of the Chief Executive Officer pursuant to Rule 13a-14(b) under the Exchange Act and 18 U.S.C. Section 1350** |
32-b | Certification of the Chief Financial Officer pursuant to Rule 13a-14(b) under the Exchange Act and 18 U.S.C. Section 1350** |
101.INS | XBRL INSTANCE DOCUMENT |
101.SCH | XBRL TAXONOMY EXTENSION SCHEMA |
101.PRE | XBRL TAXONOMY EXTENSION PRESENTATION LINKBASE |
101.LAB | XBRL TAXONOMY EXTENSION LABEL LINKBASE |
101.CAL� | XBRL TAXONOMY EXTENSION CALCULATION LINKBASE |
101.DEF� | XBRL TAXONOMY EXTENSION DEFINITION LINKBASE |
** Filed herewith.
56
MERITOR, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
����� | MERITOR, INC. | |||
� | ||||
Date: | January�29, 2015 | By:������� | /s/ | Sandra J. Quick |
� | Sandra J. Quick | |||
Senior Vice President, General Counsel, and Corporate Secretary | ||||
� | (For the registrant) | |||
� | � | |||
� | ||||
Date: | January�29, 2015 | By: | /s/ | Kevin A. Nowlan |
Kevin A. Nowlan | ||||
Senior Vice President and Chief Financial Officer | ||||
57
Exhibit 10-b
AMENDMENT AGREEMENT NO. 6
dated as of December 16, 2014
between
Meritor Heavy Vehicle Braking Systems (U.S.A.), LLC
(formerly known as Meritor Heavy Vehicle Braking Systems (USA), Inc.)
Meritor Heavy Vehicle Systems, LLC and
Meritor Aftermarket USA, LLC (formerly known as Arvinmeritor Mascot, LLC)
as Sellers
and
Viking Asset Purchaser No. 7 IC
an incorporated cell of Viking Global Finance ICC
as Purchaser
and
Citicorp Trustee Company Limited
as Programme Trustee
(the Amendment Agreement )
����
1. | BACKGROUND AND DEFINITIONS |
1.1 | The parties hereto have entered into a receivables purchase agreement dated 29 October 2010 between Meritor Heavy Vehicle Braking Systems (U.S.A.), LLC (formerly known as Meritor Heavy Vehicle Braking Systems (USA), Inc.), Meritor Heavy Vehicle Systems, LLC and Arvinmeritor Mascot, LLC (now known as Meritor Aftermarket USA, LLC) as Sellers, Viking Asset Purchaser No. 7 IC, an incorporated cell of Viking Global Finance ICC, as Purchaser and Citicorp Trustee Company Limited as Programme Trustee as amended by an amendment agreement no. 1 dated 28 June 2011, an amendment agreement no. 2 dated 28 September 2011, an amendment agreement no. 3 dated 28 September 2012, an amendment agreement no. 4 dated 29 October 2013, an amendment agreement no. 5 dated 27 June 2014 and as amended, restated and/or supplemented from time to time (the Receivables Purchase Agreement ). |
1.2 | The parties now wish to amend the Receivables Purchase Agreement in accordance with the provisions set out herein. |
1.3 | Capitalised terms shall, unless the context otherwise requires, have the meaning given to them in the Receivables Purchase Agreement. |
2. | AMENDMENTS |
2.1 | The parties hereto agree that with effect as of December 16, 2014 the following amendments shall be made to the Receivables Purchase Agreement: |
2.1.1 | Clause 2.1 shall be amended as follows: |
Purchase of Receivables
Subject to the terms and conditions of this Agreement, and within the limits of the Total Commitment, the Initial Purchaser (and, where Additional Purchasers have acceded to this Agreement, each such Additional Purchaser) agrees that it will purchase Receivables from the Seller on a continuous basis from the date hereof until the Termination Date, it being understood and agreed that the Total Commitment shall apply to all Purchasers in the aggregate and that no Purchaser shall have any obligation to purchase Receivables to the extent that, after giving effect to such proposed purchase, the Aggregate Euro Outstanding Amount of all Purchased Receivables would exceed the Total Commitment. If a proposed purchase of Receivables would result in the Aggregate Euro Outstanding Amount of all Purchased Receivables exceeding the Total Commitment, the Purchasers may, at their sole discretion, decide to accept such Offer(s) and purchase such Receivables, but shall for the avoidance of doubt have no obligation to do so.
3. | MISCELLANEOUS |
3.1 | For the avoidance of doubt, the Receivables Purchase Agreement shall remain in full force and effect and the provisions set out in this Amendment Agreement shall only take effect as specified herein. |
3.2 | This Amendment Agreement may be executed in any number of counterparts and all such counterparts taken together shall be deemed to constitute one and the same instrument. |
����
3.3 | Clause 20 (GOVERNING LAW; JURISDICTION; WAIVER OF JURY TRIAL) of the Receivables Purchase Agreement shall be incorporated in and form part of this Amendment Agreement mutatis mutandis. |
[The remainder of this page intentionally left blank]
����
IN WITNESS WHEREOF the parties have executed this Amendment Agreement on the respective dates specified below with effect from the date specified in Clause 2.1 above.
For and behalf of
Meritor Heavy Vehicle Braking Systems (U.S.A.), LLC
(formerly known as Meritor Heavy Vehicle Braking Systems (USA), Inc.)
By: | /s/Carl Anderson |
Name: | Carl Anderson |
Title: | Vice-President and Treasurer |
For and on behalf of
Meritor Heavy Vehicle Systems, LLC
By: | /s/Carl Anderson |
Name: | Carl Anderson |
Title: | Vice-President and Treasurer |
For and behalf of
Meritor Aftermarket USA, LLC (formerly known as Arvinmeritor Mascot, LLC)
By: | /s/Carl Anderson |
Name: | Carl Anderson |
Title: Vice-President and Treasurer
For and behalf of
Viking Asset Purchaser No. 7 IC
By: | /s/Michael Lombardi |
Name: Michael Lombardi
Title: Director
For and behalf of
Citicorp Trustee Company Limited
����
By: | /s/Justin Ng |
Name: Justin Ng
Title: Vice President
����
Exhibit 12
Meritor, Inc.
Computation of Ratio of Earnings to Fixed Charges
Three Months Ended December 31, 2014
(Amounts in millions, except the ratio)
�
Earnings Available for Fixed Charges (A): | |||||
Pre-tax income from continuing operations | $ | 40 | |||
Less: | |||||
Equity in earnings of affiliates, net of dividends | (5 | ) | |||
35 | |||||
Add: fixed charges included in earnings: | |||||
Interest expense | 21 | ||||
Interest element of rentals | 1 | ||||
Total | 22 | ||||
Total earnings available for fixed charges: | $ | 57 | |||
Fixed Charges (B): | |||||
Fixed charges included in earnings | $ | 22 | |||
Capitalized interest | |||||
Total fixed charges | $ | 22 | |||
Ratio of Earnings to Fixed Charges | 2.59 | ||||
(A) Earnings are defined as pre-tax income from continuing operations, adjusted for undistributed earnings of less than majority owned subsidiaries and fixed charges excluding capitalized interest.
(B) Fixed charges are defined as interest on borrowings (whether expensed or capitalized), the portion of rental expense applicable to interest, and amortization of debt issuance costs.
Exhibit 21
MERITOR, INC.
SUBSIDIARIES
The following lists the subsidiaries, direct and indirect, of Meritor, Inc., and their state or other jurisdiction of incorporation or organization, along with ownership percentage (directly or indirectly) as of December 31, 2014 (50% or more interest).
Name | Jurisdiction | Ownership % |
AVM, Inc. | South Carolina | 100% |
Arvin Canada Holding Limited | Canada (Ontario) | 100% |
Arvin European Holdings (UK) Limited | England & Wales | 100% |
Arvin European Holdings (UK) Limited French Branch | France | 100% |
Arvin Finance, LLC | Delaware | 100% |
Arvin Holdings Netherlands B.V. | Netherlands | 100% |
Arvin Innovation Australia Pty. Limited | Australia | 100% |
Arvin Innovation France Holdings, LLC | Delaware | 100% |
Arvin International (UK) Limited | England & Wales | 100% |
Arvin Motion Control Limited | England & Wales | 100% |
ArvinMeritor A&ET Limited | England & Wales | 100% |
ArvinMeritor CV Aftermarket GmbH | Germany | 100% |
ArvinMeritor OE, LLC | Delaware | 100% |
ArvinMeritor, Inc. | Delaware | 100% |
ArvinMeritor Brake Holdings, LLC | Delaware | 100% |
ArvinMeritor Brazil Holdings, LLC | Delaware | 100% |
ArvinMeritor de M�xico, S. de R.L. de C.V. | Mexico | 100% |
ArvinMeritor Filters Operating Co., LLC | Delaware | 100% |
ArvinMeritor Finance (Barbados) Inc. | Barbados | 100% |
ArvinMeritor Finance Ireland | Ireland | 100% |
ArvinMeritor Holdings France SNC | France | 100% |
ArvinMeritor Light Vehicle Systems Australia Pty. Ltd. | Australia | 100% |
ArvinMeritor Light Vehicle Systems (UK) Limited | England & Wales | 100% |
ArvinMeritor Limited | England & Wales | 100% |
ArvinMeritor Pension Trustees Limited | England & Wales | 100% |
����
Subsidiaries
Page 2
Name | Jurisdiction | Ownership % |
ArvinMeritor Receivables Corporation | Delaware | 100% |
ArvinMeritor Suspension Systems S.r.l. | Italy | 100% |
Arvinmeritor Sweden AB | Sweden | 100% |
ArvinMeritor Technology, LLC | Delaware | 100% |
Arvin Replacement Products S.r.L. | Italy | 100% |
Arvin Technologies, Inc. | Michigan | 100% |
Fonderie V�nissieux SAS | France | 51% |
MSS Holdings, Limited | Canada (Ontario) | 100% |
Maremont Corporation | Delaware | 100% |
Maremont Exhaust Products, Inc. | Delaware | 100% |
Meritor, Inc. | Nevada | 100% |
Meritor HVS AB | Sweden | 100% |
Meritor HVS (India) Limited | India | 51% |
Meritor HVS Istanbul Irtibat Burosu | Turkish branch of Italian Company (Meritor HVS Cameri-Istanbul Liaison office) | 100% |
Meritor LVS Holdings Mexico, LLC | Delaware | 100% |
Meritor Administradora de Bens Ltda. | Brazil | 100% |
Meritor Aftermarket Canada Inc. | Canada (Ontario) | 100% |
Meritor Aftermarket France SAS | France | 100% |
Meritor Aftermarket Italy, S.r.l. | Italy | 100% |
Meritor Aftermarket Netherlands B.V. | Netherlands | 100% |
Meritor Aftermarket Spain, S.A. | Spain | 100% |
Meritor Aftermarket Switzerland AG | Switzerland | 100% |
Meritor Aftermarket UK Limited | England | 100% |
Meritor Aftermarket USA, LLC | Delaware | 100% |
Meritor Automotive Export Limited | England & Wales | 100% |
Meritor Axles France SAS | France | 100% |
Meritor Brazil Holdings, LLC | Delaware | 100% |
Meritor Cayman Islands, Ltd. | Cayman Islands | 100% |
Meritor (China) Holdings, Limited | China | 100% |
Meritor Commercial Vehicle Systems India Private Limited | India | 100% |
Meritor do Brasil Sistemas Automotivos Ltda. | Brazil | 100% |
Meritor Drivetrain Systems (Nanjing) Co. Ltd. | China | 100% |
Meritor Drivetrain Systems (Nanjing) Co. Ltd. - Shanghai Branch | China | 100% |
Meritor Finance (Barbados) Limited | Barbados | 100% |
Meritor Finance Netherlands B.V. | Netherlands | 100% |
Subsidiaries
Page 3
Name | Jurisdiction | Ownership % |
Meritor France Holdings, LLC | Delaware | 100% |
Meritor France SNC | France | 100% |
Meritor Germany GmbH | Germany | 100% |
Meritor Heavy Vehicle Braking Systems (UK) Limited | England & Wales | 100% |
Meritor Heavy Vehicle Braking Systems (U.S.A.), LLC | Delaware | 100% |
Meritor Heavy Vehicle Systems B.V. | Netherlands | 100% |
Meritor Heavy Vehicle Systems, LLC | Delaware | 100% |
Meritor Heavy Vehicle Systems Australia Ltd. | Australia | 100% |
Meritor Heavy Vehicle Systems Cameri SpA | Italy | 100% |
Meritor Heavy Vehicle Systems de Venezuela S.A. | Venezuela | 100% |
Meritor Heavy Vehicle Systems Limited | England | 100% |
Meritor Heavy Vehicle Systems (Manufacturing) Limited | England | 100% |
Meritor Heavy Vehicle Systems (Singapore) Pte., Ltd. | Delaware | 100% |
Meritor Heavy Vehicle Systems (Venezuela), Inc. | Delaware | 100% |
Meritor Heavy Vehicle Systems Verona S.r.l. | Italy | 100% |
Meritor Holdings, LLC | Delaware | 100% |
Meritor Holdings (Barbados) Limited | Barbados | 100% |
Meritor Holdings France SAS | France | 100% |
Meritor Holdings Netherlands B.V. | Netherlands | 100% |
Meritor Holdings Spain, S.A. | Spain | 100% |
Meritor Huayang Vehicle Braking Company, Ltd. | China | 60% |
Meritor International Holdings, LLC | Delaware | 100% |
Meritor Japan K.K. | Japan | 100% |
Meritor Luxembourg S.a.r.l. | Luxembourg | 100% |
Meritor Management Corp. | Delaware | 100% |
Meritor Manufacturing de M�xico, S.A. de C.V. | Mexico | 100% |
Meritor Mexicana, S.A. de C.V. | Mexico | 100% |
Meritor Netherlands B.V. | Netherlands | 100% |
Meritor Services de Mexico, S.A. de C.V. | Mexico | 100% |
Meritor Technology, LLC | Delaware | 100% |
Meritor Transmission, LLC | Delaware | 100% |
Meritor Vehicle Systems (Nanjing) Co., Ltd. | China | 100% |
Meritor WABCO Vehicle Control Systems | Delaware | 50% |
Meritor WABCO Vehicle Control Systems, S. de R.L. de C.V. | Mexico | 50% |
Trucktechnic S.A. | Belgium | 100% |
Wilmot-Breeden (Holdings) Limited | England & Wales | 100% |
Xuzhou Meritor Axles Co. Ltd. | Peoples Republic of China | 60% |
Exhibit 23
CONSENT OF EXPERT
We consent to the references to our firm and to our reports with respect to estimation of the liability for pending and reasonably estimable unasserted future asbestos-related claims, which are included or incorporated by reference in Note 19 of the Notes to Condensed Consolidated Financial Statements in the Quarterly Report on Form 10-Q of Meritor, Inc. ( Meritor ) for the fiscal quarter ended December 28, 2014 and to the incorporation by reference of such reference into the following Registration Statements of Meritor:
Form | Registrations No. | Purpose |
S-3 | 333-200858 | Registration of common stock, preferred stock, warrants, debt securities and guarantees |
S-8 | 333-192458 | Amended and Restated 2010 Long-Term Incentive Plan |
S-8 | 333-171713 | Amended 2010 Long-Term Incentive Plan |
S-8 | 333-164333 | 2010 Long-Term Incentive Plan |
S-8 | 333-141186 | 2007 Long-Term Incentive Plan |
S-8 | 333-107913 | Meritor, Inc. Savings Plan |
S-8 | 333-123103 | Meritor, Inc. Hourly Employees Savings Plan |
S-8 | 333-49610 | 1997 Long-Term Incentives Plan |
S-3 | 333-43116 | Meritor, Inc. 1998 Stock Benefit Plan |
S-3 | 333-43112 | Meritor, Inc. Employee Stock Benefit Plan |
S-8 | 333-42012 | Employee Stock Benefit Plan, 1988 Stock Benefit Plan and 1998 Employee Stock Benefit Plan |
BATES WHITE LLC | ||||
By: | /s/ Charles E. Bates | |||
Charles E. Bates, Ph.D. | ||||
Chairman | ||||
Date: January 29, 2015 | |
Exhibit 31-a
CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER PURSUANT TO
RULE 13a-14(a) UNDER THE EXCHANGE ACT
I, Ivor J. Evans, certify that:
1. | I have reviewed this Quarterly Report on Form 10-Q of Meritor, Inc. for the quarterly period ended December 28, 2014; |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. | The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
a. | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
b. | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
c. | Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
d. | Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and |
5. | The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): |
a. | all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and |
b. | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. |
Date: January 29, 2015
� | /s/ Ivor J. Evans |
� | Ivor J. Evans, Chairman of the Board and |
� | Chief Executive Officer |
Exhibit 31-b
CERTIFICATION OF THE CHIEF FINANCIAL OFFICER PURSUANT TO
RULE 13a-14(a) UNDER THE EXCHANGE ACT
I, Kevin A. Nowlan, certify that:
1. | I have reviewed this Quarterly Report on Form 10-Q of Meritor, Inc. for the quarterly period ended December 28, 2014; |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. | The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
a. | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
b. | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
c. | Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
d. | Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and |
5. | The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): |
a. | all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and |
b. | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. |
Date: January 29, 2015
� | /s/ Kevin A. Nowlan |
� | Kevin A. Nowlan |
� | Senior Vice President and Chief Financial Officer |
Exhibit 32-a
CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER PURSUANT TO RULE
13a-14(b) UNDER THE EXCHANGE ACT AND 18 U.S.C. SECTION 1350
(as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002)
���� As required by Rule 13a-14(b) under the Securities Exchange Act of 1934, as amended, and 18 U.S.C. Section 1350, I, Ivor J. Evans, hereby certify that:
1. | The Quarterly Report of Meritor, Inc. on Form 10-Q for the quarterly period ended December 28, 2014 fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934, and |
2. | The information contained in that report fairly presents, in all material respects, the financial condition and results of operations of Meritor, Inc. |
������������������������������������
/s/ Ivor J. Evans |
Ivor J. Evans |
Chairman of the Board and |
Chief Executive Officer |
Date: January 29, 2015
Exhibit 32-b
CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO
RULE 13a-14(b) UNDER THE EXCHANGE ACT AND 18 U.S.C. SECTION 1350
(as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002)
���� As required by Rule 13a-14(b) under the Securities Exchange Act of 1934, as amended, and 18 U.S.C. Section 1350, I, Kevin A. Nowlan, hereby certify that:
1. | The Quarterly Report of Meritor, Inc. on Form 10-Q for the quarterly period ended December 28, 2014 fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934, and |
2. | The information contained in that report fairly presents, in all material respects, the financial condition and results of operations of Meritor, Inc. |
/s/ Kevin A. Nowlan | |
Kevin A. Nowlan | |
Senior Vice President and | |
Chief Financial Officer | |
Date: January 29, 2015
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